For the quarter ended December 31, 2004, the company reported net earnings of $673 million, or $1.38 per common share ($1.35 per diluted common share). This compares to net earnings of $543 million, or $1.16 per common share ($1.13 per diluted common share) in the fourth quarter of 2003.
"Devon delivered record-breaking performance in 2004, from nearly every perspective," said J. Larry Nichols, chairman and chief executive officer. "Record production of 251 million barrels of oil equivalent and rising oil and gas prices led to record net earnings and earnings per share. Furthermore, with drill-bit capital of $2.8 billion we added 313 million barrels of proved reserves, before price revisions. Simultaneously, the company reduced net debt by $1.8 billion with free cash flow. Devon is clearly performing at a very high level and we couldn't be more enthusiastic about our future."
Capital and Reserve Summary (detailed tables included) Year Ended December 31, 2004 2003 Drill-bit Capital (in millions) $2,805 $2,654 Reserve Data (MMBoe) Discoveries and extensions 268 188 Revisions other than price 45 (19) Drill-bit and performance reserve additions 313 169
Operating Highlights Include Exploration and Development Achievements Devon's operating strategy balances lower-risk, near-term investment in the company's gas-weighted, North American asset base with longer-term investment in high-impact exploration projects. Notable operational achievements during 2004 include:
Oil, Gas and NGL Production and Sales Reach Record Highs
Devon's sales of oil, gas and natural gas liquids increased 27 percent to $7.5 billion in the year ended December 31, 2004. The increase was driven by both higher production and higher realized prices for all products.
Combined oil, gas and natural gas liquids production averaged 685 thousand Boe per day in the year ended December 31, 2004. This was a 10 percent increase over the average rate of 624 thousand Boe per day in 2003.
Devon's realized natural gas prices increased 18 percent to $5.32 per thousand cubic feet in 2004, compared with $4.51 per thousand cubic feet in 2003. Average realized oil prices increased 10 percent to $28.18 per barrel in 2004, compared with $25.63 per barrel in 2003. The company's average realized price for natural gas liquids improved 24 percent in 2004 to $23.04 per barrel, compared with $18.65 per barrel in 2003.
Marketing and midstream revenues increased 16 percent in 2004 to $1.7 billion. After $1.3 billion of related expenses, Devon's marketing and midstream margin reached $362 million. This was a 26 percent increase over the 2003 margin of $286 million. Higher realized prices for natural gas and natural gas liquids led to the improvement.
Operating Expenses Track Growth; G&A and Interest Expense Decline Record production and revenues were partially offset by higher expenses in 2004. Most operating expense categories reflect this growth as well as the impact of the stronger Canadian dollar.
Lease operating and transportation expenses increased 19 percent to $1.3 billion in 2004. Both higher production and higher unit costs contributed to the increase. Unit lease operating and transportation expenses increased eight percent to $5.11 per Boe. The stronger Canadian dollar and increased well workover activity contributed to the increase in unit costs.
Production taxes increased 25 percent to $255 million in 2004. Increased production and higher prices were the primary drivers for the increase.
Depreciation, depletion and amortization (DD&A) of oil and gas properties increased 28 percent in 2004, to $2.1 billion. Devon's oil and gas related DD&A rate increased 17 percent to $8.54 per Boe. The increased rate includes the effects of the stronger Canadian currency and price-related reserve revisions discussed below.
General and administrative expenses decreased 10 percent, to $277 million in 2004. Overhead and personnel efficiencies realized following Devon's merger with Ocean Energy contributed to the decrease.
Interest expense in 2004 decreased five percent to $475 million, compared with 2003. Lower outstanding indebtedness more than offset increases in interest rates on floating rate debt.
Income tax expense was $1.1 billion, or 34 percent of pre-tax earnings in 2004. Of the total, $355 million was deferred income tax expense, not requiring the current use of cash. Income taxes represented 23 percent of pre-tax earnings in 2003. The 2004 and 2003 rates reflected Canadian income tax rate reductions, without which, the 2004 and 2003 combined rates would have been 35 percent and 33 percent, respectively.
Cash Flow Before Balance Sheet Changes Up 26 Percent to $4.9 Billion
Cash flow before balance sheet changes increased 26 percent to $4.9 billion in 2004. Devon funded $3.1 billion of capital expenditures and paid common and preferred dividends totaling $107 million in the year. This yielded free cash flow of $1.7 billion. Cash on hand at December 31, 2004, was $2.1 billion.
After retiring $973 million of debt in 2004, Devon's net debt to adjusted capitalization was 27 percent at December 31, 2004. This is down from 39 percent at December 31, 2003.
On September 27, 2004, Devon announced a plan to repurchase up to 10 percent, or approximately 50 million shares, of its outstanding common shares. At December 31, 2004, Devon had repurchased approximately five million shares. As of today, the company has repurchased 7.5 million shares at a total cost of approximately $279 million.
Oil and Gas Reserves
At December 31, 2003, Devon held 2.1 billion Boe of estimated proved oil and gas reserves. During 2004, the company added 268 million Boe through successful drilling (discoveries and extensions) and added 45 million Boe due to improved performance (other revisions). Devon also sold one million Boe and purchased three million Boe of reserves in place. Drill-bit capital totaled $2.8 billion in 2004.
Devon removed 76 million Boe from proved reserves as a result of changes in year-end oil and gas prices (revisions due to price). International production sharing contracts accounted for the majority of the price related revisions. Under these contracts Devon is allowed to recover its costs from the early production from a project. When oil prices increase it is assumed that Devon will recover its costs with fewer barrels, resulting in a reduction of booked reserves. In Canada, negative price revisions resulted from a dramatic temporary decline in the price of heavy crude oil at year-end. This primarily affected thermal heavy oil projects.
After subtracting the 251 million Boe Devon produced in 2004, estimated proved reserves at December 31, 2004, were 2.1 billion Boe. Proved reserves at December 31, 2004, are composed of 596 million barrels of crude oil, 7.5 trillion cubic feet of natural gas and 232 million barrels of natural gas liquids. Natural gas is converted to its oil equivalent on the basis of six thousand cubic feet of gas to one barrel of oil.
Proved developed reserves represented 80 percent of total proved reserves at year-end 2004. This compares to 76 percent of total proved reserves at December 31, 2003.
Items Excluded from Published Estimates
Devon's reported net earnings include items of income and expense that are typically excluded by securities analysts in their published estimates for the company's financial results. Such items and their effects upon full year and fourth quarter 2004 reported earnings were as follows:
In aggregate, these items increased 2004 net earnings by $3 million but had no effect on either basic or diluted earnings per share. For the fourth quarter of 2004, the applicable items increased net earnings by $18 million, or three cents per common share (four cents per diluted common share).
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