Devon's Transition to Liquids Looks Promising


Restructuring operations aren't usually smooth. However, Devon Energy (NYS: DVN) , a pioneer in shale drilling, ensured a solid third quarter without much ado.

The strategy's paying off
Given the growing interest among upstream companies to grab international assets, it was a questionable move for this Oklahoma-based company to put its entire focus on North American assets. However, the first full quarter since repositioning saw Devon book healthy net profits of $1 billion -- or $2.50 per diluted share -- from continuing operations. In other words, net earnings from North American operations rose a whopping 142% when compared to last year's third quarter.

Earnings did see a dip this time if discontinued operations from last year are also taken into account. But, investors shouldn't be overly worried. The speed with which Devon has ramped up operations (read: North American operations) is commendable.

Total production stood at 661,000 barrels of oil equivalent per day, an 8% increase from the previous year. The Barnett shale continues to lead the way, which also saw oil and natural gas liquids production grow by 15% over last year to 46,000 barrels a day. Similarly, Devon's growing operations in the Permian Basin saw liquids production increase to 37,500 barrels a day, and this region seems to hold a lot of promise in this respect; a transition to higher liquids production is clearly evident.

Canada beckons
The Canadian oil sands currently don't hold a big chunk in terms of absolute numbers, but they look very promising. The two phases of the Jackfish projects have already ramped up ahead of schedule, reaching a record production of 36,000 barrels per day with just seven gross wells. Drilling for the third phase is expected to start during next year's first quarter. By 2015, the three phases are expected to contribute an impressive 105,000 barrels per day. That's pretty neat. To compliment this, Devon is also in a 50% joint venture with BP (NYS: BP) to develop the immediately adjacent Kirby-Pike oil sands leases. Management has perfectly aligned the company for increased liquids production.

However, the biggest contribution in the future could come from Devon's 4 million net acres in the Western Canadian Sedimentary Basin. With 19 exploratory wells in operation and three of them averaging initial production of 770 barrels of oil equivalent a day per well, there is an exciting future ahead. Canadian major Suncor Energy (NYS: SU) is an ideal example of successful drilling in this region. Suncor has now plans to increase production to more than 1 million barrels of oil equivalent per day by 2020!

Foolish bottom line
In all, I believe Devon is on the right track in terms of growth and strategy. The company's vast experience in unconventional drilling and a gradual transition to higher production of oil and natural gas liquids should yield handsome results in next four years. The Motley Fool will help you keep track of this company for the latest news and analysis -- all you need to do is add it to your Watchlist. It's free, so add it today!

At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article.The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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