Devon Energy Reports Record Earnings
Devon Energy Corporation (NYSE: DVN) reported record net earnings and earnings per share for the year ended December 31, 2005. Net earnings climbed 34 percent in 2005 to $2.9 billion while 2005 earnings per share climbed more that 40 percent to $6.38 per common share ($6.26 per diluted common share). Devon's 2004 net earnings were $2.2 billion, or $4.51 per common share ($4.38 per diluted common share).
For the quarter ended December 31, 2005, Devon reported net earnings of $970 million, or $2.18 per common share ($2.14 per diluted common share). The company earned $673 million or $1.38 per common share ($1.35 per diluted common share) in the fourth quarter of 2004. Fourth quarter 2005 net earnings of $970 million were reduced by $85 million, or 19 cents per diluted share, for items securities analyst typically exclude from their published estimates. The excluded items are described in detail in this news release.
"Devon's record 2005 earnings were accompanied by excellent drill-bit results," commented J. Larry Nichols, chairman and chief executive officer. "We added 439 million equivalent barrels of reserves through drilling and performance revisions, or almost double our 2005 production. These reserve additions were achieved with just over $4 billion of related capital. In 2006 we expect to increase capital and to deliver another year of strong reserve additions at very competitive unit costs."
Capital and Reserve Summary Year Ended December 31, 2005 2004 Drill-bit Capital (in millions) $ 4,013 $ 2,805 Reserve Data (MMBoe) Discoveries and extensions 401 268 Revisions other than price 38 45 Drill-bit and performance reserve additions 439 313 2005 Drilling Activity at Record Levels
Devon drilled 254 successful exploratory wells and 2,060 successful development wells in 2005. This activity resulted in many notable operational achievements in 2005:
- In the Barnett Shale in North Texas, Devon began producing its 2,000th operated well and also drilled its 300th horizontal well. Cumulative gross production from Devon-operated wells in the field surpassed one trillion cubic feet of natural gas in 2005. Devon is by far the largest producer in the Barnett Shale, the largest natural gas field in Texas.
- Devon began drilling and construction activities on its 100 percent- owned Jackfish oil sands project in eastern Alberta. Jackfish will utilize steam assisted gravity drainage technology to achieve planned production of 35,000 barrels per day of oil in 2008. Jackfish is an estimated 300 million barrel resource. The company is considering expansions onto adjacent acreage that could at least double the size of the project.
- Devon drilled 57 wells with 100 percent success in the Iron River area of eastern Alberta, Canada. During 2005, Devon acquired 165,000 net acres at Iron River adjacent to existing production in the company's Manatokan field. Based upon the success to date, Devon expects to drill 800 wells at Iron River over the next four years increasing field production to about 30,000 barrels of oil per day by 2010.
- The company drilled successful delineation wells on two important deepwater Gulf of Mexico prospects in 2005. The follow-up wells to the Cascade and Jack discoveries in the lower Tertiary were drilled to better define reservoir size and characteristics. Devon and its partners expect to commence an extended production test of the Jack prospect later this month. Devon has a 25 percent working interest in Jack.
- Devon sanctioned development and gained regulatory approval for its Polvo offshore oil project in Brazil's Campos Basin. During 2005 Devon also began construction of the Polvo facilities with capacity to handle 50,000 barrels of oil per day. First production is expected in the second half of 2007. Devon is the operator of Polvo and owns 60 percent of the working interest.
- Offshore Equatorial Guinea, Devon drilled two discoveries in its high impact West African exploration program. The company plans to conduct additional seismic evaluation and drilling on the discovery blocks in 2006.
Sales of oil, gas and natural gas liquids increased 20 percent to $8.9 billion in the year ended December 31, 2005, compared with the year ended December 31, 2004. Higher realized oil, gas and natural gas liquids prices more than offset a decrease in production attributable to properties divested in the first half of 2005.
Combined oil, gas and natural gas liquids production averaged 619 thousand barrels of oil equivalent (Boe) per day in 2005. This was 10 percent less than Devon's 2004 average daily production of 685 thousand Boe per day. The decrease in 2005 production was entirely attributable to property divestitures in the first half of 2005 and the impact of hurricanes in the Gulf of Mexico.
Devon's average realized natural gas price increased 32 percent to $6.99 per thousand cubic feet in 2005, compared with $5.32 per thousand cubic feet in 2004. The company's 2005 average realized oil price increased 36 percent to $38.44 per barrel compared with $28.18 per barrel in 2004. The average realized price for natural gas liquids in 2005 was $28.96 per barrel, a 26 percent increase over the $23.04 per barrel realized in 2004.
Marketing and midstream margins climbed 25 percent in 2005 to a record $450 million. Marketing and midstream revenues increased $91 million to almost $1.8 billion. Related expenses increased by only $3 million, reflecting refocused activity and the divestiture of some midstream assets.
Oil and Gas Reserves Climb to Record Levels
Devon ended 2005 with estimated proved reserves of 2,112 million Boe, setting an all-time record for proved reserves. The company increased proved reserves during 2005 in spite of producing 226 million Boe and divesting non- core oil and gas properties with reserves of 183 million Boe.
In total, through drilling, extensions and revisions, the company added 439 million Boe, or nearly double Devon's 2005 production. The 2005 drill-bit capital expenditures associated with these reserve additions totaled $4 billion, including $259 million of capitalized interest and administrative expenses. Reserves added through proved property acquisitions were just 4 million Boe, or less than one percent of total additions.
Devon ended 2005 with 1,599 million Boe, or 76 percent of proved reserves, classified as proved developed. Year-end reserves comprised 649 million barrels of crude oil, 7.3 trillion cubic feet of natural gas and 246 million barrels of natural gas liquids.
Cash Flow Before Balance Sheet Changes Increases 16 percent to $5.7 Billion; Share Repurchases and Debt Reduction Total $3.6 Billion
Cash flow before balance sheet changes in 2005 reached $5.7 billion, a 16 percent increase over 2004. During 2005 the company divested non-core oil and gas properties in the United States and Canada generating almost $2 billion of additional cash. These sources of cash allowed Devon to fund over $4 billion in capital expenditures, repurchase $2.3 billion of common stock, retire $1.3 billion of debt and end the year with cash and short-term investments of approximately $2.3 billion.
At December 31, 2005, net debt to adjusted capitalization was just 19 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 for the company's financial results. These items and their effects upon full year and fourth quarter 2005 reported earnings were as follows:
- A change in fair value of derivative financial instruments decreased full year earnings by $94 million pre-tax ($60 million after tax) and increased fourth quarter earnings by $74 million pre-tax ($47 million after tax). Of the full year pre-tax amount, $54 million was related to the Chevron exchangeable debentures and the remainder was primarily related to oil and gas hedges that no longer qualify for hedge accounting. Of the fourth quarter pre-tax amount, $66 million was related to the Chevron exchangeable debentures and the remainder was primarily related to oil and gas hedges that no longer qualify for hedge accounting.
- Effects of changes in foreign currency exchange rates increased full year 2005 earnings by $2 million pre-tax ($3 million after tax) and decreased fourth quarter earnings by $2 million pre-tax ($2 million after tax).
- Additional interest expense attributable to redemption of zero coupon convertible debentures and early redemption of 6.75 percent senior notes decreased full year earnings by $81 million pre-tax ($53 million after tax).
- A loss on oil hedges associated with divestiture properties that no longer qualify for hedge accounting decreased full year earnings by $55 million pre-tax ($36 million after tax).
- Current tax expense resulting from the repatriation of foreign earnings under The American Jobs Creation Act of 2004 decreased full year earnings by $28 million.
- A reduction in the carrying value of oil and gas properties reduced full year and fourth quarter earnings by $212 million pre-tax ($161 million after tax).
- Tax benefits related to property divestitures increased full year and fourth quarter net earnings by $17 million.
- Tax benefits resulting from changes in Canadian tax law increased full year and fourth quarter net earnings by $14 million.
- A gain on the sale of marketing and midstream assets increased full year earnings by $150 million pre-tax ($97 million after tax).
The following tables summarize the full year and fourth quarter effects of these items on 2005 earnings and income taxes. Included in the tables are the tax effects resulting from an income tax accrual adjustment and those oil and gas property divestitures that did not affect net earnings.
Summary of Items Typically Excluded by Securities Analysts - Full Year 2005 (in millions) Cash Flow Before Balance Pretax After-tax Sheet Earnings Income Tax Effect Earnings Changes Effect Current Deferred Total Effect Effect Change in fair value of financial instruments $ (94) (14) (20) (34) (60) (25) Foreign exchange effect 2 --- (1) (1) 3 --- Additional interest costs on debt retirement (81) (28) --- (28) (53) (47) Loss on hedges for divestiture properties (55) (19) --- (19) (36) (36) Repatriation of Canadian cash --- 28 --- 28 (28) (28) Change in Canadian tax law --- --- (14) (14) 14 --- Reduction in the carrying value of properties (212) --- (51) (51) (161) --- Income tax accrual adjustment --- (76) 76 --- --- 76 Gain on sale of certain non-oil and gas assets 150 53 --- 53 97 (53) Effects of oil and gas property divestitures --- 182 (199) (17) 17 (182) Totals $(290) 126 (209) (83) (207) (295)
In aggregate, these items decreased full year 2005 net earnings by $207 million, or 45 cents per common share (44 cents per diluted share). These items and their associated tax effects decreased full year 2005 cash flow before balance sheet changes by $295 million.
Summary of Items Typically Excluded by Securities Analysts - Fourth Quarter 2005 (in millions) Cash Flow Before Balance Pretax After-tax Sheet Earnings Income Tax Effect Earnings Changes Effect Current Deferred Total Effect Effect Change in fair value of financial instruments $74 4 23 27 47 (18) Foreign exchange effect (2) --- --- --- (2) --- Change in Canadian tax law --- --- (14) (14) 14 --- Reduction in the carrying value of properties (212) --- (51) (51) (161) --- Effects of oil and gas property divestitures --- 49 (66) (17) 17 (49) Totals $(140) 53 (108) (55) (85) (67)
In aggregate, these items decreased fourth quarter 2005 net earnings by
$85 million, or 20 cents per common share (19 cents per diluted share). These
items and their associated tax effects decreased fourth quarter 2005 cash flow
before balance sheet changes by $67 million.
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