Transaction bodes well for less "hot" emerging plays
Devon Energy Corp. (NYSE:DVN) has signed an agreement with Sinopec International Petroleum Exploration & Production Corp. (SIPC) whereby SIPC will invest $2.2 billion in exchange for one-third of Devon’s interest in five emerging plays.
In addition to the $2.2 billion, SIPC will pay Devon $300 million as reimbursement for costs incurred prior to closing. The acreage encompasses 300,000 net acres in the Niobrara, 210,000 in the Mississippian, 235,000 in the Utica, 340,000 in Michigan, and 265,000 in the Tuscaloosa Marine Shale (TMS).
“The better-than-expected price, plus increased exploration activities in new ventures could serve as a catalyst to help the stock close the wide gap between the current price and our $84 "proved-only" valuation” said Jefferies & Co. Inc. analysts in a January 3 note to investors.
“The total consideration of $2.5 billion implies a robust $5,500 per acre. This is impressive given 1) the lack of peer interest in Michigan Utica and A1 carbonate, 2) industry doubts about the TMS, 3) variability in the Niobrara, 4) 2/3's of the Niobrara acreage is in the less desirable PRB basin, 5) some of DVN's Utica acreage is on the western fringes of the play, as indicated by state drilling permits, and 6) the general lack of well control. Positively, the upfront payment of $900 million to be made upon closing, slated for 1q12, would more than cover DVN's acreage acquisition costs for this portfolio,” the analysts continued.
SIPC will make a $900 million cash payment upon closing, expected in 1Q2012, and $1.6 billion paid in the form of a drilling carry. The drilling carry will fund 70% of Devon’s capital requirements, which results in SIPC paying 80% of the overall development costs during the carry period. Based on the current work plan, the company expects the entire $1.6 billion carry to be realized by year-end 2014. Through 2012, the companies expect to drill approximately 125 gross wells in the five plays.
“While we are still in the early stages of derisking these plays, the tremendous response by industry to our data room process clearly underscores the attractiveness of this opportunity,” said Dave Hager, Devon’s executive vice president of exploration and production.
Boost to emerging plays
The deal, noted Jefferies analysts, could rally excitement for less “hot” emerging plays. Deals like this and the recent Mississippian JV deal signed by Repsol, indicate that sufficient interest lies beyond the Utica and companies with substantial positions in plays like the Niobrara, the Mississippian, and the Tuscaloosa Marine Shale could reap the benefits.
