[Beginning of Cramer's verbatim comments for this segment...]

Jim:        Yesterday Michael Watford, the CEO of Ultra Petroleum, told us that he expects the price of natural gas to go to $6 for a thousand cubic feet… that clip was played all day today… that is more than double where it is right now… especially after the bad inventory numbers this morning… that jives with what the stocks have been saying too… natural gas names have been ramping even as the commodity has been flirting with multi year lows, seven year lows… if Watford is right, and natural gas does go to $6... do you know what you want to be in… you want to be in one of the least hedged players… a company that has not already locked in lower prices for its gas… and take advantage of a big move higher… you know what that means… it means that you want to be in Devon… that is right Devon.. and I have been buying it hand over fist for my charitable trust… which you can watch at ActionAlertsPlus.com.

I like its internationally diversified mix of oil and natural gas properties… 66% natural gas… 34% oil and liquids… but it’s lack of natural gas hedges… that is a better way to profit from the rally that I see coming… in the commodity… the c change… much better than some of the guys who are totally hedged… right now being un-hedged is seen as being a big liability when it comes to natural gas… and we like it… you know, Michael Linn, you know he is hedged big, that is terrific… but I have got to tell you, prices are low now… but Devon’s management has said that it wants to add some hedging soon…maybe after it rallies… they are starting to have a lot of exposure to spot prices… only 16% of Devon’s 3rd quarter natural gas production is hedged… but it is at $6.65 per 1000 cubic feet... 35% of its fourth quarter production is hedged at $5.86 per 1000 cubic feet… remember, it is at $2.80, so we are good here… but no hedges at all in 2010 for natural gas… and none this year or next year for crude oil.

If natural gas is really headed to $6... Devon is the way to play it… this is a company with some incredible properties… and some great foresight about where they drill… Devon’s capital expenditure budget is at one half of 2008 levels… but its latest fabulous quarter… 12% production growth… that is much better than the 7% to 8% growth than the street was expecting… it was actually much better than almost every natural gas company… and it raised its production guidance… that is vital for a stock to go higher… natural gas volumes were up 3% despite reduced drilling activity… Canadian volumes up 13%… more international strength… Brazil, they are big in Brazil… Azerbaijan, where oil production was up 13% compared to the previous quarter… Devon is getting more out of the properties that it currently has for less money… sounds like big growth margins.

I have to wonder how long the company can keep this up though… with so many big projects and expenses coming up… appraisal, development, drilling in the Gulf of Mexico… an exploration program in Brazil… increased on shore drilling in the best area of all Haynesville … also Horn River Basin, Woodford Shales, along with its Jack Fish Oil Sands project… got a lot of stuff going on here… after Devon’s great quarter everyone is now focused on the next big catalyst… that is the announcement of a partnership or a sale of 50% of its property in the Gulf of Mexico… I think that it could bring in $1b to $1.5b.. that could happen by the end of the year.

Devon is averaging finding costs world wide for natural gas over the last three years $3.60 per 1000 cubic feet… we have got to ask about that too, right… in the US it is $2.68... pretty close to where it is… the company needs prices to come up if its un-hedged gas production is going to be profitable… I think that Devon is a terrific oil and gas company… I would not be buying it for charity if I did not… but, its stock has lagged the others in the business… it is down 5.4% for the year… Appache is up 16%… Anadarko, you saw Hackett the other day, up 41%… hey, Audron McClennan, widely reviled by many of my viewers, but not by me… Chesapeake is up 43%… maybe Devon is a 57 variety stock… you know a Heinz ketchup play… but I want to dig deeper on this one… do some more homework, because I have a lot of questions… let’s bring on Larry Nichols, CEO of Devon Energy…

Jim:    Mr. Nichols welcome to Mad Money...

Larry:     Good to see you, glad to be here.

Jim:      Alright, some exciting things at your company… Gulf of Mexico, perhaps we get some news there… obviously you are drilling like mad… Haynesville, there is a lot coming out there… is that why you are having that great growth?… and shouldn’t that great growth eventually close the disparity between some of the other guys that have moved up more?

Larry:     It will. And as you have mentioned we have not hedged and there are people who in the first half of this year, rewarded hedging. We have never been a big hedger and so that was the big drag on us. As those hedges roll off of everybody else, that advantage that they have, will go away.

Jim:      And then we will go back to measuring off of production growth?

Larry:     Honest, you know, real production growth. And we have that across the board. Whether it is the heavy oil in Canada. The Barnett shale hit a record. We have record production growth in the second quarter. That is incredible.

Jim:      Yeah, it really is amazing… now, interesting fact ,back in July when natural gas was 25% higher, your stock was 20% lower… how does a stock, a natural gas play largely, go up from being down 20% while the fuel that it is relative to goes down by 25%… what is going on somewhere, outside of your company, that is making people feel that perhaps natural gas is right and playing it with the stocks?

Larry:     Well, natural gas today, is people understand that even though we have a short term problem with way too much natural gas the rest of this year, markets are going to catch up. Because natural gas production in the country is going down. Companies do not have the cash to drill with. Drilling rig rate is less than half of what it was a year ago. And so natural gas production is going to go down.

Jim:      But if I am the White House, if I am Congress, I say… oh boy, this is an unreliable fuel, I cannot be in some fuel that they can cut production back that quickly… they will strangle us.

Larry:     We are like a factory. We stop the factory the widgets stop coming out the other end. All you have to do is start the factory and we can bring those drilling rigs back just as fast as we shut them down.

Jim:      Why is it that a fuel that I regard as being dirty, has been favored by this administration and Congress, which is the so called clean coal… while I do not see the ground sweller at least in the House, did not see the ground swell for natural gas… and can that change?

Larry:     Yeah, the ? is a market bill and once you start on cap-n-trade you can have a really clean bill if you want it. But once you start giving that allocation, and Congress gets to determine who gets the allocations, they are going to go to whoever has the most political power. And you can look at how that bill unfolded in the House, and the winners were the fuels that generate the most CO2. Totally illogical.

Jim:      Totally… when we talked to Jim Hackett from Anadarko earlier in the week, and he seems to think that something has happened in the last few months, and Michael Watford said that too… a change in the air in Washington, but given what you just said about the House not being favoring natural gas… why should I think, I have to presume that people think the Senate is going to go your way… now why?

Larry:     Well, a couple of reasons really. One, our industry has done a much better job of getting the message out there lately. We have been advertising, we have been really working hard. All of the CEO’s with various companies that produce a lot of natural gas. And Devon is the largest natural gas producers in North America. We have really been working hard to get that message out. And it has gotten out. Boone Pickens, and a variety of people have been out there…

Jim:      Who is your point man in the Senate?

Larry:     We do not really have a point man in the Senate.

Jim:      In the old days I would have said how much does it cost to get a point man?… but I am no longer like that because I am a diplomat.

Larry:     You are a diplomat…. (laughing)

Jim:      I am, I am a diplomat… in the old days, I would have said okay here is the checkbook what do we have to do… but you can’t do that anymore.

Larry:     In the Senate, it is a much, the body is much better suited for understanding the issue. And that is the other thing. The Senate is not going to ram it thru as fast as the House did. The leadership of the House decided what the bill was going to do and just crammed it thru. And in the Senate, we are going to get a much better hearing. So it is a combination of education plus a better forum.

Jim:      Now, Watford said the other day…and we had the clean energy which has been hot as a pistol since we had him on… Watford seemed to think that two things could happen… one, that the Federal government could mandate that its own trucks, its own fleet has to run on natural gas… and second, he envisions a world where there can be on interstates big compressed natural gas gas stations, and we could cut dramatically our amount of imported oil… are you hearing anything like that?

Larry:     Yeah, that is starting. And the mere fact that this is feasible is really getting the attention of a lot of people.

Jim:      And also, we have had talk that we have so much that it will end up… you know, 5, 10 years from now.. exporting the stuff if we do not find a market in this country.

Larry:     Sure, and that gets peoples attention too. People in Congress say why are you going to export it? Because you are discriminating against the cleanest burning fuel. That makes no sense.

Jim:      Why are there coal plants being built in this country?

Larry:     Actually the coal plants have stopped.

Jim:      Tell me about it, because I know that there are some guys… we had Shaw Group on earlier this week, and they are still putting some up.

Larry:     They are trying. They are trying. But if you wanted to have the cleanest burning fuel that you can get, it would be natural gas.

Jim:      Look, I agree… and I am on a mission.. and it is not just because I want the stocks higher… because I want every stock higher… I just think that we could… jobs, energy independence, cleanliness… you guys are the only ones that got all three… so thank you.

Larry:     Thank you.

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Jim's comments AFTER the interview:     Devon Energy (DVN*)’s CEO… the one that I own for my charitable trust… most growth… best way to play the upside.

[verbatim recap]

[end of segment]

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