Devon Energy has entered into a definitive purchase agreement to acquire Validus Energy, an Eagle Ford operator, for total cash consideration of $1.8 billion. The transaction is subject to customary terms and conditions and is expected to close at the end of the third quarter of 2022, with an effective date of June 1, 2022.
Rick Muncrief, president and CEO stated,
“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. 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.”
TRANSACTION HIGHLIGHTS
Immediately accretive to financial metrics – The transaction is attractively valued at 2-times cash flow, with a free cash flow yield of 30 percent 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.
Increases cash-return outlook – Due to the accretive nature of this transaction to free cash flow, the outlook for Devon’s variable dividend increases by up to 10 percent on a per-share basis at strip pricing. In addition to higher dividend payouts, the incremental free cash flow from this acquisition positions the company to accelerate the return of excess cash to shareholders through the ongoing execution of its $2.0 billion share repurchase program.
Enhances Eagle Ford asset quality and scale – 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. This highly economic inventory positions the company’s Eagle Ford assets to sustain its high-margin production and free cash flow generation for several years.
Captures high-margin production – The acquired assets provide high cash operating margins through access to premium Gulf Coast pricing and low per-unit expenses. 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.
Maintains top-tier balance sheet – Devon’s pro forma leverage metrics will remain relatively unchanged, exiting the year with an expected net debt-to-EBITDAX ratio of 0.4 times at strip pricing. This balance sheet strength preserves the company’s financial and operational flexibility and allows for the accelerated return of capital to shareholders.
