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Lower 48 giant Devon Energy Corp. is becoming even larger after agreeing to buy Eagle Ford Shale pure-play Validus Energy for $1.8 billion.

The transaction, set for completion by the end of September, would add 42,000 net acres that are adjacent to Devon’s existing leasehold in South Texas. Validus today is producing 35,000 boe/d, 70% weighted to oil, with average volumes set to increase by around 5,000 boe/d by year’s end.

“The Validus acquisition captures a top-tier oil resource with a meaningful runway of highly economic inventory that is complementary to our existing footprint in the Eagle Ford,” CEO Rick Muncrief said.

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The Validus takeover would be the second Lower 48 purchase since the start of the year for Devon. In July it spent $865 million to purchase Williston Basin assets from RimRock Oil and Gas LP.

According to Oklahoma City-based Devon, Validus would add about 350 “repeatable drilling locations in the core of the Karnes trough oil window” in South Texas. It also may refracture another 150 Validus wells.

“The acquired assets provide high cash operating margins through access to premium Gulf Coast pricing and low per-unit expenses,” Devon noted. With the Validus assets in the portfolio, the independent expects to realize $50 million in average cash flow savings a year from “capital efficiencies, operating improvements and marketing synergies.”

Denver-based Validus, sponsored by private equity firm Pontem Energy Capital, acquired most of the Eagle Ford portfolio last year in an $880 million deal with Ovintiv Inc. 

Devon and Validus are in some ways related. Validus CEO Skye Callantine previously helmed Permian Basin operator Felix Energy LLC, which was sold to WPX Energy Inc. last year. Devon early last year completed its takeover of WPX, which at the time was run by Muncrief.

The Validus purchase caught some energy analysts off guard.

“Color us a bit surprised, as Devon quickly moves on its second bolt-on transaction of the year,” said Tudor, Pickering, Holt & Co. analysts. Devon’s pro forma position in the Eagle Ford would be 82,000 net acres with 70% working interest. Combined output for 2Q2022 output would have been 73,000 boe/d, weighted 60% to oil.

Siebert Williams Shank & Co. LLC’s managing director Gabriele Sorbara said Devon “remains attractive” with the transaction as it has “above-average total capital returns. Again, the deal is accretive to the variable dividend payout in 4Q2022 and beyond.”

Devon, said Sorbara, also “remains well positioned with $857 million of cash on hand pro forma, with tremendous free cash flow generation ahead to continue to execute on buybacks and other shareholder friendly initiatives.”

Mizuho Securities USA LLC analysts said organic growth investments have remained a “no-go” for U.S. producers in general, “as supply chain bottlenecks and a tight services market increase inflationary pressures, compounding with recessionary fear (demand uncertainty).

“But operators still have options to enhance per-share value. Repurchasing shares is arguably the least risky option, but bolt-on deals like Devon has recently made add similar leverage to the commodity with future operational upside. We generally like these deals such as Devon’s for Validus today, especially done with cash.”

Before the Validus transaction was announced, Devon earlier this month raised its production forecast for 2022 by 3% to 600,000-610,000 boe/d. Upstream capital spending was boosted to $2.2-2.4 billion, about $250 million higher in part because of the RimRock deal. 

Management did not indicate Tuesday if the Validus takeover would lead to higher capital spending or output for the year.

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Related topics: Acqusition Devon Energy Validus

email carolyn.davis@naturalgasintel.com

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