Devon Energy (DVN)

They have established pole position in the Barnett Shale play as well as collecting a nice backlog of prospects in the Lower Tertiary deepwater play in the Gulf of Mexico which garnered so many headlines last year with the successful drilling of the Jack deepwater well. And, in the mean time, they’ve carved out a nice market position for an independent E&P company, especially in the light of resource nationalization, increasingly-challenging exploration and declining field production worldwide. Some other things to note:

• Largest land position and producer of natural gas in the Texas Barnett Shale play with a target of over 1 BCFE per day by 2009.
• Slew of oil and gas projects scheduled to come online in 2007 (Polvo in Brazil, Jackfish oil sands in Canada, Merganzer/Independence Hub in the Gulf of Mexico).
• Robust prospect pipeline with high visibility prospects in the deepwater Gulf of Mexico (Jack, Kaskida) as well as extension plays in Brazil and Canada.
• 2006/2007 production does not include halted conventional operations in Canada due to high field services costs and the strong Canadian dollar.
• Marketing and midstream operations with operating profit around $400M annually not reflected in stock price and scheduled to be spun off in 3Q 2007.
• Company is nearing completion of its strategic divestiture plan, selling assets in West Africa and Egypt this year. Once completed, Devon’s assets will be located in politically stable regions.
• Despite divestiture plan, the company has managed to grow reserves via acquisitions and through the drill-bit.
• Company’s valuation does not include probable or indicated reserves.
• Solid balance sheet which should get stronger as they use divestiture proceeds to pay off debt. (Debt to equity ratio: 0.26)

This strategy should allow Devon to generate strong, stable cash flow for years to come while having the potential to grow reserves. The low-risk, high-volume base of the Barnett Shale and Canadian operations will anchor the company while the potential of the Lower Tertiary and other prospects propel it into the future.