10-QPeriod: Q2 FY2003

DEVON ENERGY CORP/DE Quarterly Report for Q2 Ended Jun 30, 2003

Filed August 13, 2003For Securities:DVN

Summary

Devon Energy Corp./DE (DVN) filed its Form 10-Q for the quarterly period ended June 30, 2003, on August 13, 2003. The report showcases a significant turnaround in financial performance compared to the previous year, primarily driven by increased production and higher commodity prices for oil, gas, and NGLs. The acquisition of Ocean Energy Inc. on April 25, 2003, substantially contributed to the growth in revenues and assets, although it also increased the company's debt and capital expenditures. Key financial highlights include a substantial increase in net earnings and a positive swing from a net loss in the prior year's comparable periods. The company's liquidity remains strong, supported by robust operating cash flow, which saw a significant increase due to higher revenues. Devon's capital structure appears sound, with a debt-to-capitalization ratio well within its credit facility covenants. Management remains optimistic about future performance, citing effective hedging strategies and ongoing development projects.

Key Highlights

  • 1Significant improvement in net earnings, with $356 million in Q2 2003 and $792 million for the first six months, compared to a net loss of $104 million and $42 million respectively in the prior year periods.
  • 2The completion of the merger with Ocean Energy Inc. on April 25, 2003, significantly boosted total revenues, assets, and production volumes.
  • 3Total revenues saw a substantial increase of 58% in the second quarter and 70% in the first half of 2003 compared to the same periods in 2002.
  • 4Operating cash flow more than doubled, rising to $1.8 billion in the first half of 2003 from $888 million in the first half of 2002, reflecting improved operational performance.
  • 5The company's debt-to-capitalization ratio was 44.4% as of June 30, 2003, well below the 65% covenant limit under its credit facilities.
  • 6Devon adopted new accounting standards, including SFAS No. 143 for Asset Retirement Obligations, which resulted in a cumulative effect adjustment to net earnings.
  • 7The company actively manages commodity price risk through various hedging instruments, including fixed-price swaps and costless price collars.

Frequently Asked Questions

The improved financial performance was primarily driven by a combination of increased production volumes and higher average realized prices for oil, natural gas, and natural gas liquids. The significant acquisition of Ocean Energy Inc. on April 25, 2003, also substantially contributed to revenue and production growth.

The merger with Ocean Energy Inc. resulted in a substantial increase in Devon's total assets and liabilities. Specifically, Devon assumed approximately $1.8 billion of Ocean's debt. This increased the company's total debt and consequently impacted its capital structure, although the debt-to-capitalization ratio remained within covenant limits.

Devon actively manages its exposure to commodity price volatility through various hedging strategies. These include financial price swaps, costless price collars, and fixed-price physical delivery contracts for a portion of its projected oil and natural gas production. These instruments are used to support targeted price levels and mitigate the impact of price fluctuations.

Yes, Devon adopted Statement of Financial Accounting Standards No. 143 (SFAS No. 143) regarding Accounting for Asset Retirement Obligations, effective January 1, 2003. This adoption resulted in a cumulative effect adjustment to net earnings and the establishment of a new asset retirement obligation on the balance sheet. Additionally, the company updated its critical accounting policy for the calculation of the 'full cost ceiling' for oil and gas properties based on new SEC guidance.