Devon Earns $859 Million in Second Quarter
Devon Energy Corp. on Wednesday reported net earnings for the quarter ended June 30, 2006, of $859 million, or $1.94 per common share ($1.92 per diluted common share). These results compare with second-quarter 2005 net earnings of $653 million, or $1.40 per common share ($1.38 per diluted common share). Earnings per share increased 39 percent compared with the second quarter of 2005.
For the six months ended June 30, 2006, Devon's net earnings were $1.6 billion, or $3.52 per common share ($3.47 per diluted common share). Net earnings for the six months ended June 30, 2005, were $1.2 billion, or $2.57 per common share ($2.53 per diluted common share).
Second-quarter 2006 reported net earnings of $859 million benefited from certain items securities analysts typically exclude from their published estimates. Excluding these items, Devon earned $701 million, or $1.57 per diluted share. The excluded items are described in detail in the section titled "Items Excluded from Published Earnings Estimates."
"The strength of Devon's property base and drilling programs is reflected in our production growth. Second-quarter oil and gas production was up two percent over the first quarter and we expect production growth to accelerate in the second half of the year," commented J. Larry Nichols, chairman and chief executive officer.
Acquisition of Chief Properties Enhances Devon's Lead in Barnett Shale
Devon completed its acquisition of Chief Holdings LLC on June 29, 2006, increasing its position in the Barnett Shale in north Texas. With net production of approximately 650 million cubic feet of gas equivalent per day, Devon produces almost half of the total Barnett Shale production. Following the acquisition, Devon has more than 2,500 producing wells and 733,000 net acres in the Barnett Shale.
"Acquisition of the Chief acreage gives us 2,000 additional drilling locations in the Barnett Shale," said Stephen J. Hadden, senior vice president, exploration and production. "We plan to have 30 rigs drilling in the Barnett Shale by year-end and to drive Devon's share of Barnett production to one billion cubic feet of gas equivalent per day by 2009."
Second-Quarter Highlights Include Gulf of Mexico and International Operations
Devon drilled 546 wells in the second quarter of 2006 with a 97 percent overall success rate. The following are second-quarter operating highlights:
- Devon and its partners completed the production test of the deepwater Jack well in the Gulf of Mexico's lower Tertiary trend in June. The test results are currently being evaluated and will be announced later this year. This test is an important step in Devon's evaluation of its extensive inventory of discoveries and prospects in the lower Tertiary trend.
- In May, the company restored production from the deepwater Red Hawk field in the Gulf of Mexico that was suspended by the 2005 hurricanes. Red Hawk produces about 10,000 oil equivalent barrels (Boe) per day net to Devon. In July, Devon restored another 6,000 Boe per day in the Eugene Island and West Cameron areas of the shallow water shelf. About 90 percent of the production interrupted by the hurricanes has now been restored.
- Construction and fabrication for the 50 million barrel Polvo oil development project in Brazil continues on schedule. The drilling deck was lifted into place and initial dry-dock work on the floating production, storage and offloading vessel was completed in June. Devon expects first oil production from Polvo in mid-2007.
- The inaugural shipment of crude oil from the Baku-Tbilisi-Ceyhan pipeline marked an important milestone for the 5.5 billion barrel ACG field in Azerbaijan in June. Devon's average daily oil production from ACG is expected to increase by approximately 30,000 barrels per day within the next six months.
Pre-Tax Earnings Climb on Higher Revenues
Sales of oil, gas and natural gas liquids increased seven percent to $2.2 billion in the second quarter of 2006. The increase in revenues more than exceeded combined expense increases, leading to higher earnings before income taxes.
Substantially higher realized prices for oil and natural gas liquids led to the increase in sales revenues. Devon's second-quarter 2006 average realized oil price increased 71 percent to $63.69 per barrel compared with $37.28 per barrel in the second quarter of 2005. The higher realized oil price is attributable to a global increase in crude oil prices and to the expiration of Devon's oil price hedges at December 31, 2005. None of Devon's oil production is hedged in 2006. The average realized price for natural gas liquids increased 30 percent to $33.83 per barrel in the second quarter of 2006 compared with $25.99 per barrel in the same quarter in 2005.
Conversely, the realized price of natural gas decreased by four percent in the second quarter of 2006 to $5.83 per thousand cubic feet. This compares with a realized price of $6.09 per thousand cubic feet in the second quarter of 2005.
Devon's combined oil, gas and natural gas liquids production averaged 578 thousand Boe per day in the second quarter of 2006. This compares with second quarter 2005 average production of 641 thousand Boe per day. The decrease in 2006 production was primarily attributable to property divestitures and the continued impact of hurricanes experienced in the second half of 2005. Devon has now restored about 90 percent of the production suspended by the 2005 hurricanes. Second-quarter 2006 daily production was approximately two percent greater than first-quarter 2006 daily production.
Marketing and midstream operating profit increased 17 percent in the second quarter of 2006 to $109 million. Marketing and midstream revenues increased two percent to $397 million. Related expenses decreased three percent to $288 million.
Lease operating expenses increased seven percent to $362 million in the second quarter of 2006. Higher ad valorem taxes, rising oil field service and supply costs and the continued strengthening of the Canadian dollar all contributed to the increase.
Production taxes increased 15 percent to $86 million in the second quarter of 2006. Higher production taxes resulted primarily from higher oil and gas revenues.
Depreciation, depletion and amortization (DD&A) of oil and gas properties increased 12 percent to $556 million in the second quarter of 2006 compared with the same quarter in 2005. Unit DD&A increased 25 percent to $10.56 per Boe compared with the second quarter of 2005.
Second-quarter general and administrative (G&A) expenses increased 16 percent to $90 million compared with the second quarter of 2005. Beginning in 2006, accounting rules require that stock option costs be expensed, contributing to the increase in G&A expenses.
Interest expense for the second quarter of 2006 decreased 31 percent to $102 million. Interest expense of $146 million in the second quarter of 2005 included $30 million attributable to the company's early redemption of zero coupon convertible debentures.
Lower Canadian Rate Decreases Income Tax Expense
Income tax expense was $185 million in the second quarter of 2006, or 18 percent of pre-tax earnings. Current income tax expense decreased 28 percent compared with the second quarter of 2005. A reduction in Canadian statutory income tax rates resulted in a $243 million reduction in deferred taxes. This was offset in part by a $39 million deferred tax increase attributable to a new income-based tax in the state of Texas.
Cash Flow Before Balance Sheet Changes Increases 19 Percent
Cash flow before balance sheet changes increased 19 percent to $1.5 billion in the second quarter of 2006. This was sufficient to fully fund Devon's second-quarter 2006 drilling budget of $1.1 billion and other capital expenditures. The $2.2 billion Chief acquisition was funded with cash on hand and debt.
At June 30, 2006, cash and short-term investments were $1.4 billion. Net debt at June 30, 2006, was 26 percent of adjusted capitalization, compared with 23 percent of adjusted capitalization at June 30, 2005. 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 second- quarter 2006 reported earnings were as follows:
- A change in fair value of derivative financial instruments decreased earnings by $47 million pre-tax ($30 million after tax).
- A reduction in the carrying value of oil and gas properties reduced earnings by $16 million before and after income taxes.
- A reduction in Canadian statutory income tax rates increased after-tax earnings by $243 million.
- A new income-based tax in the state of Texas decreased after-tax earnings by $39 million.
In aggregate, these items increased second-quarter 2006 net earnings by $158 million, or 35 cents per common share (35 cents per diluted share).
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