Taking a new look at North America

Oklahoma City-based Devon Energy has long been a force with which to be reckoned amongst the larger US independents, steadily growing its portfolio both in North America and overseas. But recently the company announced that it would strategically reposition itself as a “high-growth North American onshore company,” divesting its offshore and overseas assets and directing proceeds from those sales to its US and Canadian onshore portfolio as well as retiring debt.

Dave Hager of Devon Energy.
(Images courtesy of Devon Energy)

This is not to say the company’s portfolio has been vastly diluted. Devon is active in the Avalon and Bone Spring plays in the Permian Basin, the Granite Wash play in the Texas Panhandle, the Cana Woodford shale play in Oklahoma, and the Jackfish and Pike plays in Canada as well as holding acreage in the Barnett, Haynesville, and Horn River shale plays. With this vast portfolio now commanding its full attention, the company has ambitious plans to continue to grow shareholder value.

Why was the decision made to focus on North America and not the Gulf of Mexico or offshore Brazil?

We thought it was an appropriate decision. With the large number of opportunities that we had in our E&P portfolio, there were more than were going to be properly funded in the next few years. When we looked at it from several perspectives, it made the most sense to monetize the offshore and international.

First, we didn’t think that we were getting the full value in our stock price for the Gulf of Mexico and international properties. Those tend to be more long-term projects, and because they didn’t show up in short-term productionor reserves, they weren’t being fully valued by the marketplace.

We also felt the nature of those assets made them very marketable. We had had a number of discoveries in the deepwater Gulf of Mexico as well as discoveries in deepwater Brazil, and we felt that they would be very interesting to many different companies.

It wasn’t a question of competency. We have tremendous operational competencies both onshore and offshore. But we had to make a decision.

Your discovery in Brazil was a presalt discovery. Was that one hard to walk away from?

From a pure excitement and technical perspective, yes, because there’s a lot of thrill, and we think it’s a tremendous discovery. But sometimes you have to take off your technical hat and put on your financial hat.

This refocusing must have put some strain on your group to optimize the remaining assets. How have you gone about doing this?

We had not really been using the North American onshore assets for our growth engine in the past few years. Redirecting some of the people and capital to the onshore allowed us to take advantage of the deep inventory that we have. We have increased the capital spending associated with North America onshore, and we are confident we’re going to have consistent growth from those opportunities.

A Devon rig drills in the Cana shale play.

At the same time, we have to recognize the oil and gas environment that we’re in. We aren’t necessarily trying to maximize the production growth at this point; we’re trying to optimize production growth along with the proper fiscal discipline so that we focus on growth on a per-debt-adjusted share basis. We could grow at an even higher top-line rate if we chose to take on a lot more debt or issue a lot of equity. But that’s not what we’re doing. How are you optimizing these assets?

Most of what we are doing is development drilling. We have a tremendous combination of opportunities that are oil-oriented, gas-oriented, and also what we call the “liquids-rich”trend, producing natural gas liquids (NGLs). Depending on commodity prices, we have the ability to flex our capital budget to emphasize one product type over the other.

For instance, this past year we spent more than 85% of our capital on oil and liquids-rich opportunities because of the relative strength of oil and NGLs compared to gas, and we anticipate doing more than 90% in 2011 on those types of opportunities. Now, if the relative prices change, we have the ability to move back and put more capital against our dry gas opportunities.

How quickly might you ramp up in the Haynesville and Horn River plays if gas prices suddenly surge?

We look at everything on a long-term basis, so it’s important for us to examine not only commodity prices today but commodity prices over the next five to 10 years. We have to have the confidence that the prices are going to be at a high enough level over that time to put capital against those programs.

You have fewer assets to deal with, but you still have a pretty busy portfolio. How does Devon manage its assets and prioritize them?

We are very focused on the returns that we receive and on the profitability of our investments. So we look closely at several economic measures when we decide to make our investments, and we invest in those capital projects that give us the greatest economic return. We are not focused on growth at any cost. We are focused on economic return to the shareholder.

You mentioned in your 3Q 2010 conference call that you are seeing “outstanding wells” by using horizontal drilling technology in the Bone Spring play. What other old fields in the Permian Basin and elsewhere might benefit from this technology?

We have a tremendous amount of experience with horizontal drilling, starting with the Barnett, where we were one of the early leaders. We are looking throughout North America for additional opportunities to apply that technology.

Specifically in the Permian, this is an area that has a number of stacked pays, so we are looking at formations that were drilled vertically in the past to see if horizontal drilling may work. We’re in a testing phase.

As executive vice president of E&P, which of your assets are you most excited about as you enter 2011?

The thing that I’m most excited about is the number of different plays we have in different areas. Depending onthe success of any one of the plays, we can shift capital quickly to accentuate the areas where we’re having the most success and de-emphasize areas where we’re having the least success. Frankly, I don’t get particularly excited going into any specific play; I just wait to see what the results look like.

Having said that, we are ramping up activity in the Cana Woodford play about 40 miles (64 km) west of Oklahoma City. We have more than 20 rigs working in that play right now, so it’s going to be one of our largest capital expenditures. The Permian in general is very exciting, and we’re continuing our development activity up in our Jackfish complex in Canada. We’ll have our Jackfish 2 onstream this year, and we’re waiting for regulatory approval on our Jackfish 3.

We’re also working on an area just south of Jackfish called Pike, where we’ve formed a 50-50 joint venture with BP, and this winter we’re drilling a number of stratigraphic wells and hope to have at least one Jackfish-sized project identified by the end of this drilling campaign.