DEVON ENERGY CORP/DE - Quarter Report: 2011 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

DEVON ENERGY CORPORATION

Delaware (State of other jurisdiction of incorporation or organization)		73-1567067 (I.R.S. Employer identification No.)

20 North Broadway, Oklahoma City, Oklahoma (Address of principal executive offices)		73102-8260 (Zip code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On October 21, 2011, 403.9 million shares of common stock were outstanding.

 

 

DEVON ENERGY CORPORATION

FORM 10-Q
For the Quarterly Period Ended September 30, 2011

INDEX

Definitions			3
Information Regarding Forward-Looking Statements			4
Part I. Financial Information
Item 1. Consolidated Financial Statements			5
Consolidated Balance Sheets			5
Consolidated Statements of Operations			6
Consolidated Statements of Comprehensive Earnings			7
Consolidated Statements of Stockholders’ Equity			8
Consolidated Statements of Cash Flows			9
Notes to Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
Part II. Other Information
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 5. Other Information			42
Item 6. Exhibits			42
Signatures			43
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

DEFINITIONS

Measurements of Oil, Natural Gas and Natural Gas Liquids

	•		“NGL” or “NGLs” means natural gas liquids.
	•		“Oil” includes crude oil and condensate.
	•		“Bbl” means barrel of oil. One barrel equals 42 U.S. gallons.

	–		“MBbls” means thousand barrels.
	–		“MMBbls” means million barrels.
	–		“MBbls/d” means thousand barrels per day.

•

“Mcf” means thousand cubic feet of natural gas.

	–		“MMcf” means million cubic feet.
	–		“Bcf” means billion cubic feet.
	–		“Bcfe” means billion cubic feet equivalent.
	–		“MMcf/d” means million cubic feet per day.

•

“Boe” means barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of gas.

	–		“MBoe” means thousand Boe.
	–		“MMBoe” means million Boe.
	–		“MBoe/d” means thousand Boe per day.

•

“Btu” means British thermal units, a measure of heating value.

	–		“MMBtu” means million Btu.
	–		“MMBtu/d” means million Btu per day.

Geographic Areas

	•		“Canada” means the operations of Devon encompassing oil and gas properties located in Canada.
	•		“International” means the discontinued operations of Devon that encompass oil and gas properties that lie outside the United States and Canada.
	•		“North America Onshore” means the operations of Devon encompassing oil and gas properties in the continental United States and Canada.
	•		“U.S. Offshore” means the divested operations of Devon that encompassed oil and gas properties in the Gulf of Mexico.
	•		“U.S. Onshore” means the properties of Devon encompassing oil and gas properties in the continental United States.

Other

	•		“FASB” means the United States Financial Accounting Standards Board.
	•		“Federal Funds Rate” means the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
	•		“Inside FERC” refers to the publication Inside F.E.R.C.’s Gas Market Report.
	•		“LIBOR” means London Interbank Offered Rate.
	•		“NYMEX” means New York Mercantile Exchange.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare the December 31, 2010 reserve reports and other data in our possession or available from third parties. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or “continue” or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, our assumptions about:

	•		energy markets, including the supply and demand for oil, gas, NGLs and other products or services, as well as the prices of oil, gas, NGLs and other products or services, including regional pricing differentials;
	•		production levels, including Canadian production subject to government royalties, which fluctuate with prices and production;
	•		reserve levels;
	•		competitive conditions;
	•		technology;
	•		the availability of capital resources within the securities or capital markets and related risks such as general credit, liquidity, market and interest-rate risks;
	•		capital expenditure and other contractual obligations;
	•		currency exchange rates;
	•		the weather;
	•		inflation;
	•		the availability of goods and services;
	•		drilling risks;
	•		future processing volumes and pipeline throughput;
	•		general economic conditions, whether internationally, nationally or in the jurisdictions in which we or our subsidiaries conduct business;
	•		public policy and government regulatory changes, including changes in royalty, production tax and income tax regimes, changes in hydraulic fracturing regulation and changes in environmental laws, regulation and liability;
	•		terrorism;
	•		occurrence of property acquisitions or divestitures; and
	•		other factors disclosed in Devon’s 2010 Annual Report on Form 10-K under “Item 1A. Risk Factors, “ “Item 2. Properties,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

     All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.

PART I. Financial Information

Item 1. Consolidated Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2011				2010
		(Unaudited)
		(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	5,618			$	2,866
Short-term investments			1,231				145
Accounts receivable			1,430				1,202
Current assets held for sale			26				563
Other current assets			1,302				779
Total current assets			9,607				5,555
Property and equipment, at cost:
Oil and gas, based on full cost accounting:
Subject to amortization			59,331				56,012
Not subject to amortization			4,061				3,434
Total oil and gas			63,392				59,446
Other			4,778				4,429
Total property and equipment, at cost			68,170				63,875
Less accumulated depreciation, depletion and amortization			(45,000	)			(44,223	)
Property and equipment, net			23,170				19,652
Goodwill			5,951				6,080
Long-term assets held for sale			111				859
Other long-term assets			1,027				781
Total assets		$	39,866			$	32,927
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade		$	1,512			$	1,411
Revenues and royalties due to others			659				538
Short-term debt			3,288				1,811
Current liabilities associated with assets held for sale			50				305
Other current liabilities			522				518
Total current liabilities			6,031				4,583
Long-term debt			5,969				3,819
Asset retirement obligations			1,460				1,423
Liabilities associated with assets held for sale			2				26
Other long-term liabilities			493				1,067
Deferred income taxes			4,809				2,756
Stockholders’ equity:
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 408.0 million and 431.9 million shares in 2011 and 2010, respectively			41				43
Additional paid-in capital			3,827				5,601
Retained earnings			15,870				11,882
Accumulated other comprehensive earnings			1,412				1,760
Treasury stock, at cost. 0.8 million and 0.4 million shares in 2011 and 2010, respectively			(48	)			(33	)
Total stockholders’ equity			21,102				19,253
Commitments and contingencies (Note 11)
Total liabilities and stockholders’ equity		$	39,866			$	32,927

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
						(Unaudited)
		(In millions, except per share amounts)
Revenues:
Oil, gas and NGL sales		$	2,111			$	1,683			$	6,171			$	5,535
Oil, gas and NGL derivatives			738				209				986				874
Marketing and midstream revenues			653				461				1,712				1,396
Total revenues			3,502				2,353				8,869				7,805
Expenses and other, net:
Lease operating expenses			475				415				1,352				1,271
Taxes other than income taxes			108				95				336				288
Marketing and midstream operating costs and expenses			515				336				1,304				1,013
Depreciation, depletion and amortization of oil and gas properties			504				397				1,431				1,249
Depreciation and amortization of non-oil and gas properties			62				66				191				192
Accretion of asset retirement obligations			23				21				69				71
General and administrative expenses			138				131				403				399
Restructuring costs			(3	)			63				(2	)			55
Interest expense			104				83				270				280
Interest-rate and other financial instruments			40				56				33				121
Other, net			(2	)			(9	)			(14	)			(34	)
Total expenses and other, net			1,964				1,654				5,373				4,905
Earnings from continuing operations before income taxes			1,538				699				3,496				2,900
Income tax expense (benefit):
Current			(248	)			(310	)			(301	)			696
Deferred			746				580				2,184				349
Total income tax expense			498				270				1,883				1,045
Earnings from continuing operations			1,040				429				1,613				1,855
Discontinued operations:
Earnings (loss) from discontinued operations before income taxes			(4	)			1,710				2,584				2,320
Discontinued operations income tax expense (benefit)			(2	)			49				—				187
Earnings (loss) from discontinued operations			(2	)			1,661				2,584				2,133
Net earnings		$	1,038			$	2,090			$	4,197			$	3,988
Basic net earnings per share:
Basic earnings from continuing operations per share		$	2.51			$	0.99			$	3.83			$	4.20
Basic earnings from discontinued operations per share			—				3.82				6.14				4.82
Basic net earnings per share		$	2.51			$	4.81			$	9.97			$	9.02
Diluted net earnings per share:
Diluted earnings from continuing operations per share		$	2.50			$	0.98			$	3.82			$	4.18
Diluted earnings from discontinued operations per share			—				3.81				6.11				4.81
Diluted net earnings per share		$	2.50			$	4.79			$	9.93			$	8.99

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
						(Unaudited)
						(In millions)
Net earnings		$	1,038			$	2,090			$	4,197			$	3,988
Foreign currency translation:
Change in cumulative translation adjustment			(644	)			223				(382	)			119
Foreign currency translation income tax benefit (expense)			29				(12	)			17				(7	)
Foreign currency translation total			(615	)			211				(365	)			112
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in earnings			9				8				26				24
Pension and postretirement benefit plans income tax expense			(3	)			(3	)			(9	)			(9	)
Pension and postretirement benefit plans total			6				5				17				15
Other comprehensive (loss) earnings, net of tax			(609	)			216				(348	)			127
Comprehensive earnings		$	429			$	2,306			$	3,849			$	4,115

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Retained				Comprehensive				Treasury				Stockholders’
		Shares				Amount				Capital				Earnings				Earnings				Stock				Equity
		(Unaudited)
		(In millions)
Nine Months Ended September 30, 2011:
Balance as of December 31, 2010			432			$	43			$	5,601			$	11,882			$	1,760			$	(33	)		$	19,253
Net earnings			—				—				—				4,197				—				—				4,197
Other comprehensive (loss) earnings, net of tax			—				—				—				—				(348	)			—				(348	)
Stock option exercises			2				—				101				—				—				—				101
Common stock repurchased			—				—				—				—				—				(2,008	)			(2,008	)
Common stock retired			(26	)			(2	)			(1,991	)			—				—				1,993				—
Common stock dividends			—				—				—				(209	)			—				—				(209	)
Share-based compensation			—				—				105				—				—				—				105
Share-based compensation tax benefits			—				—				11				—				—				—				11
Balance as of September 30, 2011			408			$	41			$	3,827			$	15,870			$	1,412			$	(48	)		$	21,102
Nine Months Ended September 30, 2010:
Balance as of December 31, 2009			447			$	45			$	6,527			$	7,613			$	1,385			$	—			$	15,570
Net earnings			—				—				—				3,988				—				—				3,988
Other comprehensive earnings, net of tax			—				—				—				—				127				—				127
Stock option exercises			—				—				18				—				—				—				18
Common stock repurchased			—				—				—				—				—				(950	)			(950	)
Common stock retired			(15	)			(2	)			(941	)			—				—				943				—
Common stock dividends			—				—				—				(211	)			—				—				(211	)
Share-based compensation			—				—				103				—				—				—				103
Share-based compensation tax benefits			—				—				7				—				—				—				7
Balance as of September 30, 2010			432			$	43			$	5,714			$	11,390			$	1,512			$	(7	)		$	18,652

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months
		Ended September 30,
		2011				2010
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Net earnings		$	4,197			$	3,988
Earnings from discontinued operations, net of tax			(2,584	)			(2,133	)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			1,622				1,441
Deferred income tax expense			2,184				349
Unrealized change in fair value of financial instruments			(661	)			(136	)
Other noncash charges			185				154
Net (increase) decrease in working capital			(308	)			164
Decrease in long-term other assets			51				28
(Decrease) increase in long-term other liabilities			(459	)			57
Cash from operating activities — continuing operations			4,227				3,912
Cash from operating activities — discontinued operations			(13	)			324
Net cash from operating activities			4,214				4,236
Cash flows from investing activities:
Capital expenditures			(5,515	)			(4,793	)
Proceeds from property and equipment divestitures			13				4,131
Purchases of short-term investments			(5,751	)			—
Redemptions of short-term investments			4,665				—
Redemptions of long-term investments			10				20
Other			(33	)			(13	)
Cash from investing activities — continuing operations			(6,611	)			(655	)
Cash from investing activities — discontinued operations			3,162				2,298
Net cash from investing activities			(3,449	)			1,643
Cash flows from financing activities:
Net commercial paper borrowings (repayments)			3,196				(1,432	)
Proceeds from borrowings of long-term debt, net of issuance costs			2,221				—
Debt repayments			(1,760	)			(350	)
Proceeds from stock option exercises			101				18
Repurchases of common stock			(1,987	)			(929	)
Dividends paid on common stock			(209	)			(211	)
Excess tax benefits related to share-based compensation			11				7
Net cash from financing activities			1,573				(2,897	)
Effect of exchange rate changes on cash			(10	)			5
Net increase in cash and cash equivalents			2,328				2,987
Cash and cash equivalents at beginning of period (including cash
related to assets held for sale)			3,290				1,011
Cash and cash equivalents at end of period (including cash related
to assets held for sale)		$	5,618			$	3,998

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

     The accompanying unaudited consolidated financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in Devon’s 2010 Annual Report on Form 10-K.

     The unaudited interim consolidated financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon’s financial position as of September 30, 2011 and Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2011 and 2010.

Recently Issued Accounting Standards Not Yet Adopted

     In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This update does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. However, beginning in Devon’s 2011 Annual Report on Form 10-K, this update will require certain additional disclosures related to Devon’s fair value measurements. Devon does not expect the adoption of this update will materially impact its financial statement disclosures.

     In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income. Beginning in Devon’s 2011 Annual Report on Form 10-K, this update will give Devon the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Devon has not determined which presentation option it will choose but does not expect its selection to materially impact the presentation of its financial statements.

     In September 2011, the FASB issued Accounting Standards Update 2011-08: Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Devon will adopt the provisions for this update in its annual impairment test as of October 31, 2011. Devon does not expect the adoption of this update will impact its goodwill value.

2. Short-Term Investments

     Devon periodically invests excess cash in U.S. Treasuries, commercial paper and other marketable securities with original maturities exceeding three months. Such securities are presented as short-term investments in the accompanying consolidated balance sheets.

     During the first nine months of 2011, Devon invested a portion of the International offshore divestiture proceeds it had received, causing short-term investments to increase. The carrying value of these investments approximates their fair value. As of September 30, 2011, the average remaining maturity of our short-term investments was 97 days, with a weighted average yield of 0.2 percent.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

3. Accounts Receivable

     The components of accounts receivable include the following:

		September 30, 2011				December 31, 2010
		(In millions)
Oil, gas and NGL sales		$	819			$	786
Joint interest billings			269				204
Marketing and midstream revenues			185				165
Other			166				57
Gross accounts receivable			1,439				1,212
Allowance for doubtful accounts			(9	)			(10	)
Net accounts receivable		$	1,430			$	1,202

4. Derivative Financial Instruments

Objectives and Strategies

     Devon periodically enters into derivative financial instruments to manage its exposure to market risks, such as changes in commodity prices, interest rates and currency exchange rates. Devon does not hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

     Devon’s commodity derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional gas index prices and pays a variable differential on the same two index prices to the contract counterparty. The price collars set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty to the collars. Under the terms of the call options, Devon sold to counterparties the right to purchase production at a predetermined price.

     Devon’s interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount.

     Devon’s foreign currency contracts include forward contracts that hedge certain monetary assets denominated in Canadian dollars.

Credit Risk

     Through its derivative financial instruments, Devon exposes itself to credit risk, which arises from the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are minimal credit risks. It is Devon’s policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally require cash collateral to be posted if either its or the counterparty’s credit rating falls below investment grade. The mark-to-market exposure threshold, above which collateral must be posted, decreases as the debt rating falls further below investment grade. Such thresholds generally range from zero to $55 million for the majority of Devon’s contracts. As of September 30, 2011, the credit ratings of all Devon’s counterparties were investment grade.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Commodity Derivatives

     As of September 30, 2011, Devon had the following open oil derivative positions. Devon’s oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.

Production
Period		Price Swaps								Price Collars												Call Options Sold
						Weighted								Weighted				Weighted								Weighted
		Volume				Average Price				Volume				Average Floor Price				Average Ceiling Price				Volume				Average Price
Period		(Bbls/d)				($/Bbl)				(Bbls/d)				($/Bbl)				($/Bbl)				(Bbls/d)				($/Bbl)
Q4 2011			—				—				45,000			$	75.00			$	108.89				19,500			$	95.00
Q1-Q4 2012			22,000			$	107.17				54,000			$	85.74			$	126.42				19,500			$	95.00
Q1-Q4 2013			—				—				7,000			$	90.00			$	125.12				—				—

     As of September 30, 2011, Devon had the following open natural gas derivative positions. Devon’s natural gas derivative swaps, collars and call options settle against the Inside FERC first of the month Henry Hub index.

Production

Period

Price Swaps

Price Collars

Call Options Sold

Weighted

Weighted

Weighted

Weighted

Volume

Average Price

Volume

Average Floor Price

Average Ceiling Price

Volume

Average Price

Period

(MMBtu/d)

($/MMBtu)

(MMBtu/d)

($/MMBtu)

($/MMBtu)

(MMBtu/d)

($/MMBtu)

Q4 2011

712,500

$

5.51

287,935

4.66

5.07

—

—

Q1-Q4 2012

325,000

$

5.09

490,000

4.75

5.57

487,500

$

6.00

Basis Swaps
								Weighted Average
								Differential to
				Volume				Henry Hub
Production Period		Index		(MMBtu/d)				($/MMBtu)
Q4 2011		Panhandle Eastern Pipeline			150,000			$	(0.33	)

     As of September 30, 2011, Devon had the following open NGL derivative positions:

Basis Swaps
								Weighted Average
				Volume				Differential to WTI
Production Period		Pay		(Bbls/d)				($/Bbl)
Q4 2011		Natural Gasoline			332			$	(9.75	)
Q1-Q4 2012		Natural Gasoline			500			$	(10.10	)
Q1-Q4 2013		Natural Gasoline			500			$	(6.80	)

Interest Rate Derivatives

     As of September 30, 2011, Devon had the following open interest rate derivative positions:

Fixed-to-Floating Swaps
		Fixed Rate				Variable
Notional		Received				Rate Paid		Expiration
(In millions)
$100			1.90	%		Federal funds rate		August 3, 2012
500			3.90	%		Federal funds rate		July 18, 2013
250			3.85	%		Federal funds rate		July 22, 2013
$850			3.65	%

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Foreign Currency Derivative

     As of September 30, 2011, Devon had the following open foreign currency derivative position:

Forward Contract

CAD

Fixed Rate

Currency

Contract Type

Notional

Received

Expiration

(In millions)

(CAD-USD)

Canadian Dollar

Sell

$

305

0.9615

December 30, 2011

Financial Statement Presentation

     The following table presents the derivative fair values included in the accompanying consolidated balance sheets.

		Balance Sheet Caption		September 30, 2011				December 31, 2010
				(In millions)
Asset derivatives:
Commodity derivatives		Other current assets		$	672			$	248
Commodity derivatives		Other long-term assets			188				1
Interest rate derivatives		Other current assets			29				100
Interest rate derivatives		Other long-term assets			27				40
Total asset derivatives				$	916			$	389
Liability derivatives:
Commodity derivatives		Other current liabilities		$	38			$	50
Commodity derivatives		Other long-term liabilities			20				142
Total liability derivatives				$	58			$	192

     The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying consolidated statements of operations associated with these derivative financial instruments. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s commodity derivatives are presented in the “Oil, gas and NGL derivatives” caption in the accompanying consolidated statements of operations. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s interest rate and foreign currency derivatives are presented in the “Interest-rate and other financial instruments” caption in the accompanying consolidated statements of operations.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
						(In millions)
Cash settlements:
Commodity derivatives		$	96			$	232			$	241			$	580
Interest rate derivatives			52				17				73				37
Foreign currency derivatives			22				—				22				—
Total cash settlements			170				249				336				617
Unrealized gains (losses):
Commodity derivatives			642				(23	)			745				294
Interest rate derivatives			(55	)			(72	)			(84	)			(158	)
Total unrealized gains (losses)			587				(95	)			661				136
Net gain (loss) recognized on statement of operations		$	757			$	154			$	997			$	753

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

5. Other Current Assets

     The components of other current assets include the following:

		September 30, 2011				December 31, 2010
		(In millions)
Derivative financial instruments		$	701			$	348
Income taxes receivable			420				270
Inventories			98				120
Other			83				41
Other current assets		$	1,302			$	779

6. Goodwill

     During the first nine months of 2011, Devon’s Canadian goodwill decreased $129 million entirely due to foreign currency translation.

7. Debt

Credit Lines

     Devon has a $2.7 billion syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). As of September 30, 2011, Devon had no borrowings under the Senior Credit Facility, but its borrowing capacity was reduced $0.1 billion by outstanding letters of credit.

     The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization to be less than 65 percent. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of September 30, 2011, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at September 30, 2011, as calculated pursuant to the terms of the agreement, was 22 percent.

2.40% Notes Due July 15, 2016, 4.00% Notes Due July 15, 2021 and 5.60% Notes Due July 15, 2041

     In July 2011, Devon issued $2.25 billion of senior notes. The $2.22 billion of net proceeds received after discounts and issuance costs, were used to repay outstanding commercial paper balances as of June 30, 2011. These notes are unsecured and unsubordinated obligations of Devon.

Commercial Paper

     In March 2011, Devon’s Board of Directors authorized an increase in its commercial paper program from $2.2 billion to $5.0 billion. Commercial paper debt generally has a maturity of between 1 and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market.

     Although Devon ended the third quarter of 2011 with approximately $6.8 billion of cash and short-term investments, the vast majority of this amount consists of proceeds from its International divestitures. Based on Devon’s evaluation of future cash needs across its operations in the United States and Canada, these proceeds remain outside of the United States.

     Consequently, subsequent to the commercial paper repayment in July 2011 noted above, Devon utilized additional commercial paper borrowings primarily to fund debt maturities, capital expenditures, common stock repurchases and dividends in excess of cash flow generated by its United States operating activities. As of September 30, 2011, Devon’s average borrowing rate on its $3.2 billion of commercial paper borrowings was 0.27 percent. At December 31, 2010, Devon had no borrowings of commercial paper.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

8. Asset Retirement Obligations

     The schedule below summarizes changes in Devon’s asset retirement obligations.

		Nine Months
		Ended September 30,
		2011				2010
		(In millions)
Asset retirement obligations as of beginning of period		$	1,497			$	1,513
Liabilities incurred			38				36
Liabilities settled			(56	)			(94	)
Revision of estimated obligation			19				194
Liabilities assumed by others			—				(256	)
Accretion expense on discounted obligation			69				71
Foreign currency translation			(41	)			10
Asset retirement obligations as of end of period			1,526				1,474
Less current portion			66				80
Asset retirement obligations, long-term		$	1,460			$	1,394

     During the first nine months of 2010, Devon recognized a revision to its asset retirement obligations totaling $194 million. The increase was primarily due to an overall increase in abandonment cost estimates and a decrease in the discount rate used to calculate the present value of the obligations.

     During the first nine months of 2010, Devon reduced its asset retirement obligations by $256 million for those obligations that were assumed by purchasers of Devon’s Gulf of Mexico oil and gas properties in 2010.

9. Retirement Plans

Net Periodic Benefit Cost

     The following table presents the components of net periodic benefit cost for Devon’s pension and other postretirement benefit plans.

		Pension Benefits																Other Postretirement Benefits
		Three Months								Nine Months								Three Months								Nine Months
		Ended September 30,								Ended September 30,								Ended September 30,								Ended September 30,
		2011				2010				2011				2010				2011				2010				2011				2010
														(In millions)
Service cost		$	10			$	9			$	28			$	25			$	—			$	—			$	1			$	—
Interest cost			15				15				45				43				—				1				1				3
Expected return on plan assets			(11	)			(10	)			(32	)			(28	)			—				—				—				—
Amortization of prior service cost			1				—				3				2				—				1				(1	)			1
Net actuarial loss			8				7				24				21				—				—				—				—
Net periodic benefit cost		$	23			$	21			$	68			$	63			$	—			$	2			$	1			$	4

Pension Plan Assets

     Devon previously disclosed in its financial statements for the year ended December 31, 2010, that it expected to contribute $84 million to its qualified pension plans in 2011. During 2011, Devon increased its estimated contribution to $446 million and has fully funded the contribution as of September 30, 2011. The increase in Devon’s 2011 contributions is due to increased discretionary funding.

     As a result of the discretionary contributions noted above, Devon amended its target allocation for its pension plan assets in the second quarter of 2011. Devon previously disclosed a target allocation of 47.5% for equity securities, 40% for fixed

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

income and 12.5% for other investment types. Devon now expects an allocation of 70% fixed income, 20% equity and 10% for other investment types for its pension assets.

10. Stockholders’ Equity

Stock Repurchases

     During the first nine months of 2011, Devon repurchased 26.0 million common shares for $2.0 billion, or $76.95 per share, under its $3.5 billion stock repurchase program announced in 2010. As of September 30, 2011, Devon had repurchased 44.3 million common shares for $3.2 billion, or $72.25 per share, under this program, which expires December 31, 2011.

Dividends

     Devon paid common stock dividends of $209 million and $211 million in the first nine months of 2011 and 2010, respectively. These amounts reflect quarterly cash dividend rates of $0.16 per share in 2010 and the first quarter of 2011 and $0.17 per share in the second and third quarters of 2011.

11. Commitments and Contingencies

     Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals although actual amounts could differ materially from management’s estimate.

Royalty Matters

     Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold from federal and Indian owned or controlled lands. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

Environmental Matters

     Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated costs associated with remediation. Devon’s monetary exposure for environmental matters is not expected to be material.

Chief Redemption Matters

     In 2006, Devon acquired Chief Holdings LLC (“Chief”) from the owners of Chief, including Trevor Rees-Jones, the majority owner of Chief. In 2008, a former owner of Chief filed a petition against Rees-Jones, as the former majority owner of Chief, and Devon, as Chief’s successor pursuant to the 2006 acquisition. The petition claimed, among other things, violations of the Texas Securities Act, fraud and breaches of Rees-Jones’ fiduciary responsibility to the former owner in connection with Chief’s 2004 redemption of the owner’s minority ownership stake in Chief.

     On June 20, 2011, a court issued a judgment against Rees-Jones for $196 million, of which $133 million of the judgment was also issued against Devon. Both Rees-Jones and Devon are appealing the judgment. However, if the appeal is unsuccessful, Devon can and will seek full payment of the judgment and any related interest, costs and expenses from Rees-Jones pursuant to an existing indemnification agreement between Rees-Jones, certain other parties and Devon. Devon does not expect to have any net exposure as a result of the judgment. However, because Devon does not have a legal right of set

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

off with respect to the judgment, Devon has recorded in its September 30, 2011 consolidated balance sheet both a $133 million liability relating to the judgment with an offsetting $133 million receivable relating to its right to be indemnified by Rees-Jones and certain other parties pursuant to the indemnification agreement.

Other Matters

     Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject.

Commitments

     At the end of 2010, Devon’s commitments included approximately $0.6 billion related to lease contracts for a deepwater drilling rig and a floating, production, storage and offloading facility being used in Brazil. Devon’s remaining commitments for these leases were assumed by the buyer of its assets upon closing the Brazil divestiture transaction discussed in Note 15.

12. Fair Value Measurements

     Certain of Devon’s assets and liabilities are reported at fair value in the accompanying consolidated balance sheets. Such assets and liabilities include amounts for both financial and non-financial instruments. The following tables provide carrying value and fair value measurement information for Devon’s financial assets and liabilities.

     The carrying values of cash, accounts receivable, other current receivables, accounts payable and other payables and accrued expenses included in the accompanying consolidated balance sheets approximated fair value at September 30, 2011 and December 31, 2010. These assets and liabilities are not presented in the following tables.

										Fair Value Measurements Using:
		Carrying				Total Fair				Level 1				Level 2				Level 3
		Amount				Value				Inputs				Inputs				Inputs
										(In millions)
September 30, 2011 assets (liabilities):
Cash equivalents		$	5,161			$	5,161			$	1,262			$	3,899			$	—
Short-term investments		$	1,231			$	1,231			$	289			$	942			$	—
Long-term investments		$	84			$	84			$	—			$	—			$	84
Commodity derivatives		$	860			$	860			$	—			$	860			$	—
Commodity derivatives		$	(58	)		$	(58	)		$	—			$	(58	)		$	—
Interest rate derivatives		$	56			$	56			$	—			$	56			$	—
Debt		$	(9,257	)		$	(10,625	)		$	—			$	(10,533	)		$	(92	)

										Fair Value Measurements Using:
		Carrying				Total Fair				Level 1				Level 2				Level 3
		Amount				Value				Inputs				Inputs				Inputs
										(In millions)
December 31, 2010 assets (liabilities):
Cash equivalents		$	2,335			$	2,355			$	2,335			$	—			$	—
Short-term investments		$	145			$	145			$	145			$	—			$	—
Long-term investments		$	94			$	94			$	—			$	—			$	94
Commodity derivatives		$	249			$	249			$	—			$	249			$	—
Commodity derivatives		$	(192	)		$	(192	)		$	—			$	(192	)		$	—
Interest rate derivatives		$	140			$	140			$	—			$	140			$	—
Debt		$	(5,630	)		$	(6,629	)		$	—			$	(6,485	)		$	(144	)

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Level 1 Fair Value Measurements

     Cash equivalents and short-term investments — Amounts consist primarily of United States Treasury bills. The fair value approximates the carrying value.

Level 2 Fair Value Measurements

     Cash equivalents and short-term investments — Amounts consist primarily of commercial paper investments. The fair value is based upon quotes from brokers, which generally approximate the carrying value.

     Debt — Devon’s debt instruments do not actively trade in an established market. The fair values of its fixed-rate debt are estimated by discounting the principal and interest payments at rates available for debt with similar terms and maturity. The fair value of Devon’s variable-rate commercial paper borrowings is the carrying value.

Level 3 Fair Value Measurements

     Devon’s Level 3 fair value measurements included in the table above relate to certain long-term investments and a non-interest bearing promissory note. Included below is a summary of the changes in Devon’s Level 3 fair value measurements during the first nine months of 2011 and 2010.

		Nine Months
		Ended September 30,
		2011				2010
		(In millions)
Long-term investments balance at beginning of period		$	94			$	115
Redemptions of principal			(10	)			(20	)
Long-term investments balance at end of period		$	84			$	95

		Nine Months
		Ended September 30,
		2011				2010
		(In millions)
Debt balance at beginning of period		$	(144	)		$	—
Issuance of promissory note			—				(139	)
Foreign currency translation			3				(4	)
Accretion of promissory note			(4	)			(1	)
Redemptions of principal			53				1
Debt balance at end of period		$	(92	)		$	(143	)

13. Restructuring Costs

     In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of September 30, 2011, Devon had divested all of its U.S. Offshore assets and substantially all of its International assets.

     Through the end of the third quarter of 2011, Devon had incurred $202 million of restructuring costs associated with these divestitures. This amount is comprised of $120 million of employee severance costs, $78 million associated with abandoned office leases and $4 million of other miscellaneous costs.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Financial Statement Presentation

     The schedule below summarizes activity and balances associated with Devon’s restructuring liabilities.

		Continuing Operations												Discontinued Operations
		Other				Other								Other				Other
		Current				Long-Term								Current				Long-Term
		Liabilities				Liabilities				Total				Liabilities				Liabilities				Total
										(In millions)
Balance as of December 31, 2010		$	31			$	51			$	82			$	16			$	—			$	16
Cash severance settled			(13	)			—				(13	)			(12	)			—				(12	)
Cash severance revision			1				—				1				(2	)			—				(2	)
Lease obligations settled			(1	)			(10	)			(11	)			—				—				—
Lease obligations revision			1				(6	)			(5	)			—				—				—
Balance as of September 30, 2011		$	19			$	35			$	54			$	2			$	—			$	2
Balance as of December 31, 2009.		$	61			$	—			$	61			$	23			$	—			$	23
Cash severance settled			(17	)			—				(17	)			(3	)			—				(3	)
Lease obligations incurred			17				53				70				—				—				—
Cash severance revision			(18	)			—				(18	)			(5	)			—				(5	)
Balance as of September 30, 2010		$	43			$	53			$	96			$	15			$	—			$	15