Devon Hired Bankers, Lawyers to Explore Midstream MLP

Devon Energy Corp., operating partner to Sumitomo Corp. and China Petrochemical Corp. in U.S. shale fields, has hired bankers and lawyers to explore an initial public offering of a midstream master-limited partnership.

Markets have changed since 2007, when Oklahoma City-based Devon considered forming a publicly traded partnership for its pipeline and logistics assets, Chief Executive Officer John Richels said on a call with analysts today.

Initial proceeds would be $300 million to $500 million, Chief Financial Officer Jeff Agosta said on the call. Devon would follow cross-town rival Chesapeake Energy Corp., Anadarko Petroleum Corp. and other producers, in selling pipelines and processing plants for cash while retaining operational control. Separating the business may unlock value for shareholders, Richels said.

“Today, capital markets are much deeper, the yields have all changed,” Richels said. “We’re out there building new facilities all the time.”

Investors have snapped up master limited partnership units. U.S. partnerships don’t pay corporate income tax, so have more cash available to pay holders of units, which are like shares. Yield at Access Midstream Partners LP, which Chesapeake sold last year, is about 4.8 percent, compared with a 1.4 percent dividend yield on Devon stock and 1.7 percent at Chesapeake itself, according to data compiled by Bloomberg.

Lagging Peers

Devon has lagged behind the other 42 members of the Standard & Poor’s 500 Energy Index in the past year, losing 23 percent of its value while the index average rose 4.1 percent.

The company’s midstream operations include more than 6,500 miles (10,500 kilometers) of pipelines and eight U.S. natural gas processing plants with capacity of 1.2 billion cubic feet per day, according to Devon’s website. The company holds stakes in 56 Canadian plants representing 1.2 billion cubic feet per day of processing capacity.

Devon has about $7 billion of cash after divesting overseas and offshore assets to finance accelerated drilling onshore in the U.S. and Canada, Agosta said. All but about $500 million of that is kept in offshore accounts, he said.

Proceeds from an MLP sale and subsequent sale of more assets to the partnership may pay for accelerated drilling in regions such as the Permian Basin of Texas, where Devon’s fourth-quarter oil output rose 31 percent, Richels. The company also may buy back stock or make an acquisition, he said.

“Nothing’s off the table,” Richels said.

Devon fell 4.5 percent to $57.83 at 2:10 p.m. in New York. Also today, the company reported a net loss of $357 million or 89 cents on non-cash costs of $896 million to write down the value of natural gas and natural gas liquids reserves because of lower prices. Profit excluding that and other one-time items beat by 3 cents the average 75-cent estimate compiled by Bloomberg from 27 analysts.

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