There’s currently a massive consolidation wave happening in the oil patch. Oil giants ExxonMobil, Chevron, and Occidental Petroleum have sealed deals to buy rivals. Meanwhile, several smaller producers have also made acquisitions.

Devon Energy (NYSE: DVN) could be the next oil stock to make an acquisition. It has reportedly offered to buy Enerplus (NYSE: ERF). Here’s a look at why Devon is interested in the company.

Drilling down into Enerplus
Enerplus is a Canadian headquartered, U.S.-focused oil and gas company. It was Canada’s first oil and gas royalty trust when it started operations in 1986. However, the company has evolved over the years. It sold its remaining Canadian assets at the end of 2022 to focus on its higher-return U.S. resource plays.

Today, Enerplus operates in the oil-rich Bakken region of North Dakota and the gas-rich Marcellus of Pennsylvania. Roughly 73% of its production comes from the Bakken, 26% from the Marcellus, and 1% from other regions (DJ Basin). Meanwhile, oil makes up the majority of its production (51%), while natural gas is 38% and natural gas liquids is 11%. The company produces about 98,500 barrels of oil equivalent per day (BOE/d).

Enerplus also produces a lot of cash. It expected to produce $960 million of adjusted free cash flow last year and $430 million in free cash after funding its capital-spending program. Like Devon, Enerplus returns the bulk of its free cash flow to investors (it targeted to return 70% last year via dividends and share repurchases). Meanwhile, the company has a strong balance sheet with a low 0.2 times leverage ratio.

Why Enerplus would be a fit for Devon
Enerplus would check a lot of boxes for Devon Energy. In particular, it would significantly increase the company’s scale in the Bakken. Enerplus currently has 236,000 net acres in the region, where it produces 77,702 BOE/d. Meanwhile, the company has 655 remaining net-drilling locations. That gives it a lot of inventory, given its current drilling brings about 50 wells online each year.

Devon’s Bakken position is a lot smaller. It produces about 54,000 BOE/d, which is less than 10% of its total output (665,000 BOE/d during the third quarter). While the Bakken is a smaller region for Devon, it has been working to increase its scale through acquisition. It enhanced its position in the region by acquiring the leasehold interest and related assets of RimRock Oil and Gas for $865 million in 2022. Buying Enerplus would enable Devon to further enhance its scale in the region. That would help it to capture cost savings and improve its free cash flow from the combined assets.

Acquiring Enerplus would also add some land in the DJ Basin to complement Devon’s operations in the Powder River Basin area. Enerplus spent about 2% of its 2023 capital budget to drill three wells in that region last year.

Enerplus also has a non-operated position in the Marcellus. It currently doesn’t invest much capital in that position due to lower gas prices. Because of that, its output has started to decline. Since Devon doesn’t operate in the Marcellus (and has sold its gassier acreage in recent years), it probably would look to sell this non-core position should it acquire Enerplus.

A solid but not perfect fit

Devon has reportedly looked into several acquisition opportunities and has apparently settled on Enerplus. While buying Enerplus would check a lot of boxes for the company by enhancing its scale in the Bakken and increasing its free cash flow, it’s not a perfect fit. However, an acquisition of Enerplus could create value for shareholders at the right price, making this an interesting development to watch.

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