OREANDA-NEWS. May 15, 2014. Adjusting for items securities analysts typically exclude from their published estimates, the company earned USD 547 million or USD 1.34 per diluted share in the first quarter. This represents a 103 percent increase in adjusted earnings compared to the first quarter of 2013.

“Our disciplined focus on high-margin drilling opportunities led to outstanding growth in oil production and enhanced profitability in the first quarter,” said John Richels, president and chief executive officer. “Additionally, we made meaningful progress high-grading our go-forward asset portfolio by closing our Eagle Ford acquisition, completing the EnLink Midstream combination, and attractively monetizing our conventional gas business in Canada.”

Retained Assets Drive Strong Production Growth
Total production of oil, natural gas, and natural gas liquids averaged 691,000 oil-equivalent barrels (Boe) per day in the first quarter of 2014. Excluding production associated with divestiture properties, top-line production from Devon’s retained, go-forward asset base increased to 563,000 Boe per day in the first quarter. This represents a 7 percent increase compared to the first quarter of 2013. The company’s divestiture assets averaged 128,000 Boe per day in the first quarter, of which 76 percent was natural gas.

The increase in first-quarter production was driven almost entirely by growth in oil production from the company’s go-forward assets. Oil production from these assets averaged 176,000 barrels per day, a 21 percent increase compared to the first quarter of 2013. Led by the Permian Basin and Eagle Ford, the most significant growth came from the company’s retained U.S. operations, where oil production increased a substantial 56 percent year over year. Reconciliations of retained and non-core asset production are provided later in this release.

Key Operating Highlights
Permian Basin - Production averaged a record 91,000 Boe per day in the first quarter. Oil production increased 36 percent compared to the first quarter of 2013 and was 9 percent higher than the previous quarter. In the first quarter, light oil production accounted for 60 percent of Devon’s total Permian production.

The most significant contributor to the company’s Permian oil growth was once again the Bone Spring oil play in the Delaware Basin. Devon added 35 new Bone Spring wells to production in the first quarter, with initial 30-day rates averaging nearly 700 Boe per day, of which 80 percent was light oil.

Also in the Delaware Basin, Devon commenced production on two high-rate oil wells targeting the Delaware Sands in Lea County, New Mexico. Initial 30-day production from each of these two wells averaged in excess of 1,000 Boe per day, composed of nearly 90 percent light oil. The company has approximately 80,000 net acres prospective for the Delaware Sands within Southeast New Mexico.

In the Southern Midland Basin, Devon delivered another quarter of strong results from its oil development program in the Wolfcamp Shale. During the first quarter, the company brought 26 Wolfcamp Shale wells online, increasing average net production in this play to 10,000 Boe per day. Compared to the first quarter of 2013, this represents production growth of 8,000 Boe per day.

Eagle Ford – Devon completed its acquisition of 82,000 net acres in DeWitt and Lavaca counties on February 28, 2014. This acquisition secures Devon a premier position in this world-class oil play, which is delivering some of the highest rate-of-return drilling opportunities in North America. The company has at least 1,200 undrilled locations with risked recoverable resource estimated at 400 million oil-equivalent barrels. Based on well performance seen to date, Devon remains on track to average 70,000 to 80,000 Boe per day for its 10 months of ownership in 2014 and well in excess of 100,000 Boe per day in 2015.

For Devon’s first month of ownership in March, net production averaged 49,000 Boe per day. March production was temporarily constrained by gathering system downtime and the timing of well tie-ins. With the acceleration of well tie-ins at the end of March, the company’s Eagle Ford net daily production is currently 64,000 Boe per day and is expected to average between 65,000 and 70,000 Boe per day in the second quarter.

Canadian Thermal Oil – Gross production from Devon’s Jackfish 1 and Jackfish 2 thermal oil projects averaged 62,000 barrels of oil per day in the first quarter, a 9 percent increase compared to the year-ago period. After accounting for royalties, net production from the company’s Jackfish complex averaged 52,000 barrels per day in the quarter. First-quarter results were highlighted by the excellent performance at Jackfish 1, where gross production exceeded name-plate facility capacity averaging 37,000 barrels per day.

Construction of the company’s Jackfish 3 thermal oil project is nearly complete. Plant startup at Jackfish 3 is expected in the third quarter of this year. At peak production, Devon’s three 100 percent-owned Jackfish projects are expected to produce 105,000 barrels per day before royalties and generate up to USD 1 billion of free cash flow annually for the company.

Anadarko Basin – First-quarter Anadarko Basin production averaged a record 85,000 Boe per day. Growth from Devon’s Cana-Woodford and Granite Wash plays drove a 10 percent year-over-year increase in net production. With drilling focused in the most liquids-prone acreage, oil and natural gas liquids production increased to 45 percent of total production in the Anadarko Basin.

In early May, Devon further bolstered its Cana-Woodford Shale position by acquiring an additional 50,000 net acres. These assets directly overlap the company’s existing core Cana position and expand Devon’s exposure to other western Oklahoma oil and gas plays. In aggregate, the company’s total Cana-Woodford position is now approximately 300,000 net acres, with thousands of undrilled locations in this high-quality, liquids-rich play.

Barnett Shale – Net production averaged 1.3 billion cubic feet of natural gas equivalent per day in the first quarter of 2014. Barnett liquids production increased to an average of 57,000 barrels per day, a 5 percent increase compared to the first quarter of 2013.

Mississippian-Woodford Trend – In the first quarter, production from Devon’s Mississippian-Woodford Trend averaged 19,000 Boe per day, of which 50 percent was light oil. This represents a production growth rate of 35 percent compared to the previous quarter. The company commenced production on 63 operated wells within the Sinopec joint-venture area during the quarter, with overall well results supporting type-curve expectations.

Rockies – Net production from the company’s retained Rockies assets averaged 20,000 Boe per day in the first quarter. Liquids production in the Rockies increased 21 percent compared to the first quarter of last year and accounted for nearly half of Devon’s product mix in the region. Devon’s drilling activity for the quarter was highlighted by an Iberlin Ranch well targeting the Frontier formation with initial 30-day production averaging 2,000 Boe per day, including more than 1,700 barrels of oil per day. In addition, the company commenced production on a well targeting the Parkman formation with 30-day production rates averaging in excess of 1,100 Boe per day, of which 96 percent was light oil.

Devon has 150,000 net acres in the Powder River Basin, prospective for multiple formations including the Parkman, Turner, and Frontier. The company has identified approximately 1,000 risked locations across the Powder River Basin and expects its drilling inventory to increase as the company de-risks this oil opportunity.

Upstream Revenue Increases 42 Percent; Cash Flow Rises
Revenue from oil, natural gas, and natural gas liquids sales totaled USD 2.6 billion in the first quarter, a 42 percent increase compared to the first quarter of 2013. The significant growth in revenue was attributable to growth in high-margin oil production combined with improved price realizations for all products. First-quarter oil sales accounted for more than 50 percent of Devon’s total upstream revenues.

Devon’s marketing and midstream operating profit reached USD183 million in the first quarter of 2014. This result represents a 47 percent increase year over year. The increase in operating profit was attributable to higher commodity prices and the consolidation of EnLink Midstream, which was effective March 7, 2014.

In the first quarter of 2014, the company maintained its low cost structure by limiting pre-tax expenses to USD1.8 billion, in line with previous guidance. Excluding the costs associated with the consolidation of EnLink Midstream, pre-tax unit costs were 8 percent higher than the first quarter of 2013. The increase in unit costs was attributable to higher production taxes and higher operating costs associated with the company’s rapidly growing high-margin oil production. In addition, USD22 million of non-recurring G&A expenses associated with the EnLink and GeoSouthern transactions and a change in the timing of the annual stock-based compensation grant resulted in an increase in first-quarter G&A. Stock-based compensation grants were previously made in the fourth quarter of each year. However, to better link stock-based compensation to the year’s performance, the 2013 grant was delayed to the first quarter of 2014, resulting in no grant during 2013.

Overall, the benefits of higher-margin oil production, improved price realizations, and a low cost structure resulted in improved cash flow for the company. In the first quarter of 2014, operating cash flow reached USD 1.4 billion, a 41 percent increase compared to the year-ago period.

Balance Sheet Remains Strong
At the end of the first quarter, Devon’s financial position remained exceptionally strong with investment-grade credit ratings and cash balances of USD 2.0 billion. At March 31, 2014, the company’s net debt totaled USD 13.5 billion, of which USD 1.5 billion was attributable to the consolidation of EnLink Midstream and is non-recourse to Devon. 

In the first quarter, Devon drew USD 2.0 billion on its senior term loans. Proceeds from the term loans and a portion of the company’s cash on hand funded Devon’s Eagle Ford acquisition. Proceeds from the company’s ongoing asset divestiture program will be utilized to reduce debt in the second quarter.

Also in the first quarter, the company announced a 9 percent increase to its quarterly cash dividend from USD 0.22 per share to USD 0.24 per share. This was Devon’s ninth dividend increase since 2004, highlighting the company’s long-term commitment to returning cash to shareholders.

Divestiture Program Advances
Last November, Devon announced an initiative to monetize non-core assets in both the U.S. and Canada, sharpening its focus on retained, high-growth assets. The company took a significant step forward in the execution of this divestiture process in early April of this year by completing the sale of its Canadian conventional gas business for CAD3.125 billion. After adjusting for currency exchange and taxes associated with the sale and repatriation of the funds to the U.S., the company’s net proceeds totaled USD 2.7 billion.

The divestiture process for the company’s remaining non-core properties in the U.S. is ongoing. Devon expects to open data rooms for these U.S. assets in the second quarter and complete the divestiture program by year end.

EnLink Midstream Combination Complete
On March 7, 2014, EnLink Midstream was formed by combining substantially all of Devon’s U.S. midstream assets with the assets of Crosstex Energy. EnLink Midstream consists of two publicly traded entities: the master limited partnership, EnLink Midstream Partners, LP, and a publicly traded general partner entity, EnLink Midstream, LLC.

The common units of both EnLink Midstream Partners and EnLink Midstream trade on the New York Stock Exchange under the symbols “ENLK” and “ENLC”, respectively. Devon is the majority owner of EnLink Midstream with a 52 percent ownership interest in “ENLK” and a 70 percent ownership in “ENLC”.

Non-GAAP Reconciliations
Pursuant to regulatory disclosure requirements, Devon is required to reconcile non-GAAP financial measures to the related GAAP information (GAAP refers to generally accepted accounting principles). Adjusted earnings and net debt are non-GAAP financial measures referenced within this release. Reconciliations of these non-GAAP measures are provided later in this release.