Devon Energy Corporation (DVN - Free Report) announced that it has signed an agreement with Banpu Kalnin Ventures (BKV) to sell Barnett Shale gas assets for $770 million. This agreement in a way completes Devon’s transformation to an U.S. oil-focused company.
Earlier this year, it sold the Canadian business to Canadian Natural Resources Limited for $2.8 billion. Divestiture of Canadian and Barnett Shale gas assets generated $3.6 billion in proceeds at accretive multiples. Devon decided to divest non-core gas assets as these no longer support its long-term growth objectives.
The company’s board of directors authorized to repurchase an additional $1 billion shares, bringing the total buyback authorization to $6 billion. The new program expires on Dec 31, 2020 and $800 million of the $1-billion authorization is conditioned upon the closing of the Barnett transaction. To date, Devon has repurchased 144 million shares or nearly 30% outstanding shares at a total cost of $4.8 billion.
Devon’s Long-Term Goal
Divestiture of non-core assets is part of Devon’s 2020 vision. The company will concentrate on producing more from higher-margin U.S. oil producing regions like STACK and Delaware Basin. Devon aims to invest in the range of $1.7-$1.9 billion in E&P activities in 2020, which will assist in 7-9% growth in oil production volumes from U.S. assets. The company has plans to bring more than 30 wells online in the Delaware region in 2020.
Devon is managing expenses efficiently. The company reduced its full-year 2019 view for G&A expenses by 17% and expects cost savings to touch $200 million by 2019-end. The company’s systematic cost management will bring per year cost savings to nearly $780 million by 2021. This is going to have a positive impact on margins.
The sale of non-core assets is helping Devon to strengthen its balance sheet. Year to date, the company redeemed $1.7 billion debts, which lowered annual interest outlay by more than $60 million. Devon is targeting a total debt reduction of $3 billion, which will reduce annual interest expenses by $130 million. Divestiture of Canadian assets and Barnett Shale assets will allow the company to further lower the debt level and reduce annual interest payments.
U.S. Shale Oil Production on Rise
Usage of shale oil extraction technology has resulted in massive increase in oil production in the United States. Per the latest release from the U.S. Energy Information Administration (“EIA”), crude oil production in the United States will touch 12.3 million barrels per day (MMBPD) in 2019, indicating nearly 132% increase from 5.3MMBPD in 2009. Oil production in 2020 is expected to improve 8.1% from the 2019 level.
The increase in oil production levels will be supported by U.S. oil and gas operators’ increased focus on producing more oil from liquid-rich reserves. WPX Energy (WPX - Free Report) is one such company that has gradually transformed itself from a natural gas-focused company to an oil-focused one. WPX Energy focuses on its holdings in Delaware and Williston Basins. At present, 78.2% production of the company is liquid and the rest is natural gas. This was simply the opposite five years ago. Occidental Petroleum (OXY - Free Report) acquired Anadarko Petroleum, outbidding Chevron Corporation (CVX - Free Report) , to increase presence in the liquid-rich Permian Basin.
Courtesy of rising oil production, the EIA report shows that the United States exported more crude oil and petroleum products in September 2019 than it imported. This happened for the first time since the company’s monthly records started getting documented in 1973. We expect its export volumes to increase as more and more operators are concentrating to produce more oil from the U.S. shales.
Year to date, shares of Devon have outperformed its industry.
Devon currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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