Devon Energy Corp.’s 98% drilling success, combined with the completed sales of $239 million in non-strategic assets, guided the Oklahoma City-based independent above estimated earnings per share (EPS) and cash flow targets in the third quarter.

CEO J. Larry Nichols said the “only notable disappointment” was in missing its production forecast, which was “slightly” off, despite two major acquisitions. Nichols blamed the drop on two things: a shut-in during Tropical Storm Isidore in September and voluntary shut-ins in the constrained Rocky Mountains. The company lost about 186,000 boe during Isidore.

“Devon made significant progress on several fronts in the third quarter,” said Nichols. “First and foremost, we had a very profitable third quarter…second, we were very successful through the drill bit, drilling 478 wells with a 98% success rate.”

Drilling successes were across the board for Devon, whose core focus in North America. The company has spent about $1.15 billion in exploration and production to date, and expects to come in under its original budget of $1.3-$1.5 billion. At the end of September, the company had 55 rigs running, and in the quarter alone, it drilled 43 exploratory and 435 exploitation wells. Of those, 77% of the exploratory wells were a success; 98% of the exploitation wells proved positive.

The Texas play, in the North Texas’ Barnett Shale region that Devon acquired from Mitchell Energy, production currently is 450 MMcf/d, and is expected to be 500 MMcf/d by year’s end. There are 14 rigs there with 90 wells. Devon also connected 90 new gas wells during the quarter in North Texas.

In the Powder River Basin, one of Devon’s core operating areas, the company stepped up activity, with 38 new wells in the third quarter and 110 so far this year. Currently, its coalbed methane (CBM) production in the Big George play is 85 MMcf, and it “holds a lot of remaining potential.” Devon now is awaiting permit approval to expand its production area in Wyoming.

Another CBM play, the Cherokee in Kansas and northeastern Oklahoma, comprises 420,000 net acres, in which Devon holds 100% interest. In the quarter, Devon drilled 32 wells, and since its acquisition in 2001, Devon has drilled 242 wells. Current production is 15 MMcf/d, which is expected to increase as more wells are tied in.

With the final three wells drilled in a 9-well system in its Indian basin field in southeastern New Mexico, Devon claimed 100% success. The play currently is producing 10 MMcf/d and 3,000 bbl/d. Devon’s Gulf Coast play had 14 production rigs offshore in the third quarter, and onshore, its South Texas play is producing 4-5 MMcf/d.

Besides its drilling success, Devon also progressed in its ambitious plan to improve its balance sheet in the quarter. To date, Devon has sold about $1.4 billion in non-strategic assets in 2002, surpassing a $1 billion target set at the beginning of the year. However, by year’s end, Devon should complete another $100 million in asset sales. Devon’s current debt totals $6.8 billion.

Nichols said the rise in natural gas prices for the past few weeks have been welcomed. “We had significant concern earlier this year that the full gas storage would result in low gas prices, but instead, the prices have gone up in the past three weeks…At the end of last year, we were one of the ones forecasting that the productive capacity of North American gas would decline during the year…now it’s a recognized fact.” He said assuming a normal winter season, “we should continue to have very good gas prices this winter.”

Although the asset sales will contribute to improving Devon’s debt picture, the third quarter was hit with a loss from discontinued operations in Argentina. For the third quarter, Devon reported net earnings of $62 million (38 cents EPS), compared with 3Q01 net earnings of $85 million (65 cents). Net earnings declined because of a loss in discontinued operations after selling its Argentina operations.

Excluding special items in the quarter, Devon’s net earnings were $108 million (68 cents), compared with 3Q01’s $84 million (64 cents). Wall Street had forecast Devon would earn an average of 66 cents for the period.

Through Sept. 30, Devon’s net earnings were $20 million (8 cents EPS), compared with earnings a year earlier of $621 million ($4.79). Excluding special items, net earnings were $318 million ($2.02) in the first nine months, compared with $626 million ($4.82) a year earlier.

Combined, Devon’s production of oil, gas and natural gas liquids climbed 55% percent in the quarter, to 45 MMboe, which was driven by two gas-rich acquisitions: Anderson Exploration in October 2001 and Mitchell Energy and Development Corp. in January 2002. (Reported production excludes volumes produced in Indonesia and Argentina, which were sold in April 2002 and Oct. 2002, respectively. They were reclassified as discontinued operations, and together totaled 3 MMboe.)

Increased because of higher production, Devon’s sales of oil, gas and natural gas liquids were up by half from a year ago, increasing 46% to $767 million. Average natural gas prices decreased 5% in the quarter, to $2.59/Mcf from $2.73 in 3Q01. Prices for natural gas liquids were down 10% to $14.10/bbl, compared with $15.75 a year ago. The average price for oil/bbl was up 6% to $23.72.

Devon recorded income tax expense of $38 million, or 25% of pre-tax income in the quarter, which included current taxes totaling $36 million and deferred tax expense of $2 million. Excluding the tax effects of special items and property sales, income tax expenses were $37 million, or 26% of pre-tax earnings, all of which was deferred. Devon also recorded a $8 million pre-tax expense for amortization of goodwill in the quarter.

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