Energy Prospectus

CEO Hager: STACK is “the best emerging development play in North America”

Devon’s STACK position has grown by more than 150,000 net acres in recent months

Devon Energy (ticker: DVN) has secured the strongest foothold in the Cana-Woodford, pro forma for its $1.9 billion acquisition of Felix Energy LLC on December 7, 2015. Rumors of the impending cash-and-stock exchange were first brought to light by Reuters on December 3, but today’s announcement carried additional acquisitions that were unforeseen in the preliminary report.

In addition to Felix Energy, Devon purchased $600 million of acreage in the Powder River Basin from an undisclosed private seller. A third deal, in conjunction with EnLink Midstream Partners (ticker: ENLK), involved the purchase of privately held Tall Oak Midstream for $1.55 billion. Tall Oak’s assets consist of gathering and processing assets located in the Cana-Woodford region, or the STACK (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties), as Devon calls it. Both Felix Energy and Tall Oak Midstream were financed by EnCap Investments, a private equity company with approximately $27.5 billion of limited partner capital interests in the oil and gas sphere.

Collectively, the three acquisitions announced by Devon and EnLink amount to $4.05 billion. Total costs to Devon were $2.50 billion and will be funded with approximately $1.35 billion of equity and $1.15 billion of cash on hand.

Gastar's exposure to STACK is in Kingfisher County.

Analyst firms acknowledged the attractiveness of the STACK acquisition. The price, however, was a different story.

“We think stock likely comes under pressure,” said a note from Wells Fargo Securities, addressing the announcement. “In sum, levering up in this environment will likely not be well received, Felix price tag looks rich, and some conversations last week (regarding this potential transaction) had investors questioning what we don’t know about their Permian position.”

Capital One Securities had a similar take, saying, “We think the acquisitions announced today are attractive assets and are a good strategic fit, but it appears that DVN is somewhat paying up and the deals are slightly dilutive.” DVN management said about 30 million shares will be issued in accordance with the acquisitions, diluting its share count by about 8%.

Overall, the metrics for the STACK acquisition on a per-acre basis range from $19,800 to $23,000 per acre net of production, based on analyst estimates. On a simpler, black and white breakdown, DVN paid $23,750/acre and about $210,000/flowing BOE. That compares to $9,960/acre and about $86,000/flowing BOE in regards to a May 2014 transaction conducted in the same region.

Newfield Exploration (ticker: NFX), a prominent operator in the region, benefitted from the valuation: its stock dropped only (2%) today when the S&P Energy 1500 Index declined by nearly twice that amount as oil prices slid to a seven year low. Devon closed about (10%) lower.

Moving forward, Devon anticipates the STACK will receive 20% to 25% of its 2016 budget, which is forecasted at $2.5 billion, and the plan is expected to provide oil growth of 10% in 2016.

Seaport Global Securities was a bit more bullish on Devon’s Three Pronged Strategy than some of its peers, saying: “DVN had one of the lowest corporate Q3 recycle ratios in the large cap space based on our recent study, so we think adding the very economically promising Stack to its top-tier Delaware and Eagle Ford assets and doing it in conjunction with a commitment to shed $2B-$3B in non-core assets makes strategic sense.”

The Global Undervalued Fund just filed an amended 13D (not G mind you) with 9.2% of GST common as well as $25 million in bonds. Been buying recently paid as high as $1.78. The principal behind the Fund is John Kleinheinz out of Fort Worth who was also some of the money behind Husky Ventures. He knows what he is buying.

Despite a bloodbath in energy stocks, GST common has been up consistently since news of the DVN-Felix transaction surfaced. If GST announces good results on their Meramec well, I think the stock really takes off.