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Update On Devon Energy's Eagle Ford JV With BHP Billiton

Summary

Devon Energy and BHP Billiton have a 50/50 JV in the Eagle Ford region across 100,000 gross acres in DeWitt County.

The partnership has let output slide in the wake of low crude prices but now plans to add completion crews by August.

Those frac crews will bring Devon Energy's DUC inventory down from a peak of 100 in Q3 to 50 by year's-end.

As the partnership brings wells online again, Devon and BHP will get to see how effective two different pilot spacing programs are at yielding additional well locations.

Down in Texas, the Eagle Ford region could arguably be considered the location of America's second big unconventional oil boom after the Bakken/Three-Forks play. A few years ago there was a race of sorts to see which play would hit the 1 million bo/d mark first, and the Eagle Ford won back at the end of 2013. Well returns in the Eagle Ford region are usually stronger than in the Bakken/TF area and the Eagle Ford is generally considered one of the most economical plays in the US, slightly behind the parts of the STACK in Oklahoma and the Permian Basin (particularly the Midland and Delaware basins) in SE New Mexico and West Texas.

Holding back

Some players have enormous acreage positions in the Eagle Ford and can better justify developing those locations at a lower pricing point. Others do not and have to ration well locations. Devon Energy Corporation (NYSE:DVN) and its partner BHP Billiton Limited (NYSE:BHP) have a 50/50 joint venture across 100,000 gross acres in DeWitt County. Due to low crude oil prices, the venture has significantly curtailed activity in the region. In Q1 and Q2 of this year, the partnership ran a combined two rigs in the play while taking a vacation from completion activity.

Sharp cutbacks enabled Devon Energy to generate $78 million and $112 million in "free cash flow" in Q1 and Q2 2016, respectively, under the assumption that asset is in a vacuum. A better way to look at that update is that Devon Energy generated $190 million in "excess" cash flow from the Eagle Ford that it used to subsidize drilling activity and corporate level expenses elsewhere.

For some background info, Devon Energy has been shedding non-core, uneconomical acreage in the Eagle Ford after acquiring GeoSouthern Energy back in 2014 (the purchase was announced at the end of 2013). Through that deal, Devon Energy acquired 82,000 net acres in the Eagle Ford region. 50,000 net acres in DeWitt County, where it has a 50/50 JV with BHP Billiton. The remaining 32,000 net acres were located in neighboring Lavaca County.

By the end of Q2 2016, Devon Energy had wound that position down to 66,000 net acres. Lavaca County hasn't seen nearly as much oil & gas activity as DeWitt County as drilling economics in the area aren't nearly as strong. That's why it would be logical to assume that's where Devon Energy has been shedding...


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