BP Walked Away From a Potential $4.5 Billion Bet on Devon Energy's Eagle Ford Shale. Here's What It Means for BP and DVN Stock.

Energy investors were abuzz with this week's news that activist investors in Devon Energy (NYSE: DVN) might push the company to sell off some of its assets, or even the entire company.

That buzz got even louder when BP (NYSE: BP) was rumored to be a potential buyer for one of Devon's shale assets.

But today, in a move that sent Devon's shares downward, Reuters reported that BP apparently walked away from the deal. Here's what investors need to know.

Devon faces sudden pressure to sell

TOMS Capital Investment Management, an activist hedge fund led by billionaire Noam Gottesman, took a sizable share in Devon at some point over the last three months. It now says it's one of the company's top-5 shareholders.

Since then, TOMS Capital has been pressuring Devon to either sell some of its assets or sell the entire company. In a letter to management earlier this month that was revealed on Wednesday, TOMS Capital suggested that Devon's recent merger with Coterra Energy resulted in a bloated, overly complex portfolio.

Pre-merger Devon already owned several assets in the Delaware Basin – a subsection of the Permian Basin in West Texas and southeast New Mexico. Coterra Energy brought additional Delaware Basin assets into the portfolio. The combined company now also operates in Pennsylvania's Marcellus Shale, South Texas' Eagle Ford Shale, Oklahoma's Anadarko Basin, the Williston Basin of North Dakota, and the Powder River Basin in Wyoming. That's a lot.

The TOMS Capital letter argues that such a fragmented portfolio has led Devon to trade at a valuation discount relative to its peers. Another of Devon's major investors, investment firm Kimmeridge, has expressed similar sentiments and publicly urged management to streamline the portfolio. However, Kimmeridge has stopped short of asking Devon to sell itself in its entirety, which TOMS Capital thinks is a viable alternative.

BP didn't close the deal

BP has had a turbulent recent history. It has had five CEOs since 2020.

Meg O'Neill, who stepped into the role in April, has refocused the business on oil and gas rather than green energy. During her tenure, BP has reportedly "entered the data room" for a handful of shale assets up for sale. Reportedly, Devon's Eagle Ford shale holdings were among them.

"Entering the data room" means officially expressing interest in buying an asset. While it doesn't require any commitment from the prospective buyer, it gives them access to confidential information about the asset so they can better evaluate the pros and cons of the deal.

Analysts at TPH Research suggested on Wednesday that Devon's Eagle Ford assets could be worth about $4.5 billion. But today, Reuters reported that BP had decided to walk away from the deal, citing confidential sources. When asked to comment, BP didn't confirm or deny the report, but issued a general statement alluding to its "commitment to maintaining capital discipline."

Here's what that means for Devon and for BP.

U.S. shale sales are tricky right now

BP already owns some U.S. shale assets in the Eagle Ford Shale and the nearby Permian and Haynesville Basins. While buying nearby Devon assets would make strategic sense, BP seems more focused on reducing debt and making its own divestments. But its comment about capital discipline suggests it was also concerned about overpaying.

U.S. shale is a valuable asset right now. It's located far from the turmoil of the Middle East, yet still benefits from current high global oil prices. But because it's unclear how long the war in Iran will last, it's impossible to know how long that elevated value will persist.

O'Neill may be reluctant to buy U.S. shale assets right now, knowing that if the war ends soon and global oil prices drop, the assets may drop sharply in value. In that case, she could be seen as having begun her tenure by overpaying for a middling asset, even as the company is actively trying to cut dead weight.

Devon losing a potential buyer suggests the company may have an unexpectedly difficult time meeting TOMS Capital's divestiture demands. After news broke of the failed deal today, Devon's stock slumped to close down 3.6%, while BP's stock was down 0.4% for the day.

It's a good reminder for investors to base their evaluation of a company on its current situation rather than on unverified rumors about a potential asset purchase or sale.

John Bromels has positions in BP. The Motley Fool recommends BP. The Motley Fool has a disclosure policy.