For $6 billion, Devon Energy (ticker: DVN) purchased 53,000 BOEPD, 82,000 net acres and more than 1,200 drilling locations across DeWitt and Lavaca Counties in the Eagle Ford Shale from GeoSouthern Energy. The acquisition will be funded with a combination of cash on hand and borrowings.
Deal Metrics and Valuation
Based on the purchase price, the deal could be valued at $113,208 per flowing BOEPD or $73,171 per acre. We believe the deal was negotiated on an estimate of future cash flows for the following reason. Using the average of the five purest Eagle Ford players in EnerCom’s database (SN, SM, ROSE, CRZO, AEF), as of November 15, 2013, these five players were trading at $124,524 per flowing BOEPD, a 9% premium to the DVN purchase. However, those five players were trading at an average P/CFPS 2014 multiple of 3.9 times, in line with what DVN acquired the assets for – 4.0 times EV/EBITDA 2014E. The acquired assets are expected to grow at a compound annual growth rate of 25 percent over the next several years, reaching a peak production rate of approximately 140,000 BOE per day by 2017.
Location, Location, Location
Sourced from the press release, Devon said: “The acquired Eagle Ford acreage is located in DeWitt and Lavaca counties in Texas and is largely contiguous, with most of the position held by production. The acreage position is located 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 BOE per well.” The map provided reinforces this point as the majority of DVN’s acreage is in the oil and condensate windows of the play. OAG360 notes the risked recoverable resource is estimated at 400 MMBOE, the majority of which is proved.
Devon provided an interesting slide in its acquisition presentation which stated the assets were purchased at 4.0 times EV/EBITDA 2014E and 2.5 times EV/EBITDA 2015E – well below current Eagle Ford peer levels. If the acreage is so “good”, why was Devon able to purchase the assets so cheap? This question was also asked on the conference call. DVN provided two explanations: one, we are currently in a buyer’s market, and two, not many companies are looking to purchase a $6 billion package of assets.
Its apparent to us a new Devon has surfaced. They have acquired a key stake in one of the most profitable and robust oil plays in the United States which is expected to be immediately accretive to cash flow per debt adjusted share, and become immediately self-funding in 2014. With non-core asset sales on the horizon, and the combination of its infrastructure business with Crosstex Energy in October, Devon has addressed market concerns over inventory longevity and positioned itself to grow in a world-class play.
We would also point out that Blackstone, the private equity company backing GeoSouthern’s Eagle Ford operations made its exit with this acquisition. Is this the start of a new trend marking the peak of the shale revolution? We doubt it, but it is an interesting observation nonetheless.
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