How strong was Devon's 2004 financial performance?

Devon reported record net earnings of $2.19 billion, or $4.38 per diluted share, on revenues of $9.19 billion. Oil, gas and NGL revenues rose 27% to about $7.5 billion, and cash flow from operations rose 28% to $4.8 billion. Higher realized prices (oil up 10%, gas up 18%) and 10% higher production drove the gains, while G&A fell 10%.

What is happening with Devon's reserves and what drives the changes?

Proved reserves were 2,077 MMBoe at year-end 2004, roughly flat from 2003. Drilling added 268 MMBoe from discoveries and extensions plus 45 MMBoe from performance revisions, but negative price revisions of 76 MMBoe offset that. Under SEC rules, year-end prices are held constant. Higher Brent prices reduced reserves under production-sharing contracts, and wider Canadian heavy-oil differentials (over 54% of NYMEX) also reduced reserves.

What are the main capital allocation priorities for 2005?

Devon plans capital spending of $3.0 to $3.5 billion, mainly in the Rocky Mountains, Permian, Mid-Continent, Gulf of Mexico, Canada and international areas, including Brazil, China, Egypt and West Africa. It intends to repurchase up to 45 million more shares in 2005, funded by operating cash flow and divestiture proceeds, and to raise the dividend to $0.075 per quarter. Management says capital resources are more than adequate for these uses.

What risks should investors weigh?

Key risks include commodity price volatility, since earnings and cash flow are highly sensitive to oil and gas prices. Under the full-cost method, a price decline could trigger writedowns, and the filing notes that early settlements of hedges tied to divested properties would likely produce losses. Devon also faces an SEC inquiry into payments to the government of Equatorial Guinea, and its Wright royalty lawsuit has a trial date of February 2007. Management says it does not expect material exposure from either legal matter.

DVN 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 9, 2005. Cited figures are marked; the original filing is the authoritative source.

Devon Energy's 2004 Form 10-K (filed March 2005) describes a record year: production rose 10% to 251 MMBoe, net earnings reached $2.19 billion^a ($4.38 diluted EPS), and cash flow from operations hit $4.8 billion, up 28%.

Revenue climbed to $9.19 billion^b, driven by higher commodity prices and volume growth from the April 2003 Ocean Energy merger. Proved reserves were roughly flat at 2,077 MMBoe (60% gas), held back by negative price revisions from production-sharing contracts and wide Canadian heavy-oil differentials. Capital discipline and shareholder returns were the central themes.

Devon spent $3.1 billion^c on capital expenditures, retired about $1 billion of debt, and ended with $2.1 billion of cash and short-term investments. It announced a plan to sell roughly 9% of North American proved reserves for $1.0 to $1.5 billion after tax, and it began a buyback of up to 50 million shares (12.5 million repurchased through February 28, 2005 at about $40 per share). The quarterly dividend rises from $0.05 to $0.075 effective March 31, 2005, and the two-for-one stock split was completed in November 2004.

Risks flagged in the filing include a full-cost ceiling test that could trigger writedowns if prices fall, reliance on spot-market gas sales (about 86%^d of gas volumes as of February 2005), hedging exposure that could generate losses on early settlements of divested properties, and an open SEC inquiry into payments to the government of Equatorial Guinea. The IRS dispute over exchangeable debentures was resolved in Devon's favor in February 2005.

02—Key points

Key Highlights

Record 2004 results: net earnings of $2.19 billion ($4.38 diluted EPS), the highest in Devon's 16 years as a public company.
Operating cash flow of $4.8 billion (up 28%) funded $3.1 billion of capital spending and $973 million of debt repayment, while adding $846 million to cash and short-term investments.
Production rose 10% to 251 MMBoe, aided by the Ocean merger and new Chinese production (Panyu), partly offset by Hurricane Ivan and natural declines.
Proved reserves of 2,077 MMBoe (60% gas) were roughly flat year over year, as discoveries and revisions were offset by negative price revisions of 76 MMBoe.
Planned divestiture of about 9% of North American proved reserves for after-tax proceeds of $1.0 to $1.5 billion, with most closings expected in 1H 2005.
Share repurchase program of up to 50 million shares; 12.5 million repurchased through February 28, 2005 for $501 million (about $40.04 per share).
Quarterly dividend increased from $0.05 to $0.075 effective March 31, 2005, with a 2005 capital budget of $3.0 to $3.5 billion.

03—Questions

Frequently Asked Questions

How strong was Devon's 2004 financial performance?
Devon reported record net earnings of $2.19 billion, or $4.38 per diluted share, on revenues of $9.19 billion. Oil, gas and NGL revenues rose 27% to about $7.5 billion, and cash flow from operations rose 28% to $4.8 billion. Higher realized prices (oil up 10%, gas up 18%) and 10% higher production drove the gains, while G&A fell 10%.
What is happening with Devon's reserves and what drives the changes?
Proved reserves were 2,077 MMBoe at year-end 2004, roughly flat from 2003. Drilling added 268 MMBoe from discoveries and extensions plus 45 MMBoe from performance revisions, but negative price revisions of 76 MMBoe offset that. Under SEC rules, year-end prices are held constant. Higher Brent prices reduced reserves under production-sharing contracts, and wider Canadian heavy-oil differentials (over 54% of NYMEX) also reduced reserves.
What are the main capital allocation priorities for 2005?
Devon plans capital spending of $3.0 to $3.5 billion, mainly in the Rocky Mountains, Permian, Mid-Continent, Gulf of Mexico, Canada and international areas, including Brazil, China, Egypt and West Africa. It intends to repurchase up to 45 million more shares in 2005, funded by operating cash flow and divestiture proceeds, and to raise the dividend to $0.075 per quarter. Management says capital resources are more than adequate for these uses.
What risks should investors weigh?
Key risks include commodity price volatility, since earnings and cash flow are highly sensitive to oil and gas prices. Under the full-cost method, a price decline could trigger writedowns, and the filing notes that early settlements of hedges tied to divested properties would likely produce losses. Devon also faces an SEC inquiry into payments to the government of Equatorial Guinea, and its Wright royalty lawsuit has a trial date of February 2007. Management says it does not expect material exposure from either legal matter.

04—Continue

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