Devon Energy Corp., the largest U.S.-based independent producer, Thursday reported a 13% increase in quarterly net income and a 43% increase in total daily oil, natural gas and gas liquids production. The large production increase was mainly a result of Devon’s Ocean Energy merger last year. Excluding the impact of the merger Devon’s production still climbed 7% over 1Q2003.

Total production in the first quarter was a record 703,000 boe/d, compared with 492,000 boe/d for the same period a year ago. Minus the Ocean merger, quarterly production increased by about 45 Mboe/d from a year ago.

Natural gas onshore and offshore production in the United States totaled 151.2 Bcf, up from 117.8 Bcf in 1Q2003, and total Canadian production was 67.3 Bcf, up from 63 Bcf. Meanwhile, the natural gas liquids segment in the United States rose to 4.7 million bbl, compared with 3.7 million bbl, while Canadian liquids production was down at 1.2 million bbl, compared with 1.3 million bbl last year.

Daily gas production onshore in the United States was 1,305.6 MMcf/d, up from 1,085.1 MMcf/d, while offshore production grew to 363.3 MMcf/d from 224.4 MMcf/d in 1Q2003. Canadian production also was up in the quarter at 739.4 MMcf/d, compared with 699.8 MMcf/d for the same period of 2003.

Presiding over a conference call with analysts on Thursday, CEO J. Larry Nichols said “no quarter is perfect,” but the “first quarter was really an outstanding one for Devon.” He attributed the gains to record production volumes and the continuing strength of oil and gas prices.

However, he shared his concerns about the high quarterly finding and development (F&D) costs. Lease operating and transportation expenses were up 50% to $310 million. On a unit-of-production basis, expenses increased 4% to $4.84/boe on a stronger Canadian dollar. Meanwhile, depreciation, depletion and amortization expenses (DD&A) increased 93% to $572 million, driven by higher oil and gas production and a higher DD&A rate. The combined first quarter DD&A rate increased 34% to $8.95/boe.

“Our finding and development costs are significantly higher than most of our high-cap peers,” Nichols said, “but we’re increasingly confident that we will lower F&D this year. We are one-third of the way through our capital investments program, and I’m encouraged by the results in the drill bit.”

Nichols and his management team expect more success domestically this year, which would be a welcome sign. In the first quarter, Devon’s exploration well success rate in the United States plummeted to 17% from 67%, while Canadian exploration was more successful, up to 90% from 84%. Worldwide, Devon hit pay dirt on 93% of the wells it drilled, the same rate as 1Q2003.

Devon’s earnings increased to $494 million ($2.06/share), compared with $436 million ($2.76) in 1Q2003. Combined sales of oil, gas and liquids were $1.8 billion in the first quarter. Devon’s average realized price for gas production increased 4% in 1Q2004 to $5.05/Mcf, up from $4.84/Mcf a year ago. Average realized price for oil decreased 1% to $27.78/bbl, compared with $28.09/bbl, and liquids decreased 6% to $19.78/bbl, down from $21.15 in 2003. Devon also reported its highest quarterly level of cash flow from operations, which was up 48% from a year ago to $1.2 billion.

Marketing and midstream operating margins increased 9% to a record $85 million, compared with marketing and midstream margins of $78 million in 1Q2003. Revenues, however, decreased on lower third-party processed gas volumes and lower market prices for gas and gas liquids.

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