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Analysts, market reward Devon for Barnett sale, buyback plan

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Analysts, market reward Devon for Barnett sale, buyback plan

Devon Energy Corp.'s plans to divest $553 million worth of Barnett Shale assets, start a share buyback program, increase its dividend and repurchase debt earned positive reviews March 8, as analysts praised the actions and investors bid up the company's share price by more than 4%.

The sale of Barnett assets in Johnson County, Texas, to an unnamed private equity buyer particularly impressed some analysts who were concerned the dry gas holdings would not entice a bidder to pay what the assets were worth.

"Good to see the Johnson County sale cross the finish line … easing investor concerns with a decent price tag of $553 [million]," Tudor, Pickering, Holt & Co. said March 8.

During the company's fourth-quarter 2017 earnings call Feb. 21, Devon Executive Vice President and CFO Jeffrey Ritenour signaled the sale of the Barnett assets was close and previewed the company's plans once the move was complete.

"Our first priority is to fund our operational plants in the Delaware and STACK as these early stage assets transition to full-field development. Growth in these assets will drive additional operating and capital efficiencies along with higher overall margins for the company," he said. "Given our strong liquidity, we will begin utilizing the portion of cash on hand to tender for outstanding debt."

Guggenheim Securities agreed that the Barnett sale was reassuring, noting that the price tag was "at the mid-point of expectations." Importantly, the deal eliminated concerns about whether the acreage was marketable at all.

Guggenheim's analysts were more impressed by the speed with which Devon announced its stock buyback plan, and revised plan to eliminate outstanding debt.

"This release surprises on timing as well as magnitude. The $1 [billion] stock buyback program represents over 6% of the company's market cap," Guggenheim said. "The debt tender of $1 [billion] is less than the $1.5 [billion] suggested on the 4Q call. Some had questioned why [Devon] was so focused on reducing debt when the upstream debt metrics were already favorable. The return-of-capital plan represents a better balance than just debt reduction."

The Guggenheim team suggested that Devon, like other producers, had gotten the message that shareholders were now rewarding returns, not growth, and had adjusted accordingly.

"The key distinction between [Devon's] asset sales over the past decade and anything that happens now, is that for the first time proceeds will be channeled to shareholders rather than acquisitions," Guggenheim said. "[The company] has not been specific but we believe they have ample options to continue to channel billions to shareholders from asset sales."

Tudor Pickering & Holt analysts suggested more returns to shareholders once Devon sells off more of its Barnett holdings and its now noncore acreage in the Eagle Ford Shale. Devon stock closed up 4.7% to $32.40 per share.