Investors liked the unexpected June 6 news that oil and gas producer Devon Energy Corp. is selling its EnLink family of midstream companies to a private equity fund and plans to use the cash to supersize its share buyback plan.
By midday June 6, the price of Devon shares spiked 6% to nearly $42 per share in extremely heavy morning trading.
Before the market opened, Devon announced it would sell its ownership interests in the EnLink Midstream companies and use the $3.13 billion in proceeds to increase the size of its share buyback program from $1 billion to $5 billion, or about 20% of the company's outstanding shares. Devon decided to get out of the midstream business by selling its stakes in the EnLink Midstream Partners LP master limited partnership, its general partner EnLink Midstream LLC, and Enlink Midstream Manager LLC, the non-economic owner of the general partner, to private equity fund Global Infrastructure Partners.
Wall Street analysts expected Devon to keep to its pledge to sell more assets.
"We like it," B. Riley FBR Inc. senior oil and gas analyst Rehan Rashid said. As for the next assets Devon will sell in its $5 billion divestment program, "Eagle Ford and remaining Barnett assets [are] at top of the list in our mind," Rashid said.
"They are actively marketing their Delaware basin acreage in Texas," MUFG Securities Americas Inc. analyst Michael McAllister said. "I have to think that is next."
Analysts at energy investment bank Tudor Pickering Holt & Co. also think the 670,000 acres of leasehold in the Delaware Basin will be the first to go, followed by stakes in oil wells in both the Powder River Basin and the Eagle Ford Shale.
"Got to give management credit for playing cards close to the chest as we doubt many in the market expected the company to unload its entire EnLink position this year," Tudor Pickering Holt said. "We love this deal as it simplifies [Devon's] structure while raising a material amount of cash to buy back stock at a deep discount to intrinsic value."
Tudor Pickering Holt noted that the $3.13 billion sale price represents a 16% discount to the June 5 closing prices for units in the EnLink MLP and the EnLink Midstream GP but thinks the price reasonable because it would have taken Devon years to sell its stake because of the lack of liquidity in the market for units in both partnerships.
In addition to financing the buyback of more shares, Devon's EnLink sale will reduce Devon's debt by 40%, the company said. CEO David Hagar said he is committed to a slimmer, simpler Devon. "The sale of our EnLink interests represents a significant step forward in achieving our 2020 vision to further simplify our asset portfolio and return excess cash to shareholders," Hagar said in the sale announcement.
EnLink will continue to provide contracted midstream services to Devon in the Delaware Basin, as well as to oil and gas wells in Texas' Barnett Shale and Oklahoma's STACK Play, which covers the Sooner Trend oil field, Anadarko Basin, and Canadian and Kingfisher counties in Oklahoma. Additionally, EnLink said Devon extended its contract for gas processing at the Bridgeport plant in the Barnett Shale and the Cana plant in Oklahoma's Cana-Woodford Shale through 2029.
The deal valued Devon's stake at 12 times cash flow, Devon said. Devon's ownership interests include 115 million units in EnLink Midstream LLC and 95 million units in EnLink Midstream Partners. The acquisition will result in Global Infrastructure Partners owning 100% of EnLink Midstream Manager, 64% of the controlling general partner and 23% of the MLP.
The deal is scheduled to close in July. Goldman Sachs & Co. LLC acted as financial adviser and Vinson & Elkins LLP acted as legal advisor to Devon on the transaction.
