This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

[video] The Deal: Devon Energy $6B Asset Buy a Big Win for Blackstone

NEW YORK (The Deal) -- Oklahoma City oil and gas explorer Devon Energy(DVN - Get Report) said Wednesday, Nov. 20, it agreed to buy oil properties in South Texas' Eagle Ford Shale from Blackstone Group (BX - Get Report)-backed GeoSouthern Energy for $6 billion in cash, giving it a high growth area it had been lacking.

Devon plans to fund the purchase with cash on hand and borrowings, which it expects to repay with free cash flow and proceeds from the sale of non-core assets. On a conference call with analysts and investors, management said assets up for sale could include Canadian conventional assets as well as non-core U.S. assets.

Devon management said on the call that the price works out to 4 times next year's estimated EBITDA and 2.5 times estimated EBITDA for 2015, well below its own current EBITDA multiple.

When asked by an analyst why GeoSouthern would sell at such a low EBITDA multiple, management said the target was looking for a liquidity event after creating a lot of value out of the properties and that there are not that many parties looking to pursue large acquisitions or that have the balance sheet to do deals of this magnitude.

Must Read: JPMorgan's 'Admission' Oversold by Government

Devon also said on the call that it was contacted by GeoSouthern's financial advisers in February about a potential deal but that it thought others were looking at the properties as well, which another source confirmed.

Blackstone said in a separate statement that it and its affiliates' stake in the properties will bring in around $1.54 billion from the sale, which is the largest U.S. oil and gas transaction this year. It didn't say how much it invested in the company. But a source familiar with the transaction said it was "a good deal," and comparing the sale, which clocked in at $73,170 per acre on average, to the $25,000 per acre Kohlberg Kravis Roberts & Co. LP and Hilcorp Energy Co. achieved when they sold properties in the same area to Marathon Oil Corp. in 2011 for $3.5 billion.

Global Hunter Securities Inc. analyst Sameer Uplenchwar wrote in a report Wednesday that even though Devon looks to be paying a full price for a core Eagle Ford acreage position, the deal is positive for the company and addresses its inventory problem.

Blackstone originally invested in the company in January 2011 and in February of last year helped it secure $1 billion in bank debt. Angelo Acconcia led the deal from Blackstone Energy Partners and David Foley from the Blackstone Group.

Devon's shares were up 2.6% Wednesday morning after advancing almost 5% yesterday on reports of a potential deal.

The Woodlands, Texas-based GeoSouthern, one of the first companies to successfully execute in the Eagle Ford oil play, will continue to operate all of its other assets in the Texas Gulf Coast region and other areas, but Blackstone will exit its stake in the company through the transaction.

The deal is expected to close in the first quarter.

After reports started to fly Tuesday about the impending deal, GimmeCredit LLC analyst Philip Adams published a report saying that the acquisition appeared to fit well with Devon's 239,000 acres in East Texas. He noted that Devon had $4.3 billion in cash as of September, $3.6 billion of which is offshore, but that the company said on its third quarter conference call that it was in the position to repatriate about $2 billion around year-end at a tax rate of 4% to 6%. So he expected about half of the purchase price would be financed externally, "reducing the potential credit impact considerably."

The properties produce 53,000 barrels of oil equivalent per day over 82,000 net acres with at least 1,200 undrilled locations. The risked recoverable resource is estimated at 400 million barrels of oil equivalent, the majority of which is proved reserves.

Devon president and CEO John Richels said in a statement the transaction secures a "premier acreage position" in the "very best part" of the oil play. "This acquisition enhances our already strong North American portfolio by adding another low-risk, light oil asset that provides outstanding well economics and self-funded growth," he said.

Richels added that the company expects the deal to be immediately accretive to "virtually every metric." On the conference call, Richels said the deal will boost debt-adjusted cash flow per share by 5%, pre-tax cash margin per barrel of equivalent by 10% to 15% and earnings per share by 20%.

The acreage is in DeWitt and Lavaca counties in Texas and is largely contiguous, with most of the position held by production. The company claims the position is in the best part of the play, as evidenced by the highest average initial production rates in the entire play and average estimated ultimate recoveries in DeWitt County exceeding 800,000 barrels of oil equivalent per well.

"We have considered many acquisition opportunities over the past few years, but none have met our stringent criteria," Richels said. "Our patience and disciplined approach have culminated in this outstanding opportunity."

Richels noted that companies with concentrated asset positions in the best oil plays in the country, such as the Eagle Ford, Bakken and Permian Basin, are trading at substantially higher multiples.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
BX $32.61 0.49%
DVN $40.72 0.97%
AAPL $112.34 4.29%
FB $89.89 3.05%
GOOG $614.34 2.77%

Markets

Chart of I:DJI
DOW 16,351.38 +293.03 1.82%
S&P 500 1,948.86 +35.01 1.83%
NASDAQ 4,749.9790 +113.8740 2.46%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs