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Devon's North American Portfolio Grows in Emerging Gas Plays

With more than $1 billion of cash on hand, $3 billion in unused credit lines and a 13% debt-to-capitalization rate, Devon Energy Corp. will use the "opportunity to acquire some quality assets at quality prices," CEO G. Larry Nichols said last week.

Unlike some of its cash-strapped energy peers, the Oklahoma City-based producer had the resources to purchase nearly $1.4 billion of natural gas-rich assets across North America in 3Q2008, Nichols told financial analysts during a conference call to discuss quarterly earnings.

"We're currently working on several acreage acquisitions that we hope to complete by year's end," Nichols said. "If we're successful in completing all of them, it will have added over 700,000 in net undeveloped acres by the end of the year."

If Devon completes the acquisitions, its North American portfolio would be enhanced with an additional:

"Our financial strength has allowed us to maintain access to the market throughout the credit crisis," Nichols said. "We are limiting our exposure to credit party risk...and only dealing with the highest-grade credits...It's always been our philosophy to deleverage during periods of strong commodity prices to prepare for the downturns..."

Devon's cash flow year-to-date is $7.9 billion, which has allowed it to "easily fund capital expenditures...and repay debt." About the only thing to be delayed in the near term is a share buyback program, which has been put on hold "until we see how the [credit market] situation sorts itself out," said the CEO.

The independent reported the highest quarterly net earnings in its history in 3Q2008, with profit of $2.6 billion ($5.92/share), which was 256% higher than for the same period of 2007, when Devon earned $735 million ($1.65). Excluding hedging gains, Devon earned $1.4 billion ($3.09/share) in the latest quarter. Sales of oil, natural gas and natural gas liquids from continuing operations were $3.8 billion in the quarter, up 62% from the $2.3 billion recorded in 3Q2007.

Despite reduced production volumes following hurricanes Gustav and Ike in September, Devon's quarterly production from continuing operations rose to 58.6 million boe, which was 3% higher than in the same period of 2007. Devon produced 637,000 boe/d in the quarter, compared with 618,000 boe/d in 3Q2007. The company estimated that the hurricanes reduced quarterly production by around 1.5 million boe.

Devon drilled 636 wells in the quarter with an overall success rate of 97%. The company also achieved some milestones for its gas operations in the quarter:

Devon's expenses overall were generally in line with its expectations. However, hurricane-related production curtailments led to higher than anticipated unit lease operating expenses (LOE), which included $14 million of costs associated with post-hurricane inspections and repairs. On a unit basis, LOE was $10.09/boe, compared with $8.04/boe in 3Q2007.

Total U.S. gas production rose to 184.6 Bcf net in the quarter, well ahead of 164.1 Bcf reported for 3Q2007. Devon also produced 53.8 Bcf in Canada during the quarter, which was down from 57.9 Bcf for the same period a year ago. Average dally production in the United States was 2,007 MMcf/d, well ahead of 1,783 MMcf/d a year earlier. Canadian gas output was 585 MMcf/d, down from 629.5 MMcf/d in 3Q2007.

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