Sale moves Devon closer to goal of becoming a purely North American onshore company

Independent energy company Devon Energy Corp. has agreed to sell all of its Gulf of Mexico shelf assets to Apache Corp. for $1.05 billion, or roughly $840 million after tax. The agreement covers Devon's 158 blocks (including 51 producing blocks) located offshore Texas, Louisiana and Alabama.

The properties comprise of 158 blocks on the shelf with total proved reserves of 246 bcfe and 112 MMcfe/d of production.

Transaction price of $1.05 billion equates to $9,375/mcfe of daily production and $4.25/mcfe of proved reserves, both ahead of recent Gulf of Mexico transactions.

"When we first announced our plans to reposition Devon, we expected total after-tax proceeds of between $4.5 and $7.5 billion," said Larry Nichols, Devon's chairman and CEO. "This sale of the remaining Gulf of Mexico assets, combined with our previously announced divestitures of $8.3 billion, ensures that we will exceed the upper end of that range.” 

"Devon's exit from the Gulf of Mexico creates a great opportunity for Apache to add one of the best remaining Shelf asset portfolios to our existing core area," said G. Steven Farris, Apache's chairman and CEO.

Apache will fund the acquisition primarily from existing cash balances supplemented with commercial paper. Apache has hedged a portion of the production for three years using swaps and collars.

"At 3.7 times estimated cash flow, this transaction is immediately additive to Apache's per-share earnings and cash flow, generating excess cash flow that can be used to further Apache's growth through continued development of our global exploration program," said Farris.

On November 16, 2009, Devon announced plans to divest its Gulf of Mexico and international assets to allow the company to focus on its world-class North American onshore assets. The divestiture proceeds will be allocated between the acceleration of development of Devon's North American onshore properties, debt reduction and share repurchases.

The remaining pieces in Devon's original divestiture plan are its interest in the Panyu field offshore China and other minor international assets. Estimated proved reserves of these assets at 12/31 was 228 bcfe and '09 production was ~100 MMcfe/d, which could add another $0.5- $1 billion, according to Jefferies & Co.

Devon expects the closings of all divestitures to be completed prior to year-end. According to Jefferies & Co., “Assuming the remaining pieces are sold this year, the company should end the year with approximately $6 billion of cash on hand.”

In summary, Jefferies sees Devon as primarily a Barnett Shale company, with the play accounting for nearly 40% of its year-end proved reserves and 30% of current North American onshore production. The firm sees Cana as an excellent asset with returns comparable to Barnett, but thinks the company’s portfolio has “room to improve,” and is looking for Devon to be acquisitive in the oil resource front. The company is trading at a 16% discount to its p1 value of $78 and 20% discount to its franchise value.