Although Devon Energy (NYSE:DVN) is most famous for its properties in the Barnett Shale, the company actually has a well-diversified base of resources and production. This diversification and a strong balance sheet make it a prime candidate to play a rebound in exploration and production once the economy and commodity prices recover.

Barnett Shale
Devon is most known for its large properties in the Barnett Shale in Texas, where it holds 716,000 acres under lease. Devon first got involved in the Barnett area after purchasing rival Mitchell Energy, and the company has spent the last decade developing its acreage. At the end of the third quarter of 2008, the company was producing 1.1 billion cubic feet equivalent per day (BCFED) from here.

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Devon is not finished with this area and believes it can get production up to a range of 1.6-2.0 BCFED as it has 7500 undrilled locations on its acreage. This represents 13 years of inventory. Even after the recent fall in natural gas prices, Devon still has excellent returns in this area. At a price of $5.40 per thousand cubic feet (mcf), it can earn a return of 20% after tax on much of its acreage.

Growth Areas
Devon Energy is not dependent on the Barnett and has an acreage in at least a dozen other areas in North America, Canada and internationally. The company has 54,000 net acres in the Woodford Shale in Oklahoma. The Woodford Shale has attracted interest from larger oil companies, including Marathon Oil (NYSE:MRO), which just announced a discovery there last week. The well flowed at a rate of 5.2 Mmcfe/d, and Marathon has 30,000 acres to develop.

Devon also has 580,000 net acres in the Haynesville Shale in Louisiana. Petrohawk (NYSE:HK) is also developing this area, and just brought three wells on line in the Haynesville with each well producing more than 20 Mmcfe/d. These areas will help Devon grow production as the Barnett Shale matures. (For more check out The Industry Handbook: The Oil Services Industry.)

In Canada, Devon Energy has two projects in the Canadian Oil Sands, and owns 50% of a pipeline that accesses its acreage. It produced 18,000 barrels a day from here in Q3.

DeepwaterGulf
Devon Energy also has a significant acreage in the deepwater Gulf of Mexico. The company has 38 undrilled prospects it is working on currently. These are higher risk exploratory wells that have the potential of large returns if successful. (Dig deeper into how to evaluate oil and gas companies with Oil And Gas Industry Primer and Accounting For Differences In Oil And Gas Accounting.)

The industry is exploring what is called the lower tertiary trend of the deepwater. Chevron (NYSE:CVX) had a major discovery in the area in 2006, and analysts believe the entire play may hold billions of barrels of oil reserves. Devon had a 25% interest in the Chevron well at the time.

Financials
Devon is in a stronger position than its peers and had $1.1 billion on its balance sheet at September 30, 2008, and no significant debt maturities until 2011. Devon Energy may be known for its Barnett Shale acreage, but it is a well diversified and multi-dimensional exploration and production company. This makes it a solid large cap name to play in the sector.




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Tickers in this Article: DVN, MRO, HK

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