Devon Energy to acquire Grayson Mill Energy’s Williston Basin assets for $5bn

In a significant expansion of its operational footprint, Devon Energy (NYSE: DVN) has entered into a definitive agreement to acquire the Williston Basin business of Grayson Mill Energy. This major transaction, valued at $5 billion, includes $3.25 billion in cash and $1.75 billion in stock, marking a strategic enhancement of Devon’s oil production capabilities and scale. Scheduled to close by the end of the third quarter of 2024, with an effective date of June 1, 2024, this acquisition aligns with Devon’s strategy to bolster its presence in the lucrative oil sector.

Rick Muncrief, President and CEO of Devon, highlighted the acquisition’s strategic importance, noting that it is immediately accretive to Devon’s key financial metrics, including earnings, cash flow, free cash flow, and net asset value. The assets, acquired at less than four times EBITDAX, are projected to yield a 15 percent free cash flow at an $80 WTI oil price. This transaction not only enhances Devon’s scale and scope but also positions it as one of the largest oil producers in the U.S., with an estimated average oil production of 375,000 barrels per day and total production reaching 765,000 oil-equivalent barrels per day.

The acquisition significantly expands Devon’s stake in the Williston Basin, adding 307,000 net acres with a 70 percent working interest. This expansion is expected to maintain production levels at approximately 100,000 Boe per day, 55 percent of which is oil, in 2025. Additionally, the deal introduces operational efficiencies and marketing synergies, potentially saving an average of $50 million annually. The transaction also includes 500 gross new drilling locations and 300 high-quality refrac candidates, enhancing Devon’s competitive capital deployment in the basin.

The acquisition’s strategic value extends beyond increased production. It includes midstream infrastructure ownership, which encompasses 950 miles of gathering systems, disposal wells, and crude storage terminals. This midstream ownership is anticipated to contribute over $125 million in EBITDAX annually and offers marketing optionality that could capture higher pricing across multiple end-use markets.

Moreover, in light of the accretive nature of this transaction to free cash flow, Devon’s board of directors has approved a 67 percent increase in its share repurchase authorization, now totaling $5 billion through mid-year 2026. The company also anticipates that the acquisition will positively impact its dividend payouts from 2025 onwards.

Devon is committed to maintaining a robust financial position post-acquisition, projecting a net debt-to-EBITDAX ratio of approximately 1.0 times at closing. Plans are in place to allocate up to 30 percent of annual free cash flow towards reducing $2.5 billion of debt over the next two years. The acquisition will be funded through a combination of cash on hand and debt, with Devon issuing 37 million shares of common stock valued at $1.75 billion as part of the stock transaction component.

As Devon Energy prepares to integrate this significant acquisition, it has engaged Citi as its financial advisor and Kirkland & Ellis LLP as its legal advisor. Devon will update its forward-looking guidance for 2024 upon the transaction’s closing, anticipating further growth and enhanced shareholder value through strategic asset integration and optimization in the Williston Basin.

This acquisition by Devon Energy represents a calculated strategic expansion into the Williston Basin, enhancing its production capacity and financial metrics significantly. By integrating Grayson Mill Energy’s assets, Devon not only diversifies its operational portfolio but also solidifies its standing as a major player in the U.S. oil market, promising greater returns for its shareholders and stronger market positioning in a competitive industry.