When an oil and gas company is doing well, investors jump on board to ride the wave of increasing prosperity. However, as any good surfer will tell you, it is best to get before the wave to really enjoy the ride.
Devon Energy (DVN) is poised to crest and it is best to get in now. The company is gaining traction with new plays and joint ventures making the company into a great producer. Devon recently announced a $1.4 billion joint venture with Japan's Sumitomo Corporation. For 30% of Devon's interest in approximately 650,000 net acres in the Cline Shale and Midland-Wolfcamp Shale, Sumitomo will invest $1.4 billion.
This is just one example of Devon's aggressive plays. According to the agreement, Sumitomo will pay $340 million when the deal closes in the third quarter, and an additional $1.025 billion will be invested in the form of a drilling carry that will cover 70% of Devon's capital requirements. As a result Sumitomo would cover about 79% of overall drilling and completion costs during the drilling carry period, expected to be realized by mid-2014. As Devon's CEO John Richels stated, "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. These arrangements significantly improve the capital efficiency of our exploration programs which preserves cash flow for our deep inventory of development projects."
The second joint venture Richels refers to is the lucrative deal made with Sinopec International Petroleum Exploration & Production Corp. in which the Chinese oil major will pay $2.2 billion for a one-third interest in five alternative shale plays that include the Tuscaloosa Marine Shale, Niobrara, Mississippian, Ohio Utica Shale and the Michigan Basin. With Devon Energy smartly entering new ventures, its ramping up of oil and liquids production ratios, and its strategic cash management plans, this is a company I believe should be considered an investment move right now while the time is right.
Being a natural gas weighted company, Devon Energy has had to sit on reserves because of the inflated supply in the market. Other companies in the same boat include Anadarko Petroleum (APC) and Chesapeake Energy (CHK). Like Devon Energy, Anadarko Petroleum still continues to find new plays of natural gas. The company recently announced that its New Zealand blocks are expected to hold trillions of feet of natural gas. Chesapeake Energy on the other hand is spending more energy in selling off assets to reduce its debts.
Anadarko Petroleum recently entered into a purchase and sale agreement to sell assets in the southern Delaware Basin portion of the Permian Basin to SWEPI LP, a subsidiary of Royal Dutch Shell (RDS.A). Both Royal Dutch Shell and Exxon Mobil (XOM) have both suffered recently due to the fall in energy prices, including a near 50% drop in natural gas prices in the U.S. All of these companies would benefit greatly from a cold winter where natural gas prices would soar. The demand for the gas from use as an alternative fuel is taking longer than expected in creating the drastic demand that is currently needed, but Devon Energy is in a good position to wait out the drop in demand. The company's production is up 3% year over year to 679,000 BOE, with oil production up 26% year over year.
As the company continues testing new plays such as the Utica, the Mississippian, and the Tuscaloosa Marine Shale, it forecasts 680,000 to 690,000 BOE of production in the third quarter. The company also continues to see success in the Barnett Shale play where it was one of the first exploration and production companies to begin active exploration in this play. The company has 624,000 net acres under lease and reported net production of 1.32 billion cubic feet of natural gas equivalents per day in the fourth quarter of 2011. It has drilled approximately 3,000 wells in this play during the last six years, and with the use of fracturing technology has increase its production from 200 million cubic feet of natural gas equivalent per day in 2002 to about 1.3 billion today.
Some of the competition is reducing efforts in this play. WPX Energy (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. In addition, Pioneer Natural Resources (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 Energy's innovative strategies are also helping to keep costs down for the company. 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. The use of hydraulic fracturing for each well requires roughly 180,000 barrels of water, but Devon Energy has continued to prosper, completing 36 wells in the area even during the continued drought. The company's water reuse facility, that includes a lined reservoir that can hold up to 500,000 barrels of water, with an office and seldom-used ramp for truck traffic, is located about halfway between Geary and Calumet. Roughly 10 miles of pipeline system is used to move much of the water into and out of the reservoir. The facility went online this past June and is about 10 times larger than is currently needed to allow for further expansion.
For its second quarter 2012, Devon Energy reported net earnings of $477 million compared to its second-quarter 2011 net earnings of $2.7 billion, which includes a one-time gain of $2.5 billion resulting from the divestiture of assets in Brazil, which enhanced the company's second-quarter 2011 earnings. The company had second quarter 2012 revenues of $2.56 billion, 2.48% above the prior year's second quarter results. Additionally, the company recently announced that its Board of Directors declared a quarterly cash dividend on Devon's common stock for the fourth quarter of 2012. The dividend is payable on December 31, 2012 at a rate of $0.20 per share based on a record date of December 14, 2012.
With such sound financials, strong liquid and gas plays, smart partnering moves, and innovative use of resources, Devon Energy will likely move higher in the remainder of 2012 and into 2013. I think the stock will break its 52-week high of $76.34 by next Spring.