Devon Energy Corp (DVN), Range Resources Corp. (RRC): Another Big Texas Oil Play?

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Devon Energy CorpThe great state of Texas already produces approximately 30% of all oil in the United States. Over the past two years there’s been growing buzz about the Cline shale play in the Texas Permian Basin. Specifically, the Cline may hold 30 billion barrels of recoverable oil. In contrast, the Bakken in the Dakotas holds roughly 7.4 billion (at last check) and the Eagle Ford in Texas holds 853 million barrels. Here are three companies developing Cline shale assets.

Gas shifting to oil

Devon Energy Corp (NYSE:DVN) has been realigning its operations towards a more balanced mix of natural gas and oil production. Their Cline shale assets fit nicely into this strategy. During its presentation at the latest UBS Global Oil and Gas Conference, Devon Energy Corp (NYSE:DVN) management highlighted growing oil production not only from its Permian Basin assets, but its Mississippian Lime and Canadian oil sands assets. The Permian Basin production was particularly impressive. The company has yet to outline its expectations for its Cline shale play.

These positive results contrast with other company operations. Of note, Devon Energy Corp (NYSE:DVN)’s foray into Utica shale gas produced virtually nothing and the company wisely moved on. Others note Devon Energy Corp (NYSE:DVN)’s track record for converting untapped reserves into oil for sale underwhelms. Also underwhelming is Devon Energy Corp (NYSE:DVN)’s plans to create a master limited partnership from its midstream operations. As reported by Reuters, the announcement produced yawns from Wall Street. Throw in declining quarterly earnings growth and $12 billion in debt versus $6.5 billion in cash, and it’s no wonder Devon Energy Corp (NYSE:DVN)’s stock currently trades near its five years lows.

Range Resources Corp. (NYSE:RRC) joins Devon as a natural gas company balancing its energy portfolio with Cline shale oil. Like Devon, Range Resources Corp. (NYSE:RRC) acquired substantial natural gas assets, notably in the Marcellus Shale and produces growing volumes of gas and liquids there. Range Resources Corp. (NYSE:RRC)’s low production costs allow it to profit from gas sales despite historically low prices. At the moment, Range Resources Corp. (NYSE:RRC) produces modest oil volumes from the Cline. Rather than rush into developing this asset, Range Resources Corp. (NYSE:RRC) seems content to wait for other companies to drill wells in the play. If their production looks good, then Range Resources Corp. (NYSE:RRC) may invest more aggressively in Cline shale.

The company’s latest presentation forecasts a rosy future of increased production, decreased costs and growing profits.

Which raises the question: Why are insiders selling and not buying? For starters, Range’s capital expenditures exceed cash flow and thus will require some combination of debt or asset sales to fund. Further, Range also depends heavily on natural gas sales and prices remain under pressure. Lastly, while revenues climbed over the past three years, earnings oscillated between profits and losses. None of these bode well for the company.

A turnaround in the making?

An unquestionable oil producer active in the Cline is Apache Corporation (NYSE:APA). Apache Corporation (NYSE:APA) decided that the good ol’ US of A represents a better land to invest in than, I suppose, Argentina. So Apache Corporation (NYSE:APA) has begun identifying and selling $4 billion in assets to repay debt, repurchase shares and “enhance financial flexibility.” I suspect this means improving their ability to develop assets in the Cline and other US plays. One foreign asset not likely going anywhere is Egypt, which produced $1.5 billion in excess cash for the company this past year.

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