In less than a year, Devon Energy Corp. has reshaped its existence and sits atop a cache of Eagle Ford oil.
But part of that transformation was built on the back of Devon unloading its noncore gas assets.
Most recently, and in a concluding moment for this chapter of Devon’s history, it dealt away natural gas assets to Linn Energy LLC and LinnCo LLC for $2.3 billion in late June.
Natural gas’ mini-resurgence continues.
Despite lower prices in July because of cooler temperatures, what some believed would be a short-lived spike in gas prices has so far had solid staying power. Henry Hub spot prices from June 19 to 25 averaged $4.56 per million Btu (MMBtu) compared to $3.85/MMBtu a year ago.
The Eagle Ford, known for its robust oil production, as a region has posted the greatest increase in natural gas production growth since 2011. In June 2014, the shale produced an estimated 7 billion cubic feet per day (Bcf/d), an incremental increase of 4.3 Bcf/d from 2011 (and 259% overall).
The Devon/Linn deal gives Linn working assets in the Rockies, Midcontinent, East Texas, South Texas and North Louisiana. Proved reserves are estimated to be between 1.3 trillion cubic feet equivalent (Tcfe) and 1.5 Tcfe, with current production of 275 MMcfe/d and 3,800 active wells.
No doubt, a whole lot of hedging will be going on since the fate of gas is so tied to price, said Sylvia Barnes, managing director and head of KeyBanc Capital Markets Oil & Gas Group. Gas prices have yet to find a consensus point, she said.
Gas, along with oil, has strengthened acquisitions and divestitures. Statistics from PLS Inc. show that fourth-quarter 2013 generated deal value of $15.08 billion. First-quarter 2014 edged up to $15.657 billion and the second quarter took off, with $21.103 billion in deals.
Pure natural gas transaction in fourth-quarter 2013 averaged $31,701 per daily barrel of oil equivalent (boe/d). Gas deals in the first half of 2014 were up to $45,285 boe/d.
In 2014, the largest transaction has been Encana Corp.’s June 20 acquisition of 45,500 net Eagle Ford acres in South Texas. Freeport-McMoRan sold production of 53,000 boe/d acreage for $3.1 billion.
That deal, however, emerged only after Encana sold off its Jonah Field natural gas assets in Wyoming for $1.8 billion.
In several plays, Chesapeake Energy Corp. founder Aubrey McClendon, too, has stockpiled gassy assets. McClendon’s American Energy Partners (AEP) has actively hunted in the Utica and Marcellus. On June 9, American Energy–Utica LLC (AEU) announced plans to buy Utica and Marcellus and gassy assets for a total of $1.75 billion.
AEU has invested over $3.5 billion in the Utica and plans to drill about 2,600 gross wells and 1,560 net wells on its acreage.
McClendon’s companies in 2014 have spent at least $5.85 billion, with most on natural gas.
AEP has also found oil, buying into the Permian with a $2.5 billion deal for operator Enduring Resources LLC. The transaction was the company’s first foray into the Permian Basin and its first oil target.
American Energy plans to increase operated drilling activity by six to eight rigs by year-end 2015. The company will drill up to some 2,500 gross wells and 1,750 net wells on its acreage during the next decade. At closing, the properties are expected to have net production of about 16,000 boe/d.
Devon’s future appears wide open. Its noncore divestments add a thick layer of cash to an already large pile.
“With the deal proceeds, we are modeling 2014 cash balance at about $4 billion and year-end 2014 net debt/EBITDA falling to 1.5x,” said Andrew Coleman, analyst for Raymond James Financial Inc. “The cash from sale of assets can cover 30% of Devon’s 2014 capital budget” at a model of about $6 billion in capex.
It might also use the funds to expand its drilling program, since the company plans to drill about 350 wells in 2014. Or, it could return capital to its shareholders.
“With its balance sheet pared back with asset sale proceeds, we see management with enough dry powder to ramp oil growth in its core areas, such as the Permian, Eagle Ford, SAGD and emerging oil opportunities,” Coleman said.
Devon shares are up 28% year-to-date. The company’s production can grow even higher, Coleman said.
At this point, it’s up to Devon to execute the plan it started when it closed on its $6 billion entry into the Eagle Ford in February.
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