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Devon's Bone Spring, Oklahoma Rising, but Impairments Force $3.5B Loss

Devon Energy Corp. posted better-than-expected North American onshore production during the third quarter, up 6% year/year, and at a lower cost, as operating expenses fell 14%. Sharply reduced commodity prices, however, led to asset impairments totaling $3.5 billion net.

Total production averaged 680,000 boe/d, exceeding the top end of guidance by 4,000 boe/d and 6% higher year/year. Oil has become the largest component of the former natural gas heavyweight's product mix at 41%. U.S. oil-driven output hit a record 282,000 b/d, 31% higher year/year and surpassing the top end of guidance for the fifth consecutive quarter.

"Our strategy of operating in North America’s best resource plays, coupled with a focus on delivering best-in-class execution, continues to generate top-tier results," CEO Dave Hager said. "Across our asset portfolio, well performance has consistently exceeded type curve expectations through higher production rates, declining capital costs and lower operating expenses."

Incremental production growth is combining with "significantly lower costs. We are now on pace to save around $1 billion of capital and operating costs in 2015 versus original expectations."

Domestic oil production averaged 161,000 b/d in the quarter, an 18% increase from a year ago, mostly because of gains in the Eagle Ford Shale, the Delaware subbasin of the Permian, and from the Rockies.

Eagle Ford output averaged 113,000 boe/d, net a 43% increase, while Delaware Basin production jumped 32% to 61,000 boe/d. In the Rockies, there was a 61% increase, with development drilling in the Powder River Basin leading to output averaging 16,000 b/d net. Canadian output increased 52%, led by oilsands output from the Jackfish facility.

Continued improvement was seen in what Devon considers its crown jewel, the Delaware sub-basin development area of the Permian Basin.

Bone Spring wells this year are producing about 40% more than year-ago output through two months of production, with enhanced completions, including longer laterals, credited. Based on its new results, Devon raised its type curve for the Bone Spring for the second time this year, moving 30-day initial production rates to 1,000 boe/d versus 900 boe/d; the type curve for estimated ultimate recovery of 600,000 boe remains unchanged.

Three impressive Leonard Shale wells in the Delaware's Upper Bone Spring formation also ramped up during the quarter, with 30-day rates averaging 1,200 boe/d, 75% weighted to light oil. Based on the results, Devon plans to accelerate activity in the Leonard and run two rigs in 2016.

Also getting some love is Devon's Oklahoma assets in the Meramec formation, where the company and its partners completed five wells during the quarter with at least 30 days of production history. The wells averaged 1.43 million boe/d, weighted to natural gas.

The partners plan to increase the rig count to five in the Meramec and spud/participate in a total of 40 wells this year. Meanwhile, drilling and completion costs in the Meramec fell to $7 million/well on average from $8 million. Devon has identified 75,000 net acres with 500 derisked locations.

Several cost-reduction initiatives are underway that impacted quarterly results. Field-level operating costs, which include both lease operating expenses (LOE) and production taxes, declined 18% from 3Q2014 to $9.59/boe. The most significant operating cost savings came from LOE, which is Devon’s largest field-level cost. LOE declined 14% to $8.14/boe and was 9% below the low end of guidance. LOE cost savings were realized across all regions of the portfolio.

Devon also realized significant general and administrative (G&A) cost savings, which expenses at $198 million ($3.17/boe), an 8% improvement sequentially and 7% below guidance. Based on year-to-date cost savings, field-level operating costs and G&A is expected to decline to around $13.80/boe for the year.

Based on operating results year to date, Devon raised its 2015 oil production guidance by 2% to a mid-point of 276,000 b/d. Total oil production growth in 2015 now is expected to range from 31% to 33%. The Company also raised its top-line production growth guidance for 2015 to a range of 8% to 10%.

In addition to higher production, Devon also is benefiting from lower capital spending. The exploration and production capital program this year, excluding acquisitions, now is expected to be about $100 million lower at $3.8-4 billion. As a result of additional savings, Devon reduced its 2015 capital spending guidance by $500 million versus original expectations issued in February.

Protecting the balance sheet remains paramount, Hager said.

 "Our teams will maximize the value of production by aggressively pursuing cost reductions, and we will maintain the flexibility of our capital programs. The advantage of having minimal long-term commitments allows us to dynamically allocate capital to our highest-returning areas while balancing investment with cash flow."

After writing down the value of its oil and natural gas portfolio, Devon recorded a net loss of $3.5 billion (minus $8.64/share), versus year-ago profits of $1.0 billion ($2.47). Revenue totaled $1.3 billion, with oil accounting for nearly 70% of total upstream revenues.  Cash settlements related to oil and natural gas hedges increased revenue by more than $600 million, or $10.00/boe in the quarter. At the end of September, the remaining commodity hedges had a fair-market value of $650 million.

The midstream business generated operating profits of $212 million in 3Q2015, bringing the year-to-date total to $630 million. Most of the profits resulted from Devon's investment in  EnLink Midstream, which reported operating profits 14% higher year/year.

Devon exited the quarter with net debt, excluding EnLink obligations, totaling slightly above $7 billion. Devon had cash balances of $1.8 billion at the end of September, and has no borrowings under its $3.0 billion senior credit facility.

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