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Devon Says Pullback in Gas-Heavy Canadian Output Cuts Forecast

Devon Energy Corp. on Friday issued a disappointing production forecast through 2009, putting most of the blame on escalating costs in Western Canada, where 70% of its output is natural gas. The Oklahoma City-based independent said it is "significantly" reducing development of its conventional gas projects in Canada "until business conditions improve."

Devon, among the largest independents operating in Canada, focuses its exploration and development in the Western Canadian Sedimentary Basin. Its holdings are concentrated in the Alberta Foothills, Peace River Arch, the Northern Plains, the Deep Basin, Lloydminster and in the central part of the basin.

Last month CEO J. Larry Nichols warned analysts that high expenses would force the company to reduce its pricey Canadian projects next year (see Daily GPI, Nov. 2). Nichols said then that Canadian exploration and production costs were the company's most expensive.

"Competitive pressures for equipment, services and supplies in Canada have created a highly inflationary cost environment," Devon said in a statement Friday. "In addition, the strengthening of the Canadian dollar relative to the U.S. dollar has negatively impacted profit margins on these projects. This curtailment of drilling activity in Canada is the largest factor contributing to the revisions from Devon's previous estimates of 2007 through 2009 production."

Despite the expected losses in Canada, Devon's overall production forecast is positive -- it is estimating compound annual production growth of 8-10% over the next three years. Devon expects to produce 57 MMboe in 4Q2006, 7% higher than the 53.3 MMboe reported in 4Q2005. On a sequential basis from 3Q2006's 55.4 MMboe, production will be 3% higher.

For full-year 2006, Devon expects to produce 216 MMboe, including 2 MMboe (500,000 boe in 4Q2006) of production from Devon's Egyptian assets. At year-end, Egypt will be reported as a discontinued operation; the assets have been sold. In 2007, oil and gas output is expected to range between 230-232 MMboe, representing 8% growth on its retained properties.

"This growth is driven by strong performance from Devon's U.S. onshore properties, a full year of production from the ACG field in Azerbaijan and midyear start-ups of production from the company's Merganser field in the deepwater Gulf of Mexico and the Polvo discovery offshore Brazil," the company stated.

By 2008, Devon is forecasting output will rise to between 251-258 MMboe, up 10% from 2007. Growth in 2008 is forecast to include additional contributions from U.S. onshore properties, as well as a full year of production from Merganser, Polvo and Devon's Jackfish thermal oil sands project in Canada. Devon expects similar production growth in 2009 with production of 270-285 MMboe.

Drill-bit capital spending this year is expected to total $6.3-6.5 billion, including $1.2 billion of unproven acquisition costs related to the purchase of Chief Holdings LLC, the largest private operator in the Barnett Shale (see Daily GPI, June 30). Drill-bit spending includes exploration and development costs, plugging and abandonment charges and capitalized interest and administrative costs. Marketing, midstream and corporate expenses are not included.

This year, proved reserves additions will range between 415-425 MMboe, excluding 100 MMboe of reserves acquired from Chief and before any revisions related to changes in oil and gas prices, said Devon. If the estimates hold, the reserves additions would nearly double estimated 2006 production, Devon noted.

However, the estimated range of proved reserve additions in 2006 is slightly lower than the previously estimated range of 420-450 MMboe. Devon blamed the drop on its lower-than-expected reserve additions in Canada. It also is not booking any proved reserves this year on its Lower Tertiary discoveries in the Gulf of Mexico (see Daily GPI, Oct. 17).

Next year, Devon expects to post strong reserve growth again, forecasting proved reserve additions of 350-370 MMboe. Drill-bit spending is forecast at between $5.6-5.8 billion.

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