Devon Energy Earns $1.3B, Cites 44% Increase in Second Quarter
Devon Energy Corporation has reported net earnings for the quarter ended June 30, 2008, of $1.3 billion, or $2.91 per common share ($2.88 per diluted common share). This is a 44 percent increase compared with Devon's second-quarter 2007 net earnings of $904 million, or $2.02 per common share ($2.00 per diluted common share).
For the six months ended June 30, 2008, Devon reported net earnings of $2.1 billion, or $4.59 per common share ($4.55 per diluted common share). This compares with net earnings for the six months ended June 30, 2007, of $1.6 billion, or $3.48 per common share ($3.44 per diluted common share).
Earnings $3.39 per Share Excluding Items Not Estimated by Analysts
Second-quarter 2008 reported net earnings of $1.3 billion were affected by certain items securities analysts typically exclude from their published estimates. Excluding these adjusting items, Devon earned $1.5 billion or $3.39 per diluted common share.
The most significant of the adjusting items impacting continuing operations was a non-cash, unrealized loss on oil and natural gas derivative instruments of $912 million pre-tax ($584 million after tax). Also impacting continuing operations was $312 million of income tax expense attributable to the repatriation of cash from outside the United States and to a related income tax policy election.
The most significant adjusting item impacting discontinued operations was a $736 million pre-tax gain ($647 million after tax) on divestitures of assets in Africa. These and other adjusting items are discussed in more detail later in this news release.
Oil and Gas Sales Increase by 65 Percent
Sales of oil, natural gas and natural gas liquids from continuing operations increased 65 percent to $4 billion in the second quarter of 2008. The combined effects of increased oil and gas production and higher oil, natural gas and natural gas liquids prices led to the increase in sales.
Combined oil, natural gas and natural gas liquids production from continuing operations reached 58.5 million oil-equivalent barrels (Boe) in the second quarter of 2008. This was a four percent increase compared with the second quarter of 2007. The company produced 643 thousand Boe per day in the second quarter of 2008. This compares with production of 618 thousand Boe per day in the second quarter of 2007 and 640 thousand Boe per day in the first quarter of 2008. Devon has increased oil and natural gas production from retained properties for nine consecutive quarters.
U.S. Onshore and Canadian Operations Lead Quarterly Highlights
Devon drilled 494 wells in the second quarter of 2008, with an overall success rate of 98 percent. Following are recent operating highlights:
-- Devon's second-quarter net exit-rate production from the Barnett Shale field in north Texas reached almost 1.1 billion cubic feet of natural gas equivalent per day. Devon is the largest producer in the field and brought 189 new Barnett Shale wells on line in the second quarter of 2008.
-- Devon plans to drill more than 650 wells in the Barnett Shale in 2008 and has set a net production target of 1.2 billion cubic feet of natural gas equivalent per day by year-end.
-- In east Texas and northwest Louisiana, Devon added to its lease position in the Haynesville Shale play, bringing its total Haynesville lease holdings to 483,000 net acres.
-- In the Groesbeck area in east Texas, Devon commenced production from three high-rate gas wells in the second quarter. Devon has 100-percent working interests in all three wells, with initial production rates averaging 16.2 million cubic feet of natural gas per day from each well.
-- The company drilled two long-lateral horizontal wells in the Woodford Shale in Coal County, Oklahoma, in the second quarter with excellent results. Initial production rates from the two wells were 7.1 million and 6.7 million cubic feet of natural gas per day. Devon's working interests in the two wells are 66 percent and 73 percent, respectively.
-- In Canada, Devon's wholly-owned Jackfish oil sands project reached a cumulative production milestone of one million barrels of oil in the second quarter of 2008. Second-quarter exit-rate production was about 14,500 barrels per day. Production is expected to reach plant capacity of 35,000 barrels per day in the first half of 2009.
-- Also in Canada in the second quarter, Devon increased its lease position in the Horn River Shale play in British Columbia to more than 100,000 net acres. The company is now planning its upcoming winter drilling program for the Horn River area.
African Divestitures Substantially Complete
Devon has now completed substantially all of its planned divestitures in Africa. In May, the company closed the $205.5 million sale of its assets in Gabon. In June, Devon closed the $2.2 billion sale of its assets in Equatorial Guinea. In aggregate, the sale prices of the combined African divestures exceeded $3 billion before taxes. The company expects to close the remaining approximately $250 million in transactions later in 2008.
In accordance with U.S. accounting standards, Devon has classified the assets, liabilities and results of its operations in Africa as discontinued operations for all accounting periods presented in this release. Included with this release is a table of revenues, expenses and production categories and amounts reclassified as discontinued operations for each period presented.
Marketing and Midstream Profit Rises with Product Prices
Marketing and midstream operating profit increased 71 percent to $204 million in the second quarter of 2008. For comparison, marketing and midstream operating profit was $119 million in the second quarter of 2007. The increase was attributable to higher throughput and higher natural gas and natural gas liquids prices.
Expenses Track Increased Production and Activity Levels
Expenses in most categories were generally in line with expectations in the second quarter of 2008. However, second-quarter general and administrative expenses (G&A) exceeded previous estimates at $180 million. This compares with $113 million in the second quarter of 2007. Higher employee-related costs were the largest contributor to the year-over-year increase. In addition, $27 million of the increase was a one-time charge attributable to a change in the company's vesting policy for stock grants. Devon believes this modified benefits policy better reflects industry practices. Devon has also increased the size of its workforce to support expanding levels of investment in long cycle-time exploration and development projects.
Interest expense decreased in the second quarter of 2008 to $90 million, compared with interest expense of $107 million in the second quarter of 2007. The decrease reflects a decline in outstanding debt as the company repaid all of its commercial paper and credit facility balances during the second quarter of 2008.
Repatriation of International Cash Increases Current Income Tax Rate
Current income tax expense on earnings from continuing operations was $414 million in the second quarter of 2008. This amount included $295 million of U.S. income tax attributable to the repatriation of cash from outside the United States and related income tax policy elections. During the second quarter, the proceeds from Devon's African divestitures combined with cash repatriated from foreign subsidiaries totaled approximately $3 billion.
Record Cash Flow and Debt Repayments Further Strengthen Balance Sheet
Cash flow before balance sheet changes reached a record $2.7 billion in the second quarter of 2008. This was a 48 percent increase compared with the second quarter of 2007. The company funded capital expenditures of $2 billion, including $1.7 billion of exploration and development capital, in the quarter. This resulted in free cash flow of approximately $700 million during the second quarter.
In addition to free cash flow of $700 million, Devon also received $2.4 billion of pre-tax proceeds from its African divestitures in the second quarter. Utilizing free cash flow, proceeds of the divestitures and cash on hand, the company deployed $2.6 billion to retire commercial paper and other short-term borrowings and to repurchase over two million shares of its common stock. In the first seven months of 2008, Devon repurchased 5.7 million shares of its common stock at a cost of $590 million.
Devon also redeemed its $150 million 6.49 percent Series A Cumulative Preferred Stock in the second quarter. Cash and short-term investments were $1.8 billion at June 30, 2008.
Net debt as a percentage of adjusted capitalization decreased to 11 percent at June 30, 2008. Reconciliations of cash flow before balance sheet changes, free cash flow, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.
Accounting for Derivative Instruments
Devon accounts for derivative instruments using mark-to-market accounting. As a result, for each reporting period the company recognizes in earnings the unrealized changes in the fair values of its derivative instruments. A second-quarter unrealized loss on derivative instruments was the result of rising oil and natural gas prices during the quarter. The company could record unrealized gains or losses on oil and natural gas derivative instruments in subsequent quarters depending upon the direction of commodity prices.
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 second quarter of 2008 were as follows:
Items affecting continuing operations
-- A change in fair value of non-oil and gas derivative financial instruments increased second-quarter earnings by $40 million pre-tax ($25 million after tax).
-- An unrealized loss on oil and natural gas derivative financial instruments decreased second-quarter earnings by $912 million pre-tax ($584 million after tax).
-- Income tax expense related to the repatriation of cash from outside the United States and a related change in an income tax election decreased second-quarter after-tax earnings by $312 million.
-- A modification to the company's stock compensation vesting policy decreased second-quarter earnings by $27 million pre-tax ($17 million after tax).
Items affecting discontinued operations
-- Divestitures of assets in Africa resulted in a second-quarter 2008 gain of $736 million pre-tax ($647 million after tax).
-- The decisions to exit Africa generated other financial benefits that increased second-quarter earnings by $21 million pre-tax ($11 million after tax).
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