DBRS Confirms Devon Energy Corporation Ratings of at BBB (high) with Stable Trends

DBRS has today confirmed the Issuer and Unsecured Long-Term Debt ratings of Devon Energy Corporation (Devon or the Company) and its subsidiary, Devon Finance Corporation (Devon Finance), at BBB (high) and Devon’s Commercial Paper rating at R-2 (high). All trends have been returned to Stable, reflecting DBRS’s expectation that (1) the acquired Eagle Ford assets will be self-funding for the remainder of 2014 and will generate significant free cash flow beginning in 2015, and (2) the Company will complete its announced asset divestiture program as expected by year-end 2014 and reduce debt from the use of its proceeds to maintain its key credit metrics within its rating category. In terms of net proceeds, the recent divestiture of Canadian conventional assets account for 47% of the Eagle Ford asset purchase.

DBRS had placed the ratings of Devon Under Review with Negative Implications on November 21, 2013, when the Company announced the largely debt-funded $6.0 billion acquisition of GeoSouthern Energy’s assets in the Eagle Ford shale formation. The acquisition was expected to be funded by $4.5 billion in debt and $1.5 billion cash, which would have weighed down the Company’s key credit metrics to beyond the minimum requirements for its ratings.

On February 19, 2014, Devon announced the sale of the majority of its Canadian conventional assets for $2.8 billion to Canadian Natural Resources Limited (rated BBB (high)). The sale closed on April 1, 2014. Devon plans to use the all of the estimated $2.7 billion of proceeds to reduce debt incurred in the Company’s acquisition of Eagle Ford assets.

DBRS estimates the increase in production and cash flow from the acquisition of the Eagle Ford assets will more than offset the loss of production and cash flow associated with the Canadian assets disposal. Devon expects to spend $1.1 billion in capex in 2014 to develop the Eagle Ford assets, which are expected to be self-funding for the year and generate significant free cash flow beginning in 2015.

DBRS recognizes the noticeable improvement in Devon’s business risk profile pro forma the Transactions (acquisition and the divestiture combined), with the Company gaining access to the high growth (expected compound annual growth rate of 25% over the next several years), rich netback and high-producing Eagle Ford light oil assets and divesting from the largely mature natural gas assets in Western Canada. Whereas the Transactions would largely offset one another on a net production (barrels of oil equivalent per day) basis, , the acquisition of GeoSouthern assets (net of the divestiture) would improve Devon’s production mix from approximately 42% liquids as at December 31, 2013, to approximately 51% liquids.

Following the largely debt-funded GeoSouthern acquisition, Devon’s pro forma financial risk profile weakened significantly, with total debt-to-capitalization rising to 41.4% from 32.8% as at September 30, 2013, total debt-to-cash flow rising from 1.92 times (x) to more than 2.5x, and EBIT interest coverage falling from 7.26x to below 5.0x. With the Canadian divestiture proceeds of $2.7 billion used to reduce debt, pro forma credit metrics improved, with total debt-to-capitalization falling to 40.3%, total debt-to-cash flow moving to approximately 2.10x and EBIT interest coverage improving to approximately 6.0x.

With the use of proceeds from the Western Canadian asset sale and management commitment of further asset sales planned and to be completed before the end of the year to further reduce the acquisition debt, DBRS expects Devon’s credit metrics to return in line with its current ratings category. A negative rating action may result in the case that no further asset sales are completed within the Company’s announced time frame or if the proceeds are used for anything other than to reduce debt.

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

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.

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