DEVON ENERGY CORP/DE - Quarter Report: 2011 June (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

Commission File Number 001-32318

DEVON ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

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.

     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 July 22, 2011, 416.5 million shares of common stock were outstanding.

 

 

DEVON ENERGY CORPORATION

FORM 10-Q
For the Quarterly Period Ended June 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			41
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.
	•		“SEC” means United States Securities and Exchange Commission.

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

		June 30,				December 31,
		2011				2010
		(Unaudited)
		(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	3,351			$	2,866
Short-term investments			3,367				145
Accounts receivable			1,446				1,202
Current assets held for sale			36				563
Other current assets			711				779
Total current assets			8,911				5,555
Property and equipment, at cost:
Oil and gas, based on full cost accounting:
Subject to amortization			59,423				56,012
Not subject to amortization			3,915				3,434
Total oil and gas			63,338				59,446
Other			4,732				4,429
Total property and equipment, at cost			68,070				63,875
Less accumulated depreciation, depletion and amortization			(45,643	)			(44,223	)
Property and equipment, net			22,427				19,652
Goodwill			6,176				6,080
Long-term assets held for sale			94				859
Other long-term assets			929				781
Total assets		$	38,537			$	32,927
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade		$	1,365			$	1,411
Revenues and royalties due to others			669				538
Short-term debt			1,962				1,811
Current liabilities associated with assets held for sale			43				305
Other current liabilities			445				518
Total current liabilities			4,484				4,583
Long-term debt			5,968				3,819
Asset retirement obligations			1,499				1,423
Liabilities associated with assets held for sale			2				26
Other long-term liabilities			808				1,067
Deferred income taxes			4,348				2,756
Stockholders’ equity:
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 418.3 million and 431.9 million shares in 2011 and 2010, respectively			42				43
Additional paid-in capital			4,489				5,601
Retained earnings			14,901				11,882
Accumulated other comprehensive earnings			2,021				1,760
Treasury stock, at cost. 0.3 million and 0.4 million shares in 2011 and 2010, respectively			(25	)			(33	)
Total stockholders’ equity			21,428				19,253
Commitments and contingencies (Note 11)
Total liabilities and stockholders’ equity		$	38,537			$	32,927

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Unaudited)
		(In millions, except
		per share amounts)
Revenues:
Oil, gas and NGL sales		$	2,200			$	1,782			$	4,060			$	3,852
Oil, gas and NGL derivatives			416				45				248				665
Marketing and midstream revenues			604				405				1,059				935
Total revenues			3,220				2,232				5,367				5,452
Expenses and other, net:
Lease operating expenses			453				442				877				856
Taxes other than income taxes			120				92				228				193
Marketing and midstream operating costs and expenses			456				280				789				677
Depreciation, depletion and amortization of oil and gas properties			485				426				927				852
Depreciation and amortization of non-oil and gas properties			65				63				129				126
Accretion of asset retirement obligations			23				24				46				50
General and administrative expenses			135				130				265				268
Restructuring costs			6				(8	)			1				(8	)
Interest expense			85				111				166				197
Interest-rate and other financial instruments			25				81				8				66
Other, net			(11	)			(22	)			(27	)			(26	)
Total expenses and other, net			1,842				1,619				3,409				3,251
Earnings from continuing operations before income taxes			1,378				613				1,958				2,201
Income tax expense (benefit):
Current			36				707				(53	)			1,006
Deferred			1,158				(446	)			1,438				(231	)
Total income tax expense			1,194				261				1,385				775
Earnings from continuing operations			184				352				573				1,426
Discontinued operations:
Earnings from discontinued operations before income taxes			2,558				473				2,588				610
Discontinued operations income tax (benefit) expense			(1	)			119				2				138
Earnings from discontinued operations			2,559				354				2,586				472
Net earnings		$	2,743			$	706			$	3,159			$	1,898
Basic net earnings per share:
Basic earnings from continuing operations per share		$	0.44			$	0.79			$	1.35			$	3.20
Basic earnings from discontinued operations per share			6.06				0.80				6.09				1.06
Basic net earnings per share		$	6.50			$	1.59			$	7.44			$	4.26
Diluted net earnings per share:
Diluted earnings from continuing operations per share		$	0.43			$	0.79			$	1.34			$	3.19
Diluted earnings from discontinued operations per share			6.05				0.79				6.07				1.05
Diluted net earnings per share		$	6.48			$	1.58			$	7.41			$	4.24

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(Unaudited)
		(In millions)
Net earnings		$	2,743			$	706			$	3,159			$	1,898
Foreign currency translation:
Change in cumulative translation adjustment			67				(326	)			262				(104	)
Foreign currency translation income tax (expense) benefit			(2	)			17				(12	)			5
Foreign currency translation total			65				(309	)			250				(99	)
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in earnings			8				8				17				16
Pension and postretirement benefit plans income tax expense			(3	)			(3	)			(6	)			(6	)
Pension and postretirement benefit plans total			5				5				11				10
Other comprehensive earnings (loss), net of tax			70				(304	)			261				(89	)
Comprehensive earnings		$	2,813			$	402			$	3,420			$	1,809

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)
Six Months Ended June 30, 2011:
Balance as of December 31, 2010			432			$	43			$	5,601			$	11,882			$	1,760			$	(33	)		$	19,253
Net earnings			—				—				—				3,159				—				—				3,159
Other comprehensive earnings (loss), net of tax			—				—				—				—				261				—				261
Stock option exercises			2				—				96				—				—				—				96
Common stock repurchased			—				—				—				—				—				(1,285	)			(1,285	)
Common stock retired			(16	)			(1	)			(1,292	)			—				—				1,293				—
Common stock dividends			—				—				—				(140	)			—				—				(140	)
Share-based compensation			—				—				72				—				—				—				72
Share-based compensation tax benefits			—				—				12				—				—				—				12
Balance as of June 30, 2011			418			$	42			$	4,489			$	14,901			$	2,021			$	(25	)		$	21,428
Six Months Ended June 30, 2010:
Balance as of December 31, 2009			447			$	45			$	6,527			$	7,613			$	1,385			$	—			$	15,570
Net earnings			—				—				—				1,898				—				—				1,898
Other comprehensive earnings (loss), net of tax			—				—				—				—				(89	)			—				(89	)
Stock option exercises			—				—				15				—				—				—				15
Common stock repurchased			—				—				—				—				—				(503	)			(503	)
Common stock retired			(7	)			(1	)			(437	)			—				—				438				—
Common stock dividends			—				—				—				(142	)			—				—				(142	)
Share-based compensation			—				—				75				—				—				—				75
Share-based compensation tax benefits			—				—				6				—				—				—				6
Balance as of June 30, 2010			440			$	44			$	6,186			$	9,369			$	1,296			$	(65	)		$	16,830

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months
		Ended June 30,
		2011				2010
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Net earnings		$	3,159			$	1,898
Earnings from discontinued operations, net of tax			(2,586	)			(472	)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			1,056				978
Deferred income tax expense (benefit)			1,438				(231	)
Unrealized change in fair value of financial instruments			(74	)			(231	)
Other noncash charges			82				81
Net (increase) decrease in working capital			(89	)			581
Decrease in long-term other assets			45				14
(Decrease) increase in long-term other liabilities			(201	)			1
Cash from operating activities — continuing operations			2,830				2,619
Cash from operating activities — discontinued operations			(20	)			273
Net cash from operating activities			2,810				2,892
Cash flows from investing activities:
Capital expenditures			(3,720	)			(3,221	)
Proceeds from property and equipment divestitures			5				4,129
Purchases of short-term investments			(4,520	)			—
Redemptions of short-term investments			1,298				—
Redemptions of long-term investments			1				18
Other			(33	)			—
Cash from investing activities — continuing operations			(6,969	)			926
Cash from investing activities — discontinued operations			3,170				429
Net cash from investing activities			(3,799	)			1,355
Cash flows from financing activities:
Net commercial paper borrowings (repayments)			2,340				(1,432	)
Debt repayments			—				(350	)
Proceeds from stock option exercises			96				15
Repurchases of common stock			(1,290	)			(430	)
Dividends paid on common stock			(140	)			(142	)
Excess tax benefits related to share-based compensation			12				6
Net cash from financing activities			1,018				(2,333	)
Effect of exchange rate changes on cash			32				(9	)
Net increase in cash and cash equivalents			61				1,905
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)		$	3,351			$	2,916

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 June 30, 2011 and Devon’s results of operations and cash flows for the three-month and six-month periods ended June 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.

2. Short-Term Investments

     Devon periodically invests excess cash in U.S. Treasury and other marketable securities that are presented as short-term investments in the accompanying June 30, 2011 consolidated balance sheet. During the first half of 2011, Devon invested a portion of the International offshore divestiture proceeds it had received into United States Treasury securities, causing short-term investments to increase. The carrying value of these investments approximates their fair value. As of June 30, 2011, the average remaining maturity of these investments was 67 days, with a weighted average yield of 0.06 percent.

3. Accounts Receivable

     The components of accounts receivable include the following:

		June 30, 2011				December 31, 2010
		(In millions)
Oil, gas and NGL sales		$	879			$	786
Joint interest billings			245				204
Marketing and midstream revenues			136				165
Other			195				57
Gross accounts receivable			1,455				1,212
Allowance for doubtful accounts			(9	)			(10	)
Net accounts receivable		$	1,446			$	1,202

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

4. Derivative Financial Instruments

Objectives and Strategies

     Devon periodically enters into commodity and interest rate derivative financial instruments. These instruments are used to manage the inherent uncertainty of future revenues due to oil, gas and NGL price volatility and to manage exposure to interest rate volatility. 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 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 periodically enters into interest rate swaps to manage its exposure to interest rate volatility. 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 also had forward starting swaps and U.S. Treasury locks. In conjunction with Devon’s debt issuance discussed in Note 7, Devon received $35 million from the net settlement of its forward starting swaps and U.S. Treasury locks in July 2011.

Counterparty Risk

     By using derivative financial instruments to manage exposures to changes in commodity prices and interest rates, Devon exposes itself to credit risk and market risk. Credit risk is 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 June 30, 2011, the credit ratings of all Devon’s counterparties were investment grade.

Commodity Derivatives

     As of June 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)
Q3-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				—				—

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     As of June 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)

Q3-Q4 2011

712,500

$

5.51

215,000

4.75

5.17

—

—

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)

Q3-Q4 2011

Panhandle Eastern Pipeline

150,000

$

(0.33

)

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

NGL Basis Swaps
										Weighted Average
						Volume				Differential to WTI
Production Period		Pay				(Bbls/d)				($/Bbl)
Q3-Q4 2011		Natural Gasoline					416			$	(9.75	)
Q1-Q4 2012		Natural Gasoline					500			$	(10.10	)
Q1-Q4 2013		Natural Gasoline					500			$	(6.80	)

Interest Rate Derivatives

     As of June 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)
$300				4.30	%		Six month LIBOR				July 18, 2011
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
$1,150				3.82	%

Forward Starting Swaps

Fixed Rate

Variable

Notional

Paid

Rate Received

Expiration

(In millions)

$950

3.92

%

Three month LIBOR

July 7, 2011

U.S. Treasury Locks
			Fixed Rate				Variable
Notional			Paid				Rate Received				Expiration
(In millions)
$350				1.56	%		Five year U.S. Treasury				July 6, 2011
300				2.96	%		Ten year U.S. Treasury				July 6, 2011
$650			2.21	%

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Financial Statement Presentation

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

		Balance Sheet Caption				June 30, 2011				December 31, 2010
						(In millions)
Asset derivatives:
Commodity derivatives		Other current assets				$	240			$	248
Commodity derivatives		Other long-term assets					81				1
Interest rate derivatives		Other current assets					78				100
Interest rate derivatives		Other long-term assets					33				40
Total asset derivatives						$	432			$	389
Liability derivatives:
Commodity derivatives		Other current liabilities				$	83			$	50
Commodity derivatives		Other long-term liabilities					78				142
Total liability derivatives						$	161			$	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 derivatives are presented in the “Interest-rate and other financial instruments” caption in the accompanying consolidated statements of operations.

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
						(In millions)
Cash settlements:
Commodity derivatives		$	59			$	252			$	145			$	348
Interest rate derivatives			5				4				21				20
Total cash settlements			64				256				166				368
Unrealized gains (losses):
Commodity derivatives			357				(207	)			103				317
Interest rate derivatives			(30	)			(85	)			(29	)			(86	)
Total unrealized gains (losses)			327				(292	)			74				231
Net gain (loss) recognized on statement of operations		$	391			$	(36	)		$	240			$	599

5. Other Current Assets

     The components of other current assets include the following:

		June 30, 2011				December 31, 2010
		(In millions)
Derivative financial instruments		$	318			$	348
Income taxes receivable			206				270
Inventories			137				120
Other			50				41
Other current assets		$	711			$	779

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

6. Goodwill

     During the first six months of 2011, Devon’s Canadian goodwill increased $96 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 June 30, 2011, Devon had no borrowings under the Senior Credit Facility.

     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 June 30, 2011, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at June 30, 2011, as calculated pursuant to the terms of the agreement, was 19.3 percent.

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 second quarter of 2011 with approximately $6.7 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, during the first six months of 2011, Devon borrowed $2.3 billion of commercial paper in the United States primarily to fund capital expenditures, common stock repurchases and dividends in excess of cash flow generated by its United States operating activities. As of June 30, 2011, Devon’s average borrowing rate on its $2.3 billion of commercial paper borrowings was 0.27 percent.

     In July 2011, Devon received net proceeds totaling $2,224 million from the issuance of $500 million of 2.40% senior notes due July 15, 2016, $500 million of 4.00% senior notes due July 15, 2021 and $1,250 million of 5.60% senior notes due July 15, 2041. The net proceeds from issuance of this long-term debt is being used to repay substantially all of Devon’s outstanding commercial paper as of June 30, 2011 as it matures. Therefore, $2,224 million of Devon’s outstanding commercial paper is classified as long-term debt in the accompanying June 30, 2011 consolidated balance sheet.

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.

		Six Months
		Ended June 30,
		2011				2010
		(In millions)
Asset retirement obligations as of beginning of period		$	1,497			$	1,513
Liabilities incurred			23				25
Liabilities settled			(39	)			(71	)
Revision of estimated obligation			16				194
Liabilities assumed by others			—				(256	)
Accretion expense on discounted obligation			46				50
Foreign currency translation adjustment			28				(14	)
Asset retirement obligations as of end of period			1,571				1,441
Less current portion			72				95
Asset retirement obligations, long-term		$	1,499			$	1,346

     During the first six 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 six 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								Six Months								Three Months								Six Months
		Ended June 30,								Ended June 30,								Ended June 30,								Ended June 30,
		2011				2010				2011				2010				2011				2010				2011				2010
														(In millions)
Service cost		$	9			$	8			$	18			$	16			$	1			$	—			$	1			$	—
Interest cost			15				14				30				28				—				1				1				2
Expected return on plan assets			(11	)			(9	)			(21	)			(18	)			—				—				—				—
Amortization of prior service cost			1				1				2				2				(1	)			—				(1	)			—
Net actuarial loss			8				7				16				14				—				—				—				—
Net periodic benefit cost		$	22			$	21			$	45			$	42			$	—			$	1			$	1			$	2

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. Devon now expects to contribute $346 million to its qualified pension plans in 2011, including $246 million that was contributed in the first six months of 2011 and $100 million that was contributed in July 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 six months of 2011, Devon repurchased 15.2 million common shares under its $3.5 billion stock repurchase program announced in 2010 for $1.3 billion, or $84.52 per share. As of June 30, 2011, Devon had repurchased 33.5 million common shares for $2.5 billion, or $74.16 per share, under this program, which expires December 31, 2011.

Dividends

     Devon paid common stock dividends of $140 million and $142 million in the first six months of 2011 and 2010, respectively. The quarterly cash dividend was $0.16 per share in the first and second quarter of 2010 and the first quarter of 2011. In the second quarter of 2011, Devon increased the dividend rate to $0.17 per share.

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

										Fair Value Measurements Using:
		Carrying				Total Fair				Level 1				Level 2				Level 3
		Amount				Value				Inputs				Inputs				Inputs
										(In millions)
June 30, 2011 assets (liabilities):
Short-term investments		$	3,367			$	3,367			$	3,367			$	—			$	—
Long-term investments		$	93			$	93			$	—			$	—			$	93
Commodity derivatives		$	321			$	321			$	—			$	321			$	—
Commodity derivatives		$	(161	)		$	(161	)		$	—			$	(161	)		$	—
Interest rate derivatives		$	111			$	111			$	—			$	111			$	—
Debt		$	(7,930	)		$	(8,867	)		$	(2,340	)		$	(6,423	)		$	(104	)

										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):
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)

     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 six months of 2011 and 2010.

		Six Months
		Ended June 30,
		2011				2010
		(In millions)
Long-term investments balance at beginning of period		$	94			$	115
Redemptions of principal			(1	)			(18	)
Long-term investments balance at end of period		$	93			$	97

		Six Months
		Ended June 30,
		2011				2010
		(In millions)
Debt balance at beginning of period		$	(144	)		$	—
Issuance of promissory note			—				(139	)
Foreign exchange translation adjustment			(4	)			—
Accretion of promissory note			(2	)			—
Redemptions of principal			46				—
Debt balance at end of period		$	(104	)		$	(139	)

13. Restructuring Costs

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

     Through the end of the second quarter of 2011, Devon had incurred $204 million of restructuring costs associated with these divestitures. This amount is comprised of $120 million of employee severance costs, $81 million associated with abandoned office leases and $3 million of other miscellaneous costs.

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			(16	)			—				(16	)			(4	)			—				(4	)
Lease obligations settled			(1	)			(7	)			(8	)			—				—				—
Lease obligations revision			(1	)			(1	)			(2	)			—				—				—
Cash severance revision			1				—				1				(2	)			—				(2	)
Balance as of June 30, 2011		$	14			$	43			$	57			$	10			$	—			$	10
Balance as of December 31, 2009		$	61			$	—			$	61			$	23			$	—			$	23
Cash severance settled			(5	)			—				(5	)			(1	)			—				(1	)
Cash severance revision			(5	)			—				(5	)			(3	)			—				(3	)
Balance as of June 30, 2010		$	51			$	—			$	51			$	19			$	—			$	19