Devon Energy Corp. has a long “to-do” list of exploration activities planned in North America this year, and “we’d have to see a fairly large reduction in prices” before pulling back on any planned exploration, President John Richels said last week. “We’re taking the longer-term view, and we’re very confident that we’ll see higher prices this year on the gas and oil side.”

Richels joined Devon’s management team for a conference call Wednesday, and he detailed the 17% hike in Devon’s operating costs last year over 2005, which followed “upward pressure on services and personnel costs.” However, the higher costs are “a recurrent theme in the exploration and production sector.” Already, he said, Devon has begun to see some service costs coming down.

“We tend to review this on a fairly periodic basis,” he said. “We keep pretty close ties on that, and we are making most of our decisions based on longer-term horizons that are more than a quarter or a half year.” Devon is budgeting $4.9-5.3 billion for 2007 exploration; all-in capital costs are estimated at $5.3-5.7 billion. Last year, Devon invested around $5 billion in exploration.

As several of its peers have noted in recent weeks, Canadian costs are a problem for Devon. CEO C. Larry Nichols noted that some of Devon’s competitors are “pulling back on investments,” but their pull-back provides “opportunities in the market. It will return over time, and we’ll watch to see how long that takes. We’re prepared to ramp up the conventional side when that occurs.”

Meanwhile, Devon has plenty of opportunity to grow its core U.S. onshore holdings and emerging deepwater Gulf of Mexico development, said Nichols. Devon expects to increase total drillbit reserves this year by 350-370 MMboe, which would be two-thirds more than estimated production.

In addition to the drillbit reserves, oil and natural gas output from continuing operations (excluding West African assets for sale) is forecast to be 219-220 MMboe in 2007, 10% higher than in 2006. Full-year gas output is expected to climb to 841 Bcf from 815 Bcf in 2006. Devon drilled more than 2,400 wells in 2006, with a 98% success rate. It also drilled its 600th well in the Barnett Shale, the prolific play in Texas.

“This was one of the best years in Devon’s history,” said Nichols. “We had the highest earnings per share in Devon’s history…We funded the largest exploration program in the company’s history.” Nichols said last year’s successes had “set the stage for well into future,” led by core U.S. onshore exploration. “We couldn’t be more excited about Devon’s outlook.”

Using only 2006 full-year data for its retained properties, total U.S. gas production jumped 6% year-over-year, to 566.1 Bcf from 535.5 Bcf. Onshore, gas output rose 7% over 2005, to 487.5 Bcf from 455.2 Bcf. However, offshore gas output fell 2% to 78.6 Bcf from 80.3 Bcf. In Canada, total gas output fell 3% year-over-year, to 240.4 Bcf from 246.6 Bcf.

Devon’s estimated proved reserves at year-end set a record at 2,376 MMboe, a 13% increase over 2005. Reserve additions from all sources before price revisions were 533 MMboe, more than double the company’s annual oil and gas production of 214 MMboe. Also last year, Devon’s reserve life index (proved reserves divided by annual production) increased to 11.1 years from 9.4.

Organically, the independent added 427 MMboe last year through discoveries, extensions and performance revisions. It also acquired 106 MMboe, mostly in the Barnett, primarily through the $2.2 billion purchase of privately held Chief Oil & Gas (see NGI, May 29, 2006). Proved developed reserves at year’s end were 1,674 MMboe, or 70% of proved reserves, which included 8.4 Tcf of gas, 708 million bbl of crude and 275 million bbl of natural gas liquids. A slide in oil and gas prices toward the end of 2006 reduced Devon’s proved reserves by 50 MMboe.

Going forward, Devon is counting on the Barnett to provide the lion’s share of gas production. Its 2007 Barnett gas output is expected to top 800 MMcf/d. Devon produced 709 MMcf/d from the play in December.

In the deepwater, Devon will participate in a second delineation well at the Chevron Corp.-led Jack well later this year. A test on the No. 2 Jack well, located in the Lower Tertiary trend, proved successful last year, but more tests have to be conducted before development begins. The well is considered a bellwether for the Lower Tertiary, and Devon, which holds a 25% stake in the Jack, also holds stakes in several other discoveries in the trend.

Although some pointed to the 40% decline in quarterly earnings — net profit fell to $582 million ($1.31/share), down from $970 million ($2.18) in 4Q2005 — analysts generally liked Devon’s outlook.

“Despite an earnings-per-share miss, we assess Devon’s underlying fourth-quarter performance as in line with expectations,” Deutsche Bank analyst Shannon Nome wrote in a note. “The miss was largely due to ancillary items as production and costs were both in line with our estimates and guidance.”

Friedman, Billings, Ramsey & Co. Inc. analysts told clients the “deep portfolio of organic growth projects” has Devon “firing on all cylinders.”

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.