For the quarter ended December 31, 2006, Devon reported net earnings of $582 million, or $1.31 per common share ($1.29 per diluted common share). This compares to reported earnings of $970 million or $2.18 per common share ($2.14 per diluted common share) in the fourth quarter of 2005.
In aggregate, items securities analysts typically exclude from their published estimates reduced reported fourth-quarter 2006 net earnings by $28 million, or seven cents per diluted share. These items include non-cash charges, unrealized gains and other items discussed in detail later in this news release.
"From almost every perspective, 2006 was an outstanding year for Devon," commented J. Larry Nichols, chairman and chief executive officer. "We invested over $5 billion in exploration and development projects adding more than 400 million barrels of proved reserves. These investments fortified our North American onshore production base and moved our major development projects toward completion in 2007. In addition, our successful production test in the Gulf of Mexico's Lower Tertiary Trend validated our long-term growth strategy and set the stage to extend Devon's growth trajectory well into the next decade."
Oil and Gas Reserves Climb to Record Levels Capital and Reserve Summary Year Ended December 31, 2006 2005 Drill-bit Capital (in millions) $5,236 $3,952 Reserve Data (MMBoe) Discoveries and extensions 433 400 Revisions other than price (6) 37 Drill-bit and performance reserve additions 427 437
Devon's estimated proved reserves at December 31, 2006, were a record 2,376 million oil-equivalent barrels (Boe). This is a 13 percent increase over year-end 2005 estimated proved reserves. Reserve additions from all sources before price revisions were 533 million Boe, more than double the company's annual oil and gas production of 214 million Boe. During 2006, Devon's reserve life index (proved reserves divided by annual production) increased from 9.4 years to 11.1 years.
Devon added 427 million Boe through successful drilling (discoveries, extensions and performance revisions) in 2006. The company also acquired 106 million Boe in 2006, primarily through the purchase of Chief's Barnett Shale natural gas properties. Revisions, largely related to changes in year-end oil and gas prices, reduced 2006 proved reserves by 50 million Boe.
Proved developed reserves were 1,674 million Boe at December 31, 2006, or 70 percent of proved reserves. Year-end reserves comprised 708 million barrels of crude oil, 8.4 trillion cubic feet of natural gas and 275 million barrels of natural gas liquids.
Active Year Yields Many Exploration and Development Achievements
Devon drilled more than 2,400 wells in 2006, with a success rate of 98 percent. Following are highlights from the year's operations activity.
* Devon dramatically increased its presence in the Barnett Shale in north Texas in 2006 by completing the $2.2 billion acquisition of Chief. The acquired properties include estimated proved reserves of approximately 600 billion cubic feet of natural gas equivalent and leasehold totaling 169,000 net acres with some 2,000 additional drilling locations. * The company's United States onshore properties, including the Barnett Shale and the Groesbeck and Carthage areas in east Texas, showed strong production growth in 2006. Total fourth-quarter production for the U.S. onshore increased seven percent in 2006 compared with 2005. * Devon and its co-owners conducted a successful production test of the deepwater Jack No. 2 well in the Gulf of Mexico's Lower Tertiary Trend. During the test, the Jack No. 2 flowed at a sustained rate of 6,000 barrels of oil per day from approximately 40 percent of the total net pay measured in the well. The successful production test was an important milestone in moving the Jack project toward sanctioning and development. Devon has a 25 percent working interest in the Jack prospect. * Also in the Lower Tertiary Trend, the company increased its working interest in the Cascade project from 25 percent to 50 percent. Devon and equal-partner Petrobras plan to develop Cascade using a floating production, storage and offloading vessel. The partners anticipate first production from Cascade in late 2009. * Elsewhere in the Lower Tertiary Trend, Devon and its co-owners announced an oil discovery on the Kaskida prospect. Kaskida is Devon's fourth discovery in the Lower Tertiary Trend and its first in the Keathley Canyon deepwater lease area. Devon has identified 12 additional exploratory prospects on its acreage in Keathley Canyon. The company believes that Kaskida, in which it has a 20 percent working interest, is the largest of its four Lower Tertiary discoveries to date. * In the fourth quarter of 2006, the company announced a Miocene-aged oil discovery on the Mission Deep prospect in the Gulf of Mexico. The well, in 7,300 feet of water, was drilled to 25,000 feet and encountered more than 250 feet of net oil pay. The company has 15 additional prospects in its deepwater Miocene inventory. Devon has a 50 percent working interest in Mission Deep, which is operated by Anadarko. * At the 100 percent-owned Jackfish thermal heavy oil project in Canada, facilities construction and drilling continued in 2006. Devon expects to commence steam injection at Jackfish in the second quarter of 2007, with full production of 35,000 barrels per day anticipated by the end of 2008. * Construction and fabrication for the 50 million barrel Polvo oil development project in Brazil continued on schedule throughout 2006. Devon expects first production from Polvo in mid-2007. Devon operates Polvo with a 60 percent working interest.
African Operations Designated for Divestiture
In the fourth quarter of 2006, Devon announced its intention to divest its assets and terminate operations in Egypt. In accordance with accounting standards, Devon reclassified the assets, liabilities and results of its operations in Egypt as discontinued operations for all accounting periods presented. Therefore, Devon's annual and quarterly results from continuing operations for all periods presented in this release exclude results attributable to Egypt. Although revenues and expenses for prior periods were reclassified, there was no impact upon previously reported net earnings. Included with the financial information that follows is a table of revenues, expenses and production categories and the amounts reclassified as discontinued operations for each period presented.
Early in the first quarter of 2007, the company announced that it plans to divest its assets and terminate operations in West Africa. Therefore, commencing with reporting for the first quarter of 2007, Devon will also reclassify the assets, liabilities and results of its operations in West Africa as discontinued operations.
Oil, Gas and Liquids Sales Remain Steady
Sales of oil, gas and natural gas liquids increased less than one percent to $8.9 billion in the year ended December 31, 2006, compared with the year ended December 31, 2005. The positive effects of higher realized oil and natural gas liquids prices were largely offset by lower realized natural gas prices and a decline in oil and gas production.
Combined oil, gas and natural gas liquids production averaged 587 thousand Boe per day in 2006. This was four percent less than Devon's 2005 average daily production of 613 thousand Boe per day. This decrease in 2006 production was driven by property divestitures completed during 2005, partially offset by growth in production from retained properties during 2006.
Devon's combined production of oil, gas and natural gas liquids production increased throughout 2006. Fourth-quarter production climbed seven percent from 574 thousand Boe per day in 2005 to 613 thousand Boe per day in 2006.
Marketing and midstream operating profit totaled $448 million in 2006, some $2 million less than Devon's marketing and midstream operating profit for 2005. Marketing and midstream revenues decreased by $100 million while related expenses decreased by $98 million.
Cash Flow Before Balance Sheet Changes Reaches Record Levels
Cash flow before balance sheet changes in 2006 climbed seven percent to a record $6.1 billion. With cash flow, cash on hand and short-term borrowings under the company's commercial paper facility, Devon funded more than $8.0 billion of capital expenditures, including the $2.2 billion property acquisition of Chief, and repurchased $253 million of common stock. The company ended the year with cash and short-term investments of approximately $1.3 billion.
At December 31, 2006, net debt to adjusted capitalization was 24 percent. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.
Items Excluded from Published Earnings Estimates
Devon's reported net earnings include items of income and expense that are typically excluded by securities analysts in their published estimates of the company's financial results. These items and their effects upon reported earnings for the full year and fourth quarter of 2006 were as follows:
* A change in fair value of derivative financial instruments decreased full-year earnings by $178 million pre-tax ($114 million after tax) and decreased fourth-quarter earnings by $97 million pre-tax ($62 million after tax). * An unrealized gain on natural gas derivative instruments increased full-year earnings by $37 million pre-tax ($24 million after tax) and increased fourth-quarter earnings by $32 million pre-tax ($21 million after tax). * A reduction in Canadian statutory income tax rates increased full-year after-tax earnings by $243 million. * A new income-based tax in the state of Texas decreased full-year after- tax earnings by $39 million. * A reduction in the carrying value of oil and gas properties reduced full-year earnings by $152 million pre-tax ($129 million after tax). * The decision to exit Egypt generated financial benefits that increased full-year and fourth-quarter earnings by $5 million pre-tax ($13 million after tax).
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