When you master the domain in a place like the Barnett Shale, it may be easy to forget that Devon Energy Corp. actually has its hands in several other promising oil and natural gas developments onshore and offshore in North America. However, there's no forgetting Devon's strength in the Barnett, and the producer now anticipates hitting a 1 Bcf/d production target there before mid-year, which is at least 18 months ahead of schedule.
Devon on Wednesday reported that 4Q2007 profit more than doubled to $1.31 billion ($2.92/share) from $579 million ($1.29) a year earlier. Excluding special items, earnings were $2.16/share, beating Wall Street's average forecast of $1.90/share. Revenue topped $3.2 billion in the quarter, almost double the $2.42 billion reported in 4Q2006.
The management team, led by CEO J. Larry Nichols, delivered the results during a conference call with energy analysts and investors Wednesday. The catalyst for Devon's production growth was the Barnett Shale, where Devon reigns. The play was the biggest driver for Devon's growth in 4Q2007 and for the year.
"Devon's 2007 results were exceptional, both financially and operationally," said Nichols. "We set earnings and cash flow records, increased production by 12% and drilled 2,440 wells with a 98% success rate. Our 2007 drilling program added 390 million bbl of proved reserves at very competitive finding and development costs, setting the stage for continued production growth in the future. In 2008 we expect to deliver similar organic growth of reserves and production."
The bulk of Devon's budget actually is going to deepwater Gulf of Mexico (GOM) projects, including the ramp-up late last year from the Merganser gas field, where the company holds a 50% stake. Devon also began drilling the first company-operated exploratory well in the Lower Tertiary trend of the GOM last year; the Chuck exploratory well (39.5% stake) is currently drilling below 30,000 feet and is nearing its objective. In addition, Devon made progress toward commercial development of four previous discoveries in the Lower Tertiary, including the sanctioning of phase one of the Cascade project and delineation drilling on the Jack, St. Malo and Kaskida prospects.
Analysts posed questions about the deepwater and other Devon holdings. However, most of the enthusiasm appeared directed toward the company's Barnett Shale activities in North Texas. Devon continued to cement its lead as the largest producer and largest leaseholder in the play last year by increasing its net production from the play by 33% in 2007; it exited the year at 950 MMcfe/d.
"Devon's stretch goal was to be at 1 Bcf/d by the end of 2009, but we've blown through that and it now looks like we will reach our target by the second quarter of 2008, 18 months ahead of schedule," said Stephen Hadden, senior vice president, Exploration and Production. Devon was producing about 856 Bcf/d in the Barnett at the end of 3Q2007; it drilled 539 wells in the play in 2007. The company had estimated it would hit the 1 Bcf/d mark by 2009 about two years ago (see NGI, May 29, 2006).
Hadden said Devon engineers' goal is to "drive efficiency across the business to continue to work to have volumes grow. We have better well performance year-over-year, and we also had success with infill drilling, which continues to add to our inventory. The inventory is very deep for us and it will be for a very long time."
Devon, which has seen the "strain" in infrastructure among its competitors, is prepared for the continued growth. The company, whose leasehold is about 727,00 net acres, has seen "some constraints, but we've positioned ourselves to have gathering, processing and transportation" to take its product "across the United States."
Nichols also doesn't foresee any decline in the Barnett Shale for some time, and he quickly dismissed any notion that the play would be peaking anytime soon.
"We look out to the future, and we see growth continuing to occur," he said. "Well efficiencies continue to develop, and there's no stopping off on the growth. Once we hit 1 Bcf/d net, it will continue for years...What we see after many years of growth is that the rate of growth will gradually flatten out and then flatten to a plateau, then gradually decline...A peak implies that production will shoot up and then shoot down, and that's not at all what we see with our portfolio there."
This year the producer is forecasting results from its proved reserves similar to what it achieved in 2007, when it added a total of 390 million boe of proved reserves. Devon's estimated proved reserves from continuing operations were 2.5 billion boe at year-end 2007, which was 9% higher than at the end of 2006. Proved developed reserves at the end of 2007 were 1.87 million boe, which was 75% of total proved reserves. Year-end proved reserves included 677 million bbl of crude oil, 9 Tcf of gas and 321 million bbl of natural gas liquids.
In its U.S. onshore operations, Devon produced 150.1 Bcf of gas in 4Q2007, which was up from 129.5 Bcf in 4Q2006. In the U.S. offshore, gas output fell to 19.6 Bcf from 21.4 Bcf in 4Q2006. Total U.S. gas production reached 169.7 Bcf, ahead of 150.9 Bcf in 4Q2006. For the year, total gas production jumped to 634.9 Bcf from 566 Bcf in 2006. In Canada, total gas production for 2007 fell to 226 Bcf from 240 Bcf a year earlier.
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