Devon Energy Corp., the biggest independent U.S. oil and natural-gas producer, may beat a target of generating as much as $7.5 billion from asset sales as Brazil tightens its grip on the oil industry, boosting the value of the company's holdings in the country, Oppenheimer & Co. said.

Oklahoma City-based Devon, which said Nov. 16 it plans to sell all its offshore and foreign assets to focus on U.S. and Canada drilling, may get more than $1 billion for its Brazilian fields, Fadel Gheit, managing director of oil and gas research with Oppenheimer in New York, said in a Jan. 8 interview. Devon aims to raise $4.5 billion to $7.5 billion this year after taxes by selling properties from Brazil to the Gulf of Mexico.

Proposed changes to Brazil's oil industry will give state- run Petroleo Brasileiro SA a 30 percent stake in all new exploration contracts in the so-called pre-salt region, boosting the value of areas that have already been licensed to Devon, Repsol YPF SA and Woodside Petroleum Ltd. Such blocks would give investors access to reserves near the largest oil discovery in three decades without partnering with the state.

"They came in before the market heated up," Gheit said.

"The Brazilian Senate is not going to be as generous with lease terms as in the case of Devon," he said. The "uniqueness" of the assets will boost proceeds to "at least $7.5 billion and maybe more," said Gheit, who rates the shares "outperform."

Eoin Treacy's view One might well ask why a company would want to sell such potentially profitable drilling rights so close to the biggest oil discovery in years. The easy answer is that the company has taken a strategic decision to focus on what it considers an even more potentially profitable resource which is a better fit for its particular skill set: shale gas. Here is a section from an invaluable report posted in Comment of the Day on December 9th :

In 2010, Devon will embark on a transformation that will render it a pure North American onshore company. Proceeds from the sale of all its offshore Gulf of Mexico and International assets (currently ~12% of total production) should supplement operating cash flow to "kick start" a 10% CAGR over at least the next four years beginning in 2010 even though production on a pro forma basis should still be flat next year versus 2009. Essentially all of this growth will be derived from its five natural gas shale plays plus its Canadian Jackfish thermal oil project.

Consequently, after dropping to just 20 earlier this year from a peak of 112 in 2008, Devon's operated rig count is now ramping up sharply in all of it major shale plays. In the Barnett shale, which pro forma accounts for over one-quarter of the company's total production, management believes there is still ample growth potential. Meanwhile, the Haynesville shale, which represents less than 1.0% of total production, should account for nearly one-third of Devon's production growth over the next four years.

Despite the divestiture of its high-impact deepwater Gulf of Mexico and International exploration portfolio, Devon will still possess significant risked upside reserve potential in its U.S. and Canadian onshore portfolio.

Management has also stated that, although it doesn't anticipate making any large corporate or property acquisitions near term, it is "constantly looking for new play opportunities."

Deep water drilling is expensive and highly specialised work, (For more on this subject see Comment of the Day on Friday January 8th.) so it is not unreasonable to expect a company with access to abundant reserves of gas in the domestic USA to focus on that business rather than attempting to drill extraordinarily deep water wells.

Devon Energy's share price is not among the shale gas leaders but remains in an overall uptrend and broke out of the most recent range at the end of December. A sustained move back below $64 would be required to question scope for further higher to lateral ranging.