Devon Energy Earnings Call Insights: Mississippian Play and Capital Allocation

Devon Energy Corp (NYSE:DVN) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Mississippian Play

Arun Jayaram – Credit Suisse: Good morning gentlemen. Jeff, kudos on the repatriation, I know that’s been a lot of effort of you and your team, so congrats on that. My first question is regarding kind of the Woodford play Dave. Understanding, it’s early in this – you know this play, but I was wondering if you could just comment a little bit on the consistency of the well results thus far? Perhaps the initial rates of return versus the Mississippian program? And bigger picture, what do you think this could do for Devon if you can prove this position out?

David A. Hager – EVP, Exploration and Production: Well, we’re pretty excited about this opportunity overall, because I think by the nature of being a shale play and in fact it is a source rock, actually for the vast majority of the Mississippian play. But in nature, shales tend to be more consistent in nature and so that has led to greater consistency and well results, already and we’re just at the beginning stages of really characterizing the overall play. So, we are seeing more consistent results. There is obviously some variability, you know some of the keys we’re looking for looking for where we can enhance the permeability through fracturing and you see some variability depending on the thickness of the reservoir. But overall, it is a consistent play that produces strong economic results. You can see we are using a – essentially for right now the same type curve is we are using for Mississippian, but it’s going to be a little bit lower well cost. So, that’s obviously even going to enhance the economics a little bit more and we – as I highlighted, we are very confident we derisked 100,000 acres and we see the potential for up to 400,000 acres of Woodford potential across our 650,000 acre position in the Miss Trend. So, it’s an exciting play, if it works out to scale, you can do the math, but it’s going to – it can add a lot to our light oil story.

Arun Jayaram – Credit Suisse: Do you have, Dave, the same water issues that you have in the Miss Lime?

David A. Hager – EVP, Exploration and Production: No, you don’t have near the water issues you have in the Miss Lime.

Arun Jayaram – Credit Suisse: John, one for you is I wanted to ask you just around strategic alternatives or potential strategic alternatives beyond the MLP, thoughts on other things, such as Canada, thinking about strategic ultras around Canada to unlock some of the value there of your oil sands position?

John Richels – President and CEO: Sure. We’re not getting into any of the specifics. We are always looking at ways that we can bring our value forward. And I think our history proves that we are not afraid of doing that and making bold moves. However, a lot of things that you would talk about and reflect on from the outside don’t necessarily add long-term value, and so we are very conscious about that and we are looking at any opportunities available to us. We’ve always said, we’re always considering how to bring value forward and we are not leaving any stone unturned in that analysis, but we are going to do – we’re only going to do the things that add long-term value and not take action simply for action sake.


Capital Allocation

Doug Leggate – Bank of America Merrill Lynch: Dave, first to you perhaps, so the Mississippi Lime and the Woodford. Are we now basically seeing the Woodford as a primary target for your acreage there? And could you talk about what the implications are in terms of development fund, rig count activity or rather I guess well activity and ultimately how you might change capital allocation associated with plan? I have got a follow-up, please.

David A. Hager – EVP, Exploration and Production: Sure Doug. We like both of them. I think that’s the key. We like the Woodford and we like the Miss Lime. This is not necessarily – this is not negative on the Miss Lime. It’s just where we have additional potential here in the Woodford. I think that’s really the key. The Woodford is a little bit deeper and so by drilling and how some of these additional qualities that we’ve described have been shale. Probably it’s more consistent results, a little bit easier to drill, lower well costs, all of which are very positive for that, and in addition being deeper when you drill Woodford well, you hold all rights above that. And so, we’re going to have a tendency to drill more Woodford wells here in the short term to make sure that we get our acreage secured through the Woodford. But ultimately, it’s going to take the rest of this year I think really to – and that’s what I’ve been trying to say consistently that it’s going to take the rest of this year to really get a clear understanding of what the full potential is on both the Woodford and our Miss acreage. But it’s starting to emerge pretty positive, I can tell you, and it looks like we certainly have a strong leg to our – for our next oil growth within Devon and so I like where we are. Bottom line it is just as nice to have an additional formation such as the Woodford to really bolster that growth…

Doug Leggate – Bank of America Merrill Lynch: I don’t know if you want to take my follow-up, but it’s related to the carries. I mean, clearly the success in the Powder, the Permian and Miss, can you help us with – how are you allocating and, I guess, what’s the remaining capital carry you have in the two joint ventures that you have with Sumitomo and Sinopec? I’ll leave it there, thank you.

Jeff A. Agosta – EVP and CFO: We should benefit to the tune of over $1 billion this year and $1 billion next year.

David A. Hager – EVP, Exploration and Production: That’s the two JVs combined.

Jeff A. Agosta – EVP and CFO: Yes, the two combined. But as far as the specific to the Rockies and the Miss, that’s got to be upwards of $700 million, $800 million per year.