Devon Raises the 'Big Oil' Question

NEW YORK (THE WALL STREET JOURNAL via Dow Jones), Nov. 17, 2009

Not-quite-as-big oil doesn't sound as impressive as the industry's usual nickname. But Devon Energy is the latest energy producer to decide smaller is better, and with good reason.

Devon's shares have trailed the sector this year, as investors fretted about its ability to fund output growth. The hoped for after-tax proceeds of as much as $7.5 billion from selling its international and Gulf of Mexico assets will be used to deleverage its balance sheet. The other benefit is that Devon will divest projects that account for 7% of reserves and 11% of production, but swallow up 29% of the capital-expenditure budget.

The result, Devon hopes, will be a company focused exclusively on North America, enjoying lower costs, annual production growth of 10% and much greater flexibility on deploying its cash.

Devon, with a market capitalization of about $30 billion, is big, if no major. But its move echoes that of larger competitor ConocoPhillips, which has similarly embraced a "shrink to grow" strategy.

Both companies seem to recognize that simply chasing resources is pointless when you are competing with national oil companies. Far better to sell assets valued at low multiples by public market investors to, preferably, those national oil companies, which can afford to bid much more.

Platts' latest annual ranking of global energy companies, coincidentally also released Monday, shows that Western majors still lead the table, but more for their higher returns than size. As they contemplate ways to recapture the imagination of energy investors bored by scale, Devon's move carries a lesson even oil's big boys should heed.

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