Devon acquires Grayson Mill Energy assets for $ 5.0 B

[Petroleum economist]

OKLAHOMA CITY, July 08, 2024 (GLOBE NEWSWIRE) -- Devon Energy (NYSE: DVN) announced today it has entered into a definitive purchase agreement to acquire the Williston Basin business of Grayson Mill Energy in a transaction valued at $5 billion, consisting of $3.25 billion of cash and $1.75 billion of stock to the sellers. The transaction is subject to customary terms and conditions, including various purchase price adjustments, and is expected to close by the end of the third quarter of 2024, with an effective date of June 1, 2024.
“The acquisition of Grayson Mill is an excellent strategic fit for Devon that allows us to efficiently expand our oil production and operating scale while capturing a meaningful runway of highly economic drilling inventory,” stated Rick Muncrief, Devon’s president and CEO. “This transaction also creates immediate value within our financial framework by delivering sustainable accretion to earnings and free cash flow that will result in higher distributions to shareholders over time.”

TRANSACTION HIGHLIGHTS
• Immediately accretive to financial metrics – The transaction is immediately accretive to Devon’s key per-share financial measures, including earnings, cash flow, free cash flow and net asset value. The assets were acquired at less than 4-times EBITDAX, with an estimated free cash flow yield of 15 percent at an $80 WTI oil price.
• Enhances scale and scope of operations – The acquisition adds a high-margin production mix that further positions Devon as one of the largest oil producers in the U.S. Pro forma for the transaction, the company estimates its oil production to average 375,000 barrels per day, with total production reaching an average of 765,000 oil-equivalent barrels (Boe) per day across its diversified portfolio of assets.(1)
• Transforms Williston Basin business – The transaction significantly expands the company’s position in the Williston Basin with the addition of 307,000 net acres (70 percent working interest). Production from the acquired properties is expected to be maintained at approximately 100,000 Boe per day (55 percent oil) in 2025. With enhanced scale in the basin, Devon expects to realize up to $50 million in average annual cash flow savings from operating efficiencies and marketing synergies. The acquisition also adds 500 gross locations and 300 high-quality refrac candidates that effectively compete for capital in the company’s portfolio. On a pro forma basis, Devon will possess an inventory life of up to 10 years in the Williston Basin at a constant development pace of three operated rigs.
• Midstream ownership enhances margin – The acquired business generates peer-leading operating margins in the Williston Basin that benefit from midstream infrastructure ownership in 950 miles of gathering systems, an extensive network of disposal wells and crude storage terminals. This midstream ownership creates a margin uplift of more than $125 million of EBITDAX annually and provides marketing optionality to capture higher pricing through access points to multiple end use markets.
• Improves outlook for return of capital to shareholders – Due to the accretive nature of this transaction to free cash flow, Devon’s board of directors has expanded its share-repurchase authorization by 67 percent to $5 billion through mid-year 2026. The company also expects this acquisition to be accretive to the company’s dividend payout in 2025 and beyond.
• Maintains strong financial position – The transaction structure supports Devon retaining its strong investment-grade credit ratings with a projected net debt-to-EBITDAX ratio of approximately 1.0 times upon closing. The company plans to improve its financial strength by allocating up to 30 percent of its annual free cash flow towards reducing $2.5 billion of debt over the next two years.
(1) Pro forma production is a combination of Devon’s 2024 guidance and Grayson Mill’s 2025e volumes of ~100 MBOED (~55% oil).

FINANCING DETAILS
Devon will fund the $5 billion acquisition with $3.25 billion of cash and issue 37 million shares of common stock valued at $1.75 billion. The company plans to finance the cash portion of the purchase price through a combination of cash on hand and debt.

2024 OUTLOOK
Devon will provide updated forward-looking guidance for 2024 upon closing of the transaction.

ADVISORS
Citi is serving as financial advisor and Kirkland & Ellis LLP is serving as legal advisor to Devon

[dan_s]

Some work for me when I get back from Alaska.

[Petroleum economist]

Summary
At first inspection the acquisition of the Williston Basin assets of Grayson Mill Energy ($ 3.25 B cash and $1.75 B stock) looks like a good deal for Devon and its shareholders.
The price paid seems reasonable. The balance sheet weakens, but can recover quickly. The eps will increase starting 2025 and the shareholder returns will increase starting 2026.

Transaction price
• Devon paid $ 5.0 B paid for 100 K BoE/d.
• This normalizes as 5,000/100= $ 50 M/K BoE/d, This in the middle of the normal range of $ 40-70 M/K BoE/d.
• As many factors influence a price this is only a very rough assessment.

Impact on reserves
• Late 2023 Devon was a bit low on reserves, but had a good RRR.
• Proven reserves (1,817 M BoE) are equivalent to only 7.4 years of 2024 production (industry average 9.5-1.0 years).
• Reserves Replacement Raio (RRR) over the period 2019 2023 was a good at 1.25 (industry average = 1.02), suggesting that in the near future additional reserves can be booked.
• No reserves numbers were shared for Grayson Mill. However, due it limited size compared to Devon (15%) it is thought that Grayson Mill cannot have any significant impact on the Devon reserves.

Impact on balance sheet
• Before the deal, Devon had in April 2024 a moderate solvency of 49.4%.
• Due to the deal the solvency reduces a mediocre 45.3%.
• With WTI at $ 80/bbl and assuming that 50% of the FCF will flow towards the balance sheet, it will take Devon till late 2025 to restore the solvency to >50%. Late 2026 solvency can be a good 56%

Impact on profitability
• The impact on 2024 profits will be negligible. The income gains in Q4 will be offset by the extra integration cost, the higher interest payments, and the closure cost of the $ 3.25 B financing package.
• Starting 2025 profits will start to increase.
• My guess is that with WTI = $ 80/bbl, the eps between 2025-2028 will increase by $ 0.60 to $ 6.28-6.67 (PE = 7.0-7.5).

Impact on shareholder returns
• Before the acquisition, Devon had the intention to return 70% of the FCF to shareholders. I assumed that this till late 2025 will be reduced to 50% .
• Devon pays a fixed interim dividend of $ 0.22 and a variable dividend of $ 0.15-0.50. I think this can be maintained
• Devon announced that share buybacks authorization was increased to $ 5.0 B. I believe that it will take Devon years to reach this limit.
• In 2024 Devon can buy back shares for $ 800 M. In 2025 this can increase to $ 1.2 B and in 2026 and beyond to $ 1.5 B. Without the deal share buybacks in 2024 and 2025 would have been higher.
• Shareholder returns can be 5.6% in 2024, increasing to an attractive 8.0% in 2026 and beyond.

Conclusions
• The acquisition of Grayson Mill looks like an attractive deal for Devon and its shareholders
• The impact on reserves is limited.
• The balance sheet will dip, but can recover within 1 ½ years.
• The eps will be unaffected in 2024, but in 2025 and beyond can increase with 10%.
• The shareholder returns will be average in 2024/2025 but can increase to 8% in 2026 and beyond.

[dan_s]

Some work for me when I get back from Alaska.