Devon Energy to narrow focus on North American assets
Devon Energy’s J. Larry Nichols, chairman and CEO, said the company’s stock price wasn’t reflective of its Gulf of Mexico and international operations, located in Brazil, China, Azerbaijan and Russia. By pursuing all its projects simultaneously, Nichols said Devon Energy would not be able to “optimize any of them.” In selling the assets, Nichols said the company will “realize their full value” and focus on strengthening its balance sheet by paying down debt. (Already, the company is reported to have interest from Anadarko Petroleum Corp. for its Brazil assets and possible attention from oil seekers Total, Eni, Statoil, BP, Royal Dutch Shell and Exxon Mobil Corp.)
Total liabilities and stockholders’ equity, as of its third quarter financial report Nov. 5, was about $28.1 billion. The company hopes to earn up to $7.5 billion from the sale. Devon Energy expects to end 2009 with $6.9 billion net debt.
The Oklahoma City-based oil and natural gas exploration and production company’s move comes at a time when other Barnett Shale producers, such as Quicksilver Resources Inc. and Chesapeake Energy Corp., have signed agreements with European energy companies in deals that could take the United States independents abroad in search of other unconventional shale gas plays.
Devon Energy’s Gulf of Mexico and international operations comprise about 7 percent of its company-wide proved reserves of 2.8 billion barrels of oil equivalent, and 11 percent of its 2009 production.
Increased drilling expected in 2010
During a conference call, Nichols said Devon Energy is adding rigs to all of its North American operations in anticipation of increased activity in 2010. As part of the change, gas will make up about 68 percent of Devon Energy’s production, up from 64 percent at present.
“This really has nothing to do with gas versus oil,” Nichols said when asked if this was a statement on gas potential as compared to oil potential.
In 2010, Devon Energy plans to drill 370 wells, up from 2009’s 285 wells, with increased drilling in all plays, including the Barnett Shale in North Texas.
“This is a play that just continues to get better and better,” said David Hager, executive vice president for exploration and production. He added, “Many have said the Barnett is past its prime and for many operators this may be true, but this is not true for Devon.”
Devon plans to drill 65 wells in the Haynesville Shale during 2010; 80 wells in the Cana Woodford Shale, 85 wells in the Arkoma Woodford Shale; and 12 wells in the Horn River Basin of British Columbia – each of which is an increase in activity over 2009.
Nichols defended the decision to execute the “repositioning” now, rather than one year or two years ago, saying no one could have predicted the recession and its restraining impact on the industry, and also that during the past 12 months Devon Energy has continued to see progress in onshore gas and oil production.
What the market thinks
Investors responded positively to the announcement, sending shares up as much as 6.5 percent during Nov. 16 trading over their previous close.
Analysts at FBR Capital Markets and Wells Fargo Securities upgraded Devon Energy shares from market perform to outperform following the announcement, with the latter saying the move brings focus to a previously scattered asset base.
“Given recent strategic repositioning, we like the production visibility now inherent in the company’s North American asset base as the company targets a 10 percent [compound annual growth rate] within cash flow over the next 5 years,” according to the Nov. 17 report, prepared by Senior Analyst David Tameron and Associate Analyst Gordon Douthat. “Longer term, we believe a focus on fewer assets will improve the company’s operating and financial metrics.”
The analysts also liked Devon Energy’s references to the Barnett Shale as a gas play whose activity easily can be “ramped up or ramped down,” as Devon Energy executives put it. This easily toggled activity could help exploration and production companies better manage volatile gas prices.
“This is something we have heard from other operators, and this has the potential to change the dynamics of the natural gas industry,” according to the report. “Essentially, given that the Barnett is already well delineated and that companies are in development mode (i.e. – no need to drill to fulfill drilling commitments or to hold acreage), companies are going to use these plays as toggles. So when commodity fundamentals dictate, companies can either ramp or slowdown to meet current market conditions.”
