Strong natural gas prices could but dry gas drilling back on the “to do” list for Devon Energy Corp. later this year, CEO John Richels said last week.

“The relative strength in natural gas prices” that partly followed a cold end to winter, and “evidence that the natural gas supply has slowed significantly,” is giving the company increased confidence in the markets, he said during a quarterly conference call. Prices today are “just below the trailing five-year average. The recent uplift could have a significant impact on upcoming quarters…

“The improved sentiment is is encouraging,” but “we are not modifying our capital plans at this time. Even with our natural gas assets in some of the lowest cost shale plays, the returns are still more attractive on the liquids side of the portfolio versus dry gas drilling.”

Asked how long it might take Devon to ramp up dry gas drilling in the Barnett, once the plum of its portfolio, Richels said constructing pads for drilling might allow a start-up over four to six months because the pads would have to be completed before any wells are drilled. As important, he said, is to optimize the Barnett base output. “We think we’re doing a good job of maximizing that…” and it’s “frankly just as important at this point as putting more rigs back to work.”

The Barnett holds a lot of rich liquids, which Devon continues to pursue, with estimated output of 1.4 Bcfe/d, said exploration chief Dave Hager. With its gas content and strong pricing, “we expect to generate nearly $600 million of free cash flow in the Barnett in 2013…Should the outlook for gas prices continue to improve, we can easily shift activity to the Barnett and take advantage of the thousands of locations we have in our undrilled inventories.”

Devon also is “examining every option to create value” for what management believes is an undervalued stock, but each potential avenue has “unique complexities” operationally, regulatory-wise, contractually or in tax implications, explained Richels. “One option is to create a midstream partnership,” which he has said for months could provide more visibility within its earnings performance and stock price, which he feels is undervalued. An evaluation is nearly completed, and a final “go or no go” decision is expected by the end of June.

Like its peers, Devon is building a substantial liquids inventory. Companywide oil production averaged 162,000 b/d, 14% higher than in the year ago period and 8% more than in 4Q2012. Driven by the Permian Basin, the most significant growth came from U.S. operations, where oil production increased 23% year/year. Total production averaged 687,000 boe/d in the latest quarter, exceeding guidance by 2,000 b/d.

It’s impossible to ignore the results from Devon’s prospects in the Permian Basin, where the 1.3 million net-acre leasehold allows the producer to pick and choose where to drop a drillbit. There now are 29 operated rigs running, and average output hit a record 68,000 boe/d in 1Q2013. Basin-wide oil production in 2013 now is expected to be nearly 40% higher than it was last year, said exploration chief Dave Hager.

Also proving its worth is Western Oklahoma’s Cana-Woodford Shale, where 14 operated rigs helped to deliver 28 wells in the latest period. Average 30-day initial production rates were 5.5 MMcfe/d, including 470 b/d of liquids. Total output climbed 26% year/year, averaging 340 MMcfe/d.

On the exploration front, encouraging results bode for the future on the 600,000 net-acre leasehold in the Mississippian Lime in north-central Oklahoma, said Hager. Twenty-four wells were tied in during 1Q2013, and the operated well count stands at 53. Most of the activity is focused in Noble, Payne and Logan counties.

Quarterly losses totaled $1.34 billion net (minus $3.34/share), compared with year-ago profits of $393 million (97 cents). A bad hedging bet on oil and natural gas liquids (NGL) prices resulted in the losses, leading to a $1.9 billion writedown in 1Q2013. Realized prices for NGLs declined 20% year/year on oversupplies, while crude oil prices were down 14%. Without the one-time charge, the Oklahoma City operator earned $270 million (66 cents), 11 cents higher than consensus forecasts. Total revenues declined year/year to $1.97 billion from $2.50 billion, and operating cash was nearly flat at $1 billion.

The recent rise in natural gas pricing provided the opportunity to increase its hedging position for the rest of the year. For the second quarter through the end of December, Devon has protected 1.7 Bcf/d, which represents almost 75% of its expected output. Of this total, 1.0 Bcf/d is swapped at a weighted average price of $4.09/Mcf; the remaining 7 MMcf/d uses costless collars with a weighted average ceiling of $4.19 and a floor of $3.55. In 2014, Devon now has 900 MMcf/d of production locked in at a weighted average floor price of $4.34.

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