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Devon's Permian, Eagle Ford Rock Production Growth

Devon Energy Corp., which has retooled its onshore natural gas-heavy operations to reap the higher margins in oil and liquids, lost some production momentum in the second quarter as it sold off assets, but with the divestitures now complete, the company is gearing up for sustained growth, particularly from the Permian Basin and Eagle Ford Shale.

Total production averaged 667,000 boe/d in 2Q2014, up only 1% from 2Q2013. However, excluding the properties divested, the retained, go-forward asset base climbed to 620,00 boe/d, a 14% increase year/year. The divested assets had averaged 47,000 boe/d, 77% weighted to gas.

Growth in oil output drove the increase for the go-forward assets, averaging 205,000 b/d in 2Q2014, a 34% increase. The most significant growth came from U.S. operations, where oil production increased by 79% from a year ago.

Last November, Devon began monetizing underperforming and noncore properties, mostly gas-weighted. To date it has sold or agreed to sell $5.1 billion in assets, including the Canada conventional gas business that sold for $2.8 billion (see Shale DailyFeb. 19a). In June, Devon also agreed to cast off all of its noncore U.S. oil and gas properties for $2.3 billion (see Shale DailyJune 30).

The divestiture plan is now complete, said CEO John Richels.

"With the announced sale of our U.S. noncore assets in June, the portfolio transformation that we announced late last year is now complete," he said. "Devon emerges with a formidable, more focused portfolio positioned in some of the most attractive North America resource plays. We project liquids to approach 60% of our production by year-end and expect to deliver attractive high-margin production growth for many years to come."

Richels credited the "dramatic increase" in oil production to growth in the Permian and Eagle Ford.

"Our drilling programs drove impressive oil production growth in our retained assets, and our disciplined pursuit of high-margin production also improved pre-tax cash margins by 40% year/year."

Net output in the Permian Basin hit a record 95,000 boe/d, 25% higher than a year ago, with light oil output accounting for almost 60% In the Delaware sub-basin's Bone Spring play, 22 wells were brought online in the quarter, with initial production (IP) rates over 30 days averaging 660 boe/d, exceeding type-curve expectations. Close to 3,500 risked, undrilled locations across the Bone Spring play have been identified, with additional inventory expected over time.

Production also ramped up for two high-rate oil wells targeting the Delaware Sands formation in Lea County, NM. IP rates from each of the wells averaged about 1,000 boe/d, nearly 70% light oil. Devon has around 80,000 net acres prospective for the Delaware Sands within southeastern New Mexico. In the Permian's Midland sub-basin, Devon delivered another quarter of strong results from oil development in the Wolfcamp Shale. Thirty wells were brought online in the latest period, increasing average net production to 12,000 boe/d and year/year growth of 9,000 boe/d.

The Eagle Ford leasehold, which was acquired by Devon late last year, delivered 65,000 boe/d on average, in line with guidance, in spite of production interruptions related to third-party system downtime. The gathering constraints reduced expected production by 8,000 boe/d. However, with accelerated well tie-ins during June, net production rose to an average 73,000 boe/d, representing an increase of nearly 50% from 1Q2014. Devon said it remains on track to average 70,000-80,000 boe/d net within the Eagle Ford for its 10 months of ownership this year.

Devon paid GeoSouthern Energy Corp. $6 billion to gain a foothold in the Texas formation (see Shale DailyNov. 20, 2013). Sixty wells were brought online during the latest period, with IP rates approaching 1,200 boe/d. The first operated well in Lavaca County, TX, Ronyn 1H, had an IP rate of 1,600 boe/d, also weighted 70% to light oil.

In addition to an active upstream program in the Eagle Ford, Devon recently completed the Victoria Express Pipeline (VEX) to give it marketing flexibility. VEX is a 56-mile oil pipeline that runs from the core position in DeWitt County to the Port of Victoria terminal on the Texas Gulf Coast. Initial capacity is 50,000 b/d, with invested capital to date totaling $70 million. Devon owns 100% of the pipeline and indicated it could be a candidate to drop down into the Devon-controlled midstream partnership EnLink Midstream (see Daily GPIFeb. 19b).

Meanwhile, in the Anadarko Basin, production averaged a record 93,000 boe/d net, with liquids output rising 26%. Liquids now account for 45% of total output. The Cana-Woodford play was the most significant contributor, where 20 wells were brought online at IP rates averaging 1,250 boe/d, 55% liquids. Driven by an enhanced completion design, the IP rates exceeded Devon's Cana-Woodford type curve by more than 35%.

On its success in the Oklahoma formation, Devon bolstered its leasehold position in May by acquiring 50,000 net acres, increasing the total acreage leasehold to around 280,000 net surface acres with stacked-pay potential.

Production also has ramped up on four high-rate wells in the Granite Wash, with IPs averaging 1,900 boe/d, including 1,200 b/d of liquids. The results included the Mathers Ranch 167-3H well, which had an IP rate of nearly 4,000 boe/d.

Devon also continues to optimize its gassy Barnett Shale well performance, where sustained production hit 1.3 Bcfe/d net in the quarter. Liquids production increased 2% to an average of 57,000 b/d and accounted for 27% of total output.

In the Rockies, the Powder River Basin (PRB) oil program also delivered "encouraging results" during 2Q2014. Drilling activity was highlighted by two wells targeting the Parkman formation in Campbell County, WY, with IPs averaging 950 boe/d, 95% light oil. Costs averaged $5 million/well. To date, the company has identified close to 1,000 risked oil locations across its PRB position, with the Parkman formation accounting for nearly 75% of inventory. Devon also is testing the Turner and Frontier intervals.

From the emerging Mississippian-Woodford trend in Oklahoma/Kansas, production averaged 18,000 boe/d net in 2Q2014, 50% light oil, representing a growth rate of 13,000 boe/d from a year ago. Fifty-five wells ramped up within Devon's Sinopec Group joint venture area (see Shale DailyJan. 4, 2012).

The Oklahoma City independent earned $675 million net ($1.65/share) in 2Q2014, nearly flat from year-ago profits of $683 million ($1.69). Adjusting for one-time items including asset sales, earnings were $574 million ($1.40/share), a 16% increase from a year ago. Generated cash flow from operations was $2.0 billion, a 47% climb year/year. Combined with $2.8 billion of pre-tax proceeds on the sale of its Canadian gas business, total cash inflows reached $4.8 billion.

Revenue totaled $2.7 billion in the latest period, 21% higher than a year earlier and above Wall Street estimates. The growth was attributed to higher-margin oil production and improved price realizations. Second quarter oil sales increased to more than 60% of total upstream revenues. Marketing and midstream operating profit reached $224 million, a 90% increase year/year that was driven by consolidating the midstream assets into EnLink.

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