Companywide, production at the top-five ranked independent Devon Energy Corp. will rise, with exploration in the Gulf of Mexico and success in its coalbed methane (CBM) stakes in the Powder River and Raton basins contributing the most, executives revealed in an earnings conference call Thursday. Like its peers, Devon reported record earnings and surpassed Wall Street estimate. After announcing the numbers, the CEO and others laid out their future strategy, which will include continued reserve replacement, key acquisitions and stock repurchases.

The Oklahoma City-based company reported record high earnings for the second quarter and the first half of 2001, with quarterly earnings standing at $194 million, or $1.48 a share — a 26% increase over second quarter 2000, when earnings were $153 million, or $1.19 a share. The second quarter saw Devon impair the carrying value of some of its international assets, and it also recorded a non-cash gain on a change in the fair value of derivatives. Including the impairment charge and the non-cash gain, net earnings were $136 million or $1.03 per common share.

Second quarter sales of oil, gas and natural gas liquids reached $710 million, a 12% increase over the same period last year, which had $636 million in sales. Devon said the “small increase” in natural gas production and higher natural gas prices offset declines in oil production and oil prices. Total production of oil, gas and natural gas liquids was 29.7 MMboe for the quarter, compared with total production of 30.6 MMboe in the second quarter of 2000.

However, Devon pointed out that about 1.2 MMboe of 2000’s second quarter production came from non-core properties that have since been divested. Adjusting for the sold properties, 2001 second quarter production was “slightly above” that a year ago.

Moving into the second half of the year, Devon expects production to gear up, especially in the Gulf of Mexico and its Powder River Basin assets, said CEO J. Larry Nichols. He pointed out that Devon had forecast its production to stand at about 120 MMboe by the end of 2001, and he said the company was on a pace to reach between 63-65 MMboe in the second half. Especially noteworthy, he said, was the ramped up production from Devon’s Powder River CBM properties.

Calling Devon the “premier” CBM producer in America, Nichols predicted that Powder River’s production will grow from its current 80 MMcf/d to around 100 MMcf/d by the end of the year. With 115 CBM wells now in the Powder River Basin alone, Nichols said that he expects the company to increase its rig count to 14 in the next few months.

“We are looking for an increase in the Powder River Basin in the second half,” Nichols noted, but warned that the “increases in production are tied to the timing of water discharge permits,” which have been slower to obtain than expected. He said that transportation costs also are a higher cost factor than expected in the infrastructure-poor Rocky Mountain region.

Noting that transportation costs had risen to more than $18 million for the quarter over 2000’s costs of about $13 million, Nichols said that Devon’s companywide “big driver for transportation costs is Powder River…it is highly economic, but we pay high transportation costs” because the pipeline infrastructure is still in its infancy. Devon’s CBM transportation costs run about 68 cents/Mcf, he said, but the “good news” is that Devon pays the fees for transportation to Thunder Creek, in which it has a 75% stake. Still, he said that “in any case, it looks like transportation costs will probably exceed the estimate” made at the beginning of the year.

Brian Jennings, the senior vice president of corporate development, revealed that Devon also is considering acquisitions in the near future, and allied that with part of the company’s three-pronged strategy for future growth. He declined to reveal any possible deals, saying it would be “hard to predict” mergers and acquisitions in the future, but the volatility in the current marketplace “makes M&A more attractive.” Jennings added that along with acquisitions, reserve replacement and a continued share repurchase program would move the company forward.

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