Devon Energy Corporation, Company Intelligence Report

Wednesday 11 July 2012, Amsterdam

Development of the Permian Basin Holds the Next Key after Unconventional Projects; Strong Upside Potential Expected
Devon holds several conventional and unconventional oil-rich prospects in the Permian basin, which are in different stages of exploration and development. The company reported a net acreage position of around 1.5 m acres in this basin as of April, 2012. Currently, it holds an unrisked resource potential of nearly 7.6 Bboe and risked resources of approximately 2.8 Bboe in the area. Devon’s resources in this basin are primarily made up of oil, which represents around 74% of its risked resources. 75% of the company’s Q4 2011 production from the Permian basin was from crude oil and NGLs.

Devon’s drilling inventory in this basin includes more than 8,000 risked locations, which provides it with an opportunity to accelerate its development activities in the area. In line with this, Devon plans to invest a total capex of nearly $1.4 bn into this basin during 2012, drilling more than 300 wells. Moreover, the company plans to increase the number of rigs it has in the Permian basin from its 21 currently deployed rigs to 24 by the end of 2012.

In the future, the company plans to further increase its number of rigs in the Permian basin and its drilling activities are also expected to follow an increasing trend.

Devon’s major development targets in the Permian basin include the Bone Spring oil play, the Delaware oil formation, the Wolfberry Light oil play and the Central Basin Platform conventional targets. Currently, Devon’s production from the Permian basin is mainly driven from the Bone Spring oil play and the Delaware oil formation, where its development activities are focused on further improving the company’s production level. The company holds a net risked resource potential of nearly 140 MMboe in both these targets. The company holds a drilling inventory of 350-400 locations in the Bone Springs oil play alone, and plans to drill 80 wells in this play during 2012. Devon reported an EUR/well of nearly 400-600boe and an average well cost of $5-8m/well in this play.

Devon’s development activities in the Delaware oil formation primarily target the conventional resources. The company drilled seven wells and completed four wells in Q3 2011, which showed a 30-day average initial production (IP) rate of 400boe/d. The company reported 125 net risked locations in the Delaware oil formation at the end of Q3 2011. It also reported performance improvement in terms of production rate and EUR in these formations over the past two years. Consequently Devon’s production increased from 7 Mboe/d in 2010 to 11 Mboe/d in 2011, which is further expected to increase to 19 Mboe/d in 2012.

The company’s assets in Wolfberry Light oil play also support Devon’s oil production from the Permian basin. The company currently holds a net acreage of 160,000 acres and a risked resources potential of 120 MMboe in this play. Additionally, Devon has an access to a drilling inventory of nearly 1,000 risked locations. The company’s major targets in the Wolfberry Light oil play include the Sprayberry & Wolfcamp formations. Currently, its drilling activities are based on vertical methods. However, Devon plans to target horizontal drilling in this play in the future. The company is also working on reducing the spacing between its drilling locations from 40 acres to 20 acres, which is expected to increase the number of its drilling locations in the play. In line with this objective, the company started a four well infill pilot program based on 20-acre spacing in H1 2011. With the application of horizontal drilling and down-spacing, Devon’s development activities in the Wolfberry Light oil play are further expected to increase in the future.

Devon reported a reduction in drilling time from 11.6 days in 2009 to 9.9 days in Q2 2012, which is evidence of its improved drilling efficiency in the Wolfberry Light play. The company plans to maintain its focus on the development of the Wolfberry Light oil play and expects to drill nearly 100 wells in this area, investing a capex of nearly $275m in 2012. Devon also has exposure to conventional targets in the Central Basin Platform, where it has acreage in various oil plays such as the Tubb, Wichita-Albany, Strawn, Clear Fork, and other oil plays. As well as this it has several other untapped targets in the area. The company holds a net acreage position of nearly 77,000 acres and risked resource potential of nearly 210 MMboe in this platform. Currently, it is working on testing for longer horizontal wells.

Apart form these developmental targets, Devon also has several exploration targets in the Permian basin, of which the major is the Wolfcamp shale. The company’s assets in the Wolfcamp shale are located in the Midland basin and the Delaware basin. Its major focus is on the Midland basin, which includes its light oil resource play, as opposed to its natural gas-rich prospects in the Delaware basin. The company brought its first horizontal well from this shale to production in Q3 2011. Moreover, it added four more horizontal wells in the Wolfcamp shale to production in Q4 2011. Devon is also working on optimizing its drilling and completion technique in this shale and drilled its first 7,100 feet lateral well with 30 stages in Q4 2011. The company plans to increase its drilling activities in this area in 2012, drilling 35 new wells. Moreover, it also has various other horizontal plays in the evaluation phase in the Permian basin, which is expected to bring upside in the company’s resource potential in the future. The figure shows Devon’s production from the Permian basin from 2011–2016.

Devon has thus piled up a substantial inventory of oil-rich exploration and development assets in the Permian basin, which contains a huge untapped resource potential. The company’s enhanced focus on the development of this resource base is expected to bring significant upside in its proved reserves and total production in the future. Higher production from the Permian basin along with production growth from its Canadian thermal oil projects is expected to increase the share of oil in Devon’s total production. Moreover, the company’s decision to reduce its natural gas based drilling will further support the
contribution of oil in its upstream portfolio in the near future. Consequently, Devon is anticipated to emerge with an oil focused resource and production mix. Increased oil production will benefit the company due to the high premium associated with oil prices compared to natural gas prices, thereby boosting its bottom line in the future. Higher profitability will eventually improve Devon’s cash flows and valuation.