Devon Energy Corp., which is repositioning itself as a North American-only onshore producer, last week easily beat Wall Street's profit forecasts for 4Q2009 and lifted estimated onshore proved reserves by a record amount in 2009, the Oklahoma City-based independent said.
Net profits in the last three months of 2009 reached $667 million ($1.49/share), compared with year-ago earnings losses of $6.8 billion (minus $15.42), when it took a charge to write off the value of its natural gas and oil assets. Excluding one-time charges, earnings were $713 million, or $1.60/share, well ahead of Wall Street's consensus forecast of $1.25. Revenue in 4Q2009 fell 4% from a year earlier to $2.46 billion.
"Devon's North American onshore properties had stronger growth than expected," CEO J. Larry Nichols told financial analysts during a conference call. "2009 was a pivotal year for Devon as we began repositioning the company to focus entirely on our high-return North American onshore natural gas and oil portfolio. We grew North American onshore production by more than 6% in 2009 and replaced more than twice our production with the drillbit at very attractive costs."
North American onshore proved reserves hit a record 2.6 billion boe in 2009, with 669 million boe from all sources; drillbit reserve additions more than doubled record production, he said. Costs for the onshore properties totaled $3.3 billion.
2010 is a "transition year," Nichols noted, as Devon continues to sell its Gulf of Mexico (GOM) assets and international portfolio piece by piece, a process expected to bring the company after-tax proceeds of $4.5-7.5 billion once completed. With its full focus in the North American onshore -- expected by the end of this year -- Devon should have a "rock-solid balance sheet" to enable the company to "accelerate growth across our U.S. and Canadian asset base."
Production in the North American onshore jumped more than 6% to 220 million boe last year; the reserve life index for the onshore assets now is about 12 years. Proved developed reserves of 1,869 million boe at year-end 2009 "represented 71% of total North American onshore proved reserves," said Nichols. "Proved undeveloped reserves were 29% of the total."
Devon's year-end North American onshore proved reserves included 653 million bbl of crude oil, 9.4 Tcf of natural gas and 419 million bbl of natural gas liquids.
Until the offshore and international asset sales are completed, Devon's balance sheet will be somewhat muddied, Nichols explained. Under U.S. accounting standards, Devon's reserve reporting for its continuing operations will include -- until the end of 2010 -- the GOM properties. However, Devon under the rules was allowed to reclassify the assets, liabilities and results of its international operations as "discontinued operations" going forward.
Devon had 23 drilling rigs operating onshore last August and gradually ramped up to 64 rigs by the end of the year, Dave Hager, executive vice president of exploration, told analysts. Now the company has 80 onshore rigs in operation -- and more will come on as the year progresses, he said.
Asked if Devon planned to use some of the money from its divestments to buy into some of the other shale plays in North America, especially the Marcellus Shale, Hager and Nichols both said no.
"The reason for the sale of the assets is that we reviewed our North American onshore portfolio, all aspects of it, and we see a lot of opportunities where we are that can consume our cash for a long time to come," said Nichols.
"We have so much opportunity," said Hager. "While we always have to look at new opportunities, we see no compelling reason to do that...If it fits very well, it may mean we'd have to push something out if it competes for capital. I don't see any real holes in our asset base at this time. We chose not to move into the Marcellus because of the other opportunities that we have...We find a lot more opportunities in the huge asset base that we have..."
As has been the case for almost a decade, Barnett Shale operations lead the way. Devon drilled 1,135 wells in 2009, including 336 wells in the Barnett Shale.
"We're ramping up in the Barnett and running 16 Devon-operated rigs there now," Hager said. "Net production was just over 1 Bcfe for the fourth quarter. With increased drilling, and 225 wells awaiting completion at year end, Barnett production is gradually trending up.
"There is no shortage of drilling opportunities in the Barnett. We recently completed our 2,000th horizontal well in the Barnett and we still have over 7,000 remaining locations." This year Devon plans to invest around $1 billion in its Barnett operations. It plans to drill about 370 operated wells and participate in 20 nonoperated wells. "We'll add one rig to make a 17-rig program, which we'll maintain for most of the year. Devon's Barnett production should be back up to a record 1.2 Bcfe by the third quarter."
In the Woodford Shale Devon added three rigs in 4Q2009 and now has five rigs in operation. Plans are to "continue to grow production in the Arkoma Woodford in 2010," said Hager. Devon plans to drill 51 operated wells in the play this year, with activity "focused on 600-foot offset infill wells."
In the Cana Woodford play, Devon added 9,000 net acres to its position and now is the largest leaseholder with 118,000 net acres, said Hager. "We're running seven operated rigs there now after we added one in the fourth quarter, and we expect to add two more rigs in the second quarter..."
Devon plans to drill 43 wells in the Cana Woodford Shale in 2010 and production should be more than 100 MMcf/d by the end of the year. "The production history in the core of the play continue to improve...these are some of the most economic shale wells...from a full-cycle perspective," Hager said.
The Cana shale play "is strong, if not stronger, than the Barnett in terms of EUR [estimated ultimate recovery]."
Devon also drilled eight wells in Texas portion of the Haynesville shale in the greater Carthage area of East Texas, where the producer holds around 110,000 net acres. Three more wells are close to completion and those results are expected in 2Q2010, Hager said. The producer plans to invest $250 million in the play this year, which would include a five-rig program and 24 operated wells.
The Horn River Shale in British Columbia is in the mix as well, Hager noted. Devon now holds 170,000 net acres in the gas play, and it has one rig in operation. This year seven horizontal wells are planned along with four vertical wells. Initial results are expected later this year, he said.
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