Oklahoma City-based Devon Energy Corp. reported second quarter earnings of $859 million, or $1.94/common share ($1.92/diluted common share), up substantially from second quarter 2005 earnings of $653 million, or $1.40/share ($1.38/diluted share). Earnings per share increased 39% compared with the second quarter of 2005.

Second quarter 2006 reported net earnings benefited from certain items that securities analysts typically exclude from their published estimates. Excluding these items, Devon earned $701 million, or $1.57/diluted share. Earnings growth was realized despite declines in North American natural gas and gas liquids production. Lower North American gas prices were offset by higher prices for natural gas liquids.

Domestic natural gas production declined to 135.9 Bcf (1.5 Bcf/d)from 139.6 Bcf in the second quarter of 2005 and to 265.8 Bcf from 284.4 Bcf in the first half of 2005. Canadian production declined to 62.7 Bcf from 66.9 Bcf in the second quarter of 2005 and to 121.8 Bcf from 133 Bcf in the first half of 2005.

Domestic natural gas liquids production declined to 4.5 MMbbl from 4.6 MMbbl in the first quarter of 2005 and to 9.1 MMbbl from 9.3 MMbbl in the first half of 2005. Canadian liquids production declined to 1.2 MMbbl from 1.3 MMbbl in the first quarter of 2005 and to 2.4 MMbbl from 2.6 MMbbl in the first half of 2005.

Realized North American and Canadian natural gas prices were down for the quarter, but up for the first half of the year. The realized U.S. price declined to $5.91/Mcf from $6.17 in the second quarter of 2005, but increased to $6.47/Mcf from $5.80/Mcf in the first half of 2005. The Canadian price declined to $5.70/Mcf from $5.98/Mcf in the second quarter of 2005, but increased to $6.51/Mcf from $5.83/Mcf in the first half of 2005.

Natural gas liquids prices improved in the quarter and first half. The realized U.S. gas liquids price was $30.88/bbl, up from $23.78/bbl in the second quarter of 2005, and $28.86/bbl, up from $22.95/bbl in the first half of 2005. Canadian liquids prices averaged $44.87/bbl, up from $34.28/bbl in the second quarter of 2005, and $43.70/bbl, up from $33.16/bbl in the first half of 2005.

“The strength of Devon’s property base and drilling programs is reflected in our production growth. Second quarter oil and gas production was up 2% over the first quarter, and we expect production growth to accelerate in the second half of the year,” said CEO J. Larry Nichols.

Devon completed its acquisition of Chief Holdings LLC June 29 (see Daily GPI, May 3), increasing its position in the Barnett Shale in North Texas. With net production of approximately 650 MMcfe/d, Devon produces almost half of the total Barnett Shale production. Following the acquisition, Devon has more than 2,500 producing wells and 733,000 net acres in the Barnett.

“Acquisition of the Chief acreage gives us 2,000 additional drilling locations in the Barnett Shale,” said Stephen J. Hadden, senior vice president, exploration and production. “We plan to have 30 rigs drilling in the Barnett Shale by year-end and to drive Devon’s share of Barnett production to one billion cubic feet of gas equivalent per day by 2009.”

For the first half of the year, net earnings were $1.6 billion, or $3.52/common share ($3.47/diluted common share). For the year-ago period earnings were $1.2 billion, or $2.57/common share ($2.53/diluted common share).

Devon drilled 546 wells in the second quarter of 2006 with a 97% overall success rate. Devon and its partners completed the production test of the deepwater Jack well in the Gulf of Mexico’s lower Tertiary trend in June. The test results are currently being evaluated and will be announced later this year. In May the company restored production from the deepwater Red Hawk field in the Gulf of Mexico that was suspended by the 2005 hurricanes. Red Hawk produces about 10,000 Boe/d net to Devon. In July Devon restored another 6,000 Boe/d in the Eugene Island and West Cameron areas of the shallow water shelf. About 90% of the production interrupted by the hurricanes has now been restored.

Sales of oil, gas and natural gas liquids increased 7% to $2.2 billion in the second quarter of 2006. The increase in revenues more than exceeded combined expense increases, leading to higher earnings before income taxes.

Substantially higher realized prices for oil and natural gas liquids led to the increase in sales revenues. Devon’s second quarter 2006 average realized oil price increased 71% to $63.69/bbl compared with $37.28/bbl in the second quarter of 2005. The higher realized oil price is attributable to a global increase in crude oil prices and to the expiration of Devon’s oil price hedges at Dec. 31, 2005. None of Devon’s oil production is hedged in 2006. The average realized price for natural gas liquids increased 30% to $33.83/bbl in the second quarter of 2006 compared with $25.99/bbl in the same quarter in 2005.

Devon’s combined oil, gas and natural gas liquids production averaged 578 thousand Boe/d in the second quarter of 2006. This compares with second quarter 2005 average production of 641 thousand Boe/d. The decrease in 2006 production was primarily attributable to property divestitures and the continued impact of hurricanes experienced in the second half of 2005. Second quarter 2006 daily production was approximately 2% greater than first quarter 2006 daily production.

Marketing and midstream operating profit increased 17% in the second quarter of 2006 to $109 million. Marketing and midstream revenues increased 2% to $397 million. Related expenses decreased 3% to $288 million.

Lease operating expenses increased 7% to $362 million in the second quarter of 2006. Higher ad valorem taxes, rising oil field service and supply costs and the continued strengthening of the Canadian dollar all contributed to the increase. Production taxes increased 15% to $86 million in the second quarter of 2006. Higher production taxes resulted primarily from higher oil and gas revenues.

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