10-QPeriod: Q1 FY2008

DEVON ENERGY CORP/DE Quarterly Report for Q1 Ended Mar 31, 2008

Filed May 8, 2008For Securities:DVN

Summary

Devon Energy Corporation's first quarter 2008 report shows a significant increase in net earnings to $749 million, a 15% rise from the prior year, driven by a 10% increase in production to 58 million Boe and a substantial 38% increase in realized prices (without hedges) to $55.07 per Boe. This strong operational performance, coupled with a 59% increase in marketing and midstream operating profit, resulted in record net cash provided by operating activities of $2.3 billion, a 49% increase year-over-year. The company is actively progressing with the divestiture of its West African operations, having entered into agreements for $2.6 billion in sales, with a significant portion expected to close in the second quarter of 2008. While oil and gas hedges resulted in a substantial net loss of $788 million in the quarter, primarily due to unrealized fair value losses, the company's financial position remains solid, with a debt-to-capitalization ratio of 23.3% and an upgraded credit rating from Standard & Poor's.

Key Highlights

  • 1Net earnings increased by 15% to $749 million ($1.66 per diluted share) in Q1 2008 compared to Q1 2007.
  • 2Production increased by 10% to 58 million Boe, and realized prices (without hedges) surged by 38% to $55.07 per Boe.
  • 3Net cash provided by operating activities reached a record $2.3 billion, up 49% year-over-year.
  • 4The company is on track to divest its West African operations for $2.6 billion, with closings expected in Q2 2008.
  • 5Oil and gas derivative financial instruments resulted in a significant net loss of $788 million in Q1 2008, primarily due to unrealized fair value adjustments.
  • 6Capital expenditures increased by 25% to $1.86 billion, primarily driven by increased drilling activities in key U.S. shale plays.
  • 7Devon's debt-to-capitalization ratio remained strong at 23.3% as of March 31, 2008.

Frequently Asked Questions

The primary drivers for the increase in Devon's earnings were a 10% rise in production to 58 million Boe and a significant 38% increase in realized commodity prices (excluding hedges) to $55.07 per Boe. Additionally, higher operating profit from marketing and midstream activities contributed to the improved financial performance.

Devon utilizes derivative financial instruments, including price swaps and costless collars, to hedge a portion of its future oil and natural gas production against price volatility. However, in the first quarter of 2008, these instruments resulted in a substantial net loss of $788 million, largely due to unrealized fair value changes driven by increases in forward commodity price curves.

Devon has entered into agreements to sell its West African operations for $2.6 billion. The company is in the process of obtaining necessary approvals and expects to complete the majority of these sales, including Equatorial Guinea, during the second quarter of 2008. These divestitures are expected to provide significant liquidity.

Devon's primary source of liquidity is its operating cash flow, which reached a record $2.3 billion in Q1 2008. The company also maintains significant credit facilities and access to commercial paper. As of March 31, 2008, Devon had approximately $1.5 billion in available credit capacity and maintained a strong debt-to-capitalization ratio of 23.3%. The company also recently extended the maturity of a significant portion of its senior credit facility.