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Devon poised to chop Canadian spending Rising costs, weaker natural gas prices indicate cuts, says CEO Larry Nichols; spending decisions based on long-term economics Ray Tyson For Petroleum News
E&P independent Devon Energy, faced with rising operational costs and weaker natural gas prices, plans to reduce spending in Canada next year unless conditions improve.
“While the budget is still very much a work in progress, early indications are that we will reduce activity levels in the conventional gas business in Canada,” said Larry Nichols, Devon’s chief executive officer.
He said the “relative softness” in gas prices during the 2006 third quarter had generated numerous questions from shareholders and analysts regarding Devon’s future plans in Canada.
“Are we releasing rigs? Are we cutting back on drilling? I’ll remind you that we make capital spending decisions based on long-term economics, including both expected cost and our long-term view of commodity prices,” Nichols said.
Long-range outlook ‘very positive’ Nichols reassured analysts during the company’s 2006 third-quarter conference call on Nov. 1 that Devon’s long-range outlook for oil and gas supply and demand fundamentals remains “very positive.”
“We have a very large inventory of high-quality assets in Canada and have had good performance in the past,” he added.
However, Devon also has been subjected to “significant upward pressure” on operational costs in Canada, resulting from “an overheated regional industry,” Nichols said, noting that in addition to rising costs, the continued erosion of the U.S. dollar “has squeezed margins further.”
“As a result of these factors, Western Canada is currently the most expensive basin in which we operate,” Nichols said. “We will not invest in low margin projects just to chase production volumes. Rather, we will continue to be focused on returns.”
Activity in Canada already reduced In fact, Devon already has reduced activity in Canada, resulting in natural gas production declines in 2006, “and we would expect further declines in 2007,” Nichols said.
Devon said it produced 60.9 billion cubic feet of natural gas in Canada during the 2006 third quarter, compared to 62.7 bcf in the 2006 second quarter and 66.6 bcf in the 2005 third quarter. That represents an 8 percent decline year-over-year and a 3 percent decline vs. the prior quarter.
On the drilling front, the number of Devon-operated rigs in Canada plummeted from 19 in 2005 to seven in 2006. In comparison, Devon currently maintains a U.S. fleet of about 60 company-operated rigs compared to 52 in 2005.
“When the Canadian market corrects, or the U.S. dollar strengthens and project economics improve, we’ll once again begin (to) ramp up the conventional program back in Canada,” Nichols pledged.
Company continues to invest in oil Devon, in spite of the financial pressures on gas-related projects, continues to invest in Canadian oil primarily through its Lloydminster play and Jackfish thermal heavy oil project in Alberta. Devon produced 3.2 million barrels of oil during the 2006 third quarter, up slightly from 3.1 million barrels produced in the 2005 third quarter and from 3.1 million barrels produced in the 2006 second quarter.
“We believe these projects continue to deliver attractive, risk-adjusted returns in the present environment,” Nichols said of Devon’s Canadian oil projects.
He said Devon plans to increase capital spending next year in the United States, including the Barnett Shale field of East Texas, the company’s premier natural gas producer.
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