Weak natural gas prices forced Devon Energy Corp. to write down almost $900 million in the value of its assets in the fourth quarter, the Oklahoma City-based operator said Wednesday.
It was the second quarter in a row that Devon wrote down the value of its gas assets; it took a a $896 million charge in 4Q2012 and a $1.1 billion charge in 3Q2012. In the last three months of 2012 net losses totaled $357 million (minus 89 cents/share), versus profits of $507 million ($1.25) in 4Q2011. Revenue, which showed gains from onshore liquids operations, declined slightly in 4Q2012 to $2.6 billion.
Asset impairments also led to the loss of $206 million (minus 52 cents/share) for the year. Excluding the one-time charges, Devon earned $1.3 billion ($3.26/share) in 2012.
“In spite of a challenging commodity price environment that impacted our financial results, Devon delivered solid operating results in 2012,” said CEO John Richels. “During the year, we continued to make significant progress toward the conversion of our asset portfolio to a higher oil weighting. This is evident through the strong oil production growth we delivered during the year and the impressive growth in oil reserves.”
For all of 2013, no dry natural gas drilling is scheduled, a strategy that Devon followed in 2012 (see NGI, Feb. 20, 2012). Until prices strengthen, there is no point in investing in its broad gas portfolio. said the CEO. Devon’s share price doesn’t reflect the value of its asset base, and the management team was willing to do whatever it takes to build value.
“We’ve got a lot of projects…that if they’re successful, as we think they’re going to be, they’re going to require quite a bit of cash investment over the next few years as we develop them into really major projects,” said Richels. “But anything that we do, whether we’re investing that money in our projects, whether we use it do an acquisition, whether we buy back stock, we’re going to do whatever is going to result in the most accretion and cash flow per share adjusted for debt. We’ve talked a lot about that metric. We think that that ultimately is what we ought to be focused on. So nothing is off the table.”
One of the ideas getting more than a glance is creating a master limited partnership in which to drop the midstream assets. Devon had worked on an MLP plan in 2007 before dropping it.
The timing wasn’t right in 2007, said Richels, because an “MLP with high variability or high exposure to commodity prices did not exact the same kind of multiples as say a tolling business did. We’ve talked a lot about that in the past. There are a couple of things that have changed. First of all, we think there may be more of an opportunity for us to change the nature of some of the contracts that we have today than a few years ago for a variety of contractual reasons. And secondly, there are some innovations, if I can call it that, that have arisen in the last few years as where the operating company can ensure a more constant cash flow through hedging or other techniques…between the MLP and the operating company, and where the operating company becomes the counterparty.”
He also didn’t exclude the idea of selling assets — at the right price, and he hinted that more monetizations similar to the mega joint ventures (JV) announced last year might be in the works. Last summer Japan’s Sumitomo Corp. agreed to pay Devon $1.4 billion for a 30% stake in 650,000 net acres in the Permian Basin’s Cline and Midland-Wolfcamp shales (see NGI, Aug. 6, 2012). In early 2012 China’s Sinopec International Petroleum Exploration & Production Co. agreed to invest $2.2 billion for a one-third stake in five plays — the Tuscaloosa Marine and Utica shales, the Niobrara and Mississippian Lime formations, and the Michigan Basin (see NGI, Jan. 9, 2012). The JVs are paying for most of Devon’s drilling.
Total oil, natural gas and natural gas liquids (NGL) output last year climbed to 250 million boe, up 10 million boe from 2011 and the highest annual production in Devon’s history from its North American operations. The production increase was driven almost entirely by onshore oil output, which jumped 20% year/year, more than offsetting declines in onshore natural gas volumes because of reduced activity levels.
Oil output increased 13% year/year to average 151,000 b/d, with the “most significant growth” in the United States, where output jumped 30%, the company noted.
The Permian Basin operations reported output rising 31% in the final quarter from a year ago, with oil accounting for 60% of the 66,000 boe/d. Seven wells each were brought online in the Mississippian Lime and the Granite Wash. In the Cana-Woodford Shale, 29 operated wells began to produce in 4Q2012 with average IP rates of 6.5 MMcfe/d, including 420 b/d of NGL and 135 b/d of oil.
The gassy Barnett Shale operations brought in 1.4 Bcfe/d net in the final period, with liquids output rising 3% year/year to 48,000 b/d.
Devon added 381 million boe through the drillbit last year, with about $7.5 billion in associated capital invested. For reporting purposes, $1.3 billion of cash proceeds received from closing two joint ventures were not subtracted from the 2012 drillbit capital total. However, the proceeds effectively reimbursed Devon for leasing and exploration costs incurred.
“Devon’s capital program delivered excellent drillbit results in 2012,” said exploration chief Dave Hager. “Our oil-focused drilling program replaced nearly 260% of our oil produced during the year. Even before the benefits of our joint venture agreements, these reserve additions were added at very competitive finding costs.”
Reserve revisions related to lower gas prices, which impacted gas and NGL reserves, resulted in a decrease to proved reserves of 171 million boe in 2012. The company’s reserve life index (proved reserves divided by annual production) remained at about 12 years. Proved developed reserves accounted for 72% of total proved reserves.
Although total production in 2012 increased, revenue from oil, natural gas and NGL sales declined 14% to $7.2 billion. Cash settlements related to oil and gas hedges increased revenue by $870 million ($3.48/boe), which partially offset lower realized prices. Devon has entered into 2013 hedging contracts for 115,000 b/d of oil. Of this total, 55,000 b/d are swapped at a weighted average price of $101/bbl. The remaining 60,000 b/d use costless collars with a weighted average ceiling of $113 and a floor of $90. For 2013 Devon has about 1.3 Bcf/d protected at a weighted average floor price of $3.87, which covers about 60% of expected gas output.
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