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Devon's Permian Success Lifts U.S. Oil Output 23%

A standout performance in the Permian Basin increased oil production 23% year/year in the first three months of this year, but it's not the only racehorse in the stable, Devon Energy Corp.'s top executive said Wednesday. Encouraging results from the emerging Mississippian Lime, for example, may provide the "next leg of growth."

Devon, while still a natural gas heavyweight, increased its onshore North American portfolio mix of oil and liquids to 41% of total volumes in 1Q2013, up from 30% just a few years ago. The liquids aren't just building reserves, they also provided "two-thirds of our sales revenue" from January through March, CEO John Richels said during an earnings conference call.

Higher natural gas prices haven't hurt either, and if they are sustained, Devon could make a go of gas-directed later this year, he said.

For the time being, it's impossible to ignore the results from Devon's prospects in the Permian Basin, where the 1.3 million net-acre leasehold allows the producer to pick and choose where to drop a drillbit. There now are 29 operated rigs running, and average output hit a record 68,000 boe/d in 1Q2013. Based on results to date, basin-wide oil production in 2013 now is expected to be nearly 40% higher than it was last year, said exploration chief Dave Hager.

Also proving its worth reserves-wise is Western Oklahoma's Cana-Woodford Shale, where 14 operated rigs helped to deliver 28 wells in the latest period. Average 30-day initial production rates were 5.5 MMcfe/d, including 470 b/d of liquids. Total output climbed 26% year/year, averaging 340 MMcfe/d.

On the exploration front, encouraging results on the 600,000 net-acre leasehold in the Mississippian Lime in north-central Oklahoma bodes well for the future, said Hager. Twenty-four wells were tied in during 1Q2013, and the operated well count stands at 53. Most of the activity is focused in Noble, Payne and Logan counties.

"Important progress" also has been made in derisking Mississippian and Rockies oil acreage, providing "good visibility to the next leg of oil growth at Devon," said Richels.

The CEO also commented on the "most discussed" topic in the industry today, improving natural gas prices. "The recent uplift in natural gas prices could have a significant impact on our financial results in upcoming quarters," Richels told analysts. However, "while the improved sentiment around gas prices is certainly encouraging, we're not modifying our 2013 capital plans at this time.

"Even with our natural gas assets being located across some of the lowest cost shale plays in North America, returns continue to be more attractive on the oil and liquids-rich side of our portfolio versus dry gas drilling."

Asked how long it might take Devon to ramp up in the gassy Barnett, once the plum of its portfolio, if it were to proceed, Richels said constructing pads for drilling might allow a start-up over four to six months because the pads would have to be completed before any wells are drilled. As important, he said, is to optimize the Barnett base output. "We think we're doing a good job of maximizing that..." and it's "frankly just as important at this point as putting more rigs back to work."

The Barnett holds a lot of rich liquids, Hager said, and with its gas content and strong pricing, "we expect to generate nearly $600 million of free cash flow in the Barnett in 2013...Should the outlook for gas prices continue to improve, we can easily shift activity to the Barnett and take advantage of the thousands of locations we have in our undrilled inventories."

From April through June, output from the Permian and Mississippian plays together is expected to grow about 4% sequentially to a range of 163,000 to 173,000 b/d, said CFO Jeff Agosta. "For the second half of the year, oil and liquids growth will accelerate as a result of pad tie-ins and a plan expansion at Cana, a plant expansion in the Barnett and the impact of the ramp-up in the Permian and Mississippian trend."

A bad hedging bet on oil and NGL prices led to a $1.9 billion writedown in the first period and resulted in quarterly losses of $1.34 billion net (minus $3.34/share), compared with year-ago profits of $393 million (97 cents). Without the one-time charge, the Oklahoma City operator earned $270 million (66 cents), 11 cents higher than consensus forecasts. Total revenues declined year/year to $1.97 billion from $2.50 billion, and operating cash was nearly flat at $1 billion.

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