Devon Energy (DVN.N) announced on Monday its strategic move to acquire Grayson Mill Energy, a major Bakken-focused energy producer owned by private equity firm EnCap, in a cash-and-stock deal valued at $5 billion. This acquisition, structured to include $3.25 billion in cash and $1.75 billion in stock, is poised to enhance Devon’s footprint in the Williston Basin and capitalize on high stock valuations to expand its acreage.
Strategic Expansion Amidst Industry Consolidation
The U.S. energy sector has witnessed a significant wave of consolidation, with deals amounting to $250 billion in 2023 alone. This trend has carried over into 2024, as companies seek opportunities to deploy their capital and bolster their reserves. The current landscape has created a favorable environment for private equity firms like EnCap to divest their assets profitably. EnCap, which previously sold shale assets of XCL Resources for approximately $2 billion in June, had planned since January to offload Grayson Mill, a major player in the Bakken region.
Grayson Mill Energy, established by EnCap in 2016, operates across North Dakota, Montana, and the Powder River Basin in Wyoming. The sale of Grayson Mill marks a significant divestiture for EnCap, aligning with their strategy to capitalize on the booming consolidation wave.
Enhancing Devon’s Williston Basin Operations
The deal, anticipated to close by the end of the third quarter, will significantly bolster Devon’s inventory and production capacity. It will add up to 10 years of inventory life with 500 additional wells, primarily in the Bakken region. This acquisition will contribute 307,000 net acres to Devon’s Williston Basin position, enhancing its multi-basin business model.
Devon Energy’s production is expected to surge, growing from 664,000 barrels of oil equivalent per day (boepd) to 765,000 boepd. This substantial increase underscores the strategic value of the acquisition, despite concerns about the high transaction cost. Neal Dingmann, an analyst at Truist Securities, noted that while the deal appears costly, the three-rig Bakken plan and midstream addition should drive incremental shareholder returns, primarily through stock buybacks.
Financial Implications and Shareholder Returns
The acquisition is set to have several positive financial implications for Devon Energy. The company’s board of directors plans to expand its share repurchase program by 67%, reaching $5 billion by mid-year 2026. Additionally, the acquisition is expected to enhance Devon’s dividend payout starting in 2025, further solidifying its commitment to delivering value to shareholders.
Scott Hanold, an analyst at RBC Capital Markets, acknowledged the strategic extension of Devon’s drilling inventory in the Williston Basin but also pointed out the relatively high acquisition price. Hanold emphasized that assets in the Williston Basin are generally less competitive compared to those in the Permian Basin, given the relative maturity of the region. Despite this, the deal is seen as a crucial step for Devon in maintaining and expanding its production capabilities.
Market Reaction and Industry Context
Shares of Devon Energy experienced a slight dip of 1.7% in early morning trading following the announcement, amidst a lower crude price environment. However, the long-term outlook for Devon appears promising, given the strategic benefits of the acquisition. The consolidation trend inthe U.S. energy sector is likely to continue, driven by companies’ need to optimize their portfolios and expand their resource bases.
This acquisition positions Devon Energy as a significant player in the ongoing consolidation wave, leveraging its financial strength and strategic vision to enhance its operational footprint. The integration of Grayson Mill Energy’s assets is expected to provide substantial growth opportunities and drive shareholder value in the coming years.
In conclusion, Devon Energy’s $5 billion acquisition of Grayson Mill Energy represents a strategic move to expand its acreage and production capacity in the Williston Basin. Despite the high acquisition cost, the deal is poised to deliver significant long-term benefits, including increased production, expanded drilling inventory, and enhanced shareholder returns. As the energy sector continues to evolve, Devon’s proactive approach to consolidation and growth underscores its commitment to maintaining a competitive edge in the industry.
