by Paul Whitfield | Published January 3, 2012 at 2:52 PM
Devon Energy Corp. said Tuesday, Jan. 3, that it had sold a one-third stake in five oil and gas projects to China Petroleum & Chemical Corp. in return for a $900 million up-front payment and an agreement from the state-backed Chinese company to invest a further $1.6 billion in drilling at the sites.
The deal gives China Petroleum & Chemical, known as Sinopec, a stake in Devon's leases on 1.2 million net acres of land spanning the Tuscaloosa Marine Shale, Niobrara, Mississippian, Ohio Utica Shale and Michigan Basin shale gas fields. Sinopec has invested in Canada, but the Devon deal is its first investment in the U.S.
The transaction is the latest in a spate of investments by overseas companies in American shale gas ventures as prospectors like Devon move from exploration to the expensive process of extracting the gas and oil trapped between layers of buried shale. Devon's deal was announced hours after Chesapeake Energy Corp. said that it had sold a 25% stake in its Ohio Utica Shale lease to France's Total SA for $2.32 billion.
Devon, which is based in Oklahoma City, struck the deal following an auction of the stake that was contested by at least three other bidders, predominantly from Asia, according to a source who asked not to be named. BP plc is also understood to have bid for the asset, the source said, though that could not be confirmed.
"This arrangement improves Devon's capital efficiency by recovering our land and drilling costs to date and by significantly reducing our future capital commitments," Devon president and CEO John Richels said in a statement. "We can accelerate the derisking and commercialization of these five plays without diverting capital from our core development projects."
Sinopec has paid about $5,500 per acre, including drilling costs for its stakes in the Devon sites, according to a company spokesman. According to a source, the price looks "pretty rich" compared to industry expectations of a $3,000 per acre valuation.
Chinese gas and oil companies, led by Sinopec, have been regular buyers of overseas assets in recent months as they seek to diversify their resource bases and establish themselves as global energy companies. Sinopec in November agreed to buy a 30% stake in the Brazilian unit of Galp Energi SGPS SA for $4.8 billion, to gain access to Brazil's deepwater oil reserves. A month earlier, the Beijing-based company struck a C$2.2 billion ($2.16 billion) deal for Canadian gas and oil producer Daylight Energy Ltd.
Chinese firms are also seeking to benefit from foreign expertise in developing unconventional gas fields as they begin to tap China's own reserves of shale gas, which are estimated to be among the world's largest.
Interestingly, Sinopec chairman Fu Chengyu was previously head of Cnooc Ltd. The Chinese energy giant tried to buy U.S. oil company Unocal Corp. in 2005 for $18.5 billion, but the U.S. Congress blocked the deal. Unocal was later sold to Chevron Corp. for $16.4 billion.
Under the terms of the Devon deal, Sinopec will pay the initial $900 million at the deal's closing and invest as much as $1.6 billion more to fund drilling on the sites. The so-called drilling carry payment will fund 70% of Devon's capital requirements to develop the field, the Oklahoma-based gas company said in its statement.
"The company expects the entire $1.6 billion carry to be realized by year-end 2014," Devon said. "Devon will serve as the operator and will have ultimate responsibility for the allocation of capital."
The deal is expected to close by the end of the first quarter.
Shares in Devon traded Tuesday at $65.43, up $3.43, or 5.53%, on their previous close.
Devon's sale was managed by an in-house team led by CFO Jeff Agosta. The company did not use outside financial advisers and turned to Vinson & Elkins LLP's John B. Connally and Shay Kuperman for legal counsel. Vinson & Elkins had previously advised Sinopec on its acquisition of Daylight.
Sinopec was advised by Credit Suisse Group's Greg Weinberger, Christian Deiss, Janice Hu, Tim Perry and Osmar Abib. It took legal counsel from Fulbright & Jaworski LLP's Craig Vogelsang. -- Claire Poole in Houston contributed to this report.