Devon's First-quarter Profit Edges Downward
Devon Energy Corp. on Wednesday reported net earnings of $651 million, or $1.46 per common share, ($1.44 per diluted common share), for the quarter ended March 31, 2007. In the first quarter of 2006, Devon earned $700 million, or $1.58 per common share ($1.56 per diluted common share).
The company's reported net earnings increased 12 percent compared with the fourth quarter of 2006. Fourth-quarter 2006 net earnings were $582 million, or $1.31 per common share ($1.29 per diluted common share).
Securities analysts typically exclude certain items from their published estimates. In aggregate, these items were offsetting and had no effect upon Devon's first-quarter 2007 net earnings. The adjusting items are discussed in detail later in this news release.
12 Percent Production Growth Underpinned by Operational Milestones
Oil and gas production from continuing operations increased 12 percent in the first quarter of 2007 to 52.9 million oil-equivalent barrels (Boe). This was Devon's fourth consecutive quarter of production increases from retained properties. The steady growth in production reflects the strength of the company's underlying property base. Further production growth in the remaining quarters of 2007 and in 2008 will be fueled by growth in all the company's geographic regions.
Devon drilled 585 successful wells in the first quarter of 2007. This represents an overall success rate of 98 percent. Following are highlights of operations conducted in the first quarter of 2007.
- Devon's net production in the Barnett Shale field in north Texas averaged a record 730 million cubic feet of gas equivalent per day in the first quarter of 2007. This was a 28 percent increase compared with first-quarter 2006 average production and a six percent increase compared with the fourth quarter of 2006.
- The company drilled its 700th operated horizontal well in the Barnett Shale in the first quarter of 2007. Devon plans to drill more than 385 wells in the Barnett in 2007, and more than 90 percent of the planned wells will be horizontals.
- In the Gulf of Mexico, subsea preparations continued at the Merganser field. Devon expects to produce about 50 million cubic feet of gas per day from Merganser when the deepwater Independence Hub becomes operational in the third quarter of this year.
- Offshore Brazil, the Polvo platform was readied for drilling and commissioning. Devon expects to commence oil production at Polvo in the next few months.
- In Azerbaijan, Devon achieved its first full quarter of increased production following payout of its carried interest in the ACG field. Devon's net production from ACG averaged more than 35,000 barrels of oil per day in the quarter.
Increased Production Boosts Revenues
Combined oil, gas and natural gas liquids production from continuing operations averaged 588 thousand Boe per day in the quarter ended March 31, 2007. This was a 12 percent increase in production from continuing operations over the first quarter of 2006. The production growth was largely driven by the United States onshore and Azerbaijan.
Combined daily production from continuing operations climbed two percent in the first quarter 2007 over the fourth quarter of 2006. Devon expects to produce 219 to 221 million Boe from continuing operations in the full year of 2007, representing a 10 percent increase over 2006.
Sales of oil, natural gas and natural gas liquids increased three percent to $2.1 billion in the first quarter of 2007 compared with the same quarter in 2006. The 12 percent increase in daily oil and gas production more than offset lower realized natural gas and natural gas liquids prices.
Devon's first-quarter 2007 average realized price for natural gas decreased 15 percent to $6.07 per thousand cubic feet compared with $7.16 per thousand cubic feet in the first quarter of 2006. The company's average realized oil price increased one percent to $52.11 per barrel in the first quarter of 2007 compared with $51.70 per barrel in the year-ago period. The realized natural gas liquids price decreased three percent to $29.33 per barrel from $30.18 per barrel in the first quarter of 2006.
Marketing and midstream operating profit was $109 million in the quarter ended March 31, 2007, compared with $120 million in the comparable period in 2006. The quarterly decrease was primarily due to lower natural gas prices and lower third-party throughput volumes.
Rising Expenses Reflect Rising Production
Lease operating expenses (LOE) in the first quarter of 2007 increased to $430 million. On a unit of production basis, first-quarter 2007 LOE was $8.13 per Boe, or 16 percent higher than in the first quarter of 2006. The increase in unit LOE in the 2007 quarter reflects higher oil transportation costs, casualty insurance premiums, increased workover activity and generally higher industry prices for oilfield services and supplies. The increase in oil transportation costs is largely related to higher production volumes in Azerbaijan.
Depreciation, depletion and amortization (DD&A) of oil and gas properties increased 32 percent to $587 million in the first quarter of 2007. Unit DD&A increased 18 percent to $11.09 per Boe.
First-quarter general and administrative expenses (G&A) increased 33 percent to $119 million in 2007 compared with 2006. Higher employee-related costs were the largest contributor to the quarterly increase in G&A. Devon has increased the size of its technical workforce in response to expanding levels of exploration and development activity and opportunities.
Interest expense for the first quarter of 2007 increased nine percent to $110 million. The increase reflects higher commercial paper balances offset in part by an increase in capitalized interest and lower long-term debt balances.
African Divestitures Progressing; Reported as Discontinued Operations
In the fourth quarter of 2006, Devon announced its intention to divest its assets and terminate operations in Egypt. In April 2007, Devon entered into an agreement to sell its Egyptian assets for $375 million. The sale is expected to close in the third quarter of 2007.
In the first quarter of 2007, the company announced its intentions to divest its remaining assets in Africa and terminate African operations. Data rooms are now open in Houston and London for divestiture of the West African assets, and bids are expected in the third quarter.
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.
Balance Sheet Remains Strong
Cash flow before balance sheet changes totaled $1.5 billion in the first quarter of 2007. The company used cash flow and cash on hand to fund $1.3 billion of exploration and development expenditures and $300 million of other capital expenditures during the quarter.
Devon also repaid $348 million of commercial paper during the first quarter of 2007 utilizing cash and short term investments. The company's net debt to adjusted capitalization was approximately 23 percent at March 31, 2007.
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 reported earnings for the first quarter of 2007 were as follows:
- A change in fair value of financial instruments decreased first- quarter earnings by $1 million pre-tax (no effect after tax).
- An unrealized loss on natural gas derivative instruments decreased first-quarter 2007 earnings by $32 million pre-tax ($21 million after tax).
- The decisions to exit Egypt and West Africa generated financial benefits that increased first-quarter 2007 earnings by $40 million pre-tax ($21 million after tax).
Devon Energy Corp. is an Oklahoma City-based independent energy company engaged in oil and gas exploration and production. Devon is one of the world's leading independent oil and gas producers and is included in the S&P 500 Index.
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