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Devon's departure from Canada to focus on US assets draws analyst support

Devon Energy Corp.'s May 29 announcement that it was selling its Canadian assets met with approval from most analysts, who support the company's plans to focus on its best U.S. assets while reducing debt.

Company executives described the sale of Devon's assets in Canada for about C$3.8 billion, or about US$2.8 billion, to Canadian Natural Resources Ltd. as a necessary move as the company transitions into an oil-heavy producer in fewer areas.

"The sale of Canada is an important step in executing Devon's transformation to a U.S. oil growth business," Devon President and CEO Dave Hager said in a statement. "This transaction creates value for our shareholders by achieving a clean and timely exit from Canada, while accelerating efforts to focus exclusively on our high-return U.S. oil portfolio."

Up next for Devon is the sale of its assets in the gas-heavy Barnett Shale in North Texas. The company said it will open a data room for the assets this quarter and anticipates having divested them by the end of the year.

According to Moody's Vice President Amol Joshi, Devon's departure from Canada "will sharpen its focus" on its oil-producing assets in the U.S. While the company will see a significant drop in its overall production for the short term, Moody's believes that Devon's approach is the correct one if it uses the capital to clean up its balance sheet.

"While Devon's scale will shrink over 20% in terms of production and proved reserves, the company has indicated that it will use proceeds from the sale for debt reduction," Joshi said. "[The] exit from Canada combined with the expected sale of its Barnett Shale assets by the end of 2019 should increase Devon's margins as the company focuses on its higher return shale assets."

Moody's said liquidating the Canadian assets eliminated an element of price volatility that a company such as Devon did not need as it shifts its overall focus.

"The Canada sale removes uncertainty regarding volatile Canadian oil differentials and adds to existing cash balances, while the credit impact will largely depend on the quantum of debt reduction," Joshi said.

While Canadian Natural considers the deal a "win-win" scenario, Tudor Pickering Holt & Co. said in a May 29 note that Devon's return for the assets topped most predictions.

"In our view, [the] $2.8B sticker price exceeds tempered market expectations, which had ranged between $2-2.5B based on investor conversations both north and south of the border," the firm said.

Mizuho had expected Devon to receive more for the assets, but analyst Paul Sankey said the price tag was still a respectable one for the company.

"It is hardly a distressed asset price as some feared, and removes the overhang of a perceived 'difficult' sale," he said in a May 29 commentary. Sankey believes that Devon could receive $1.5 billion for its Barnett holdings later this year.

Even with the positive commentary from analysts and plans to use the capital from the asset sale to reduce debt, Devon stock barely moved in May 29 trading on the New York Stock Exchange. Shares were down 5 cents, or less than 0.2%, in mid-afternoon trading.