Devon Energy Dives Into Deeper Waters
Gulf of Mexico Discovery May Help Company Join the Ranks Of Major Oil Producers
By ANGEL GONZALEZ and RUSSELL GOLD / WSJ
September 12, 2006; Page A14
Until last week, many investors saw Devon Energy Corp. as a midsize company with a mixed bag of assets around the world -- the result of several years of ambitious acquisitions intended to catapult it into the ranks of major oil producers.
Then came news that test results of a well deep in the Gulf of Mexico -- and 25%-owned by Devon -- showed potential supplies of oil there could be commercially pumped. Devon's acreage in what is known as the lower Tertiary trend could yield a trove of up to nearly six billion barrels of hydrocarbons, Devon's executives say.
The news led the markets to re-evaluate Devon's assets there and elsewhere, which have taken on added shine as oil and natural-gas prices have remained lofty. Devon's shares jumped $7.99, or 13%, the day of the announcement about the well, known as Jack. "The Street may have realized it undervalued Devon," said Merrill Lynch & Co. analyst John Herrlin Jr. The shares have fallen since that first euphoria, but yesterday in 4 p.m. New York Stock Exchange composite trading were at $65.81, $1.66, or 2.6%, above their preannouncement close of $64.15.
The Oklahoma City company faces new questions. It will need financial muscle to develop big projects usually undertaken by larger companies like Chevron Corp. and Brazil's Petróleo Brasileiro SA that can better afford big-money gambles. If Devon reaches its goal of becoming the operator of such projects instead of a minority partner, it will compete with deeper-pocketed companies for drillings rigs and other equipment, in tight supply amid the energy boom.
For years, Devon -- which last year reported profit of $2.93 billion on revenue of $10.74 billion -- struggled to increase production on its own North American natural-gas turf. Expansion came from a series of major acquisitions earlier this decade, like Mitchell Energy & Development Corp. in 2001 and Ocean Energy Inc. in 2003. Earlier this year, Devon paid $2.2 billion to acquire Chief Holdings LLC, a closely held Dallas company.
Some investors worried the company was taking on too much debt and not immediately increasing production. Since 1999, Devon invested $300 million to $700 million a year, or 15% to 20% of its capital budget, in "high-impact" projects, said Devon President John Richels. "That wasn't always the most popular strategy," as they delivered no immediate production increase, he said.
Still, the bets are beginning to pay off. The Mitchell and Chief acquisitions have made Devon a major player in the Barnett Shale gas field in Texas, where gas is trapped in compact, sedimentary rock. The area has surged with activity as technology has enabled companies to increase production there.
J. Larry Nichols, Devon's chairman and chief executive, said in an interview that Devon has evolved from an "acquire-and-exploit" company to a company with a balanced portfolio that will deliver an expected 36% rise in production to 813,000 barrels of oil equivalent by 2009, he said.
Other projects are set to begin producing. The Azeri-Chirag-Gunashli field in Azerbaijan, operated by BP PLC, will start making payouts this year. The Polvo offshore field in Brazil, the Merganser gas project in the U.S. Gulf of Mexico and the Jackfish oil-sands development in Alberta are scheduled to start producing in 2007. Devon looks solid after four years of "almost flattish organic growth," said Tom Covington, a Denver-based analyst with A.G. Edwards Inc.
Although Devon won't see lower Tertiary oil until Cascade, a venture with Petrobras, starts producing in 2009, the deep-water Gulf of Mexico play promises to drive the company's expansion.
The lower Tertiary is a rock layer beneath the Gulf of Mexico, deeper and more ancient than the Miocene layer from where most of the region's production has come. After discovering oil in the area in 2002, Devon accumulated 273 lower Tertiary blocks, second only to Chevron. Devon has four discoveries that could add up to 900 million barrels of oil equivalent, a 43% increase from its 2005 reserves. The company is also present in 19 other prospects, each potentially containing 300 million to 500 million barrels of oil equivalent. Devon could operate up to six of those.
These offshore fields are in the outer reaches of the Gulf of Mexico, beyond the realm of existing infrastructure. Developing Jack and other lower Tertiary fields is estimated to cost about $2 billion each, Mr. Nichols said. Some analysts wonder whether Devon -- which with a market value of about $30 billion is less than one-fifth the size of Jack's operating partner, Chevron -- has enough clout to execute its ambitious designs. The company could remain dependent on bigger fish for money and access to drilling rigs. "When you're an interest holder you tend to be hostage to what these companies want to do in terms of investments and timeframe," said Mr. Covington.
If it becomes an operator, as Devon says it wants to do in coming years, it will face even greater risks. Other companies of its size "have drilled $100 million dry holes. That has damaged them to some degree," said Mr. Covington.
Devon secured a deep-water rig and is looking for more, with plans to drill two to three exploratory wells a year, and is confident that it has enough cash flow to finance its program. The company is undertaking a gradual approach: Its working interest in most of the leases ranges from 20% to 50%. Accumulated experience will enable Devon "to move into an operating role into the next couple of years," said Devon Senior Vice President Steve Hadden.
\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\In Gulf of Mexico, Industry Closes In On New Oil Source
Chevron, Partners Penetrate Miles of Water, Ancient Rock; Test of Commercial Potential
By RUSSELL GOLD / WSJ
September 5, 2006; Page A1
The oil industry is on the verge of cracking open a deep-water region in the Gulf of Mexico that could become the nation's biggest new domestic source of oil since the discovery of Alaska's North Slope more than a generation ago.
Chevron Corp. and partners Devon Energy Corp. and Statoil ASA announced today the first successful oil production from the region, a 300-mile-wide swath of the Gulf that lies below miles of water and deep within a bed of ancient rocks geologists call the lower tertiary. The company said the well sustained a flow rate of more than 6,000 barrels of crude oil a day during the production test.
The test paves the way for the development of the three partners' Jack field, located 270 miles southwest of New Orleans, and ultimately for dozens of comparable discoveries under federal lease to companies that include Anadarko Petroleum Corp., Petróleo Brasileiro SA, Exxon Mobil Corp., BP PLC and Royal Dutch Shell PLC.
Chevron and Devon officials estimate that the recent discoveries in the Gulf of Mexico's lower-tertiary formations hold more than three billion barrels' and perhaps as much as 15 billion barrels' worth of oil and gas reserves. If the industry succeeds in finding 15 billion barrels of oil, it would boost the nation's current reserves of 29.3 billion barrels by 50%.
And if all these new finds were successfully exploited, they could approach or perhaps exceed the output of Alaska's giant Prudhoe Bay, the largest U.S. oil field.
While the new discoveries are sizable, they won't usher in an era of plentiful, low-priced oil. The Gulf's lower-tertiary reservoirs don't come close in size to the enormous oil fields of the Middle East or even Mexico's huge, but tired, Cantarell oil field in the waters off the Yucatán Peninsula. Still, a major new oil source in U.S. waters could help to cool the heated market for crude oil.
Though oil prices slipped below $70 a barrel in New York trading Friday on a pared-back forecast for the current hurricane season, they have risen for the past two years. Factors fueling the rise include shrinking surplus production capacity, fear that global oil output is peaking, instability in several oil-producing regions and a rising tide of oil nationalism, which has led some countries to tighten control over their oil resources.
With three-quarters of the world's oil and natural-gas resources off-limits to Western oil companies, the high oil prices swelling their coffers have encouraged them to take bigger financial risks in search of new sources of oil.
The five-mile-deep Jack well, among the world's deepest production wells, is thought to have cost more than $100 million, according to industry officials. Developing Jack and the other lower-tertiary fields could cost several billion dollars for drilling, building platforms and laying pipelines to take the oil ashore.
"The well test is an important milestone" in unlocking the new region's commercial potential, says Paul Siegele, who heads Chevron's deep-water Gulf exploration unit. "Based on the oil in place and the amount of structures yet to be drilled, this is exciting."
Companies aren't disclosing how much oil they think they have found in most of the region's fields. Devon, however, says its four discoveries, including Jack, hold at least 300 million barrels each, making them among the largest fields discovered anywhere in the world in the past few years, according to Wood Mackenzie, an Edinburgh, Scotland, energy consulting firm.
At a time when energy companies are struggling to replace reserves, the Gulf's deep-water lower-tertiary region "is one of the few exploration success stories where potentially world-class finds have been made in recent years," says Wood Mackenzie oil analyst Zoë Sutherland.
Many of the finds in the region are still unexplored. There are four discoveries near Jack. Two hundred miles to the west, there are five discoveries clustered together, including Royal Dutch Shell's Great White field, which Wood Mackenzie estimates holds the equivalent of 500 million barrels' worth of oil and natural gas.
The area in between has recently yielded its first strike -- and potentially the largest yet. On Thursday, BP said its exploratory Kaskida well had passed through 800 feet of oil-bearing rock, the second-thickest oil zone ever found in the Gulf of Mexico.
Last year, a team of Chevron geologists estimated that between three billion and 15 billion barrels of oil could be extracted from the Gulf of Mexico's lower-tertiary rocks. "I suspect today that is on the low side," says Larry Nichols, Devon's chairman and chief executive. Chevron, which is based in San Ramon, Calif., agrees that the three-billion-barrel end of the range is probably low.
Devon, an Oklahoma City oil company about a fifth the size of Chevron by market capitalization, stands to benefit the most from the emerging oil reserves in the Gulf's lower tertiary. After Chevron, it holds the second-largest number of exploration leases in the region. Company officials said they believe Devon's fractional interest in four discoveries, including Jack and Kaskida, could yield 900 million barrels of reserves -- a 43% increase to its year-end booked reserves.
With the Jack well, Chevron and its partners are hoping to kick off a new wave of Gulf of Mexico exploration. Since the first oil derricks went up in Gulf waters in 1947, more than 99% of the oil and natural-gas molecules have been sucked out of rocks no more than 24 million years old. The Jack well and others in the region are drilled into older rocks that remain largely unexplored.
Technological gains have made the new wells possible. Today's floating oil rigs can drill deeper than their predecessors, and advances in seismic exploration -- the use of sound waves to map underground oil and gas formations -- have made it possible to detect oil below the massive salt canopies that typically sit atop the Gulf's lower-tertiary rock formations.
Until recently, seismic images from below these salt formations were muffled and largely useless. The oil companies, however, developed new mathematical formulas that allow them to interpret the images, bringing potential new troves of oil and gas into focus.
Oil companies still face technical challenges in tapping the lower tertiary, which requires them to penetrate unprecedented depths. Before the test of the Jack well, one of the biggest concerns had been that the rocks in the lower tertiary might be so tight that pulling the oil out would be prohibitively expensive. Now, "that is not a concern," says Mr. Nichols of Devon. "You will be able to flow these wells at a commercial rate."
Others are more conservative in their assessment. While the Jack test flowed oil into a pipeline for more than month, Chevron's Mr. Siegele says he would be more comfortable seeing the well perform for a year before proceeding.
Chevron says it and its partners haven't decided whether to drill another appraisal well or move straight ahead to developing the Jack field. Getting set up to produce oil could take three years or longer.
The three partners discovered Jack, which is under 7,000 feet of water, in May 2004. One 29,066-foot-deep well was drilled that year and a second 28,175-foot-deep well followed in 2005.
This spring, the companies parked the Cajun Express, a 350-foot floating rig, above the second well and turned on the well. Chevron says it produced 6,000 barrels of oil a day, a maximum rate set to prevent damage to equipment. They perforated only a portion of the 350-foot-thick reservoir. The oil is both light and sweet, says Mr. Siegele, the kind that commands the best prices and is in the most demand.
\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\House of Pain: Housing Futures Crumble 09/11/06
2:57 p.m.: The declining fortunes of home builders and the real-estate market in general has many facets, and the stock prices of those stocks aren't the only place in which to see this. The Chicago Mercantile Exchange now trades futures on single-family home prices for major metropolitan areas, and as Birinyi Associates points out, traders on the CME are betting on sharp declines in U.S. housing prices over the next year.
The 10 different contracts show, among other things, expectations for declines of at least 5.6% in the 10 different metropolitan areas traded. Las Vegas is the frothiest market, according to the contracts, as traders expect an 8% decline in the price from June 2006 to August 2007, which may not be surprising -- the median price for a single-family home in Las Vegas increased by nearly 80% from 2003 to mid-2006, according to the National Association of Realtors. |
