As Projects Near Finish, Devon Poised to Boost Oil & Gas Output

Dow Jones Newswires

HOUSTON Aug 23, 2006 (Dow Jones Newswires)

After years of treading water, Devon Energy Corp. (DVN) is about to catch the wave of rising crude oil and natural gas output.

A strong lineup of energy developments is expected to greatly boost production between 2006 and 2009, making the Oklahoma City-based hydrocarbons producer one of the fastest growing in the sector.

"We've created this pipeline of opportunities through our previous investments," Devon President John Richels told Dow Jones Newswires in an interview. "Now we're seeing them come out of the other end of the pipeline."

The projects - in Canada's oil sands, U.S. unconventional gas provinces and deepwater plays both in the Gulf of Mexico and abroad - underscore the resurgence of long-term, capital-intensive projects that gradually are replacing conventional fields in decline.

Their timing coincides with a new stage in the current energy boom, as a great number of developments - supported by historically high prices - will simultaneously come on line in the next few years, potentially providing some slack in a highly strung market.

"If the U.S. and the world grow more slowly than they have in the recent past, but at the same time there are increased supplies, the markets might just get a little loose," said Paul Tossetti, a Washington D.C.-based analyst with PFC Energy, a consultancy.

Turning The Corner

For years, Devon has struggled to grow organically, increasing its production mainly through acquisitions, said Tom Covington, a Denver-based analyst with A.G. Edwards, an investment bank.

Divestitures have also exacted a heavy price. Since 2005, total production decreased as the company got rid of about $2.2 billion in declining North American assets.

Devon, however, is about to "turn the corner," because the company finally has "the projects in place to actually grow production forward," Covington said.

Devon and other independent oil and gas companies focus on exploration and production, unlike major integrated oil companies that also have extensive refining operations. The independents are directly exposed to commodity prices - and constitute fertile ground for takeovers similar to Anadarko Petroleum Corp.'s (APC) recent $21.1 billion acquisition of Kerr-McGee Corp. and Western Gas Resources Inc. (WGR).

In the second half of 2006, Devon will start receiving output from its 5.6% stake in Azerbaijan's giant Azeri-Chirag-Gunashli field, operated by BP PLC (BP), the first of a string of "longer term, high-impact projects that will continue to create an inventory for the future, and that will be large enough to move the needle," Devon's Richels said.

Since 1999, Devon annually has invested between $300 and $700 million - about 15% of its capital spending - in these "high-impact" developments, Richels said.

Many of these new sources of energy are either unconventional or in deepwater territory, like the Merganser gas project in the U.S. Gulf of Mexico, the Polvo field in offshore Brazil and the Jackfish oil sands development in Alberta, all scheduled to start producing in 2007. Cascade, another deepwater U.S. Gulf project, will start in 2009.

These developments, and increased production in Texas' unconventional Barnett Shale gas field, will bring Devon's production up to 813,000 barrels of oil equivalent a day in 2009, up 36% from the volume it estimates it will extract this year. Shale is a compact, impermeable sedimentary rock that must be fractured in order to extract the hydrocarbons it may contain.

Other investments in China, offshore Brazil and the Lower Tertiary trend in the deepwater Gulf of Mexico will provide further growth in years ahead, Richels said.

Devon's pipeline of projects puts it among the fastest growing independent oil and gas producers, said David Heikkinen, a New Orleans-based analyst with Pickering Energy Partners.

Keeping a tight rein on schedule and costs is a major challenge for the entire industry. As equipment and crews remain scarce amid a scramble to complete similar projects, capital costs continue to rise, Richels said.

But, for Devon, there's a caveat. The company is a passive investor in some of its growth prospects, forcing it to rely on the operators to execute on time and on budget.

"The timing of those is always somewhat uncertain," said A.G. Edwards' Covington.

Fresh Oil Supplies Incoming

Devon's expansion coincides with the start of many long-awaited energy projects in Angola, Central Asia, the Middle East, the deepwater Gulf of Mexico and Canada's oil sands, said PFC Energy's Tossetti.

More than 5.4 million barrels a day will be added to the world's current oil supply of about 85 million over the next five years. If demand slows down in the U.S. and major Asian economies, the Organization of Petroleum Exporting Countries may have to abandon its "lucrative vacation" and start managing oil supplies, Tossetti said.

But the possibility, albeit remote, of an oversupplied market shouldn't erode the profitability of Devon's projects, said Pickering's Heikkinen.

Production decline and the fact that a major portion of the world's energy supply comes from politically unstable regions may keep prices up, said Devon's Richels, as should a strong economy in North America.

"We think there's a good home to that oil coming on line," he said.

Copyright (c) 2006 Dow Jones & Company, Inc.