Devon Energy Corp. is turning to an old idea to ensure the value of its assets is properly reflected in its stock price.
CEO John Richels said Wednesday the company is looking into creating a midstream master limited partnership.
“If we have assets that we do not believe are being appropriately reflected in our stock price, we're working to determine how that value might be realized or more appropriately reflected in our stock,” Richels told analysts in Devon's fourth-quarter earnings call. “However, anything we do must be thoughtful and smart and must enhance long-term value.
“We will not pursue a short-lived bump in the stock price at the expense of sustained value creation.”
Devon's stock closed Thursday at $54.88 a share, down $1.69 or almost 3 percent.
Richels said a midstream partnership seems to be a promising opportunity for the Oklahoma City-based oil and natural gas company.
Devon's domestic midstream operations are the largest among U.S. independent producers, with more than 6,500 miles of pipelines, 300 compressor units and eight gas processing plants with net inlet capacity of nearly 1.2 billion cubic feet per day, according to the company's website.
Devon considered a midstream partnership in 2007, but eventually concluded the timing was not right.
“Today, capital markets are deeper, yields in the MLP (master limited partnership) market are lower and structural enhancements have occurred that have caused us to re-examine whether moving midstream assets into an MLP may make sense,” Richels said Wednesday. “We have now retained investment bankers and specialized legal counsel to assist us in that evaluation.”
Edmond investment adviser Greg Womack said spinning off its midstream assets could be beneficial for Devon and its shareholders.
He said master limited partnerships don't pay corporate income tax, so there is more cash available to pay unit holders.
“The yields are much higher for unit holders of MLPs,” said Womack, president of Womack Investment Advisers Inc. “With Devon's stock yield currently at 1.4 percent, many MLPs are paying out 4 percent to 6 percent or more.”
Womack said Devon's stake in the proposed midstream partnership could be used to fund additional drilling opportunities in areas of higher return, like the oil-rich Permian Basin in west Texas.
“Subsequent sale of more pipelines and processing plants to a partnership could be used to accelerate operations in key fields, and even be used for stock buybacks, creating potential for even more value for shareholders,” he said.
“If they continue to control operations from the sale of these assets, there is little downside in the deal.”
The master limited partnership route has been successful for other state companies, including Williams and Chesapeake Energy Corp.
Chesapeake created Chesapeake Midstream Partners in 2009, selling a 50 percent stake to New York-based private equity firm for nearly $600 million.
Last year, Chesapeake sold its stake in its former subsidiary in a deal that netted a pretax gain of about $1.3 billion, the company's chief financial officer said in Thursday's earnings call.
“Our midstream exit enabled us to redirect the company's strategic focus and capital resources into our upstream oil and gas operations,” Nick Dell'Osso said. “We originally entered the midstream business at a time when the midstream industry's knowledge and appetite for capital growth and unconventional assets was limited.
“Entering midstream proved to be profitable and strategically important.”