Devon strikes again at year's end with $2.5 billion in buys
DAVID MICHAEL COHEN, PLS INC., HOUSTON
THE US UPSTREAM MARKET experienced an upswing in deal activity heading toward year's end, led by $2.5 billion in acquisitions from Devon Energy. Devon gave the deal markets a similar boost toward the end of 2013 when it acquired GeoSouthern's Eagle Ford assets for $6.0 billion, but this time it is upgrading existing positions to become the industry's leading leaseholder in Oklahoma's emerging STACK play and Wyoming's Parkman/Turner play.
In the STACK deal, Devon is acquiring the "best-in-class" assets of privately held Felix Energy for $1.9 billion, marking the third-largest deal this year in the US upstream sector, after Noble Energy's $3.9 billion acquisition of Rosetta Resources and WPX Energy's $2.8 billion RKI E&P buy. Devon estimates it is paying $20,000 per acre for Felix's 80,000-net-acre Woodford and Meramec position after allocating $33,300 per boe/d for 9,000 boe/d in existing production. In 2015's stilted deal market, PLS Inc.'s proprietary valuation analytics indicate that only the "core of the core" of resource plays, heavily weighted to the Permian, have commanded value for undrilled acreage. Examples of Permian acreage values in 2015 include Noble/Rosetta ($12,500/acre), Diamondback/Cobra ($25,000/acre) and Yantai Xinchao/Tall City ($8,500/acre).
Felix's well results demonstrate why the STACK play may be able to compete with the Permian. Almost all of Felix's leasehold is concentrated in the oil window of both the Meramec and the Woodford, de-risked and in full development mode. In an August presentation, Felix touted its 2015 program as consistently achieving IRRs above 40% with its last three wells showing RORs from 35% to 70% based on $50 oil and $3 gas. Its first 13 operated Meramec wells had IP rates averaging 1,341 boe/d (83% liquids) from 1-mile and 2-mile laterals, tracking a 1.36 MMboe EUR (75% liquids).
Nonetheless, Devon CEO Dave Hager said the deal would not have been possible if Devon's midstream MLP affiliate EnLink Midstream wasn't simultaneously agreeing to acquire Midcontinent gathering company Tall Oak Midstream for $1.55 billion. Felix's entire acreage position is dedicated to Tall Oak's gathering and processing assets. "We leveraged the midstream relationship to secure the Felix transaction," Hager said on a conference call. "And the EnLink relationship gave us a strategic advantage in this transaction. We would not have been able to place the value on Felix we did unless EnLink controlled the midstream." Both Felix and Tall Oak are backed by private equity firm EnCap Investments.
The acquisition by EnLink provides an unusually quick turnaround for EnCap's Tall Oak investment. The gathering firm launched in early 2014 with a $100 million initial equity commitment from EnCap Flatrock Midstream, a JV formed in 2008 between EnCap and Flatrock Energy Advisors. That commitment was later increased to $400 million. The company has two gathering and processing systems serving west-central Oklahoma's STACK play and the "Central Northern Oklahoma Woodford" or CNOW play, both supported by long-term, fixed-fee contracts with acreage dedications averaging 15 years. Felix is the largest of Tall Oak's 15 customers.
In Wyoming, Devon is acquiring 253,000 net acres in the Parkman oil fairway with wells producing 7,000 boe/d (85% oil) for $600 million. After attributing $100 million of the deal value to acquired midstream assets and backing out production at $30,000 per boe/d, Devon estimates it is paying $1,100 per acre for undeveloped leasehold-notable in a 2015 deal market where assets have often sold for the value of their existing production alone.
Devon will pay $300 million cash to sellers NewWoods Petroleum, Renos Land & Minerals and REMI Midstream and issue shares valued at $300 million to NewWoods, according to an SEC filing. NewWoods is a portfolio company of First Reserve and the successor of Permian driller RKI E&P. When WPX announced it was acquiring RKI in July, it said the Powder River assets would not be part of the deal but rather would be divested or spun off prior to closing.
To fund the cash portion of these acquisitions and strengthen its financial position, Devon is planning $2-3 billion in asset sales next year including its Access pipeline system in Canada (in which Devon has $1 billion invested) and non-core upstream properties producing 50,000-80,000 boe/d (~50% liquids). Upstream assets being considered for divestment include Carthage field in East Texas, the Mississippi Lime, the Granite Wash and portions of the Midland Basin. On the conference call, Hager noted that Devon repaid all the debt taken on for its GeoSouthern acquisition within one year using non-core divestment proceeds.
Devon has already executed one of these non-core sales less than two weeks after announcing the program. Coming back into the buyside of the market, BP agreed to buy Devon's assets in the San Juan Basin. The bulk of the acquisition consists of Devon's operated stake in the Northeast Blanco Unit, a 33,000-acre coalbed methane project with 480 wells on federal land in San Juan and Rio Arriba counties, New Mexico. The deal adds to BP's existing 550,000-acre position in the area where it has been active since the 1920s. Market watchers will note that this marks the first acquisition in more than seven years for BP's Lower 48 onshore unit, which began operating as a separate business headquartered in Houston early this year.
