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Devon Expands Eagle Ford Position in $1.8 Billion Buy

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Devon Energy said Tuesday it plans to take over privately held Eagle Ford Shale producer Validus Energy in the largest deal announced in the play in four years.

The $1.8 billion transaction would expand Devon’s footprint in the South Texas shale play by 42,000 net acres and tack on another 35,000 barrels of oil equivalent per day of output, which is expected to grow to 40,000 boe/d over the coming year. Devon said that 70% of Validus’ current production is oil.

Growth Work-Around

Producers are keen to capitalize on the high commodity price environment by selling more barrels, but are limited in how much they can grow due to investor pressure and supply chain issues. Deals like Devon's Validus acquisition enable buyers to add production that is already on line without having to hire a rig or completion crew.

The deal “also matches investor preferences for immediate capital returns as it is easy to show line-of-sight from a deal like this with its strong cash flow accretion and a boost to dividends and buybacks,” said Enverus director Andrew Dittmar.

Indeed, investors responded favorably Tuesday after Devon said increased cash flow from the deal would translate to a 10% boost in its outlook for its variable dividend and an acceleration of its $2 billion share buyback program. Devon’s stock had risen by more than 3% to over $59 per share by mid-morning.

Eagle Ford Expansion

News of the deal comes one week after Chesapeake Energy announced it would exit the Eagle Ford as it shifts its focus to natural gas. The company purchased the bulk of its position there in 2018 when it acquired WildHorse Resource Development for almost $4 billion.

Devon’s purchase of Validus would be the largest deal in the Eagle Ford since Chesapeake’s WildHorse acquisition.

Eagle Ford Corporate Deals Since 2016
Date AnnouncedBuyersSellersValue ($MM)Acres NetDate Closed
8/9/2022Devon EnergyValidus Energy$1,800 42,000NA
4/14/2022SilverBow ResourcesSundance Energy35439,0007/5/2022
7/12/2021Penn VirginiaLonestar Resources US Inc.37053,55010/6/2021
7/8/2021WildFire Energy I LLCHawkwood Energy650160,0008/31/2021
11/3/2020Juniper Capital Advisors LPPenn Virginia150NA1/15/2021
4/13/2020SilverBow ResourcesVitruvian ExplorationNA97,8504/13/2020
7/10/2019Pillar Oil & Gas LLCCinco Oil & Gas LLCNANA7/10/2019
2/14/2019Undisclosed BuyerHarvest Oil & Gas Corp51.7NA2/14/2019
10/30/2018Chesapeake EnergyWildHorse Resource Development Corp3,977420,0002/1/2019
10/28/2018Denbury ResourcesPenn Virginia1,71684,060NA
2/22/2018Essel GroupEOS Petro IncNANA2/22/2018
5/12/2016CreditorsPenn VirginiaNA120,3009/12/2016

Validus, backed by Pontem Capital, acquired its Eagle Ford assets from Ovintiv in 2021 for $880 million. At the time, the properties produced 21,000 boe/d and oil prices were in the low $60 per barrel range, Dittmar noted.

“The current commodity price environment has led to a wave of asset offerings from private equity owners as their sponsors look to cash out,” he said. “However, deals have been more elusive as the bid/ask spread between what these sellers hope to get and what buyers are willing and able to pay has been wide. Companies like Validus that had a fairly low entry cost on their assets are at an advantage as even current asset pricing has the potential to generate a strong return.”

Upside Potential

While current production is the focus of the deal for Devon, the Oklahoma City-based independent said the Validus properties also hold 350 “repeatable drilling locations” in the core of the Karnes Trough oil window, along with 150 “high-quality” older wells that could be recompleted in the future.

“This highly economic inventory positions the company’s Eagle Ford assets to sustain its high-margin production and free cash flow generation for several years,” Devon said.

For its part, Devon produced 38,000 boe/d in the Eagle Ford in the second quarter, a 6% increase compared to the previous three months. The company said last week it was planning to complete 15 wells in the play over the remainder of the year.

Topics:
M&A, Corporate Strategy , Shale, Independent E&Ps
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