The market rumor proved to be true as oil and gas company
Devon Energy Corporation
) announced that it will acquire Texas-based oil and gas explorer
GeoSouthern Energy for about $6 billion in cash. The market had
already reacted positively to the media report on Nov 19. Finally
when the deal was announced, the shares ended two cents lower
than the previous day's close. Despite the nominal decline, it
appears the market continues to have a positive view with nearly
14.57 millions shares changing hands during the day.
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The deal will enhance Devon's footprint in the Eagle Ford Shale
as the acquired assets bring with it an output of 53,000 barrels
of oil equivalent (BOE) per day and 82,000 net acres with at
least 1,200 undrilled locations. In addition, reserves are
estimated at 400 million barrels of oil equivalent, the majority
of which is proved reserves.
The existing holdings of GeoSouthern are located in a rich
reserve area in DeWitt and Lavaca counties in Texas, with average
estimated recoveries per well in DeWitt County exceeding 800,000
Most importantly, production from the acquired assets are
expected to grow at a compound annual growth rate of 25% for the
next few years, reaching a peak production rate of 140,000 BOE
per day, a whopping increase of 164.1% from the current
As expected, the acquisition will be primarily funded from
Devon's huge pile of cash and the balance funded from borrowings.
Devon generates a significant volume of cash flow each year. The
company expects to repay its borrowings from the generated cash
flow and proceeds from its monetized assets.
The current boom in oil and natural gas with demand spiralling on
a global scale has prompted Devon to strengthen its position in
the Eagle Ford, a region with tremendous growth potential. The
acquired assets are expected to contribute $800 million in free
cash flow from 2015 and increase further going forward.
No doubt, Eagle Ford has now become a hot spot for mergers and
acquisitions; the big operators are leveraging their financial
strength to expand their presence in the region. In 2011,
Marathon Oil Corporation
) invested $3.5 billion to acquire acreage from Hilcorp
Resources. In Jun 2013,
Sanchez Energy Corporation
) invested $230.1 million to further its presence in this shale.
The increasing exploration and development activity in the region
is also attracting the midstream operators. In April 2013, oil
and gas pipeline operator,
Atlas Pipeline Partners
) acquired the midstream business from TEAK Midstream for $1
Devon also has plans in place for transporting and processing the
excess volume from the Eagle Ford. The company has already
planned to develop its midstream business by forming a midstream
master limited partnership (MLP). So, acquiring GeoSouthern
Energy, which primarily has upstream operations, will allow Devon
to process the additional production from the Eagle Ford shale
through its midstream MLP assets.
Devon Energy currently carries a Zacks Rank #3 (Hold).