Credit analyst views Devon Energy with caution despite Ocean merger

By Ronda Fears

Nashville, Feb. 25 - Carol Levenson, director of research at Gimme Credit, views Devon Energy Corp.'s acquisition of Ocean Energy Inc. as neutral to its credit picture, but is still cautious on the name pending some progress in debt reduction.

"Fortunately, Devon's announced purchase of Ocean Energy (Baa3/BBB-) for $3.5 billion in stock and $1.8 billion in assumed debt appears to have been crafted with credit quality preservation, if not necessarily improvement, in mind," Levenson said in a report Tuesday.

"Devon was able to snag OEI for a very modest market premium and with no cash outlay. While we're not in total agreement with management's claim that the purchase actually strengthens its financial position, it doesn't do much harm either."

Levenson estimates Devon's pro forma debt/EBITDA will be essentially unchanged at just under 3x, while EBITDA/interest will improve slightly to 5.5x.

"Nevertheless, a company that had a debt load of less than $2 billion in September 2001 will now carry debt on its books of nearly $9 billion," the analyst said.

Devon remains well below the leverage covenant in its bank lines, she noted, and if it were willing to push the investment grade envelope it could borrow the money fairly easily.

"We consider the acquisition as currently structured to be essentially neutral to Devon's credit quality," Levenson said, "but we see little additional upside in this paper."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.