Devon Energy Corp. announced Aug. 9 that it entered into a definitive purchase agreement to acquire Validus Energy, an Eagle Ford operator, for $1.8 billion in cash.
The transaction is expected to close at the end of the third quarter.
Assisting them were associates Will Eiland, Jonathan Strom, Skyler Sikes, James Murphy, Mitch Holliman and Clayton Hart; corporate partners Rami Totari and Kevin Crews; tax partner Mark Dundon; environmental transactions partner Jon Kidwell; debt finance partner Jordan Roberts; and capital markets partner Michael Rigdon.
Connally, head of V&E’s energy transactions and projects group, counseled Pontem Energy Capital-backed Validus when it bought the properties from Ovintiv Inc. in 2021 for $880 million. He has also advised Devon on several divestitures.
Analysts at Tudor, Pickering, Holt said the timing was a bit surprising coming off of Devon’s July acquisition of the leasehold interest and related assets of RimRock Oil and Gas in the Williston Basin for $865 million in cash.
Devon CEO and president Rick Muncrief said in a statement that Validus acquisition captures a top-tier oil resource with a meaningful runway of highly economic inventory that is complementary to its 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,” he said.
Devon said 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 per-share metrics in the first year, including earnings, cash flow, free cash flow and net asset value.
Devon added that the outlook for its variable dividend increases by up to 10 percent on a per-share basis at strip pricing. In addition to higher dividend payouts, Devon said the incremental free cash flow from the acquisition positions the company to accelerate the return of excess cash to shareholders through the ongoing execution of its $2 billion share repurchase program.
The acquisition involves 42,000 net acres that carries a 90 percent working interest adjacent to Devon’s existing leasehold in the basin. Validus’ production is 35,000 barrels of oil equivalent per day (70 percent oil), with volumes expected to increase to an average of 40,000 barrels of oil equivalent per day over the next year.
Devon said the transaction adds 350 repeatable drilling locations in the core of the Karnes Trough oil window along with 150 high-quality refrac candidates. The inventory positions the company’s Eagle Ford assets to sustain its high-margin production and free cash flow generation for several years.
The buyer expects to realize $50 million in average annual cash flow savings from capital efficiencies, operating improvements and marketing synergies.
Devon said its leverage metrics will remain relatively unchanged, exiting the year with an expected net debt-to-EBITDAX ratio of 0.4 times at strip pricing.