Devon Energy Corporation (NYSE:DVN) (“Devon”), Crosstex Energy,
Inc. (NASDAQ: XTXI) and Crosstex Energy, L.P. (NASDAQ: XTEX)
(collectively “Crosstex”) today announced the signing of definitive
agreements to combine substantially all of Devon’s U.S. midstream
assets with Crosstex’s assets to form a new midstream business. The
new business will consist of two publicly traded entities: the
Master Limited Partnership and a General Partner entity (the
“Master Limited Partnership” and the “General Partner”,
collectively “the New Company”). The New Company is expected to
have adjusted EBITDA of approximately $700 million in 2014, before
synergies. The transaction is expected to be immediately accretive
to both Crosstex and Devon. A name for the New Company will be
announced prior to the closing of the transaction.
The combination of Devon’s and Crosstex’s extensive midstream
systems, including gathering and transportation pipelines, and
processing, fractionation and logistics assets, provides the New
Company with diversification and scale, along with an enhanced
liquids-oriented growth profile. These assets are located in many
of North America’s premier oil and gas regions, including the
Barnett Shale, Permian Basin, Cana and Arkoma Woodford, Eagle Ford,
Haynesville, Gulf Coast, Utica and Marcellus. The New Company will
have approximately 7,300 miles of gathering and transportation
pipelines, 13 processing plants with 3.3 Bcf/day of net processing
capacity, 6 fractionators with 165 MBbl/day of net fractionation
capacity, as well as barge and rail terminals, product storage
facilities, brine disposal wells and an extensive crude oil
trucking fleet.
Under the terms of the definitive agreements, in exchange for a
controlling interest in both the new General Partner entity and the
Master Limited Partnership, Devon will contribute its equity
interest in a newly formed Devon subsidiary (“Devon Holdings”) and
$100 million in cash. Devon Holdings will own Devon’s midstream
assets in the Barnett Shale in North Texas, the Cana and Arkoma
Woodford Shales in Oklahoma and Devon’s interest in Gulf Coast
Fractionators in Mt. Belvieu, Texas. The Master Limited Partnership
and the General Partner will each own 50% of Devon Holdings.
Current stockholders of Crosstex Energy, Inc. will receive one unit
in the General Partner entity for each share of Crosstex Energy,
Inc. they own, as well as a one-time cash payment at closing of
approximately $2.00 per share or $100 million in aggregate. Devon’s
contributed assets are valued at $4.8 billion in the
transaction.
Devon, with its strong upstream development portfolio, will be
the New Company’s largest customer. Devon’s inventory of organic
exploration and development opportunities, combined with Crosstex’s
other high-quality third-party customers, provides the Master
Limited Partnership a visible path to long-term growth in
distributable cash flow. Over time, the potential exists for the
General Partner to drop-down its 50% interest in Devon Holdings to
the Master Limited Partnership, further enhancing growth for
unitholders. Owners of the General Partner entity will benefit from
the increased capacity to pay dividends and the acceleration of
achievement of the highest-tier incentive distributions through
this transaction.
“The combined company’s midstream assets and expertise greatly
accelerate the value proposition of Devon’s previously announced
standalone master limited partnership in a manner that is highly
accretive to our shareholders,” said John Richels, Devon’s
President and Chief Executive Officer. “Additionally, this
transaction provides Devon a market-based valuation for these
assets on a go forward basis.”
“The integration of Devon’s midstream assets with Crosstex
provides the New Company with greater operating leverage and strong
sponsorship from a leading North American exploration and
production company,” said Barry E. Davis, Crosstex’s President and
Chief Executive Officer. “Indeed our equity holders, customers and
employees will benefit from a larger, stronger company. The
enhanced financial position will support both existing and new
growth projects, provide capacity for greater distribution payouts,
and is expected to result in a higher valuation of our equity.”
Strategic Rationale
- Immediate and meaningful value
accretion for both Devon and Crosstex equity holders –Both the
Master Limited Partnership and the General Partner will benefit
from the increased capacity to pay higher cash distributions and
dividends to holders. As a result of the transaction, the cash
distributions per unit of the Master Limited Partnership will
exceed the highest incentive distribution tier. This maximizes the
value of the incentive distribution rights held by the General
Partner.
- Increased scale and diversification
– The transaction combines Devon’s large Texas and Oklahoma
midstream platform with Crosstex’s positions in the Barnett Shale,
Permian Basin, Eagle Ford, Haynesville, Gulf Coast, Utica and
Marcellus. The combination creates a geographically diverse
portfolio of midstream assets, a broad range of predominately
fee-based services, and an increasing focus on liquids-based growth
projects.
- Strong sponsorship – Through its
majority ownership in the New Company, Devon is aligned with the
interests of unitholders and committed to the New Company’s success
and ongoing growth. Devon will dedicate nearly 800,000 net acres to
the New Company in areas where it expects to develop liquids-driven
upstream opportunities. Fixed-fee contracts and minimum volume
commitments associated with Devon’s midstream assets will also
support the stability and growth of the New Company’s future cash
flows.
- Enhanced financial strength –
The New Company’s investment-grade credit profile will provide
access to low-cost capital. This enhanced financial capacity better
positions it to secure and execute sizable organic development and
acquisition opportunities across the midstream value chain. The
Master Limited Partnership’s pro forma leverage will be
approximately 2.1x debt-to-EBITDA. Additionally, the New Company
expects to achieve operational and financial synergies of up to $45
million annually. This includes approximately $20 million in cost
savings and approximately $25 million in financing savings, which
the New Company expects to achieve from reduced interest costs as a
result of its improved credit profile.
- Improved cash flow stability –
Fixed-fee contracts will account for approximately 95% of the New
Company’s estimated 2014 adjusted EBITDA. The New Company’s cash
flow stream is further stabilized by the diversified industries
represented in its customer base.
- Enhanced growth outlook - The
New Company’s strong financial foundation will enable it to pursue
additional opportunities over and above the $1 billion of growth
projects Crosstex currently has underway. In addition to future
greenfield projects, the New Company will be positioned to
capitalize on opportunities supporting Devon’s upstream growth
needs. Furthermore, the New Company is expected to have the
opportunity to acquire additional Devon assets over time.
Specifically, Devon has granted the New Company a right of first
offer with respect to Devon’s interest in Access Pipeline, a
pipeline system serving Devon’s growing thermal heavy oil
production in Canada.
- Cultural alignment and experienced
leadership – Devon and Crosstex have a long and successful
history of working closely together with a clear understanding of
each company’s values, internal processes and expectations. The
combination brings together highly skilled workforces and a senior
management team with a significant track record of creating value
in the midstream industry.
Transaction Detail
The combination is structured to be a tax-free contribution. The
new General Partner entity will acquire all shares of Crosstex
Energy, Inc. in a one-for-one exchange. Upon closing of the
transaction, Crosstex Energy, Inc. stockholders will also receive a
one-time cash payment of approximately $2.00 per share, or $100
million in aggregate. Simultaneously, 50% of the equity in Devon
Holdings plus $100 million in cash will be contributed to the new
General Partner entity in exchange for approximately 70% of the
outstanding common units in the General Partner entity. The common
units to be received by Devon are valued at $2.4 billion, based on
the volume weighted average closing prices of Crosstex Energy,
Inc.’s shares for the 20 trading days prior to today’s
announcement.
Devon’s remaining 50% equity interest and the general partner
interest in Devon Holdings will be contributed to the Master
Limited Partnership in exchange for approximately 53% of the
outstanding common units in the Master Limited Partnership. The
common units to be received by Devon for the contribution of the
remaining 50% of equity is valued at $2.4 billion, based on the
volume weighted average closing prices of Crosstex Energy, L.P.’s
units for the 20 trading days prior to today’s announcement.
Upon closing of the transactions, the pro forma ownership of the
new General Partner entity will be approximately:
- 70% - Devon Energy Corporation
- 30% - Current Crosstex Energy, Inc.
public stockholders
Upon closing of the transactions, the pro forma ownership of the
Master Limited Partnership entity will be approximately:
- 53% - Devon Energy Corporation
- 40% - Current Crosstex Energy, L.P.
public unitholders
- 7% - the new General Partner
entity
The transaction, which is expected to close in the first quarter
of 2014, is subject to approval by the stockholders of Crosstex
Energy, Inc., as well as customary regulatory approvals and closing
conditions. Crosstex intends to hold a special stockholder meeting
as soon as practicable. Stockholders representing approximately 22%
of Crosstex Energy, Inc.’s outstanding shares, including
Blackstone/GSO Capital, Crosstex Energy, Inc.’s largest
stockholder, and certain members of management and directors, have
entered into voting agreements under which they have agreed to vote
their combined interest in favor of the proposed transaction.
Headquarters, Directors and Management
Following the close of the transaction, the New Company will be
headquartered in Dallas, Texas, with a continued employee presence
in Oklahoma City.
The boards of directors of both Devon and Crosstex have
unanimously approved the transaction. Until the transaction has
closed, Devon’s midstream business and Crosstex will continue to
operate as separate, independent companies.
The newly constituted boards of directors for the General
Partner entity and the general partner of the Master Limited
Partnership will each be comprised of nine directors, including
five members designated by Devon. John Richels, President and CEO
of Devon Energy Corporation, will act as Chairman. The executive
management team of the New Company will consist of senior officers
from both Devon and Crosstex, led by Crosstex’s Barry E. Davis as
President and CEO.
Advisors
BofA Merrill Lynch acted as financial advisor and Vinson &
Elkins LLP acted as legal advisor to Devon. Greenhill & Co.,
LLC acted as financial advisor and Baker Botts L.L.P. and Richards,
Layton & Finger, P.A. acted as legal advisor to Crosstex.
Citigroup Global Markets Inc. acted as financial advisor to
Crosstex Energy, Inc. Evercore acted as financial advisor and
Potter Anderson Corroon LLP acted as legal advisor to the Special
Committee of the Crosstex Energy, Inc. board of directors. Simmons
& Company International acted as financial advisor and Morris,
Nichols, Arsht & Tunnell LLP acted as legal advisor to the
Conflicts Committee of the Crosstex Energy GP, LLC Board of
Directors.
Conference Call and Webcast
Devon and Crosstex will discuss this transaction today on a
conference call and webcast at 9 a.m. Central Time (10 a.m. Eastern
Time). Institutional investors and analysts are invited to
participate in the call by dialing (877) 659-1807, or (702)
696-4908 for international calls using conference ID: 86781301.
Other interested parties, including individual investors, members
of the media and employees of Devon and Crosstex are encouraged to
participate via webcast. The webcast may be accessed from Devon's
home page at www.devonenergy.com or Crosstex’s home page at
www.crosstexenergy.com.
About the Companies
Devon Energy Corporation is an Oklahoma City-based independent
energy company engaged in oil and gas exploration and production.
Devon is a leading U.S.-based independent oil and gas producer and
is included in the S&P 500 Index.
Crosstex Energy, L.P., is an integrated midstream energy
partnership headquartered in Dallas, Texas, that offers
diversified, tailored customer solutions spanning the energy value
chain with services and infrastructure that link energy production
with consumption. Crosstex operates approximately 3,500 miles of
natural gas, natural gas liquids and oil pipelines, 10 natural gas
processing plants and four fractionators, as well as barge and rail
terminals, product storage facilities, brine disposal wells and an
extensive truck fleet. Additional information about Crosstex
Energy, L.P. can be found at www.crosstexenergy.com.
Crosstex Energy, Inc. headquartered in Dallas, Texas, owns the
general partner interest, the incentive distribution rights and a
portion of the limited partner interests in Crosstex Energy, L.P.
as well as the majority interest in E2, a services company focused
on the Utica Shale play in the Ohio River Valley. Additional
information about Crosstex Energy, Inc. can be found at
www.crosstexenergy.com.
Additional Information and Where to Find It
This press release contains information about the proposed
merger involving a Devon entity and Crosstex Energy Inc. In
connection with the proposed mergers, the new General Partner
entity will file with the Securities and Exchange Commission (SEC)
a registration statement on Form S-4 that will include a proxy
statement/prospectus. Investors and stockholders are urged to read
the proxy statement/prospectus and other relevant documents filed
or to be filed with the SEC. These documents (when they become
available), and any other documents filed by Crosstex or Devon with
the SEC, may be obtained free of charge at the SEC’s website, at
www.sec.gov. In addition, shareholders will be able to obtain free
copies of the proxy statement/prospectus from Crosstex Energy, Inc.
by contacting Investor Relations by mail at Attention: Investor
Relations, 2501 Cedar Springs, Dallas, Texas, 75201.
Non-GAAP Financial Information
This press release contains non-generally accepted accounting
principle financial measures that Devon and Crosstex refer to as
adjusted EBITDA. Adjusted EBITDA is defined as net income plus
interest expense, provision for income taxes, depreciation and
amortization expense, impairments, stock-based compensation, (gain)
loss on non-cash derivatives, distribution from a limited liability
company and non-controlling interest; less gain on sale of property
and equity in income (loss) of limited liability company.
Devon and Crosstex believe this non-GAAP measure is useful to
investors because it may provide users of this financial
information with a meaningful comparison between current results
and prior-reported results.
Adjusted EBITDA, as defined above, is not a measure of financial
performance or liquidity under GAAP. This measure should not be
considered in isolation or as an indicator of Devon’s, Crosstex’s
or the New Company’s performance. Furthermore, it should not be
seen as a measure of liquidity or a substitute for a metric
prepared in accordance with GAAP.
Participants in the Solicitation
Devon, Crosstex and their respective directors and officers may
be deemed to be participants in the solicitation of proxies from
the stockholders of Crosstex Energy, Inc. in respect of the
proposed transaction. Information regarding the persons who may,
under the rules of the SEC, be deemed participants in the
solicitation of the stockholders of Crosstex Energy, Inc. in
connection with the proposed transaction, including a description
of their direct or indirect interests, by security holdings or
otherwise, will be set forth in the proxy statement/prospectus when
it is filed with the SEC. Information regarding Crosstex Energy,
Inc.’s directors and executive officers is contained in its Annual
Report on Form 10-K for the year ended December 31, 2012, which is
filed with the SEC. Information regarding Devon’s directors and
executive officers is contained in its Annual Report on Form 10-K
for the year ended December 31, 2012, which is filed with the
SEC.
Forward Looking Statements
This press release contains forward-looking statements within
the meaning of the federal securities laws. Although these
statements reflect the current views, assumptions and expectations
of Devon’s and Crosstex’s management, the matters addressed herein
involve certain risks and uncertainties that could cause actual
activities, performance, outcomes and results to differ materially
than those indicated. Such forward-looking statements include, but
are not limited to, statements about future financial and operating
results, objectives, expectations and intentions and other
statements that are not historical facts. Factors that could result
in such differences or otherwise materially affect Devon’s,
Crosstex’s or the New Company’s financial condition, results of
operations and cash flows include, without limitation,(a) failure
to consummate the transactions due to unsatisfied closing
conditions with respect the transactions or failure to obtain
regulatory approval for the transactions, (b) the risk that the New
Company will not be integrated successfully or that such
integration will take longer than anticipated, (c) the possibility
that expected synergies will not be realized, or will not be
realized within the expected timeframe, (d) fluctuations in oil,
natural gas and NGL prices, (e) the extent and success of drilling
efforts, as well as the extent and qualify of hydrocarbon volumes
produced within proximity of our assets, (f) failure or delays by
customers in achieving expected productions in their projects, (g)
competitive conditions in our industry and their impact on our
ability to connect hydrocarbon supplies to our assets, (h) actions
or inactions to or non-performance by third parties, including
suppliers, contractors, operators, processors, transporters and
customers, (i) our ability to consummate future acquisitions,
successfully integrate any acquired businesses, realize any cost
savings and other synergies from any acquisition, (j) changes in
the availability and cost of capital, (k) operating hazards,
natural disasters, weather-related delays, casualty losses and
other matters beyond our control, (l) timely receipt of necessary
government approvals and permits, our ability to control the costs
of construction, including costs of materials, labor and
right-of-way and other factors that may impact our ability to
complete projects within budget and on schedule, (m) the effects of
existing and future laws and governmental regulations, including
environmental and climate change requirements, (n) the effects of
existing and future litigation and (o) risks related to our
substantial indebtedness, as well as other factors disclosed in
Devon’s and Crosstex’s filings with the Securities and Exchange
Commission. You should read Devon’s and Crosstex’s filings with the
Securities and Exchange Commission, including their respective
Annual Reports on Form 10-K for the year ended December 31, 2012
and their Quarterly Reports for the quarters ended March 31, 2013
and June 30, 2013 and other filings made with the Securities and
Exchange Commission. Neither Devon nor Crosstex assumes any
obligation to update these forward-looking statements.
Devon Investor ContactsScott Coody, 405-552-4735Shea Snyder,
405-552-4782orDevon Media ContactChip Minty, 405-228-8647orCrosstex
Investor & Media ContactJill McMillan, 214-721-9271
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