Devon Energy Corp. WPX Energy Merger Update

Devon Energy Corp. has emerged as one of the Permian’s most prominent players after completing a “merger of equals” with WPX Energy in January, with the company retaining Devon’s name, Oklahoma City headquarters, and a blended board and executive team. The two companies’ portfolios overlapped in the Delaware Basin, where it is now a dominant leaseholder with some 400,000 net acres in the economic core of the play, but Devon also holds assets in the Anadarko, Eagle Ford, Powder River and Bakken.

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When the deal closed, Devon Energy became one of the top five largest unconventional oil producers, with daily production of 580,000 barrels of oil equivalent and a capital budget of $1.6 billion-$1.8 billion. The majority of the CAPEX program is earmarked for the New Mexico and Texas portions of the Delaware, where Devon’s 2021 oil production is forecast to average 280,000-300,000 bbl/d.

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This spring, Chief Operating Officer Clay Gaspar and his fellow executives are busy integrating the two heavy hitters into a better, larger Devon built to grow through the bit with an inventory of thousands of wells replete with a lengthy list of high-graded Delaware Basin prospects. Devon also has new economies of scale and structural efficiencies that are expected to save $575 million in annual operating costs, Gaspar says.

“We are in the early stages of really coming together as a team, but I think this investment and the time we are spending is an important process that will allow Devon to take a significant step up as we go forward,” he comments.

With both legacy organizations considered low- to no-growth companies focusing on generating free cash flow after periods of exceptional growth, the new Devon will generate consistent growth in the single digits and create long-term value for shareholders that also will benefit service company partners and employees, Gaspar points out.

While assuring that staffs are on the same page on formation names and the like, and ensuring the best of best practices and technical know-how, the company is combining teams that have proven their mettle on Devon’s legacy acreage in southeastern New Mexico and WPX’s former core position in Texas.

The fruit of their labors just prior to closing included 23 mostly Bone Spring wells brought on line in Devon’s legacy New Mexico acreage with 30-day initial production rates averaging 3,200 boe/d (70% oil) and 26 new wells in WPX’s legacy Stateline area in Texas targeting the Upper Wolfcamp and Bone Spring with average IPs of 2,300 boe/d (61% oil).

Now, the New Mexico team with expertise in the Bone Springs formation can be leveraged in Texas, where the play is emerging, Gaspar points out. Conversely, WPX’s Wolfcamp experts in Texas can work completions on the emerging Wolfcamp on the New Mexico side.

Differences in completion design philosophy are being worked out, he adds, including whether to use 100 percent 100-mesh sand or a mix of 40/70- and 100-mesh on laterals typically averaging 10,000 feet in length and frac designs ranging from 2,000 to 2,500 pounds of proppant per lateral foot.

Although 35% of Devon’s Delaware holdings are on federal lands in New Mexico, Gaspar says the company has been able to mitigate the risks associated with the U.S. Bureau of Land Management’s decision to impose a 60-day freeze on new permits in January, and feels it in a good position. Devon already had secured more than 500 federal drilling permits in New Mexico, which will provide drilling opportunities for years, Gaspar explains.

Devon also will continue to focus on the Williston, Powder River, Eagle Ford and Anadarko, which will complement its Delaware holdings as it looks to fund its base dividend and grow its variable dividend, according to Gaspar.

Assessments of potential asset acquisitions will continue, but the bar will be high, he emphasizes. “Just because we are actively in conversation and showing eagerness to evaluate new ideas, we also have to reflect back in the mirror and make sure it is truly accretive to the story we have,” Gaspar remarks. “That is the interesting balance that we play. I would not rule out any of those basins as places for future deal potential.”

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