Devon Energy is faced with a decision to make—-sell its Marcellus shale assets to money manager Stone Ridge Asset Management or keep them.
Reuters reported over the weekend that Stone Ridge had offered nearly $8 billion for Devon’s holdings in the Marcellus, a shale play that extends from New York through Pennsylvania, eastern Ohio, western Maryland and most of West Virginia and extending into extreme western Virginia. The Reuters report was based on information from four people familiar with the offer.
It followed Devon’s closing of its $58 billion merger with Coterra Energy earlier this month, a combination which created one of the largest independent oil and gas producers in the United States, with a presence in a half-dozen regions led by the Delaware portion of the Permian basin in Texas and New Mexico.
The report indicated Stone Ridge made the offer as away to initiate conversations with Devon. But the sources indicated Devon, which recently moved its headquarters from its 50-story Devon Tower in downtown Oklahoma City to Houston, Texas, had not made a decision whether to sell the assets which were previously owned by Coterra Energy. The holdings total about 190,000 net acres in Pennsylvania.
Reuters indicated there is no guarantee that the Stone Ridge offer would lead to a sale in the Marcellus play. Neither Devon nor Stone Ridge offered any comment.
From Reuters:
LARGEST ABS EVER
The Stone Ridge proposal includes utilizing the largest asset-backed securitization (ABS) ever in the U.S. oil and gas industry, the sources said. The sources declined to elaborate, including on the actual size of the financing.
Under the financing structure, future revenue generated from oil and gas production is pledged as collateral to lower borrowing costs. ABS financing has found favor in the last couple of years as a way to fund acquisitions of mature oil and gas assets with established production levels. These wells typically provide limited growth, but have low decline rates, making them attractive to financial investors looking for steady returns.
New York-based Stone Ridge, an investment firm focused on alternative asset classes with $35 billion of assets under management, has been among the most active buyers of oil and gas production using ABS funding. This includes Ovintiv’s Oklahoma assets, which were acquired in April by Stone Ridge in partnership with Flywheel Energy for $3 billion, according to two sources familiar with that deal.
Stone Ridge could partner on a possible acquisition of Devon’s Marcellus with another party, one more suited to operating the undeveloped acreage in the position, some of the sources said.
DEVON’S PRIORITIES
Devon management, including Chief Executive Clay Gaspar, has said the company is looking to optimize the business following the Coterra merger. On a May 6 earnings call, Gaspar said it was reviewing all assets against strategic and financial criteria, and would be quick to act on an opportunity to enhance shareholder value.
“Every asset in the combined portfolio has to compete for its capital and earn its seat at the table,” he said.
Devon also said on May 7 – the same day the merger closed – it would boost its share repurchase program to $8 billion, and pay a quarterly dividend that was a third higher than the previous quarter. It plans to unveil new financial guidance in mid-June.
