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Devon’s Delaware multi-zone development that shaved $1 million off of well costs is a ‘game changer’

Devon Energy (ticker: DVN) announced third quarter results today, showing earnings of $228 million, or $0.43 per share. After excluding special items, Devon earned $242 million, or $0.46 per share, which the company reports exceeds analyst consensus estimates.

Devon produced 527 MBOEPD in Q3, compared to 536 MBOEPD in Q2. This drop is entirely due to hurricanes, as storm-related curtailments reduced production by about 15 MBOEPD. Production did exceed the previously-released hurricane-adjusted guidance, though.

Devon brought 50 wells on production with IP30s higher than 2,100 BOEPD

Recent well results have been very strong, and Devon reports it brought 50 different wells on production that had averaged initial 30-day rates of more than 2,100 BOEPD. The company’s STACK wells have been among its best, as 14 new wells in the play averaged 2,300 BOEPD over the first 30 days of production.

Well results like these are boosting the company’s STACK and Delaware production, and Devon predicts the two assets will grow combined production by 30% YOY by the end of 2017. This growth will take a great deal of activity, and the company will run 20 development rigs and 7 frac crews in Q4.

Barnett acreage up for sale

Devon is progressing on its divestment program, and expects to sell more than $1 billion in total. The most significant asset left to sell is the Johnson County portion of the company’s Barnett acreage. These assets produce about 30 MBOEPD, and Initial bids are expected in Q4.

Devon Energy Sees 40% NPV Improvements in the Delaware

Source: Devon

$1 million per well in savings

Devon recently completed its first multi-zone project in the Delaware, testing ten wells over three landing zones. Early flow rates are encouraging, with two wells in the Leonard B reaching 30-day IPs of 1,600 BOEPD. In total, spud to first production on the project was 5.8 months. The project yielded significant savings, with an average well cost of $5.5 million per well. This means the Anaconda project has savings of about $1 million per well, with additional efficiencies expected in future development.

Devon Energy Sees 40% NPV Improvements in the Delaware

Source: Devon

Devon has high hopes for this multi-zone style of development, and has planned several other projects in the Delaware. Four new projects will be underway by the end of 2017, with a cumulative 49 wells over up to 15 intervals. The company estimates the efficiency gains and improved recoveries from such projects will increase the NPV of its Delaware properties by over 40% on a per-section basis.

Devon Energy Sees 40% NPV Improvements in the Delaware

Source: Devon

Q&A from today’s Q3 earnings call

Q: The highlight in the release around a projected NPV uplift of greater than 40% as you look forward for the STACK and Delaware kind of caught our eye, but can you help us understand kind of define the starting point for where the NPV is in the STACK know and then how the 40% or more is there and then same thing for the Delaware starting point?

Tony D. Vaughn: The comment about the 40% uplift in PV10 is really in comparison to a typical historic 4-well or 6-well pad. That’s the delta that we see in front of us by utilizing this multi-zone concept. As we mentioned before, we already saw 20% of the cost come out of the first project in the Delaware Basin. We really haven’t even optimized the opportunity in front of us. And you’re starting to see the concept of more batch operations utilizing spudder rigs to get to surface hole drilled followed by the conventional drilling rig to drill the production string. And the utilization of these centralized production facilities that will be equipped to handle production from multi-pads kind of a drill to fill-type of concept is a substantial boost. So if you just look at the typical flow – or the typical work process in the Gantt chart, this is a way that we’re leaning out all components of that.

And to give you order of magnitude, when you take a rig in typical Delaware Basin well, you take the rig and move it to another pad a couple of miles away. It’s an additional 3.5 days of nonproductive time until you’re back moving the bit. And simply skidding over for a multiwell pad, you’ve got about a half a day of downtime. So this is the type of work that we think is something we’ve been planning and talking about for two years. We’re just now coming into this space. And again, we think it’s a game changer for the type of contiguous multi-zone sweet spot type of projects that we have.

Q: So the operations report shows a number of interesting multi-zone projects, beginning with Anaconda at the top and going down to Medusa. I was just wondering because – particularly because there’s a number of different zones and multiple intervals involved in these different projects. Are any of these, anything that you would still consider to be a delineation project or a testing zone interference or anything in any way, I wouldn’t want to call it exploratory, but something of that nature? Are these all just purely development projects at this point aiming for efficiency?

DVN: Yes, Jeffrey, these are all development projects. And we’ve done a lot of pilot work over the last couple years. We felt like we have really good understanding of the lateral spacing requirements for the different zones that we work in. We’re continuing to gain more insight into the vertical connectivity.

When you go into the Delaware Basin, for instance, you’ve got about a dozen different known commercially productive horizons there. Through the pilot work, we’ve established what we believe to be zones that are pressured dependent on each other and some that are independent of each other. So we’re utilizing that knowledge to really focus here on what we consider to be the high-return, low-risk development projects in front of us.

That doesn’t mean to say that we’re not going to do a little bit of a spacing work or test a zone in a column that we know to be pressuring communication with the rest of the column that we’re going to complete. A little bit of that will happen. But for the most part, in the Delaware Basin for 2018, you’ll see about a 90-plus percent, maybe 95% of our capital spend will be on development.

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