Devon Energy Loves the Permian Basin and Oil Sands
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Devon Energy (NYSE: DVN) reported solid growth of crude oil production in the second quarter of 2012, as it continues to benefit from prior investments made in the Permian Basin in the United States and the oil sands in Western Canada. The company also signed another joint venture agreement to share the cost and risk of the development of its immense onshore resource base.
Production Growth
Devon Energy reported production of 679,000 barrels of oil equivalent (BOE) per day in the second quarter of 2012, with about 22%, or 149,000 barrels, per day of this production composed of crude oil. This represented growth of 26% on a year over year basis for the company.
Permian Basin
The Permian Basin provided much of the growth for Devon Energy, with the company reporting 24% growth in oil production in the quarter. The company is developing multiple formations on its properties here, including the Bone Spring, Wolfcamp, Wolfberry and Cline Shale. Devon Energy has a large development program planned for the Permian Basin in 2012, with the company budgeting $1.5 billion to drill more than 300 wells.
Occidental Petroleum (NYSE: OXY) is the largest operator in the Permian Basin with crude oil and natural gas liquids production from the Permian of 177,000 barrels per day in the second quarter of 2012. The company has allocated $1.6 billion, or 20% of its 2012 capital budget to the Permian Basin.
Occidental Petroleum is working many of the same plays that Devon Energy is developing but also derives the majority of its production from enhanced oil recovery projects. The company reported that 64% of its Permian Basin production is generated from properties where carbon dioxide injection is employed.
Oil Sands
Devon Energy has two producing projects in the oil sands in Alberta, and has various other projects in either the construction or planning process. The company reported net oil production of 51,000 barrels per day in the second quarter of 2012 from the Jackfish 1 and Jackfish 2 projects, up 63% from the same quarter of 2011.
Devon Energy is building the Jackfish 3 oil sands project and has completed about 40%, with first production expected in late 2014. The company also recently filed for a regulatory permit for phase one of the Pike project, located nearby the Jackfish properties.
The oil sands in Canada have attracted many energy companies looking for future crude oil production. Gulfport Energy (NASDAQ: GPOR) owns 25% of Grizzly Oil Sands, which is working on the Algar Lake project. Gulfport Energy is employing steam assisted gravity drainage at Algar Lake and expects to invest $420 million in a two phase development at the project. The company is looking for first oil production from here in mid-2013.
Joint Venture
Devon Energy signed a $1.4 billion agreement with Sumitomo Corporation to jointly develop properties in the Permian Basin. Sumitomo agreed to pay $340 million up front and the balance in the form of a drilling carry to cover future development costs.
Devon Energy will convey a 30% interest in 650,000 net acres that are prospective for the Cline Shale and Wolfcamp Shale. The company plans to aggressively move forward with development, drilling 40 gross wells in 2012 and using the entire drilling carry by the middle of 2014.
New Ventures
Devon Energy has categorized several onshore plays as part of its New Ventures portfolio and added acreage here during the most recent quarter. The company leased an additional 400,000 net acres prospective for the oily Mississippian play, increasing its total position to 545,000 net acres.
This immense resource play is present across Oklahoma and Kansas, with dozens of operators vying for leases. Sandridge Energy (NYSE: SD) is arguably the king of the Mississippian play with 1.7 million acres under lease and 29 rigs. The company drilled 91 horizontal wells during the second quarter of 2012 and averaged production of 25,200 BOE per day.
Sandridge Energy’s large development program is motivated by the solid economics on wells in the Mississippian. The company indicated a 30% rate of return, even at an oil price of $60 per barrel and a natural gas price of $2.50 per Mcf.
Devon Energy’s strong growth in crude oil production in the second quarter of 2012 is the direct result of the company’s large investments made here over the last few years, and has validated its strategic shift towards exploration and development exclusively in the onshore United States.
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