01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's 2007 10-K portrays a record year: production rose 12% to 224 MMBoe, net earnings reached an all-time high of $3.6 billiona, and diluted EPS rose 26% to $8.00.
Proved reserves grew 9% to a record 2,496 MMBoe, with 390 MMBoe of extensions, discoveries and revisions against 224 MMBoe produced, a reserve replacement well above 100%. Operating cash flow was $6.65 billionb, and the company funded $6.2 billion of capital expenditures while also reducing debt by $567 million, repurchasing $326 million of stock and paying $259 million in dividends. Year-end liquidity was supported by $1.7 billion of cash and short-term investments, though $372 million of that was auction rate securities whose auctions began failing in February 2008.
The main forward-looking items are the planned 2008 capital budget of $6.6c-7.0 billion (above 2007's $6.2 billion), guidance for production growth of about 9% and 390-410 MMBoe of reserve additions, and the pending divestiture of West African assets, with Egypt sold for $341 million and Gabon agreed at $205.5 million. Management also flagged that Alberta's new royalty regime from 2009 could reduce future earnings from Alberta properties, with the impact not yet quantifiable. Hedging covers about 64% of expected 2008 gas and 12% of oil production, which limits some price upside.
Key growth drivers are the Barnett Shale, Jackfish heavy oil in Canada, and deepwater Gulf of Mexico and Lower Tertiary exploration. Leverage is moderate: total debt was $7.9 billiond at year-end, the debt-to-capitalization ratio under the credit agreement was 23.8%, and the covenant limit is 65%. Investors should weigh the strong cash generation and reserve growth against rising costs (LOE up 28%, DD&A per Boe up 15%), exposure to commodity price volatility, and the execution risk of the Jackfish expansion and West African exit.
02—Key points
Key Highlights
- Record 2007 results: net earnings of $3.6 billion (up 27%), diluted EPS of $8.00 (up 26%), and operating cash flow of $6.65 billion (up 11%).
- Production grew 12% to 224 MMBoe, driven by the Barnett Shale (up 33% to 950 MMcfe/d exit rate) and Lloydminster (up 40%).
- Proved reserves reached a record 2.5 billion Boe (up 9%), with 390 MMBoe of additions, about 1.7x 2007 production; the 2008 plan targets 390-410 MMBoe of additions.
- 2008 capital budget of $6.6-7.0 billion, with guidance for about 9% production growth; 83% of planned spending is in low-risk, primarily North American projects.
- Divestitures: Egypt sold in October 2007 for $341 million (a $90 million after-tax gain); Gabon agreed at $205.5 million, with the remaining West African assets expected to sell in 1H 2008.
- Alberta's proposed royalty regime, effective January 2009, could reduce future earnings and cash flows from Alberta properties; the financial impact cannot yet be estimated.
- Balance sheet: total debt of $7.9 billion, a 23.8% debt-to-capitalization ratio against a 65% covenant, and $1.7 billion of cash and short-term investments, including $372 million of auction rate securities facing failed auctions since February 2008.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
| Revenue | $9.97B |
| Operating Expenses | $6.65B |
| Operating Income | $2.48B |
| Net Income | $3.61B |
| EPS (Basic) | $8.08 |
| EPS (Diluted) | $8.00 |
05—Questions
Frequently Asked Questions
How did Devon's reserve replacement and production compare in 2007?
Devon added 390 MMBoe of proved reserves through extensions, discoveries and performance revisions, well above the 224 MMBoe produced, lifting total proved reserves 9% to a record 2,496 MMBoe. Roughly 75% of year-end reserves are proved developed (1,874 MMBoe), and the company is 64% gas by production mix.
What is the 2008 outlook for capital spending and production?
Management guided to 2008 capital expenditures of $6.6-7.0 billion, the largest use of operating cash flow, and expects production to rise about 9% from 2007 to roughly 240-247 MMBoe. Capital is weighted toward North America: about 83% of planned spending is in low-risk projects, with the remainder in high-impact Gulf of Mexico, Brazil and China projects.
How exposed is Devon to commodity price swings in 2008?
Devon has hedged about 64% of expected 2008 gas production (collars with a $7.50 floor and $9.43 average ceiling, plus swaps at $8.24) and about 12% of oil production (collars with a $70 floor). Hedges do not cover the rest of production, so unhedged volumes remain fully exposed, and the 2007 year-end NYMEX oil price of $96 was well above the $60.42 average used for reserve valuation.
What risks does the auction rate securities exposure pose?
Devon held $372 million of auction rate securities at year-end 2007 (reduced to $153 million afterward), all rated AAA and backed by federally guaranteed student loans. Since February 8, 2008, auctions have failed, so these holdings may become illiquid and could be reclassified as long-term investments or require impairment, although management does not currently believe they are impaired.
What are the main near-term growth projects and their timing?
Key projects include Jackfish in Alberta, where steam injection began in 2007 and production is expected to ramp through 2008 toward 35,000 Bbl/d, with a second phase sanction targeted for mid-2008. Cascade in the deepwater Gulf of Mexico is expected to start production in 2010, and Polvo in Brazil began producing oil in 2007. Devon also plans 500-600 gross Barnett Shale wells in 2008.
06—Continue