Devon Energy to buy big Bakken driller Grayson Mill for $5B

Investors did not appear impressed with Devon Energy Corp.'s $5 billion cash-and-stock deal for private Bakken Shale driller Grayson Mill Energy LLC that was announced before the market opened July 8.

Devon will pay Grayson Mill $3.25 billion in cash and $1.75 billion in stock for acres and wells that bolt on to Devon's own Bakken operations in North Dakota, along with the associated gathering and disposal assets that run with the land position. Grayson Mill is backed by private equity firm EnCap Investments LP.

"This transaction secures a premier leasehold position of 307,000 net acres, positioning Devon as one of the largest operators in the play, now with over 430,000 net acres," Devon President and CEO Rick Muncrief told analysts on a call to brief the deal. "The acquired business is expected to triple our in-basin production to roughly 150,000 [barrels of oil equivalent] per day, with oil reaching almost 60% of the product mix."

Devon's shares closed down 1% at $46.52 on July 8 following heavier-than-normal trading volume.

Benchmark analyst Subash Chandra was "lukewarm" about the deal, which he said offered minimal savings from synergies for assets that are relatively gassy at about 45% of the production mix. Chandra worried that Devon's desire to jump on the oil and gas M&A wave may have made the Oklahoma oil and gas driller too eager for a deal.

Devon "has been aggressively on the hunt for new assets," Chandra wrote to clients. "Acquisitions can distract from the core theme which has driven year-to-date returns (improved type curves)" while adding debt.

Devon said it will finance the $3.25 billion cash portion of the deal using cash on hand and debt.

Chandra said Devon may be planning to turn its combined Bakken operation into a cash flow machine. Devon planned to run three rigs on the acreage after the deal closes in the third quarter, down from the four Devon and Grayson now run, and to let production slip back to 150,000 boe/d from the current combined rate of 170,000 boe/d.

"It appears [Devon] will allow volumes to decline on reduced investment and scalp the [free cash flow] to boost share buybacks and debt reduction," Chandra said.

Devon increased its share buyback authorization 67% to $5 billion on July 8 and said it intends to reduce $2.5 billion of debt over the next two years.

The addition of the Grayson Mill acres with 500 gross drilling locations and 300 opportunities to refracture older wells will extend the life of Devon's Bakken position by 10 years, Devon said. Included in the deal are 950 miles of associated gathering pipelines, oil storage terminals, and disposal wells that generate $125 million per year of EBITDA, Devon said.

Truist analyst Neal Dingmann told clients the deal was priced on the high side, considering that the assets are not in the Permian Basin, but that Devon's three-rig plan will generate cash for shareholder returns.