Devon Energy Corp (DVN.N) will buy oil-producing assets in Texas for $6 billion and plans to sell or otherwise monetize some of its natural gas-heavy holdings in response to investor criticism about its lack of exposure to more profitable crude.
The Oklahoma City-based company said it will buy privately held GeoSouthern Energy Corp's core assets in the Eagle Ford shale region of south Texas for $6 billion in cash, as it seeks to revive investor interest in its shares.
Oil and gas deals have been slow in the United States in 2013, compared to previous years when companies like Exxon Mobil (XOM.N), Royal Dutch Shell (RDSa.L) and BHP Billiton Ltd (BHP.AX) poured billions into emerging shale assets.
Investors had worried that Devon did not have a position in some of the hottest U.S. shale formations, like the Eagle Ford.
Devon Chief Executive John Richels said after the GeoSouthern deal was announced that Devon was looking to sell or otherwise extract value from its conventional natural gas assets in Canada and other non-core assets in the U.S.
"The new Devon is a significant North American oil producer capable of delivering high rates of growth in high-margin oil production while generating free cash flow," Richels said on a conference call with investors.
Shares of Devon Energy were barely lower in Wednesday afternoon trading, down five cents to $62.72.
The company said the assets it was buying currently produce 53,000 barrels of oil equivalent (BOE) per day over 82,000 net acres.
That's expected to grow at a compound annual rate of 25 percent over the next several years, reaching peak production of about 140,000 BOE per day, the company said. The GeoSouthern assets hold estimated risked recoverable resources of 400 million barrels of oil equivalent, most of which is proved reserves, it said.
Private equity firm Blackstone Group (BX.N), an investor in GeoSouthern, will sell its stake through the Devon deal, raking in about $1.54 billion, Blackstone said.
GeoSouthern CEO George Bishop also holds an ownership stake in the company, but it is not currently known how much he will make from the sale.
Devon has been working for years to transform itself. In 2009, the company started selling international and offshore assets to focus on its North American operations.
That strategy left the company with a big exposure to lower-priced natural gas and natural gas liquids, causing the company's shares to underperform over the past two years.
Richels said that after exiting the non-core assets, Devon would focus on five key areas - the Eagle Ford shale, the Permian basin, Canadian heavy oil, the Barnett Shale, and the Anadarko basin - as well as two other emerging oil plays.
Through the asset monetization program, the company hopes to exit assets holding around 30 percent of Devon's natural gas, 12 percent of its natural gas liquids and 8 percent of its oil.
Through the GeoSouthern deal, Richels said the company was buying light-oil rich acreage in the best part of the Eagle Ford formation at a discount to the stock market valuation of similar assets.
"The deal makes them more of an oil company and grows their production right away. A lot of people still have the idea that they are too much of a gas company and this deal will change that right away," said Mike Breard, an analyst at Hodges Capital Management in Dallas.
Morgan Stanley and Goldman Sachs were financial advisors to Devon in the GeoSouthern deal. Jefferies & Co advised GeoSouthern.
Last month, Devon agreed to combine most of its U.S. pipeline and processing businesses with those owned by Crosstex Energy Inc XTXI.O and Crosstex Energy LP XTEX.O and form a new infrastructure company.
(Additional reporting by Anna Driver in Houston; Editing by Nick Zieminski, Bernadette Baum and Tim Dobbyn)