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Devon buys Validus Energy for $1.8 billion, expands Eagle Ford footprint


Transaction provides scale, operational overlap

Efficiency savings estimated around $50 million/year

Access to US Gulf Coast pricing is a bonus

  • Author
  • Starr Spencer
  • Editor
  • Gary Gentile
  • Commodity
  • Natural Gas Oil

Devon Energy made what it called a $1.8 billion "bolt on" acquisition Aug. 9 of privately held Validus Energy that expands its Eagle Ford Shale scale, a surprise move that bulked up its position in a maturing basin but one which the company said was low-cost and situated in a premium-priced locale.

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Oklahoma City-based Devon said the accretive transaction captures a "top-tier oil resource with a meaningful runway of highly economic inventory" that geographically complements its existing Eagle Ford footprint, CEO Rick Muncrief said in a statement.

The acquisition consists of 42,000 net acres in Karnes County, Texas, adjacent to Devon's DeWitt County position. The acreage comes with a current 35,000 boe/d of production, 70% oil, which is projected to rise to 40,000 boe/d in 2023, the company said.

It also adds 350 "highly, economic" repeatable drilling locations in the heart of the Karnes Trough oil window, plus 150 high-quality refracturing candidates that can boost production in the future by recompleting those wells to obtain higher oil and gas yields, Devon said.

"Color us a bit surprised as Devon quickly moves on its second bolt on transaction of the year," boutique investment bank Tudor Pickering Holt said in its daily investor note Aug. 9.

Devon, which completed a similar acquisition of assets of RimRock Oil and Gas during July in the maturing Bakken Shale oil play of North Dakota, also said the Validus transaction not only has a low-cost structure, but its margins benefit from access to premium US Gulf Coast pricing and low per-unit expenses.

Spot Eagle Ford crude has averaged at a $4.92/b premium to Cushing WTI so far in August, S&P Global Platts assessments show. That's down from a $6.74/b premium in July, but up from a 75 cents/b premium in August 2021.

M&A activity muted

S&P Global Commodity Insights supply and production analyst Nathan Hasbrook said Validus "made a really nice profit with this sale."

That company "bought most, if not all, of this acreage in the Eagle Ford in early 2021 from Ovintiv for less than $900 million. So this acquisition now gives Devon a pretty nice position in the basin by adding 42,000 net acres," Hasbrook said.

"There has been fairly limited M&A [merger and acquisition] activity in 2022 and it is likely due to the high commodity prices we are seeing which are preventing buyers and sellers from finding common ground due to different outlooks for WTI and Henry Hub prices moving forward," he said.

While Devon did not hold a conference call to explain the deal, Muncrief did provide some tantalizing clues in retrospect in the company's Aug. 2 Q2 earnings call as to Devon's thoughts about the Eagle Ford and other maturing US shale basins.

Asked by an analyst if those basins could provide much US oil growth or if domestic shale was transitioning to maintenance mode, Muncrief said the Eagle Ford and Bakken "will be challenged to grow much."

"You've seen places like the Bakken, the Eagle Ford, in particular, where ... volumes are hanging in there, but you're really not seeing a lot of growth," he said.

Will 'watch' DJ Basin

The Oklahoma's Anadarko Basin, where Devon made large acquisitions in the previous decade, could provide "some [natural gas] growth," while the DJ Basin mainly in Colorado, which Devon does not operate, is a "place we'll watch," Muncrief added.

But on the whole, US oil growth from shale – which Muncrief expected to provide the bulk of oil growth in the years to come – "is, in aggregate, going to be moderate" and most will come from the Permian Basin of West Texas and Southeast New Mexico.

According to the US Energy Information Administration, the US' average crude oil production in second quarter totaled just shy of 11.7 million b/d and total marketed natural gas output was 105 Bcf/d.

Crude production should average 12 million b/d in Q3, EIA said, but that's down from nearly 13 million at the start of 2020. However, the total should rise to average 12.7 million b/d for 2023.

Devon's Eagle Ford production has hovered from the high 30,000s b/d of oil equivalent to the low 40,000s boe/d.

Owing to enhanced scale in the basin, the company expects to realize $50 million in average annual cash flow savings from capital efficiencies, operating improvements, and marketing synergies, Devon said.