Buoyed by still-elevated crude oil, natural gas and NGL prices — and discipline on capital spending and production growth — U.S. E&Ps have been generating unprecedented cash flow and using much of that bounty to reduce debt, increase dividends and buy back shares. A number of producers have also been investing some of that cash to expand their holdings, mostly to complement their existing acreage in the Permian and other plays and thereby allow for increased efficiency and, in many cases, longer laterals. Few have been doing more in this regard lately than Devon Energy, the Oklahoma City-based E&P, which completed a big bolt-on acquisition in the Bakken in late July and just followed that up with a plan for an even bigger buy in the Eagle Ford. In today’s RBN blog, we look at the company’s strategy.
As we said recently in Rollin’ on the River and Make It Rain, the run-up in hydrocarbon prices through the first half of 2022 put oil and gas producers in their best financial shape in years. And, in sharp contrast to boom times of the past, the vast majority of publicly owned E&Ps have been maintaining strict financial discipline and spending only enough on new drilling-and-completion work to either keep their production steady or increase it only by a few percentage points. Many of the 43 U.S. producers we monitor also have been laser-focused on returning cash to shareholders, either by increasing their dividends, issuing special dividends or buying back shares — or some combination of the three. Debt reduction also is in vogue among E&Ps, as are mergers and acquisitions — the topic of our Buy Buy Buy, We Go Together, and Baby (I’m-a Want You) blogs. A commonality among much of the M&A activity — large, medium or small — has been that it involves assets and acreage in the hottest production areas, especially the Permian (of course!) and, to a much lesser extent, the Haynesville and Marcellus/Utica plays.
Today, we shift our spotlight to Devon Energy, which closed on the $865 million acquisition of privately held RimRock Oil & Gas in July and announced August 9 that it has agreed to acquire privately held Validus Energy for $1.8 billion in cash. The deals, which we’ll discuss in detail in a moment, follow Devon’s all-stock merger of equals with WPX Energy, which was valued at $12 billion and consummated in January 2021, and the October 2020 sale of Devon’s assets in the Barnett Shale to Banpu Kalnin Ventures for $320 million in cash.
[RBN’s Crude Oil Permian provides detailed analysis of the fundamental drivers impacting the Permian Basin crude oil market including weekly updates of data, analysis and market intelligence, Permian crude oil supply and demand, pipeline outflows and capacity, prices, and infrastructure updates. Click here for more information and a sample report.]
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