10-KPeriod: FY2003

DEVON ENERGY CORP/DE Annual Report, Year Ended Dec 31, 2003

Filed March 5, 2004For Securities:DVN

Summary

Devon Energy Corp./DE (DVN) reported strong performance in its 2003 10-K filing, driven by significant production growth and higher commodity prices. The company completed a major merger with Ocean Energy, Inc. in April 2003, which substantially expanded its asset base and boosted its production to a record 228 million Boe for the year. This strategic acquisition, along with the prior Mitchell Energy & Development Corp. and Anderson Exploration Ltd. mergers, has positioned Devon as one of the largest independent oil and gas companies in the U.S., measured by reserves. Financially, Devon achieved record net earnings of $1.7 billion and earnings per diluted share of $8.07 in 2003. Strong cash flow from operations of $3.8 billion allowed the company to fund its capital expenditures, reduce debt, and increase its cash on hand. Management's strategy focuses on building reserves, production, and cash flow through acquisitions, exploration, and optimization of existing properties, emphasizing core area concentration and financial flexibility. The company is well-positioned for continued growth, with plans to invest in high-impact exploration and development projects while strengthening its balance sheet.

Key Highlights

  • 1Record Production and Financial Performance: Devon reported a record 228 million Boe produced in 2003, its highest annual production in history. Net earnings reached a record $1.7 billion, with diluted earnings per share at $8.07.
  • 2Significant Acquisitions: The company completed the transformative merger with Ocean Energy, Inc. in April 2003, adding substantial reserves and production. Previous acquisitions of Mitchell Energy & Development Corp. (January 2002) and Anderson Exploration Ltd. (October 2001) also significantly contributed to growth.
  • 3Strong Cash Flow and Debt Reduction: Generated $3.8 billion in cash flow from operations in 2003, enabling full funding of $2.6 billion in capital expenditures, repayment of over $500 million in long-term debt, and a nearly $1 billion increase in cash on hand.
  • 4Expanded Reserve Base: Proved reserves grew to 2,089 MMBoe at year-end 2003, with a 10% present value of future net revenues estimated at $22.7 billion. The company replaced 321% of its annual production with new reserves.
  • 5Strategic Focus on Core Areas: Devon concentrates its operations in key geographic areas in the U.S. (Permian Basin, Mid-Continent, Rockies, Gulf Coast) and Canada (Western Canadian Sedimentary Basin), along with international operations, to achieve economies of scale and operational efficiencies.
  • 6Diverse Asset Portfolio: The company's reserves are balanced between natural gas (58%) and oil and NGLs (42%), providing diversification across commodity prices.
  • 7Marketing and Midstream Operations: Devon's marketing and midstream segments contributed $286 million to operating margins, showcasing integrated business operations.

Frequently Asked Questions

Devon's growth in 2003 was primarily driven by significant production increases stemming from its strategic acquisitions, notably the merger with Ocean Energy, Inc. completed in April 2003. These acquisitions, coupled with higher commodity prices for oil, gas, and NGLs, led to record revenues and earnings.

The Ocean Energy merger substantially increased Devon's asset base, production volumes, and proved reserves, particularly in the deepwater Gulf of Mexico and internationally. Financially, it contributed to record revenues and earnings, though it also led to an increase in debt and operating expenses due to assumed liabilities.

Devon's strategy is to build reserves, production, cash flow, and earnings per share by acquiring oil and gas properties, exploring for new reserves, and optimizing existing ones. They focus on concentrating properties in core areas, acquiring high-profit margin assets, divesting marginal properties, balancing oil and gas reserves, maintaining financial flexibility, and enhancing value through marketing and midstream activities.

Devon manages commodity price risk by periodically entering into financial hedging activities, including price swaps and costless price collars. These instruments are used to secure targeted price levels for a portion of its projected oil and natural gas production, thereby mitigating the impact of price fluctuations on its operating cash flow.