Devon Energy Increases 2012 Capital Budget

By Eric Fox | April 09, 2012 AAA

Devon Energy (NYSE:DVN) has increased the company's 2012 capital budget by $1 billion over previous levels, with the extra funds to be used for exploration and additional oil and gas leasehold acquisitions during the year. The company is targeting various crude oil and other liquid plays in the onshore United States.

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2012 Capital Budget
Devon Energy's original capital budget was set in a range from $5.1 billion to $5.5 billion, with 90% of the funds devoted to the development of the company's extensive domestic inventory, and only 10% allocated to exploration and leasehold acquisitions.

The new budget adds an additional $1.07 billion for these purposes, bringing the exploration and acquisitions budget to $1.6 billion, or 25% of the total. The company's five-year capital plan calls for exploration and production spending of $35.4 billion through 2016.

Leasehold Acquisitions
Devon Energy will spend $350 million on acreage prospective for the Cline Shale in the Permian Basin, and $500 million on an undisclosed play in the onshore U.S. The company has already acquired 250,000 net acres exposed to this new play and is targeting a total position of 500,000 net acres.

It will use the final additional $220 million on various other undisclosed plays that produce oil and liquids.

Cline Shale
The company has built up a position of 500,000 net acres prospective for the Cline Shale and plans to drill 15 wells into this play in 2012. It estimates that unrisked resources here may total 3.6 billion barrels of oil equivalent (BOE). See Understanding Oil Industry Terminology.

Other operators have started to explore and develop the Cline Shale formation. Range Resources (NYSE:RRC) has 100,000 net acres exposed to this play and recently reported the production results of a well drilled and completed to this formation. The well had an initial production rate of 600 BOE per day, and an estimated ultimate recovery (EUR) of 340,000 BOE.

Laredo Petroleum Holdings (NYSE:LPI) is also active in the Permian Basin and has allocated $560 million in capital for the Cline Shale and other plays here.

Apache Corp (NYSE:APA) is also targeting the Cline Shale and other plays in the Permian Basin. The company plans to spend at total of $1.7 billion to develop the Permian Basin in 2012, and will drill six wells to the Cline Shale in 2012.

Production Growth
Devon estimates that it will grow production by a 6 to 8% compound annual growth rate (CAGR) from 2011 to 2016. Crude oil and natural gas liquids production will increase at a faster rate and grow at a 16 to 18% CAGR over that time.

The Bottom Line
Devon Energy is taking advantage of its large cash hoard to increase its exploration and acquisitions budget for 2012. The company's decision two years ago to divest its offshore and international oil and gas segments has turned out to be a prescient one and has added to shareholder value. See What Determines Gas Prices?

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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