Devon Seals WPX Merger

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Speaking after the merger of Devon Energy and WPX Energy was announced this morning, Alex Beeker, principal analyst, corporate upstream, at Wood Mackenzie, said: “Tight oil consolidation has been underway for years, but extreme market volatility has slowed the process considerably. WTI has essentially hovered around US$40/bbl since June, with the stability likely closing the bid-ask spread.

“We’ve expected Devon to make a move for some time. With US$1.5 billion in cash on its balance sheet (albeit earmarked for debt reduction), Devon is on a relatively strong financial footing. But Devon has been shrinking fast since its disposal program started in earnest about two years ago. The company’s net production is down 40% since 2018.”

He added: “A WPX and Devon tie-up makes sense operationally. We like the diversification WPX brings, particularly mature Bakken production. We do expect the combined budget – if the deal closes – to be less than the sum of the parts, so Devon’s cash flow should improve. WPX has a shallower underlying base decline rate than Devon.

“In terms of financial impacts, the combined company wouldn’t have any significant maturities before 2026. Each has US$5-6/boe in both G&A costs and interest expense. If management can reduce that by just 10%, an extra US$150 million could be available for shareholders each year. Add in the effects of a reduced budget, and it’s easy to see why this tie-up helps meet the current demands of tight oil investors.”

Beeker said: “Are there divestment candidate assets? In this spending environment, funding all the parts of a diverse portfolio will prove tough.

“What could the combined company sell? We struggle to see Devon funding much more of its joint venture in the STACK. The Eagle Ford is in managed decline. With some selective trimming, a new portfolio could actually mimic that of EOG’s with assets in the Bakken, Eagle Ford, Delaware, and Powder River.”

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