[Editor's note: This story was updated at 8:03 CDT June 6.]
Devon Energy Corp. (NYSE: DVN) said June 6 it will sell its stake in EnLink Midstream to fund manager Global Infrastructure Partners (GIP) for $3.125 billion, surpassing the U.S. shale producer’s divestiture target in record speed.
Devon’s ownership interests in EnLink Midstream includes 115 million units in the general partner, EnLink Midstream LLC (NYSE: ENLC), and 95 million units in the MLP, EnLink Midstream Partners LP (NYSE: ENLK), and generated $265 million of cash distributions over the past year, valuing the transaction at roughly 12 times cash flow, according to Devon’s press release.
Additionally, Devon’s board has increased the size of the Oklahoma City-based company’s share-repurchase authorization to $4 billion in conjunction with the sale.
Analysts with Tudor, Pickering, Holt & Co. (TPH) praised the move by Devon saying the sale will simplify the company’s structure and accelerate value.
“Got to give management credit for playing cards close to the chest as we doubt many in the market expected the company to unload its entire EnLink position this year,” TPH analysts said in the firm’s morning note on June 6. “We love this deal as it simplifies Devon's structure while raising a material amount of cash to buy back stock at a deep discount to intrinsic value.”
Devon President and CEO Dave Hager said the company is now set to exceed its $5 billion divestiture target as a result of the combination of proceeds from the EnLink sale with proceeds from other Devon noncore E&P assets already sold and those currently being marketed.
“The sale of our EnLink interests represents a significant step forward in achieving our 2020 Vision to further simplify our asset portfolio and return excess cash to shareholders,” Hager said in a statement.
In May 2017, Devon launched its “2020 Vision”—a strategic turn away from growth at any cost—with a focus on delivering “top-tier returns” to investors. As a result, the company set a $1 billion sales target and began shedding noncore assets, including divestitures in the Eagle Ford and Delaware Basin.
Devon expected to exceed its original $1 billion divestment target within a year to 18 months and has since bumped up its asset sales goal. The company also had offerings in the Powder River Basin and Stack play.
Earlier this year, Devon agreed to sell a chunk of assets in the Barnett Shale for $553 million. PLS reported the buyer is KKR-backed Fleur de Lis Energy LLC. The sale, announced in early March, is expected to close in the second quarter.
“Looking ahead, we will continue to build upon our strong relationship with EnLink and GIP,” he added. “EnLink remains a preferred partner for us in the midstream space, and we will continue to pursue mutually beneficial ways to grow our respective businesses across North America’s most prolific growth basins.”
For EnLink, the divestiture represents an important next step in the midstream company’s journey, said Michael J. Garberding, EnLink’s president and CEO.
“Our new, long-term strategic partnership with GIP will continue EnLink's strong momentum, build upon our core strengths and add to our robust growth outlook,” Garberding said in a statement. “GIP has significant expertise and experience in the midstream industry that will enhance and elevate our growth plans.”
Upon closing, GIP will own a 100% equity interest in EnLink’s manager, roughly 64% in its general partner and about 23% in the MLP.
Cindy Jaggi, EnLink’s senior vice president of strategic process transformation, commented on the deal at Hart Energy’s recent Midstream Texas conference in Midland, Texas: “We are very excited to have GIP—Global Infrastructure Partners—as a new strategic partner for EnLink. Devon has been an amazing customer and a very big supporter of EnLink for a very long time. However, I really feel like this is just a great win-win situation for all of us to continue to grow the EnLink organization.”
Headquartered in Dallas, EnLink operates in several top U.S. shale basins and is focused on the core growth areas of the Permian’s Midland and Delaware basins, Oklahoma’s Midcontinent and Louisiana’s Gulf Coast.
EnLink will continue to maintain a strong commercial relationship with Devon following the transaction. The companies will continue to work together in the Stack, redevelop the Barnett Shale, and team on new potential opportunities, such as crude gathering in the Delaware Basin, the release said.
As part of the EnLink sale, Devon will extend its fixed-fee gathering and processing contracts with respect to the Bridgeport and Cana plants with EnLink through 2029. The company’s minimum volume commitments for these agreements will expire at the end of 2018.
TPH analysts said EnLink’s clean exit from the sponsor while extending some existing commercial agreements may alleviate fears of stranded asset and incentivize some buyers.
“While midstream monetization has long been a conversation for E&P-sponsored MLPs, the ‘all-at-once’ approach vs. gradual sell-down could cement views that monetization of interests in favor of the parent balance sheet will take priority over midstream valuation,” TPH analysts said.
EnLink said it expects to close the transaction early third-quarter 2018.
Citi was EnLink’s financial advisor on the transaction. Intrepid Partners LLC was financial adviser and Latham & Watkins was legal adviser to GIP. Goldman Sachs & Co. LLC was Devon’s financial adviser on the transaction. J.P. Morgan Securities LLC provided a fairness opinion to the company’s board of directors and Vinson & Elkins LLP was its legal adviser.
Emily Patsy can be reached at firstname.lastname@example.org.
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