Devon Energy has struck a deal to sell its stakes in EnLink Midstream to Global Infrastructure Partners (GIP) for US$3.13 billion. Consequently, Devon is upping the amount it will spend on share buybacks to US$4 billion.
The company announced the deal on June 6. It covers 115 million in the EnLink Midstream general partner and 95 million in the EnLink Midstream master limited partnership (MLP), corresponding to 64% and 23% stakes respectively. Closing is expected in July this year. Devon’s holdings in EnLink provided US$265 million over the past year, it said, valuing the transaction at around 12 times cash flow.
In addition to the cash paid by GIP, Devon will also save around US$300 million per year from reduced administration and interest costs. Consolidated debt will be reduced by 40%, Devon said.
The sale “represents a significant step forward in achieving our 2020 Vision to further simplify our asset portfolio and return excess cash to shareholders”, said Devon’s president and CEO, Dave Hager. “The EnLink proceeds, combined with proceeds from the non-core E&P assets already sold and those currently being marketed, will exceed our US$5 billion divestiture target.”
EnLink’s president and CEO, Michael Garberding, said the GIP “has significant expertise and experience in the midstream industry that will enhance and elevate our growth plans … Our right plan and our right team are unchanged, and we remain committed to executing our seven growth strategies and growing value for all stakeholders."
EnLink said it would continue to work with Devon on improving returns in the STACK play and redeveloping the Barnett shale – in addition to new opportunities, such as crude links in the Delaware Basin. For instance, Devon’s Showboat project, the company’s first multi-zone STACK development, is anticipated to reach full production this month, after starting up in April. Devon has another six projects to tie in EnLink’s gas system, the midstream company said in its first-quarter results.
Before the EnLink deal, Devon had been planning to spend US$1 billion on share buybacks. The deal with GIP has allowed the company to increase this to allow it to buy back 20% of outstanding stock, at current prices. In March, Devon raised its dividend payments by 33%, to US$0.08 per share, and announced plans to buy back around US$1 billion of debt. It took a US$312 million charge in the first quarter of this year, on the early retirement of debt. As a result of this, it reported a net loss of US$197 million but, adjusting for the debt retirement, core earnings reached US$108 million.
Devon will extend its fixed-fee gathering and processing contracts, from its Bridgeport and Cana plants, with EnLink until the end of 2029. Minimum volume commitments, though, will expire at the end of this year.
The company’s CEO said EnLink “remains a preferred partner for us in the midstream space, and we will continue to pursue mutually beneficial ways to grow our respective businesses across North America’s most prolific growth basins”.
A note from Baird Equity Research said the sale “could raise concerns about [EnLink’s] future development opportunities with Devon”. The fact that Devon had a stake in the midstream company kept their motives largely aligned, it continued. “However, we believe that EnLink's strong operating track record and incumbent position across Devon's portfolio will provide strong motivation for continued close ties between the two firms.”
GIP has previously struck deals with Hess, taking a 50% stake in Bakken-focused midstream assets, and owns Permian-focused Medallion Gathering & Processing.