By Pranav Mathur and Sheila Dang
May 21 (Reuters) – Shale producer Devon Energy on Thursday said it has acquired 16,300 net undeveloped acres in the core of the Delaware Basin in New Mexico for about $2.6 billion through a federal lease, strengthening its presence in the top U.S. shale play.
The move is a major step for Devon to deepen its position in the Delaware, part of the broader Permian Basin spanning West Texas and New Mexico, just weeks after closing its $58 billion merger with Coterra Energy. Shares of Devon closed down about 2.5% as some analysts expressed concern that the company had overpaid.
The transaction adds about 400 net drilling locations normalized to two-mile laterals, Devon said. That implies a price of about $6.5 million per net drilling location, which two analysts said was surprisingly high.
“While we understand the need to continue bolstering inventory … we believe investors will be surprised by the sticker price,” Matt Portillo, an analyst with TPH & Co, said in a research note.
The price is “eye watering compared to historical M&A in the Permian,” RBC Capital Markets analyst Scott Hanold said in a note. The leases are mainly in three sections of the basin that have no existing development, and one is near Devon’s best-performing asset, Hanold said.
NEW AREA COMPLEMENTS EXISTING HOLDINGS
The acreage sits next to Devon’s existing operations, letting the company leverage established infrastructure and drill longer laterals, it said.
“This area has some of the best wells, best economics in the entire basin. It’s like virgin rock,” said Chris Atherton, CEO of Houston-based Efficient Markets, a platform that facilitated the sale on behalf of the Bureau of Land Management.
He noted that the area was in New Mexico’s Potash Area, where oil and gas drilling is generally heavily restricted in order to protect potash mining interests.
“It was a knife fight. It was hyper competitive. The biggest companies in the U.S. were competing over the absolute best rock,” Atherton said, referring to the leasing process.
The U.S. Bureau of Land Management leases carry an 87.5% net revenue interest and 10-year terms across all depths, which Devon said offers more favorable terms and lower royalty burdens than typical state or private leases in the region.
Devon said it will fund the acquisition using cash on hand. Total cash at the end of the first quarter was $1.8 billion.
(Reporting by Pranav Mathur in Bengaluru and Sheila Dang, Arathy Somasekhar and Georgina McCartney in Houston; Editing by Sahal Muhammed, Nathan Crooks , Bill Berkrot and Mark Porter)
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