Devon Energy (NYSE:DVN) recently reported solid third-quarter results that helped reinforce the strength of its North American asset portfolio. Adjusted earnings came in at $526 million, or $1.29 per diluted share, up 47% from the third quarter of 2012, fueled by 16% year-over-year growth in companywide oil production and higher realized oil and natural gas prices.
Let's take a closer look at the company's key North American assets that drove this impressive growth and what to expect going forward.
The Permian Basin
The majority of this growth was driven by the company's operations in the U.S., especially in the Permian Basin and the Mississippian-Woodford trend, which delivered 38% year-over-year oil production growth, along with output gains and sharply improved price realizations across its Canadian assets.
With roughly 1.3 million net acres in the Permian Basin, Devon commands a truly dominant position in this legacy oil play. Not only does it already have thousands of low-risk, undeveloped drilling opportunities across the basin, but its inventory continues to grow as it expands into emerging plays like the Delaware-Wolfcamp, where initial well results from other operators have been highly encouraging.
Pioneer Natural Resources (NYSE:PXD), for instance, recently drilled a horizontal well in its Wolfcamp D interval that posted a 24-hour peak initial production rate of 3,605 barrels of oil equivalent per day -- the highest 24-hour peak IP rate for any interval in the Midland Basin so far. While Pioneer is perhaps the most optimistic about the Wolfcamp's potential, other companies are also ramping up activity in the region, including Anadarko Petroleum (NYSE:APC), which now has six rigs operating in the play with recent wells posting encouraging IP rates, and Concho Resources (NYSE:CXO), which hopes to drill 175 horizontal wells in the Delaware Basin by the end of the year and is allocating a large portion of its capital budget toward the Wolfcamp A bench.
With 300,000 net prospective acres in the Wolfcamp and roughly 800 undrilled locations, Devon has a potentially huge runway for growth in this emerging play. And with much of its Permian acreage already de-risked, the company expects further cost reductions through pad drilling efficiencies, which should further boost returns from key plays like Bone Springs. This year, the company is on track to grow Permian oil production by more than 30%.
Mississippi-Woodford trend and Canadian assets
Though the Permian is Devon's most prized asset, the company also has a sizable position in the Mississippi and Woodford trend in North-Central Oklahoma, where it commands 650,000 net acres. During the third quarter, Devon's production across the Mississippi and Woodford trend averaged 8,800 barrels of oil equivalent per day, up by a staggering 65% over the second quarter.
Notably, the company's Woodford wells yielded average initial 30-day production rates of 535 barrels of oil equivalent per day, significantly higher than the company's tight curve for the trend. Going forward, production from the trend should continue to grow rapidly, given continued improvements in IP-rates from the application of 3-D seismic technology and an inventory of more than 100 wells that haven't yet been tied in or completed.
Last but not least are Devon's assets in Alberta's oil sands, which are now benefiting tremendously from the recent improvement in oil-sands crude prices. During the third quarter, production from the company's two Jackfish projects came in at about 46,000 barrels of oil per day net of royalties, while cash margins improved significantly due to price realizations that jumped 36% over the previous quarter. Given these projects' relatively low finding and development costs, flat production profiles, and 20+ year reserve lives, they should continue to generate strong and reliable cash flows for Devon.
The bottom line
Since divesting virtually all its international assets back in 2009 and 2010, Devon has amassed a truly enviable portfolio of high-quality, North American assets that includes premier positions in the Permian Basin, the Mississippi-Woodford trend, and Alberta's oil sands.
Going forward, the company plans to direct the majority of its capital budget toward low-risk, developmental drilling in these liquids-rich plays, leaving plenty of room to grow production for several years into the future. Meanwhile, it also has a great deal of optionality to capitalize on rising natural gas prices, thanks to sizable stakes in the Barnett, Texas' Carthage play, and British Columbia's Horn River Basin.