Devon Energy Corp. is selling its ownership stakes in the EnLink family of midstream companies to a private equity fund amid recent tax changes for master limited partnerships, and market reactions have so far been positive.
An affiliate of the fund manager Global Infrastructure Partners agreed to acquire all of Devon's stakes in EnLink Midstream Partners LP, EnLink Midstream LLC and EnLink Midstream Manager LLC for about $3.13 billion. The sale is part of Devon's ongoing strategy to simplify its portfolio and is expected to cut Devon's consolidated debt by 40%.
Devon plans to use the sale proceeds to supersize its share buyback plan as its board approved an increase of $3 billion to the company's $1 billion share repurchase program, representing about 20% of its outstanding common stock.
Investors liked the unexpected news. By midday on June 6, the day of the announcement, the price of Devon shares spiked 6% to nearly $42 per share in extremely heavy morning trading.
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."
On EnLink's side, the partnership's executives stayed mum on whether Devon's decision would speed up structural simplification plans. EnLink CEO Michael Garberding declined to elaborate on what an eventual consolidation would look like and if it might happen sooner rather than later.
"The point we made in the last call was if we saw really a cost to capital disadvantage, it was something that we need to be very focused on," he said during a June 6 conference call. "I would say now we have [Global Infrastructure Partners] sitting side by side with us working through those solutions, but our path forward is unchanged."
Analysts at Jefferies LLC were unconvinced that the deal, which values the stake at 12 times cash flow based on $265 million of cash distributions contributed by the ownership interests over the past year, would not accelerate a reorganization given Global Infrastructure Partners' history.
"We believe today's transaction announcement marks a first step in a multi-step simplification/restructuring profile ... similar to GIP's LP and GP purchase of [Chesapeake Midstream Partners LP] in 2012, whereby GIP acquired outstanding LP units and controlling GP interest, GIP eventually monetized its stakes in the company to a strategic 3rd party buyer (Williams)," they wrote in a June 6 note to clients. "In this case ... we believe the next step will be a roll-up simplification transaction between [EnLink Midstream LLC] and [EnLink Midstream Partners], leaving the parent C-Corp as the surviving entity."
"GIP has a great track record ultimately in this space as far as what they've done with the different assets they've been invested in," Garberding said during the call.
