During the most recent quarter, the Fund exited its small position in Cenovus Common, allocating the capital to Devon Common (DVN
), which appears to be much more attractively valued. The Fund initiated its position in Devon Common in January 2012, and the investment has been discussed in each of the last two shareholder letters. Devon's common stock price has been falling recently, owing primarily to weakness in commodity prices. In Devon's recently reported second quarter, oil, natural gas and natural gas liquids prices fell 19%, 54% and 26%, respectively, compared to a year ago. Nevertheless, the company reported a profitable and cash flow positive quarter (including proceeds from the closing of its previously announced joint venture with Sinopec). The company also announced a new $1.4 billion joint venture with Sumitomo Corporation, in which Sumitomo will pay $340 million in cash upon closing and fund 70% of Devon's future capital requirements for a 30% interest in 650,000 acres (no proved reserves) in two oil shale developments in Texas. Devon will continue to operate the properties and retain a 70% ownership interest. The transaction appears to be very attractive for Devon, as Sumitomo is effectively paying up for Devon's expertise by funding most of the capital.
Despite the pressure from falling commodity prices, Devon continues to have a very strong financial position, with $7 billion of cash compared to $10.6 billion of debt. Net debt totals only 14% of capital and $0.20 per thousand cubic feet equivalent ("mcfe") of proved reserves. Devon added to its hedges during the quarter and now has 65% of its gas production hedged for the rest of the year at $3.76 per mcfe (versus the current price of about $3) and 85% of its oil hedged at $97 (versus the current price of about $90). The valuation seems to be very compelling at about $9 per barrel of oil equivalent ("BOE") of proved reserves. In 2009 and 2010, Devon exited its less attractive Gulf of Mexico and international operations at a price of about $45 per barrel of proved reserves. More recently, Nexen, a Canadian E&P company, agreed to be sold to CNOOC for about $19 per BOE of proved reserves. Although Nexen's reserves are more heavily weighted to oil, Devon's assets carry less development risk as evidenced by its much lower percentage of proved undeveloped ("PUD") reserves (26% versus 53%).
From Third Avenue's third-quarter letter
, by Ian Lapey, portfolio manager.