Devon Reports 2008 Financial and Reserves Results
Devon Energy Corporation reported a net loss of $2.1 billion, or $4.85 per common share ($4.85 per diluted common share), for the year ended December 31, 2008. Increased natural gas and liquids production and sales were more than offset by a $7.1 billion non-cash, after-tax reduction in the carrying value of oil and gas properties, which is explained in detail below. In the year ended December 31, 2007, Devon earned $3.6 billion, or $8.08 per common share ($8.00 per diluted common share).
For the quarter ended December 31, 2008, Devon reported a net loss of $6.8 billion, or $15.42 per common share ($15.42 per diluted common share), also reflecting the $7.1 billion non-cash charge. In the fourth quarter of 2007, the company reported net earnings of $1.3 billion or, $2.96 per common share ($2.92 per diluted common share).
2008 Earnings $9.91 per Share Excluding Items Not Estimated by Analysts;Non-Cash Ceiling Adjustment Triggered by Declining Prices
Devon's full-year and fourth-quarter 2008 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most significant of these items was a $7.1 billion after-tax reduction in the carrying value of oil and gas properties. This was the result of a non-cash, full-cost ceiling adjustment in the fourth quarter of 2008. This charge resulted from application of the ceiling test as prescribed by the Securities and Exchange Commission (SEC) for companies that follow the full-cost method of accounting.
Under the full-cost method of accounting, a company's net book value of its oil and gas properties, less related deferred income taxes, may not exceed a calculated "ceiling." The test is performed separately for each country in which the company operates. The ceiling is the estimated after-tax stream of future net revenues from proved oil and gas properties, discounted at 10 percent per year, using year-end costs and prices held flat plus the cost of unevaluated properties. Any excess is written off as a non-cash expense. The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the ceiling. Full-cost companies must use the prices in effect at the end of each accounting quarter to calculate the ceiling value of reserves. Future net revenues are calculated assuming continuation of prices and costs in effect at the time of the calculation, except for changes that are fixed and determinable by existing contracts. Although the SEC recently modified its rules applicable to the ceiling test, the new rules do not take effect until year-end 2009.
Excluding the reduction in carrying value of oil and gas properties and other adjusting items, Devon earned $4.4 billion or $9.91 per diluted common share in 2008. In the fourth quarter of 2008, excluding adjusting items, the company earned $297 million, or 67 cents per diluted common share. The adjusting items are discussed in more detail later in this news release.
"Despite the effects of the sharp fourth-quarter declines in oil and natural gas prices, 2008 was a very successful year for the company," said J. Larry Nichols, chairman and chief executive officer. "Cash flow reached an all-time record of nearly $10 billion. We increased oil and gas production by six percent and drilled 2,441 wells with a 98 percent success rate. In addition, we added 584 million barrels of proved reserves before price revisions at a very attractive cost per barrel."
Cash Flow a Record $9.6 Billion
Cash flow before balance sheet changes increased 31 percent to a record $9.6 billion in 2008. Other sources of cash included $1.9 billion in after-tax proceeds from the African divestiture program and $280 million from an exchange of assets with Chevron Corporation. Devon utilized these sources of cash and cash on hand to fund $10.5 billion of capital expenditures, repurchase $815 million of common and preferred stock, pay $289 million in dividends and reduce total debt by $2.1 billion during the year. The company exited 2008 with cash of $379 million and a net debt to adjusted capitalization ratio of less than 25 percent. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.
Drill-bit Reserve Additions More Than Double Production
In 2008, Devon added 584 million oil-equivalent barrels (Boe) to its proved oil and gas reserves through successful drilling (discoveries, extensions and performance revisions). The company invested $9 billion of associated drill-bit capital during the year.
Devon also acquired 66 million Boe through purchases of proved reserves. Revisions related to changes in year-end oil, natural gas and natural gas liquids prices decreased 2008 proved reserves by 473 million Boe. More than 70 percent of the price-related reserve revisions resulted from the impact of year-end prices on heavy oil reserves at Devon's Jackfish oil sands project in Canada.
Oil and gas production from continuing operations increased six percent to 238 million Boe in 2008. Estimated proved reserves at December 31, 2008, were 2,428 million Boe.
Proved developed reserves were 1,934 million Boe at December 31, 2008. This represented 80 percent of total proved reserves. Year-end proved reserves included 429 million barrels of crude oil, 9.9 trillion cubic feet of natural gas and 352 million barrels of natural gas liquids. Devon's reserve life index (proved reserves divided by annual production) is approximately 10 years.
Barnett Shale Growth and Start-Up at Jackfish Paced 2008 Operations
Devon drilled 2,441 wells in 2008 with a 98 percent success rate. Following are operational highlights from 2008:
- The company drilled 659 wells in the Barnett Shale field in north Texas during the year. Devon had 3,809 producing wells in the field at December 31, 2008.
- Devon produced 398 billion cubic feet of gas equivalent (Bcfe) from the Barnett Shale field in 2008. This was a 31 percent increase compared with its 2007 net Barnett production.
- Net production from the Barnett Shale reached nearly 1.2 Bcfe per day during the fourth quarter of 2008. Devon had exited 2007 producing about 950 million cubic feet equivalent (MMcfe) per day.
- In east Texas, Devon increased production from its Carthage area by nearly 10 percent in 2008 to more than 300 MMcfe per day. The company drilled 132 wells at Carthage during the year, including 20 horizontal wells.
- Devon added another 40,000 net acres to its industry-leading lease position in the Haynesville Shale play in eastern Texas and western Louisiana in the fourth quarter of 2008. The company now holds some 570,000 net acres in the Haynesville Shale and is evaluating its position through drilling, coring and testing.
- In the Arkoma Basin in Oklahoma, Devon increased net production from the Woodford Shale to about 64 million cubic feet of gas equivalent per day. This is a 165 percent increase compared with the fourth quarter of 2007. Also in 2008, the company completed construction and commenced operation of its Northridge gas processing plant, which can process up to 200 million cubic feet of natural gas per day.
- Devon began successful development of a new shale play in the Anadarko Basin in Oklahoma in 2008. The company has assembled a lease position of 112,000 net acres in the "Cana" play and drilled 10 Devon-operated wells during the year. Devon's net production from Cana was nearly 20 MMcfe per day at December 31, 2008. The company believes its net risked resource potential in the Cana play represents nearly four trillion cubic feet of natural gas equivalent.
- Devon continued to advance its Lower Tertiary projects in the Gulf of Mexico in 2008. At Cascade, the company commenced drilling the first of two initial producing wells and continued work on the production facilities and subsea equipment. When Cascade begins producing in 2010, it will utilize the Gulf's first floating production, storage and offloading vessel, or FPSO.
- Devon ramped up production from Jackfish, its 100-percent owned Canadian oil sands project, throughout 2008. Production reached 22,000 barrels per day in the fourth quarter and is expected to peak at 35,000 barrels per day in 2009.
- Jackfish is expected to produce at 35,000 barrels per day for more than 20 years. Devon sanctioned and began work on a second phase, Jackfish 2, in 2008. Jackfish 2 is also sized to produce 35,000 barrels per day, with production commencing by the end of 2011.
African Divestitures Substantially Completed
Devon completed the sales of its West African producing assets in 2008. The aggregate pre-tax value of the combined African divestitures was approximately $3 billion. In accordance with U.S. accounting standards, the company classified the assets, liabilities and results of its operations in Africa as discontinued operations for all accounting periods presented. Included in this release is a table of revenues, expenses and production categories and amounts reclassified as discontinued operations for each period presented.
Oil and Gas Sales Increase 36 Percent
Sales of oil, gas and natural gas liquids from continuing operations increased 36 percent to $13.1 billion in the year ended December 31, 2008. Comparable sales for the year ended December 31, 2007, were $9.6 billion. The combined effects of increased natural gas and liquids production and higher realized oil, natural gas and natural gas liquids prices led to the increase in sales.
Combined oil, gas and natural gas liquids production from continuing operations averaged 650 thousand Boe per day in 2008. This was a six percent increase compared with Devon's 2007 average daily production.
Marketing and midstream operating profit increased 31 percent to $668 million in 2008. The increase in operating profit was attributable to higher throughput and higher natural gas and natural gas liquids prices.
Expenses Generally in Line with Expectations
With the exception of depreciation, depletion and amortization of oil and gas properties (DD&A), most expense items were in line with expectations. Unit DD&A in 2008 increased to $13.68 per Boe compared with $11.85 per Boe in 2007. The higher than expected DD&A rate was attributable to the impact on estimated proved reserves of low commodity prices at December 31, 2008.
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 full year and fourth quarter of 2008 were as follows:
Items affecting continuing operations
- An unrealized gain on oil and natural gas derivative instruments increased full-year earnings by $243 million pre-tax ($156 million after tax) and increased fourth-quarter earnings by $103 million pre-tax ($65 million after tax).
- A change in fair value of other financial instruments decreased full-year earnings by $151 million pre-tax ($97 million after tax) and decreased fourth-quarter earnings by $129 million pre-tax ($82 million after tax).
- A reduction in the carrying value of oil and gas properties decreased full-year and fourth-quarter earnings by $10.4 billion pre-tax ($7.1 billion 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 full-year after-tax earnings by $312 million.
- A modification to the company's stock compensation vesting policy decreased full-year earnings by $27 million pre-tax ($17 million after tax).
- A reduction in Canadian statutory income tax rates increased full-year after-tax earnings by $7 million.
Items affecting discontinued operations
- Divestitures of assets in Africa resulted in a full-year gain of $819 million pre-tax ($769 million after tax) and a fourth-quarter gain of $4 million pre-tax ($25 million after tax).
- A reduction in the carrying value of oil and gas properties decreased full-year and fourth-quarter earnings by $6 million pre-tax ($6 million after tax).
- The decisions to exit Africa generated other financial benefits that increased full-year earnings by $55 million pre-tax ($27 million after tax).
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