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DEVON ENERGY CORP/DE Annual Report, Year Ended Dec 31, 2006

Filing Date
Filed February 28, 2007
Period End
December 31, 2006
Security
DVN
In the record · 2016–202610-K1210-Q328-K123

DVN filed 12 annual reports (10-K), 32 quarterly reports (10-Q) and 123 current reports (8-K) between 2016 and 2026.

  1. FY2016 annual report10-K · Feb ’17Feb ’17
  2. Deal closed8-K · Jul ’19Jul ’19
  3. Leadership change8-K · Dec ’21Dec ’21
  4. Leadership change8-K · Oct ’25Oct ’25

01—Abstract

Summary

Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

Devon Energy's 2006 10-K describes a year of strong operating and financial results, led by record reserves and operating cash flow, alongside a major strategic pivot.

Net earnings were $2.8 billiona ($6.34 diluted EPS), down 3% from $2.9 billion in 2005, while net cash from operations reached a record $6.0 billion. Proved reserves grew to a record 2,376 MMBoe, up 533 MMBoe in the year, with the $2.2 billion Chief Holdings acquisition adding about 100 MMBoe of Barnett Shale reserves. Production fell 4% to 214 MMBoe, though management says production from continuing operations should rise roughly 10% in 2007.

The company is refocusing its portfolio. Devon announced plans to sell its Egyptian operations (completion expected in 1H 2007) and West African assets (including Equatorial Guinea, expected 3Q 2007). Proceeds are earmarked to repay the $1.8 billionb of commercial paper and to resume the stock buyback in late 2007.

Growth priorities are North American onshore, the deepwater Gulf of Mexico (Lower Tertiary discoveries such as Jack, Cascade, St. Malo and Kaskida), and international operations in Brazil (Polvo, first production expected mid-2007) and China, along with the Jackfish thermal heavy oil project in Canada. Investors should weigh the company's balance sheet and growth outlook against cost and execution risks. Per-unit lease operating expenses rose 17% to $6.95 per Boe and DD&A rose to $10.59c per Boe.

Stockholders' equity rose to $17.4 billiond and the debt-to-capitalization ratio was 27.3%, well inside the 65% covenant. Management guides 2007 capital expenditures to $5.7 to $6.2 billion and reserve additions of 350 to 370 MMBoe. Pending legal matters include the Wright royalty False Claims Act case (trial set for November 2007) and an SEC inquiry into Equatorial Guinea payments, which management does not expect to be material.

02—Key points

Key Highlights

  1. Record proved reserves of 2,376 MMBoe at year-end 2006, up 533 MMBoe in the year, with a pre-tax 10% present value of $24.1 billion and a standardized measure of $16.6 billion.
  2. Net earnings of $2.8 billion ($6.34 diluted EPS), down 3% from 2005; net cash from operating activities hit a record $6.0 billion.
  3. $2.2 billion acquisition of Chief Holdings in June 2006 added about 100 MMBoe of Barnett Shale reserves, 169,000 net acres and roughly 2,000 drilling locations.
  4. Plans to divest Egypt (completion expected 1H 2007) and West Africa (expected 3Q 2007), with proceeds targeted to repay commercial paper and resume buybacks in late 2007.
  5. Deepwater Gulf of Mexico Lower Tertiary success: four discovery wells to date, with a Jack No. 2 production test, Cascade development targeted for late 2009, and Kaskida as the largest discovery so far.
  6. 2007 guidance: production up about 10% for continuing operations (219 to 221 MMBoe), capital expenditures of $5.7 to $6.2 billion, and lease operating expenses of $1.70 to $1.77 billion.
  7. Lease operating expenses rose 17% to $6.95 per Boe and DD&A per Boe rose to $10.59 from $8.86, pressuring unit margins; the debt-to-capitalization ratio was 27.3% against a 65% covenant.

03—Questions

Frequently Asked Questions

  1. Why did Devon's net earnings decline in 2006 despite record reserves and cash flow?

    Net earnings fell 3% to $2.8 billion mainly because of higher costs and non-cash charges. DD&A rose $285 million on higher per-unit rates, lease operating expenses increased 12%, the change in fair value of derivatives rose to $178 million from $94 million (mostly from the Chevron-linked exchangeable debentures), and a $121 million impairment was recorded. Realized prices rose 5% to $41.51 per Boe, but production fell 4%, partly offsetting the gain.

  2. What is the outlook for production and capital spending in 2007?

    Management expects continuing-operations production to rise about 10% from 2006, to 219 to 221 MMBoe, and reserve additions of 350 to 370 MMBoe. Capital expenditures are guided to $5.7 to $6.2 billion, the largest planned use of operating cash flow, with about 82% directed to low-risk North American projects. Egypt and West Africa are excluded from these estimates once the sales close.

  3. How will the Egypt and West Africa divestitures affect shareholders?

    Egypt (8 MMBoe of proved reserves) and West Africa (90 MMBoe, about 4% of total) are being sold to sharpen focus on North America, the deepwater Gulf of Mexico, Brazil and China. Proceeds are planned to repay the $1.8 billion of commercial paper and fund a resumed buyback of up to the 43.5 million shares still authorized, expected in late 2007. The company does not yet record any gain or loss on the sales.

  4. What are the main legal and regulatory risks disclosed?

    The most significant is the Wright False Claims Act royalty case, with trial set for November 2007; Devon says it has strong defenses and no material exposure is recorded. An SEC inquiry into payments to Equatorial Guinea officials is ongoing, with no contact from the SEC since 2005. Devon also accrued about $6 million for possible royalty relief adjustments on 1998 and 1999 deepwater leases, and it has only de minimis named-windstorm coverage in the Gulf of Mexico.

04—Continue

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