Devon reported net earnings of $904 million, or $2.02 per common share, ($2.00 per diluted common share), for the quarter ended June 30, 2007. In comparison, second-quarter 2006 net earnings were $859 million, or $1.94 per common share ($1.92 per diluted common share).
For the six months ended June 30, 2007, the company reported net earnings of $1.6 billion, or $3.48 per common share ($3.44 per diluted common share). For the six months ended June 30, 2006, Devon earned $1.6 billion, or $3.52 per common share ($3.47 per diluted common share).
Securities analysts typically exclude certain items from their published estimates. In aggregate, these items increased Devon's second-quarter 2007 net earnings by $59 million, or 13 cents per diluted share. The adjusting items are discussed in detail later in this news release.
Fifth Consecutive Quarterly Production Increase Exceeds Expectations
Devon increased oil and gas production from continuing operations in the second quarter of 2007 to 56.2 million oil-equivalent barrels (Boe). This is a 16 percent increase compared with second-quarter 2006 production. Devon has increased oil and gas production from retained properties for five consecutive quarters.
Second-quarter production benefited from better than expected performance from several core properties including the Barnett Shale. Also contributing to the production increase were minor favorable royalty adjustments in Canada, the timing of oil sales in Azerbaijan and a delay in scheduled downtime at the Panyu field in China.
Record Barnett Shale Production Leads Operating Highlights
Devon drilled 425 successful wells in the second quarter of 2007 with an overall success rate of 98 percent. Following are highlights of operations conducted in the second quarter of 2007.
Increased Production Fuels 26 Percent Sales Growth
Combined oil, gas and natural gas liquids production from continuing operations averaged 618 thousand Boe per day in the second quarter of 2007. This was a 16 percent increase in daily production from continuing operations compared with the second quarter in 2006. The production growth was concentrated in onshore fields in the United States and in Azerbaijan.
Second-quarter combined daily production from continuing operations increased five percent compared with the first quarter of 2007. Devon now expects full-year 2007 production from continuing operations at the high end of a forecast range of 219 to 221 million Boe. This represents about a 10 percent increase when compared with 2006 annual production.
Sales of oil, natural gas and natural gas liquids reached $2.5 billion in the second quarter of 2007. This was a 26 percent increase compared with the second quarter of 2006. The increase in sales was the result of greater production and increased realized prices for natural gas and natural gas liquids.
The average realized price for natural gas increased 11 percent in the second quarter of 2007 to $6.50 per thousand cubic feet. This compares with $5.85 per thousand cubic feet in the second quarter of 2006. The company's average realized oil price decreased four percent to $60.01 per barrel in the second quarter of 2007 compared with $62.38 per barrel in the year-ago period. Devon's realized natural gas liquids price increased four percent to $35.03 per barrel from $33.83 per barrel in the second quarter of 2006.
Second-quarter 2007 marketing and midstream operating profit was $119 million, compared with $105 million in the second quarter of 2006. The 13 percent increase resulted primarily from an increase in marketed gas volumes and higher natural gas and natural gas liquids prices.
Cost Increases Supported by Greater Production and Revenues
Devon's expenses in all categories are higher in 2007 than in 2006, but generally in line with expectations. The expense increases are being driven by industry-wide upward cost pressure and higher production and activity levels. Higher costs in the second quarter of 2007 were more than offset by higher revenues, leading to an increase in net earnings.
African Results Reported as Discontinued Operations
Devon is in the process of divesting its assets and terminating operations in Egypt and West Africa. In accordance with accounting standards, Devon has reclassified the assets, liabilities and results of its operations in Egypt and West Africa as discontinued operations for all accounting periods presented in this release. 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.
Cash Flow Before Balance Sheet Changes Reaches Record Levels
Cash flow before balance sheet changes reached a record total of $1.8 billion in the second quarter of 2007. The company used cash flow and cash on hand to fund $1.4 billion of capital expenditures during the second quarter.
At June 30, 2007, net debt had been reduced to 20 percent of adjusted capitalization, compared with 26 percent at June 30, 2006. 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 second-quarter 2007 reported earnings were as follows:
-- A change in fair value of financial instruments increased
second-quarter 2007 earnings by $10 million pre-tax ($6 million after
-- An unrealized gain on natural gas derivative instruments increased
second-quarter 2007 earnings by $9 million pre-tax ($6 million after
-- A reduction in the Canadian statutory income tax rate increased
after-tax earnings by $30 million.
-- The decisions to exit Egypt and West Africa generated financial
benefits that increased second-quarter 2007 earnings by $57 million
pre-tax ($30 million after tax).
-- A reduction in the carrying value of assets held for sale in West
Africa reduced second-quarter earnings by $64 million pre-tax ($13
million after tax).
The following table summarizes the effects of these items on second-quarter 2007 earnings and income taxes.
Summary of Items Typically Excluded by Securities Analysts -
Second Quarter 2007
Pretax tax Sheet
Earnings Income Tax Effect Earnings Changes
Effect Current Deferred Total Effect Effect
Change in fair value
instruments $10 - 4 4 6 -
Unrealized gain on
derivatives 9 - 3 3 6 -
Change in Canadian
income tax rate - - (30) (30) 30 -
decision to exit
Africa 57 - 27 27 30 -
carrying value in
West Africa (64) - (51) (51) (13) -
Totals $12 - (47) (47) 59 -
In aggregate, these items increased second-quarter 2007 net earnings by $59 million, or 13 cents per common share (13 cents per diluted share).