Devon is company to watch in Tuscaloosa shale

The answer to whether Louisiana’s Tuscaloosa Marine Shale oil formation will see a rapid increase in activity could come Wednesday during Devon Energy’s analyst day, said Doug Leggate, senior U.S. energy analyst with Bank of America Merrill Lynch.

Devon Energy is expected to reveal if it has figured out how to economically produce in the shale formation, Leggate told those who attended Merrill Lynch’s oil and gas industry update Wednesday at Juban’s Restaurant. If so, drilling activity can be expected to accelerate.

“Watch this one very closely,” Leggate said, “because they’re the ones who are going to tell us if this play is working or not.”

In February, Devon officials said the company planned to drill 10 wells in the shale by the end of 2012. Devon has leased more than 265,000 acres in the formation, which straddle’s Louisiana’s midsection.

So far, Devon officials have described the Tuscaloosa Marine Shale as still in the exploratory stages, although the company is optimistic about the formation.

Leggate said Devon bought Mitchell Energy and Development Co., the company that originally figured out how to produce in shale formations.

Devon likes to quietly establish a lease position and then experiment with its production techniques, Leggate said. The process typically takes a couple of years.

Devon along with Encana Corp. hold more than 550,000 acres in the formation, which contains an estimated 7 billion barrels of oil.

Encana has announced plans to drill eight wells during the first half of the year.

Leggate told those in attendance that energy stocks remain an opportunity although the potential for volatile energy prices concern some investors.

He also said that refinery stocks offer investors an opportunity.

The United States has become a net exporter of refined products, such as gasoline, Leggate said. When domestic gasoline consumption dropped, refiners turned to the export market.

The export market will not disappear even if an economic turnaround increases domestic demand, Leggate said.

Meanwhile, some U.S. refineries have closed because companies could not recover the cost to meet environmental regulations.

The remaining refineries already were seeing much higher margins on their products, Leggate said.

Removing additional capacity from the market with summer, when the demand for gasoline is highest, could mean refineries could enjoy even higher margins.