Devon Energy (DVN - Get Report) said Thursday it agreed to sell its half stake in the Access pipeline to Canada Pension Plan Investment Board-backed Wolf Midstream for C$1.4 billion ($1.1 billion), the last of its expected asset sales to raise cash during a difficult time in the oil and gas industry.
The deal includes the potential for a C$150 million payment with the sanctioning and development of a new thermal-oil project on Devon's Pike lease in Alberta, Canada.
The pipeline system transports blended bitumen and diluent between the Christina Lake area of Northeastern Alberta and Edmonton.
Wolf, which CPPIB formed in September of last year with the company's management, said separately it will fund the deal through an C$825 million investment from CPPIB and third-party debt financing. "Access is an attractive foundational asset for Wolf that provides us with immediate scale in the region," CEO Gord Salahor said in the statement.
Devon CEO and president Dave Hager said in a statement that the "highly accretive" sale of Access completes the company's asset divestiture program with proceeds of $3.2 billion, surpassing the top end of its $2 billion to $3 billion target. "Furthermore, the divestiture proceeds significantly strengthen our investment-grade balance sheet and position us to further accelerate investment in our best-in-class U.S. resource plays, led by the Stack and Delaware Basin," he said.
As part of the deal, Devon's thermal-oil acreage is dedicated to the pipeline for an initial 25 years with a market-based toll applied to production from Devon's three Jackfish projects, which are fully operating. As a result, Devon expects its lease operating expense at the Jackfish complex to increase by $100 million per year.
The agreement also includes the potential for the pipeline toll to be cut by as much as 30% with the development of new thermal-oil projects. Devon's next potential project is the first phase of Pike, which is next to the Jackfish complex. Devon operates the joint venture leasehold with a 50% working interest. Devon said front-end engineering and design work at Pike's first phase is complete but the project hasn't been sanctioned.
The transaction must clear regulators but is expected to close in the third quarter.
Phillips Johnston, an analyst at Capital One Securities, said in a note that the price tag is above Wall Street's estimates of $1 billion and comes after worries when the sale was delayed. He's raising his net asset value for the company by $1 to $41 per share and currently has an overweight rating on the stock.
Johnston estimates that the sale will modestly compress the company's leverage ratios assuming $1 billion in after-tax cash proceeds (Devon previously indicated the sale would result in 5% to 10% tax leakage), which would allow it to begin to grow again. "We believe there is a good chance that DVN further accelerates activity in the Stack and Delaware Basin later this year beyond the three incremental rigs that management announced in mid-June," he said.
Seaport Global Securities analyst Mike Kelly said Devon's focus will likely turn to establishing a growth trajectory for its sizeable production base, which he thinks will require more than $2 billion in capital expenditures and more supportive oil prices of around $60 per barrel. He has a neutral rating on the stock with a $34 price target.
Companies owned by CPPIB have been picking up oil and gas assets recently to capitalize on low valuations during the downturn. It also backs Seven Generations Energy, which bought properties in Canada's Montney Nest area from Paramount Resources. earlier this month for $1.46 billion. And in May its Teine Energy unit acquired Saskatchewan assets from Penn West Petroleum in June for $767 million.
Bennett Jones LLP's Pat Maguire counseled Devon on the sale. Peters & Co. and Norton Rose Fulbright LLP's Richard Borden and Kaylynn Litton advised Wolf.