Credit analyst views Devon acquisition of Ocean positively

By Ronda Fears

Nashville, Feb. 24 - Devon Energy's $5.3 billion acquisition of Ocean Energy appears at first glance to be a positive event, said CreditSights analyst Brian Gibbons in a report Monday.

The union will form the largest U.S.-based oil and natural gas producer.

"Our initial take is positive given the transaction provides DVN with a growth vehicle to compliment its low-growth exploitation-oriented North American business," Gibbons said in the report.

"DVN has not only improved its leverage and cash flow coverage ratio through the deal, but has added a strong backlog of deepwater and international growth projects to its mature U.S. and Canadian businesses."

Devon is rated Baa2/BBB and Ocean Baa3/BBB-.

Terms of the deal call for Ocean shareholders to receive 0.414 shares of Devon stock. The total deal value of $5.3 billion, including $3.5 billion in new Devon equity and the assumption of $1.8 billion of Ocean debt.

Going forward, the company expects to have a 52% long-term debt capitalization, below Devon's currently high 62%, Gibbons noted.

At year-end, Ocean had 593 million barrels of oil equivalent of reserves, 342 boe of which was proved developed. Based on the equity Devon will issue, the company is paying $5.90 per boe or $0.99 per million cubic feet equivalent of natural gas.

Ocean in turn becomes part of a much bigger organization that is able to spread unit costs over a larger asset base and have greater access to capital markets, the analyst said.

"This is very important for Ocean given its deepwater exploration focus and high-cost development schedule," Gibbons said.

"Ocean has been very successful with the drill-bit in recent years, particularly in the challenging deepwater environments offering Devon a competency it could not have easily replicated on its own."

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