Devon Energy made a giant step in its investments in Texas oil and gas fields with this week’s announced $1.8 billion acquisition of Validus Energy of Denver, Colorado.
Validus is an Eagle Ford operator and the deal is expected to close at the end of the third quarter of this year with an effective date of June 1, 2022. Devon will add about 42,000 acres to its lease program in South Texas according to the announcement.
The assets were acquired just last year by Validus from Ovintiv Inc. in an $880 million deal, as hedge fund Elliott Management invested in Validus. The land is adjacent to Devon’s existing leasehold in the Eagle Ford basin.
“The Validus acquisition captures a top-tier oil resource with a meaningful runway of highly economic inventory that is complementary to our existing footprint in the Eagle Ford,” said Rick Muncrief, president and CEO at Devon.
“This accretive transaction also enhances our financially-driven strategy that is designed to deliver per-share financial growth and accelerate the return of capital to our shareholders.”
This acquisition secures a premier acreage position of 42,000 net acres (90% working interest) adjacent to Devon’s existing leasehold in the basin. Validus’s current production is approximately 35,000 Boe per day (70 percent oil), with volumes expected to increase to an average of 40,000 Boe per day over the next year. The transaction also adds 350 repeatable drilling locations in the core of the Karnes Trough oil window along with 150 high-quality refrac candidates.
As Devon leaders pointed out, the transaction is valued at 2-times cash flow with a free cash flow yield of 30% at strip pricing over the next year. The acquisition is expected to be immediately accretive to all relevant per-share metrics in the first year, including earnings, cash flow, free cash flow and net asset value.
It also means the outlook for Devon’s variable dividend increases by up to 10% on a per-share basis at strip pricing. It should also accelerate the return of excess cash to shareholders through the ongoing execution of its $2 billion share repurchase program.
With enhanced scale in the basin, Devon expects to realize $50 million in average annual cash flow savings from capital efficiencies, operating improvements, and marketing synergies.