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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 (46445)	11/3/2005 9:25:56 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 206084

Devon Energy (IL/A): On-track for higher relative ROCE in 2006 and accelerating growth in 2007 and 2008 - Goldman Sachs - November 02, 2005 We believe Devon Energy is well positioned to show improving ROCE relative to its large-cap E&P/domestic oil peer group in 2006 with accelerating production growth to follow in 2007 and 2008. The ROCE improvement is driven by strong operating performance, the end of below market hedges at year-end 2005, previously completed asset sales, and continued share repurchase. Our 7% volume growth forecast for 2007-8 is driven by its Jackfish heavy oil project in Canada, Azerbaijian oil production, and Devon's exposure to a number of key unconventional natural gas resource plays like the Barnett Shale, Bossier trend, and Woodford/Caney shales. We expect Devon to perform well on an absolute basis given our Attractive coverage view and favorable outlook for the company. We rate it In-Line versus its peers, though, as we see even greater upside in our OP-rated top picks. KEY COMPANY-SPECIFIC CATALYSTS (1) Return to production growth in 2007 and 2008. We forecast that Devon's production growth will accelerate in 2007 and 2008 rising by about 7% in both years, following a couple of years of essentially flat-to-modestly growing production (pro forma for asset dispositions). Driving the increase is new production from the Jackfish heavy oil project in Canada and cost recovery pay-out in Azerbaijian that will allow volumes to start accruing to Devon's interest. In addition, we expect modestly increasing volumes in North America from a variety of unconventional resource plays including the Barnett Shale, Bossier trend, Woodford/Caney shales, and others. (2) Lower Tertiary progress. Devon remains optimistic that it will have commercial projects in the emerging Lower Tertiary trend of the deepwater Gulf of Mexico. Appraisal drilling of the Cascade and Jack discoveries appears to be going well, with production flow tests at both fields scheduled for 2006. If the production tests go well, we expect Devon to sanction development of one if not both fields later in 2006 or 2007. First production is possible before the end of the decade. In our view, the Street is taking very much of a wait-and-see attitude toward the Lower Tertiary given the frontier nature of the play and the uncertainty as to its commercial viability. With Devon owning a large acreage position in the Lower Tertiary, success at Jack or Cascade could be meaningful for its share price. (3) Returning excess cash to investors via share buyback program. We believe Devon continues to show a strong commitment to returning excess funds to shareholders via its share buyback program. Like many companies that have made numerous purchase-accounted acquisitions, Devon's return on capital employed (ROCE) has historically lagged its peer group. We believe the combination of ongoing strong operating results, previously completed asset sales, the stock buyback program, and the end of its below-market hedges will all contribute to its ROCE moving above the peer group average in 2006. 3Q 2005 RESULTS SLIGHTLY AHEAD OF EXPECTATIONS Devon reported 3Q 2005 adjusted EPS of $1.87 ($1.63 on a reported basis), which was ahead of the Street's $1.80 projection and our $1.70 forecast. UPDATED ESTIMATES We have raised our full-year 2005 EPS estimate to $6.79 from $6.62 to account for the positive 3Q variance. Our 4Q 2005 EPS estimate of $2.45 is unchanged. We have raised our EPS projections for 2006-2010 primarily to reflect a greater assumption for share repurchase, which in turn is driven by our increased confidence in the company's commitment to returning excess funds to shareholders. Our new estimates are as follows: $10.50 ($9.92 before) for 2006E, $11.50 ($10.60 before) for 2007E, $4.10 ($3.80 before) for 2008 normalized, $4.37 ($4.05 before) for 2009N, and $4.67 ($4.31 before) for 2010N. 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.