Devon Energy Corp.’s net earnings climbed 34% in 2005, earnings per share were up more than 40%, and cash balance reached a record, making last year the best in the Oklahoma City-based producer’s history. Devon also added 439 million boe of proved reserves through drilling and performance revisions, nearly doubling its 2005 output of 226 million boe, with Barnett Shale assets driving the results.

Devon’s 4Q2005 net earnings jumped 44%, to $970 million ($2.14/share), from $673 million ($1.35) in 4Q2005. Excluding special items, Devon would have earned $2.33/share in the final quarter. Revenue rose to $3.22 billion in the final quarter, compared with $2.47 billion a year earlier. On average, Thomson First Call analysts had forecast earnings of $2.20/share on revenue of $3.04 billion. For the year, Devon earned $2.9 billion ($6.26/share), compared with 2004 earnings of $2.2 billion ($4.38).

CEO J. Larry Nichols said in a conference call the most important element of last year’s performance was through the drillbit. Even after selling nearly $2 billion in properties (with reserves estimated at 183 million boe), Devon, which is 60% weighted to natural gas, ended 2005 with 1.599 billion boe, or 76% of proved reserves, classified as proved developed. Year-end reserves comprised 649 million bbl of crude oil, 7.3 Tcf of gas and 246 million bbl of natural gas liquids.

“We had an outstanding year,” Nichols said. “More importantly, we laid the foundation for robust growth. By growing reserves, production follows.”

Devon’s Barnett Shale holdings in North Texas were the “most significant source of reserve growth,” Nichols said. The company added 115 billion boe in proved reserves from the Barnett holdings alone, with production of 34 billion boe. Overall, U.S. onshore properties contributed to 219 billion boe in proved reserves. In Canada, the company added another 184 billion boe in reserves, or almost three times the amount of oil and gas produced.

Excluding divested properties, Devon’s total 2005 natural gas production in the U.S. onshore climbed 1% year-over-year, to 455.2 Bcf from 449.6 Bcf in 2004. In the offshore, gas output climbed 20% to 80.3 Bcf from 67.1 Bcf. Total U.S. gas production was up 4% to 535.5 Bcf from 516.7 Bcf. In Canada, gas production climbed 6% year-over-year, to 246.6 Bcf from 239.7 Bcf. Average daily production for U.S. onshore and offshore properties totaled 1.467 Bcf/d, 4% higher than 1.411 Bcf/d reported in 2004. In Canada, average daily output climbed 3%, to 675.5 MMcf/d from 654.9 MMcf/d.

In 4Q2005, U.S. onshore production climbed 5%, to 119.1 Bcf from 113.9 Bcf in 4Q2004. In the U.S. offshore, hurricanes dropped gas output 16%, to 15 Bcf from 17.8 Bcf in 4Q2004. Total U.S. gas output in the quarter was up 2%. In Canada, gas production in the quarter grew 1% to 61.2 Bcf from 60.6 Bcf. On a combined basis, oil, gas and natural-gas liquids output averaged 619,000 boe/d in 2005, down 10% from Devon’s 2004 average daily production, because of property divestitures and lost output from hurricane-related downtime. Devon drilled 254 successful exploratory wells and 2,060 successful development wells in 2005.

Nichols was asked if Devon was considering any possible acquisitions this year, including the rumored buy of Chief Oil & Gas Co., a private exploration company that it also one of the top producers in the Barnett Shale. Chief is said to be asking more than $1 billion for its assets.

“We have, over the years, tried to find acquisitions when prices are low,” Nichols said. “We bought properties when gas was out of favor…and when you look back in hindsight, some of our those acquisitions [including Mitchell Energy in 2000], were exceptionally well timed. We are long positioned in the Barnett Shale. For us to do an acquisition now, we would have to find a set of properties or a company that would be accretive to earnings, accretive to cash…to give us an attractive rate of return. That is very hard to do.”

Nichols said Devon has been focused on selling off properties to improve the quality of its asset base, and finding complements now “is made more difficult…We also have to find a property that adds to long-term growth. We could find properties out there today that would enhance our production in 2006, but the cost of that would be to dilute our growth in 2007 and thereafter. I see absolutely no reason to do that. The chances [of an acquisition] to meet our high hurdles this year and beyond are exceedingly remote. It’s been three years since we did an acquisition, which reflects the fact that the value we see in the marketplace is not in some of these companies that have focused on short-term growth.”

Nichols added he was “frankly, blown away by the very aggressive prices people will pay” to move into the Barnett. “If we could buy one cheap, we would. Is it likely? No, it’s not. That’s all I’ll say.”

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