Oil News: Devon Energy Corp Reportedly Preparing Multi-Billion Dollar Deal
According to a Reuters report, Devon Energy (NYSE: DVN) is in talks to acquire a private company Felix Energy. The report says Devon Energy made a cash and stock offer that would value Felix at $ 2 billion, which includes taking on the debt. Devon’s main attraction for Felix is its acreage position in the STACK area of northern Oklahoma, which is an area where Devon also has oil and gas acreage as well as intermediate infrastructure.
Get the scoop on the STACK game
The STACK game, which stands for Searlier Tto tear Anadarko Ba sin VSanadian and KThe ingfisher counties are starting to gain a lot of industry attention due to their high potential for petroleum and natural gas liquids. It’s a game Devon Energy is reducing risk, having drilled more than 100 wells in the area. The slide below shows that the company has built a net position of 75,000 acres of liquid-rich windows.
By acquiring Felix, Devon would not only roughly double the size of its acreage in STACK, but would also acquire a very complementary acreage.
What’s also worth noting is that most of Felix’s acreage is in the oil window, resulting in solid drilling returns even at current commodity prices. Felix noted that he enjoys an internal rate of return of over 40% to current well costs and raw material prices.
The next big thing?
This compelling drilling performance at current commodity prices is what really attracts the industry to this particular area. Exploration of new fields (NYSE: NFX), for example, moved most of its capital out of the Eagle Ford and Bakken zones to focus instead on expanding its acreage in STACK. CEO Lee Boothby noted in the company’s third quarter press release that Newfield Exploration had,
[…] We have shifted both human and capital resources to our most profitable asset – the Anadarko Basin. Our short-term priorities remain unchanged: maintaining liquidity and a solid capital structure, maintaining our economically resilient STACK acreage by production, seizing the remaining acreage opportunities in the Anadarko basin ….
In other words, the company sees STACK as the main driver of growth going forward, as the economic conditions are so convincing at current prices and will become even more so when prices improve.
In fact, Felix Energy estimates that at a well cost of $ 6 million, its best wells could generate up to an internal rate of return of 140% once the oil rises above $ 70 a barrel. That said, the producers of STACK are just starting to figure out how to develop this game, so future yields and recoveries could be even better. Newfield, for example, is just starting to drill what it calls the NEW STACK SXL wells, which offer much better initial production performance than previous wells. The implication here is that as companies continue to test and develop this game, it is highly likely that performance could improve further.
Takeaway for investors
Although the deal has yet to be announced, it looks like Devon Energy is set to strengthen its STACK position. It is a game that is just starting to gain the attention of the industry given that the returns are quite lucrative at current prices. Because of this, the potential is there for this game to turn into something really special, especially once the industry has a solid understanding of the best techniques for developing the game and oil prices improve.
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