After stumbling through some rough quarters as it reworked the portfolio toward North America's unconventionals, Devon Energy Corp. this week reported improved profitability in the third quarter, and management said the gains offer opportunities that could provide the next leg of high margin growth.
The Oklahoma City-based producer earned $429 million ($1.05/share) in 3Q2013, compared with a year-earlier loss of $719 million (minus $1.80). The losses a year ago related to a huge writedown on the value of the natural gas portfolio. Devon generated cash flow of $1.6 billion, an 18% increase from the year-ago quarter, helping to almost completely fund total capital spending of $1.7 billion.
The natural gas projects, once the envy of operators, have been put aside to wait out prices. U.S. oilfields, and oilsands projects in Canada, now are the go-to trends, as they helped lifted average production to 691,000 boe/d in the quarter, up from 678,000 in the year-ago period.
Oil output averaged 165,000 b/d in 3Q2013, 16% higher, with a 29% increase in the Permian Basin and 34% higher in the Rocky Mountain operations. Light oil production, which nearly doubled from a year ago to reach 81,000 b/d, should top 90,000 by year's end, said CEO John Richels.
"Our success in growing our U.S. light oil production has resulted in higher margins and improved profitability in the current commodity price environment," he said during a conference call to discuss the latest quarterly results.
"Looking beyond the low risk development projects that are driving today's growth, we're also investing in opportunities that will provide the next leg of high margin production growth for Devon. In the U.S., we're highly encouraged by the progress we have made with our Mississippi and Woodford, and our Rockies oil plays. Our light oil production in these plays is growing rapidly, and is currently approaching 20,000 b/d..." The thermal oil projects in Canada are on track to produce "at least" 150,000 b/d of oil by 2020.
The company-wide focus on oil not only is delivering volume growth but it has improved revenues and cash margins, said the CEO. Oil revenues in 3Q2013 rose 19% and accounted for almost 60% of total upstream revenue. That growth helped increase cash margins/bbl by 16% from a year ago.
Devon's ability to effectively control costs in the field also has contributed to the margin expansion, said Richels. Of note, upstream cash costs/unit of production were flat sequentially -- even with the rapid increase in oil output. At the same time, capital spending this year has been in line with guidance, while cash inflows between July and September exceeded capital demands.
Devon's team now is preparing for the midstream master limited partnership (MLP) that is being created with U.S. assets and 800,000 net acres, and Crosstex Energy Inc. properties (see Shale Daily,Oct. 21). Devon's fee-based service initially would extend 7,300 miles and offer 3.3 Bcf/d net capacity.
Devon's equity ownership in the new midstreamer initially was valued at $4.8 billion, noted Richels. However, based on Tuesday's closing stock prices, the market value of its ownership stakes now totals $6.6 billion, or 16 times gross earnings of the contributed assets, equal to about 25% of the company's current market capitalization.
Devon evaluates all of its opportunities "all the time," said Riches. "I think you know that in our history, we have proven that we're not afraid of making bold moves when we have to. But, you know, one of the things people talk about and reflect on from the outside don't always add long-term value, particularly when you look at taxation and everything else that's involved.
"So we're always looking at how we might bring value forward, and...we're not leaving any stone unturned. But we're...only going to do things that adds long-term value and we're not going to take action simply for action sake. So these are things we're always looking at, but sometimes they're not quite so simple.
Devon has made good progress on reducing its well service and supply costs, which fell roughly 5% from a year ago, said operations chief Dave Hager. The "enhanced productivity" allowed Devon to run fewer rigs and produce more oil. At the end of September, Devon was running 64 rigs -- 10% lower than a year before even though output was higher.
The top play in its pocket again was the Permian, where production averaged a record 82,000 boe/d, and light oil accounted for 60% of total volumes. Devon now is running 23 operated rigs, and by year's end expects to have drilled more than 350 wells for 2013. In the Bone Spring of the Delaware subbasin, the horizontal program has been a key driver of Permian growth, with 12 operated rigs working in the play, Hager noted.
"The Bone Spring [wells] are our highest returns in our portfolio in the Permian Basin and amongst the highest in our entire portfolio as a company," said Hager. Other wells are strong, but "the Bone Spring's are a little bit better. No question."
Devon brought on 24 Bone Spring wells in the quarter with average 30-day initial production rates of 690 boe/d and 70% light oil. Devon also completed its first horizontal test in the Wolfcamp, a formation within the Delaware, with strong tests in all of its benches.
Solid results also were evident in other U.S. plays, including in a north-central Oklahoma trend that extends into the Mississippian Lime (Miss Lime) and Woodford Shale. There, Devon is operating 15 rigs and it tied-in 49 wells during the latest period. Quarterly production across the trend averaged 8,000 boe/d in the period, a 65% sequential increase.
The Powder River Basin oil program, still an emerging play, also shows promise, with output up by one-third from a year ago to average 11,000 b/d. In addition, the Cana-Woodford Shale in Western Oklahoma had quarterly output averaging a record 57,000 boe/d, 58% more than a year ago in part because of expanded processing facilities.