Oil & Gas News

Devon: The Merger That Never Was

Devon, Merger

In the past year, U.S. oil and gas producer Devon Energy (DVN.N) has faced significant challenges in its attempts to acquire at least three of its industry peers. Despite its efforts, Devon’s stock has been deemed unattractive as acquisition currency, leading to failed bids. This information comes from sources familiar with the negotiations.

One of the notable failures was Devon’s attempt to outbid ConocoPhillips (COP.N) for Marathon Oil (MRO.N) in a deal worth $22 billion. Additionally, Devon’s $12 billion bid for CrownRock fell short against Occidental Petroleum (OXY.N). Devon also unsuccessfully pursued Enerplus, which was eventually acquired by Chord Energy (CHRD.O) for $3.8 billion.

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Similar to other companies in the sector, Devon has been seeking acquisitions to expand its scale as it continues to develop its existing acreage. However, rising drilling costs and production issues have made its stock less appealing to potential acquisition targets, according to the sources.

The recent wave of major deals in the industry, such as Exxon Mobil’s (XOM.N) $59.5 billion acquisition of Pioneer Natural Resources and Chevron’s (CVX.N) $53 billion agreement to buy Hess (HES.N), have primarily been structured as all-stock transactions. These all-stock deals help reconcile price disagreements with acquisition targets whose shareholders prefer to maintain their investments in the energy sector, hoping for a rebound in energy prices. However, skepticism about the value of Devon’s stock has hindered its acquisition efforts.

Devon, Merger, Shares

Devon’s shares have underperformed the S&P 500 Energy index by 16 percentage points over the last year, according to Andrew Dittmar, principal analyst at energy consultancy Enverus Intelligence, highlighted that Devon’s stock weakness has placed it at a disadvantage compared to rival bidders. “They had less room to offer premiums and bid-up asking prices without potentially making the deal financially dilutive to themselves,” Dittmar explained.

Despite these challenges, Devon’s leadership remains cautious about acquisitions. During the company’s first-quarter earnings call, CEO Rick Muncrief stated that Devon has a “very, very high bar” for the acquisitions it would consider. “Can we find something that makes us stronger? Then we would consider that without a doubt,” Muncrief said.

Founded in 1971, Devon operates in prominent shale formations, including the Permian Basin of Texas and New Mexico, the Eagle Ford in south Texas, and the Williston Basin in North Dakota. The company has a market value of approximately $30 billion.

Interestingly, Devon’s recent acquisition targets’ doubts are notable given the company’s strong stock performance following its last major deal. When Devon merged with WPX Energy in a $12 billion all-stock transaction at the start of 2021, it became the best-performing stock in the S&P 500 index that year. However, despite Devon’s strategy of maintaining financial discipline and returning cash to shareholders, production issues and rising costs have eroded investor confidence.

Mineral Rights, Sell Mineral RightsOne notable production issue was a fire at a critical gas compression station in Texas in January 2023, which took the facility offline for several weeks. These setbacks have contributed to the market’s waning enthusiasm for Devon’s stock.

Devon’s inability to secure recent acquisitions also reflects its disciplined approach to pricing and the heightened competition for assets in the sector. Some of the companies Devon targeted, such as Marathon Oil and Enerplus, were sold at a premium to their undisturbed share prices, exceeding the average premium paid for U.S. publicly listed oil and gas companies since early 2023, according to Enverus data.

Kevin MacCurdy, director of upstream research at investment advisory firm Pickering Energy Partners, noted that smart companies evaluate each transaction on its merits rather than feeling pressured to make deals in response to competitors. “Some people feel like when one company does a deal, their competitor needs to do a deal, but smart companies judge every transaction on its merits,” MacCurdy said.

Looking ahead, Devon may still pursue potential acquisitions. Investment bankers and analysts have identified logical targets that could enhance Devon’s position, such as Permian Resources (PR.N), Matador Resources (MTDR.N), and privately-owned Mewbourne Oil, all of which would strengthen its presence in the Delaware Basin. If Devon aims to reinforce its Williston Basin position, it could target privately held Grayson Mill Energy, which is reportedly considering sale options.

Buyout firm EnCap Investments, which owns Grayson Mill, declined to comment. Permian Resources, Matador Resources, and Mewbourne Oil did not respond to requests for comment. Bryce Erickson, head of valuation consultancy Mercer Capital’s oil and gas group, believes that a deal for Devon is inevitable. “Real or imagined, from my chair, there is a sort of feeding frenzy – it’s acquire or be acquired,” Erickson stated.

In conclusion, while Devon Energy has faced setbacks in its recent acquisition efforts, the company’s disciplined approach and strategic considerations position it for future opportunities. Despite production challenges and market skepticism, Devon remains a significant player in the U.S. oil and gas industry, with potential for growth and consolidation in the years ahead.

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