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Devon's Proved Oil Reserves Surpass Record; Turns Losses to Profits

Devon Energy Corp. in the final three months of 2013 increased proved oil reserves to the highest level ever in company history -- mostly on results from the Permian Basin -- and turned around year-ago losses to profits.

Companywide, oil production in 4Q2013 averaged 177,000 b/d, which exceeded the top end of guidance and provided a 17% increase from 4Q2012 and a 7% increase sequentially.

Led by the Permian Basin, the most significant growth in production came from U.S. operations, where total output jumped 32% year/year. Output increased to an average of 696,000 boe/d in the final quarter, surpassing the midpoint forecast by 6,000 boe/d.

"2013 was a year of strong execution and exciting change for Devon," CEO John Richels said during a conference call Wednesday. "Our drilling programs not only drove impressive oil production growth, but also expanded margins and improved operating cash flow."

Production from the Permian alone averaged a record 86,000 boe/d in 4Q2013, a 29% uplift from 4Q2012. Light oil production accounted for nearly 60% of the total.

The Bone Spring formation in the Permian's Delaware Basin proved a big contributor to results, with 21 new wells ramping up in the final period on initial production (IP) rates averaging 800 boe/d, 70% weighted to light oil. The IP rates exceeded Devon's Bone Spring type curve by about 40%.

Also in the Delaware, production began on the first horizontal in the Wolfcamp Shale in Ward County, TX. IP rates from the Martinsville 120-4H averaged 960 boe/d, with 800 b/d of light oil. From the Southern Midland Basin's Wolfcamp extension, 24 wells came online in the final three months with IP rates averaging 410 boe/d.

More than 100,000 prospective net acres already have been identified for the entire Wolfcamp play, with plans to derisk the emerging opportunity this year.

Because Devon is gaining most of its profits and reserves from U.S. unconventionals and Canada oilsands and thermal output, the Oklahoma City operator announced Wednesday it would sell its gas-weighted Canadian conventional properties, with proved reserves of about 170 million boe, to Canadian Natural Resources Ltd. for US$2.8 billion. Excluded are unconventional projects in the gassy Horn River Shale, Lloydminster and thermal heavy oil assets.

The sale's proceeds are to be directed to the Eagle Ford Shale, a new position acquired last fall in a friendly $6 billion takeover of GeoSouthern Energy Corp. (see Shale Daily,Nov. 20, 2013).

Also expected to draw more cash flow is EnLink Midstream, a partnership with Crosstex Energy Inc. that it formed last October (see Shale Daily,Oct. 21, 2013).  Devon contributed an estimated $4.8 billion of its U.S. midstream assets in Texas and Oklahoma, as well as 800,000 net acres, with Crosstex contributing midstream assets in the Marcellus, Utica, Barnett, Eagle Ford and Haynesville shales, Permian Basin and the Gulf Coast.

 EnLink Midstream, is expected to launch as a separate master limited partnership by the end of March with two separate entities, EnLink Midstream Partners LP and general partner EnLink Midstream LLC, Richels told analysts.

Devon isn't forsaking some of other U.S. onshore properties, some legacy and some emerging, but in all cases, it's about oil and liquids. In the Barnett Shale, net production in 2013 averaged 1.4 Bcfe/d, with liquids increasing by an average of 57,000 b/d, a 17% increase from 2012. Anadarko Basin production averaged a record 85,000 boe/d for 2013, with growth from the Cana-Woodford and Granite Wash plays driving a 10% year/year net increase from 2012. Oil and natural gas liquids production increased to more than 40% of total output from the Anadarko.

The emerging Mississippian Lime-Woodford trend averaged 16,000 boe/d in December, which was a 47% increase from September, exceeding the projected exit rate. More delineation is to come this year.

Devon has been monetizing other noncore assets since last November to sharpen its focus on higher-growth properties. The assets so far identified for divestiture averaged 144,000 boe/d in 4Q2013, of which almost 80% is natural gas. Excluding production associated with these assets, top-line production in the fourth quarter from the retained asset base increased 7% from 4Q2012.

Net profits in 4Q2013 were $207 million (51 cents/share) versus a year-ago loss of $357 million (minus 89 cents). Adjusting for one-time items, profits rose to $447 million ($1.10/share), a 49% increase from 4Q2012. Operating cash flow jumped 26% in the final period from a year ago to $1.4 billion. Including $419 million in cash received from asset sales, cash inflows totaled $5.9 billion in 2013.

Revenues for 2013 rose 19% from 2012 to $8.5 billion, which Devon attributed to higher oil output and improved natural gas realizations. Last year oil sales accounted for more than half of the total upstream revenues.

Marketing and midstream operating profits rose 25% from 2012 to $513 million on higher gas prices and better cost management, Devon stated. Pre-tax cash costs totaled $14.96/boe in 2013, a 4% increase year/year because of the jump in oil output.

"In general, oil wells have higher operating costs than gas wells, but [they] also have higher margins in the current commodity price environment," said Richels. In 4Q2013, cash margins/boe increased 15% from 4Q2012, reflecting the higher-margin oil production.

The Eagle Ford transaction with GeoSouthern is on track to close by the end of March. Net production is expected to grow at a compound annual growth rate of 25% "over the next several years, reaching a peak production rate of approximately 140,000 boe/d," said the CEO. "Devon's development program in 2014 is self-funding and expected to generate significant free cash flow beginning in 2015. The risked recoverable resource associated with this position is estimated at 400 million boe, of which more than 60% is classified as proved reserves.

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