One of the leading independent energy companies leading the way in the exploration and development of natural gas liquids (NGL) is Devon (DVN). While other energy companies are searching out alternative resources because of the downward pricing of natural gas, Devon is going for the liquid.
This is a smart move especially when analysts are expecting this company's growth, due to NGL, to be close to 13% this year. Of course NGL is not Devon's only energy resource to bring to market. The company is expecting growth of up to 24% from its oil plays. In the most recent quarter, the company reported record production of 694,000 barrels of oil equivalent (BOE) per day in the most recent quarter, up 10% from the first quarter of 2011. Devon is a company that I believe investors should not just keep a keen eye on, but own the company while watching its phenomenal growth.
Two of Devon's competitors, Apache (APA) and Anadarko (APC) are in for a surprise when Devon's plans finally begin to take hold. Lesser competitors such as Cabot Oil & Gas (COG), Comstock Resources (CRK), and Canadian Natural Resources (CNQ) will also need to be on their toes as Devon begins taking action on its lofty goals. The company has set a goal to spend $1 billion more than originally planned for oil exploration, or close to $6.5 billion, with expectations of increasing its oil and gas production by 6% to 8% on an annual basis over the next five years.
The company said it has acquired 500,000 acres in the Cline shale in West Texas, and it is also targeting oil on another 250,000 acres in an unspecified location, hoping to increase that position to 500,000 acres. Similar to the Sinopec deal, the company may pursue a joint venture for its Cline shale acreage. The company expects to drill 15 wells in this emerging play in 2012. The invested capital is focused on oil and liquids where for the first quarter 2012, the company reported 26% year over year growth in the production of these hydrocarbons. This aggressive plan is expected to deliver 23% growth in oil production and 12% growth in natural gas liquids this year.
The oil-rich sedimentary basin stretching across the western part of Texas and southeastern New Mexico known as the Permian Basin is just one of the areas where Devon is finding success. The company currently operates 21 rigs there now, adding five rigs in this basin during the first quarter of 2012.
With 500,000 acres in the Cline Shale play, the company is targeting liquids production planning to drill 15 horizontal wells this year. The company estimates the wells will cost about $6.5 million each and produce 570 mboe. Devon is also working on the Bone Spring play and completed 16 wells in the first quarter 2012. The company reported an average production rate of 580 BOE from each of these wells. In the Great White North of Canada, Devon is developing multiple oil sands projects in Alberta: One is known as The Jackfish 2 project, already producing 21,000 barrels of oil per day in the first quarter of 2012. The project's ultimate capacity is 35,000 barrels of oil per day. The other project is Jackfish 3 which is 30% complete and has a similar capacity to Jackfish 2. It is expected to start up production in 2014.
Another attractive feature of the company is that it is willing to be creative in seeking liquids and in its exploration and production endeavors, including partnering or participating in joint ventures. Devon's CEO John Richels recently stated, "We are open to taking on partners to help us develop our new exploration plays. While we could easily pursue these new opportunities on our own, bringing in a partner enhances our overall risk-reward profile." This openness to new business along with cash on hand makes Devon a very attractive company for investors.
Devon reported first quarter 2012 earnings of 1.05 per share, and reported annual 2011 earnings of 6.00 per share. The company had first quarter 2012 revenues of $2.50 billion, 3.40% below the prior year's first quarter results, and had revenues for the full year 2011 of $11.45 billion, 15.23% above the prior year's results. For the quarter, gross margin was 66.4%, 90 basis points worse than the prior-year quarter, but operating margin was 28.4%, or 150 basis points better than the prior-year quarter. Net margin was 15.7%, 230 basis points worse than the prior-year quarter.
The company reported net earnings of $393 million for the quarter ended March 31, 2012, and generated cash flow before balance sheet changes of $1.4 billion, representing a 3% increase in cash flow compared to the first-quarter 2011. The good showing for the first quarter was due in part to the company's first quarter liquids production that increased for the sixth consecutive quarter to 256,000 Boe per day. This growth was led by a 26% year-over-year increase in oil production. Increasing 3% to $1.9 billion for the first quarter were sales of oil, natural gas and natural gas liquids. Cash settlements related to oil and natural gas hedges increased revenues by $158 million or $2.50 per Boe, and marketing and midstream operating profit was $112 million in the first quarter of 2012, representing a 7% decrease compared with the first-quarter 2011 attributable to lower natural gas and natural gas liquids prices.
Devon has been hit pretty hard in the media because of not living up to the dream company that some analyst predicted. That's okay. Devon is still chugging full steam along making great strides in production of oil and liquids and is still ranked as a top-five producer of natural gas. The company is in a good position for when prices do come back for gas and when more of their exploration plays pan out.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.