Devon Energy Corp., on the asset acquisition trail since 1988, believes it has all the bases covered in terms of natural gas assets, expertise and overall size and is focusing going forward almost exclusively on developing those predominantly North American assets and paying down the debt it accumulated during the acquisition phase.
The Oklahoma City-based company last Monday announced a series of financial moves reflecting its new directions and mature status, including divestiture of some of its North American oil and gas reserves, a two-for-one stock split, a buyback of up to 10% of its stock and a move from the American to the New York Stock Exchange.
“Our growth strategy is to create shareholder value by investing in significant long-term projects,” said John Richels, Devon’s president. “The non-core and mature properties we plan to sell no longer fit that strategy. Given the premium prices recent divestitures have commanded, we believe this is an ideal time to refocus our producing portfolio. Proceeds from these divestitures will be applied to fund a planned share purchase program that we are also announcing today.
“We see the next decade for Devon being a lot different than the last decade” when acquisitions to build the company were the driving force, Richels said. Acquisitions are not particularly on Devon’s to-do list going forward. Elaborating for a questioner, he pointed out that when Devon started out in 1988 there were 400 publicly-traded companies. “We thought they would consolidate and wanted to be player in the consolidation.”
Growth was focused on gas. “We said we wanted to get as much gas as we can before the world recognizes that it is a commodity in shortage in North America,” Richels continued, explaining that in 2001 “we moved very aggressively, incurred a lot of debt to make strategic acquisitions in gas, which we thought would be the last opportunity to buy gas on the cheap. So far that’s proven to be correct.”
In addition, “we wanted to have a company that would have all the technological expertise to do anything you wanted to do in North America,” and spread out geographically. That has been achieved, Richels said, with its base in coalbed methane, plus Barnett Shale operations and activity in the deep waters of the Gulf of Mexico. “We don’t see any technology we need that we don’t have. We are one of the larger players with critical mass in each and every one of the basins in North America. We don’t see any holes in our armor.
After starting purely as an exploitation company, Devon grew large enough to take on risk activities. “We now have a meaningful position of real exploration risk,” Richels maintained. “We’re capable of drilling right there with the majors in the deepest most expensive wells in North America.”
Devon also has some international plays in North Africa and Brazil, but “we don’t want to compete with Exxon or BP around the world; we don’t have the size and strength.
As for acquisition potential, there are now less than 100 publicly-traded companies, and Devon has already looked most of them over. The bottom 50 “are pretty small and irrelevant for us,” and as for the rest, “availability is restricted and the cost is awfully, awfully high,” Richels said. Right now the best buy is its own stock.
“We’ve been building for this. It’s no accident that we have almost 14 million acres in North America. We’ve been building to be in exactly this position at this time in the cycle when the M&A business gets contracted.”
The company will be paying down debt for its acquisition spree and further developing the properties that have made it the fourth largest gas producer in North America. The strategy has been to leverage up when prices are low and leverage down when prices increase.
The properties to be divested are located principally in the offshore Gulf of Mexico and onshore in the United States and Canada. Oil and gas production from these properties is expected to average 90,000 to 100,000 Boe per day in 2004. The company’s second quarter 2004 oil and gas production was 684,000 Boe per day. Excluding the contribution of the divested properties for the full year, Devon expects its 2005 production of oil, gas and natural gas liquids to be 210 to 220 million Boe.
Due to the steeper production decline characteristics of many of the properties to be divested, Devon expects its companywide reserve life to lengthen as a result of the sales. Additionally, divestiture of these properties is expected to result in a lower overall cost structure and improved operating efficiency.
Devon carried out a similar divestiture program in 2002, and refocused its portfolio by selling approximately $1.5 billion in non-core properties. The company expects to begin the current divestiture process in the fourth quarter of 2004 and substantially complete it in the first quarter of 2005. After-tax sale proceeds are expected to range between $1.0 billion and $1.5 billion.
Devon’s two- for-one split of outstanding common stock will be applicable to shareholders of record at the close of business on Oct. 29, 2004. It will be accomplished through a stock dividend to be issued on Nov. 15, 2004.
The share repurchase will take place from time to time depending on market conditions over an 18-month period beginning in the fourth quarter of 2004, Devon said. The 10% target represents approximately 25 million shares, or approximately 50 million shares following a planned two-for-one stock split. The company plans to repurchase shares in the open market and in privately negotiated transactions. The stock repurchase program may be discontinued at any time.
“We have already repaid nearly $1 billion in long-term debt in 2004 and have reached our goal of accumulating sufficient cash to retire debt payable in 2005 and 2006,” said Brian J. Jennings, senior vice president and CFO. “Given the strength of oil and natural gas prices, we expect to continue generating significant amounts of excess cash. We plan to aggressively purchase Devon’s shares with cash flow from operations and the proceeds of the divestiture program we are also announcing today. We are very confident about Devon’s future and are firmly committed to enhancing per share value.”
The company intends to repay approximately $1.6 billion of long-term debt in 2005 and 2006. Cash balances on hand currently exceed this amount.
Devon has been approved to file an application with the New York Stock Exchange (NYSE) and expects trading to commence on Oct. 12, 2004. Until then, Devon will continue trading on the American Stock Exchange (AMEX). The company expects to retain DVN as its ticker symbol.
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