How did the Ocean Energy merger change Devon's profile?

The April 2003 Ocean merger issued about 74 million Devon shares and assumed roughly $1.8 billion of debt. It added approximately 554 MMBoe of proved reserves, more than tripled Devon's Gulf of Mexico reserves, and gave Devon a major stake in the Zafiro field in Equatorial Guinea, the Panyu project in China, and deepwater Gulf of Mexico projects.

Is Devon's balance sheet getting stronger or weaker?

It is getting stronger in the near term. Long-term debt was $8.6 billion at year-end 2003, but stockholders' equity more than doubled to $11.1 billion and the company generated enough cash to retire over $500 million of debt and build cash to $1.27 billion. Management intends to use accumulated cash to repay debt maturing in 2004 and subsequent years. Debt ratings were BBB (S&P), Baa2 with a negative outlook (Moody's), and BBB (Fitch).

What are the main risks to future earnings?

Commodity price volatility is the largest risk; Devon's revenues depend on oil, gas, and NGL prices. Other risks include full-cost ceiling writedowns if prices fall (Devon recorded $111 million of impairments in 2003 and $651 million in 2002), rising per-unit finding and development costs, currency exposure from Canadian operations, the Canadian Kyoto Protocol, and royalty and tax litigation.

How much of 2004 production and prices are already hedged?

As of December 31, 2003, collars, swaps, and fixed-price contracts covered about 65% of estimated 2004 oil production and 48% of estimated 2004 natural gas production. Hedges reduced 2003 realized oil prices (about $25.63 per barrel with hedges versus $27.67 without) and gas prices ($4.51 per Mcf with hedges versus $4.79 without).

Will Devon's dividend and capital spending plans change?

The quarterly common dividend was raised from $0.05 to $0.10 per share effective March 31, 2004, which management expects to cost about $96 million per year. The 2004 capital budget is approximately $2.8 billion, and management expects operating cash flow to exceed planned spending at current price expectations. Devon can defer part of its capital program if prices decline.

DVN 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 5, 2004. Cited figures are marked; the original filing is the authoritative source.

Devon Energy's 2003 10-K portrays a record year driven by the April 2003 Ocean Energy merger and strong commodity prices.

Production rose 21% to 228 MMBoe, total revenues reached $7.35 billion^a (up 70%), and net earnings were $1.75 billion, or $8.07 per diluted share, the highest in the company's 15 years as a public company. Operating cash flow of $3.8 billion fully funded $2.6 billion of capital spending, retired over $500 million of long-term debt, and added nearly $1 billion to cash on hand, which the company is accumulating to repay debt maturing in 2004 and beyond. Proved reserves ended 2003 at 2,089 MMBoe (58% gas, 42% oil and NGLs), up from 1,609 MMBoe a year earlier, with a pre-tax 10% present value of $22.7 billion and a standardized measure of $15.9 billion.

Finding and development costs were high at $7.9 billion^b including business combinations, and management acknowledged per-unit costs above historical and industry averages. Net debt-funded growth was reduced: long-term debt was $8.6 billion, and the company plans a dividend increase to $0.10 per quarter effective March 2004.

Key risks include commodity price volatility (Devon hedged roughly 65% of estimated 2004 oil and 48% of 2004 gas production), a full-cost ceiling writedown exposure, a potential IRS claim of about $68 million^c related to exchangeable debentures, and the Wright False Claims Act royalty litigation, which management does not consider material. The 2004 capital budget is about $2.8 billion, with operating cash flow expected to exceed planned spending.

02—Key points

Key Highlights

Record 2003 results: net earnings of $1.747 billion ($8.07 per diluted share), versus $104 million in 2002, with revenues up 70% to $7.35 billion.
Production rose 21% to 228 MMBoe, aided by the Ocean merger (74 million shares issued, about $1.8 billion of debt assumed) and average realized prices up 47% per Boe to $25.88.
Operating cash flow of $3.8 billion funded $2.6 billion of capital expenditures, retired over $500 million of long-term debt, and increased cash to $1.27 billion.
Proved reserves grew to 2,089 MMBoe at year-end 2003, with a standardized measure of discounted future net cash flows of $15.9 billion; reserves replaced 321% of production, including acquisitions.
Finding and development costs were $7.9 billion including business combinations, and management acknowledged per-unit costs remain above historical and industry averages.
Dividend increased to $0.10 per quarter effective March 31, 2004, and the 2004 capital budget is approximately $2.8 billion.
Key contingencies include the Wright False Claims Act royalty lawsuit and a potential IRS claim of about $68 million, both of which management does not believe are material.

03—Questions

Frequently Asked Questions

How did the Ocean Energy merger change Devon's profile?
The April 2003 Ocean merger issued about 74 million Devon shares and assumed roughly $1.8 billion of debt. It added approximately 554 MMBoe of proved reserves, more than tripled Devon's Gulf of Mexico reserves, and gave Devon a major stake in the Zafiro field in Equatorial Guinea, the Panyu project in China, and deepwater Gulf of Mexico projects.
Is Devon's balance sheet getting stronger or weaker?
It is getting stronger in the near term. Long-term debt was $8.6 billion at year-end 2003, but stockholders' equity more than doubled to $11.1 billion and the company generated enough cash to retire over $500 million of debt and build cash to $1.27 billion. Management intends to use accumulated cash to repay debt maturing in 2004 and subsequent years. Debt ratings were BBB (S&P), Baa2 with a negative outlook (Moody's), and BBB (Fitch).
What are the main risks to future earnings?
Commodity price volatility is the largest risk; Devon's revenues depend on oil, gas, and NGL prices. Other risks include full-cost ceiling writedowns if prices fall (Devon recorded $111 million of impairments in 2003 and $651 million in 2002), rising per-unit finding and development costs, currency exposure from Canadian operations, the Canadian Kyoto Protocol, and royalty and tax litigation.
How much of 2004 production and prices are already hedged?
As of December 31, 2003, collars, swaps, and fixed-price contracts covered about 65% of estimated 2004 oil production and 48% of estimated 2004 natural gas production. Hedges reduced 2003 realized oil prices (about $25.63 per barrel with hedges versus $27.67 without) and gas prices ($4.51 per Mcf with hedges versus $4.79 without).
Will Devon's dividend and capital spending plans change?
The quarterly common dividend was raised from $0.05 to $0.10 per share effective March 31, 2004, which management expects to cost about $96 million per year. The 2004 capital budget is approximately $2.8 billion, and management expects operating cash flow to exceed planned spending at current price expectations. Devon can defer part of its capital program if prices decline.

04—Continue

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