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Devon Comes Ashore, to Anchor Business in North American Shale

An "overabundance of opportunities" led Devon Energy Corp. to put all of its Gulf of Mexico (GOM) and international properties on the market and reposition itself as a "high-growth North American onshore company," CEO Larry Nichols said last week.

The asset sales, expected to be completed by the end of 2010, could generate up to $7.5 billion in after-tax proceeds, which would be used to build Devon's North American onshore portfolio and to retire debt. The producer already plans to add more onshore drilling rigs in 2010 across North America as it launches its more focused exploration strategy.

"Devon's success has led to an overabundance of opportunities, and this repositioning will allow us to optimize value for our shareholders," Nichols said during a conference call with financial analysts. Devon's share price, which was trading above $67 on the day of the announcement last Monday, doesn't reflect the company's GOM and international assets, he said. "By monetizing these assets, we will realize their full value, allowing us to unleash the growth potential that resides within our world-class onshore assets."

Devon earlier this year already had announced that it wanted to find a partner to help fund some of its GOM deepwater assets in the emerging Lower Tertiary trend, and it was expected to announce a partner by year's end (see NGI, Nov. 9; May 11).

The news that Devon, the largest exploration and production (E&P) independent in North America, would sell all of its offshore and international prospects surprised several analysts (see related story). Nichols explained why.

"A lot has changed in the last 12 months when you look at both sides of our balance sheet," said the CEO. "On one hand, in the last 12-18 months, there's been outstanding performance from all of the assets that we have...I won't go down the list, but we've continued to demonstrate in the last 12 months the remarkable strength of our portfolio and the opportunities...in every one of the areas that we operate...

"On the other hand, the capital requirements for offshore and international have jumped. That can lead to exploration success and accelerate growth. Conversely, if you look at the availability of cash and the markets today, nobody saw the depth of the recession that was going to restrain oil and gas prices to the depth that it has...Taking all of these things together, we had a clear direction forward this year, and we've executed it."

Once Devon sells the offshore and overseas portfolios, Devon will fund its organic growth "entirely with internally generated funds," said Nichols. "Furthermore, we expect Devon to emerge with an even stronger balance sheet and one of the lowest overall cost structures in our peer group."

Based on estimated year-end 2009 proved reserves, the GOM and international properties comprise around 7% of Devon's companywide proved reserves, or 2.8 billion boe. However, the offshore and international assets "have commanded almost 30% of the current E&P capital," said Nichols. Meanwhile, the North American assets have a compound annual growth rate of "around 9%...

"On average we've replaced 200% of our [North American] reserves per year. They are delivering outstanding organic growth and we've achieved it very economically."

Devon's overall production balance between liquids and natural gas "will change only slightly as a result of this repositioning," said President John Richels. Total proved gas reserves following the sales actually would be up 2%, to 59%, versus a current estimate of 57%. Once the sales are completed, Devon would be 68% weighted to gas versus a current 64%. Liquids would account for 32% of production, down from 36% today.

One big change for Devon will be a move to hedging, something the company has used little in recent years. "Our goal is to protect the price on roughly 50% of both oil and natural gas for the foreseeable future...through a combination of swaps, collars, fixed-price contracts and basis swaps," said Richels. "We've almost reached that goal for 2010...and protected about 42% of our production."

Dave Hager, who helms the E&P unit, said Devon has "the people and the projects to execute this program. We have money in our capital forecast to restock inventory, but none will be necessary to meet 10% growth going forward. I'm convinced this is the right strategy to produce top quartile results."

Onshore North America, Devon has an estimated "27,000 undrilled locations" said Hager, which are concentrated in six plays: the Barnett, Haynesville, Cana Woodford and Arkoma Woodford shales, the Horn River Basin and the Jackfish heavy oil development.

More than 90% of Devon's proved reserves today are in North America. Assets to be sold overseas are mostly in Azerbaijan, Brazil and China. Internationally Devon holds interests in more than nine million gross acres, most of which are undeveloped.

With interests in 330 deepwater GOM blocks, Devon is one of the largest independent deepwater leaseholders. In the GOM, where it has a leasehold of more than one million acres, Devon had 34 producing wells at year-end 2008 with net production of 7 million boe (68% gas-weighted), or about 3% of total company output. Net GOM total reserves at the end of 2008 totaled 56 million boe (63% gas), which was 2% of the total company production.

The ultra-deep waters of the GOM have yielded a treasure trove of prospects for potential buyers, including four in the Lower Tertiary trend, including Cascade (2002), St. Malo (2003), Jack (2004) and Kaskida (2006). Appraisal drilling with Devon's partners has continued, and first production from the Lower Tertiary's Cascade discovery is to begin in 2010. Devon also has been exploring the Miocene trend, where it is evaluating the Mission Deep discovery.

In addition Devon has stakes in three significant producing properties in U.S. waters: Magnolia, Merganser and Nansen. The Nansen and Magnolia projects ramped up in 2002 and 2005, and production began in the Merganser field in 2007. Natural gas from those projects flows into the Independence Hub production facility.

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