Devon Set To Become A Leading Energy Play In 2013

| About: Devon Energy (DVN)

Devon Energy (NYSE:DVN) is ready to take off and smart investors will be there for the ride if they get in soon on this stock. The company is aggressively moving forward with joint ventures and new plays that will push Devon to become a leading energy producer.

Devon recently entered into a deal with Japan's Sumitomo where Devon agreed to sell a 30% interest in around 650,000 acres in the oil rich Cline and Midland-Wolfcamp shales in west Texas. Sumitomo will pay $340 million when the deal closes, expected in the third quarter, and commit an additional $1.025 billion toward funding the joint venture's drilling, covering 70% of Devon's capital requirements. As a result Sumitomo would cover about 79% of overall drilling and completion costs during the so-called drilling carry period, the timeframe in which Devon's partner will carry most of the drilling costs. That period is expected to conclude by mid-2104. The deal will mean less profit for Devon on the venture, but will also fully fund the capital expenditures for the play. I believe this to be a very nice deal for Devon, given that cash flow has been a problem for the company largely due to the decline in natural gas prices. The Cline and Midland-Wolfcamp plays are for oil, which makes the play that much more promising.

The deal with Sumitomo comes on the heels of another big deal the company has made. In January, Sinopec International Petroleum Exploration & Production agreed to pay Devon $2.2 billion for a one-third interest in five alternative shale plays. "With the close of the Sumitomo transaction, we have now successfully entered two exploration joint ventures during 2012, approaching $4 billion in value to our company," said John Richels, Devon's president and chief executive officer. "These arrangements significantly improve the capital efficiency of our exploration programs which preserves cash flow for our deep inventory of development projects."

Devon is pursuing new ventures to emphasize oil production and is in the process of increasing its oil and liquid production ratios. It has also done a good job of increasing cash flow and is addressing its debt issues in a way that is as good as any company hit by the natural gas market. The company has had to sit on natural gas reserves because of the heavily oversupplied market. There are plenty of companies in similar situations. Chesapeake Energy (NYSE:CHK) is in the middle of an aggressive strategy of increasing cash flow and paying down debt by selling off assets, many of them natural gas areas. Anadarko Petroleum (NYSE:APC) continues to expand production of natural gas, just as Devon, while also aggressively expanding its oil producing capabilities. Exxon Mobil (NYSE:XOM) is not even immune from the natural gas slowdown. The company has seen its share price take a hit. All of these companies would benefit greatly from a very cold winter, but Devon understands that it must have better diversification and has acted on that by expanding oil production.

Other companies are looking to reduce holdings. WPX Energy (NYSE:WPX) recently announced the sale of the company's natural gas properties in the Barnett Shale and Arkoma Basin for $306 million to an investor group comprised of KKR Natural Resources and Premier Natural Resources. At the same time, Pioneer Natural Resources (NYSE:PXD) announced that it is looking to sell the 155,000 gross acres in the Barnett Shale that it has accumulated since entering the play in 2007. Pioneer is looking to focus on higher rates of return from its Permian and Eagle Ford's positions. Devon is taking the strategy of bringing in other companies to reduce costs as opposed to selling assets as a whole. While profits might not be as much, the reduction in costs is well worth it.

Devon is also reducing costs in other ways. Because of an innovative recycling project, the company is on track to reuse three million barrels of water in its drilling operations in western Oklahoma this year. Water costs amount to a considerable percent of the total costs for drilling, this sort of innovation will save the company millions each year

Accounting for a $1.1 billion one-time impairment charge the company made $355 million for the third quarter of 2012. This comes on the heels of a $477 million profit for the second quarter. Devon continued to deliver strong oil production growth in the third quarter of 2012. Oil production averaged 143,000 barrels per day, a 14 percent increase compared to the third quarter of 2011. In total, Devon's production averaged 678,000 oil-equivalent barrels per day in the third quarter, a 3 percent increase compared to the year-ago quarter. Year-over-year declines in natural gas volumes driven by reduced activity levels in liquids-rich gas projects partially offset the company's oil production growth in the third quarter.

Devon Energy has strong financials and is pursuing a sound strategy of continuing natural gas plays while also understanding that diversification into the liquids market will only produce better results. The smart partnering moves will prove to set this company apart from many of its competitors going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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