With the Barnett Shale sale completed, Devon Energy Corp. has transformed into a Lower 48 oil-rich powerhouse, with the Permian Basin set to drive performance this year, CEO Dave Hager said Wednesday.
The slimmed-down independent cast off its once premier Barnett Shale portfolio, which had launched entry into the unconventional natural gas business in the early 2000s. With the sale, combined with an exit from Canada, Devon has completed a multi-year metamorphosis to a Lower 48-trained oil operator in the Permian Delaware, Powder River Basin (PRB), Eagle Ford Shale and Oklahoma’s STACK, aka the Sooner Trend of the Anadarko Basin, mostly in Kingfisher and Canadian counties.
“Even with the challenging market conditions, we successfully completed our portfolio simplification objectives in only 10 months,” Hager said during a quarterly conference call. “All in all, it was a great year, but let me be clear, we are just getting started…”
Strategy and priorities remain the same: to fund the maintenance capital requirements and the quarterly dividend.
“Even after accounting for their recent weaknesses in gas and natural gas liquids strip pricing, should this volatility drive prices higher, we will remain disciplined and the benefits of any pricing windfall above our conservative based planning scenario will manifest itself in higher levels of free cash flow for shareholders not higher capital spending,” the CEO said.
“Conversely should we see price volatility to the downside, we've designed our operating plan to have the flexibility and agility to reassess the capital program and react to any structural changes in the macro environment.”
A “consistent theme” last year was steady improvement in well productivity and capital efficiency, which has driven oil output above guidance for four consecutive quarters, Hager said.
The Oklahoma City-based independent has increased its 2020 oil production forecast after delivering 28% growth year/year to 160,000 b/d. Total oil and natural gas production climbed to 343,000 boe/d from 306,000 boe/d. Natural gas, still a heavy influence, contributed 634 MMcf/d in 4Q2019 from year-ago volumes of 587 MMcf/d.
Net production in the Delaware averaged 154,000 boe/d in 4Q2019, an 82% year/year increase, driven by 36 high-impact wells across the Wolfcamp, Bone Spring and Leonard shale targets. Average 30-day initial production (IP) was 2,800 boe/d, 70% oil, at an average well cost of $7.5 million.
From the PRB, output in the final quarter averaged 27,000 boe/d, 54% higher year/year and 74% weighted to oil. Growth was pinned on 19 new wells with average 30-day IPs of 1,300 boe/d, while wells cost on average $5.5 million to complete.
PRB wells last year averaged IPs as high as 1,500 boe/d, 85% oil. Given the success of the play, which is part of the Niobrara formation, Devon now plans to double activity to ready a portion of the field for development in 2021.
From the Eagle Ford, average output was 45,000 boe/d, below guidance because of a well control event that curtailed volumes by 9,000 boe/d. The event was resolved before the end of the year, allowing Devon to bring online 21 wells with IP rates of 2,900 boe/d. Production had reached on average 53,000 boe/d by year’s end.
In the STACK, where Devon has been reducing activity, output averaged 107,000 boe/d. The company recently formed a drilling partnership with Dow Inc., which is providing funding to develop some acreage, allowing STACK projects to compete for capital.
On the realized price side of the equation, Devon fetched an average oil price of $57.02/bbl West Texas Intermediate in 4Q2019, versus $58.80 a year earlier, while natural gas prices averaged $2.50/Mcf from $3.65. Mont Belvieu blended natural gas liquids prices were on average $18.69/bbl versus $26.30 in 4Q2018.
Meanwhile, lease operating expenses (LOE) fell on average in the final quarter by 17% to $251 million, credited to lower cost oil production in the Delaware and the sale of costlier assets. Improvements to the LOE cost structure were partially offset by $11 million of expenses related to the well control event in the Eagle Ford and one-time transportation adjustments.
The “steady cadence of cost reductions captured throughout the year” allowed Devon to exit 2019 with around $240 million of annualized run-rate savings compared with 2018, management said.
Devon also made substantial progress in reducing debt by more than 75% from peak levels of a few years ago. The latest results gave management confidence to increase the dividend by 22% to 11 cents/share and to launch another $1 billion share repurchase program. To date, the company has repurchased 147 million shares, or 28% of outstanding shares since 2018, at a total cost of $4.8 billion.
Full-year 2020 output is forecast to climb by 7.5-9%, led by the Delaware. Overall, oil production in 1Q2020 is projected to average 158,000-163,000 b/d, with natural gas output of 590-620 MMcf/d.
Meanwhile, capital expenditures (capex) for the year have been trimmed by $50 million to $1.7-1.85 billion. Delaware capex was increased by 15% from 2019, as Devon reallocated funds from the STACK. Overall, the Delaware is set to have 60% of total upstream spend this year.
Net losses in 4Q2019 totaled $642 million (minus $1.70/share), versus year-ago profits of $1.15 billion ($2.50). Upstream revenue fell to $919 million from $2.42 billion. Operating cash flow totaled $579 million in 4Q2019, which funded all capital requirements and generated $171 million of free cash flow. In 4Q2019 operating cash flow totaled $2.04 billion.
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