Devon Set To Surge On Anticipated Production

| About: Devon Energy (DVN)

Devon Energy (NYSE:DVN) is casting its net north to Alberta, Canada, where it is scaling up oil sands production. With 50,000 barrels of daily production at two facilities, the company is already building a third, despite concerns over where the labor to staff expanded production will be found. According to the operations manager at Jackfish 2, Kelly Hansen, workers at the Jackfish facilities hail from as far away as Reno, Nevada, as the local labor markets "are essentially tapped out."

Labor is a perennial problem for exploration and production companies, since many of the most promising plays discovered in the last ten years are located far from major population centers. Even in fairly populated areas like Oklahoma, labor can be scarce as skilled oil rig workers travel to areas where the pay scale reflects the scarcity. At other times, mass migrations of workers from shut downs in one area can drive labor prices lower in another. In one such case, SandRidge Energy (NYSE:SD) reported recruiting workers for its operations in Oklahoma from the Gulf of Mexico after the BP (NYSE:BP) Deepwater Horizon disaster idled operations there in 2010.

To attract far-flung talent, Devon is taking a new approach in recruiting by offering potential workers dorm lodging with resort-like amenities, including private bathrooms, hockey rinks, fitness facilities, and a movie theater. According to Devon Canada President Chris Seasons, "having a competitive camp is essential" to attract qualified workers. And Devon is committed to Jackfish, since it is relying on production between the Jackfish projects and its Permian holdings for most of its predicted annual growth rate of 22 to 24%. With net production in the first quarter of 2012 totaling 31 mbopd, I think that Devon's hopes for this project are on the mark.

In addition to its Jackfish projects, Devon is preparing to develop a site in Pike, Alberta in partnership with BP Canada, a subsidiary of BP. The Pike project will proceed based on Devon's success at Jackfish and regulatory approval, but is currently expected to begin production in 2016. Devon anticipates making its first regulatory filing for the project within the next few months. Devon's stratigraphic drilling in the area reveals a reservoir with similar characteristics to Jackfish, though at higher depths - a maximum of 1,560 feet for Pike, compared to 1,380 for Jackfish. Either way, with Devon holding a 50% ownership share in the pipeline that connects the Pike and Jackfish reservoirs to the hub at Edmonton, these projects combined will be a huge revenue driver for Devon.

Devon Pits Experience Against Inaccurate Statistics

Devon is stepping up to the plate for the industry against what many believe to be inaccurate estimates by the Environmental Protection Agency. In particular, Devon and others familiar with the oil and gas industry are repudiating the EPA's estimates of natural methane leakage from fracked wells. According to Devon's Environmental Manager Darren Smith, these "overestimate[s] allowed the EPA to justify the promulgation of new air standards," and new research shows that this bad data is leading the EPA to the wrong conclusions.

The EPA's estimate of 9 mcf of methane leakage per well is suspect from the beginning, once one takes a step back to remember that methane is exactly the type of natural gas that companies are drilling for in the first place. As Smith pointed out to the EPW Subcommittee on Clean Air and Nuclear Safety earlier this month, that would mean that Devon alone was wasting $40 million per year on escaped gas - an unlikely scenario, especially considering that more recent restrictions mean that companies are monitoring leakage more tightly than ever.

These misguided estimates could potentially lead to more stringent, and more costly, than necessary restrictions, and are already leading to factually erroneous studies based on the bad data - including a claim that emissions from natural gas powered vehicles would be as bad as or worse than conventional vehicles due to leakage at the initial point of production. The impact this could have on energy independents like Devon and Chesapeake Energy (NYSE:CHK) that are keeping gas wells warm in hopes that prices will eventually rise is huge.

First of all, well costs are steadily increasing in almost all plays for most players, and increased regulation will only accelerate that curve, taking away from revenues that could be used for further development and production. Second of all, many natural gas players, including Anadarko Petroleum (NYSE:APC), Apache (NYSE:APA), and Cabot Oil & Gas (NYSE:COG), are supporting a push towards natural-gas driven vehicles through various industry groups. If vehicle manufacturers perceive lack of demand for such vehicles due to negative and inaccurate buyer perception over the proposed vehicles' efficiency, this new market simply won't be developed. Since a natural gas price increase depends on increased demand and these types of vehicles are one of the major hopes for such an increase, the entire industry is eager to set the record straight.


Currently trading around $58 per share, Devon is close to its 52 week low of $50.74. At $58 Devon has a price to book of 1.0 and a forward price to earnings of 7.4, very attractive ratios for a company that has a proven plan for growth on existing resources. Devon also pays a competitive dividend, currently yielding 1.5%. Its oil-heavy leases in Canada, the Permian, and other more conventional plays give it strong revenues even in the face of continued low natural gas prices. Taking advantage of an opportunity, Devon CEO John Richels exercised options to purchase 12,000 shares earlier this month, and I think that at its current value it would be difficult to characterize Devon as anything but a solid buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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