Devon Energy Reports Record 2010 Net Earnings and Proved Reserves

OKLAHOMA CITY, Feb 16, 2011 (BUSINESS WIRE) --

Devon Energy Corporation (NYSE:DVN) today reported record net earnings for the year ended December 31, 2010, of $4.6 billion, or $10.35 per common share ($10.31 per diluted common share). This compares to a full-year 2009 net loss of $2.5 billion, or $5.58 per common share ($5.58 per diluted common share). The company's 2009 financial results were impacted by a $4.2 billion non-cash, after-tax reduction in the carrying value of oil and gas properties.

For the quarter ended December 31, 2010, Devon reported net earnings of $562 million, or $1.30 per common share ($1.29 per diluted common share). In the fourth quarter of 2009, the company reported net earnings of $667 million, or $1.50 per common share ($1.49 per diluted common share).

Devon's fourth-quarter 2010 financial results were impacted by certain items securities analysts typically exclude from their published estimates. Excluding these adjusting items, the company earned $683 million, or $1.57 per diluted common share. The adjusting items are discussed in detail later in this news release.

"2010 was an outstanding year for Devon. The company's record earnings were accompanied by excellent operating results and the successful execution of our strategic repositioning," commented John Richels, president and chief executive officer. "Our focused North American onshore capital program helped grow proved reserves to an all-time record of 2.9 billion equivalent barrels, and we are nearing completion of our strategic repositioning with total asset sales of more than $10 billion."

Proved Oil and Gas Reserves Climb to Record Levels

In accordance with accounting standards, Devon's year-end 2009 reserve balances include the reserves associated with the company's Gulf of Mexico properties that were divested in 2010. Following is a discussion of proved reserves related only to Devon's retained North American onshore assets, excluding the impact of the divested properties.

At year-end 2010, Devon's North American onshore estimated proved reserves were a record 2,873 million oil-equivalent barrels (Boe), a nine percent increase over year-end 2009. During 2010 Devon added 389 million oil-equivalent barrels through successful drilling (discoveries, extensions and performance revisions). Drill-bit capital applicable to its North American onshore properties totaled $6.1 billion, including $1.2 billion of unproved leasehold capture. Revisions related to changes in oil, natural gas, and natural gas liquids prices increased North American onshore proved reserves by an additional 71 million Boe.

Proved developed reserves were 2,042 million Boe at December 31, 2010, or 71 percent of total proved reserves. Year-end proved reserves were composed of 681 million barrels of crude oil, 10.3 trillion cubic feet of natural gas and 479 million barrels of natural gas liquids.

"Devon delivered outstanding results with our North American onshore drilling program in 2010," said Dave Hager, executive vice president, exploration and production. "Our drill-bit reserve additions were 175 percent of our production output for the year. In addition, the reserves were added at very competitive finding costs in spite of adding $1.2 billion of unproved acreage during the year."

Liquids Production Growth and Cana-Woodford Development Lead 2010 Operating Highlights

Devon drilled 1,588 wells in 2010 applicable to its continuing operations with a 99 percent success rate. Following are operational highlights from the past year:

• Devon increased oil and natural gas liquids production from its North American onshore properties by six percent in 2010, to an average of 193,000 barrels per day.
• During the year, Devon completed 87 wells in the Cana-Woodford Shale play in western Oklahoma and more than doubled its industry-leading leasehold position in the play to 243,000 net acres. Fourth-quarter production from the Cana-Woodford increased more than 200 percent over the year-ago quarter to an average of 137 million cubic feet of gas equivalent per day. The company also completed construction and commenced operation of its Cana gas processing plant in 2010.
• In the Permian Basin, Devon increased fourth-quarter production 16 percent over the fourth quarter of 2009, to 45,000 Boe per day. Devon has nearly 1 million net acres of leasehold in the region targeting various oil and liquids-rich play types. In 2011, the company plans to run 17 operated rigs and drill approximately 300 wells to continue de-risking and developing these plays.
• In 2010, production from the Devon-operated Jackfish oil sands project averaged 26,000 gross barrels per day or 25,000 barrels per day net to the company. Following scheduled facilities maintenance in the third quarter and the Enbridge pipeline system outage in the fourth quarter, Jackfish production ramped back up to 31,000 gross barrels per day at year-end.
• Construction of the company's second Jackfish project is now complete. Devon expects to begin injecting steam at Jackfish 2 in the second quarter, with first oil production expected by the end of 2011. Devon applied for regulatory approval of a third phase of Jackfish in the third quarter of 2010.
• During the year, Devon added to its Canadian oil position by acquiring a 50 percent interest in the Pike oil sands leases. The Pike acreage lies immediately adjacent to the company's highly successful Jackfish project and has estimated gross recoverable resources of up to 1.5 billion barrels. Devon is the operator of the project and is currently drilling appraisal wells to determine an optimal development configuration.
• The company's net production from the Barnett Shale field in north Texas averaged 1.2 billion cubic feet of natural gas equivalent per day in the fourth quarter, including 42,000 barrels per day of liquids production. This represents a 14 percent increase in production compared to fourth quarter of 2009.

Oil and Gas Sales Increase 19 Percent

Sales of oil, gas and natural gas liquids from continuing operations increased 19 percent to $7.3 billion in the year ended December 31, 2010. Comparable sales for the year ended December 31, 2009, were $6.1 billion. Devon's average full-year 2010 realized price per Boe, including the impact of hedges, increased 26 percent over the prior year to $35.81 per barrel. Higher commodity prices more than offset a decrease in production resulting from the Gulf of Mexico properties that were divested during 2010.

Full-year 2010 production from the company's North American onshore properties grew by 3 million Boe over the prior year to a total of 223 million oil-equivalent barrels. The improvement was driven entirely by higher oil and natural gas liquids production.

Devon's fourth quarter production was impacted by a number of minor operational issues including volume curtailments attributable to the Enbridge pipeline outage, completion delays, and interruptions due to severe weather. In aggregate, these items reduced fourth quarter production by 11,000 equivalent barrels per day. In spite of these operational issues, North American onshore production in the fourth quarter averaged 619,000 Boe per day, an eight percent increase over the fourth quarter of 2009.

Repositioning Drives Cost Savings

Cost efficiencies realized through Devon's strategic repositioning were reflected in the company's 2010 results. In spite of a rising industry cost environment, expenses in most categories declined or increased only modestly.

Lease operating expenses (LOE) in 2010 increased one percent over 2009 to $1.7 billion. The increase in LOE is primarily attributable to the strengthening of the Canadian dollar. Devon's divestiture of higher cost Gulf of Mexico properties helped offset the effects of rising oilfield service and supply costs.

Depreciation, depletion and amortization (DD&A) of oil and gas properties decreased nine percent in 2010 to $1.7 billion. The lower DD&A expense was primarily driven by the disposition of Devon's Gulf of Mexico properties.

General and administrative expenses declined 13 percent in 2010 to $563 million. Lower employee costs related to the company's strategic repositioning drove the improvement.

Interest expense in 2010 increased $14 million to $363 million. However, 2010 interest expense included a $19 million charge attributable to the early redemption of the company's senior notes. Absent the early redemption charge, interest expense declined by $5 million when compared to 2009.

Cash Flow Before Balance Sheet Changes Increases 21 Percent;
Share Repurchases and Debt Reduction Total $3 Billion

Cash flow before balance sheet changes in 2010 reached $5.7 billion, a 21 percent increase over the prior year. During 2010, divestiture sale proceeds from the company's strategic repositioning efforts provided an additional $7 billion of cash flow. In total, these sources of cash allowed Devon to fund its total capital demands, to repurchase 18.3 million shares of common stock for $1.2 billion, and to retire $1.8 billion of debt during the year.

As of December 31, 2010, the company's cash balances totaled $3.4 billion, reducing net debt to 10 percent of adjusted capitalization compared with 29 percent at year-end 2009. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.

Strategic Repositioning Nears Completion

In 2010, the company divested its Gulf of Mexico operations and closed on the sale of its assets in Azerbaijan and China for aggregate pre-tax proceeds of $7 billion. The company's remaining divestiture package, consisting of its assets in Brazil, is under contract for $3.2 billion. Total proceeds for Devon's strategic repositioning will exceed $10 billion with after-tax proceeds approximating $8 billion.

In accordance with accounting standards, Devon has reclassified the assets, liabilities, and results of its international segment as discontinued operations for all accounting periods presented in this release. Although revenues and expenses for prior periods were reclassified, previously reported net earnings were not impacted. Included with this release is a table of revenues, expenses, production categories, and the amounts reclassified as discontinued operations for each period presented.

Although Devon successfully completed the divestiture of its Gulf of Mexico operations, results from these assets do not qualify as discontinued operations under accounting standards and reside within continuing operations. However, information is provided within this release to enable the reader to isolate results of the company's North American onshore operations.

Items Excluded from Published Earnings Estimates

Devon's reported net earnings include items of income and expense that are typically excluded by securities analysts in their published estimates of the company's financial results. These items and their effects upon reported earnings for the full year and fourth quarter of 2010 were as follows:

Items affecting continuing operations:

• A change in the fair value of oil, gas and NGL derivative instruments decreased full-year earnings by $77 million pre-tax ($50 million after tax) and decreased fourth-quarter earnings by $371 million pre-tax ($244 million after tax).
• A change in fair value of interest-rate and other financial instruments decreased full-year earnings by $30 million pre-tax ($19 million after tax) and increased fourth-quarter earnings by $128 million pre-tax ($86 million after tax).
• U.S. income taxes on foreign earnings now expected to be repatriated to the U.S. decreased full-year earnings by $144 million and decreased fourth-quarter earnings by $70 million.
• Income tax accrual adjustments increased full-year earnings by $57 million and increased fourth-quarter earnings by $72 million.
• Restructuring costs decreased full-year earnings by $57 million pre-tax ($36 million after tax) and decreased fourth-quarter earnings by $2 million pre-tax ($1 million after tax).
• Additional interest expense attributable to the early redemption of 7.25 percent senior notes decreased full-year earnings by $19 million pre-tax ($12 million after tax).

Items affecting discontinued operations:

• Divestitures of assets increased full-year earnings by $1.8 billion pre-tax ($1.8 billion after tax) and decreased fourth-quarter earnings by $25 million pre-tax and increased after-tax earnings by $20 million.
• The decision to divest all international assets generated financial benefits that increased full-year earnings by $143 million pre-tax ($93 million after tax) and increased fourth-quarter earnings by $29 million pre-tax ($19 million after tax).
• Insurance settlement proceeds related to a business interruption claim in Azerbaijan increased full-year earnings by $60 million pre-tax ($60 million after tax).
• Restructuring costs increased full-year earnings by $4 million pre-tax ($3 million after tax) and decreased fourth-quarter earnings by $4 million pre-tax ($3 million after tax).

The following tables summarize the full-year and fourth-quarter effects of these items on 2010 earnings, income taxes and cash flow.

In aggregate, these items increased full-year 2010 net earnings by $1.7 billion, or $3.94 per common share ($3.92 per diluted share). These items and their associated tax effects decreased full-year 2010 cash flow before balance sheet changes by $561 million.

In aggregate, these items decreased fourth-quarter 2010 net earnings by $121 million, or $0.28 per common share ($0.28 per diluted share). These items and their associated tax effects increased fourth-quarter 2010 cash flow before balance sheet changes by $112 million.

Conference Call to be Webcast Today

Devon will discuss its 2010 financial and operating results in a conference call webcast today. The webcast will begin at 10 a.m. Central Time (11 a.m. Eastern Time). The webcast may be accessed from Devon's Internet home page at www.devonenergy.com.

This press release includes "forward-looking statements" as defined by the Securities and Exchange Commission. Such statements are those concerning strategic plans, expectations and objectives for future operations. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the company expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Statements regarding future drilling and production are subject to all of the risks and uncertainties normally incident to the exploration for and development and production of oil and gas. These risks include, but are not limited to the volatility of oil, natural gas and NGL prices; uncertainties inherent in estimating oil, natural gas and NGL reserves; drilling risks; environmental risks; and political or regulatory changes. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. The forward-looking statements in this press release are made as of the date of this press release, even if subsequently made available by Devon on its website or otherwise. Devon does not undertake any obligation to update the forward-looking statements as a result of new information, future events or otherwise.

Effective January 1, 2010, the United States Securities and Exchange Commission permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves that meet the SEC's definitions for such terms, and price and cost sensitivities for such reserves, and prohibits disclosure of resources that do not constitute such reserves. This release may contain certain terms, such as resource potential and exploration target size. These estimates are by their nature more speculative than estimates of proved, probable and possible reserves and accordingly are subject to substantially greater risk of being actually realized.The SEC guidelines strictly prohibit us from including these estimates in filings with the SEC. U.S. investors are urged to consider closely the disclosure in our Form 10-K for the fiscal year ended December 31, 2009, available from us at Devon Energy Corporation, Attn. Investor Relations, 20 North Broadway, Oklahoma City, OK 73102. You can also obtain this form from the SEC by calling 1-800-SEC-0330 or from the SEC's website at www.sec.gov.

Devon Energy Corporation is an Oklahoma City-based independent energy company engaged in oil and gas exploration and production. Devon is a leading U.S.-based independent oil and gas producer and is included in the S&P 500 Index. For more information about Devon, please visit our website at www.devonenergy.com.

DEVON ENERGY CORPORATION
FINANCIAL AND OPERATIONAL INFORMATION

Devon capitalizes certain general and administrative expenses related to property acquisition, exploration and development activities. These capitalized expenses were $311 million and $332 million in 2010 and 2009, respectively. Devon also capitalizes certain interest expenses related to property acquisition, exploration and development activities. These capitalized expenses were $37 million and $74 million in 2010 and 2009, respectively. These capitalized general and administrative expenses and interest expenses are included in the costs shown in the preceding tables.