QUOTE AND NEWS
SeekingAlpha  Aug 28  Comment 
By Callum Turcan: Over the past few years Devon Energy Corp (NYSE:DVN) has molded itself into a premier oil play. In its latest earnings release, company wide oil output grew by 34% as US oil production grew 79% year-over-year. Higher oil...
SeekingAlpha  Aug 28  Comment 
By Casey Hoerth: What's the first thought that comes to your mind when someone says "Devon Energy (NYSE:DVN)?" You'd be forgiven if you thought of "the shale-gas revolution." But, in fact, Devon has transformed itself from a major producer of...
SeekingAlpha  Aug 27  Comment 
By Bret Jensen: Over the last year or two I have made some huge gains by investing in mid-cap E&P concerns that decided to simplify their portfolios, shed non-core assets and become more "oily" in their production. Sometimes these efforts got...
Jutia Group  Aug 27  Comment 
[Business Wire] - Devon Energy Corporation today announced its management will present at the Barclays CEO Energy/Power Conference in New York on Wednesday, September 3, 2014 at 9:45 a.m. Eastern Time. Read more on this. Devon Energy Corporation...
Motley Fool  Aug 26  Comment 
Devon Energy Corp stock is up 30% in the past year, and here's what could take it up even higher.
TheStreet.com  Aug 26  Comment 
NEW YORK (TheStreet) -- Shares of oil and gas produceraDevon Energy may be worth a second look because of the company's plans to increase oil production and its lower debt. The company plans to increase its oil production from its assets in the...
Times Online  Aug 24  Comment 
The owner of one of the Cotswolds’ most beautiful hamlets has boosted his estate by buying up an unspoilt seaside...
Motley Fool  Aug 19  Comment 
Highlights from Devon Energy Corp’s second-quarter conference call.
SeekingAlpha  Aug 17  Comment 
By Apex Financial Consultants: Devon Energy Corp's (NYSE:DVN) second-quarter earnings on August 6th came with a positive surprise. Revenues substantially beat the consensus estimate. Revenues of $4.5 billion beat analysts' expectations by $800...
SeekingAlpha  Aug 13  Comment 
ByPrice Point: Devon Energy (NYSE:DVN), one of the largest independent exploration and production companies, reported 2Q14 operating EPS of $1.40, in-line with consensus estimates of $1.40. Strong quarterly results were boosted by production...




 

Devon Energy (NYSE" DVN) is an international, independent oil and gas company that operates primarily in the U.S. but has major production centers in Canada, China, Azerbaijan, and West Africa. The company is one of the five largest holders of deepwater properties in the lower tertiary section of the Gulf of Mexico[1], though production in the area is not expected to start until 2010. Deepwater exploration is both costlier (and made more so by the increasing day-rates of oilfield services companies) and riskier than traditional off-shore drilling, as finding reserves becomes more difficult. The company also controls 75% of the Barnett Shale's production volume, a natural gas deposit that is the second largest producing on-shore domestic natural gas field in the United States. It is the most important customer to Boardwalk Pipelines contributing about 11% of Boardwalk's revenue (2009).

Overall profitability for the company is threatened by increases in royalties paid to the Alberta government over oil sands production, terrorism and political instability in West Africa, China, and Azerbaijan, and hurricanes in the Gulf of Mexico. Devon's closest competitors are Anadarko Petroleum, Apache, and Comstock Resources.

Company Overview

Devon operates by selling its hydrocarbons to range of customers: utilities, refiners, pipelines, industrial users, and others. The company's most significant customer is refiner and oil giant Exxon Mobil.[2]

In 2009, Devon drilled 1,135 gross wells. It drilled 336 wells in the Barnett Shale field in north Texas in 2009, bringing its total producing wells in the field to almost 4,200 as of December 31, 2009.[3] Devon is running 16 operated drilling rigs in the Barnett. In addition, the Company drilled 47 wells in the Cana-Woodford Shale in western Oklahoma in 2009.[3] The Company drilled eight Haynesville Shale wells in the greater Carthage area of east Texas in 2009. Offshore Brazil, Devon participated in two deepwater discoveries in 2009. Its Itaipu and Wahoo are pre-salt prospects located in the Campos Basin.[3]

The Company has certain midstream assets, including natural gas and NGL processing plants and pipeline systems. Its major midstream assets are its assets serving the Barnett Shale region in north Texas. These assets include approximately 3,100 miles of pipeline, two natural gas processing plants with 750 million cubic feet (MMcf) per day of total capacity, and a 15 thousand barrels (MBbls) per day NGL fractionator.[3] The Northridge plant has a capacity of 200 MMcf per day. Its midstream assets also include the Access Pipeline transportation system in Canada.[3] This 220-mile dual pipeline system extends from its Jackfish operations in northern Alberta to a 350 MBbls storage terminal near Edmonton. The Company has a 50% ownership interest in the Access Pipeline.[3]

Business and Financial Metrics

Second Quarter 2010 Results (ended June 30, 2010)[4]

For the second quarter of 2010, Devon Energy reported net earnings of $706 million, or $1.59 per common share ($1.58 per diluted common share). This is a 125 percent increase compared with Devon's second-quarter 2009 net earnings of $314 million, or $0.71 per common share ($0.70 per diluted common share).

Earnings from continuing operations for the second quarter of 2010 increased 85 percent over the second quarter of 2009 to $352 million. The earnings increase was driven by higher revenues from the sale of oil, natural gas and natural gas liquids. Second-quarter sales of oil, natural gas and natural gas liquids increased 23 percent to $1.8 billion. Higher realized prices for all three products more than offset a three percent decrease in overall production.

Devon's second-quarter average realized oil price increased 23 percent to $62.35 per barrel compared with $50.84 per barrel in the second quarter of 2009. The average realized price for natural gas, before the impact of hedges, increased 24 percent in the second quarter of 2010 to $3.62 per thousand cubic feet. This compares with $2.91 per thousand cubic feet in the second quarter of 2009. The company's average second-quarter realized natural gas liquids price increased 39 percent over the year-ago period to $30.90 per barrel.

Oil and gas production from continuing operations averaged 643 thousand oil-equivalent barrels (Boe) per day in the second quarter of 2010. This compares with second quarter 2009 average production of 666 thousand Boe per day. The most significant component of this production decline was the impact of property divestitures in the Gulf of Mexico.

In the second quarter of 2010, Devon completed the sale of its Gulf of Mexico operations and closed on the sale of its Panyu development in the South China Sea. To date, Devon has received aggregate pre-tax proceeds of $4.6 billion and has announced sale agreements for the majority of the remaining international assets. The company expects to close on the remaining asset packages throughout the second half of 2010. Devon expects the total proceeds from the divestitures to approximate $10 billion with after-tax proceeds approximating $8 billion.

As of June 30, 2010, the company had utilized a portion of divestiture proceeds to repurchase 7.6 million shares of its common stock for $495 million and to reduce debt balances by $1.7 billion. Devon also has directed $500 million of proceeds to acquire a 50 percent interest in the Kirby-Pike oil sands leases.

Business Segments

United States Onshore[3]

Barnett Shale, located in north Texas, is the Company’s largest property. Its leases include approximately 663,000 net acres located primarily in Denton, Johnson, Parker, Tarrant and Wise counties. The Barnett Shale is a non-conventional reservoir and it produces natural gas and NGLs. The Company has an average working interest in the Barnett Shale of 89%. Devon drilled 336 gross wells in 2009. The Carthage area in east Texas includes primarily Harrison, Marion, Panola and Shelby counties. Its average working interest is 86%, and holds approximately 218,000 net acres. Its Carthage area wells produce primarily natural gas and NGLs from conventional reservoirs. Devon drilled 39 gross wells in 2009. Its oil and gas properties in the Permian Basin of west Texas comprise approximately 850,000 net acres located across several counties in west Texas. These properties produce both oil and natural gas from conventional reservoirs. The Company’s average working interest in these properties is about 40%. Devon drilled 80 gross wells in 2009.

Washakie area leases are concentrated in Carbon and Sweetwater counties in southern Wyoming. Devon’s average working interest is about 76%, and holds about 157,000 net acres in the area. The Washakie wells produce primarily natural gas from conventional reservoirs. In 2009, the Company drilled 94 gross wells. The Cana-Woodford Shale is located in Canadian, Blaine and Caddo counties in western Oklahoma. Its average working interest is approximately 46% and it holds approximately 117,000 net acres. The Company’s Cana-Woodford Shale properties produce natural gas and NGLs from a non-conventional reservoir. It drilled 47 gross wells in 2009. Devon’s Arkoma-Woodford Shale properties in southeastern Oklahoma produce natural gas and NGLs from a non-conventional reservoir. Its 58,000 net acres are concentrated in Coal and Hughes counties, and it has an average working interest of about 32%. In 2009, the Company drilled 61 gross wells in this area.

The Groesbeck area of east Texas includes portions of Freestone, Leon, Limestone and Robertson counties. The Company’s average working interest is approximately 72%, and it holds about 132,000 net acres of land. The Groesbeck wells produce primarily natural gas from conventional reservoirs. In 2009, Devon drilled 13 gross wells. The Company’s Haynesville Shale acreage spans across east Texas and north Louisiana with an average working interest of 92%. The Company’s drilling activity has been focused on de-risking the 157,000 acres located in Panola, Shelby and San Augustine counties in east Texas. It drilled eight gross wells in 2009.

Canada[3]

Jackfish is the Company’s wholly owned thermal heavy oil project in the non-conventional oil sands of east central Alberta. As of December 31, 2009, Jackfish’s gross production was 33.7 MBbls of oil per day, and it was constructing the second phase of Jackfish. The Northwest region includes acreage within west central Alberta and northeast British Columbia. It holds approximately 1.9 million net acres in the region, which produces primarily natural gas and NGLs from conventional reservoirs. The Company’s average working interest in the area is approximately 73%. In 2009, it drilled 36 gross wells.

Devon’s Lloydminster properties are located to the south and east of Jackfish in eastern Alberta and western Saskatchewan. Lloydminster produces heavy oil by conventional means without steam injection. It holds 2.5 million net acres and has an 89% average working interest in its Lloydminster properties. In 2009, the Company drilled 239 gross wells in the area. The Company’s properties in Canada’s Deep Basin include portions of west central Alberta and east central British Columbia. It holds approximately 570,000 net acres in the Deep Basin. The area produces primarily natural gas and NGLs from conventional reservoirs. Its average working interest in the Deep Basin is 45%. In 2009, the Company drilled 30 gross wells. The Horn River Basin, located in northeast British Columbia, is a non-conventional reservoir targeting the Devonian Shale. Its leases include approximately 170,000 net acres with a 100% working interest. The Company drilled two gross wells in 2009.

Divestiture of Gulf of Mexico Assets[4]

In the second quarter of 2010, Devon completed the sale of its Gulf of Mexico operations and closed on the sale of its Panyu development in the South China Sea. To date, Devon has received aggregate pre-tax proceeds of $4.6 billion and has announced sale agreements for the majority of the remaining international assets. The company expects to close on the remaining asset packages throughout the second half of 2010. Devon expects the total proceeds from the divestitures to approximate $10 billion with after-tax proceeds approximating $8 billion.

As of June 30, 2010, the company had utilized a portion of divestiture proceeds to repurchase 7.6 million shares of its common stock for $495 million and to reduce debt balances by $1.7 billion. Devon also has directed $500 million of proceeds to acquire a 50 percent interest in the Kirby-Pike oil sands leases.

Trends and Forces

Oil Prices Are Rising, Benefiting Devon

Oil and gas prices have fluctuated heavily over the past few years, though the most recent trend is a rise in prices, with a barrel of oil trading in international market a day after the new year at just over $70. Because both are nonrenewable forms of energy, slowing discoveries of new sources combined with increasing pricing has led to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's gas can only be differentiated from another company's gas based on price. While Devon currently benefits from high prices, the profitability of the current market will drive increased exploration and production, which could eventually cause prices to fall and margins to drop.

Devon's Bet on the Lower Tertiary Leaves the Company Unhedged Against Fluctuating Oil Prices

Devon is the second-largest leaseholder in the Lower Tertiary of the Gulf of Mexico[5] (after Chevron[6]); it was one of the first companies to strike black gold in the Lower Tertiary, back in 2006, though production in the area is not expected to start until 2010. Deepwater exploration is both costly, as increasing demand has pushed day-rates of oilfield services companies way up, and risky, as finding reserves becomes more difficult. The rewards of deepwater exploration, however, could be tremendous: oil companies need to find new reserves to supplement the maturing ones. Successful deepwater hits are often extremely rich in oil and gas, and deepwater Gulf properties are not subject to the political risks of reserves in developing nations. An example of deepwater rewards was seen in November 2007, when Brazilian oil company Petrobras discovered 5-8 billion barrels of oil equivalent in the deepwater Tupi field off the coast of Brazil[7]. Successful deepwater exploration and extraction could combine with high oil prices to be a tremendous boon to Devon's business, though repeated failures in finding reserves would waste millions of dollars and drive margins down. Furthermore, if oil prices fell, the hit Devon would take to its margins would be greater than most competitors, since the company is so heavily invested in high-cost, high-risk areas.

Canadian Government Regulations and Forex Risk

In 2007, the government of Alberta announced that it would increase the total amount of royalties paid by companies developing Alberta's oilsands by 20% - about 1.4 billion Canadian dollars. Oil companies like Devon saw drops in net profitability in 2009 when the law took effect, though it should be noted that industry efforts to lobby the tax away were mildly successful - most Albertans favored a much higher tax.[8]

Moreover, the strengthening Canadian Dollar (C$) has affected bottom-line results to the extent that Devon has shut down conventional resource production in light of escalating operating costs. The combination of rising costs and the exchange rate hit has hurt Canadian results.[9]

Devon's Stake in the Barnett Shale Could Continue to Deliver, With Risks

Devon has about a 75% stake in the North Texas Barnett Shale by production volume[10], an area that has delivered tremendously in the past. Though most of the easy-access wells are beginning to mature, there are purportedly rich reserves in the area that simply require more complicated technologies to access. In 2007, Devon announced that because of the royalty increase in the Alberta Oil Sands, it would move some of its capital from Canada to the Barnett Shale.

Political Risk and Terrorism Could Affect Devon's Profits

Outside of North America, most of Devon's operations are based in West Africa, China, and Azerbaijan. Unstable governments pose threats to Devon because of their unpredictability when it comes to taxation, war, currency fluctuations, trade regulations, and nationalization. Furthermore, in areas that are politically unstable, there is a high risk of terrorist attacks, especially on western establishments like Devon's facilities. Though these areas are rich in oil and gas, Devon's profitability in each of them is unpredictable because of the possibility of political and terror-based cost shocks. The overall effect of these areas on Devon's business is not very large, as they comprise only around 9.5% of Devon's reserves[11], but as North American reserve production begins to slow in the future, development in these unstable zones could become more important.

Natural Disasters Are Seasonal Threats to Devon's Diverse Operations

Because of the geological position of many of Apache's sites, the company risks production failures and rising costs from natural disasters. Highest visibility growth prospects center around the deepwater Gulf of Mexico plays in the Lower Tertiary, which is subject to weather (hurricane) risk. After the 2005 hurricanes (Katrina, Rita, etc), catastrophe insurance has been hard to come by and as the company puts it, their coverage in this respect is “de minimis.”

Hurricanes in the Gulf of Mexico during the third quarter and storms in the North Sea during the fourth quarter can damage equipment, hurt employees, and make transportation of products very difficult. This leads to higher costs and lower profits all around.

Competition

Devon's main competitors lie in the independent oil and gas sector, since the major oil companies like Exxon Mobil and BP are too large and diverse to fairly be called competition. Among Devon's independent competitors are Anadarko Petroleum, Cabot Oil & Gas, Comstock Resources, EnCana, and Apache. Anadarko Petroleum is the largest of these, and possibly the most similar, as it produces mostly in the Rockies and the Gulf of Mexico, with some drilling activity in Algeria. Comstock Resources is the smallest of Devon's competitors, and is also betting on deepwater exploration to deliver in the future. Apache's strategy is a unique one; the company buys up mature properties from oil majors and then extracts more from them, taking advantage of the high price level to keep margins up despite the use of expensive technology. Apache is expanding on the Gulf shelf, a zone that Devon is leaving alone.

Cabot Oil & Gas and EnCana are both heavily invested in natural gas (only 3% of Cabot's reserves contain liquids[12]); if Devon's gas production from the Barnett Shale and its deepwater reserves continues to increase, it could be in closer competition with these two in the future.



References

  1. JPT Online: "Lower Tertiary Trend: A Study in the Impact of Advancing Technology"
  2. http://sec.gov/Archives/edgar/data/1090012/000095013407004377/d43782e10vk.htm#102
  3. 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Reuters: DVN Company Profile
  4. 4.0 4.1 Devon Investor Relations: "Devon Energy's Second-Quarter 2010 Net Earnings Increase 125 Percent to $706 Million" August 4, 2010
  5. JPT Online: "Lower Tertiary Trend: A Study in the Impact of Advancing Technology"
  6. Petroleum News: "New horizon for industry"
  7. http://www.plenglish.com.mx/article.asp?ID=%7BF7FB5E40-66BA-421F-9111-061341EA40CF%7D&language=EN
  8. http://en.epochtimes.com/news/7-10-26/61223.html
  9. http://www.enlightened-american.com/wealth/research/dvn_report_risk.htm
  10. http://www.thebarnettshale.com/
  11. http://sec.gov/Archives/edgar/data/1090012/000095013407004377/d43782e10vk.htm#105
  12. Reuters, Cabot Oil & Gas Corp, http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=COG
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