Big exploration and production independent Devon Energy, which already has amassed a huge war chest exceeding $3 billion in cash and untapped credit, is now looking to raise another $1billion-$1.5 billion from the sale of non-core properties in the United States and Canada.
“Every crown jewel ultimately becomes a little long in the tooth and it’s time to send it on its way,” Larry Nichols, Devon’s chief executive officer, said in a Sept. 28 conference call with investors and industry analysts. “That’s one way to keep your cost structure low.”
The company has yet to identify all of the properties to be sold. However, the package will include U.S. onshore properties, “a pretty good chunk in Canada” and “a very meaningful contribution” from the Gulf of Mexico’s outer continental shelf, Devon President John Richels said.
“The properties that we’re going to sell will be higher decline properties, some that are higher cost properties … and properties that are in areas that don’t fit with our strategic focus,” he said.
Devon carried out a similar divestiture program in 2002, refocusing its portfolio by selling about $1.5 billion in non-core properties. The company said it expects to launch the current divestiture program in the fourth quarter of 2004 and substantially complete it in the first quarter of 2005.
However, the planned sale would put a 7 percent dent in Devon’s reserves and a 13 percent hole in its daily production based on 2004 rates. In total, the company said it hopes to sell 145 to 165 million barrels of oil equivalent reserves and between 90,000 and 100,000 barrels of equivalent production per day.
The company averaged 684,000 barrels of equivalent per day in production during the 2004 second quarter. Devon had proved reserves of about 2.1 billion barrels of oil equivalent at year-end 2003.
Proceeds destined for stock buybacks
But don’t look for Devon to spend the windfall on wild ventures. The company said it would use the proceeds mainly to repurchase up to 10 percent of its own stock, or about 50 million shares after an announced two-for-one stock split, over an 18 month period.
“We are very optimistic about the outlook for Devon and the oil and gas industry,” said Brian Jennings, Devon’s chief financial officer. “Splitting the stock will further enhance liquidity and make Devon’s shares available to an even larger group of potential shareholders.”
The company, which plans to begin repurchasing shares in the current quarter, said it intends to buy back shares both in the open market and in privately negotiated transactions.
“Given the premium prices recent divestitures have commanded, we believe this is an ideal time to refocus our producing portfolio,” Richels said.
Devon also announced that its board of directors has approved plans to transfer the company’s common stock listing from the American Stock Exchange to the New York Stock Exchange. The company said trading is expected to begin on the NYSE on Oct. 2 and that it expects to retain DVN as its ticker symbol.
Devon said it currently has $1.6 billion of cash on hand and another $1.5 billion in unused credit.
Nearly $1 billion in debt repaid
Jennings noted that Devon already has repaid nearly $1 billion in long-term debt in 2004 and has accumulated enough cash to retire company debt payable in 2005 and 2006.
“Given the strength of oil and natural gas prices, we expect to continue generating significant amounts of excess cash,” he added.
The company said it plans to spend between $2.5 billion and $2.9 billion on capital projects in 2005, the bulk of which would be earmarked for low risk projects such as its Barnett Shale gas development in East Texas and its Jackfish heavy oil development in Canada.
However, the company also plans to spend about $350 million on unspecified “high impact projects to build some more growth opportunities for the future,” Richels said.
“We’re going to get a lot out of this 2005 budget,” he added. “We expect to deliver reserve additions of 330 to 380 million barrels of oil equivalent for a reserve replacement of between 150 and 180 percent.”
He said it has been a cornerstone of Devon’s operating philosophy “to make investments in our future growth opportunities by investing in longer cycle time and high impact projects.”
“It’s for that reason we got into the Gulf of Mexico deepwater in 2002,” Richels said. “It’s for that reason we moved ahead with our Jackfish project in 2002. And it’s for that reason that we got into international in a bigger way over the past several years.
