Devon Fills Up Gas Reserve With Mitchell Purchase

Devon Energy (DVN) is filling up with gas.

In a move long-rumored on Wall Street, 82-year-old gas magnate George Mitchell agreed to sell Mitchell Energy and Development (MND), the company he founded that bears his name, to Devon Energy, which will pay $31 in cash plus 0.585 share of Devon stock for each share of Mitchell stock. Based on Devon's closing price Monday, the deal is worth $60.40 per Mitchell share, a 32% premium over Mitchell's $45.65 closing price Monday.

Including the assumption of nearly $400 million in Mitchell debt, the deal is worth nearly $3.5 billion. The combination creates the second-largest independent domestic natural gas exploration and production company, adding nearly 2.5 trillion cubic feet of gas reserves to Devon's portfolio. The combined company will have reserves equivalent to 1.5 billion barrels of oil. Fifty-eight percent of the reserves are natural gas, 32% crude oil and 10% natural gas liquids.

"The Mitchell properties fit perfectly with our long-term objectives,'" said J. Larry Nichols, Devon's chairman, president and CEO, in a statement announcing the merger. "We believe this transaction can deliver significant growth in per-share value, as Devon's shareholders have come to expect."

George Mitchell has indicated his willingness to sell the company in the past, both as a plan of succession and as a way to monetize his large holding. While recently selling more than 4.6 million shares, he still owns about 22 million Mitchell shares, or about 46% of the company. Although he has reportedly turned down several previous acquisition offers, the Devon offer values the company close to the company's highs of last November.

"This transaction provides important benefits to our shareholders and employees," said Mitchell in the statement. "It provides significant value while retaining a unique opportunity to participate in the exciting upside potential of Devon. Our shareholders and employees will benefit from becoming part of a larger, stronger and more diversified company."

While analysts and investors are still reviewing the details of the transaction, one analyst likes what he sees. "It is a particularly good deal, especially for Devon," says Mark Meyer, an analyst at Simmons & Co., a Houston energy investment boutique. "Mitchell has the best growth and inventory story among independent E&P companies. This provides Devon with an acquisition that improves its growth trajectory." Simmons has provided banking services to Mitchell.

Devon says the purchase will be accretive to the company's reserves per share, production per share, cash margin per share and earnings per share.

The deal also refocuses Devon on domestic gas markets, a strength that recent acquisitions have diluted. "I like the asset concentration, the domestic concentration," says Meyer. "Past deals brought some international complexity, but this is very straightforward. It adds scale where they are trying to add scale."

The Devon-Mitchell deal will no doubt give rise to talk of other natural gas companies that might be ripe for purchase, similar to talk that arose once Williams (WMB) reached an agreement to purchase Barrett Resources. The deal is also likely to rekindle at least short-term interest in natural gas stocks, which have lost more than 20% of their value since May on concerns over rising natural gas storage levels and sagging gas prices.

In premarket trading, Devon looks about $2.65 lower, while Mitchell is currently bid up nearly $9 at $54.60.

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