Then & Now: Has Devon Finished Rationalizing its Portfolio?

---

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--For some companies, portfolio rationalization is a destination, not a journey, and few oil & gas producers have been on a longer journey than Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma). The company was an active buyer and seller of acreage in the year leading up to the late 2014 crude-oil price collapse, and in the 30 months since prices tanked, Devon has continued buying, selling and taking asset impairment charges.

Are the asset impairment charges that savaged Devon's income statement a thing of the past? Not yet. In its fourth-quarter results, reported in mid-February, Devon took a $124 million charge against earnings. For all of 2016, the producer's income was slashed by $4.98 billion in write-downs. Full-year revenue in 2016 was $12.2 billion; net losses were $3.7 billion.

Last year's results, while grim, were downright upbeat compared to 2015, when $20.82 billion of asset impairments led to a net loss of $15.2 billion on $13.14 billion of revenue.

Devon spent $10.3 billion acquiring properties between 2013 and 2016. During the same time, it sold $8.26 billion of assets and took $29.7 billion of write-downs, according to the company's earnings statements for those years. Some of the asset-impairment charges were caused by declining crude-oil prices. But some also resulted from Devon overpaying for some assets.

Industrial Info's "Then & Now" series explores what independent Oil & Gas Producers have done since crude-oil prices collapsed in late 2014 to become more competitive and continue operating in a low-price environment. For earlier articles in this series, see: January 4, 2017, article - Then & Now: Continental Resources Cuts Costs, Boosts Outlook, but Losses Grow; January 11, 2017, article - Then & Now: Sheffield Ends Run at Pioneer with a Bang, Leaves Company Well-Positioned for New Leaders; January 12, 2017, article - Then & Now: Cabot Oil & Gas Keeps Growing Production, Waits for Pipelines; January 16, 2017, article - Then & Now: Sanchez Slashes Capex, Boosts Production While Waiting or a Price Recovery; and February 10, 2017, article - Then & Now: EOG Drills for Oil on Wall Street Using its Stock as Currency.

Industrial Info is tracking 24 active Devon capital projects in North America valued at about $5.63 billion. Most of those projects are located in Canada.

In the 12 months before Devon posted full-year 2016 financial results, the stock gained 111%, more than peers Occidental Petroleum Corporation (NYSE:OXY) (Houston, Texas), Noble Energy Incorporated (NYSE:NBL) (Houston), EOG Resources Incorporated (NYSE:EOG) (Houston) and Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas). However, Devon's 111% rise trails the stock-price appreciation of Sanchez Energy Corporation (NYSE:SN) (Houston), which rose 341%, and Continental Resources Incorporated (NYSE:CLR) (Oklahoma City, Oklahoma), which jumped 142%.

Since Devon posted full-year 2016 results on February 14, the stock has declined slightly, to about $44 per share.

In discussing 2016 results with investors and analysts, Devon President and Chief Executive Dave Hagger said, "For Devon, 2016 was a transformational year. We successfully reshaped our asset portfolio to focus on our top two franchise assets, the STACK and Delaware Basin, providing us a sustainable, multi-decade growth platform. With these world-class assets, we delivered outstanding operational performance throughout the year. Our drilling programs generated the best well productivity in Devon's 45-year history."

The trouble is, Devon executed a similar "portfolio transformation" in 2013-14, when it sold its U.S. non-core assets, entered the Eagle Ford and combined its midstream assets with the midstream assets of Crosstex Energy L.P. (NASDAQ:XTEX) (Dallas, Texas) to form EnLink Midstream.

Devon entered the Eagle Ford Shale in late 2013 at the top of the market by paying $6 billion in cash--$73,000 per acre for 83,000 acres--to acquire GeoSouthern Energy's assets there, Devon said in a November 20, 2013, press release. GeoSouthern was producing about 53,000 barrels of oil per day at the time from those Eagle Ford assets.

Shortly after that 2013-2014 portfolio transformation, Devon took a $1.9 billion asset impairment charge on Canadian oil and gas assets it acquired more than a decade before. That write-down was triggered by the late-2014 plunge in crude oil prices.

Today, most of Devon's production comes from the STACK (Sooner Trend Anadarko basin Canadian and Kingfisher counties) play in Oklahoma, the Delaware Basin in West Texas/Southeastern New Mexico, the Eagle Ford shale in Texas, the Barnett Shale in Texas and the heavy oil fields of eastern Alberta, Canada.

Has the company finally turned a corner? The signs are mixed. Devon's midstream business, EnLink, reported full-year operating profit rose 6% in 2016, to $879 million. The company expects "strong growth" from EnLink in 2017, which will push operating profits to between $900 million and $950 million, about a 10% increase over full-year 2016 results.

On the production side, the company reported continued gains in trimming costs and increasing well productivity. "Substantial improvement in well productivity was driven by activity focused in top resource plays, improved subsurface reservoir characterization, leading-edge completion designs and improvements in lateral placement," Devon said in its full-year earnings statement. Lease operating expenses in the U.S. were lowered 42% from the peak rates of early 2015, it said. On an annualized basis, operating and general and administrative costs fell $1.3 billion from early 2014 levels, it added.

Devon said its fourth-quarter results benefitted from the best new well productivity in the company's 45-year history. "Led by results from the STACK, Delaware Basin and Eagle Ford assets, the company's initial 90-day production rates in the U.S. increased for the fourth consecutive year, advancing more than 300% from 2012, the company said in its February 14 earnings statement.

Despite its lowered cost structure, Devon's crude-oil production fell slightly last year. Rising production from its Canadian bitumen properties offset declining crude-oil production at its core U.S. properties. Among the assets it retained, crude-oil production for all of 2016 fell from 253,000 barrels of oil per day (BBL/d) in 2015 to 250,000 BBL/d in 2016. A 20,000-BBL/d full-year increase in Canadian bitumen production offset a 23,000-BBL/d full-year decline from U.S. core properties.

Rising prices may offer some relief going forward. In the U.S., the company's realized crude-oil prices rose 23% in the fourth quarter over the comparable year-earlier quarter. Natural gas prices rose even more, surging 35% on a quarter-over-quarter basis. Realized prices for natural gas liquids soared 57% on a quarter-over-quarter basis, to an average of $13.8 per barrel in the U.S. from $8.81 per barrel in the fourth quarter of 2015. The average realized price for its Canadian bitumen rose 39% in the fourth quarter of 2016, to $25.90 per barrel from $18.03 per barrel in the fourth quarter of 2015.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.