Devon Energy Strikes Out on Another Acquisition Target. Where Does the Oil Stock Go From Here?

The oil patch is undergoing a major consolidation wave. Several oil companies are acquiring smaller rivals in deals that will enhance their scale, reduce costs, and boost their free cash flow. Most of the industry’s largest players have now secured deals after ConocoPhillips agreed to buy Marathon Oil for $22.5 billion.

Devon Energy (DVN 3.13%) was reportedly interested in buying Marathon before it agreed to a deal with ConocoPhillips. It’s the latest in a string of acquisition attempts where Devon emerged as a losing bidder.

With another potential acquisition target now off the table, Devon will need to look elsewhere. Here’s a look at its recent misses and some potential alternatives that the oil company might target next.

Falling short again

Devon Energy has been studying acquisition opportunities for the past several months. In October, Bloomberg reported that it was looking into buying CrownRock, which was reportedly seeking a sale price of more than $10 billion.

CrownRock ultimately agreed to a $12 billion cash-and-stock deal with Occidental Petroleum in December. That deal will enhance the oil giant’s position in the Permian Basin (where Devon has a world-class operation) and boost its free cash flow by about $1 billion in the first year based on $70-a-barrel oil (crude is now closer to $80).

Meanwhile, Reuters reported earlier this year that Devon had approached Enerplus with a more than $3 billion acquisition offer. But Enerplus opted to combine with Chord Energy in a cash and stock deal that valued it at around $3.6 billion. The merger will create a larger-scale producer in the Williston Basin (a core region for Devon) and significantly enhance Chord’s free cash flow.

Devon also held on-again, off-again talks with Marathon Oil over the past several months, before it agreed to a $22.5 billion all-stock deal with ConocoPhillips. That transaction will enhance Conoco’s position across three core U.S. shale plays (the Permian, Williston, and Eagle Ford). It will also increase its free cash flow, enabling the company to return more cash to shareholders. As a producer in multiple basins, Marathon would have been an excellent strategic fit for Devon.

The game of musical chairs continues

The oil industry’s consolidation wave has left fewer remaining players. Most of the largest producers have already gotten bigger. Other than Devon Energy, the only large-scale producer that has yet to make a major acquisition is EOG Resources.

But EOG has historically avoided corporate mergers and acquisitions, preferring to expand organically through exploration and development. Because of that, the $70 billion oil giant by enterprise value likely isn’t a competitor for Devon Energy on a future acquisition target.

With a $36 billion enterprise value, Devon is big enough to acquire any of the remaining smaller independent oil and gas producers that haven’t yet agreed to a merger deal with a larger producer. Among the potential targets it could consider are:

• Ovintiv (OVV 2.68%): The $19.3 billion company produces oil and gas in the U.S. (the Permian, Uinta, and Anadarko) and Canada (Montney). A deal for Ovintiv would enhance Devon’s position in the Permian and Anadarko Basins while diversifying its operations. Ovintiv isn’t a perfect match since Devon exited Canada a few years ago. However, a deal could still make sense because Devon could sell the Canadian assets to strengthen its balance sheet.
• Permian Resources (PR 1.11%): As the name suggests, the $15.7 billion oil company focuses on the Permian Basin. It has been participating in the industry consolidation wave: Permian Resources bought Earthstone Resources for $4.5 billion last year and subsequently made bolt-on acquisitions in the Permian for $175 million earlier this year. A deal for Permian Resources would significantly enhance Devon’s already world-class position in the Permian.
• Civitas Resources (CIVI 1.34%): The $11.7 billion oil and gas producer operates in Colorado’s DJ Basin and the Permian Basin. It recently bolstered its position in the Midland basin side of the Permian by acquiring Vencer Energy for $2.1 billion. A deal for Civitas would enhance Devon’s position in the Permian and expand its operations into the DJ Basin.

Many solid options remain

Devon Energy continues to swing and miss on acquisition targets. While many of the top options are now off the table, some solid alternatives remain. If the company can find the right deal at the right price, it could join its rivals in making an acquisition that enhances its scale, reduces costs, and increases its cash flow.

If anything, Devon’s discipline means it’s unwilling to overpay for a deal just to keep up with its rivals. That patience could eventually pay off since it will now face much less competition for the remaining acquisition targets.