Analyst Note
| Dave Meats, CFA |We have increased our fair value estimate for Devon Energy to $46 per share from $45 after incorporating the company's acquisition of private operator Validus Energy for $1.8 billion. The transaction, announced Aug. 9, will bolster Devon's Eagle Ford footprint with additional 42,000 net acres in the Karnes Trough, a region where well performance typically far exceeds the play average. The new assets are situated in the play's oil-rich band to the northwest, with current production of about 35 thousand barrels of oil equivalent per day (70% oil). Management expects this to grow to 40 mboe/d next year. In addition, the acquired assets contain 350 undrilled locations to add to Devon's drilling queue, along with 150 refrack opportunities (legacy wells that can be cheaply turbocharged by restimulating with hydraulic fracking). The deal will increase Devon's 2022 cash flow expectation, resulting in a 10% hike to the firm's variable dividend, assuming strip prices as of the date of the announcement.