Focus: How Devon Energy missed out on the US oil and gas mega-deal wave

Chord Energy

06/06/2024 11:00

By David French and Arathy Somasekhar
       June 6 (Reuters) - U.S. oil and gas producer Devon
Energy  DVN.N  has lost bids to acquire at least three of its
peers in the last 12 months because its shares were spurned as
acquisition currency, according to people familiar with the
negotiations.
    Devon missed out on the sector's dealmaking boom by losing
to ConocoPhillips  COP.N  the $22 billion deal to acquire
Marathon Oil  MRO.N , failing to beat Occidental Petroleum's
 OXY.N  $12 billion bid for CrownRock, and unsuccessfully
courting Enerplus  ERF.TO  before it was sold to Chord Energy
 CHRD.O  for $3.8 billion, the sources with knowledge of the
matter said.
    Like its peers, Devon has turned to dealmaking to gain scale
as it drills more of its existing acreage. It has struggled to
clinch an acquisition as higher drilling costs and production
issues made its stock less attractive to acquisition targets,
the sources said. 
    Most recent big deals in the sector, including Exxon Mobil's
 XOM.N  $59.5 billion acquisition of Pioneer Natural Resources
and Chevron's  CVX.N  $53 billion agreement for Hess  HES.N ,
have been all-stock. 
    All-stock offers help reconcile price disagreements with
acquisition targets whose shareholders are reluctant to cash out
for fear energy prices may sharply rebound, but are happy to
roll their stakes in a deal because they want to stay invested
in the combined company.
    Acquisition targets were skeptical, however, about the value
of Devon's stock, the sources said. Devon's shares have
underperformed the S&P 500 Energy index by 16 percentage points
in the last 12 months, LSEG data shows.   
    Andrew Dittmar, principal analyst at energy consultancy
Enverus Intelligence, said the weakness in Devon's stock put the
company at a disadvantage to rival bidders for companies.
    "They had less room to offer premiums and bid-up asking
prices without potentially making the deal financially-dilutive
to themselves," Dittmar said of Devon.
    A Devon spokesperson declined to comment. In the company's
first-quarter earnings call last month, CEO Rick Muncrief said
Devon had a "very, very high bar" on the acquisitions it would
pursue.
        "Can we find something that makes us stronger? Then we
would consider that without a doubt," Muncrief said.
  
    Founded in 1971, Devon operates in shale formations that
include the Permian basin of Texas and New Mexico, the Eagle
Ford in south Texas, and the Williston basin in North Dakota.
The company has a market value of about $30 billion.
    The doubts Devon's recent acquisition targets harbored are
striking given the strong performance of its stock in the wake
of its last major deal. When Devon combined with peer WPX Energy
in a $12 billion all-stock merger at the start of 2021, the
company went on to be the best-performing stock in the S&P 500
index that year.
    Yet despite Devon's strategy of running a tight ship and
returning cash to shareholders, the production issues and higher
costs have undermined investor confidence, and the market has
more recently fallen out of love with Devon's stock.
    The problems with production included a fire at a key gas
compression station in Texas in January 2023, which knocked the
facility offline for a number of weeks.
    
    NEW TARGETS
    To be sure, Devon's failure to bag a deal is also a function
of its price discipline as an acquirer, as well as heightened
competition for assets in the sector, according to the sources. 
    Some of the companies Devon failed to buy were pricey;
Marathon Oil and Enerplus sold at an average premium to their
undisturbed share price that was around 3 percentage points over
the average premium paid for U.S. publicly listed oil and gas
companies since the start of 2023, according to Enverus data.
    "Some people feel like when one company does a deal, their
competitor needs to do a deal, but smart companies judge every
transaction on its merits," said Kevin MacCurdy, director of
upstream research at investment advisory firm Pickering Energy
Partners.
    Were Devon to give a potential acquisition another shot
soon, investment bankers and analysts say logical targets
include Permian Resources  PR.N , Matador Resources  MTDR.N ,
and privately-owned Mewbourne Oil, all of which would bolster
its Delaware basin footprint. Alternatively, if Devon wants to
reinforce its Williston basin position, it could target
privately held Grayson Mill Energy, which Reuters reported is
considering sale options.
    Buyout firm EnCap Investments, which owns Grayson Mill,
declined comment. Permian Resources, Matador Resources and
Mewbourne Oil did not respond to comment requests.
    Bryce Erickson, who leads valuation consultancy Mercer
Capital's oil and gas group, predicted a deal for Devon was only
a matter of time, given the company has managed to overcome many
of its production issues.
    "Real or imagined, from my chair, there is a sort of feeding
frenzy - it's acquire or be acquired," said Erickson.

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Devon Energy shares underperform since the start of 2023    https://reut.rs/3V4v2sd
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 (Reporting by David French in New York and Arathy Somasekhar in
Houston
Editing by Greg Roumeliotis and Marguerita Choy)
 ((davidj.french@thomsonreuters.com;))