Devon Earns $499MM on Increased 3Q Production, Lower Costs
Devon has reported net earnings of $499 million for the quarter ended September 30, 2009, or $1.13 per common share ($1.12 per diluted common share). For the quarter ended September 30, 2008, Devon reported net earnings of $2.6 billion, or $5.93 per common share ($5.88 per diluted common share).
Production of oil, natural gas and natural gas liquids increased six percent to 61.9 million oil-equivalent barrels (Boe) in the third quarter of 2009. Costs in nearly every expense category were lower in the third quarter of 2009 compared with the same period in the previous year. Strong production growth and lower overall costs were more than offset by significantly lower product prices.
For the nine months ended September 30, 2009, Devon reported a net loss of $3.1 billion, or $7.09 per common share ($7.09 per diluted common share). A $4.2 billion non-cash, after-tax reduction in the carrying value of oil and gas properties in the first quarter of 2009 drove the year-to-date loss. For the nine months ended September 30, 2008, the company reported net earnings of $4.7 billion, or $10.50 per common share ($10.40 per diluted common share).
"Year to date, Devon increased oil and gas production eight percent compared with 2008," commented President John Richels. "The performance of the company's oil and gas properties has continued to exceed our expectations throughout 2009."
Minimal Impact from Items Not Estimated by Analysts
Devon's third-quarter 2009 financial results were increased slightly by the net effects of items securities analysts typically exclude from their published estimates. Excluding the adjusting items, Devon earned $491 million or $1.10 per diluted common share in the third quarter of 2009.
Companywide Production Increased
Combined oil, gas and natural gas liquids production averaged 673 thousand Boe per day in the third quarter of 2009. This is the highest third-quarter production in Devon's history and a six percent increase compared with the third quarter of 2008.
Each of Devon's operating segments contributed to the production growth. Growth in oil and natural gas liquids production in the United States was greater than the decline in natural gas volumes. The continuing ramp up of volumes at the Jackfish oil sands project led Canadian oil production growth. Canadian natural gas production also increased, principally due to lower government royalties. Canadian royalties are calculated on a sliding scale. Therefore, at lower product prices, a producer's share of Canadian gas production increases.
Sequentially, average daily oil and gas production in the third quarter decreased six percent when compared with 719 thousand Boe per day produced in the second quarter of 2009. The decrease is attributable to voluntary reductions, planned maintenance downtime and natural declines.
Revenues from oil, gas and natural gas liquids sales decreased 54 percent to $1.7 billion in the third quarter of 2009 compared with the third quarter of 2008. Significantly lower product prices more than offset the growth in natural gas and liquids production.
Other income, net of expenses, increased 17 percent to $96 million in the third quarter of 2009. This amount includes an $84 million accrual reversal resulting from a favorable federal court ruling pertaining to royalties in the deepwater Gulf of Mexico. For the third quarter of 2008, other income included $57 million of hurricane damage-related insurance recoveries.
Haynesville Shale Success Leads Operational Highlights
Devon drilled 233 wells in the third quarter of 2009 compared with 636 wells drilled in the third quarter of 2008. In both periods, approximately 97 percent of the wells were successful. In spite of significantly reduced drilling activity in 2009, Devon achieved several notable operational accomplishments in the third quarter:
- In the third quarter of 2009 Devon commenced completion operations on its first Haynesville Shale well to be drilled in San Augustine County, Texas. The Kardell Gas Unit 1H flowed at an average continuous 24-hour rate of 30.7 million cubic feet of natural gas equivalent per day. Devon operates the well with a 48 percent working interest.
- The company is currently drilling another well on its east Texas Haynesville Shale acreage. This well is located in Shelby County, northwest of the Kardell well.
- Also in the third quarter, Devon added two operated drilling rigs at its Cana Woodford Shale play in western Oklahoma. The company commenced production from eight additional Cana wells in the quarter, bringing its net production in the play to 53 million cubic feet of gas equivalent per day.
- Following scheduled facilities maintenance in the third quarter, Devon has resumed ramping up production from its 100 percent-owned Jackfish oil sands project in Alberta. Currently, Jackfish is producing approximately 31,000 barrels of oil per day and is expected to reach its
- facilities-design capacity of 35,000 barrels per day by year end.
- Construction of the second phase of the Jackfish project, Jackfish 2, passed the 50 percent completion milestone in the third quarter. Devon expects Jackfish 2, which is also sized to produce 35,000 barrels per day, to commence steam injection in 2011.
- Devon completed evaluation of a third phase of the Jackfish project in the third quarter. The company plans to file a regulatory application for Jackfish 3 in 2010. In aggregate, the three phases of Jackfish are expected to produce more than 100,000 barrels of oil per day from approximately 900 million barrels of recoverable resource.
- In the Gulf of Mexico, Devon has encountered an encouraging oil column in an appraisal well on the Lower Tertiary Kaskida prospect. The company is now evaluating options including a possible side-track of the well. Devon has a 30 percent working interest in Kaskida.
Costs Decline in Most Expense Categories
Devon continued to report favorable cost comparisons in the third quarter of 2009 versus the year-ago quarter. The company reduced lease operating expenses (LOE) 15 percent, to $505 million. Unit LOE decreased by an even greater 19 percent to $8.16 per Boe, reflecting both lower absolute costs and increased production volumes.
Compared with the third quarter of 2008, depreciation, depletion and amortization (DD&A) of oil and gas properties decreased 39 percent to $480 million. Unit DD&A decreased by 42 percent to $7.75 per Boe in the third quarter of 2009.
The company also reduced general and administrative expenses (G&A) in the most recent quarter. G&A decreased by seven percent to $137 million.
Interest expense increased by 30 percent to $90 million compared with the third quarter of 2008. The increase results from a larger debt balance.
Income Taxes Reduced by Adjustments
Third-quarter 2009 income tax expense was reduced by $121 million attributable to four separate adjustments. These tax adjustments are presented in the table below listing the effects of items typically excluded by securities analysts in published estimates.
Maintaining Financial Strength
Cash flow before balance sheet changes reached $1.2 billion in the third quarter of 2009. This cash flow fully funded total capital investments and generated $168 million of free cash flow in the quarter. Devon exited the third quarter with more than $900 million of cash on hand and $1.9 billion of unused credit facilities.
At September 30, 2009, net debt to adjusted capitalization was 31 percent. Reconciliations of cash flow before balance sheet changes, free cash flow, net debt and adjusted capitalization, which are non-GAAP measures.
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 third quarter of 2009 were as follows:
Items affecting continuing operations
- A change in the fair value of oil and natural gas derivative instruments decreased third-quarter earnings by $104 million pre-tax ($67 million
- after tax).
- A change in the fair value of other financial instruments decreased third-quarter earnings by $9 million pre-tax ($6 million after tax).
- Income tax accrual adjustments increased third-quarter earnings by $59 million.
- Income tax benefits related to unsuccessful international drilling increased third-quarter earnings by $22 million.
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