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NorthAmOil COMMENTARY NorthAmOil Chesapeake’s Eagle
inventory”, noting that the “accretive transaction also enhances” the company’s financially driven strategy to deliver share price growth.
In a press release accompanying the announcement, Devon said that the transaction is valued at two times cash flow “with a free cash flow yield of 30% at strip pricing over the next year” while it is seen boosting the company’s variable dividend by as much as 10%, based on oil futures, and accelerating the firm’s $2bn stock buyback programme.
The deal is expected to close by the end of Q3 and will have an effective date of early June.
M&A returning?
Devon’s deal is the Eagle Ford’s first valued at more than $650mn since Chesapeake Energy paid nearly $4bn to acquire WildHorse Resource Development in 2018 – these assets are back on the market with Chesapeake saying last week it would turn its focus to natural gas.
Issuing comments on the deal by email, Enverus director Andrew Dittmar said: “deals have been elusive owing to disparity between buyers and sellers on the value of assets as con- flict in Ukraine and other factors continue to keep commodity prices buoyant”.
He added: “High prices, though, also encour- aged a rush by private equity firms to test the waters for M&A. While not everyone that is going into the market is getting what they deem to be a suitable offer, there are enough to drive modestly active upstream M&A.”
Dittmar said that Devon’s approach makes sense given the asset’s potential to generate a strong return. “Companies want to capture as much value as possible while commodity prices are high and adding barrels that are already online is the surest way to do that. It also matches investor preferences for immediate capital returns as it is easy to show line-of-sight from a deal like this with its strong cash flow accretion
and a boost to dividends and buybacks,” he explained.
While Chesapeake CEO Nick Dell’Osso said that its departure from Eagle Ford would not be a “fire sale” and the assets may be divested over multiple deals, its plans to utilise the proceeds to increase capital expenditure in the Haynesville and Marcellus shales over the next year put bil- lions of dollars’ worth of assets on the table.
Dell’Osso said: “While the Eagle Ford is a strong asset, as we look to the future, it simply does not compete today with the exceptional returns, rock and runway of our gas assets. The Eagle Ford has become non-core to our future capital allocation strategy and we believe that we will be a better company if we focus all of our resources, both capital and human, on the Mar- cellus and Haynesville.”
Chesapeake holds around 610,000 net acres (2,470 square km) across the Caldwell and Carizzo Springs areas of the Eagle Ford, which produced 90,000 boepd in Q1 and accounting for around 15% of total production. According to Fitch Ratings, “the contribution to its netbacks due to the play’s NGLs and oil cuts helps support a relatively strong netback compared to more dry gas peers.
The acreage has been available for some time with Bloomberg reporting in April 2021 that advisers had been hired to find a buyer based on a $2bn valuation. However, while the valuation will have been impacted by higher oil prices, appetite is likely to be greater now than it was last year.
“It’s a big asset and it will take time to find a buyer,” Dell’Osso said. “We are going to be patient and maximise value for our sharehold- ers.” Such comments suggest that challenging negotiations are likely to continue, but as prices remain high for both oil and gas, strategic shifts may lead to the return of largescale M&A in the Eagle Ford.™
Ford position. Source: Chesapeake
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