Joining a hyperactive M&A market, Devon Energy (ranked ninth on Enverus Top Public Operators list) is acquiring EnCap Investments’ Grayson Mill Energy for $5 billion in cash and stock. Like SM’s acquisition of XCL in the Uinta Basin, also purchased from EnCap, the deal points to buyers looking beyond the Permian to find buyable opportunities of scale in an increasingly consolidated market. Grayson Mill was one the largest remaining private opportunities reasonably likely to come up for sale with around 560 remaining gross operated drilling locations and over 100 Mboe/d production. Among remaining private equity-sponsored E&Ps, Grayson Mill has the largest count of remaining undeveloped gross drilling locations, and the quality of the inventory is higher than most other non-Permian opportunities. While Devon still had a substantial runway of remaining drilling inventory, pressure may have been mounting on the company to strike a deal to keep pace with peers that had been rapidly rolling up the remaining opportunities.
While inventory has gotten more expensive as opportunities dwindled, the deal still fits Devon’s generally conservative outlook for M&A focusing on deals where value is largely supported by current production. In this deal, more than 80% of the total deal value Devon is paying for Grayson Mill is for existing production with the remainder going to undeveloped inventory. Devon is paying less than $2 million per undeveloped location. However, the company’s conservative outlook on deals may have prevented Devon from coming out on top in the competition for core Permian opportunities where inventory makes up a larger portion of total deal value and prices can range above $4 million per location. This deal makes the Williston a key region for Devon, where they might otherwise have been a seller if they couldn’t find a large-scale opportunity to replenish dwindling remaining inventory. The deal positions Devon as the fourth largest producer in the Williston Basin based on gross operated production, just beneath the combination of ConocoPhillips and Marathon Oil in third place and trailing basin leaders Chord Energy and Continental.
Chord now finds itself in an interesting position. Grayson was a natural acquisition target for Chord with closely fitting operations. Now that the biggest private opportunity to build scale in the Williston is off the table, Chord could find itself an acquisition target in another of the public-public company mergers that have been a key component of recent M&A activity. Chord could also go after other smaller opportunities in the Williston like Kraken Resources or potential non-core sales from companies like Exxon and Chevron, pending closing the Hess deal. Or, after buying Enerplus, Chord may simply sit tight as its 11 years of sub-$55/bbl breakeven inventory leaves it very well positioned in a market that is seeing increasing value for middle-tier drilling locations.
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