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Devon Eyes Other Shales, but Still Courting Barnett

The Haynesville, Horn River and Cana Woodford shales may drive Devon Energy Corp.'s future North American natural gas growth, but the Barnett Shale in North Texas "has plenty of running room left," the company's exploration chief said last week.

The Barnett Shale, which has been the touchstone for all of the other great shale finds, long has been the backbone of Devon's onshore gas business, and it still is, Dave Hager told financial analysts Wednesday during a conference call. The company's net production in the Barnett averaged 1.1 Bcfe/d in 3Q2009, which was 7% below 2Q2009. But the decline had nothing to do with the quality of the wells, he explained.

"This decrease is consistent with our reduced activity in the field and the decision to both reduce incremental compression and push completions back to late in the year," he said. Devon expects to be producing around 1 Bcfe/d net in the Barnett by the end of the year, with 150 wells awaiting completion by year's end.

"We are ramping activity up going into 2010 on most of our major gas plays," he said. Seven rigs are now running in the Barnett, but "we expect to have 16 operated rigs running in the Barnett as we enter 2010...

"The Barnett is still a terrific play. We have almost 7,500 locations in the Barnett, and while we have seen a rollover in our production as a result of reduced activity levels, as we ramp up activity levels, we're going to increase that production again, and we think there's a lot of running room for us there."

Increased activity is expected in the coming year in Devon's other shale holdings in North America, including the Haynesville Shale, where last week the company said its first well, the Kardell Gas Unit 1H in East Texas, achieved an average continuous 24-hour initial production (IP) flow rate of 30.7 MMcfe/d -- perhaps the highest IP from the play to date -- through a 37/64-inch choke with flowing pressure at 6,824 pounds per square inch.

The well in San Augustine County, TX, was drilled to a total measured depth of 18,350 feet, including a horizontal lateral section of about 4,500 feet. Devon operates the well with a 48% working interest. Crimson Exploration Inc. owns the remaining stake.

In the Carthage area of East Texas, where the Kardell well is located, Hager said the wells produce at "higher pressures, which, of course, helps out on the deliverability side. It gives you higher rates as well...I think anybody with engineering knowledge understands that what you're trying to do here is look at the flowing casing pressure. That's the most important thing. I can tell you every time we increase the choke size, our production rate increased significantly, and our flowing casing pressure remained very high.

"The only reason we kept increasing the choke size is we're trying to get back some of the frac [fracture] fluid. We still only recovered 12% of the frac fluid as we speak...So I can tell you this is an extremely strong well."

In the Horn River play of British Columbia, "we have plans to drill about eight wells," said Hager. "After the [ice] breakup, we'll be drilling eight wells to just continue to evaluate our acreage, to hold the acreage we have out there. Those are very long-term leases and just increase our understanding. So this is a resource that, again, we talk about the company being very opportunity-rich, and you can see, when you put together something like this, that we're not really pushing too hard at this point, but these results are certainly as good as anybody else is having out in the industry. We think we have a lot of future growth opportunity here."

Devon also added two operated drilling rigs at its Cana Woodford Shale play in western Oklahoma. The company ramped up output from eight additional Cana wells in the quarter, bringing its net production in the play to 53 MMcfe/d.

Offshore in the Gulf of Mexico, the company said it has encountered an "encouraging" oil column in an appraisal well on the Lower Tertiary Kaskida prospect. The company, which has a 30% working interest in the prospect, now is evaluating options, including a possible side-track of the well.

Devon also is close to securing a joint venture (JV) partner to help develop some projects in the deepwater, said Vince White, who heads the investor relations unit.

"This process has attracted a very broad interest, and we've had a strong showing in the data room," which opened in July, said White. Devon still had not asked for specific bids and won't until delineation well results are in on the deepwater Kaskida prospect, he said.

"We are confident that we will complete those operations on Kaskida this month," said White. "That schedule would put us with bids due by the end of December."

Devon's natural gas and oil production in 3Q2009 grew 6% to 61.9 million boe while costs fell in nearly every expense category compared with the same period a year ago. Devon drilled 233 wells in the period, well below the 636 wells drilled in the year-ago period.

"Year to date, Devon increased oil and gas production 8% compared with 2008," said President John Richels. "The performance of the company's oil and gas properties has continued to exceed our expectations throughout 2009."

However, lower commodity prices pressured quarterly earnings, which fell to $499 million ($1.13/share) from $2.6 billion ($5.93) in 3Q2008. Excluding one-time items, Devon earned $491 million ($1.10/share). Combined gas, oil and natural gas liquids (NGL) production averaged 673,000 boe/d in 3Q2009, which was the highest third quarter production in Devon's history.

Each of Devon's operating segments contributed to the production growth. Growth in oil and NGL production in the United States was more than the decline in natural gas volumes, Devon said. The continuing ramp-up of volumes at the Jackfish oilsands project led Canadian oil production growth, and Canadian natural gas production also increased, principally because of lower government royalties.

Sequentially from 2Q2009, average daily output fell 6% in the quarter, which Devon attributed to voluntary reductions, planned maintenance downtime and natural declines.

Revenues fell by almost half to $1.7 billion compared with 3Q2008; significantly lower product prices more than offset the growth in natural gas and liquids production, Devon said. Other income, net of expenses, increased 17% to $96 million, which included $57 million of 2008 hurricane damage-related insurance recoveries.

Devon continued to report favorable cost comparisons versus the year-ago quarter. The company reduced lease operating expenses (LOE) 15%, to $505 million. Unit LOE decreased by even more, 19%, to $8.16/boe, which reflected both lower absolute costs and higher production volumes.

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