Devon to sell stake in EnLink Midstream
Devon Energy Corp. shares soared Wednesday after the company said it will sell its stake in its pipeline subsidiary for $3.125 billion and use the proceeds to buy back about 20 percent of stock.
Devon shares gained as much as 8.6 percent Wednesday before settling at $41.51 a share, up $2.19, or 5.6 percent on the day.
“We’re taking our position and monetizing a stock that’s done well and reinvesting those dollars back into Devon because we think the potential is even better there,” CEO Dave Hager said in an interview following Wednesday’s annual meeting.
Devon executives said the company has agreed to sell its 64 percent general partner interest in EnLink Midstream LLC and 25 percent stake in EnLink Midstream Partners LP to an affiliate of New Yorkbased Global Infrastructure Partners (GIP).
Devon will use the proceeds of the sale to boost its common stock buyback program to $4 billion by the end of 2019, up from $1 billion announced earlier this year, the company said. The new total represents about 20 percent of Devon’s outstanding shares.
“The sale of our EnLink interests represents a significant step forward in achieving our 2020 Vision to further simplify our asset portfolio and return excess cash to shareholders,” Hager said. “The EnLink proceeds, combined with proceeds from the noncore E&P assets already sold and those currently being marketed, will exceed our $5 billion divestiture target.”
Announced last year, the 2020 Vision plan calls for the company to use increased cash flow and proceeds from asset sales to repay debt, buy back shares and increase the company’s dividend paid to shareholders.
Dallas-based EnLink was formed in 2014 when Devon merged its midstream assets with Crosstex Energy. Devon received $265 million in cash distributions from EnLink over the past year, meaning the sale price represents about 12 times annual cash flow. The sale is expected to close in the third quarter.
Getting Wall Street’s attention
Along with other oil and natural gas producers, Devon executives in recent months have focused heavily on appeasing Wall Street by focusing on debt reduction, stock buybacks and dividend payments. While a strong stock price always has been important to publicly traded energy companies, many previously have focused primarily on increased oil production.
Struggling stock prices throughout the energy sector have driven the changes, Tulsa money manager Jake Dollarhide said. Oil prices increased throughout the second half of 2017 even as energy stock prices stagnated, and increased production now can be seen as a liability that could lead to lower oil prices, he said.
“This disconnect between the recovery in oil prices and a lack of a bull market with oil and gas shares, I think, is about to end,” said Dollarhide, president of Longbow Asset Management Co. “In order to completely convince Wall Street that oil and gas stocks are a truly valuable sector to own, I think Wall Street wants proof, it wants to have some type of confirmation in buying.”
A company can send that signal by buying back its own stock, he said.
“Stock buybacks are a slam dunk way of proving to Wall Street that oil and gas companies themselves think their stock is a good deal,” Dollarhide said. “You can shout from the rooftop all you want, but when you buy back your own stock, people listen in a different way.”
Devon also has operational reasons not to use the sale proceeds to significantly boost its drilling operations. Hager said the company keeps costs down in its primary drilling areas through the use of long-term contracts with pipeline companies, sand providers, rig crews and other suppliers in its operational areas.
“We feel discipline around capital allocation is important,” Hager said. “If we would change our capital investment in the short term, we would risk degrading the returns because we would not optimize the use of those cash proceeds.”
Still, improved financials and an improved stock price could help the company increase drilling in the future.
“In future years, we do plan to increase our capital investment,” Hager said. “That’s part of our 2020 Vision.”
Devon’s sale of its EnLink assets also promises to simplify the company’s financial statements, which now include information on both companies.
“That makes it not as simple a story about the underlying value of Devon when you have the EnLink financials combined with the Devon financials,” Hager said. “When we can de-consolidate the EnLink financials, that will highlight
the true Devon financials, which we think will screen very attractively for investors.”
Pipeline operations
While Devon no longer will own an interest in the EnLink systems, the Oklahoma City company will continue to rely on the infrastructure as part of its development strategy, particularly in its key fields in northwest Oklahoma and southeast New Mexico.
“Looking ahead, we will continue to build upon our strong relationship with EnLink and GIP,” Hager said. “EnLink remains a preferred partner for us in the midstream space, and we will continue to pursue mutually beneficial ways to grow our respective
businesses across North America’s most prolific growth basins.”
EnLink operates pipeline, processing and storage infrastructure throughout the country, including Devon’s key assets in Oklahoma’s STACK play and in the Delaware Basin in southeast New Mexico and west Texas.
“Today’s announcement marks an important next step in our journey as a leading midstream company,” EnLink CEO Michael J. Garberding said in a statement.
“We are thankful for the ownership relationship we’ve had with Devon, and we look forward to deepening our long-term commercial relationship with them as EnLink and Devon continue to collaborate in multiple core basins.”