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Rating agencies clip Devon's credit score after Barnett sale, buyback expansion

While Wall Street analysts welcomed Devon Energy Corp.'s sale of its historic position in the Barnett Shale, the driller's move toward becoming an onshore shale oil producer drove two credit rating agencies to clip Devon's investment credit rating by a notch Dec. 20.

The rating agencies noted that the sales involve hefty cuts to Devon's production and reserve numbers.

"The downgrade reflects Devon's asset transformation, which will result in a material reduction in production (more than 200,000 barrels of oil equivalent per day) and proved reserves as well as loss of geographic, operational and hydrocarbon diversification," Fitch Ratings said, lowering Devon's credit rating from BBB+ to BBB.

S&P Global Ratings lowered Devon's credit profile to BBB- over many of the same concerns, adding that Devon's newly announced plan to buy back more than $1 billion of more shares was worrisome. Still, acknowledging that oil and gas drillers are under tremendous pressure to start showing immediate payouts to shareholders, "the selling of assets to raise capital for share buybacks can have a negative impact on our business risk assessment," Ratings said.

Both Fitch and Ratings said their future outlook for Devon's credit was stable.

With the sale of the Barnett Shale gas play and its Canadian heavy oil fields in Alberta, Devon's drilling will be focused on U.S. shale oil plays, primarily the Delaware Basin portion of the Permian Basin but also including rigs in Wyoming's Powder River Basin, Oklahoma's STACK play, and Texas' Eagle Ford Shale.

"The pro forma 2020 plan targets 7% to 9% oil growth at a mid-to-upper $40/barrel West Texas Intermediate (WTI) oil price," Fitch said. "Delaware and STACK production results continue to be strong with additional operational efficiency gains and cost savings providing return enhancing opportunities," the credit rating agency said, noting that Devon's Powder River play was still emerging and the more mature Eagle Ford had potential room to grow in the Austin Chalk portion of the play.

Wall Street analysts said they liked the narrowing of the company's operations and the addition of another $1 billion to the existing $5 billion share buyback program. Devon has already repurchased $4.8 billion of its own shares under that authorization, according to S&P Global Market Intelligence.

"Via asset sales, Devon has sharpened its focus on four domestic resource plays, offering ample running room across oily zones," veteran shale oil and gas analyst Gabriele Sorbara with Siebert Williams Shank & Co. LLC told clients Dec. 20. "With this asset base, we believe Devon can achieve mid-to-high single digit oil production growth while delivering a solid free cash flow yield, returning cash to shareholders and reducing financial leverage."

Ratings said it expected Devon to slightly outspend its cash flows in 2020 and 2021 to accommodate heavy spending for shale oil operations while completing the buyback of $1.2 billion of shares in 2020.

Devon shares were up just over 1% to $25.40 on light trading before the closing bell Dec. 20

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.