With management trained on a bevy of exploration opportunities in the deepwater Gulf of Mexico (GOM) and its mounting success onshore in the Barnett Shale and Midcontinent, Devon Energy Corp.’s announcement last week to put its West African oil and gas assets on the market appeared to clarify the independent’s optimism about North American prospects.
The West African assets, which account for about 4% of the independent’s total proved reserves, had estimated proved reserves of 90 MMboe at year-end 2006. Most significant among the properties is Devon’s interest in the ExxonMobil Corp.-operated Zafiro field in Equatorial Guinea. In all, Devon owns interests in 16 blocks in various stages of production, exploration and appraisal. The properties are expected to produce 11 MMboe in 2007.
“The sale of West Africa will enable us to concentrate our talent in North America and our efforts in China and Brazil…,” said President John Richels, who presided over a conference call last week. “We took a look at the ongoing success we’ve had… We’ve been blessed with an awful lot of success, a lot of talent, and we want to concentrate it where we can be the most effective.”
The West African assets, while profitable, have higher costs and are higher risk, and they don’t hold the promise of Devon’s North American onshore and offshore properties, said Richels.
“In our overall strategy, and in the several years since Devon went public, we’ve concentrated our low-risk property base mostly in North America, while simultaneously investing in other opportunities,” he said. “We found it has been the best way to develop and sustain our long-term organic growth. On our low-risk assets, we’ve been very successful in the Barnett Shale, in [the Carthage/Bethany field in East Texas and]…throughout the Midcontinent…
“We dramatically increased our acreage in the Barnett in 2006 with the Chief [Oil & Gas] acquisition, leading to a higher level of drilling there for the foreseeable future.” Devon is the largest producer in the Barnett (see NGI, Sept. 11, 2006; May 29, 2006). “Also, we’re now developing our assets in Oklahoma [the Arkoma Basin], where we also expect to see a significant increase in production in 2007.”
Besides its onshore acreage, Richels also noted Devon’s “very strong inventory” in the GOM, which includes a stake in the deepest well ever tested in the GOM, the Jack #2 well in the Lower Tertiary (see NGI, Sept. 11, 2006). Devon has to date made four discoveries in the GOM’s deepwater Lower Tertiary trend, and it estimates that its participation in just those four discoveries could yield 900 million boe, which would increase its 2005 year-end booked reserves by 43%. All told, Devon now holds stakes in 19 prospects in the Lower Tertiary.
“Because of our position as the first mover in the play, we have a large control of the trend acreage,” he said. “We have some long-term drilling rigs under contract, and we have the capacity to have an impact on the deepwater.”
Devon last October signed a four-year $690 million contract with Seadrill Offshore AS for use of the West Sirius rig, which would be capable of drilling any prospect in Devon’s deepwater inventory in the GOM (see NGI, Oct. 23, 2006). The rig, currently under construction, is designed to drill to 37,500 feet in up to 10,000 feet of water. The rig is scheduled for delivery from Singapore in 2Q2008, and Devon has the option to extend the lease term to five or six years.
Before entering into the West Sirius contract, Devon obtained a four-year contract on Diamond Offshore’s Ocean Endeavor deepwater drilling rig. The Ocean Endeavor is being refurbished in Singapore and is scheduled to arrive in the GOM by mid-year. The Ocean Endeavor is capable of drilling to 35,000 feet in 10,000 feet of water.
In response to a question about how Devon plans to use the proceeds from its West African sale, Richels said there were still “many unknowns on the transaction,” but the company plans to use the net proceeds to pay down its commercial debt and resume its share repurchase program. The sale, he said, is expected to have a neutral impact on earnings. The company does not foresee the sale being finalized before 3Q2007, and Richels said most of the $140 million allocated in Devon’s capital budget for the West African assets this year will be spent there.
The sale process will be managed for Devon by Goldman Sachs & Co. and Scotia Waterous. Data rooms for interested buyers will be opened in London and Houston near the end of 1Q2007. Devon has scheduled its 4Q2006 earnings announcement for Feb. 7.
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