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Devon Begins Voluntary Curtailments in U.S. Onshore

After achieving the highest quarterly output in company history, Devon Energy Corp. through the rest of the year will voluntarily curtail around 3 million boe/d in the U.S. onshore, CEO Larry Nichols said last week.

Through the rest of the year, Devon now plans to defer well completions, shut in marginal wells in the Rockies and slow its production rates in the Barnett Shale, where the company produced on average 1.2 Bcf/d in 2Q2009.

The curtailments followed news that Devon's production rose to a record 719,000 boe/d in 2Q2009, the highest average daily output in company history and 5% higher sequentially than production in the first three months of this year. The Oklahoma City-based independent produced 643,000 boe/d in 2Q2008, and output averaged 685,000 boe/d in 1Q2009. The 12% jump in production from 2Q2008 was led by the Barnett Shale field in Texas, and the ramp-up of daily volumes from the Jackfish oilsands project led Canadian growth.

Even with the shut-ins, the independent still is forecasting 2009 natural gas and oil production will jump by 3%, Nichols said during a conference call with energy analysts to discuss the company's 2Q2009 performance.

"Based on the very strong performance of our asset base for the first half of the year, we are increasing our full year production forecast by 7 million boe, which takes it to a range of between 243 and 247 million boe," Nichols said. "The midpoint represents a 3% increase over 2008 production from continuing operations."

The production level "is net of roughly 3 million boe of voluntary reductions that we are planning for the second half of 2009," said the CEO.

The voluntarily drilling reductions follow Devon's decision to reduce capital expenditures this year. The producer in May reset its exploration budget at $3.5-4.1 billion, which is less than half of 2008 levels, and it said it would curtail drilling until gas prices rebounded (see NGI, June 8).

"In aggregate, we expect to reduce production by 15-21 Bcf, or 2.5-3.5 million boe, over the remainder of 2009," said CFO John Richels. "First we are reducing incremental compression in the Barnett and Arkoma Woodford. This accounts for more than half of the reduction...Most of the remaining reduction will result from deferred completions across North America and by shutting in some marginal wells in the Rockies."

Total net U.S. gas production jumped to 193.7 Bcf from 176.5 Bcf a year earlier. Onshore U.S. gas production grew in the period to 183.2 Bcf from 162.3 Bcf a year ago, while domestic offshore gas output fell to 10.5 Bcf from 14.2 Bcf. Canadian gas production was up to 60.1 Bcf from 53 Bcf in 2Q2008.

Despite the strong production growth, revenues from natural gas, oil and natural gas liquids (NGL) sales decreased 58% from the year-ago period to $1.7 billion in 2Q2009. Average realized natural gas prices decreased 70% quarter/quarter to $2.91/Mcf. The company's average realized oil price fell 53% to $52.44/bbl, and NGL prices dropped 59% to $22.24/bbl.

Net profits were $314 million (71 cents/share) in 2Q2009, compared with $1.3 billion ($2.91) in the year-ago period. Excluding one-time items, Devon earned $379 million (85 cents/share).

The drop in natural gas and oil prices dramatically reduced Devon's drilling. A total of 198 wells were drilled in 2Q2009, down by more than half from the 494 wells drilled a year earlier. Only two exploration wells were drilled in the United States, down from eight a year ago. The producer drilled 160 development wells in the United States, down from 405, and it drilled 22 development wells in Canada, compared with 61 a year ago.

Only 23 company-operated rigs were running in the United States in 2Q2009, well below the 79 in the year-ago period. There was only one Canadian rig in operation, down from 12, and Devon had no international rigs running in the quarter.

In spite of lower drilling activity, Devon's gas business made some accomplishments, which included:

Devon gained more expertise in its shale operations, which include not only the Barnett, Cana-Woodford and East Texas holdings, but acreage in the Horn River Basin in British Columbia and extensive acreage in the promising Granite Wash in the Texas Panhandle.

Devon's ability to leverage its shale expertise centers around its core Barnett play, where the company continues to tinker with technology. For example, a drilling record was set in the Barnett during 2Q2009 by drilling and completing a well in nine days from spud to rig release, said exploration chief Dave Hager. Typical shale wells took 30 days on average to complete less than two years ago; most producers now claim to have reduced the drilling cycle to 15-20 days.

Devon said it has been able to not only improve drilling times, but it's lowered its costs, which allows it to drill more wells.

"We believe that we can still nimbly drill 200 Barnett wells planned for 2009," said Hager. However, because of the curtailments planned through the rest of the year, output in the play is forecast to be down slightly at the end of 2009 to around 1 Bcfe/d.

In the deepwater Gulf of Mexico Devon also continues to appraise four jointly owned discoveries in the Lower Tertiary trend. The No. 4 well at the Cascade discovery encountered 500 net feet of pay, and facilities installation is on schedule to ramp up first production in mid-2010, said Hager.

In addition, front-end engineering and design work continues "in anticipation of a sanctioning decision next year" at the deepwater Jack and St. Malo discoveries, he said. Devon holds a 25% stake in both of the fields. At Kaskida, the largest of the discoveries, appraisal drilling operations are under way and total drilling depth is expected in September. An additional well is being considered next year by co-owner BP plc, said Hager.

In May Devon said it was looking for a partner to share costs on some of its deepwater projects (see NGI, May 11).

"Bringing in a partner will allow to us reduce capital requirements for the long-term projects and still maintain meaningful exposure to this very exciting growth area," said Nichols. The company has opened a data room, but Devon won't request offers "until we learn the results of an appraisal well that is now drilling at Kaskida" by BP.

"This time will allow us to evaluate bids and close a transaction or transactions around year-end...Although we will be flexible as to the type of deal structure that we will consider, an agreement could involve a combination of both cash and a promoted interest in future capex," Nichols said.

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