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Devon's Divestiture Goal Reached with Access Pipeline Sale

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Devon Energy Corporation (DVN - Free Report) announced that it has entered into a definitive agreement with Wolf Midstream Inc. to sell the 50% ownership interest it has in Access Pipeline. The deal is valued at $1.1 billion (CAD $1.4 billion). With the company in talks with prospective buyers to sell interest in the midstream assets, this announcement came as no surprise to the business community.

Details of the Deal

Apart from the 50% stake in the Access Pipeline, the sale agreement can potentially go up by $120 million (CAD $150 million) upon the sanctioning and development of a new thermal-oil project on Devon’s Pike lease in Alberta, Canada.

Under the terms of the sale agreement, Devon’s thermal-oil acreage is dedicated to the Access Pipeline for an initial term of 25 years. As a market-based toll will be applied to production from the company’s three Jackfish projects, it will see an increase in lease operating expense at the complex by nearly $100 million on an annualized basis.

Divestiture Target Breached

Devon Energy had plans to divest non-core assets worth $2 billion to $3 billion in 2016. The completion of the Access Pipeline sale, subject to regulatory approval, will take the total proceeds to $3.2 billion, surpassing the divestiture program target for 2016.

Earlier Divestiture

Last month, Devon announced that it has entered into a definitive agreement to sell its existing Midland Basin non-core assets for $858 million (read more: Devon Energy to Sell More Assets; Ups Capex, Output View ) .

Benefits from Sale Proceeds

The company expects the sale proceeds will significantly strengthen its investment-grade balance sheet, and position it to further accelerate investment in resource rich U.S. plays, led by the STACK and Delaware Basin.

Recovery in Oil Prices

Last month, Devon Energy announced that it will deploy the additional funds in the Delaware Basin and the Oklahoma STACK play during the third quarter. Devon also raised its 2016 total production expectation from core assets by 7,000 boe per day to the range of 540,000–560,000 boe per day. The steady recovery of oil prices from historical lows will definitely help Devon as it boosts its top line. Devon Energy expects every $1 improvement in realized oil price to lead to a $90 million incremental annualized cash flow for the company.

On the basis of the oil price recovery, we expect the Eagle Ford assets of Devon to contribute a significant amount of free cash flow, exceeding the expected level of $250 million for 2016.

Zacks Rank

Devon currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil & gas space are Noble Energy (NBL - Free Report) , WPX Energy (WPX - Free Report) and Apache Corp.(APA - Free Report) , all carrying a Zacks Rank #2 (Buy).

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