May 21 - Devon Energy said on Thursday it has secured 16,300 net undeveloped acres in the heart of the Delaware Basin in New Mexico through a federal lease transaction valued at about $2.6 billion. The acquisition follows the closing of Devon's approximately $58 billion merger with Coterra Energy several weeks earlier and further concentrates the company's position in the broader Permian Basin, which spans West Texas and New Mexico.
Devon reported that the leasehold adds roughly 400 net drilling locations when normalized to two-mile laterals. By that metric, the company has effectively paid about $6.5 million per net drilling location, a figure several analysts characterized as high.
Shares of Devon were down 1.6% in afternoon trading as market participants and some analysts questioned whether the company overpaid for the federal lease. "While we understand the need to continue bolstering inventory... we believe investors will be surprised by the sticker price," said Matt Portillo of TPH & Co in a research note. Scott Hanold of RBC Capital Markets described the price as "eye watering compared to historical M&A in the Permian." Both comments reflect concerns about valuation on a per-location basis.
Devon said the acquired acreage sits adjacent to its existing operations, enabling the company to leverage established infrastructure and to drill longer laterals. The leases are concentrated mainly in three sections of the basin that have no current development, and one of those sections is located near what Hanold called Devon's best-performing asset.
The U.S. Bureau of Land Management leases carry an 87.5% net revenue interest and have 10-year terms across all depths. Devon said those lease terms provide more favorable economic arrangements and lower royalty burdens than typical state or private leases in the region.
Devon indicated it will fund the $2.6 billion acquisition using cash on hand. The company reported total cash of $1.8 billion at the end of the first quarter. The company did not provide additional financing details in the disclosure accompanying the announcement.
The announcement also included a reference to valuation tools available to investors interested in Devon's stock, noting a Fair Value calculator that applies multiple industry valuation models to assess DVN and other equities.
Key takeaways
- Devon purchased 16,300 net undeveloped acres in the Delaware Basin for about $2.6 billion.
- The lease adds about 400 net drilling locations normalized to two-mile laterals, implying roughly $6.5 million per net drilling location.
- Analysts raised concerns about the per-location price, and Devon's shares fell 1.6% in afternoon trading.
Context on operations and terms
- The acreage borders Devon's existing operations, which the company said will allow it to use current infrastructure and drill longer laterals.
- The federal leases carry an 87.5% net revenue interest and 10-year terms across all depths, which Devon describes as offering lower royalty burdens versus typical state or private leases in the region.
- Devon intends to pay for the acquisition with cash on hand; the company reported $1.8 billion in cash at quarter end.
Analyst views and market reaction
- Some analysts described the acquisition price per drilling location as surprisingly high compared with past M&A activity in the Permian, signaling investor concern over valuation.
- Devon's shares experienced a modest decline following the announcement, reflecting market sensitivity to the purchase price and its implications for inventory economics.
Additional notes
- The leases are mainly in three undeveloped sections of the basin, with one section adjacent to a top-performing Devon asset, according to analysts cited in commentary on the deal.