Devon to shut-in 10,000 b/d of oil in Q2; further curtailments to be decided 'month to month': CEO

Houston — Devon Energy will curtail 10,000 b/d of oil production across the board in the second quarter of 2020, representing about 6-7% of its total crude output.

As a result, the Oklahoma City-based company expects its oil production in Q2 to average 145,000 b/d-155,000 b/d after the curtailment, which was made owing to unusually low commodity prices since early March, CEO Dave Hager said during a first-quarter 2020 earnings conference call Wednesday.

The largest percentage of Devon's oil output comes from the Permian Basin of West Texas/New Mexico at 84,000 b/d. But it also has production from the Eagle Ford Shale of South Texas, Powder River Basin in Wyoming and Anadarko Basin in Oklahoma.

However, unlike many operators, only about 20% of the 10,000 b/d is shut-in production for Devon, with the "vast majority" of its curtailments coming from restricted flow-back of higher-rate wells and deferral of placing "a few" new wells online in Q2, Hager said.

"We plan to proceed [with] curtailment decisions on a month-to-month basis," he said, owing to the "extreme volatility" of current oil markets.

"We have no pricing exposure to West Texas Light, Clearbrook [Minnesota, an oil hub], the North Slope, Canadian bitumen or many other well-known pricing hubs that have recently experienced exceptionally weak prices," Hager said.

Until June 2019, Devon had Canadian heavy oil sands assets, but sold them to Canadian Natural Resources.

EAGLE FORD, WYOMING OUTPUT PRICES LOCKED IN

Moreover, in key plays like the Eagle Ford and the PRB, "we correctly anticipated that there would be weak regional pricing, and our marketing team took ... action to lock in our revenue at pricing above variable costs in May and June," he added.

Oil executives have said their decisions to shut in or curtail production from existing wells generally occurs when the variable cost to operate a well exceeds its expected revenue. That is the main factor, although considerations such as leasehold obligations, mechanical risks and involuntary third-party constraints also play into curtailment decisions, Hager said.

NYMEX WTI crude futures have traded in the low to mid-$20s this week, but in the teens for the previous couple of weeks.

For the full-year, Devon expects its oil production to be essentially flat compared with 2019. The company averaged oil output of 150,000 b/d in 2019.

Devon also reaffirmed its capital spending for 2020 will remain at $1 billion, a figure that was twice reduced in March from an original $1.7 billion-$1.85 billion.

Hager said its current maintenance capital – the level of investment to keep production flat – is currently around $1.25 billion, but should drop to $1.1 billion in 2021. The current maintenance capital level represents a 10% improvement from a year ago.

SEE BARNETT SHALE SALE CLOSE BY YEAR-END

In addition, Devon is on track to close the sale of its legacy Barnett Shale asset to Thai conglomerate Banpu Kalnin Ventures by the year's end, Hager said. The original agreement inked in December 2019 was amended in April to delay the close to December 2020 in exchange for an up-front payment of $170 million and potentially higher total proceeds up to $830 million.

The original agreement was for $770 million and an April 2020 close. The additional $260 million takes into account variable commodity prices.

Devon received a $170 million deposit last month on the asset, Hager said. The company had originally purchased its Barnett Shale operation from Mitchell Energy in 2002, when US operators were largely chasing natural gas instead of oil, Hager said.

The Mitchell purchase kicked off an industry shale boom that endures to this day, and accounts for most of the US' oil and gas production.