Monday, March 15, 2010

Devon's Yard Sale Going Well

Along with Petrohawk, Devon Energy is unloading a bunch of assets so it can focus more on its North American onshore drilling program.  Last week, Devon announced that BP has purchased the company's deepwater Gulf of Mexico leases, its Brazilian business and its interest in the ACG field in Azerbaijan for $7 billion.  Along with the boatload of cash, Devon also transferred some expensive drill leases to BP.  As part of the deal, Devon also bought into BP's Kirby oil sands project in eastern Alberta, Canada for $500 million with a commitment for an additional $150 million of carry.  Devon will take over as operator of the Kirby project, which appears to offer some synergies with Devon's Jackfish properties immediately to the south.

This sale combined with an earlier sale of Gulf of Mexico deepwater assets has brought the running total for Devon's asset sale to $8.3 billion.  With some Gulf of Mexico shelf interests, offshore Chinese interests and some smaller international properties still on the block, Devon looks to clear between $9.6 to $10.3 billion from its yard sale, which eclipses the originally announced estimate of $4.5 to $7.5 billion.  Devon either set the bar really low or the deal making environment is stronger than expected.

Proceeds from the sale will be used to fund E&P capital expenditures as well as to reduce debt (happy bankers) and buy back stock (happy shareholders).  Devon's capital budget for 2010 is $4.4 to $4.8 billion, and about 40% ($1.7 B to $1.9 B) is allocated to gas shales.  Along with the Haynesville Shale, Devon owns interests in the Barnett, Woodford and Horn River shales.

Devon's asset sale is similar to Petrohawk's in that it allows Devon to focus more attention and capital on its onshore activities. But the big difference from Petrohawk is that the assets being sold are very different from a risk/reward perspective.  Devon is selling high risk/ high reward projects that might yield a future home run but will require significant capital investment and uncertainty, while Petrohawk is selling dependable near-term cash flowing assets.  But what they are both doing is concentrating their companies' risk in fewer assets. I don't mean to sound judgmental, but it's a pretty big strategic shift for both companies.

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