Devon Shifts Focus to Eagle Ford Oil Plays with Asset Sale to LINN Energy

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The makeover at Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma) is complete. Following a strategic decision late last year to focus on oil plays in the Eagle Ford Shale, Devon has:

• Invested $6 billion to buy 82,000 acres in the Eagle Ford Shale.
• Committed to invest about $1.1 billion to develop that acreage.
• Sold its Canadian assets for $2.7 billion.
• Sold its non-core, gas-rich assets in the U.S. for $2.3 billion.

Click on the image at right to see crude oil production gains in the Eagle Ford from 2008 through 2013.

The latest, and apparently last, transaction in the company's transformation was its decision June 30 to sell its non-core U.S. oil and gas assets to LINN Energy LLC (NASDAQ:LINE) (Houston, Texas) for $2.3 billion. The U.S. assets include properties in the Rockies, onshore Gulf Coast, and Mid-Continent regions. Natural gas accounted for about 80% of the production from those properties. Lower gas prices, vis-à-vis crude oil, made those assets less attractive than oil-rich Eagle Ford acreage. Soft gas prices have hurt Devon's profitability in recent years.

"With the sale of our remaining non-core assets, the portfolio transformation that we announced late last year is now complete," said John Richels, Devon's president and chief executive officer, in a statement June 30. "In a short period of time, we transformed our portfolio through three significant steps: the accretive Eagle Ford entry, the innovative creation of EnLink Midstream, and the sale of our non-core properties.

"Devon is now concentrated in some of the most attractive North American resource plays, with liquids expected to approach 60% of our production by year-end and multi-year oil production growth projected to be in excess of 20%. In addition to creating a platform that supports competitive and high-margin growth, we remain committed to maintaining strong investment-grade credit ratings. Upon completion of this transaction, we will have reduced our net debt by more than $4 billion this year."

Devon turned a few heads in the Oil & Gas Industry last November when it spent $6 billion to buy the Eagle Ford assets of GeoSouthern Energy (The Woodlands, Texas). GeoSouthern held prime acreage there: its wells were producing about 53,000 barrels of oil equivalent per day (BOE/d). Recoverable reserves are estimated to be approximately 400 million barrels of oil equivalent (BOE), the majority of which is proved reserves, Devon added. But analysts wondered if Devon wasn't overpaying when it spent a record average of $72,000 per acre to buy GeoSouthern's holdings.

Shortly thereafter, Devon doubled down on its Eagle Ford bet, announcing it would spend $1.1 billion to drill more than 200 wells there this year. Only time will tell if Devon overpaid for its Eagle Ford stake, but so far investors like the move: Devon's stock is up about $16 per share, about 26%, since announcing its entry into the Eagle Ford last Thanksgiving.

The newly acquired Eagle Ford acreage produced about 49,000 barrels of oil-equivalent per day (BOE/d) for Devon this past March. But production grew to an estimated 64,000 BOE/d late in the second quarter. The company expects production will average 70,000 to 80,000 BOE/d for 2014, and more than 100,000 BOE/d in 2015. ConocoPhillips (NYSE:COP) (Houston, Texas), one of the largest crude-oil producers in the Eagle Ford, produces an average of about 140,000 BOE/d there.

Devon also is a large crude-oil producer in the Permian Basin, where production averages about 91,000 BOE/d. It also is a major producer in the gas-prone Barnett Shale in Texas.

When the GeoSouthern acquisition was announced last November, Devon's Richels said: "With this transaction, we have secured a premier acreage position in the very best part of the world-class Eagle Ford oil play. This acquisition enhances our already strong North American portfolio by adding another low-risk, light oil asset that provides outstanding well economics and self-funded growth. Furthermore, this transaction is expected to be immediately accretive to virtually every metric, including cash flow per debt-adjusted share."

Crude-oil production from the Eagle Ford continues to grow. Through 2013, daily production averaged about 688,000 barrels per day (BBL/d), up from less than 1,000 BBL/d in 2009, according to the Texas Railroad Commission (Austin, Texas). Industry reports that production in the Eagle Ford continues to rise. At 2013 production levels, the Eagle Ford was the nation's third-highest producing formation, trailing the Permian Basin and Bakken Shale. For more on increasing crude-oil production in the Eagle Ford, see May 21, 2014, article- Texas Crude Oil Production Surges in 2013, Could Double by 2020 and June 10, 2014, article-- ConocoPhillips in the Eagle Ford: A Good Story Gets Better.

"Devon is one of many producers that have been trying to rebalance their portfolio in the wake of weak gas prices," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "They have made a large, expensive splash in entering the Eagle Ford, but if oil prices remain at their current levels, it may turn out ... to be a smoking deal."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.