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EXPLORERS USA 2005: Devon: Largest U.S. independent Path to the top full of multi-billion dollar deals; formed by present chairman, CEO and his father in 1971, Devon is a Fortune 500 company with a listing on coveted S&P 500 stock index Ray Tyson Petroleum News Houston Correspondent
Devon Energy is one of those exploration and production companies that seem to do most everything right, despite taking occasional criticism from Wall Street questioning the company’s bold moves and spending habits.
Nevertheless, under the leadership of chairman and chief executive Larry Nichols, Devon has managed to grow into the largest exploration and production independent in the United States, building itself into a Fortune 500 company with a listing on the coveted S&P 500 stock index.
Devon was actually formed in 1971 by Nichols and his father, John. But it wasn’t until several years after Devon became a publicly traded company in 1988 that the independent began its move up the ladder through a series of large mergers and acquisitions valued at over $20 billion.
While billion dollar deals would become routine for Devon, it actually was the modest $122-million acquisition of Hondo Oil & Gas in 1992 that set the stage for Devon’s rise to the top in the years to come. Hondo was an independent exploration and development company focused on international oil and gas exploration and development. Big onshore acquisition in ’96 Devon, with $250 million worth of company stock, acquired Kerr-McGee’s North American onshore properties in 1996. That deal alone boosted Devon’s proved oil and gas reserves by 46 percent to 160 million barrels of oil equivalent from 115 million barrels. Just as important, Devon received the drilling rights to 370,000 acres of undeveloped leasehold situated in the Permian Basin, Mid-continent, the Rocky Mountains and western Canada. Most of the Kerr-McGee acreage was located in areas where Devon already operated.
Devon’s $750 million acquisition of Canada’s Northstar Energy in 1998 launched what would become an annual Devon M&A ritual for the next six years.
In the Northstar deal, Devon once again used stock rather than cash to acquire a company. The merger transformed Devon into an evenly balanced North American producer with 53 percent of its reserves in the United States and 47 percent in Canada. Prior to the merger, about 90 percent of Devon’s properties were in the United States and only 10 percent in Canada.
Northstar’s properties were entirely in Canada and concentrated in Alberta and the northeastern Foothills region of British Columbia. The transaction, which made Devon a top 15 U.S.-based independent, came with 550 billion cubic feet of proved natural gas and 36 million barrels of proved oil and gas liquids, plus Northstar’s interest in processing facilities and pipelines. Mega-mergers began in ‘99 Devon’s mega-mergers began in 1999 with the $2.6 billion acquisition of PennzEnergy in another stock deal. That transaction established Devon as a significant operator in the Gulf of Mexico and a top-ten independent in the United States. In addition to the United States, Devon acquired PennzEnergy properties in Egypt, Venezuela, Azerbaijan, Qatar and Brazil. Together, the two companies had reserves of about 600 million barrels of oil equivalent and daily production of roughly 230,000 barrels of oil equivalent.
Devon became a top-five U.S.-based independent in 2000, acquiring Santa Fe Snyder in a $3.5 billion stock transaction that made Devon a $9 billion company based on combined enterprise value. The new Devon came out of the deal with proved reserves of 1.1 billion barrels of oil equivalent, 76 percent of which were in North America. PennzEnergy also had substantial international reserves, including Azerbaijan, Southeast Asia and South America.
Devon announced two major acquisitions in 2001 — Canada’s Anderson Exploration for $4.6 billion and Texas’ Mitchell Energy & Development for $3.5 billion. Those transactions elevated Devon to the rank of second largest U.S.-based independent producer.
In the Anderson transaction, Devon acquired estimated proved reserves of 532 million barrels of oil equivalent and about eight million net undeveloped acres. The deal also established Devon as the third largest natural gas producer in Canada. Anderson also had been the most active explorer in Canada during the previous two years.
The Mitchell deal, which actually closed in early 2002, gave Devon entry into the prolific Barnett Shale gas play of North Texas where today the company dominates in both reserves and production. In total, Mitchell expanded Devon’s year-end reserve base by about 38 percent. In addition to the oil and gas properties, Devon also acquired one of the largest suites of U. S. midstream assets of any independent. ’03 acquisition moves Devon to top However, it was the $5.3 billion acquisition of Ocean Energy in 2003 that turned Devon into the largest U.S.-based independent with combined daily production of about 650,000 barrels of oil equivalent, reserves of 2.2 billion barrels of oil equivalent, and an enterprise value of about $20 billion. When the all-stock transaction closed about 84 percent of Devon’s reserves and 90 percent of the company’s production were in North America. Moreover, the deal established Devon as a legitimate deepwater player in the Gulf of Mexico.
Since the Ocean deal, Devon has been relatively quiet on the merger and acquisition front, causing some industry analysts to speculate on the company’s next big move.
Meanwhile, Devon keeps rolling along, posting a record profit of $2.2 billion or $4.51 per share in 2004, a healthy 25 percent increase over the company’s 2003 profit of $1.7 billion or $4.16 per share. Last year Devon also recorded record production of 251 million barrels of oil equivalent amid rising oil and gas prices, which obviously benefited Devon’s balance sheet. Additionally, with a $2.8 billion drilling budget, Devon added 313 million barrels of proved reserves in 2004, and also managed to reduce its net debt by $1.8 billion with free cash flow. At year-end 2004, the company had $2.1 billion of cash on hand.
Even with all the billions Devon invested in mergers and acquisitions over the years, the company ended 2004 with an enviable debt-to-capitalization ratio of 27 percent, down from 39 percent at year-end 2003.
In late 2004, Devon announced a plan to repurchase up to 10 percent, or about 50 million shares, of its outstanding common shares. The company also increased dividend payments to shareholders.
Devon also announced in late 2004 plans to divest non-core oil and gas properties in North America representing proved reserves of 145 to 165 million barrels of oil equivalent. The properties are located mainly in offshore Gulf of Mexico and onshore United States and Canada.
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