Record Production Drives Sales
Combined sales of oil, gas and natural gas liquids increased 47 percent from the quarter ended March 31, 2003, to $1.8 billion in the quarter ended March 31, 2004. Increased production was the major driver to this record first quarter sales performance.
Total daily oil, gas and natural gas liquids production climbed 43 percent in the first quarter of 2004 to a record 703 thousand barrels of oil equivalent (Boe) per day. This compares to total production of 492 thousand Boe per day, in the first quarter of 2003. Devon's April 2003 merger with Ocean Energy and the company's successful exploration and development programs drove the production increase. Pro forma for the Ocean merger, first quarter 2004 production increased seven percent, or about 45 thousand barrels per day, from the first quarter of 2003.
Devon's average realized price for first quarter natural gas production increased four percent in 2004, to $5.05 per thousand cubic feet, up from $4.84 per thousand cubic feet in the first quarter of 2003. Devon's average realized price for oil decreased one percent to $27.78 per barrel in 2004 compared with $28.09 per barrel in 2003. The company's average realized price for natural gas liquids decreased six percent to $19.78 per barrel in 2004, compared with $21.15 per barrel in 2003.
International Oil Growth Leads Operating Achievements
Record Cash Flow From Operations Reduces Debt
Cash flow from operations increased 48 percent to $1.2 billion in the first quarter of 2004. This marks the highest level of cash flow of any quarter in Devon's history.
Cash on hand at March 31, 2004, totaled $1.5 billion. During the first quarter of 2004 Devon retired $211 million of debt. Additionally, in April 2004, following the close of the first quarter, Devon used cash on hand to repay $635 million of long-term debt.
"Record first quarter production volumes and continuing oil and gas price strength combined to deliver another outstanding quarter for Devon," said J. Larry Nichols, chairman and chief executive officer. "We doubled our common stock dividend in the first quarter and are now well on our way to repaying a billion dollars in debt this year. This is on top of funding an estimated $2.8 billion in 2004 capital expenditures."
Marketing and Midstream Margins Improve
Marketing and midstream operating margins increased nine percent to a record $85 million in the first quarter of 2004. This compares to marketing and midstream margins of $78 million in the first quarter of 2003. Marketing and midstream revenues decreased, driven primarily by lower third-party processed gas volumes and lower market prices for natural gas and natural gas liquids. This decrease in revenues was more than offset by lower marketing and midstream costs and expenses.
Costs and Expenses Track Expanded Operations
Devon's April 2003 merger with Ocean Energy significantly increased the size and scope of the company's operations. This is reflected in higher overall costs and expenses.
Lease operating and transportation expenses increased 50 percent to $310 million in the first quarter of 2004. On a unit of production basis, lease operating and transportation expenses increased four percent to $4.84 per Boe. The increase in lease operating and transportation costs per barrel is primarily attributable to the stronger Canadian dollar.
Depreciation, depletion and amortization expense (DD&A) increased 93 percent in the first quarter of 2004, to $572 million. This increase was driven by higher oil and gas production and by a higher DD&A rate. Devon's combined first quarter DD&A rate increased 34 percent in 2004, to $8.95 per Boe. The combined DD&A rate includes depreciation of Devon's midstream and corporate assets in addition to depletion of its oil and gas properties.
General and administrative expenses (G&A) increased 59 percent to $77 million in the first quarter of 2004. On a unit of production basis, G&A increased 10 percent to $1.21 per Boe from $1.10 per Boe in the first quarter of 2003. G&A per Boe increased by three cents due to the stronger Canadian dollar. Eighteen cents of the per Boe increase was due to a change in the value of investments of deferred compensation plans, which increases the obligation to the plan participants. This increase in the value of investments was substantially offset by a corresponding increase in other income.
Income tax expense for the first quarter of 2004 totaled $282 million, or 36 percent of pre-tax income. Most of the increase in income taxes resulted from higher pre-tax earnings. Of the total, $79 million was deferred income tax expense, not requiring the current use of cash.
Items Excluded from Published Estimates
Devon's reported net earnings include items of income and expense that are excluded by certain securities analysts in their published estimates of the company's financial results. Such items and their effects upon first quarter 2004 reported earnings were as follows:
In aggregate, these items decreased first quarter 2004 net earnings by $2 million, or one cent per diluted common share.
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