Devon Energy Corp., Oklahoma City, (NYSE: DVN) plans to acquire the Barnett Shale E&P properties in northeast Texas from privately owned Chief Holdings LLC for $2.2 billion in cash, including assumed liabilities. Closing is expected this month. The properties have estimated proved reserves of 617 billion cu. ft. of gas equivalent and leaseholding totals 169,000 net acres. Production is approximately 55 million cu. ft. of gas equivalent per day. An additional 31 wells are awaiting completion and pipeline connection, which will add production of 30 million cu. ft. of gas equivalent per day. Devon plans to drill approximately 800 wells on the acreage during the next five years and produce in excess of 2 trillion cu. ft. of gas equivalent. Chief's assets include an estimated 103 million BOE in the Barnett Shale. Devon is the leading producer in the Barnett Shale, producing approximately 600 million cu. ft. equivalent per day from about 2,200 wells. Devon expects company-wide production to approach 300 million BOE in 2009. "This was a unique opportunity to add to Devon's position in the hottest natural gas play in North America where Devon is already the largest and most active producer," says J. Larry Nichols, Devon chairman and chief executive. "With the addition of Chief's lease position, Devon's Barnett Shale acreage will expand to 720,000 net acres." The company plans to fund the acquisition from approximately $900 million of cash on hand and $1.3 billion of short-term borrowings. Its 2006 capital budget for exploration and development will grow approximately $125 million. "As with Mitchell Energy in 2002, the value of Chief to Devon is not fully reflected in current production or booked reserves. The true value lies in the trillions of cubic feet of gas underlying its acreage in the shale, gas that Devon has the knowledge, capital and resources to develop and produce," Nichols says. Devon's successful bid was made jointly with Dallas-based Crosstex Energy Services (Nasdaq: XTEX), which is acquiring Chief's midstream assets for $480 million. "Crosstex is the logical and best-positioned owner for Chief's gathering assets," Nichols adds. Crosstex reports that Chief's natural gas gathering systems link Crosstex's existing facilities and other pipelines with 328 existing producing wells and thousands of new wells expected to be drilled in the future across nine North Texas counties. The acquired systems consist of approximately 250 miles of existing pipeline with up to an additional 400 miles of planned pipelines, located in Parker, Tarrant, Denton, Palo Pinto, Erath, Hood, Somervell, Hill and Johnson counties. The acquired systems have a current throughput of approximately 125 million cu. ft. per day with an additional 44 million of daily throughput awaiting pipeline connections. Petrie Parkman & Co. advised Chief on the deal. Morgan Stanley analyst Lloyd Byrne says the economics of the deal are expensive on a proved-reserve basis. "While more reasonable when incorporating the unbooked potential on Chief's acreage, Devon must still execute with a much-reduced margin for error." Devon is paying $3.57 per thousand cu. ft. equivalent of proved reserves, he says. "Assuming Devon captures another 1.4 trillion cu. ft. equivalent of unbooked potential for an incremental some $2.3 billion-including proved undeveloped capital-we still arrive at a full-cycle cost of some $2.25 per (thousand cu. ft. equivalent)." Byrne says Devon is now modeling 2 billion cu. ft. per well versus 1.8 billion for its horizontal infill wells. Management has more than 300 remaining 20-acre infill locations on its core area acreage, which translates into some 600 billion cu. ft. equivalent of additional reserve potential or roughly 4.8% of year-end 2005 company reserves, he adds. Though Devon's stock jumped 3.3% following the acquisition announcement, Byrne says this had more to do with the incremental reserve potential for Devon's existing Barnett acreage than the Chief acquisition. "Operationally, the assets fit well with Devon's existing acreage position," Byrne says. "Financially, since Chief was sold in a competitive bidding process that involved several knowledgeable Barnett players, it is likely that Devon's price was near/at the high-end of all offers. "Devon paid up for the sizeable unbooked potential of Chief's acreage. As for most upstream acquisitions executed during the past two years, economically capturing unbooked potential will be the key determinant of value creation, absent the commodity."
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