Oklahoma City-based Devon Energy Corp., which stands to become the largest independent when it completes its acquisitions of two North American producers, saw its third-quarter earnings decline from last year, posting $90 million, or 69 cents per share, compared with earnings of $165 million or $1.27 per share a year ago. Mitchell Energy & Development Corp., one of Devon’s acquisitions, also reported lower quarterly earnings and now plans to reduce its active Texas drilling program.

During the third quarter Devon said it impaired the carrying value of its assets in Thailand and recorded a non-cash gain attributable to a change in the fair value of derivatives. After the impairment charge and the non-cash gain, net earnings were $85 million or 65 cents per common share (64 cents per diluted common share). Including the effects of the impairment charge and items related to accounting for derivatives, net earnings for the first nine months of 2001 were $621 million or $4.79 per common share, compared with net earnings for the first nine months of 2000 of $423 million or $3.27 per common share.

Devon’s lower quarterly earnings disguised a record increase in total oil, gas and natural gas liquids (NGLs) production of 6% to 31.3 MMboe for the quarter. The total production compares with last year’s third quarter, when Devon produced 29.5 MMboe. Total production in the second quarter of 2001 was 29.7 MMboe.

CEO J. Larry Nichols said the increase in production “set an all time quarterly record,” which he noted was achieved before the coming contributions of Mitchell and Calgary-based Anderson Exploration Ltd. Devon announced the dual acquisitions earlier this year (see Daily GPI, Oct. 8; Sept. 5). The Anderson deal was completed on Oct. 15, and Devon expects to complete the Mitchell merger by the end of the year.

Mitchell, headquartered outside of Houston in The Woodlands, reported that its third-quarter net income fell 86% on lower commodity prices. Net income fell to $10.5 million, or 21 cents a share, from $74.4 million, or $1.48, a year earlier, and revenue fell 20% to $356.3 million from $446.1 million.

Excluding $16.9 million in costs incurred at one of its fields, profit in the latest quarter would have been $27.4 million, or 54 cents, Mitchell said. It was expected to earn 75 cents, the average estimate of analysts polled by Thomson Financial/First Call, with estimates ranging from 63 cents to 88 cents.

With the quarterly loss and lower commodity prices, Mitchell said it would reduce its drilling programs in East Texas and along the Texas Gulf Coast because of lower energy prices and high rig-rental rates. In the Barnett Shale, where drilling returns remain more attractive, Mitchell added two rigs during the third quarter, but plans to maintain 18 rigs in the Barnett for now, rather than going by year-end to the previously announced 20-rig program. In its East Texas and Texas Gulf Coast drilling programs, current returns are only “marginally attractive” and the number of rigs working in these areas is being reduced to two from nine by the end of the year.

In related news, Devon last week said it has made an effort to reduce its downside commodity price risk with several hedging instruments, including costless collars, price swaps and fixed price transactions that cover a substantial amount of its natural gas production.

For the fourth quarter, Devon entered into price swaps and fixed price contracts covering 147,000 MMBtu/d at an average price of $2.70/MMBtu. The price swaps and fixed price contracts will be settled using the first of the month published index prices in the regions in which the gas is produced. Devon also entered into costless collars for the fourth quarter covering 40,000 MMBtu/d. The average floor and ceiling prices for the costless collars are $3 and $3.38/MMBtu, respectively.

In aggregate, including previously disclosed transactions, Devon has downside price protection in place for 513,000 MMBtu/d in the fourth quarter at an average price of $3.06/MMBtu. For 2002, Devon recently entered into price swaps and fixed price contracts covering 220,000 MMBtu/d at an average price of $2.79/MMBtu. The price swaps and fixed price contracts will be settled using the first of the month published index prices in the regions in which the gas is produced. In aggregate, including previously disclosed transactions, Devon has downside price protection in place for 685,000 MMBtu/d in 2002. This downside price protection is at an average price of $3.02/MMBtu.

For 2003, Devon entered into price swaps and fixed price contracts covering 118,000 MMBtu/d at an average price of $3.17/MMBtu. These price swaps and fixed price contracts also will be settled using the first of the month published index prices in the regions in which the gas is produced. Devon also recently entered into costless collars for 2003 covering 300,000 MMBtu/d with average floor and ceiling prices for the costless collars at $2.91 and $3.85/MMBtu, respectively. In aggregate, Devon has downside price protection in place for 439,000 MMBtu/d in 2003. This downside price protection is at an average price of $3.03/MMBtu.

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