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BP Snaps Up Devon Properties in $7B Cash Deal

Devon Energy Corp., which last year began restructuring its operations to focus on North American onshore operations, Thursday agreed to sell all of its deepwater Gulf of Mexico (GOM), Brazil and Azerbaijan assets to London's BP plc for $7 billion.

BP also would assume two of Devon's offshore drilling rig leases for the duration of the contract terms. In addition, the two producers plan to form a joint venture (JV) to develop BP's Kirby oilsands leases in Alberta.

"These sales, combined with our previously announced divestitures of $1.3 billion of deepwater Gulf of Mexico assets, put Devon well on the way to completing its strategic repositioning," said Devon CEO Larry Nichols. "Given any reasonable sales price for Devon's remaining divestiture assets, the transactions to date suggest that our total after-tax proceeds for the entire divestiture program will exceed our previously announced range of $4.5 to $7.5 billion."

Because of the heavy costs involved, Devon last year said it was looking for a partner to help it develop its deepwater GOM properties. At the time, Nichols said Devon had been "a victim of our own success" (see NGI, May 11, 2009). By November, Devon upped the stakes, and Nichols, who said the company had an "overabundance of opportunities," said all of the GOM properties would go on the block, as well as the international assets (see NGI, Nov. 23, 2009).

Devon already has sold its interests in three deepwater GOM projects to its partners and Maersk Oil for a combined $1.3 billion (see NGI, Feb. 1; Daily GPI, Feb. 11).

Devon expects to complete the sale of the various assets throughout this year, and as the transactions are completed, it said it would update guidance for 2010 production, expenses and capital expenditures. Profits from the sales would be allocated between Devon's North American onshore properties and debt reduction.

For BP, the transaction strengthens its position worldwide, said Group CEO Tony Hayward.

"This strategic opportunity fits well with BP's operating strengths and key interests around the world, offering us significant additional long-term growth potential with an emphasis on high-margin oil," said Hayward. "As well as giving us a broad portfolio of assets in the exciting Brazilian deepwater, it will strengthen our position in the Gulf of Mexico, enhance our interests in Azerbaijan and enable us to progress the development of Canadian assets."

In the GOM deepwater, BP would gain a portfolio with interests in about 240 leases, with a particular focus on the emerging Paleogene play in the ultra-deepwater. The addition of Devon's 30% stake in the major Paleogene discovery Kaskida would give BP 100% control. The GOM assets also include interests in four producing fields: Zia, Magnolia, Merganser and Nansen.

In the oilsands JV, Devon is to acquire a half-stake of BP's interest in the Kirby oilsands leases and would become the operator. Devon would pay BP $500 million at closing and commit to fund an additional $150 million of capital costs on BP's behalf. The Kirby project is close to Devon's Jackfish steam-assisted gravity drainage (SAGD) project, and like Jackfish, Kirby is expected to be a multi-stage SAGD development. Devon and BP also agreed to negotiate a long-term heavy crude sales agreement for Devon's share of Kirby production.

At the end of 2009 Devon's reported estimated proved reserves included 20 million bbl of liquids and 198 Bcf of natural gas associated with the GOM assets being purchased by BP. Around 37% of these reserves were classified as proved developed. The international assets BP is purchasing were reported as discontinued operations at year's end, and they were excluded from Devon's reported reserves and 2010 guidance for production from continuing operations.

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