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Devon intends to stay on top in Barnett Shale
Ray Tyson Petroleum News Houston Correspondent
Big Oklahoma independent Devon Energy is intent on remaining King of the Hill in the prolific Barnett Shale gas play of East Texas, telling analysts it plans to spend an additional $58 million on drilling this year in an apparent effort to reverse anticipated production declines over the next few quarters.
Devon already produces around 575 million cubic feet per day from the Barnett, or about twice as much as the other 30 companies in the gas play combined. But Devon’s competitors are catching on to the Barnett.
“Several of our peer companies are now gathering acreage and attempting to establish a meaningful presence,” Devon President John Richels said in May 6 conference call on 2004 fourth-quarter earnings. “Devon clearly has the first move advantage.”
Devon, primarily through its acquisition of Mitchell Energy, has amassed a huge 510,000-acre position in the Barnett, an unconventional gas play that has evolved into a production cornerstone for the company. More than 1,700 wells The company has drilled more than 1,700 wells into the Barnett, including the region’s first horizontal well. Since the Mitchell acquisition, it has drilled and completed 76 horizontals “with far more resolve than any other company,” Richels asserted. Devon has 13 rigs operating in the Barnett, 10 of them drilling horizontals.
To help keep its dominant position in the Barnett, Devon said it intends to acquire an additional 140,000 acres of 3-D seismic this year to go along with 106,000 acres of 3-D seismic it already has in the bank.
Because Devon holds the largest acreage position in the Barnett, the company is actually benefiting from its competitors, Richels said.
“New participants are essentially helping out to evaluate our acreage with every new well they drill,” he added. “So we are assembling a very large body of information that will help us move toward optimization of our massive acreage position.”
He said Devon’s progress in the Barnett “is beginning to show up in the numbers,” noting the company’s 76 horizontal wells currently produce nearly 100 million cubic feet of gas equivalent per day, or 15 percent of total field production. Based on drilling success outside the company’s core area, he said, Devon has decided to spend an additional $58 million for wells this year.
The daily 575 million cubic feet of gas equivalent Devon produced in the Barnett during 2004 first quarter was about 15 percent greater than what the company produced from the field in the year-ago first quarter. However, 2004 first quarter output was flat to the previous quarter, and the company said it is expecting production to decline over the next few quarters.
“However, based on the success we’ve had with horizontal drilling both inside and outside the core area, we are becoming increasingly confident that we can reverse this decline down the road,” Richels said. Gulf production down Overall, Devon said it reduced its full-year 2004 production guidance by 2 percent due mainly to projects in the Gulf of Mexico. The company said it now expects to produce between 251 million and 256 million barrels of oil equivalent this year.
“This happened in spite of the fact these projects are out performing our expectations on a gross production basis,” said Brian Jennings, Devon’s chief financial officer.
The main culprit is the continuing loss of about 3,800 barrels of oil per day from two new satellite wells at the Nansen-Boomvang complex in the deepwater Gulf, which averaged daily about 40,000 barrels of oil equivalent during the 2004 first quarter.
“These wells are not performing as well as we had hoped,” Devon’s Richels said. The East Boomvang 688 No. 8 well was shut in due to equipment malfunction, he said, and the East Boomvang 686 No. 2 well “watered out” in April after startup in February.
In addition to Nansen-Boomvang, production from some of Devon’s onshore and shallow water Gulf properties “failed to meet our expectations,” Jennings said.
Regardless, Devon set both production and earnings records during the 2004 first quarter, due in large part to strong commodity prices and production gains from last year’s acquisition of independent Ocean Energy.
Devon reported average 2004 first-quarter production of 703,000 barrels of oil equivalent per day, up 43 percent from the 492,000 barrels of equivalent compared to the year-ago period. Output in the 2004 first quarter increased about 1 percent from the previous quarter, the company said. First quarter profit a record Devon’s profit for the 2004 first quarter came in at a record $494 million or $2 per diluted share, a 13 percent increase over the prior year’s first-quarter profit of $436 million or $2.67 per diluted share. The company handily beat analysts’ expectations of $1.84 per share for the 2004 first quarter.
Increased production, together with strong oil and gas prices, propelled Devon’s revenues to $2.2 billion for the 2004 first quarter, leaving the company with a healthy $1.1 billion in cash on hand.
“The pace at which we continue to generate excess cash is allowing us to rapidly approach a financial goal — to cover all of our debt maturities for 2004, 2005 and 2006,” said Larry Nichols, Devon’s chief executive officer.
In addition to paying off debt, using some excess cash “to buy back our own stock is a very attractive alternative,” he said.
Nichols also pledged to lower Devon’s 2003 finding and development costs amounting to $15.01 per barrel, which was significantly higher than the company’s peers.
“We’re becoming increasingly confident that we will lower F&D costs significantly this year,” he said.
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