DBRS Places the Ratings of Devon Energy Corporation Under Review with Negative Implications

DBRS has today placed the ratings of Devon Energy Corporation (Devon or the Company) and its subsidiary, Devon Finance Corporation (Devon Finance), Under Review with Negative Implications. The rating action reflects DBRS’s concern with regard to the aggressive use of debt to fund the $6 billion acquisition of GeoSouthern Energy’s assets in the Eagle Ford shale formation. This leverage will weigh down the Company’s credit metrics to levels that are no longer consistent with current ratings. The Company plans to fund the acquisition with $4.5 billion in new debt and $1.5 billion cash on hand. DBRS expects the rating action will be limited to one notch upon the completion of the transaction (Q1 2014).

Pro forma, following the acquisition, (1) the percentage of debt in the capital structure is expected to rise above 40%, which is below the mid-point range for the rating category; (2) debt-to-cash flow is expected to exceed 2.0 times, which is weak for the current ratings; and (3) EBIT-to-interest coverage is expected to be below 5.0 times, which is below investment grade.

DBRS recognizes that the transaction will modestly improve the business risk profile as the Company increases its higher-margin liquids production from 37% (2012) to over 45% by 2014. The transaction will boost production by 53,000 barrels of oil equivalent per day (boe/d) and will help Devon diversify into the Eagle Ford basin. The Company expects production levels from these assets to grow to 135,000 boe/d to 145,000 boe/d by 2017. During this ramp-up phase, the Company is expected to spend approximately $1.4 billion annually to achieve these goals. Given the current pricing environment, the transaction should be cash flow neutral in 2014. Overall, this purchase is consistent with the Company’s strategy to focus on North American onshore liquids assets.

Devon currently has sufficient cash on hand to fund the cash portion of the acquisition. As at September 30, 2013, Devon had a cash balance of $4.3 billion.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The rating of Devon Finance Corporation is based on an irrevocable guarantee of Devon Energy Corporation.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Oil and Gas Industry (July 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.