Devon Energy's Missed Opportunity in the US Oil and Gas Mega-Deals Wave

Devon Energy's Bidding Challenges in the Oil and Gas Sector

U.S. oil and gas producer Devon Energy has faced setbacks in its acquisition attempts over the past year. According to insider sources, Devon lost out on deals to acquire Marathon Oil, CrownRock, and Enerplus to ConocoPhillips, Occidental Petroleum, and Chord Energy, respectively. These missed opportunities highlight the difficulties Devon has encountered in leveraging its shares as acquisition currency.

The company has been trying to expand its scale through mergers and acquisitions to optimize its existing drilling acreage. However, Devon's stock has been less appealing to potential acquisition targets due to higher drilling costs and production challenges. In recent major industry deals, such as Exxon Mobil's $59.5 billion acquisition of Pioneer Natural Resources and Chevron's $53 billion agreement for Hess, all-stock offers have been prevalent. These types of offers reconcile price differences with acquisition targets whose shareholders prefer rolling their stakes in a combined entity over cashing out, fearing a rebound in energy prices.

Challenges with Devon's Stock Value

Potential acquisition targets were apprehensive about the value of Devon's stock, which underperformed the S&P 500 Energy index by 16 percentage points in the last 12 months. This performance discrepancy placed Devon at a disadvantage compared to its competitors. Weak stock performance hindered Devon's ability to offer competitive premiums and outbid rivals without risking financial dilution.

During a first-quarter earnings call, CEO Rick Muncrief emphasized the stringent criteria Devon follows for acquisitions, indicating a cautious approach to potential deals. Despite a robust performance following its merger with WPX Energy in 2021, recent production issues and higher costs have shaken investor confidence, dampening the market's enthusiasm for Devon's stock.

Production Setbacks and Potential Targets

Devon's difficulties included a fire at a critical gas compression station in Texas in January 2023, which disrupted production for several weeks. These setbacks, combined with Devon's discipline on acquisition pricing and intense competition, influenced its failure to secure deals. Some companies that Devon aimed to acquire, like Marathon Oil and Enerplus, fetched higher-than-average premiums compared to other U.S. publicly listed oil and gas companies.

Industry experts suggest that Devon's disciplined approach and strategic evaluation of transactions could lead to a successful acquisition soon. Potential targets for Devon include Permian Resources, Matador Resources, and privately-owned Mewbourne Oil, as these would strengthen Devon’s position in the Delaware basin. Additionally, privately-held Grayson Mill Energy could be a target to bolster Devon's presence in the Williston basin.

Investment specialists and analysts remain optimistic about Devon's future prospects in securing acquisitions. Given the company’s resilience and ability to address previous production issues, a strategic acquisition seems likely. Bryce Erickson of Mercer Capital expressed confidence in Devon’s near-term acquisition potential, citing the prevailing industry trend of aggressive deal-making.

Conclusion

In summary, Devon Energy's recent experiences in the acquisition landscape underscore the challenges of maintaining competitive stock value and navigating intensified industry competition. While Devon has missed out on several lucrative deals, its disciplined approach and strategic focus signal that a significant acquisition may be on the horizon, positioning the company for future growth and stability in the volatile energy sector.