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Oil driller's path led to riches beneath gulf

Smart growth catapulted Devon Energy Corp., which positioned itself to share in the biggest oil find in a generation.

By ASSOCIATED PRESS
Published September 7, 2006

OKLAHOMA CITY - In the span of 35 years, Devon Energy Corp. has grown from a tiny energy upstart with five natural gas wells to one of the largest oil drillers in the nation, thanks to a little luck and a series of smart business decisions - none more key than targeting the Gulf of Mexico for growth.

That vision now puts Devon in position to cash in on the biggest domestic oil discovery since Alaska's Prudhoe Bay a generation ago.

A trio of oil companies, including Devon, announced Tuesday a well drilled 5.3 miles below sea level in the Gulf of Mexico had tapped a petroleum pool that could yield from 3-billion to 15-billion barrels. The upper end of that range is equivalent to half the nation's current reserves.

Chevron has a 50 percent stake in the field, while partners Statoil ASA of Norway and Devon each own 25 percent. But Devon is one-fifth the size of Chevron, magnifying the relative benefits to the Oklahoma City company.

Devon's recent success in the Gulf of Mexico is the latest in a series of profitable moves by company co-founder J. Larry Nichols, 64, that resulted partly from a series of mergers and acquisitions the company embarked on in the early 1990s.

In 2003, Devon's $5.3-billion merger with Ocean Energy Inc. strengthened its foothold in the region and catapulted the company into one of the largest independent oil and gas producers in the United States, with more than 4,000 employees worldwide.

The acquisition of deep-water properties in the gulf was a natural progression, said Stephen Smith, an analyst with Stephen Smith Energy Associates.

"Devon was an onshore U.S. player balanced between gas and oil, but they got so big that at a certain time, they started looking at a broader base of acquisitions," Smith said. "As part of some of those packages, along came some companies that had deep-water or international positions."

Devon entered into the joint venture with Chevron and committed to participate in drilling four wells in exchange for a 25 percent interest in 71 deep-water "blocks," a term used to describe a leased section of the ocean floor.

Devon already had enjoyed success in recent years drilling on several other projects in the so-called lower tertiary, a rock formation that is 24-million to 65-million years old.

The company has been building a position in the area since 2002, with four major discoveries in the formation. Besides the project with Chevron, Devon also has an interest in three other major deepwater projects. The company has also identified 19 other "prospects" that haven't been drilled yet.

Devon's share from the four discoveries ranges from 300-million to 900-million barrels of oil, but the potential from the untapped prospects is even more significant, said Steve Hadden, senior vice president of exploration and production for Devon.

But despite recent success, analysts say it will take a lot of time and money before the discoveries in the lower tertiary lead to cheaper oil or lower prices at the gas pump.

"You won't see a drop of that oil for at least six years," Smith said. "It sounds like it's big, and in all likelihood it will be developed, but it won't be seen for a while."

The total cost to establish a production facility on any of the company's prospects in the lower tertiary could be as high as $1.5-billion, said Devon spokesman Chip Minty.

Devon's rise to the upper echelon of independent producers began in the dusty fields of East Texas when Nichols, with a geology degree from Princeton University and a law degree from the University of Michigan, and his father, oilman John Nichols, started the company in 1971 with five gas wells.

Devon grew with the rest of the industry through the oil boom of the late 1970s and early 1980s but was insulated from the bust because of its focus on natural gas and a decision to pay off its debt in the early 1980s, Minty said.

"So we went into the oil bust debt-free," Minty said. "That allowed us to weather those lean years without laying off a single employee."

The company went public in 1988, and its acquisition of Hondo Oil & Gas for $122-million in 1992 set the stage for a series of major acquisitions over the next decade.

The company's philosophy has paid off, with total revenue increasing from $2.9-billion in 2001 to $10.7-billion in 2005, according to Devon's annual report. Net earnings over the same period grew from $103-million to $2.9-billion, while net earnings per diluted share jumped from 37 cents in 2001 to $6.38 in 2005.

After Tuesday's announcement, Devon's stock briefly shot up to an all-time high of $74.75. The stock lost some of that ground Wednesday, settling at $69.01.

[Last modified September 6, 2006, 23:04:11]