What is Next for Devon Energy?

The natural gas market has heated up in the first quarter of 2014. Despite this rally, Devon Energy (NYSE:DVN) won’t benefit from it as much as it could have because of its decision to shift from natural gas to oil production. Let’s examine the recent changes the company implemented in order to augment its oil production and cut its natural gas operations.

Steering away from natural gas

Devon Energy  has decided to slowly steer away from natural gas and increase its oil production. In particular, during 2013, the company slashed its natural gas production by nearly 7%, while its oil production increased by nearly 15%. Despite the fall in the company’s natural gas production in 2013, the jump in the realized price of natural gas during last year led to a 22% jump in its natural gas production. Nonetheless, this trend of cutting down the natural gas production is likely to continue in 2014. Therefore, in the first quarter of 2014, the sharp rise in the price of natural gas is likely to more than offset the decline in the company’s production.

Devon Energy isn’t the only company that is steering away from natural gas to oil: Chesapeake Energy (NYSE: CHK) also plans to cut down its natural gas production by roughly 1% in 2014, while its oil production is expected to rise by 16%.

One of Devon Energy’s purchases back in late 2013 is likely to sharply increase its oil production in the coming years. The company bought GeoSouthern Energy’s assets in Texas’ Eagle Ford shale. This acquisition is expected to increase the company’s oil and NGL production to a peak production of 140,000 barrel of oil equivalent per day.  Since the company’s daily production was roughly 692,900 BOE in 2013, this recently acquired asset will add nearly 20% on top of its current production. But based on my rough estimates, this peak oil production will come to fruition in 2022. In the short term, this asset is expected to generate nearly $800 million in free cash flow starting in 2015. Considering the company’s free cash flow was negative in 2013, this asset will significantly improve the company’s cash flow situation.

Chesapeake has also been operating in Eagle Ford shale; in the fourth quarter the production in this asset grew by 39% year over year. Nearly 68% of the company’s production in this asset was oil. This asset is also likely to improve Chesapeake’s production and steer it towards oil.

The shift away from natural gas wasn’t the only change Devon Energy has implemented in recent years. The company has shifted its focus to the U.S and Canada as it sold off its assets in other regions including Brazil, the Gulf of Mexico and Azerbaijan back in 2010. Moreover, the company continues to grow its production mainly in the U.S. E.g. back in 2013, Devon Energy increased its U.S oil production by more than 31%, while its oil production in Canada grew by 3%. These changes are likely to reduce the company’s foreign exchange risks.

Bottom line

Devon Energy has cut down its natural gas production in the past year and is likely to continue on this path in the coming years. Conversely, the company’s decision to purchase assets in Eagle Ford shale is likely to significantly improve its cash flow in the coming years.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.