How did Devon's profitability change in 2005?

Net earnings rose 34% to $2.93 billion and diluted EPS rose to $6.26 from $4.38. The gain came mainly from a 32% increase in realized prices to $39.59 per Boe, partly offset by lower production and higher operating and DD&A costs per unit.

Why did production decline in 2005, and is that trend expected to continue?

Production fell 10% to 226 MMBoe, mainly because of the first-half 2005 property divestitures and hurricane-suspended Gulf of Mexico output. Excluding those effects, production rose about 1%. Management expects 2006 production to be roughly flat, with about 8% growth in 2007.

What is the risk from the SEC investigation into Equatorial Guinea?

The SEC issued a subpoena in August 2005 under a formal investigation into payments to Equatorial Guinea government officials. Devon says it is cooperating fully. The 10-K does not estimate a financial penalty or liability, and Equatorial Guinea (Zafiro, Block B) is among Devon's most significant international producing assets.

How strong is Devon's balance sheet and financing position?

Debt-to-capitalization was 27% against a 65% covenant. Long-term debt fell to $5.96 billion from $7.03 billion, and the company had $2.3 billion in cash and short-term investments. The $1.5 billion revolving credit facility was undrawn, with about $1.2 billion available after letters of credit. Management expects operating cash flow and working capital to fund the 2006 capital program.

DVN 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 3, 2006. Cited figures are marked; the original filing is the authoritative source.

Devon Energy's 2005 10-K describes a record year.

Net earnings rose 34% to $2.93 billion^a, and diluted EPS climbed more than 40% to $6.26. Operating cash flow reached $5.6 billion. Total revenues were $10.7 billion, up from $9.2 billion in 2004.

Production fell 10% to 226 MMBoe, largely because of 2005 divestitures and hurricane-related shut-ins, though production excluding those effects grew about 1%. Realized prices rose 32% to $39.59^b per Boe, which drove the earnings gain. The balance sheet strengthened over the year.

Devon sold non-core Gulf of Mexico, U.S. and Canadian properties for about $1.8 billion^c after tax, covering 176 MMBoe of reserves. It repurchased $2.3 billion of stock, retired about $1.3 billion of debt, and funded $4.1 billion of capital expenditures. Estimated proved reserves ended the year at 2.1 billion Boe, up 439 MMBoe through drilling and revisions.

The debt-to-capitalization ratio was 27%, and cash plus short-term investments totaled $2.3 billion^d. Looking ahead, management guided to 2006 capital spending of $5.0 to $5.2 billion, with 2006 production roughly flat and 8% growth expected in 2007.

Key risks include commodity price volatility, reserve revision risk under full cost accounting (a $212 million impairment was booked in Q4 2005 for Angola and Brazil), and an SEC inquiry into payments to Equatorial Guinea officials. Also disclosed is the Wright royalty False Claims Act case, with trial set for February 2007 and no material liability recorded.

02—Key points

Key Highlights

Record 2005 results: net earnings of $2.93 billion (up 34%), diluted EPS of $6.26 (up over 40%), and operating cash flow of $5.6 billion.
Realized price per Boe rose 32% to $39.59, while production declined 10% to 226 MMBoe because of asset sales and Gulf of Mexico hurricane shut-ins.
Asset divestitures generated about $1.8 billion after tax from 176 MMBoe of proved reserves sold, lengthening reserve life and lowering unit costs.
Proved reserves reached 2.1 billion Boe (up 439 MMBoe from drilling and revisions), with 76% proved developed, though reserve life is affected by the divestitures.
Shareholder returns were substantial: $2.3 billion of buybacks completed under the 2004 program and a new program of up to 50 million shares, plus a dividend increase to $0.1125 per quarter for 2006.
Full cost accounting led to a $212 million pre-tax impairment in Q4 2005, mainly for Angola ($170 million) and Brazil ($42 million).
2006 guidance calls for $5.0 to $5.2 billion in capital expenditures, flat production, and 8% production growth in 2007; the SEC is investigating payments tied to Equatorial Guinea.

03—Questions

Frequently Asked Questions

How did Devon's profitability change in 2005?
Net earnings rose 34% to $2.93 billion and diluted EPS rose to $6.26 from $4.38. The gain came mainly from a 32% increase in realized prices to $39.59 per Boe, partly offset by lower production and higher operating and DD&A costs per unit.
Why did production decline in 2005, and is that trend expected to continue?
Production fell 10% to 226 MMBoe, mainly because of the first-half 2005 property divestitures and hurricane-suspended Gulf of Mexico output. Excluding those effects, production rose about 1%. Management expects 2006 production to be roughly flat, with about 8% growth in 2007.
What is the risk from the SEC investigation into Equatorial Guinea?
The SEC issued a subpoena in August 2005 under a formal investigation into payments to Equatorial Guinea government officials. Devon says it is cooperating fully. The 10-K does not estimate a financial penalty or liability, and Equatorial Guinea (Zafiro, Block B) is among Devon's most significant international producing assets.
How strong is Devon's balance sheet and financing position?
Debt-to-capitalization was 27% against a 65% covenant. Long-term debt fell to $5.96 billion from $7.03 billion, and the company had $2.3 billion in cash and short-term investments. The $1.5 billion revolving credit facility was undrawn, with about $1.2 billion available after letters of credit. Management expects operating cash flow and working capital to fund the 2006 capital program.

04—Continue

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