The oil field is undergoing a important wave of consolidation. Several oil companies are acquiring smaller rivals in deals that will increase their scale, lower costs and increase their free cash flow. Most of the industry largest players have now secured deals afterwards ConocoPhillips agreed to buy Marathon oil for $22.5 billion.
Devon Energy (NYSE: DVN) was reportedly interested in buying Marathon before agreeing to a deal with ConocoPhillips. It is the latest in a series of takeover attempts in which Devon emerged as the losing bidder.
Now that another potential takeover target is off the table, Devon will have to look elsewhere. Here’s a look at the recent misses and some possible alternatives that the Oil company could be the next target.
Falling short again
Devon Energy has been exploring acquisition options in recent months. In October, Bloomberg reported that it was investigating the CrownRock takeover. which was reportedly looking for a sale price of more than $10 billion.
CrownRock ultimately agreed to a cash-and-stock deal worth $12 billion Western petroleum in December. That deal will strengthen the oil giant’s position in the Permian Basin (where Devon has a world-class operation) and increase its free cash flow by about $1 billion in the first year, based on $70 per barrel of oil (crude is now closer to $80).
Meanwhile, Reuters reported earlier this year that Devon had been approached Enerplus with a takeover bid of more than $3 billion. But Enerplus chose to combine with Agree Energy in a cash and stock deal that valued it at about $3.6 billion. The merger will create a larger scale producer in the Williston Basin (a core region for Devon) and significantly increase Chord’s free cash flow.
Devon also held his ground again, off again discussions with Marathon Oil in recent months, before that agreed to a $22.5 billion all-stock deal with ConocoPhillips. This transaction will strengthen Conoco’s position in three major US shale gas plays (Permian, Williston and Eagle Ford). It will also increase free cash flow, allowing the company to return more money to shareholders. As a multi-basin producer, Marathon would be an excellent strategic fit for Devon.
The game of musical chairs continues
The wave of consolidation in the oil industry has left fewer players. Most of the largest producers have already gotten bigger. Besides Devon Energy, it is the only large-scale producer that has yet to make a major acquisition EOG Resources.
But EOG has historically avoided corporate mergers and acquisitions, preferring to expand organically through exploration and development. That’s why the $70 billion oil giant is going bankrupt enterprise value is unlikely to be a competitor for Devon Energy in terms of a future acquisition target.
With an enterprise value of $36 billion, Devon is large enough to acquire the remaining smaller independent oil and gas producers not yet agreed to a merger agreement with a taller producer. Possible targets it could consider include:
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Ovintiv (NYSE: OVV): The $19.3 billion company produces oil and gas in the US (the Permian, Uinta and Anadarko) and Canada (Montney). A deal for Ovintiv would strengthen Devon’s position in the Permian and Anadarko basins while diversifying its activities. Ovintiv is not a perfect competition since Devon left Canada a few years ago. However, a deal could still make sense as Devon could sell the Canadian assets to strengthen its balance sheet.
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Permian Resources (NYSE:PR): As the name suggests, the $15.7 billion oil company focuses on the Permian Basin. It has joined the wave of industry consolidation: Permian Resources bought Earthstone Resources for $4.5 billion last year and then made additional acquisitions in the Permian for $175 million earlier this year. A deal for Permian Resources would significantly strengthen Devon’s already leading position in the Permian.
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Civitas Resources (NYSE: CIVI): The $11.7 billion oil and gas producer operates in Colorado’s DJ Basin and Permian Basin. It recently strengthened its position in the Midland Basin of the Permian by acquiring Vencer Energy for $2.1 billion. A deal for Civitas would strengthen Devon’s position in the Permian and expand its operations into the DJ Basin.
Lots of solid options to stay
Devon Energy continues to swing and misses acquisition targets. While many of the The best options are now off the table, leaving some solid alternatives. If the company can find the right deal at the right price, it could join its rivals to make an acquisition that increases scale, reduces costs and increases cash flow.
If anything, Devon’s discipline means he’s not willing to overpay for a deal just now to keep up with its rivals. That patience could pay off in the end, because it will now will face much less competition for the remaining acquisition targets.
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Matt DiLallo has positions in ConocoPhillips. The Motley Fool holds and recommends EOG Resources and Enerplus. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Devon Energy reaches another acquisition target. Where does the oil supply go from here? was originally published by The Motley Fool
