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Devon, Crosstex Form Giant U.S. Midstreamer

October 21, 2013
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Devon Energy Corp. has agreed to throw in an estimated $4.8 billion of U.S. midstream assets in Texas and Oklahoma and 800,000 net acres to form a partnership with Crosstex Energy Inc.'s assets in the Marcellus, Utica, Barnett, Eagle Ford and Haynesville shales, Permian Basin and the Gulf Coast, to create a fee-based service that initially would extend 7,300 miles and offer 3.3 Bcf/d net capacity.

The new master limited partnership (MLP) and general partner (GP), to date unnamed, intends to grow over time. It would start with 13 processing plants, six fractionators and 165,000 b/d net processing capacity, barge and rail terminals, product storage facilities, brine disposal wells and a crude oil trucking fleet.

Devon would be the partnership's largest customer and hold controlling interest in the new entity. The producer would dedicate the acreage to the new company in areas where it expects to develop liquids-driven upstream opportunities.

Dallas-based Crosstex now owns the GP and a portion of the stakes in Crosstex Energy LP, along with the majority interest in E2, a services company that focuses on the Utica in the Ohio River Valley.

The management teams spent about an hour Monday discussing the new venture.

"This transaction provides Devon a market-based valuation for these assets on a go forward basis," said Devon CEO John Richels. He noted that the Oklahoma City-based operator has been eyeing a midstream spin-off or another financing method for the unit for months to provide investors more transparency for the company (see Shale Daily, April 17).

The tie-up with Crosstex was not a surprise, Richels assured analysts. The management teams have been friends and "have been getting together for years," said Richels. Their friendship deepened in 2006 when Devon purchased Chief Holdings LLC's Barnett Shale properties; Crosstex bought Chief's midstream assets.

The relationship between the companies "became stronger than ever," Richels said. The new venture "came together quite naturally."

Davis agreed. He pointed to the companies' shared values, cultural alignment and experienced leadership.

"Ultimately, it became the right time," Davis said.

Devon isn't putting all of its midstream into one basket. Canadian operations remain within the corporation, as do other U.S. properties. "We have many areas that are dealing with third-stream providers that we need to augment internally," said Richels. "We still have to have internal midstream expertise."

The new company's financial foundation should enable it to pursue more opportunities "over and above" the $1 billion in growth projects Crosstex currently has underway. In addition to future greenfield projects, the new company would be positioned to capitalize on opportunities supporting Devon's upstream growth needs.

In addition, the MLP is expected to have the opportunity to acquire more Devon assets over time. Specifically, Devon has granted the right of first offer with respect to its interest in Access Pipeline, a system serving Devon's growing thermal heavy oil production in Canada.

In the new MLP, Devon is contributing equity interest through newly formed Devon Holdings and $100 million in cash. Devon Holdings would include the Barnett, Cana and Arkoma Woodford in Oklahoma, and interest in Gulf Coast fractionators in Mont Belvieu, TX. The MLP and GP each would own half of the holding company. Crosstex Energy Inc. stockholders would receive one unit in the GP for each share, and a one-time cash payment of about $2.00/share, or $100 million in aggregate.

The new company expects to achieve operational and financial synergies of up to $45 million a year, including $20 million in cost savings and about $25 million in financing savings achieved from reduced interest costs from an improved credit profile.

Fixed-fee contracts and minimum volume commitments associated with the midstream assets are expected to support the stability and growth of the new entity's future cash flows. Fixed-fee contracts would account for nearly all (95%) of the new company's estimated 2014 estimated earnings. Cash flow stream would be further stabilized by the diversified industries represented in its customer base, the partners said.

The combination is structured to be a tax-free contribution. Once the transaction closes, expected by the end of March, Devon would own 70% of the GP, with 30% owned by Crosstex Energy Inc. Ownership of the MLP would be Devon 53%; Crosstex Energy LP 40%; and the new GP entity 7%. The transaction is subject to approval by Crosstex Energy Inc. shareholders.

If approved, the new company would be headquartered in Dallas with some employees still based in Oklahoma City.

The new board of the GP and the MLP would consist of nine directors, five designated by Devon and Richels as chairman. The executive management team would be comprised of senior officers of both Devon and Crosstex, led by Davis as CEO and president.

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