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Devon Grows Even Bigger in the Barnett Shale

Devon Energy Corp., already the largest producer in the hot Barnett Shale play of North Texas, got even larger last week with the announcement that it will by the No. 2 Barnett producer for $2.2 billion. Oklahoma City-based Devon said it will acquire the properties of Chief Holdings LLC (Chief Oil & Gas), expanding its Barnett Shale position to 720,000 net acres.

Privately held Chief, the second largest Barnett producer after Devon, went up for sale late last year (see NGI, Nov. 21, 2005), and Devon was an obvious suitor. The properties are estimated by Devon to include proved reserves of 617 Bcfe and leasehold of 169,000 net acres. Devon said it plans to drill about 800 wells on the Chief acreage over the next five years and ultimately recover more than 2 Tcfe.

"This was a unique opportunity to add to Devon's position in the hottest natural gas play in North America where Devon is already the largest and most active producer," said Devon CEO J. Larry Nichols. "As with Mitchell Energy in 2002 [which Devon acquired in 2001 (see NGI, Aug. 20, 2001)], the value of Chief to Devon is not fully reflected in current production or booked reserves. The true value lies in the trillions of cubic feet of natural gas underlying its acreage in the shale -- gas that Devon has the knowledge, capital and resources to develop and produce."

Mitchell Energy was the pioneer of the Fort Worth Basin's Barnett Shale (see NGI, Jan. 16). An October 2005 report by Pickering Energy Partners Inc. called the Barnett Shale the hottest gas play in the U.S. and said that with $6/Mcf gas, "Barnett drilling is full steam ahead."

Since acquiring Mitchell Devon has drilled 1,300 vertical and horizontal wells in the Barnett while producing 750 Bcfe and adding more than 1.3 Tcfe of reserves.

Devon's bid for Chief was made jointly with Crosstex Energy Services, an independent midstream company active in the Barnett, which is acquiring Chief's gathering assets. As of late last year, Chief's Eagle Mountain Pipeline system in Saginaw, TX, was moving about 100 MMcf/d for sale to local and regional markets.

In 2004 Chief was the third largest Barnett producer, according to Ramona Nye at the Texas Railroad Commission. Analysts were saying late last year that Chief could command a price of $1.2 billion, or about $6,000 per acre. At $6,000 per acre, the Devon transaction just announced would be worth $1.01 billion for 169,000 net acres or $1.22 billion for 204,000 gross acres.

Devon currently produces about 600 MMcfe/d from about 2,200 wells. The company's outlook for the Barnett has been greatly enhanced by results of a successful 20-acre infill well pilot program. Devon also said Tuesday that it has increased estimated recoveries for 20-acre infill horizontal wells from 1.8 Bcfe per well to 2 Bcfe per well, based upon results to date of 29 horizontal infill wells drilled on its core acreage. Ultimately, the company expects infill drilling on both its core and noncore acreage.

"Redevelopment of our 120,000 net-acre core position on 20-acre spacing may ultimately increase our core area recoveries by more than 1 Tcfe," Nichols said. "We are excited about the potential of applying this technology to our vast holdings in the noncore area as well."

In addition to the acquisition news, Devon increased its long-term production growth outlook for 2006 through 2009. The outlook has increased to 9.5% compound annual growth rate from 8%. The increase is based upon better performance throughout the company's asset base, Nichols said. With the Chief assets included, the company's outlook will again increase from the revised 9.5% to 11% for 2006 through 2009, reflecting annual production approaching 300 MMBoe in 2009.

Once the Chief acquisition closes, Devon's daily production from the Barnett will increase by about 55 MMcfe/d. An additional 31 Chief wells await completion and pipeline connection and are expected to add an additional 30 MMcfe/d.

The Chief acquisition is to be funded with about $900 million of cash on hand and $1.3 billion of short-term borrowings. Because of the Chief acquisition, Devon expects to increase its 2006 capital budget for exploration and development expenditures by about $125 million. Operating and general and administrative expenses also will see a modest increase. A share-repurchase program will be temporarily suspended.

Devon said the deal will be modestly dilutive to earnings per share in 2006 but accretive thereafter.

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