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Devon Sharpens North American Focus with W. Africa Sale

Investors welcomed Devon Energy Corp.'s announcement Tuesday to sell its West African oil and natural gas assets to concentrate more of its resources in North America and the deepwater Gulf of Mexico (GOM). In heavy trading, the Oklahoma City-based producer's share price gained more than $2.15, or 3.2%, to close at $69.43 for the day.

The optimism appeared centered on Devon's decision to sell all of its West African assets, which account for about 4% of the company's total proved reserves. Estimated proved reserves totaled 90 MMboe at year-end 2006. The most significant producing property is Devon's interest in the ExxonMobil Corp.-operated Zafiro field in Equatorial Guinea. In all, Devon owns interests in 16 blocks in various stages of production, exploration and appraisal. The properties are expected to produce 11 MMboe in 2007.

Devon President John Richels, who presided over a conference call Tuesday, said, "The sale of West Africa will enable us to concentrate our talent in North America and our efforts in China and Brazil... We took a look at the ongoing success we've had... We've been blessed with an awful lot of success, a lot of talent, and we want to concentrate it where we can be the most effective."

The West African assets, while profitable, have higher costs and are higher risk, and they don't hold the promise of Devon's North American onshore and offshore properties, said Richels.

"In our overall strategy, and in the several years since Devon went public, we've concentrated our low-risk property base mostly in North America, while simultaneously investing in other opportunities," he said. "We found it has been the best way to develop and sustain our long-term organic growth. On our low-risk assets, we've been very successful in the Barnett Shale, in [the Carthage/Bethany field in East Texas and]...throughout the Midcontinent...

"We dramatically increased our acreage in the Barnett in 2006 with the Chief [Oil & Gas] acquisition (see Daily GPI, May 3, 2006), leading to a higher level of drilling there for the foreseeable future. Also, we're now developing our assets in Oklahoma [the Arkoma Basin], where we also expect to see a significant increase in production in 2007."

Richels also noted Devon's "very strong inventory" in the GOM, which includes a stake in the deepest well ever tested in the GOM, the Jack #2 well in the Lower Tertiary (see Daily GPI, Sept. 6, 2006). "Because of our position as the first mover in the play, we have a large control of the trend acreage," he said. "We have some long-term drilling rigs under contract, and we have the capacity to have an impact on the deepwater" (see Daily GPI, Oct. 17, 2006).

In response to a question about how Devon plans to use the proceeds from its West African sale, Richels said there were still "many unknowns on the transaction," but the company plans to use the net proceeds to pay down its commercial debt and resume its share repurchase program. The sale, he said, is expected to have a neutral impact on earnings. The company does not foresee the sale being finalized before 3Q2007, and Richels said most of the $140 million allocated for the West African assets this year will be spent there.

The sale process will be managed for Devon by Goldman Sachs & Co. and Scotia Waterous. Data rooms for interested buyers will be opened in London and Houston near the end of 1Q2007.

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