Devon Energy Corp. has decided to not accelerate its North American dry gas production other than to secure acreage positions or to test “a few new concepts,” CEO J. Larry Nichols said last week.

“We’ve been working on our oil portfolio for some time,” Nichols told financial analysts during a conference call. He pointed to Devon-owned gas processing plants that have been or are being built near some of its substantial production areas. “It’s a shift,” he said, of the move toward more oily prospects, “but it’s not nearly as dramatic as some of the gas producers” (see related stories).

About two-thirds of Devon’s output is locked in natural gas, but the producer has a substantial position in Canada’s oilsands business. With gas prices sustainably lower, Devon also has increased its natural gas liquids (NGL) and oil production in its U.S. basins.

“We will produce dry gas to secure our acreage position in the shale plays, such as Haynesville and Horn River, and to test a few new concepts,” Nichols said. “However, oil and NGL are the focus now. Most of 2010 is focused on oil and liquids-rich plays, with some capital to expand our footprint.”

Until this year, Devon’s portfolio included some of the top prospects in the Gulf of Mexico (GOM). However, with a plethora of opportunities on the table, management put all of the GOM and international assets up for sale — a decision that has worked out better than expected.

Devon’s exit from the offshore is essentially complete. It has sold or as agreements for nearly all of the marketed assets, with aggregate proceeds of about $9.9 billion before taxes and after-tax proceeds of about $8 billion — well ahead of an original forecast of $4.5-7 billion.

The funds “leave us with tremendous flexibility to pay down debt,” Nichols noted. “Devon is emerging with a rock-solid balance sheet, a balanced portfolio of oil and gas projects and one of the lowest cost structures in the peer group.”

Don’t expect the Oklahoma City-based independent to turn its back on gas. In fact, most of its onshore gas output continues to deliver rates of return (ROR) “above 20%,” based on current strip prices, the CEO noted.

The only gas shale basin where ROR is “challenged” is the Haynesville Shale, operations chief Dave Hager told analysts. “We really need to evaluate that, especially on the term acreage in St. Augustine [county in East Texas]…everything else is generating very strong rates of return.”

Nichols is confident that gas prices eventually will generate even stronger earnings for the company.

“Could we envision a time to increase our exposure to natural gas for the longer term?” he asked rhetorically. “We certainly can envision that. It’s not there today. But we certainly envision that in the future…”

Devon reported net earnings of $1.2 billion ($2.67/share) in 1Q2010 versus a net loss of $4.0 billion (minus $8.92) in the year-ago period. Cash flow topped $1.4 billion, 45% higher than in the first three months of 2009.

Devon in 1Q2010 also received $1.3 billion in pre-tax proceeds from selling three Lower Tertiary discoveries in the deepwater GOM, and it used the proceeds to fully fund this year’s capital program and to repay $1.2 billion of commercial debt.

The company ended March with $1.2 billion of cash on hand and net debt of about 22%.

North American natural gas production in 1Q2010 totaled 226.5 Bcf, down from 244.4 Bcf in the year-ago period. In the U.S. onshore, gas output fell to 165.9 Bcf from 181.1 Bcf. In Canada gas production dropped to 50.8 Bcf from 52.7 Bcf. Average daily gas production was 2,516.3 MMcf, down from 2,716.6 MMcf in the year-ago period.

In part because of its asset sales, Devon’s 1Q2010 oil equivalent production, which combines output from the United States and Canada, totaled 55.9 million boe, down from 58.5 million boe in the year-ago period.

High on its list of movers this year is the liquids-rich Cana-Woodford Shale, where Devon’s leasehold is now about 180,000 net acres. The company has added 16 new wells to its production area, lifting average net output in the play to 73 MMcfe/d.

Net production from the granddaddy of all the shale plays, the Barnett Shale field in North Texas, averaged 1.1 Bcfe/d in 1Q2010 — 5% higher sequentially partly on new liquids output.

Three Haynesville Shale wells also were completed in Texas’ Shelby and Nacogdoches counties in 1Q2010. Initial 24-hour production rates for the three horizontal wells averaged 6 MMcfe; Devon holds a 100% working interest.

Sales of oil, natural gas and NGLs from continuing operations were $2.1 billion in 1Q2010, which was 50% higher than sales of $1.4 billion in the year-ago period. Average realized natural gas prices jumped 29% to $4.80/Mcf from $3.73/Mcf. Average realized oil prices were up 115% from 1Q2009.

Marketing and midstream operating profits topped $133 million in 1Q2010, which was 9% lower than in 1Q2009. The decrease, said Devon, resulted from lower gas marketing margins that were partially offset by higher commodity prices.

Most of Devon’s expenses in 1Q2010 were down from a year ago. For instance, lease operating expenses were $414 million, or 6% lower than the year-ago quarter.

Based on its asset sales to date, Devon’s board of directors authorized the repurchase of up to $3.5 billion of the company’s common stock, and plans are to begin purchasing shares immediately. The shares would be acquired in the open market, with timing dependent on market conditions.

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