Devon Reports $1.2B in 1Q10
Devon reported net earnings of $1.2 billion for the quarter ended March 31, 2010, or $2.67 per common share ($2.66 per diluted common share). This compares with a first-quarter 2009 net loss of $4.0 billion, or $8.92 per common share ($8.92 per diluted common share).
Devon also announced today that its board of directors has authorized the repurchase of up to $3.5 billion of the company's common stock. Devon plans to begin purchasing shares immediately. The shares will be acquired in the open market, and the timing of purchases may depend upon market conditions.
Earnings of $1.85 per Share Excluding Items Not Estimated by Analysts
First-quarter 2010 reported net earnings of $1.2 billion were affected by certain items securities analysts typically exclude from their published estimates. Excluding these adjusting items, Devon earned $831 million or $1.85 per diluted common share. The most significant of the adjusting items was a non-cash, unrealized gain on oil and natural gas derivative instruments of $524 million pre-tax ($335 million after tax). This and other adjusting items are discussed in more detail later in this release.
Gulf of Mexico and International Divestitures Total $9.9 Billion to Date
In 2009, Devon announced it would divest its Gulf of Mexico and international properties. To date, the company has announced sale agreements for the majority of its divestiture assets with aggregate proceeds totaling $9.9 billion, before taxes. In the first quarter of 2010, Devon closed on the sale of three lower tertiary discoveries in the deepwater Gulf of Mexico receiving $1.3 billion pre-tax. Subsequent to quarter-end, the company closed on the sales of its remaining deepwater Gulf of Mexico properties. Devon has now essentially completed its exit of the deepwater Gulf of Mexico. The company expects to close on the remaining asset sales throughout 2010 and finalize the entire restructuring process by year-end. Devon now estimates the total pre-tax proceeds from the divestitures to exceed $10 billion with after-tax proceeds approximating $8 billion.
"With Devon's strategic repositioning nearing completion, we could not be more pleased with the results," said J. Larry Nichols, chairman and chief executive officer. "Devon is emerging with a rock-solid balance sheet, a balanced portfolio of oil and gas projects and one of the lowest cost structures in the peer group. This positions the company to deliver low-risk, profitable, organic production growth on a sustainable basis."
In accordance with accounting standards, Devon has reclassified the assets, liabilities and results of its international segment 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 this release is a table of revenues, expenses, and production categories and the amounts reclassified as discontinued operations for each period presented.
Although Devon is in the process of selling all of its Gulf of Mexico assets, these assets do not qualify as discontinued operations under accounting standards. However, information is provided within this release to enable the reader to isolate results of the company's operations that will be retained following the divestitures.
First-Quarter Operating Highlights
Devon drilled 454 wells in the first quarter of 2010 with a success rate of almost 100 percent. The following are highlights of first-quarter exploration and development activity:
- Gross production from Devon's first Jackfish oil sands project reached design capacity of 35,000 barrels per day in the first quarter of 2010. Located in Alberta, Jackfish is 100-percent owned by Devon and has an estimated 300 million gross barrels of recoverable resource.
- Construction for the second Jackfish project remains on schedule and is now over 75-percent complete. Devon expects Jackfish 2, which is also sized to produce 35,000 barrels of gross production per day, will commence steam injection in the second quarter of 2011. The company also expects to file a regulatory application for a third, similarly-sized Jackfish project in the third quarter of 2010.
- In March, Devon announced it will add to its Canadian oil position by acquiring 50 percent of BP's interest in the Kirby oil sands leases for $500 million. The Kirby leasehold lies adjacent to the company's highly successful Jackfish project and has estimated gross recoverable resources of up to 1.5 billion barrels. Devon will operate the project, and delineation drilling at Kirby is expected to begin in the second half of 2010.
- In its emerging Wolfberry oil play in the Permian Basin, the company drilled 20 wells and increased net production to approximately 5,000 barrels per day.
- Also in the first quarter, Devon increased its lease position in the Cana-Woodford Shale to 180,000 net acres. The company added 16 new wells to production in the quarter, increasing average net production in the play to 73 million cubic feet of gas equivalent per day.
- The company's net production from the Barnett Shale field in north Texas averaged 1.1 billion cubic feet of natural gas equivalent per day in the first quarter of 2010. This was five percent greater than production in the fourth quarter of 2009.
- Devon completed three Haynesville Shale wells within Shelby and Nacogdoches counties in the first quarter. Initial 24-hour production rates for the three horizontal wells averaged six million cubic feet of gas equivalent. Devon has a 100 percent working interest in the wells.
Higher Prices Increase Oil and Gas Sales
Sales of oil, natural gas, and natural gas liquids from continuing operations were $2.1 billion in the first quarter of 2010. Comparable sales for the same period in 2009 were $1.4 billion. This 50 percent increase in sales was attributable to higher realized oil, natural gas, and natural gas liquids pricing.
Devon's average realized oil price increased 115 percent in the first quarter of 2010, to $67.58 per barrel. This compares with an average realized price of $31.41 per barrel in the first quarter of 2009. The company's average realized natural gas price increased 29 percent to $4.80 per thousand cubic feet in the first quarter of 2010, as compared to $3.73 per thousand cubic feet in the year-ago period.
Marketing and midstream operating profit was $133 million in the first quarter of 2010. This was a nine percent decrease compared to the first quarter of 2009. The decrease resulted from lower gas marketing margins partially offset by higher commodity prices.
Lower Costs in Most Expense Categories
First-quarter 2010 expenses in most categories decreased from the first quarter of 2009. Lease operating expenses in the first quarter of 2010 were $414 million, or six percent lower than the year-ago quarter.
Taxes other than income taxes increased 13 percent, to $101 million in the first quarter of 2010. This increase was driven by higher production taxes resulting from higher oil and gas revenues.
First quarter depreciation, depletion and amortization expense declined by 24 percent in 2010, to $426 million. Unit DD&A was $7.63 per Boe in the first quarter of 2010.
Devon also reduced costs related to general and administrative expenses (G&A) in the most recent quarter. First-quarter 2010 G&A expense was $138 million, or 16 percent lower than the first quarter of 2009. Operational efficiencies realized through restructuring led to lower G&A expenses for the quarter.
Cash Flow Increases 45 Percent; Debt Repayments Further Strengthen Balance Sheet
Cash flow before balance sheet changes reached $1.4 billion in the first quarter of 2010, a 45 percent increase over the first quarter of 2009. In addition, Devon received $1.3 billion of pre-tax proceeds from the sale of three lower tertiary discoveries in the deepwater Gulf of Mexico. Devon utilized this cash in the first-quarter to fully fund its capital program and repay $1.2 billion of commercial paper borrowings. The company ended the quarter with cash on hand of $1.2 billion and a net debt to adjusted capitalization ratio of 22 percent. 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 of the company's financial results. These items and their effects upon reported earnings for the first quarter of 2010 were as follows:
Items affecting continuing operations:
- A change in the fair value of oil and natural gas derivative instruments increased first-quarter earnings by $524 million pre-tax ($335 million after tax).
- A change in the fair value of other financial instruments decreased first-quarter earnings by $1 million pre-tax ($1 million after tax).
Items affecting discontinued operations:
- The decision to divest all international assets generated financial benefits that increased first-quarter earnings by $41 million pre-tax ($27 million after tax).
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