It’s hard to find an E&P equity analyst who does not like Devon Energy Corp. But, the company’s popularity is not due to any glitz or glamour. The fact is Devon is about as sexy as ExxonMobil Corp., just plowing along in big plays and minting money.

It pays dividends—more and more each year. It has repurchased more than 20% of its stock. It happened to divest its Gulf of Mexico portfolio before the Gulf became a political lightning rod. It also sold its non-North American assets , representing some 8% of its production and 10% of its reserves, for 25% of the company’s enterprise value. Those proceeds—$6.9 billion—are parked in an offshore account for deployment outside the U.S. or until a repatriation holiday.

To fund wildcat exploration, the U.S.-based super-independent has brought in a $2.5-billion joint venture with China’s Sinopec Corp., whose new chairman, Fu Chengyu, led U.S. shale-play JVs with Chesapeake Energy Corp. while he was chief executive at CNOOC Ltd.

Devon Energy Corp. president and chief executive John Richels says an important point about the company is its ability to fund robust E&P programs while increasing its dividend.

Otherwise, it funds its exploration and development from cash flow. Yes, from cash flow. At year-end 2011, 35% of its production and 60% of its revenues were from oil and gas-liquids wells—and those numbers are set to grow, as practically 100% of its roughly $5.3-billion, 2012 capital budget is focused on its liquids-rich assets.

“It is the oiliest of the (North American-focused E&Ps) at 32% liquids as a fraction of production,” notes one E&P analyst. Otherwise, he and his peers just, well, like the stock.

Oil and Gas Investor visited recently with Devon president and chief executive officer John Richels about the company’s current profile and outlook. A Canadian native who joined Devon in 1998 from the acquisition of North-star Energy Corp., Richels discussed Canadian oil sands and Keystone XL, new plays Devon is developing in North America, and why it is leasing and drilling for reserves rather than buying them.

Investor The JV with Sinopec involves your leasehold over the Utica, Tuscaloosa Marine shale, Mississippi Lime, Niobrara and the Michigan Basin’s A1 Carbonate and Utica. How did you come into those five new plays?

Richels We were looking for areas that have oil potential in early stages where we could acquire a position with a very low entry cost and low royalty rate that would have more in common with our other assets and would be able to compete effectively for capital. Our new-ventures groups and geologists and geophysicists mapped out much of the U.S. We liked what we saw in those five areas.

Investor You’re leasing up a sixth new play. That’s in North America as well?

Richels It is. Our focus is still North America. The five new ventures in the JV with Sinopec are five ideas. Our new-venture groups are working on the next five and, then, the next five, so there is a lot we’re seeing that is going to create many exciting opportunities.

Investor One of those new plays—the Tuscaloosa Marine Shale—has been a commercial conundrum for decades. Can you overcome its challenges?

Richels The Tuscaloosa is still in very early stages. We’ve been encouraged by what we’ve seen, particularly in terms of the rock quality. We’re going to find oil there for sure. The question is whether it will be economic in relation to our other opportunities.

It’s a deep formation. I liken the cost side to when we first drilled in the Cana Field just outside Oklahoma City. It’s a liquids-rich field and we’re drilling 11,000 to 12,000 feet vertically and then horizontally from there. It was impor- tant to keep the drilling and completion costs down to produce it very economically, and we’ve been able to do that.

Investor So the greatest challenge in the Tuscaloosa isn’t the clay content?

Richels We’ve only drilled a couple of wells so far. It’s hard to extrapolate that. Up to this point, we’re pretty encouraged by the subsurface information. But it’s very early. We’ve seen some fairly encouraging results by a couple of other operators in the area and, if we have the type of results we think we can have, the next step will be to keep costs down, given the deeper drilling.

Investor It appears you prefer lately to grow reserves via drilling and leasing instead of buying them.

Richels We keep our eyes open, but we have a very large opportunity set and it’s a very low-cost opportunity set. Anything that we bring in, we have to make awfully sure that what we pay for it will still compete effectively against the opportunities we already have. If you look at acquisition opportunities right now, they just look expensive and will have lower returns than the opportunities we are generating inside the company. We sure won’t acquire assets that in any way are going to make the company less valuable the day after we do the transaction than it was the day before. We’re just generating too many ideas—exciting ideas—organically and acquisition opportunities aren’t competing real well against that.

Investor You’ve not spun out an MLP (master limited partnership).

Richels We looked at an MLP for our midstream operation a few years ago, for example. We’re only going to do things that make sense from a shareholder-value point of view and stay away from transactions that are just financial engineering. Every time you do an MLP, you complicate the company—complicate the financials—and unless there is a meaningful accretion to shareholder value, it’s not something that makes sense doing. We haven’t found a situation where we thought it would add any value to our shareholders.

Devon’s North America-focused portfolio includes development projects as well as exploration opportunities to grow production for years to come.

Investor Except for the JV with Sinopec, you don’t have other JVs or have rolled out royalty trusts or other entities. Do these not work?

Richels Each company has its reasons for doing these things. We’ve tried to keep our situation simple and clear; we’ve been fortunate and worked hard to make sure we didn’t get ourselves in a position where we were financially strapped or had to raise capital to alleviate debt concerns. Those transactions are often done for that reason. What’s good for one company might not be good for another. We’ve tried to stay away from complicating things too much with those kinds of arrangements, and we haven’t needed to resort to that to pay down debt.

Investor You began paying dividends in 2003 and are now at 20 cents a quarter.

Richels It’s an important point about the company—that we’re profitable, large and in the fortunate position where we can fund very robust exploration and production programs and increase our dividend every year. And, we’ve returned money to shareholders by our share buybacks. In the past seven years, we’ve reduced our share count by more than 20%. We’re probably the only company in our space that has done that.

Investor Has the postponement of completing Keystone XL affected the economics at your Jackfish and Pike oil-sands properties?

Richels Not really. We do think that Keystone XL will be approved; it just makes no sense for it not to be. I don’t want to get into a political discussion here, but unfortunately we all know what’s behind this: The president is using this as a bit of political theater to advance his own agenda and, unfortunately, it is at the cost of American jobs and American energy security. It just makes no sense that we wouldn’t take the oil from our neighbor—our closest ally, our biggest trading partner—and refuse that and instead buy three quarters of a million barrels from Venezuela, the Middle East or other places that don’t have America’s interests at heart.

Investor There is talk of taking it to Canada’s West Coast and sending it to Asia.

Richels Correct. And, I don’t mind talking politics. I just didn’t think you wanted to.

Investor Well, we have a lot to talk about then.

Richels Okay. Yes, that’s exactly right. You know, I grew up in Canada and I know the lay of the land there pretty well. One thing that has come from this whole Keystone decision is that a light switch came on in Canada. All of a sudden, a lot of politicians—from the prime minister to provincial legislators—and the industry itself have said, “Gosh this trading partner, our good friends in the U.S., maybe we just can’t rely on them as our only customer.”

And I think that is a shame for the U.S., for America. There is already a pipeline to the West Coast. The proposals now are to either expand that pipeline or build a new pipeline to the West Coast, or both, to ship the oil to the Pacific Rim.

Investor Could Keystone XL still be built then?

Richels We think it will be approved either after a change of administration or by this administration after the election. In terms of getting Canadian oil to markets, the oil sands are 25-year-life assets. The short-term speed bumps don’t really change that a whole lot.

Investor Besides exporting Canadian oil to Asia, there is also the possibility currently of exporting U.S. and Canadian natural gas via liquefied natural gas (LNG) terminals, and of exporting U.S. ethane and refined products. What would be a better world for North America’s energy consumers? Richels These reflect the tremendous opportunities we’ve created as an industry in this country for energy self sufficiency and, getting back to our political discussion, hopefully the administration will understand that as well and won’t continue with regulation on an industry that is already very well regulated by the states. That doesn’t allow us as a country to reach our full potential on the production of oil and gas.

Investor Considering that seaborne oil is worth between $15 and $30 more than U.S. and Canadian oil, do you have any regrets now about divesting your overseas assets?

Richels No, we have no regrets. And, here at home in the Gulf of Mexico, it’s become nothing but more difficult to drill and costs are continuing to climb. We are focusing in areas where we think we have terrific land positions and expertise. Also, our international operations were only 8% of our production and 10% of our reserves. We sold that for almost 25% of the enterprise value of the company and are now deploying the cash in high-return properties in our core areas of expertise and in new plays in North America.

Investor Speaking of the proceeds, you have $6.9 billion in an offshore account, waiting for deployment outside the U.S. or for a repatriation tax holiday.

Richels You’re right. We can deploy that without any additional taxes payable if we don’t spend it here in the U.S. We could spend it in Canada. We hope we are going to see some kind of repatriation holiday after the next election, if we have a different administration or even under this administration. Eventually, they will come to the realization that it makes no sense to leave all that capital offshore. You know, we are relatively small players in this repatriation matter. A lot of large tech companies and pharmaceutical companies have a lot of cash offshore.

Investor So, with the $6.9 billion in a cash account offshore, you’ve created all of this growth at Devon and bought back stock and paid dividends with just cash flow?

Richels The bulk of it, right, with cash flow. We are very margin and returns focused and are generating a lot of cash flow. It validates the philosophy we’ve always had of having a diverse portfolio that helps when commodity prices swing.

That’s one thing people don’t quite understand about Devon. There’s been a stampede in the past three or four years by the industry into liquids-rich properties; we’ve always taken that kind of portfolio approach. We never wanted to be just a natural gas company when natural gas was a hot commodity or just an oil company. We went into the low-gas-price period with about 35% of our production already coming from oil and natural gas liquids. That’s generating 60% of our revenues. We’re going to grow to about 40% liquids production this year and, if we keep spending virtually 100% of our capital budget on liquids properties, the proportion is going to do nothing but continue to grow.

Investor You’re not drilling new gas wells. Your only new dry-gas production is associated gas?

Richels That’s right. We have absolutely zero rigs drilling for dry gas. Our gas production is actually going to decline a bit. We’re not drilling at all in areas where there is just dry gas.

Investor Your dry-gas acreage, such as in portions of the Barnett, is fully held by production now?

Richels Yes. As a rule, we have tried not to get too far over our skis in terms of acreage expires. We have tried not to get into the position where we might end up having to spend money where we have to rather than where we want to. You’ve seen many times in the past where companies have paid very large amounts for acreage positions and given high royalty rates and then are faced with lease expirations and almost have to drill even if the economics don’t make sense. We try to stay away from that.

Investor You have 4 million net acres in Canada, including in areas of stacked pay.

Richels We are in the early stages of drilling in multi-pay areas in Canada, just as we have been in the Permian Basin and several other multi-horizon areas in the U.S. We know there is stacked pay in these areas that the industry has drilled through vertically in the past, but the rock was too low in permeability for economic production. Now, we’re going back into those areas and applying new technology.

Investor In tapping North American hydrocarbons horizontally, in what inning is industry? The fifth or still the first?

Richels Using horizontal drilling and fracturing to develop natural gas is a little further along as a result of the fact that we’ve been doing it for more than 10 years. On the oil side, that technology has only been applied in the past three to five years, so the oil side of the business is in an earlier stage.

Investor The wildcatting in North America today—is it something not seen in a century?

Richels Certainly not seen in many years. Really, it’s a testament to the new frontiers that new technology has opened for development. It wasn’t very long ago that North America’s oil and gas basins were viewed as mature and couldn’t be grown.

Just look at the natural gas side: It was only eight or nine years ago that I was at an investor conference where everyone was afraid we wouldn’t have enough gas in North America. You’ve seen those maps with (proposed) new LNG facilities dotting the coastlines of North America. And, here we are fewer than 10 years later actually talking about exporting natural gas from North America. It’s a real testament to what technology can do to continue to open these markets. Look, the majors were getting out of North America because they couldn’t see the potential; today, they’re all getting back in.

Investor What else should potential investors know about Devon?

Richels We have a great portfolio, not only of development projects but of exciting exploration opportunities that are going to continue to grow our production for many years to come. We’ve been generalized in a pack of independents that are reinventing themselves by growing oil production. We were there before it became popular. And, we’re not forced to drill in any area; we are able to be nimble in our capital allocation and we are allocating all of our capital to liquids-rich assets.