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Devon Cuts $75M Deal With DowDupont

May 15, 2018

A commodity hedge deal between Oklahoma City-based energy company Devon and  petrochemical/agriculture giant DowDupont could be a sign of a new trend.

The Journal Record’s Sarah Terry-Cobo writes the deal will provide “low-risk cash” to Devon, and DowDupont will receive natural gas that will be used to produce plastics, chemicals and other products.

The $75 million deal will last 5 years, according to the Journal Record.

The company is selling to DowDupont half of the working mineral interests in 116 undrilled spots in the Barnett Shale. Working interest owners share in production revenues once royalties are paid. Devon promises to drill at least 24 wells each year around the Fort Worth metro.

[Dan] Johnson, founder and CEO of Oklahoma City-based Freestone Analytics, said the acreage in the Barnett Shale could have been something that was otherwise up for sale. The agreement with Dow allows Devon to maintain operational control over the wells, have their costs covered and keep the upside.

Terry-Cobo writes the deal lowers the cost risk for Devon to drill the wells because DowDupont is paying the operating fees.

FULL TRANSCRIPT

Jacob McCleland: It’s the Business Intelligence Report, a weekly conversation about business news in Oklahoma. I'm Jacob McCleland. I’m joined today by Journal Record senior reporter Sarah Terry-Cobo. Hey Sarah, thanks for joining us.

Sarah Terry-Cobo:  Hi Jacob, it is great to be here.

McCleland: I want to talk with you today about Devon Energy’s 5-year, $75 million deal with petrochemical and agriculture company DowDupont. You’re going to need to walk me through this a little bit. In the big picture what does this deal accomplish for the companies?

Terry-Cobo: Right, so basically the arrangement provides a hedge for both Devon, which is an oil and gas driller of course, and DowDupont. They make fertilizers, chemicals, seeds, all kinds of stuff. The hedge, in principle, cuts off the risk from a high price or a low price. And so Dow pays Devon money and in return gets access to a fuel, that’s natural gas, that Dow uses to manufacture all these plastics and chemicals.

McCleland:  So what does Devon gain from this arrangement?

Terry-Cobo:  Sol Devon will get that $75 million over five years that you mentioned. And basically they don’t have to use their proverbial credit card, right. They won’t have to get more debt, to spend any cash to drill wells in the Fort Worth area, that’s the Barnett Shale. So Devon gets money to drill some wells they would not have otherwise drilled if they had to pay for them out of their own budget.

McCleland: And what’s in it for DowDupont?

Terry-Cobo:  So Dow is getting access to natural gas at a low cost and it gets what is known as a “working interest.” And that basically means that Dow would get a share of the revenue that comes from the natural gas sales from those Barnett wells after the royalties are paid. That’s what a “working interest” is. So the more Dow can get a cheap feedstock or cheap input, then the more they can control their overhead costs.

McCleland: So what are the potential risks for the companies, if there are any?

Terry-Cobo:  Right. So there are risks and each of them face risks, but they are market risks, outside of this deal.

Because Dow operates all over the world, it buys supplies to make products locally, the biggest risk it faces is changes in local currencies, like the value of local money.

And for Devon, the risk it faces are continued low natural gas prices, because they’re trying to sell oil and gas to make money. But the experts I talked to say this deal reduces risk for both parties.

McCleland: I want to talk about another energy-related story from the Journal Record. And this one is about activist investor Carl Icahn. He successfully expanded the board of directors at SandRidge by two members. Why is this significant?

Terry-Cobo: Ok. So a bit of a clarification there. Carl Icahn is fighting to get all new directors for SandRidge’s board. He proposes five new ones at first. Then a few days later, SandRidge executives come out and say they supported two of his five candidates. A few days after that, Icahn says he wants two more, so now he wants a total of seven board members.

McCleland: Who is Icahn trying to get on the board here?

Terry-Cobo: Right, so two members that SandRidge CEO Bill Griffin says he supports are these independent directors and that is Jack Lipinksi, a former refinery executive, and Randolph Read. Lipinksi was at CVR refining, they are based in Texas but have a refinery in Wynnewood. And Read is now CEO of an investment fund, but he used to work with the former oil and gas company Atlantic Richfield Co., or ARCO. These others that SandRidge doesn’t support that Carl Icahn wants, they’re basically Carl Icahn’s employees. They work for various hedge funds that he owns or manages in some way. So they’re pretty closely linked to Icahn or his investments.

McCleland: What is the end-game for Icahn here? What is he trying to accomplish?

Terry-Cobo: Pretty much what he says that he wants is what all activist investors want, right, is that they want the executives and the board to focus on shareholder value. So what does that mean? In plain English, that means that they want the top brass to be paid less and the company to be run better, so the share price goes up. That benefits shareholders.

McCleland: Sarah Terry-Cobo is the Journal Record’s senior reporter. Sarah, thank you for your time... 

Terry-Cobo: Absolutely. Thanks for having me, Jacob.

McCleland: KGOU and the Journal Record collaborate each week on The Business Intelligence Report. You can find this conversation at kgou.org. You can also follow us on social media. We're on Facebook and Twitter, @journalrecord and @kgounews.

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