Energy Prospectus

HOUSTON, June 15 (Reuters) - U.S. shale oil producer Devon Energy Corp said on Wednesday it would sell Texas acreage to Pioneer Natural Resources Co and an undisclosed buyer for $858 million.

Devon also raised its 2016 capital budget by $200 million, now planning to spend $1.1 billion to $1.3 billion this year.

Separately, Pioneer said it would add five drilling rigs in Texas starting in September, bringing its total rig count to 17 as oil prices recover to $50 a barrel.

This is good news for Devon shareholders. The company is hoping to raise approximately $2.5 Billion to fund their Felix acquisition and a aggressive Stack drilling program.

This brings total announced non-core transactions to $2.1 billion.

“We are pleased to announce these highly accretive non-core divestitures, concluding our E&P sales process ahead of schedule,” said Dave Hager, president and CEO. “We anticipate our total non-core asset sales to be at or above the top end of our $2 billion to $3 billion guidance, with the sale of our 50 percent interest in the Access pipeline.”

“At least two-thirds of our asset sales proceeds are expected to be used to further strengthen our investment-grade balance sheet, while one-third are targeted for reinvestment in our best-in-class U.S. resource plays,” said Hager. “With the success of our E&P asset sales, we are now in the planning stages to increase our upstream activity by approximately $200 million in the second half of this year. This additional activity will deliver production in early 2017 and beyond. Additionally, we are seeing even better than expected results from our core business and we are raising the mid-point of our full-year 2016 production guidance by 7,000 Boe per day.”

Increasing 2016 Capital Program; Raising Full-Year Production Guidance

The Company now expects its full-year 2016 upstream capital program to range between $1.1 billion and $1.3 billion, an increase of $200 million from previous guidance. The incremental capital investment will be deployed in the Delaware Basin and the Oklahoma STACK play beginning in the third quarter of 2016 with the addition of three operated rigs. Devon is evaluating further accelerating activity in the fourth quarter of 2016.

The Company is also raising its full-year 2016 production guidance from core assets to a range of 540,000 to 560,000 Boe per day. This represents an increase of 7,000 Boe per day from previous guidance. More detailed information for Devon’s 2016 production and capital outlook will be provided within second-quarter 2016 earnings disclosures.

Midland Divestitures Transaction Details

In the northern Midland Basin, Devon agreed to monetize its working interest across 15,000 net acres in Martin County, Texas along with 13,000 net acres in eight surrounding counties for $435 million. Current net production associated with this largely undeveloped leasehold position is approximately 1,000 Boe per day, with oil accounting for roughly 70 percent. Combined with the recent sale of the Company’s overriding interest in Martin County, proceeds from Devon’s northern Midland Basin acreage position totaled $574 million.

In a separate transaction, Devon entered into an agreement to sell its assets in the southern Midland Basin for $423 million. Current production from these assets is approximately 22,000 Boe per day, of which 33 percent was oil. At Dec. 31, 2015, proved reserves associated with these properties totaled 43 million Boe. Field-level cash flow accompanying these assets, which excludes overhead costs, amounted to $13 million in the first quarter of 2016.

The Company expects to incur minimal taxes associated with these divestitures. These transactions are subject to customary terms and conditions and are expected to close in the third quarter of 2016.

Jefferies LLC acted as the lead financial advisor to Devon on the divestiture transactions. RBC Richardson Barr also acted as a financial advisor to Devon. Vinson & Elkins LLP acted as legal advisor to Devon.

This raises my valuation of Devon by $4/share to $56.00. An updated forecast model will be posted to the EPG website on 6/16.

First Call's price target is $39.47, but I am sure that number will be raised as analysts update their forecast models. With a stronger balance sheet, this very high quality company needs to be trading at a higher multiple of cash flow. Devon has a LARGE leasehold position in the core of STACK where well level economics are good at $50 oil and fantastic at $60 oil.

Devon Energy Corp: Asset Sales Tracking High End of Guidance
Evan Calio – Morgan Stanley rates DVN a Top Pick with a price target of $54.00
June 16, 2016 1:24 PM GMT

In a win-win transaction, DVN sells Martin Co acreage to PXD (and producing Midland to unnamed buyer) as asset sales track high-end of $2-3Bn guidance. Expect Access sale shortly. DVN accelerates activity, adds 3 rigs starting in 3Q16 with capex +$200MM. Both E&Ps are our top picks into upcycle.

Win-win: In a mutually-beneficial transaction, DVN sells its Martin County acreage to PXD. From DVN's perspective, success of the asset sale program continues balance sheet repair process and allows it to accelerate activity in 2H16, delivering value-accretive volumes in 2017. DVN's concurrent 7Mboed 2016 production guidance increase (unrelated to the rig adds) highlights its top-tier resource and execution ability. DVN completes its upstream asset sale program ahead of schedule, bringing in $2.0Bn in total. Combined Midland proceeds of $858MM broadly in line with the $900MM bottom end of our valuation estimates range.

DVN's prior guidance for the entire monetization program, which includes Access pipeline, was $2-3Bn and management currently expects total proceeds "to be at or above the top end" of this range. This implies Access to be sold at or above $1.0Bn, which is our base case (and included in our NAV). Access sale is still on track to happen in the next few weeks though could slip into early July given complicated nature of the contract (25-year transport agreement and Pike volume upside).

The transaction improves DVN's leverage to 2.6x Net Debt/EBITDA (2017 on the Strip), which should improve further to 2.2x once Access is monetized (assuming $1Bn sale, loss of $100MM in cash flow and $1.50/bl transport cost increase for associated volumes). DVN's portfolio moves likely done for the time being, though DVN retains CBP and some producing Midland assets.