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Devon Has $1B Quarter, Looks for Single JV Partner

Devon Energy Corp. said increased production and higher prices for natural gas liquids (NGLs) helped the company earn $1 billion during 3Q2011 as it continues to look for a joint venture (JV) partner to help develop five of its emerging assets.

During a conference call with financial analysts to discuss 3Q2011 results on Wednesday, CEO John Richels said the Oklahoma City-based company's preference was to work with one JV partner in the Tuscaloosa Marine Shale, Niobrara Shale, Mississippian Lime, Ohio Utica Shale and the A1 Carbonate and Utica Shale in Michigan.

"We're not looking at doing a whole bunch of JVs with different parties," Richels said. "We're really pursuing the idea of creating a JV with one partner where our interests are clearly aligned, so that as we move down the road with some of these projects we're not continuing to drill just because we're got a bunch of JV cash out there. We want to make sure we allocate capital to places where we're going to be making some money, both from our point of view and from our JV [partner's] point of view."

Although Richels said Devon was open to the structure of a JV -- including a "cash and carry" based agreement -- the company's exploration chief Dave Hager told investors that Devon would like to retain operatorship.

"This is something that we have not typically done," Richels said of a JV. "Nothing has changed [in our thinking] other than the fact that we see a lot of opportunity in these five plays and a lot of capital commitment over time. To bring somebody in at an early stage in an exploratory play to help diversify that risk just seems to make the most sense to us. These [plays] all have a lot of potential."

Devon's $1 billion in 3Q2011 earnings ($2.51/common share, $2.50/diluted share) were lower compared to the $2.1 billion ($4.81/common, $4.79/diluted) realized in 3Q2010, but that quarter's earnings were boosted by a one-time gain of $1.5 billion from the sale of assets in Azerbaijan.

NGL production was strong during 3Q2011, in aggregate averaging 226,000 b/d, or 17% higher than the same quarter in 2010. Total oil, natural gas and NGL production averaged 661,000 boe/d during 3Q2011, an 8% increase from the same quarter last year.

Working in tandem with higher production, improved prices drove sales of oil, natural gas and NGLs to $2.1 billion in 3Q2011, up 25% from 3Q2010. Higher production and prices also boosted Devon in the marketing and midstream sectors, with operating profits climbing 11% during 3Q2011 to $138 million.

Devon produced 239.9 Bcf of natural gas during 3Q2011, up 3% from the 232.2 Bcf produced during the third quarter of last year. The company also produced 9.3 million bbl of NGLs and 60.8 MMboe during 3Q2011, increases of 13.4% and 7.8%, respectively, from 3Q2010.

Hager indicated that Devon might not add too many acres to its portfolio in 2012. "We're very happy with the acreage position we have," Hager said. "We've had outstanding interest from the companies who have reviewed our acreage position. [But] it is possible that, with continuing good results on some of these wells, we may incrementally add some acreage on some of these plays."

On specific plays, Devon said 3Q2011 production in the Barnett totaled 1.3 Bcfe/d and liquids production averaged 46,000 b/d, increases of 8% and 15%, respectively, over the same quarter one year earlier.

In the Cana-Woodford, Devon said overall 3Q2011 production increased 71% over 3Q2010, with a record net average of 200 MMcfe/d and 8,100 b/d of liquids. The company also said its Cana gas processing facility in Canadian County, OK, remains on schedule to be online during 4Q2011. The facility sustained heavy damage from a tornado on May 24.

Devon saw oil and NGL production in 3Q2011 increase 17% in the Permian Basin over the same quarter last year, with liquids production accounting for 75% of the increase at 50,000 boe/d. At the Bone Spring play in the Permian Basin the company put 11 new wells into production during 3Q2011, with initial daily production averaging 540 boe/d per well.

Asked if Devon would consider dropping any drilling rigs because of the continuing low prices for natural gas, Richels said no.

"We're not spending any material amount today on plays that aren't providing a good rate of return," Richels said. "We're spending more than 90% of our capital in 2011 on oil and liquids-rich opportunities. Even at today's prices, any of the rigs that are drilling in the gas plays -- where the returns are enhanced by liquids recoveries -- are still providing a good rate of return."

Last July Devon was ranked as the fifth largest U.S. natural gas producer in a recent analysis by Natural Gas Intelligence of federal filings (see Shale Daily, July 14).

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