DEVON ENERGY CORP/DE - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2002

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ------ OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-30176

DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 73-1567067
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)

20 NORTH BROADWAY
OKLAHOMA CITY, OKLAHOMA 73102-8260
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (405) 235-3611

Not applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .

The number of shares outstanding of Registrant's common stock, par
value $.10, as of October 31, 2002, was 156,666,000.

1 of 56 total pages
(Exhibit Index is found at page 50)

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DEVON ENERGY CORPORATION

Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission

DEFINITIONS
As used in this document:
"Mcf" means thousand cubic feet
"Bcf" means billion cubic feet
"Bbl" means barrel
"MBbls" means thousand barrels
"MMBbls" means million barrels
"Boe" means equivalent barrels of oil
"MMBoe" means million equivalent barrels of oil
"Oil" includes crude oil and condensate
"NGLs" means natural gas liquids
"C$" means Canadian dollar

2

DEVON ENERGY CORPORATION

PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001

(FORMING A PART OF FORM 10-Q QUARTERLY REPORT
TO THE SECURITIES AND EXCHANGE COMMISSION)

3

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)

See accompanying notes to consolidated financial statements.

4

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

See accompanying notes to consolidated financial statements.

5

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)

See accompanying notes to consolidated financial statements.

6

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN MILLIONS)

See accompanying notes to consolidated financial statements.

7

DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

See accompanying notes to consolidated financial statements.

8

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements and notes thereto of
Devon Energy Corporation ("Devon") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. The accompanying consolidated financial statements and notes
thereto should be read in conjunction with the consolidated financial statements
and notes thereto included in Devon's Current Report on Form 8-K filed October
3, 2002.

In the opinion of Devon's management, all adjustments (all of which are
normal and recurring) have been made which are necessary to fairly state the
consolidated financial position of Devon and its subsidiaries as of September
30, 2002, and the results of their operations and their cash flows for the
three-month and nine-month periods ended September 30, 2002 and 2001. Certain of
the 2001 amounts in the accompanying consolidated financial statements have been
reclassified to conform to the 2002 presentation.

2. BUSINESS COMBINATIONS AND PRO FORMA INFORMATION

Mitchell Energy & Development Corp. Merger

On January 24, 2002, Devon completed its acquisition of Mitchell Energy
& Development Corp. ("Mitchell"). Under the terms of this merger, Devon issued
approximately 30 million shares of Devon common stock and paid $1.6 billion in
cash to the Mitchell stockholders. The cash portion of the acquisition was
funded from borrowings under a $3.0 billion senior unsecured term loan credit
facility (see Note 3).

Devon acquired Mitchell for the significant development and
exploitation projects in each of Mitchell's core areas, increased marketing and
midstream operations and increased exposure to the North American natural gas
market.

The calculation of the purchase price and the preliminary allocation to
assets and liabilities as of January 24, 2002, are shown below. The purchase
price allocation is preliminary because certain items such as the determination
of the final tax bases and fair value of the assets and liabilities as of the
acquisition date are subject to change.

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Anderson Exploration Ltd. Acquisition

On October 17, 2001, Devon completed its acquisition of all the common
shares of Anderson Exploration Ltd. ("Anderson"). The cost to Devon of acquiring
Anderson's outstanding common shares and paying for the intrinsic value of
Anderson's outstanding options and appreciation rights was approximately $3.5
billion, which was funded from the sale of $3.0 billion of debt securities and
borrowings under a $3.0 billion senior unsecured term loan credit facility (see
Note 3).

Pro Forma Information

Set forth in the following table is certain unaudited pro forma
financial information for the nine-month periods ended September 30, 2002 and
2001. The information for the nine-month periods ended September 30, 2002 and
2001, has been prepared assuming the Anderson acquisition and the Mitchell
merger were consummated on January 1, 2001. All pro forma information is based
on estimates and assumptions deemed appropriate by Devon. The pro forma
information is presented for illustrative purposes only. If the transactions had
occurred in the past, Devon's operating results might have been different from
those presented in the following table. The pro forma information should not be
relied upon as an indication of the operating results that Devon would have
achieved if the transactions had occurred on January 1, 2001. The pro forma
information also should not be used as an indication of the future results that
Devon will achieve after the transactions.

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The following should be considered in connection with the pro forma
financial information presented:

- On February 12, 2001, Anderson acquired all of the outstanding shares
of Numac Energy Inc. The summary unaudited pro forma combined statements of
operations do not include any results from Numac's operations prior to February
12, 2001.

- Devon's historical results of operations for the nine-month period
ended September 30, 2001 include $25 million of amortization expense for
goodwill related to previous mergers. As of January 1, 2002, in accordance with
new accounting pronouncements, such goodwill is no longer amortized, but instead
is tested for impairment at least annually. No goodwill amortization expense has
been recognized in the pro forma statements of operations for the goodwill
related to the Anderson acquisition or the Mitchell merger.

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3. LONG-TERM DEBT

$3 Billion Term Loan Credit Facility

Prior to December 31, 2001, Devon used proceeds of $1 billion of a $3
billion term loan credit facility to partially fund the Anderson acquisition.
The remaining $2 billion of availability was utilized upon the closing of the
Mitchell acquisition on January 24, 2002. As of September 30, 2002, $1.9 billion
of the balance outstanding was retired. The primary sources of the repayments
were the issuance of $1 billion of debt securities, of which $0.8 billion was
used to pay down debt, and $1.1 billion from the sale of certain oil and gas
properties. As of September 30, 2002, the balance outstanding under the term
loan credit facility was $1.1 billion at an average rate of 2.8%.

Debt Securities

On March 25, 2002, Devon sold $1 billion of 7.95% notes due April 15,
2032. The net proceeds received, after discounts and issuance costs, were $986
million. The debt securities are unsecured and unsubordinated obligations of
Devon. The net proceeds were partially used to pay down $820 million on Devon's
$3 billion term loan credit facility. The remaining $166 million of net proceeds
was used in June 2002 to partially fund the early extinguishment of $175 million
of 8.75% senior notes due June 15, 2007. The notes were redeemed at 104.375% of
principal, or approximately $183 million.

Commercial Paper

As of September 30, 2002, Devon had $78 million of borrowings under its
commercial paper program at an average rate of 2.3%. Because Devon has the
intent and ability to refinance the balance due with borrowings under its credit
facilities, the $78 million outstanding under the commercial paper program was
classified as long-term debt on the September 30, 2002 consolidated balance
sheet.

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Credit Facilities

Devon has $1 billion of unsecured long-term credit facilities (the
"Credit Facilities"). The Credit Facilities include a U.S. facility of $725
million (the "U.S. Facility") and a Canadian facility of $275 million (the
"Canadian Facility"). The $725 million U.S. Facility consists of a Tranche A
facility of $200 million and a Tranche B facility of $525 million. On June 7,
2002, Devon renewed the $525 million Tranche B facility and its $275 million
Canadian facility.

The Tranche A facility matures on October 15, 2004. Devon may borrow
funds under the Tranche B facility until June 5, 2003 (the "Tranche B Revolving
Period"). Devon may request that the Tranche B Revolving Period be extended an
additional 364 days by notifying the agent bank of such request between 30 and
60 days prior to the end of the Tranche B Revolving Period. On June 6, 2003, at
the end of the Tranche B Revolving Period, Devon may convert the then
outstanding balance under the Tranche B facility to a two-year term loan by
paying the Agent a fee of 12.5 basis points. The applicable borrowing rate would
be at LIBOR plus 125 basis points. On September 30, 2002, there were no
borrowings outstanding under the $725 million U.S. Facility. The available
capacity under the U.S. Facility as of September 30, 2002, net of commercial
paper borrowings and outstanding letters of credit, was $623 million.

Devon may borrow funds under the $275 million Canadian Facility until
June 5, 2003 (the "Canadian Facility Revolving Period"). Devon may request that
the Canadian Facility Revolving Period be extended an additional 364 days by
notifying the agent bank of such request between 30 and 60 days prior to the end
of the Canadian Facility Revolving Period. Debt outstanding as of the end of the
Canadian Facility Revolving Period is payable in semiannual installments of 2.5%
each for the following five years, with the final installment due five years and
one day following the end of the Canadian Facility Revolving Period. On
September 30, 2002, there were no borrowings under the $275 million Canadian
facility.

Under the terms of the Credit Facilities, Devon has the right to
reallocate up to $100 million of the unused Tranche B facility maximum credit
amount to the Canadian Facility. Conversely, Devon also has the right to
reallocate up to $100 million of unused Canadian Facility maximum credit amount
to the Tranche B Facility.

Amounts borrowed under the Credit Facilities bear interest at various
fixed rate options that Devon may elect for periods up to six months. Such rates
are generally less than the prime rate. Devon may also elect to borrow at the
prime rate. The Credit Facilities provide for an annual facility fee of $1.4
million that is payable quarterly.

Devon's $1 billion revolving credit facilities and its $3 billion term
loan credit facility each contain only one material financial covenant. This
covenant requires Devon to maintain a ratio of total funded debt to total
capitalization of no more than 65%. The credit agreements contain definitions of
total funded debt and total capitalization that include adjustments to the
respective amounts reported in Devon's consolidated financial statements. Per
the agreements, total funded debt excludes the debentures that are exchangeable
into shares of ChevronTexaco Corporation common stock. Also, total
capitalization is adjusted to add back noncash financial writedowns such as full
cost ceiling property impairments or goodwill impairments. As of September 30,
2002,

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Devon's ratio of total funded debt to total capitalization, as defined in its
credit agreements, was 55.8%.

Letter of Credit Facility

On July 25, 2002, Devon renewed and increased its letter of credit and
revolving bank facility ("LOC Facility") for its Canadian operations. This C$150
million LOC Facility will be used primarily by Devon's wholly-owned
subsidiaries, Devon Canada Corporation and Northstar Energy Corporation, to
issue letters of credit. As of September 30, 2002, C$105 million ($ 66 million
converted to U.S. dollars using the September 30, 2002 exchange rate) of letters
of credit were issued under the LOC Facility primarily for Canadian drilling
commitments.

4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Devon has periodically entered into oil and gas financial instruments
and foreign exchange rate swaps to manage its exposure to oil and gas price
volatility. The foreign exchange rate swaps mitigate the effect of volatility in
the Canadian-to-U.S. dollar exchange rate on certain Canadian gas revenues that
are based on U.S. dollar prices. The hedging instruments are usually placed with
counterparties that Devon believes are minimal credit risks. It is Devon's
policy to only enter into derivative contracts with investment grade rated
counterparties deemed by management to be competent and competitive market
makers. The oil and gas reference prices upon which the price hedging
instruments are based reflect various market indices that have a high degree of
historical correlation with actual prices received by Devon.

As of September 30, 2002, $82 million of net deferred losses on
derivative instruments in "accumulated other comprehensive loss" are expected to
be reclassified to earnings from operations during the next 12 months.
Transactions and events expected to occur over the next 12 months that will
necessitate reclassifying these derivatives' losses to earnings from operations
are primarily the production and sale of the hedged oil and gas quantities. The
maximum term over which Devon is hedging exposures to the variability of cash
flows for commodity price risk is 27 months.

Devon recorded in its statements of operations a gain of $21 million
and $2 million in the third quarter of 2002 and 2001, respectively, and a gain
of $28 million and a loss of $5 million in the nine-month periods ended
September 30, 2002 and 2001, respectively, for the change in fair value of
derivative instruments that do not qualify for hedge accounting treatment, as
well as the ineffectiveness of derivatives that do qualify as hedges. Included
in the three-month periods ended September 30, 2002 and 2001 are a net loss of
$3 million and $1 million, respectively, related to such ineffectiveness.
Included in the nine-month periods ended September 30, 2002 and 2001 are a net
gain of $7 million and a net loss of $1 million, respectively, related to such
ineffectiveness. These gains and losses are related to both (i) the
ineffectiveness of the various cash flow hedges and (ii) the component of the
derivative instrument gain or loss excluded from the assessment of hedge
effectiveness.

5. GOODWILL

Effective January 1, 2002, Devon adopted the remaining provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142).

15

Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives
are no longer amortized, but are instead tested for impairment at least
annually.

As of January 1, 2002, Devon had unamortized goodwill in the amount of
$2.2 billion, which was subject to the transition goodwill impairment assessment
provisions of SFAS No. 142. Devon has completed its assessment of the fair value
of its reporting units and compared such fair value to each reporting unit's
carrying value, including goodwill, as of January 1, 2002. Based on this
assessment, no transitional impairment of the carrying value of goodwill was
required.

As a result of the January 2002 Mitchell acquisition, goodwill
increased $1.4 billion. All of the Mitchell-related goodwill is recorded in
Devon's U.S. segment.

Following is a reconciliation of reported net income and the related
earnings per share amounts assuming the provisions of SFAS No. 142 had been
adopted as of January 1, 2001.

6. EARNINGS PER SHARE

The following table reconciles the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three-month periods ended September 30, 2002 and 2001 and the nine-month
period ended September 30, 2001. The diluted earnings per share calculations for
the nine-month period ended September 30, 2002 produce results that are
anti-dilutive as a result of the loss on continuing operations. (The diluted
calculation for the nine months ended September 30, 2002 increased the net
earnings by $5 million and increased the common shares outstanding by 6 million
shares.) Therefore, the diluted earnings per share amounts for the nine-month
period ended September 30, 2002 reported in the accompanying consolidated
statements of operations are the same as the basic earnings per share amounts.

The senior convertible debentures were not included in the dilution
calculation for the three-month period ended September 30, 2002, because the
inclusion was anti-dilutive.

Options to purchase approximately 3.3 million shares of Devon's common
stock with exercise prices ranging from $44.60 per share to $89.66 per share
(with a weighted average price of $53.89 per share) were outstanding at
September 30, 2002, but were not included in the computation of diluted earnings
per share for the third quarter of 2002 because the options' exercise prices
exceeded the average market price of Devon's common stock during the period.
Similarly, options to purchase approximately 3.0 million shares of Devon's
common stock with exercise prices ranging from $45.49 per share to $89.66 per
share (with a weighted average price of $55.58 per share) were excluded from the
diluted earnings per share calculation for the third quarter of 2001. The
excluded options for the 2002 period expire between November 30, 2002 and May
16, 2012.

All options to purchase Devon common stock were excluded from the
diluted earnings per share calculations for the first nine months of 2002
because of the anti-dilutive effect of such

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options. Options to purchase approximately 1.1 million shares of Devon's common
stock with exercise prices ranging from $52.39 per share to $89.66 per share
(with a weighted average price of $63.44 per share) were excluded from the
diluted earnings per share calculation for the first nine months of 2001.

7. REDUCTION OF CARRYING VALUE OF OIL AND GAS PROPERTIES

Under the full cost method of accounting, the net book value of oil and
gas properties less related deferred income taxes (the "costs to be recovered")
may not exceed a calculated "full cost ceiling." The ceiling limitation is the
discounted estimated after-tax future net revenues from oil and gas properties
plus the cost of properties not subject to amortization. The ceiling is imposed
separately by country. In calculating future net revenues, current prices and
costs are generally held constant indefinitely, and Devon does not include the
effect of hedges in the calculation of the future net revenues. Therefore, the
ceiling limitation is not necessarily indicative of the properties' fair value.
The costs to be recovered are compared to the ceiling on a quarterly basis. If
the costs to be recovered exceed the ceiling, the excess is written off as an
expense.

An expense recorded in one period may not be reversed in a subsequent
period even though higher oil and gas prices may have increased the ceiling
applicable to the subsequent period.

Based on oil and natural gas cash market prices as of June 30, 2002,
Devon's Canadian costs to be recovered exceeded the related ceiling value by
$371 million. This after-tax amount resulted in a pre-tax reduction of the
carrying value of Devon's Canadian oil and gas properties of $651 million in the
second quarter of 2002. This reduction was the result of a sharp drop in
Canadian gas prices during the last half of June 2002. The June 30, 2002,
reference prices used in the Canadian ceiling calculation, expressed in Canadian
dollars based on an exchange ratio of $0.6585, were a NYMEX price of C$40.79 per
barrel of oil and an AECO price of C$2.17 per Mcf of gas. The cash market prices
of natural gas increased during the month of July 2002 prior to Devon's release
of its second quarter results, but the increase was not sufficient to offset the
entire reduction calculated as of June 30.

8. DISCONTINUED OPERATIONS

Effective January 1, 2002, Devon was required to adopt SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes
both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business (as previously defined in that Opinion).

On April 18, 2002, Devon, sold its Indonesian operations to PetroChina
Company Limited for total cash consideration of $250 million. In accordance with
SFAS No. 144, Devon has reclassified the assets, liabilities and results of its
Indonesian operations, which were included in Devon's International segment, as
discontinued operations for each of the periods presented.

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On August 13, 2002, Devon announced that it had entered into an
agreement to sell its operations in Argentina to Petroleo Brasileiro S.A. -
Petrobras. The purchase price was approximately $90 million. Devon completed
this sale in October 2002. In accordance with SFAS No. 144, Devon has recognized
a loss in the third quarter of 2002 of $55 million from the divestiture, and has
reclassified the assets, liabilities and results of its Argentine operations,
which were included in Devon's International segment, as discontinued operations
for each of the periods presented.

The following tables include the major classes of assets and
liabilities and the revenues that were reclassified.

9. SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments (refunds) for interest and income taxes in the first nine
months of 2002 and 2001 are presented below:

20

The 2002 Mitchell acquisition involved non-cash consideration as
presented below:

10. SEGMENT INFORMATION

Devon manages its business by country. As such, Devon identifies its
segments based on geographic areas. Devon has three segments: its operations in
the U.S., its operations in Canada and its international operations outside of
North America. Substantially all of these segments' operations involve oil and
gas producing and marketing and midstream activities. Following is certain
financial information regarding Devon's segments. The revenues reported are all
from external customers.

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10. SEGMENT INFORMATION (CONTINUED)

22

10. SEGMENT INFORMATION (CONTINUED)

23

10. SEGMENT INFORMATION (CONTINUED)

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10. SEGMENT INFORMATION (CONTINUED)

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11. COMMITMENTS AND CONTINGENCIES

Devon is party to various legal actions arising in the normal course of
business. Matters that are probable of unfavorable outcome to Devon and which
can be reasonably estimated are accrued. Such accruals are based on information
known about the matters, Devon's estimates of the outcomes of such matters and
its experience in contesting, litigating and settling similar matters. None of
the actions are believed by management to involve future amounts that would be
material to Devon's financial position or results of operations in excess of
recorded accruals.

Environmental Matters

Devon is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and similar state statutes. In response to liabilities associated
with these activities, accruals have been established when reasonable estimates
are possible. Such accruals primarily include estimated costs associated with
remediation. Devon has not used discounting in determining its accrued
liabilities for environmental remediation, and no material claims for possible
recovery from third party insurers or other parties related to environmental
costs have been recognized in Devon's consolidated financial statements. Devon
adjusts the accruals when new remediation responsibilities are discovered and
probable costs become estimable, or when current remediation estimates must be
adjusted to reflect new information.

Certain of Devon's subsidiaries acquired in the 1999 merger with
PennzEnergy Company are involved in matters in which it has been alleged that
such subsidiaries are potentially responsible parties ("PRPs") under CERCLA or
similar state legislation with respect to various waste disposal areas owned or
operated by third parties. As of September 30, 2002, Devon's consolidated
balance sheet included $9 million of non-current accrued liabilities, reflected
in "Other liabilities," related to these and other environmental remediation
liabilities. Devon does not currently believe there is a reasonable possibility
of incurring additional material costs in excess of the current accruals
recognized for such environmental remediation activities. With respect to the
sites in which Devon subsidiaries are PRPs, Devon's conclusion is based in large
part on (i) the availability of defenses to liability, including the
availability of the "petroleum exclusion" under CERCLA and similar state laws,
and/or (ii) Devon's current belief that its share of wastes at a particular site
is or will be viewed by the Environmental Protection Agency or other PRPs as
being de minimis. As a result, Devon's monetary exposure is not expected to be
material.

Royalty Matters

Numerous gas producers and related parties, including Devon, have been
named in various lawsuits filed by private litigants alleging violation of the
federal False Claims Act. The suits allege that the producers and related
parties used below-market prices, improper deductions, improper measurement
techniques and transactions with affiliates which resulted in underpayment of
royalties in connection with natural gas and natural gas liquids produced and
sold from federal and Indian owned or controlled lands. The various suits have
been consolidated by the United States Judicial Panel on Multidistrict
Litigation for pre-trial proceedings in the matter of In re Natural Gas
Royalties Qui Tam Litigation, MDL-1293, United States District

26

Court for the District of Wyoming. Devon believes that it has acted reasonably,
has legitimate and strong defenses to all allegations in the suits, and has paid
royalties in good faith. Devon does not currently believe that it is subject to
material exposure in association with these lawsuits and no liability has been
recorded in connection therewith.

Devon is involved in other various routine legal proceedings incidental
to its business. However, to Devon's knowledge as of the date of this report,
there were no other material pending legal proceedings to which Devon is a party
or to which any of its property is subject.

12. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 requires liability recognition for
retirement obligations associated with tangible long-lived assets, such as
producing well sites, offshore production platforms, and natural gas processing
plants. The obligations included within the scope of SFAS No. 143 are those for
which a company faces a legal obligation for settlement. The initial measurement
of the asset retirement obligation is to be fair value, defined as "the price
that an entity would have to pay a willing third party of comparable credit
standing to assume the liability in a current transaction other than in a forced
or liquidation sale." Devon expects that it will use a valuation technique such
as present value of expected cash outflows to estimate fair value.

The asset retirement cost equal to the fair value of the retirement
obligation is to be capitalized as part of the cost of the related long-lived
asset and allocated to expense using a systematic and rational method.

Devon will be required to adopt SFAS No. 143 effective January 1, 2003
using a cumulative effect approach to recognize transition amounts for asset
retirement obligations, asset retirement costs and accumulated depreciation.

Devon currently includes estimated costs of dismantlement, removal,
site reclamation, and other similar activities in the total costs that are
subject to depreciation, depletion, and amortization. Devon does not record a
separate asset or liability for such amounts. Devon has not completed the
assessment of the impact that adoption of SFAS No. 143 will have on its
consolidated financial statements.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion addresses material changes in results of
operations for the three- month and nine-month periods ended September 30, 2002,
compared to the three-month and nine-month periods ended September 30, 2001, and
in financial condition since December 31, 2001. It is presumed that readers have
read or have access to Devon's 2001 Annual Report on Form 10-K which includes
disclosures regarding critical accounting policies as part of Management's
Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

Devon recorded net earnings for the third quarter of 2002 of $62
million, or $0.38 per share. This compares to net earnings of $85 million, or
$0.65 per share for the third quarter of 2001. Net earnings for the first nine
months of 2002 were $20 million, or $0.08 per share. This compares to net
earnings for the first nine months of 2001 of $621 million, or $4.79 per share.
The decrease in third quarter net earnings was due to the effect of the
discontinued operations. The decrease in the first nine months' net earnings was
due to a decline in oil, natural gas and NGL prices and increases in expenses,
including a $651 million reduction of carrying value of Canadian oil and gas
properties. These negative effects in both periods were partially offset by an
increase in production from the Anderson and Mitchell acquisitions.
Additionally, the nine month period ended September 30, 2002, benefited from a
net gain from discontinued operations.

On January 24, 2002, Devon completed its acquisition of Mitchell. Under
the terms of this merger, Devon issued approximately 30 million shares of Devon
common stock and paid $1.6 billion in cash to the Mitchell stockholders. The
cash portion of the acquisition was funded from borrowings under a $3.0 billion
senior unsecured term loan credit facility.

On March 25, 2002, Devon sold $1 billion of 7.95% notes due April 15,
2032. The net proceeds received, after discounts and issuance costs, were $986
million. The debt securities are unsecured and unsubordinated obligations of
Devon. The net proceeds were partially used to pay down $820 million on Devon's
$3 billion term loan credit facility. The remaining $166 million of net proceeds
was used in June 2002 to partially fund the early extinguishment of $175 million
of 8.75% senior notes due June 15, 2007. The notes were redeemed at 104.375% of
principal, or approximately $183 million.

On June 7, 2002, Devon renewed the $800 million, 364-day portion of its
unsecured long-term credit facilities (the "Credit Facilities"). The Credit
Facilities include a U.S. facility of $725 million (the "U.S. Facility") and a
Canadian facility of $275 million (the "Canadian Facility").

On July 25, 2002, Devon renewed and increased its letter of credit and
revolving bank facility ("LOC Facility") for its Canadian operations. This C$150
million LOC Facility will be used primarily by Devon's wholly-owned
subsidiaries, Devon Canada Corporation and Northstar Energy Corporation, to
issue letters of credit.

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RESULTS OF OPERATIONS

Total revenues increased $495 million, or 92%, in the third quarter of
2002, and $887 million, or 40%, in the first nine months of 2002. This was the
result of increases in oil, gas and NGL production and an increase in marketing
and midstream revenue, partially offset by a decline in the combined average
price of oil, gas and NGLs. The increases in production and marketing and
midstream revenues were primarily the result of the Anderson