Devon Energy Corporation
DVN
recently announced that it has completed the sale of Barnett Shale assets to Banpu Kalnin Ventures (“BKV”). Devon received a cash payment of $320 million from BKV at closing, after adjusting for a $170 million deposit received in April 2020.
The sale agreement with BKV provides Devon the opportunity for contingent cash payments of up to $260 million based on future commodity prices, with upside participation beginning at either a $2.75 Henry Hub natural gas price or a $50 West Texas Intermediate oil price. The contingent payment period, which commences from Jan 1, 2021, has a term of four years and will be payable on an annual basis.
Taking into consideration the payment received and expected contingent cash payment, the total consideration for Barnett Shale assets can go up to $750 million. The completion of divestiture will further strengthen the liquidity position of Devon and help it in its $1.5 billion debt reduction target.
Focus on Oil
The completion of this divestiture will allow Devon to focus on its four oil rich U.S. basin assets. Nearly 78% of the revenues of the company in the first half of 2020 were generated from its oil assets. Moreover, Devon Energy’s recent decision to merge with WPX Energy
WPX
will strengthen its position in the Permian Basin.
The U.S. Energy Information Administration (“EIA”) estimates that nearly 1/3rd of the U.S. crude oil is currently produced from the Permian Basin. So, the sale is in sync with Devon’s strategy to focus on oil rich basins.
Strong Competition in Permian Basin
Occidental Petroleum
OXY
has already expanded its reach in Permian Basin by acquiring Anadarko. Chevron Corporation
CVX
, after its failed attempt to acquire Anadarko, has entered into a deal to acquire Noble Energy and expand its presence in the region. Noble’s shareholders have provided their approval for this acquisition.
Apart from these two giant operators in Permian Basin, the combined Devon and WPX Energy company will face tough competition from other existing operators in the region.
The demand for oil is also expected to recover globally and in the United States as the process of unlocking of activities has started. Permian Basin will play an important role in overall U.S production as EIA forecasts Permian Basin October crude oil production will go up to 4.17 million barrels per day from 4.15 million in September.
Zacks Rank
Devon is currently carrying a Zacks Rank #3 (Hold). You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price Performance
The sale of Barnett Shale assets has positively impacted its share price, with Devon outperforming its
industry
since announcement of this news.
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