For the six months ended June 30, 2005, Devon reported net earnings of $1.2 billion or $2.57 per common share ($2.53 per diluted common share). Net earnings for the six months ended June 30, 2004, were $996 million, or $2.06 per share ($2.01 per diluted common share).
"Devon's impressive second quarter results were driven by production growth from our core, North American property base and strong oil and gas prices," commented J. Larry Nichols, chairman and chief executive officer. "In a separate release today, we also announced plans to launch a second share repurchase program. This reflects our focus on building value per share and the abundant free cash flow Devon is generating in today's environment."
200th Horizontal Barnett Shale Well Leads Exploration and Production Highlights
Devon drilled 493 gross wells in the second quarter of 2005 with a 98 percent success rate. Also in the second quarter:
Oil, Gas and NGL Sales Increase to Record $2.1 Billion; Core Property Production Climbs
Quarterly sales of oil, gas and natural gas liquids increased to a record high $2.1 billion in the second quarter of 2005. This was 13 percent higher than second quarter 2004 sales of $1.8 billion. Increased production from Devon's core, retained properties coupled with record high realized oil, gas and natural gas liquids prices led to the sales increase. The increase in sales was achieved despite lower oil and gas production in the second quarter of 2005, caused by divestitures of non-core oil and gas properties in the first half of 2005.
Combined daily oil, gas and natural gas liquids production was 641 thousand Boe in the second quarter of 2005. This was six percent lower than second quarter 2004 production of 685 thousand Boe per day. Excluding production from oil and gas properties divested in 2005, second quarter production was 610 thousand Boe per day. This was three percent greater than second quarter 2004 production, excluding the divestiture properties, of 590 thousand Boe per day.
The company's second quarter 2005 average realized natural gas price increased 15 percent to $6.09 per thousand cubic feet, compared with $5.29 per thousand cubic feet in the second quarter of 2004. Devon's second quarter 2005 average realized oil price increased 33 percent to $37.28 per barrel compared with $28.04 per barrel in the same quarter in 2004. The company's second quarter 2005 average realized price for natural gas liquids increased 24 percent to $25.99 per barrel from $20.89 per barrel in the second quarter of 2004.
Marketing and midstream revenues increased three percent to $389 million in the second quarter of 2005, while related expenses decreased one percent to $296 million. This resulted in a 19 percent increase in the marketing and midstream operating margin to $93 million for the second quarter of 2005.
Expense Increases Include Interest Associated with Debt Redemption
Lease operating expenses increased 10 percent to $338 million in the second quarter of 2005 compared with the second quarter of 2004. Lease operating expenses per unit of production increased 18 percent to $5.80 per Boe. Increases in transportation costs, ad valorem taxes, well workover expenses, power, fuel and repairs and maintenance costs, in addition to the compounding effect of the weaker U. S. dollar, contributed to higher unit costs. Production taxes increased six percent to $75 million in the second quarter of 2005 due to higher overall oil and gas prices.
Depreciation, depletion and amortization of oil and gas properties decreased four percent to $494 million in the second quarter of 2005 compared with 2004. The decrease was due to lower overall production resulting from the property divestitures.
General and administrative expenses increased 11 percent, to $78 million in the second quarter of 2005. Increases in personnel expenses and charitable contributions were primary causes of the increase.
Interest expense increased nine percent to $146 million in the second quarter of 2005. This amount included $30 million attributable to the early redemption of the company's zero coupon convertible debentures, as described below.
Second quarter 2005 income tax expense was $357 million, or 35 percent of pre-tax earnings. Gains for income tax purposes on sales of assets in the second quarter resulted in a shift of $59 million of income taxes to current from deferred.
Devon Retires $427 Million of Debt, Completes Stock Repurchase Program
In May, Devon announced that it would call for redemption its $427 million principal amount zero coupon convertible debentures due June 2020. The redemption date was June 27, 2005. All but one percent of the outstanding debentures were presented for conversion prior to the redemption date. Devon settled the redemptions from cash on hand for $452 million.
Following redemption of the zero coupon convertible debentures, Devon's net debt to adjusted capitalization was 23 percent at June 30, 2005. Net debt to adjusted capitalization was 34 percent at June 30, 2004. Reconciliations of net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.
Also during the second quarter, the company repurchased 21.5 million shares of its common stock for approximately $1 billion. As of today, Devon has completed its targeted 50 million share repurchase program announced in September 2004. Devon announced a second share repurchase program in a separate news release today.
Divestiture Proceeds Add to Cash on Hand
Devon closed sales of non-core oil and gas properties during the second quarter of 2005 for aggregate proceeds of $1.7 billion. The divestiture program, first announced in September 2004, is now substantially complete.
Cash flow before balance sheet changes increased nine percent to $1.3 billion in the second quarter of 2005. A reconciliation of cash flow before balance sheet changes, which is a non-GAAP measure, is also provided in this release.
Cash and short term investments on hand were $2.8 billion as of June 30, 2005. Approximately $1.6 billion of this amount is intended for additional debt repayments through 2006. This includes early retirement in 2005 of $400 million of 6.75 percent senior notes due in 2011 that the company announced in a separate news release today.
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. These items and their effects upon second quarter 2005 reported earnings were as follows:
The following table summarizes the effects of these items on earnings and income taxes. Included in the table are the tax effects of oil and gas property divestitures that had no effect on net earnings.
Summary of Items Typically Excluded by Securities Analysts (in millions) Cash Flow Pretax After-tax Before Earnings Income Tax Effect Earnings Balance Sheet Effect Current Deferred Total Effect Changes Effect Change in fair value of derivative financial instruments $18 --- 7 7 11 --- Foreign exchange effect (11) --- (3) (3) (8) --- Loss on hedges for divestiture properties (16) (5) --- (5) (11) (11) Repatriation of Canadian cash --- (5) --- (5) 5 5 Additional interest costs on debt retirement (30) (11) --- (11) (19) (14) Effects of oil and gas property divestitures --- 59 (59) --- --- (59) Totals $(39) 38 (55) (17) (22) (79)
In aggregate, these items decreased 2005 net earnings by $22 million, or five cents per common share (three cents per diluted share). The diluted calculation is based upon 480 million shares, which includes nine million shares that are anti-dilutive for GAAP purposes. These items and their associated tax effects decreased cash flow before balance sheet changes by $79 million.
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