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Devon Hits 1 Bcfe/d in Barnett Shale

Devon Energy Corp.'s net Barnett Shale production surpassed the magic number of 1 Bcfe/d in April, a milestone achieved 21 months ahead of the company's original target date.

Fueled by success in the burgeoning North Texas gas play, Devon's quarterly profit rose 15% and production from continuing operations rose 9% from a year ago. Average production from the Barnett Shale alone averaged a record 995 MMcfe/d in the first three months of the year, a 36% surge from 1Q2007.

Stephen J. Hadden, vice president of exploration and production, said during a conference call Wednesday that Devon would continue to build its position in the Barnett, even though it already is the top leaseholder and producer. The company said in March it could produce 1.6-2 Bcfe/d from its current leasehold within two years (see NGI, March 31).

"You'll see us continue to add to our acreage position in areas that make good sense for the portfolio going forward," Hadden said. "We will continue to be opportunity-driven."

The Oklahoma City-based independent reported 1Q2008 net earnings of $749 million ($1.68/share), compared with 1Q2007 net earnings of $651 million ($1.46). Excluding losses from natural gas hedging, which totaled $789 million pre-tax ($500 million after tax), Devon earned $1.2 billion ($2.74/share). Quarterly cash flow reached a record $2.6 billion in 1Q2008, up 74% from 1Q2007. The company funded $2.0 billion of capital expenditures in the quarter and paid common and preferred dividends totaling $73 million, which resulted in free cash flow of nearly $600 million.

With its oil, natural gas and natural gas liquids production concentrated onshore in North America, Devon, which drilled a total of 646 wells with a 97% success rate, reported that combined output from continuing operations averaged 640,000 boe/d in the first three months of 2008. Total sales jumped 52% from a year earlier to $3.2 billion.

Devon, whose operations are spread both onshore and offshore in North America, is stepping up its development efforts in the emerging Groesbeck play in East Texas, Hadden told analysts. Devon ramped up production on three "significant" horizontal gas wells in 1Q2008 with initial production averaging 18 MMcfe/d per well. Devon has 100% working interest in two of the wells and a 93% interest in the third, and the company is "anxious" to review the production tests going forward, he said.

Besides its horizontal drilling in East Texas, which is still in the development stage, Devon is expanding its vertical well program across the Cotton Valley and Carthage gas-rich acreage of Texas where it plans to drill 100 vertical wells in 2008.

In addition, the independent continues to pursue four tantalizing discoveries in the deepwater Lower Tertiary trend of the Gulf of Mexico: Cascade, St. Malo, Jack and Kaskida. Drilling on the Jack No. 3 appraisal well has begun, and at Cascade Devon will begin drilling the first of two producing wells later this year. An exploratory well in the Chuck deepwater prospect, which is located in the Green Bay region of the Lower Tertiary, has been plugged and abandoned (P&A), Hadden said. However, data from the 30,000-foot-deep well, in which Devon has a 39.5% stake, provided a lot of data that will be used for other Lower Tertiary prospects.

"We're still very confident, very optimistic about the trend itself," Hadden said in response to a question from a financial analyst. "Green Bay was a dry hole, but we think we understand that and the outcome of it to our portfolio...When you look at Chuck, it was P&A, but we did find hydrocarbons, and our partners [ExxonMobil Corp. and BP plc] are evaluating the remainder of the unit. It's just another step in getting information on the entire trend. We'll have two more Lower Tertiary opportunities later this year."

Higher Canadian exchange rates, transportation costs and oilfield services costs caused lease operating expenses (LOE) to reach $506 million in the quarter. On a unit basis, 1Q2008 LOE was $8.69/boe, or 7% more than in 1Q2007. As expected, general and administrative expenses (G&A) also jumped to $148 million. Higher employee-related costs were the largest contributor to the quarterly increase; Devon is expanding its workforce to support its many large-scale exploration and development projects.

Flat oil and gas production is forecast for 2Q2008 compared with the first three months, but Devon expects to have sequential growth through the last half of 2008.

"Devon's execution continues to be solid, and their ongoing focus on the Barnett, deepwater projects and Canadian oilsands has allowed them to create a predictable profile with attractive production upside," Simmons & Co. International wrote in a note to clients. "Still, Devon's results may be viewed as somewhat neutral because they lack a near-term catalyst."

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