Devon Energy Corp. expects to achieve 14% more production this year than it did in 2013, a 3% higher forecast from a few months ago, after surpassing expectations from Texas oilfields during the third quarter.
The optimistic forecast followed a revamp of the Oklahoma City-based independent's portfolio, now much more natural gas-light than it was a year ago (see Shale Daily, June 30; Feb. 19). Most of its midstream assets also have since been spun into EnLink Midstream LP, freeing up cash for development.
"Devon's repositioned portfolio delivered outstanding growth in production and margins in the third quarter," CEO John Richels said. "With our strong position in many of North America’s best resource plays and our focused efforts to deliver high-quality performance, we saw profitability continue to expand." He and his management team spent about an hour discussing the results with analysts.
"Based on our strong year-to-date results and the confidence we have in our portfolio, we are raising our full-year production growth outlook to 14%, up from our previous guidance of 11%. And we are delivering this incremental production growth without any increase in capital spending."
Most of the company's operating and financial metrics remain relatively unchanged versus previous full-year guidance disclosures, except for raising the midpoint of the 2014 production outlook from retained assets by 3% to 617,000 boe/d.
The higher-than-expected output is coming from stronger type curves in the Permian Basin's Bone Spring and the Midcontinent's Cana-Woodford Shale. A big surge in liquids and oil came online in South Texas from the Eagle Ford Shale. In the Powder River Basin, Devon is bringing on some high-rate development wells. Canada oilsands also continues to outperform guidance.
Total output from the retained assets, all oil and liquids-rich, averaged 640,000 boe/d in the latest quarter, representing a 19% gain year/year. Oil and liquids production accounted for 55% of the production mix.
Devon saw its oil output average 216,000 b/d in 3Q2014, exceeding the top end of the guidance range by 6,000 bbl -- a 44% increase from a year ago. The most significant growth came from the U.S. operations, where oil production increased by 77% year/year.
Growth in domestic oil production was attributed mostly to the Eagle Ford Shale, where net output increased to an average of 87,000 boe/d in September, an increase of 76% from Devon’s first month of ownership in March 2014. Volumes are forecast to average 85,000-95,000 boe/d by the end of the year. Production optimization practices in DeWitt County, TX, are expected to lead to more type curve improvements in 2015.
In the Permian Basin, led by outstanding results from the Bone Spring play, total production increased to 98,000 boe/d, a 20% increase from the year-ago period. Bone Spring initial production rates are exceeding the type curve by 50%, to 750 boe/d from 550-600 boe/d, while the estimated ultimate recoveries (EUR) have risen to 450,000 boe from between 400,000-500,000 boe. Devon plans to test up to eight Bone Spring wells per section in the first half of 2015, which could increase the location count from four-to-five wells per risked section.
In the Cana-Woodford, Devon increased its type curve to 1.2 million boe from 900,000 boe EUR for only around $200,000 more drilling and completion costs, Devon noted. Drilling activity is to be accelerated to 10 rigs in the first half of next year. Devon also highlighted 200,000 net acres within the oil and liquids windows of the stacked pay zones, known as the Stack and South Central Oklahoma Oil Province play, where Devon recently spud its first two wells.
First oil also was achieved at the Jackfish 3 oilsands project in Canada during the latest quarter, another leg of multi-year growth from the heavy oil business. Additionally, the start-up of Jackfish 3 is to begin a new era from the Jackfish complex, with the potential to generate up to a $1 billion per year of free cash flow, after maintenance capital.
Devon outperformed financially in the latest period as well. Net earnings more than doubled year/year to $1.0 billion ($2.48/share) from $429 million ($1.06). Cash flow totaled $1.6 billion, and when combined with $2.3 billion of pre-tax proceeds from selling U.S. assets, total cash inflows approached $4 billion.
Revenue from oil, natural gas and liquids sales totaled $2.6 billion, an 11% increase from a year ago. Oil sales accounted for 63% of total upstream revenues. Marketing and midstream operating profits of $219 million represented a 68% increase versus 3Q3013, exceeding guidance. The increase in operating profit was attributed to expanded margins in EnLink Midstream LP, its joint partnership with Crosstex Energy Inc.
Cost-containment efforts also were reflected in the quarterly performance. Pre-tax cash costs totaled $16.06/boe, a 3% decrease sequentially. Costs in several categories were lower than guidance, most notably Devon's largest cash cost, lease operating expenses (loe). On a unit-of-production basis, loe totaled $9.47/boe, flat compared with the year-ago period and 1% lower sequentially.
Overall, the benefits of higher-margin oil production and a low-cost structure resulted in expanded cash margin for Devon. Pre-tax cash margin reached $29.42/boe in 3Q2014, a 20% increase compared with the year-ago period.
Because of the rapid growth in high-margin production, Devon has hedged 60% of its expected oil output in 4Q2014 at an average floor price of $92.00/bbl. Almost 80% of Devon's expected 4Q2014 natural gas output is locked in at an average floor price of $4.28/Mcf. For full-year 2015, the company has 138,000 b/d protected through swaps and collars at an average floor price of $91.00/bbl and 500 MMcf/d hedged at an average floor price of $4.20/Mcf. These hedge positions cover more than half of Devon's expected oil production in 2015 and around 30% of gas production.
Some analysts who cover Devon were impressed with the quarterly results. BMO Capital Markets analyst Phillip Jungwirth noted that the earnings and production were above consensus estimates and beat his forecast on Eagle Ford volumes. "Overall, we view the quarter as solid with Eagle Ford, Jackfish and Cana all surprising to the upside, Jungwirth wrote. "Permian was in line, but would have exceeded expectations absent weather, and resource potential continues to have upside bias." West Texas was hit by heavy rains during the third quarter.
"We think Devon shares have lagged in part due to it not being perceived as a low-cost operator or having a restructuring angle to the story, as is the case with other large caps," he wrote. "That said, we think its high-graded asset base is more than capable of competing on a returns basis and with continued strong execution, expect shares to reflect more of this value."
The quarterly results were strong, said Tudor, Pickering, Holt & Co. analysts. "We expected Cana-Woodford boost on enhanced completions but Bone Spring is a nice surprise." Wells Fargo Securities analysts added that Devon has met or beaten earnings estimates for nine consecutive quarters, "which should continue to improve Street perceptions" of its ability to execute.