Devon's 3Q Earnings Increase to $2.1B

Devon reported net earnings of $2.1 billion for the quarter ended September 30, 2010, or $4.81 per common share ($4.79 per diluted common share). This compares with third-quarter 2009 net earnings of $499 million, or $1.13 per common share ($1.12 per diluted common share).

For the nine months ended September 30, 2010, Devon reported net earnings of $4.0 billion, or $9.02 per common share ($8.99 per diluted common share). This compared with a net loss for the nine months ended September 30, 2009, of $3.1 billion, or $7.09 per common share ($7.09 per diluted common share).

Devon's third-quarter 2010 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most significant of the adjusting items was a $1.5 billion gain on the sale of assets in Azerbaijan. Excluding adjusting items, the company earned $628 million, or $1.44 per diluted common share. 

Divestiture Program Advances; Share Repurchase Plan On Track

In November 2009, Devon announced a plan to strategically reposition itself as a focused North American onshore company. During the third quarter of 2010, Devon completed the sale of its assets in Azerbaijan and China. To date, the company has received aggregate pre-tax proceeds of $6.8 billion. The only significant, remaining divestiture package, Devon's assets in Brazil, is under a $3.2 billion contract and is expected to close around year-end 2010. Total proceeds from the divestiture program are expected to exceed $10 billion with after-tax proceeds approximating $8 billion.

On May 5, 2010, the company announced a portion of its divestiture proceeds would be utilized to repurchase $3.5 billion of common stock. As of September 30, 2010, Devon had repurchased 14.7 million shares of its common stock for $936 million. In addition, Devon also directed $1.7 billion of sales proceeds to reduce debt balances and allocated $1.2 billion to capture leasehold across its North American onshore property base, principally in oil and liquids-rich areas.

Oil and Liquids Production Growth Lead Third-Quarter Operating Highlights

Devon drilled 407 wells in the third quarter of 2010 with an overall success rate of 99 percent. The company achieved several notable operational accomplishments in the third-quarter:

Devon's total production for the third quarter of 2010 averaged 613,000 oil-equivalent barrels (Boe) per day. The company's oil and natural gas liquids production totaled 193,000 barrels per day for the quarter. This represents an 11 percent increase in liquids production compared to the third quarter of 2009.

In the Permian Basin, increased oil and liquids-rich activity drove production 18 percent higher than the year-ago quarter to 44,000 barrels per day. The company is currently running 17 operated rigs and has assembled nearly 1 million net acres of leasehold targeting the Avalon Shale, Bone Spring, Wolfberry and a number of other plays.

In Canada, net production from Devon's Jackfish oil sands project averaged 21,300 barrels per day in the third quarter. Jackfish was taken offline for scheduled plant maintenance during the last three weeks of the third quarter and resumed operations on September 30, 2010.

Construction of Devon's second Jackfish oil sands project is now approximately 90 percent complete. The company plans to commence steam injection at Jackfish 2 in the second quarter of 2011, with first production expected by the end of next year.
Devon sanctioned its third Jackfish development project and filed a regulatory application in the third quarter. The company could begin facilities construction at Jackfish 3 by the end of 2011, with plant start-up targeted for 2015.

Production from the company's Cana-Woodford Shale play in western Oklahoma averaged a record 117 million cubic feet of gas equivalent per day during the quarter. This represents an increase in production of 122 percent over the year-ago quarter. Devon expects to commence operations from its Cana gas processing plant by the end of 2010.

In the Granite Wash in the Texas panhandle, Devon drilled three significant horizontal wells in the third quarter. Initial production from these wells averaged 4,290 barrels of oil-equivalent per day, including 605 barrels of oil and 1,450 barrels of natural gas liquids per day. The company has an average working interest of 65 percent in these wells.

Devon increased its net production from the Barnett Shale field in north Texas to an all-time high of 1.2 billion cubic feet of natural gas equivalent per day in the third quarter, including 40,100 barrels per day of liquids production. This represents an eight percent increase in production compared to the third quarter of 2009.

Oil and Gas Revenues Increase

Sales of oil, gas, and natural gas liquids from continuing operations were $1.7 billion in the third quarter of 2010. This was a 14 percent increase compared to the third quarter of 2009. Higher realized natural gas and liquids prices more than offset a decrease in production following the Gulf of Mexico properties that were divested in the second quarter of 2010. Devon's average third-quarter realized price per Boe, including the impact of hedges, increased 23 percent over the year-ago period to $33.96 per barrel.

Oil and gas production from continuing operations averaged 613,000 oil-equivalent barrels per day representing a four percent increase in the company's North American onshore production over the third quarter of 2009. Oil and natural gas liquids production growth from the company's U.S. onshore segment drove the increase.

Repositioning Drives Cost Savings

The efficiencies realized through the strategic repositioning of the company were reflected in Devon's third-quarter results. Expenses in most categories declined both in total and on a unit-of-production basis.

Lease operating expenses (LOE) in the quarter totaled $415 million or $1 million less than the third quarter of 2009. When compared to the second quarter of 2010, LOE declined by $27 million. Devon's divestiture of higher cost Gulf of Mexico properties more than offset the effects of rising oilfield service and supply costs.

Third-quarter general and administrative expenses declined by three percent to $131 million in 2010 compared with 2009.

The company also reduced interest expense in the most recent quarter. Compared with the third quarter of 2009, interest expense decreased eight percent to $83 million due to lower overall debt balances.

Taxes other than income taxes increased $14 million to $95 million in the third quarter of 2010. The year-over-year increase was driven by higher production taxes resulting from increased oil and gas revenues.

Compared with the third quarter of 2009, depreciation, depletion, and amortization expense (DD&A) of oil and gas properties declined by six percent to $397 million. Unit DD&A declined four percent to $7.04 per Boe in the third quarter of 2010.

Income tax expense from continuing operations in the third quarter of 2010 was $270 million or 39 percent of pre-tax earnings. After adjusting for several items generally excluded by securities analysts, Devon's third quarter tax rate totaled 33 percent of pre-tax earnings.

Cash Flow Increases 47 Percent; Divestiture Proceeds Add to Cash on Hand

Cash flow before balance sheet changes totaled $1.8 billion in the third quarter of 2010, a 47 percent increase over the third quarter a year ago. Other sources of cash included $2.0 billion in proceeds from the divestitures in Azerbaijan and China. Devon utilized a portion of this cash flow in the third quarter to fully fund its capital program and to repurchase $441 million of common stock. At September 30, 2010, the company's cash balances reached $4.0 billion, and its net debt to adjusted capitalization ratio declined to eight percent. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.

Divestitures Impact Reported Financial and Operational Results

In accordance with accounting standards, Devon has reclassified the assets, liabilities, and results of its international segment as discontinued operations for all accounting periods presented in this release. Although revenues and expenses for prior periods were reclassified, previously reported net earnings were not impacted. Included with this release is a table of revenues, expenses, production categories, and the amounts reclassified as discontinued operations for each period presented.