A unit of China's Sinopec Group on Tuesday agreed to invest $2.2 billion to acquire a one-third interest in five of Devon Energy Corp.'s frontier unconventional oil and gas fields.
The area of mutual interest with Sinopec International Petroleum Exploration & Production Corp. (SIPC) is to cover a portion of Devon's 1.2 million net acres in the Tuscaloosa Marine Shale, Niobrara, Mississippian, Ohio's Utica Shale and the Michigan Basin. The companies recently added acreage in Ohio, increasing their joint position in the play to 235,000 net acres.
"While we are still in the early stages of derisking these plays, the tremendous response by industry to our data room process clearly underscores the attractiveness of this opportunity," said Devon's Dave Hager, executive vice president of exploration and production. "We believe our strong acreage positions in these plays, our reputation as a quality operator and the uniqueness of the opportunity for exposure to five different plays in a single venture make this a compelling value proposition."
CEO John Richels had said in November that Devon wanted to secure one JV partner for the five developing plays, not a "whole bunch of JVs with different parties" (see Shale Daily, Nov. 4, 2011). Although Devon frequently partners in its offshore exploration ventures, it has not, unlike some of its peers, until now given up stakes in its estimable onshore holdings.
"This is something that we have not typically done," Richels said in November. "Nothing has changed [in our thinking] other than the fact that we see a lot of opportunity in these five plays and a lot of capital commitment over time. To bring somebody in at an early stage in an exploratory play to help diversify that risk just seems to make the most sense to us. These [plays] all have a lot of potential."
SIPC is to pay Devon $900 million in cash when the transaction closes and $1.6 billion in the form of a drilling carry, which would fund 70% of Devon's capital requirements and result in SIPC paying 80% of the overall development costs during the carry period. Based on the current work plan, Devon expects the entire $1.6 billion carry to be realized by the end of 2014. Through 2012 the companies expect to drill about 125 gross wells in the five plays.
"This arrangement improves Devon's capital efficiency by recovering our land and drilling costs to date and by significantly reducing our future capital commitments," said Richels. "We can accelerate the derisking and commercialization of these five plays without diverting capital from our core development projects. This transaction also provides us further flexibility to seek exposure to additional new play types with less risk."
Like many of the biggest producers, Devon quietly acquires a big leasehold and conducts drilling tests before showing its hand. It first disclosed its Tuscaloosa Marine Shale leasehold last May (see Shale Daily, May 5, 2011). In June Richels disclosed that Devon was attempting to amass "at least" 150,000 net acres in several North American plays (see Shale Daily, June 30, 2011). At the time Devon had about 110,000 net acres in Ohio's Utica Shale and 300,000 net acres in Michigan's portion of the Utica play. In addition, about 300,000 net acres had been acquired in Wyoming's Niobrara Shale, 150,000 net acres in Oklahoma's Mississippian Lime play and 65,000 net acres in the Wolfberry Shale in Texas.
Devon is to serve as the operator of the Sinopec partnership and said it would have "ultimate responsibility" to allocate capital. The company also would be responsible for marketing all production from the plays into the North American market. Subject to approvals, closing is expected before the end of March.