Even at the choicest poker tables, with the highest stakes running; players vie for the winnings through an ever-dynamic mix of skill and luck.
For the following three natural gas producers to each outperform prevailing expectations with solid first-quarter earnings, a similar mix was required.
Luck of the draw
While BP clearly has all hands on deck to remediate this environmental catastrophe, another major buyer of Devon's assets in the gulf has indicated it will proceed with plans to develop its now-wholly owned Cascade-Chinook play. Referring to its decision to develop the offshore field, Brazil's Petrobras
Meanwhile, just as my Foolish colleague Toby Shute predicted, Devon is deploying the mammoth windfall generated by these asset sales both to shore-up its balance sheet, and to improve shareholder equity with an impressive $3.5 billion share-repurchasing initiative. For Fools counting cards, that equates to roughly 12% of the company's market capitalization. I believe that Chairman and CEO J. Larry Nichols accurately conveys the strategic position of the newly restructured Devon Energy when he states:
Devon is emerging with a rock-solid balance sheet, a balanced portfolio of oil and gas projects and one of the lowest cost structures in the peer group. This positions the company to deliver low-risk, profitable, organic production growth on a sustainable basis.
Back on the skill side of the equation, Devon yielded a separate pre-tax windfall of $524 million from successful hedging, and reports a near-100% success rate on the 454 wells the company drilled during the quarter. Also, with a product mix that was weighted only 68% in natural gas -- at a time when natural gas producers are scrambling to increase their exposure to oil and natural gas liquids -- here again I view Devon Energy as the real deal among North American energy plays.
Producers pass (on) gas
With natural gas prices languishing in relative weakness amid a persistently elevated supply, producers are increasingly looking to enhance profitability through a greater focus upon oil and natural gas liquids within their overall product mix. As Chesapeake Energy
Reflecting this emerging focus upon optimization of liquids production, Chesapeake has indicated a desire to reduce its excessive natural gas weighting to a more balanced 80% of total production. Looking to the first quarter data, we find Chesapeake achieving half of that target, with liquids accounting for 10% of average daily production. Accordingly, natural gas production rose only 7% year over year, while liquids flowed into 35% more volume. To move closer to that 80/20-mix, Chesapeake will reduce its peak 2010 rig count by 12% to 105 rigs, and institute an even sharper curbing of effort in 2011 with a 17% reduction in gas-related capital expenditures.
For a company that nearly crumbled beneath the weight of weak gas prices not that long ago, a more diversified product mix will come as a welcome improvement.
So long, ex-XTO
In likely our last glimpse of XTO Energy
So there you have it, Fools: Three natural gas producers that beat the street despite persistent weakness in the market for their primary product. Chalk it up to whatever combination of skill and luck that you will, but these operators prove that some players can win a pot regardless of the hand they are dealt. Of the three, Devon Energy appears to be holding the clear upper hand, but I look forward to hearing your thoughts in the comments section below.
Chesapeake Energy is a Motley Fool Inside Value selection. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. The Fool owns shares of Chesapeake Energy, Devon Energy, and XTO Energy. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.
Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns no shares in the companies mentioned. The Motley Fool has a highly liquid disclosure policy.