In a Sept. 28 research note, Raymond James analyst John Freeman reported that Devon Energy Corp. (DVN:NYSE) agreed to acquire WPX Energy in an all-stock transaction valued at about $12 billion, debt inclusive.
"We concur with the market's positive assessment of the deal and have long been advocates of increasing scale in the shale game," Freeman commented. Devon Energy stock surged after the merger announcement.
The analyst presented the ways in which Devon Energy will benefit from the transaction. It will expand its lease holdings to 400,000 acres and achieve an estimated $575 million worth in synergies by year-end 2021. Also, the acquisition lowers Devon's exposure to federal acreage in the Delaware Basin to 35%.
It "further accelerates Devon's transition to a shareholder returns-based, low-growth business model (reinvest about 75% of operating cash flow with maximum production growth of 5%)," noted Freeman.
The acquisition is immediately accretive to Devon Energy, Freeman added. Raymond James estimates that in 2021, the combined company's earnings per share will increase to $0.36 per share from $0.07, and cash flow per share will grow to $4 per share from $3.38. Free cash flow yield in 2021 is an estimated 10.7%, assuming the current strip price based on a current West Texas Intermediate oil price of $40 per barrel. Leverage is expected to drop to 1.5x by year-end 2021 and to 1x by year-end 2022.
The deal between these two Oklahoma-based hydrocarbon firms will allow Devon Energy to pay out a variable dividend in addition to its existing fixed dividend, and it announced plans to do so. With its new policy, the company intends to distribute up to 50% of excess free cash flow each quarter. In 2021, excess free cash flow, at the current strip price, is estimated by Raymond James to be about $375 million and at $50 per barrel, should be about $800 million.
"Overall, we view the acquisition as a positive," Freeman concluded.
Raymond James has an Outperform rating and a $15 per share target price on Devon Energy, the stock of which is trading currently at about $10.13 per share.
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Disclosures from Raymond James, Devon Energy Corp., September 28, 2020
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.
Raymond James & Associates received non-investment banking securities-related compensation from Devon Energy Corporation within the past 12 months.
Raymond James & Associates, Inc. makes a market in the shares of Devon Energy Corporation and WPX Energy, Inc.
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