Shares of oil and gas company Devon Energy (DVN – Analyst Report) moved higher after a media report revealed that Devon is closing in on a deal to acquire GeoSouthern Energy for about $6 billion. Although Devon’s management remained tight lipped regarding this deal, nearly a 5% increase in the share price to $62.77 indicates that the market has reacted to the news positively.
The Woodlands, Texas-based oil and gas explorer GeoSouthern Energy primarily operates in the Eagle Ford Shale of South Texas. The reserve-rich Eagle Ford shale has become a hotspot for acquisition and merger related activities. Companies like Chesapeake Energy Corporation (CHK – Analyst Report) and Murphy Oil Corporation (MUR – Analyst Report) have boosted their presence here via acquisitions. In Jun 2013, Sanchez Energy Corporation (SN – Snapshot Report) invested $230.1 million to increase acreage in this shale.
If the above mentioned acquisition finally takes place, it will further expand Devon’s footprint there. Devon is presently sitting on a pile of cash, exiting the third-quarter 2013 with a cash balance of $4.32 billion, which might be used to fund the acquisition.
Devon Energy is currently concentrating on oil and gas production, which is definitely boosting its performance given the oil and gas boom in the U.S. now. The strategy to focus on oil and gas operation has enabled the company to surpass consensus estimates in the last five quarters.
In June, Devon Energy decided to form a midstream master limited partnership (MLP). The MLP is expected to initially own a minority interest in Devon’s U.S. midstream business which includes natural gas gathering and processing assets located in Texas, Oklahoma and Wyoming.
So, acquiring GeoSouthern Energy, which primarily has upstream operations, will allow Devon to process the additional production from the Eagle Ford shale through its midstream MLP assets.
Devon Energy currently carries a Zacks Rank #3 (Hold).