After several industry sales of oil sands assets at what Bank of America Merrill Lynch views as full value, Devon Energy Corp (NYSE:DVN) stands out as the only US E&P to retain significant oil sands interests at what the firm views as a deeply discounted value vs the apparent market for these assets. ConocoPhillips’ sale of its FCCL interests to Cevonus stands out with similarities with DVN’s Jackfish project, suggesting no obvious justification on why the two assets should be valued differently. While COP’s confirmed sale removes oil price risk vs what the market may previously have been prepared to recognize for Devon’s oil sands: the difference in value is 100%. As a minimum, BAML suggests this helps support downside for DVN vs peers.
ConocoPhillips recently sold its Canadian deep gas assets and 50% interest in FCCL for $13.3bn. By the firm’s estimates oil sands accounted for ~80% ($10.7bn) of the sale price with an implied value per flowing barrel of ~$60,000 for 178,000 bpd capacity. Critically, development of FCCL’s sanctioned phases was recently completed and in this respect BAML views a ‘per flowing barrel’ valuation is an appropriate benchmark for Jackfish given that development is also complete. To all intents and purposes the assets are the same on key operating metrics such as steam oil ratios and per well productivity. However by BAML’s estimates the difference in value is equivalent to $6 per DVN share.
DVN management has already transformed its underlying asset quality with top tier positions in the STACK and Delaware basin driving a rate of change in cash flow growth from a (still) gas weighted production base. As part of a broader portfolio repositioning in recent years it has periodically pointed to oil sands as an underappreciated part of its portfolio – and a source of binary value recognition by the market under BAML’s base case that in a rising oil price environment. However any move to release value was seen as difficult given concerns over tax leakage, a weaker drilling inventory or leaving value on the table given current oil prices. In the firm’s view these have changed leading the firm to ask whether with the potential to realize full value from an outright sale, the company could reconsider oil sands as part of its remaining portfolio repositioning.