With a sharper focus on its North American operations, Devon Energy Corp. exceeded Wall Street forecasts Wednesday, increasing its natural gas-directed production by 16% and upping its profits by 5.2% from a year ago.
Net income for the Oklahoma City-based independent rose to $904 million ($2/share after paying dividends on preferred stock) from $859 million ($1.92) for the same period of 2006. Sales were up 25% to $2.93 billion.
On the news, the stock price of the largest U.S.-based independent jumped more than 5%, or $3.81/share, to close at $78.42. The company’s share price has risen more than 15% this year.
“Clearly, it was a terrific quarter,” said CEO J. Larry Nichols, who presided over a conference call Wednesday. He said Devon’s decision to sell some of its overseas holdings (see Daily GPI, Jan. 24) has helped the company redirect most of its attention to North America — on and offshore.
The Barnett Shale’s leading operator ensured its position in the play last year with the purchase of privately held rival Chief Oil & Gas LLC (see Daily GPI, June 30, 2006). The contribution of Chief and Devon’s production prowess helped grow U.S. natural gas output to 154.8 Bcf from 135.9 Bcf in 2Q2006. In the U.S. onshore, gas output jumped to 135.9 Bcf from 117.3. Offshore, gas production was flat at 18.6 Bcf, compared with 18.6 Bcf in 2Q2006. Canadian gas production was down at 57 Bcf from 62.7 Bcf.
U.S. realized gas prices in the quarter averaged $6.44/Mcf from $5.91/Mcf a year earlier. In the U.S. onshore, prices averaged $6.25/Mcf, compared with $5.67/Mcf a year ago; offshore, U.S. gas prices rose to $7.82/Mcf from $7.39/Mcf a year ago.
Like other producers coping with higher oilfield service costs, Devon’s operating expenses were higher across the board. Total lease operating costs jumped 28%, and marketing and midstream operating costs were up 20% from a year ago.
However, Stephen J. Hadden, senior vice president of exploration and production, said Devon managed to keep some of its Barnett Shale costs down from a year ago because of gains in technology.
“We have new, more automated rigs, which have allowed us to buck the trend,” Hadden said. “Our average drilling costs have actually decreased, with a 10% decline in average drill days.” He said it now takes Devon about 16.5 days to drill a well in the Barnett, down from more than 18 days, which saves the company about $190,000 per well in drilling costs.
With “solid” development success in and around the core Barnett Shale holdings, Devon’s drilling plans for the year also are ahead of schedule, Hadden told analysts. “We have 30 Devon-operated rigs, with 13 in the core operating area and 17 outside the core…At the current pace, we’ll drill about 500 wells in the Barnett Shale this year, compared with our previous forecast of 385 wells.
Devon produced 797 MMcf/d net from the Barnett during the quarter, which was 9% higher than a year ago — and nearly on target with the company’s forecasted projections for 2007.
“We had earlier expected production by the end of 2007 to be 800 [MMcf], but now we expect it to be 875 [MMcf] in the Barnett Shale by the end of the year,” Hadden said.
Devon also is finding success in its Woodford Shale play. There, it has five operating rigs in play, and seven new wells were ramped up in the quarter. Hadden said Devon’s net production from its Woodford Shale holdings “could be as much as 1 Tcf.” In its East Texas Cotton Valley play, 22 vertical wells were completed. And in the Rocky Mountains, Devon’s Powder River Basin exploration is expected to result in 200 new wells, with an exit rate of 70 MMcf/d by the end of the year, said Hadden. Devon is forecasting production in its Big George play to approach 100 MMcf/d by the end of 2008.
Nichols said he was encouraged by Devon’s ability to grow its gas production onshore. However, he provided some insight into why the company may be increasing its leverage in the Gulf of Mexico (GOM). Besides its Outer Continental Shelf properties, Devon holds stakes in both the Eastern and Central GOM deepwater.
“Independents have been fueling the growth” in North America’s onshore gas production, and “Devon is pleased to be a contender overall,” said Nichols. However, the “majors are not putting their capital into the onshore, and their production has been declining for many years. That, of course, could change, but there’s a lot of production decline in the United States and Canada and a lot of moving pieces there.”
Devon is one of the largest producers in the GOM with interests in about 700 offshore blocks — 500 in the deepwater. In its emerging deepwater unit, Devon likely will drill one to three exploration wells a year over the next four or five years, said Hadley. The deepwater so far has yielded four significant discoveries for Devon in the Lower Tertiary trend including Cascade in 2002, St. Malo in 2003, Jack in 2004 and Kaskida in 2006 (see Daily GPI, Sept. 6, 2006). Delineation tests will be done on some of the prospects in 2008, but Hadley said production isn’t likely for several more years.
“We are working together with the [Chevron Corp.-led] partnership, and it will be somewhere around that range,” Hadden told analysts. “It’s still very early as it relates to final production consideration and a commercially sanctioned project.”
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