Strong natural gas prices are offering Devon Energy Corp. an opening into putting more gas rigs back to work later this year, CEO John Richels said Wednesday.

The management team discussed the company’s quarterly performance and outlook for the year during an hour-long conference call.

“The relative strength in natural gas prices” that partly followed a cold end to winter, and “evidence that the natural gas supply has slowed significantly,” is giving the company increased confidence in the markets, he said. Prices today are “just below the trailing five-year average. The recent uplift could have a significant impact on upcoming quarters…

“The improved sentiment is is encouraging,” but “we are not modifying our capital plans at this time. Even with our natural gas assets in some of the lowest cost shale plays, the returns are still more attractive on the liquids side of the portfolio versus dry gas drilling.”

However, if higher prices are sustained into the second half of this year, “we could start drilling in the Barnett..” The operator now is “dealing with a very large base of 1.4 Bcfe/d, and one of the things we are really focused on is optimizing our base production. Doing a good job of maximizing base production is, quite frankly, just as important as putting more rigs back to work.”

If gas drilling were to increase, the effects might not be seen for months because it would require a shift in rigs from liquids back to dry gas plays, the CEO noted.

Stronger gas prices also lifted the marketing and midstream business, which earned a profit of $125 million in 1Q2013, 12% higher from a year ago and above guidance.

Devon is “examining every option to create value,” but each potential avenue has “unique complexities” operationally, regulatory-wise, contractually or in tax implications, explained Richels.

“One option is to create a midstream partnership,” which he has said for months could provide more visibility within its earnings performance and stock price, which he feels is undervalued. An evaluation is nearly completed, and a final “go or no go” decision is expected by the end of June.

Quarterly losses totaled $1.34 billion net (minus $3.34/share), compared with year-ago profits of $393 million (97 cents). A bad hedging bet on oil and natural gas liquids (NGL) prices resulted in the losses, leading to a $1.9 billion writedown in 1Q2013. Realized prices for NGLs declined 20% year/year on oversupplies, while crude oil prices were down 14%. Without the one-time charge, the Oklahoma City operator earned $270 million (66 cents), 11 cents higher than consensus forecasts. Total revenues declined year/year to $1.97 billion from $2.50 billion, and operating cash was nearly flat at $1 billion.

Like its peers, the formerly gas-directed operator is building a substantial liquids inventory. Companywide oil production averaged 162,000 b/d, 14% higher than in the year ago period and 8% more than in 4Q2012. Driven by the Permian Basin, the most significant growth came from U.S. operations, where oil production increased 23% year/year. Total production averaged 687,000 boe/d in the latest quarter, exceeding guidance by 2,000 b/d.

Natural gas still is more than half of Devon’s output, but “oil and liquids production, our highest margin products, now account for 41% of our total production,” said Richels. “Driven by our success in the Permian, we are on track to grow our U.S. oil production by almost 40% in 2013.”

The recent rise in natural gas pricing provided Devon the opportunity to increase its hedging position for the rest of the year. For the second quarter through the end of December, Devon has protected 1.7 Bcf/d, which represents almost 75% of its expected output. Of this total, 1.0 Bcf/d is swapped at a weighted average price of $4.09/Mcf; the remaining 7 MMcf/d uses costless collars with a weighted average ceiling of $4.19 and a floor of $3.55. In 2014, Devon now has 900 MMcf/d of production locked in at a weighted average floor price of $4.34.

©Copyright 2013Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.