01—Abstract
Summary
Summary of the 10-K/A filed June 9, 2008. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's 2007 Form 10-K (filed June 9, 2008) reports a record year: net earnings rose 27% to $3.6 billiona, diluted EPS was $8.00 (up 26%), and production grew 12% to 224 MMBoe.
Operating cash flow reached $6.7 billionb (continuing operations $6.2 billion), and proved reserves hit a record 2.5 billion Boe, up 9% after adding 390 MMBoe through extensions, discoveries and revisions. Growth was concentrated in the Barnett Shale, Canadian heavy oil (Jackfish and Lloydminster), and the deepwater Gulf of Mexico, with new Brazil (Polvo) production starting in 2007. Roughly 83% of planned 2008 capital is directed to low-risk North American projects.
The key risks are commodity-price exposure, rising costs, and balance sheet and portfolio actions. Lease operating expense per Boe rose 15% to $8.16c, and capital spending of $6.2 billion exceeded operating cash flow, with the gap funded by $1.5 billion of credit facility borrowings and $341 million from the Egypt sale. The West Africa divestiture, including Gabon at $205.5 million, is expected to close in the first half of 2008, with proceeds earmarked to repay commercial paper and resume buybacks.
Alberta's planned royalty increase effective 2009 is a notable overhang on Canadian returns, and the company has $372 milliond of auction rate securities facing failed auctions. The company guided to 2008 production growth of about 9%, capital expenditures of $6.6 to $7.0 billion, and a 390 to 410 MMBoe reserve addition target.
02—Key points
Key Highlights
- Record 2007 results: net earnings of $3.6 billion (up 27%) and diluted EPS of $8.00 (up 26%), with net cash from operations of $6.65 billion.
- Production rose 12% to 224 MMBoe, and proved reserves reached a record 2.5 billion Boe (up 9%), a reserve life that supports continued growth.
- Drill-bit success: 2,440 wells drilled at a 98% success rate; 390 MMBoe of reserve additions versus 224 MMBoe produced (about 1.7x replacement).
- Barnett Shale remains the largest property (29% of proved reserves, 950 MMcfe/d exit rate), and Jackfish heavy oil is ramping toward 35,000 Bbl/d.
- Balance sheet strain: capex of $6.2 billion exceeded operating cash flow, $1.45 billion of credit facility borrowings were drawn, and debt-to-capitalization was 23.8% against a 65% covenant.
- Portfolio reshaping: Egypt was sold for $341 million, and the West African divestiture (Gabon at $205.5 million) is targeted for completion in 1H 2008 to fund debt reduction and buybacks.
- Risk factors to monitor: Alberta royalty increases from 2009, $372 million in auction rate securities with failed auctions, and LOE per Boe up 15% to $8.16.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-K/AFY2007filed June 9, 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 strong were Devon's 2007 earnings and cash flows?
Net earnings reached a record $3.6 billion, with diluted EPS of $8.00 (up 26%). Net cash provided by operating activities was $6.65 billion, with $6.16 billion from continuing operations, an increase of about 11%.
Is Devon's reserve base growing sustainably?
Proved reserves rose 9% to a record 2.5 billion Boe at year-end 2007. Extensions, discoveries and performance revisions added 390 MMBoe, well above the 224 MMBoe produced, and 2008 guidance targets 390 to 410 MMBoe of additions. About 62% of the reserves are proved developed.
What are the biggest risks to Devon's outlook?
Key risks include commodity price volatility (about 64% of 2008 gas output is hedged), rising field service costs (LOE up 15% per Boe), capital spending that outpaces operating cash flow, and the planned Alberta royalty increase effective 2009, which management says will reduce future Canadian earnings but cannot yet be quantified. Auction rate securities and the West Africa sale timing are additional near-term items.
What is the 2008 outlook?
Management expects production to rise about 9% to roughly 240 to 247 MMBoe, capital expenditures of $6.6 to $7.0 billion, LOE of $2.17 to $2.24 billion, DD&A of $12.75 to $13.25 per Boe, and interest expense of $340 to $350 million. Dividends are expected near $250 million, and the company plans to resume buybacks after the West Africa sales close.
How is Devon funding its growth and shareholder returns?
Operating cash flow is the primary source, supplemented by $1.45 billion of Senior Credit Facility borrowings and $1.3 billion of available credit capacity at year-end 2007. Shareholder returns in 2007 included $326 million of buybacks and $259 million of dividends. Proceeds from the Egypt and West Africa sales are planned to repay commercial paper and credit facility borrowings.
06—Continue