Devon's Onshore Energy Plan Validated By Exxon's Deal

HOUSTON (Dow Jones), Dec. 22, 2009

Devon Energy Corp.'s plan to rid itself of international and offshore oil and gas assets and to focus on what is known as unconventional gas in North America received a surprise endorsement last week from the world's largest publicly traded oil company.

Exxon's $31 billion all-stock deal for XTO Energy Inc. -- the biggest energy industry transaction in years -- showed that the Irving, Texas, oil giant is heading in the same direction as Devon. Devon shares opened 4.6% higher on Dec. 14, the day the deal was announced -- and market watchers said the Oklahoma City-based company could be a takeover target for a major eager to replicate Exxon's deal.

Devon President John Richels, in an interview, said the Exxon move "provides some validation of the strategy we are following. It also provides a validation of natural gas and the future of shale natural gas in North America."

The increasing interest shown by Exxon, BP PLC, Eni SpA and other large integrated oil companies in what is known as unconventional gas in North America underscores the success of independent domestic producers in cracking these complex reservoirs. Once thought unexploitable, the natural gas that is trapped in tight rock formations has contributed to a boom in North America's gas reserves.

Some observers have said, however, that the independents' era is over--as only major oil companies have the deep pockets needed to further develop these shale deposits.

But Richels said independent oil and gas companies will still play a starring role in the field. "The independents have done a terrific job developing these shales," he said.

Devon is the largest producer in the Barnett Shale, the most mature and prolific of these fields, and owns assets in other large unconventional natural gas fields. In some analysts' eyes, however, Devon has operated like a major international oil company for the past decade, investing in expensive ventures in deepwater and overseas.

But in order to beef up its ability to exploit domestic unconventional gas, Devon last month announced that it would sell off its four discoveries in the U.S. Gulf of Mexico as well as its assets in Brazil, China and Azerbaijan. The company expects these assets to bring between $4.5 billion and $7.5 billion in net proceeds, which it will invest in onshore exploration and development in areas such as the Hayneville Shale, a natural gas rich-formation in Louisiana and Texas, the Wolfberry, an oil field in West Texas, and the Cana Shale in Oklahoma, a field containing both natural gas and liquid hydrocarbons.

Devon could also increase production from the Barnett, where it has cut back drilling to cope with lower natural gas prices as the economic downturn cut into demand for the fuel.

The first assets were sold off Tuesday, when Danish conglomerate AP Moller Maersk A/S bought three deepwater fields in the U.S. Gulf of Mexico for $1.3 billion in cash--and Devon executives have said that they have received interest for other fields in Brazil, Azerbaijan and the U.S. Gulf.

"The divestiture will transform Devon into a more financially flexible company," said Fadel Gheit, an analyst with Oppenheimer & Co. in New York. The divestiture, he noted, could also make the company "easier to digest" for potential buyers looking for a bigger stake in North America.

Many of the fields where Devon is aiming its financial firepower were unheard of even a few years ago. The company has sought out new exploration areas in order to boost its footprint and increase shareholder value.

Devon shares, trading recently at $70.75, aren't far off their 52-week high of $73.12, set in October; the 52-week low was $38.55 in March. Devon has a forward price-to-earnings ratio of 11.8, compared to a 12.5 average P/E for its industry sector.

Richels said there are still many opportunities in North America for energy production that haven't been identified yet.

"Over time, there is tremendous potential for long-term, secure supplies of natural gas," Richels said.

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