Commodities Today: Will Oil Deals Keep Flowing?

Includes: CHK, DVN, ECA, EVEP, SD
by: Matthew Smith

We have seen a lot of deals in the oil sector recently with declining prices and very favorable terms for the buyers. Some of the large premiums have disappeared as more and more prime acreage has become available but the most valuable land continues to be in the shale oil plays with large contiguous tracts. That is why the deal that Devon Energy (NYSE:DVN) just closed seems like such a steal.

With the funding issues many companies are facing as they have tapped debt markets out and have weary investor bases that have grown tired of secondaries the trend has been to sell assets off and focus on developing other assets with the cash from deals. This has placed many buyers, who only a few years ago were fighting tooth and nail for deals and paying top dollar, in a position of strength. The stark contrast in positioning is not lost upon investors and this is why we believe many of the larger players have seen investors gravitate towards their shares in recent months.

We have long thought that the names with strong balance sheets would seek to deploy capital into areas, which needed large capital expenditures, and this move by Devon, although expected, backs that thinking up and highlights just how hard of a bargain these buyers are driving in the current market.

Also of importance is the fact that Bernanke seemed to shift the Federal Reserve's stance to even more dovish, if there was such a thing, with his comments that rates could be kept low even with unemployment figures falling below previously guided levels. It is bullish for the economy and commodities that easy money could last even longer, but the market seems to be ignoring this so far.

Chart of the Day:

Don't look now, but gasoline prices are making a move towards the $2.70/gallon level. It is still early, but with the Thanksgiving holiday fast approaching we might see prices take out that level as American families hit the road.

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Source: CNBC

Commodity prices this morning are as follows:

  • Gold: $1256.90/ounce, down by $16.90/ounce
  • Silver: $20.18/ounce, down by $0.154/ounce
  • Oil: $93.13/barrel, down by $0.21/barrel
  • RBOB Gas: $2.6261/gallon, down by $0.0134/gallon
  • Natural Gas: $3.644/MMbtu, up by $0.088/MMbtu
  • Copper: $3.1665/pound, up by $0.009/pound
  • Platinum: $1399.90/ounce, down by $20.00/ounce


We have not been fans of Devon Energy for some time. The company was carrying a lot of cash on the balance sheet and had little leverage for investors to benefit from rising oil prices. There were reasons to be bullish the name, but even when looking at the bull case one was faced with many questions, which is probably a reason that the company's stock languished for so long.

The recent deals that the company has entered have provided much more clarity to Devon's plans moving forward. That all set the stage for today's announcement that Devon would pay $6 billion in cash to GeoSouthern, a privately held company that had private equity money behind it, for 82,000 net acres in the Eagle Ford Shale in the light oil window. The acreage currently produces around 53,000 boe/d and should reach peak production of over 140,000 boe/d as more of its 1,200 undrilled locations are developed. The acreage here is contiguous which allows for more uniformed spacing and longer laterals and increases the value of the land package moving forward.

Shares in Devon Energy have been strong performers as of late and even outperformed its peers as they have announced deals that investors have long expected. We like the latest move and think the Eagle Ford acquisition will pay off handsomely in the years ahead.

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Source: Yahoo Finance

The deal solves many problems that Devon was facing from the investment community, such as increasing their exposure to the high value liquids and oil while diversifying away from dry natural gas - the same problem that Encana (NYSE:ECA) is currently facing. The deal skews production more towards the oil side now and will also be accretive to cash flow per debt adjusted share. What is more is that the asset will be self funding as the company is doing the deal for cash and the assets have already reached the critical mass point.

There are a few other acreage positions for sale right now by names such as Chesapeake Energy (NYSE:CHK), EV Energy Partners, LP (NASDAQ:EVEP) and possibly SandRidge Energy (NYSE:SD). We think that 2014 will see more deals done, but at bigger discounts than what we have seen in the past and that buyers will be targeting assets much like what Devon just purchased; producing assets which are for the most part de-risked.

Disclosure: I am long EVEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.