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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (44382)	8/4/2005 11:33:41 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 206084

Devon Energy (IL/A): Onshore sustainability, deepwater exploration, and returning cash to shareholders key to performance relative to E&P peers Goldman Sachs August 03, 2005 We believe Devon Energy is delivering drillbit results from its core onshore North America asset base that are better than the Street has been willing to believe. The combination of greater credit for having an onshore asset base that can generate sustainable growth and competitive returns, commercial success with its deepwater exploration program, and greater Street confidence that the company is committed to returning excess funds to shareholders we believe would be the key drivers of a higher relative valuation for Devon and outperformance versus its large-cap E&P peers. We like Devon's financial and operational strategy, but at this time see even greater upside in several other large-cap E&P and domestic oil companies. Devon's peer average EV/DACF valuation seems appropriate to us and we maintain an In-Line rating on Devon relative to an Attractive coverage view. KEY COMPANY-SPECIFIC CATALYSTS (1) Sustainability of strong drillbit results onshore North America. We believe Devon continues to show strong drillbit (i.e., excluding acquisitions) performance onshore North America. The company's history of making acquisitions, in our view, clouded the clarity with which investors could judge its drillbit reserve replacement and finding and development (F&D) cost performance. Based on comments made on the company's 2Q conference call, we believe Devon's reserve replacement and F&D costs onshore North America will be quite competitive with other North America-focused E&P companies in 2005. Continued success in the Barnett Shale (Texas), Deep Basin (Canada), and other areas coupled with new opportunities in places like the Bossier Trend (Louisiana) and Horseshoe Canyon coals (Canada) bode well for the future. On its 2Q call, the company announced an 18% increase to the mid-point of its expected worldwide E&P capital spending range for 2005 to $3.3 billion from $2.8 billion previously. Implied F&D costs for 2005 were raised to $8.80 per BOE from $7.80 per BOE based on comments management made about expected reserve adds this year. In our view, single digit F&D costs will likely prove to be quite competitive among E&Ps in 2005. (2) Deepwater exploration upside. We continue to see Devon as receiving little credit for its deepwater exploration program. In the deepwater Gulf of Mexico's Lower Tertiary play, the next 12 months looks to be an evaluation period for its key discoveries at Cascade, Jack, and St. Malo. We believe it is possible that a development decision for at least one of the projects could be made by the end of 2006, though 2007 may be more likely. In our view, the market is likely to remain in a wait-and-see mode until a development is sanctioned. Offshore West Africa, the company is currently participating in the high-risk/high-potential Esmeralda prospect (500+ mn BOE potential). Additional impact wells could spud by year-end on Angola Block 10 (initial well) and Nigeria Block 256 (2nd well, first was unsuccessful). (3) Returning cash to shareholders. We view favorably Devon's decision to institute a new 50 million share buyback program having completed in 2Q its previous 50 million share authorization. We believe Devon is showing a strong commitment to returning excess funds from high commodity prices back to shareholders. 2Q 2005 EPS BETTER THAN EXPECTED Devon reported 2Q 2005 adjusted EPS of $1.41 ($1.38 on a reported basis), which was ahead of our $1.21 forecast and the $1.26 First Call consensus projection. Higher-than-forecast production coupled with lower-than-expected costs (in particular DD&A) drove the favorable variance from our estimates. UPDATING ESTIMATES We are raising our 2005 EPS estimate to $5.36 from $5.00 to reflect actual 2Q results and higher forecasts for 3Q and 4Q. We are now at $1.35 ($1.27 before) for 3Q and $1.49 ($1.41 before) for 4Q. For 2006, we now project EPS of $6.20 ($6.00 before). For 2007 normalized we now forecast EPS of $2.75 ($2.70 before) and for 2008 normalized we are at $3.00 ($2.96 before). Our new estimates reflect a combination of updated company guidance, a lower share count, slightly higher production volumes, and minor changes to other items. I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.