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Devon Asset Sales Reach $2.3B, 1Q Earnings Up

Devon Energy Corp. will receive $2.3 billion -- more than expected -- for all of the noncore U.S. and Canadian properties it put up for sale last year, the company said last week. The sales represent an average price of $14/boe for the proved reserves, based on year-end 2004 estimates. Combined, the divestitures produced 6.9 MMboe in 1Q2005.

The combined U.S. sales, which totaled $1.2 billion, were announced last month (see NGI, April 11). On Wednesday, the Oklahoma City-based producer announced the Canadian asset sales to undisclosed buyers. The agreements cover multiple packages of properties, and some of the transactions have already closed. The remaining transactions are expected to close by mid-June. Under terms of the agreements, Devon would not disclose details of the individual transactions nor identify the purchasers.

U.S. onshore properties brought $605 million ($420 million after tax), and proved reserves totaled 46 MMboe. U.S. offshore properties brought $595 million ($495 million after tax), with proved reserves totaling 42 MMboe. In Canada, expected gross proceeds total $1.137 billion ($1.135 billion after tax), with proved reserves totaling 78 MMboe. Total proved reserves are 166 MMboe at year-end 2004.

"The market response to our Canadian divestiture packages was very enthusiastic," said CFO Brian J. Jennings. "Consequently, the combined after-tax proceeds of more than $2 billion are well above the $1.5 billion upper end of our original target range."

The Canadian divestitures are expected to result in early settlement of oil hedges covering 3,000 bbl/d. Devon said the amount of the loss to be recognized from the early settlement of the Canadian oil hedges will not be known until the closing date of some of the divestitures. However, based on current oil prices, Devon expects the loss will be $16 million, which would be reported in 2Q2005 financial results.

Devon previously announced that its property divestitures in the United States would result in early settlement of oil hedges covering 5,000 bbl/d. Early settlement of the U.S. oil hedges will result in a loss of $39 million, which is reported in 1Q2005 results.

Combined oil, gas and natural gas liquids production averaged 660,000 boe/d, a 6% decrease from 703,000 boe/d for the same period of 2004. Properties in North America that Devon is divesting accounted for most of the decline, the company said. The divested properties produced 27,000 boe/d less in 1Q2005 than a year ago. Outside North America, Devon's share of oil production from the Zafiro field in Equatorial Guinea also declined.

For the quarter, total U.S. natural gas production was 144.9 Bcf, down from 151.9 Bcf in 1Q2004. Canadian production also fell slightly to 66.2 Bcf, compared with 67.3 Bcf from a year earlier. Average daily production in the United States, onshore and offshore, was 1.609 Bcf/d, down slightly from 1.668 Bcf/d in 1Q2004. In Canada, daily production averaged 735.4 MMcf/d, down from 739.4 MMcf/d.

Total U.S. oil equivalent production was 36.6 MMboe, down from 38.7 MMboe a year ago, while Canada reported 15.5 MMboe in 1Q2005, down slightly from 15.9 MMboe.

Devon's realized natural gas prices increased 9% to $5.50/Mcf in 1Q2005, compared with $5.05/Mcf in 1Q2004. Average realized oil prices increased 24% to $34.47/bbl from $27.78, and the average realized price for natural gas liquids improved 23% to $24.30/bbl from $19.78 in 1Q2004.

"Increased levels of activity throughout the exploration and production industry are reflected by rising costs," said Devon in a statement. Its lease operating expenses increased 12% to $348 million in the quarter, while unit lease operating expenses increased 21% to $5.85/boe. Increases in ad valorem taxes, well workover expenses, power, fuel and repairs and maintenance costs, in addition to the compounding effect of the weaker U.S. dollar, drove the increase in unit costs, Devon said.

Devon's net debt to adjusted capitalization was 26% at the end of 1Q2005, down from 36% in 1Q2004.

In October 2004, Devon began to repurchase up to 10%, or 50 million shares, of its common stock. At the end of the first quarter, Devon had repurchased approximately 18 million shares for $746 million. The company now anticipates completing the stock repurchase program by Sept. 30, six months earlier than previously estimated.

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