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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (64)	5/8/2008 6:00:12 PM
From: Dennis Roth	Respond to of 111

Devon Energy Corp. (DVN): Lower net production forgivable; exploration, onshore growth key - Goldman Sachs - May 08, 2008 What's changed Devon reported 1Q 2008 adjusted EPS of $2.52 vs. our estimate of $2.43 and First Call consensus estimate of $2.33. Total production was 3.8 Bcfe/d vs. our 3.9 Bcfe/d estimate. Operating cash flow was $2.6 bn vs. our $2.1 bn estimate. Management guided FY 2008 production to the low end of the previous range of 240-247 MMBOE due to several issues that we generally view as forgivable, including the Independence Hub shut-in, slower rampup of the Polvo project (Brazil), and a high-oil-price-related earlier-than-expected onset of higher government take at Azerbaijan’s ACG field. Implications The Barnett Shale continues to outperform, with average 1Q production of 995 MMcfe/d vs. our estimate of 966 MMcfe/d. While we believe further Barnett upside versus expectations would be a positive, a key driver for Devon going forward will be growth and rates of return from onshore assets outside the Barnett. 1Q 2008 production was flat with 4Q 2007, though well results from Groesbeck (East Texas) were positive, with three horizontal initial production rates of more than 19 MMcf/d. In Canada, the Jackfish oil sands rampup appears on track, winter drilling results were positive and should lead to sanctioning of Jackfish phase 2 in 3Q 2008. Valuation Devon’s assets offer an attractive mix of onshore gas growth led by the Barnett, deepwater exploration upside, and oil sands exposure. Devon’s production growth, returns, and free cash flow are competitive with other large-cap diversified E&Ps such as Apache (rated Buy) and Anadarko (Neutral). With each stock now trading in a relatively tight valuation band of 4.6X-4.8X 2009E EV/DACF, we believe exploration results and operating momentum in key regions will drive relative share price performance. Our E&P coverage view is Attractive. We are Not Rated on Devon. Key risks Commodity price/cost volatility, drilling results, govt pronouncements.