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Devon Opts to Wait Gas Prices Out

Devon Energy Corp. will cut back on its natural gas drilling until prices begin to rebound, CEO Larry Nichols said last week.

"We see absolutely no reason to continue to drill...and bring natural gas production on at this time, any more than we need to," Nichols said at the annual shareholder meeting in Oklahoma City Wednesday. "It's better to leave that gas in the ground and sell it next year, or in future years, when we can generate a greater profit for our shareholders."

Since mid-2009 oil and natural gas prices have declined "by roughly 60%," Nichols noted. "Most North American drilling is subeconomic," and with "further price weakness in the near term," Devon's go-forward approach will be to "preserve liquidity, scale back short-cycle projects, maintain momentum with long-term projects and maintain organizational capacity."

Last year Devon spent $8.5 billion for its exploration and production program. The bulk of the budget (72%) was spent on drilling and recompletions, and around 21% went toward acquisitions. This year spending priorities have changed, said the CEO. Devon now plans to spend about half of what it did in 2008, or around $3.5-4.1 billion. About 88% will be spent on drilling and recompletions.

In one cost-cutting move, Devon last month announced it would combine its International and Gulf divisions into a newly formed Offshore division (see NGI, June 1). Up to 75 jobs were to be eliminated.

Most of Devon's exploration money, or 63%, will be spent this year on "near-term projects," which include onshore drilling in some of North America's biggest gas plays, including the Barnett Shale, where it is the largest producer. Around 37% of the 2009 budget is to be spent for the long-term projects, and most of that money (38%) will be directed toward the deepwater Gulf of Mexico. About 90% of Devon's exploration inventory is now in North America, both on- and offshore.

"While last year was a great year, this year is a tough year," Nichols said. Gas prices are expected to take longer to recover than those of oil, he said, because of the current oversupply.

Even though Devon's spending will be lower, Nichols told shareholders that the company is in "exceptionally good shape." Devon has cash and unused credit lines totaling about $2.7 billion. It won't have any significant debt maturities until 2011, he noted.

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