Devon Energy's Second Quarter Earnings Jump 41 Percent

Devon Energy Corporation (Amex: DVN) reported net earnings for the quarter ended June 30, 2004, of $502 million, or $2.07 per common share ($2.02 per diluted common share). This represents a 41 percent increase over second quarter 2003 net earnings of $356 million, or $1.67 per common share ($1.62 per diluted common share). An increase in oil and gas production and higher price realizations drove the improvement in net earnings.

For the six months ended June 30, 2004, the company reported net earnings of $996 million, or $4.13 per common share ($4.02 per diluted common share). This compares with net earnings of $792 million, or $4.27 per common share ($4.11 per diluted common share) for the six months ended June 30, 2003.

"The company's second quarter results reflect the strength of our organization and the high quality of Devon's asset base," said J. Larry Nichols, Devon's chairman and chief executive officer. "In addition to strong oil and gas production, the second quarter reflects better than expected operating costs and significantly lower general and administrative expenses."

Sales Up 25 Percent on Record Production and Higher Prices

Combined sales of oil, gas and natural gas liquids increased 25 percent from the second quarter of 2003, to $1.8 billion in the quarter ended June 30, 2004. The sales increase reflects higher production volumes and higher prices for all three products.

Total daily oil, gas and natural gas liquids production climbed 11 percent in the second quarter of 2004 to 684 thousand barrels of oil equivalent (Boe) per day. This compares with total production of 615 thousand Boe per day in the second quarter of 2003. Devon's April 2003 merger with Ocean Energy contributed significantly to the production increase. However, second quarter 2004 production was also higher on a pro forma basis. Assuming the two companies were merged for the entirety of both quarters, pro forma second quarter production increased four percent in 2004, or about 27 thousand Boe per day over the 2003 quarter.

Devon's average second quarter realized gas price increased 13 percent to $5.29 per thousand cubic feet in 2004, up from $4.67 per thousand cubic feet in 2003. Devon's average second quarter realized oil price increased 10 percent to $28.04 per barrel in 2004 compared with $25.42 per barrel in the 2003 quarter. The company's average realized price for natural gas liquids increased 17 percent in the second quarter of 2004 to $20.89 per barrel compared with $17.88 per barrel in the second quarter of 2003.

Second quarter marketing and midstream operating margins increased 34 percent to $78 million in 2004. A 12 percent increase in marketing and midstream revenues more than offset an eight percent increase in associated expenses. The improvement in margins was primarily attributable to stronger natural gas and natural gas liquids prices.

Deepwater Results Lead Exploration and Production Highlights

Devon drilled 398 wells in the second quarter of 2004 with an overall success rate of 98 percent. Capital expenditures for drilling and production facilities were $629 million in the quarter. During the second quarter:

  • Devon drilled a successful appraisal of its St. Malo deepwater Gulf of Mexico discovery in the second quarter. This lower Tertiary trend follow-up well encountered more than 400 net feet of oil pay. The company has a 22.5 percent working interest in this significant discovery.
  • The company completed development work on its Red Hawk deepwater Gulf of Mexico natural gas project in the second quarter and commenced production in early July. The field is currently producing at its capacity of 120 million cubic feet per day. Devon has a 50 percent working interest in Red Hawk.
  • Onshore construction of the Magnolia tension leg platform was wrapping up in the second quarter, leading to tow-out to its offshore Louisiana location. The deepwater Magnolia oil field is on schedule to commence production in the fourth quarter. Devon's share of production is expected to peak in 2005 at more than 10,000 barrels per day.
  • Devon commenced natural gas production from its 100th horizontal well in the Barnett Shale in north Texas in June. More than 20 percent of the company's daily net Barnett Shale gas production of approximately 555 million cubic feet equivalent is from horizontal wells. The company produces gas from a combined total of more than 1,750 vertical and horizontal wells in the Barnett Shale.


  • Cash Flow Boosts Balance Sheet Strength

    Cash flow before balance sheet changes increased 33 percent to $1.2 billion in the second quarter of 2004. During the quarter the company funded $765 million of capital expenditures and paid common and preferred dividends totaling $27 million leaving $393 million of free cash flow. Devon began the second quarter with a cash balance of $1.5 billion, retired $760 million of debt during the quarter and had $1.1 billion of cash on hand as of June 30, 2004.

    Operating Expenses and DD&A Increase after Merger; G&A Decreases

    Devon's April 25, 2003 merger with Ocean Energy significantly increased the size and scope of Devon's operations. Consequently, most expense items increased in the second quarter of 2004, reflecting a full three months of merged operations.

    Second quarter lease operating and transportation expenses increased 12 percent to $306 million in 2004. However, on a unit of production basis, lease operating and transportation expenses increased only one percent, to $4.92 per Boe in the second quarter of 2004.

    Depreciation, depletion and amortization expense (DD&A) increased 29 percent in the second quarter of 2004, to $552 million. This increase was driven by higher oil and gas production and by a higher DD&A rate. Devon's combined DD&A rate totaled $8.86 per Boe in the second quarter of 2004. 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) decreased 25 percent to $70 million in the second quarter of 2004 from $93 million in the year-earlier quarter. Second quarter 2004 and 2003 G&A expense included $5 million and $8 million, respectively, for office closings.

    Second quarter interest expense increased two percent to $134 million in 2004. Interest expense for the 2004 quarter included $16 million of unamortized debt issuance costs. The $16 million was expensed in conjunction with Devon's early retirement of $635 million of long-term debt during the second quarter. Excluding this amount, second quarter interest expense decreased 10 percent in 2004, as compared with 2003.

    Income tax expense for the second quarter of 2004 totaled $270 million, or 35 percent of pre-tax earnings. Most of the increase in income taxes resulted from higher pre-tax earnings. Of the total, $72 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 second quarter 2004 reported earnings were as follows:

  • A charge for abandoning office space in Calgary decreased second quarter 2004 earnings by $5 million pre-tax ($3 million after tax).
  • Debt issuance costs that were written off as a result of early debt repayment decreased earnings by $16 million pre-tax ($10 million after tax).
  • Effects of changes in foreign currency exchange rates decreased earnings by $9 million pre-tax ($8 million after tax). This is primarily related to U.S. dollar denominated debt in Canada.
  • A change in fair value of financial instruments not associated with hedges decreased earnings by $11 million pre-tax ($7 million after tax).
  • A one-time tax benefit, the result of a change in Canadian tax law, increased net earnings by $28 million.


  • In aggregate, these items offset one another. Therefore, second quarter 2004 net earnings as reported are comparable to analysts' estimates.

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