Devon 3Q Net Drops 50% in 2011
Devon reported net earnings of $1.0 billion for the quarter ended September 30, 2011, or $2.51 per common share ($2.50 per diluted share). This compares with third-quarter 2010 net earnings of $2.1 billion, or $4.81 per common share ($4.79 per diluted share). The company's third-quarter 2010 earnings were enhanced by a one-time gain of $1.5 billion resulting from the divestiture of assets in Azerbaijan.
Earnings Increased to $1.54 per Share Excluding Items Not Estimated by Analysts
Devon's third-quarter 2011 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most significant of the adjusting items was an unrealized gain on oil, gas and natural gas liquids derivatives of $642 million before-tax ($415 million after-tax). Excluding these adjusting items, the company earned $638 million or $1.54 per diluted share in the third quarter. The adjusting items are discussed in more detail later in this news release.
Strong Liquids Production Growth and Higher Prices Drive Sales
Devon continued to deliver strong oil and natural gas liquids production growth in the third quarter of 2011. In aggregate, liquids production averaged 226,000 barrels per day. This represents a 17 percent increase in liquids production compared to the third quarter of 2010.
Total production of oil, natural gas and natural gas liquids averaged 661,000 oil-equivalent barrels (Boe) per day in the third quarter of 2011, an eight percent increase over the year-ago quarter.
Higher overall production and improved oil and natural gas liquids prices drove sales of oil, natural gas and natural gas liquids to $2.1 billion in the third quarter of 2011. This represents a 25 percent increase over the year-ago quarter.
Devon's marketing and midstream operating profit rose 11 percent over the third quarter of 2010, to $138 million. The increase was attributable to higher natural gas liquids prices and production.
Oil and Natural Gas Liquids Production Growth Leads Operating Highlights
- In the Permian Basin, Devon increased oil and natural gas liquids production 17 percent compared to the third quarter of 2010. Liquids production accounted for 75 percent of the 50,000 oil-equivalent barrels per day produced in the Permian Basin during the third quarter.
- At the Bone Spring play in the Permian Basin, the company added 11 new wells to production in the third quarter of 2011. Initial daily production from the 11 wells averaged 540 Boe per day per well.
- In Canada, average net production from Devon's 100 percent-owned Jackfish 1 and Jackfish 2 projects reached a record 36,000 barrels per day during the third quarter. Devon's net production from its Jackfish 2 oil sands project continued to ramp-up ahead of schedule.
- Also in Canada, Devon completed 19 exploration wells targeting oil and liquids-rich opportunities across its more than 4 million net acres in the Western Canadian Sedimentary Basin. The company tied in 10 of these wells to production in the third quarter. This activity was highlighted by results in the Ferrier area where the company commenced production on three Cardium wells with initial production averaging 770 Boe per day per well.
- Third-quarter production from the Cana-Woodford Shale increased 71 percent compared to the year-ago quarter. Net production averaged a record 200 million cubic feet of natural gas equivalent per day in the quarter, including 8,100 barrels per day of liquids. The company's Cana-Woodford gas processing facility remains on schedule to be fully operational in the fourth quarter.
- The company's Barnett Shale production totaled 1.3 billion cubic feet of natural gas equivalent per day in the third quarter, an eight percent increase over the third-quarter 2010. Liquids production in the Barnett Shale averaged 46,000 barrels per day, a 15 percent year-over-year increase.
- Devon brought 10 operated Granite Wash wells online in the third quarter. Initial production from these wells averaged 1,250 barrels of oil-equivalent per day, including 180 barrels of oil and 405 barrels of natural gas liquids per day. The company has an average working interest of 86 percent in these wells.
Balance Sheet and Liquidity Remain Strong; Share Repurchase Plan on Schedule
Devon generated $1.9 billion of cash flow before balance sheet changes in the third quarter of 2011, a six percent increase over the year-ago quarter. The company comfortably funded its total capital program during the third quarter and returned nearly $800 million to its shareholders in the form of stock buybacks and dividend payments.
In May 2010, Devon commenced a program to repurchase $3.5 billion of its common stock. During the third-quarter 2011 the company repurchased $697 million of common stock. As of September 30, 2011, the company had repurchased $3.2 billion of stock and expects to complete the stock repurchase program during the fourth quarter of 2011.
Devon exited the third quarter of 2011 with cash and short-term investments of $6.8 billion and a net debt to adjusted capitalization ratio of 10 percent. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.
Expenses in Line with Forecasts
The company's lease operating expenses (LOE) totaled $475 million in the third quarter. On a unit of production basis, LOE increased six percent compared to the third quarter of 2010. The increase in LOE reflects higher industry costs and the impact of a stronger Canadian dollar.
Taxes other than income were $108 million in the third quarter of 2011. The year-over-year increase of 14 percent was driven by higher production taxes resulting from the significant increase in oil and natural gas liquids revenues.
Third-quarter 2011 general and administrative expenses (G&A) totaled $138 million, or $2.27 per Boe. G&A per Boe declined three percent compared to the third quarter of 2010.
Total depreciation, depletion and amortization expenses (DD&A) were $566 million in the third quarter of 2011. Compared to the year-ago quarter, unit DD&A increased 14 percent, to $9.32 per Boe.
Interest expense for the third quarter was $104 million, a $21 million increase over the third quarter of 2010. Higher average debt balances drove the increase.
Third-quarter income tax expense from continuing operations totaled $498 million, or 32 percent of pre-tax earnings. After adjusting for items generally excluded by securities analysts, Devon's third quarter tax rate was 35 percent of pre-tax earnings from continuing operations.
Divestitures Impact Reported Financial and Operational Results
In accordance with accounting standards, Devon has classified the assets, liabilities, and results of its international segment as discontinued operations for all accounting periods presented in this release. Included with this release is a table of revenues, expenses, production by category, and the amounts classified as discontinued operations for each period presented.
Items Typically Excluded from Analyst's 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 third-quarter 2011 are described below:
Items affecting continuing operations:
- A change in the fair value of oil, gas and NGL derivative instruments increased third-quarter earnings by $642 million pre-tax ($415 million after tax).
- Income tax accrual adjustments increased third-quarter earnings by $42 million.
- The reversal of previously accrued restructuring costs increased third-quarter earnings by $3 million pre-tax ($2 million after tax).
- A change in fair value of interest-rate and other financial instruments decreased third-quarter earnings by $92 million pre-tax ($59 million after tax).
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