Devon Energy Corporation (DVN) has completed its proposed joint venture agreement, worth $1.4 billion, with Japan’s Sumitomo Corporation. Per the contract, Sumitomo will invest $410 million in cash upon closing of the agreement and an added $980 million will be invested as a drilling carry. In exchange, Sumitomo will enjoy 30% of Devon’s interest in 650,000 net acres in the Cline Shale and the Midland-Wolfcamp Shale. Last August, Devon had declared its intension to enter into a joint venture with Sumitomo.
The drilling carry investment will fulfill 70% of Devon’s capital requirements related to total drilling and completion expenses. Overall, Sumitomo will be paying 79% of the entire drilling and completion costs during the carry period.
Both companies expect to drill approximately 40 gross wells in 2012. Based on the current work program, Devon expects the entire $980 million carry to be realized within mid-2014.
In this agreement, Devon will act as an operator and will be responsible for commercially marketing all production from these plays into the North American market.
In the view of Devon’s last few agreements, it is evident that the company intends to strengthen its existence in the natural resource rich regions of the U.S. with the financial assistance of other players.
In April 2012, Devon closed its joint venture contract, worth $2.5 billion, with China’s Sinopec International Petroleum Exploration & Production Corporation (“SIPC”). Per the agreement, SIPC will be giving outright cash payment of $900 million. The remaining $1.6 billion payment is designated to cover 80% capital expenditure of Devon, expected to be incurred for the development of its holdings in the five plays till 2014. In exchange, SIPC will be getting a 33.3% interest from Devon’s combined 1.2 million net acres in Tuscaloosa Marine Shale, Niobrara, Mississippian, Ohio Utica Shale and the Michigan Basin.
We believe Devon-Sumitomo joint venture will enable Devon Energy to improve its future returns, and speed-up its assessment and progress of these assets. We expect more such agreements in the near term as these kinds of contracts would help Devon to develop the U.S. shale assets, and will turn out to be mutually accretive for each player.
We believe these types of joint ventures create win-win situation for both the parties. As these agreements allow one party to leverage its position in the oil and gas rich shale assets backed by the requisite funding, the other party benefits from the production from these plays.
Though this deal was announced earlier, the closure of the same has already experienced positive market reaction with an increase of $60.63 in share price on September 27, 2012 from $59.00 on September 26, 2012.
Oklahoma City-based Devon Energy Corporation is an independent energy company. The company engages primarily in exploration, development and production of oil and natural gas. The company competes with EOG Resources, Inc. (EOG) and Chesapeake Energy Corporation (CHK). Devon Energy Corporation currently retains a short-term Zacks #3 Rank (Hold Rating).
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