By David French
(Reuters) -U.S. oil and gas producer Devon Energy (NYSE:DVN) has approached Enerplus (NYSE:ERF) , a peer with a market value of C$4 billion ($3 billion), with an acquisition offer, people familiar with the matter said on Thursday.
Such a combination would continue the dealmaking spree seen in the North American oil patch in recent months, which has included many of Devon's rivals -- including Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Occidental Petroleum (NYSE:OXY) -- making major acquisitions.
There is no certainty that Devon and Enerplus will negotiate a deal, the sources said, requesting anonymity because the matter is confidential. Devon's proposed acquisition terms could not be learned.
Devon declined comment. Enerplus, which is headquartered in Calgary, did not immediately respond to a request for a comment.
Enerplus shares traded up 8.6% higher at C$20.93 on the news. Devon Energy shares rose 2.6% to $42.39.
Kimmeridge Energy Management, an investment firm that according to LSEG data is Enerplus' second-largest shareholder with a 3.8% stake, said Enerplus should make sure any deal price it agrees to values the company fairly.
"Any potential transaction for Enerplus would need to reflect the quality of their remaining core inventory in the Bakken," Kimmeridge managing partner and lead portfolio manager Mark Viviano said in a statement.
TD Securities analysts wrote in a research note that Devon could afford to pay $3.5 billion for Enerplus with cash on hand and cash flow it expects to generate this year.
"We would expect a deal to be accretive across the board and add at least 90 basis points to Devon's free cash flow yield," the TD Securities analysts wrote. A basis point is one-hundredth of a percentage point.
Enerplus operates mainly in the Bakken Basin in North Dakota, and also has a footprint in the Marcellus shale region in Pennsylvania. Were a deal to materialize, it would complement Devon's existing presence in North Dakota and reduce its reliance on the Delaware Basin in Texas and New Mexico.
Enerplus sold its Canadian assets to Journey Energy and Surge Energy (OTC:ZPTAF) in 2022 to focus on its more lucrative U.S. acreage.
The bet has paid off, generating strong cash flow and allowing Enerplus to return $307 million to shareholders in 2023. The company has said it expects to return approximately 70% of its free cash flow to shareholders through share buybacks and dividends in 2024.
Enerplus shares have underperformed many of those of its peers as investors fret about the company spending more to generate the same levels of production. Its capital spending totaled $532 million in 2023, up from $432 million in 2022.
Prior to news of the potential deal with Devon, Enerplus shares had dropped 18% in the last 12 months, compared to a 6% drop in the S&P 500 Energy Index.
Devon's shares have performed even worse, down 34% in the last 12 months. The Oklahoma City-based company, which has a market value of $26 billion, has also been grappling with high production costs and struggled to meet performance goals.
The hunt for better reserves and economies of scale has fueled consolidation in the U.S. oil and gas sector over the course of the past year.
Exxon agreed to pay $59.5 billion for Pioneer Natural Resources (NYSE:PXD) and $4.9 billion for Denbury. Chevron inked a $53 billion deal for Hess (NYSE:HES) and bought PDC Energy (NASDAQ:PDCE) for $6.2 billion. Occidental clinched a $12 billion deal for CrownRock.