Devon: This One Goes to 11

In the classic mockumentary This Is Spinal Tap, the fictitious heavy metal band's guitarist proudly displays an amplifier that goes all the way to 11. Why 11? It's one louder.

Devon Energy (NYSE: DVN  ) is arguably the independent oil and gas firm that goes to 11. Sure, there are other terrific outfits like Apache (NYSE: APA  ) , XTO Energy (NYSE: XTO  ) , and Chesapeake Energy (NYSE: CHK  ) , all of which are rocking 'n' rolling. There's something special about Devon, though, and the company wants investors to have enough information to draw this conclusion for themselves. That's why the firm took the extraordinary step last week of webcasting a very detailed rundown of its entire resource bass -- er, base.

I highly recommend this presentation to Devon shareholders, investors in other E&Ps, investors who have never owned an energy company -- OK, pretty much every investor. It's that good. But perhaps your ideal evening differs from mine, and you'd prefer to do something other than listen to a two-hour discussion of petroleum resource classification, well spacing, and refracs. That's fine -- allow me to summarize the salient points.

A whale of a shale
Devon is the doyen of the Barnett Shale. The company (and its acquirees) got into the Fort Worth-area play early, acquiring vast acreage well before the local gas grab began in earnest. Devon's gross Barnett production far exceeds that of nearest competitors Chesapeake, XTO, or EOG Resources (NYSE: EOG  ) .

Devon not only scooped cheap leases, it also nabbed the ones with high net revenue interests. That makes a big impact on well economics. And boy does Devon ever have a lot of wells waiting to be drilled. Between primary drilling and downspacing, which places wells closer together than usual, the company has more than 7,500 undrilled well locations. That's about 13 years' worth of drilling at today's pace.

Even though Devon has drilled more than 1,000 horizontal wells in the Barnett, there are still uncertainties when it comes to estimating the resource base. For example, in downspacing from 1,000 foot intervals between wells to 500 feet, Devon has observed slightly lower well productivity, resulting in lower estimated ultimate recovery (EUR) of natural gas per well. The firm models these "infill" locations as performing only 85% as well as normally spaced wells. And that's a conservative assumption, relative to actual downspacing performance of 92% to date.

Any extensive onshore play's total resource potential ultimately boils down to the number of wells that can be drilled and the amount of gas that can be recovered over the life of those wells. That's why it's so important for Foolish investors to pay attention to the manner in which their upstream company goes about estimating its resource base. When an E&P is aggressive with these numbers, it's playing with fire. Negative revisions to reserve estimates can irrevocably lose the firm its credibility with investors, so conservatism is key.

Other pieces of the pie
At 28% of Devon's total resource base on a risked basis, "Barnett" is the first word, but it's far from the last. Let's take a quick look at a few other irons in the fire.

You may be aware that Devon is a dilettante of the deepwater, with several major discoveries under its belt. What I had never fully appreciated was just how many prospects the firm has. In the Gulf of Mexico's lower tertiary trend alone, where Chevron (NYSE: CVX  ) is another major leaseholder, Devon has 20 undrilled prospects ranging from 300 million to more than 500 million gross barrels of potential. In the entire deepwater Gulf, the firm has 35 undrilled prospects, with an unrisked potential of 4 billion to 7 billion barrels net to Devon.

Further afield, Devon also has tantalizing prospects in waters off the coasts of Brazil and China. These frontier areas offer unrisked potential of 2 billion to 4 billion and 1 billion to 2 billion barrels, respectively.

Finally, circling back home, Devon has a diverse assortment of other onshore oil, gas, and oil sands plays throughout North America. In addition to established plays, Devon's working on some interesting emerging plays, such as British Columbia's Horn River Basin, an area drawing the attention of exceptional EOG and enchanting EnCana (NYSE: ECA  ) .

The Foolish final word
About a year ago I casually suggested that Devon didn't make sense as a stand-alone entity, on account of its dispersed asset portfolio. Through both divestitures and presentations like this one, the company keeps getting easier for simpletons like yours truly to grasp. This team has its hands on all the right value-creating levers, and if you're not already a Devon groupie, it's time to tune in.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 22, 2008, at 1:12 PM, jbkirk wrote:

    The oil patch has its own phrase of biting off more than you can chew. Its called: Drilling yourself into the ground.

  • Report this Comment On August 22, 2008, at 1:14 PM, jbkirk wrote:

    Devon may well be working itself towards this predicament.

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