DEVON ENERGY CORP/DE - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-30176

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

DELAWARE 73-1567067
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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. [X] Yes No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes No [ ]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 28, 2002, was $7,639,933,692.

On March 1, 2003, 155,195,958 shares of common stock and 1,680,637
exchangeable shares of Devon's wholly-owned subsidiary, Northstar Energy
Corporation, were outstanding. Each exchangeable share is exchangeable for one
share of Devon common stock.

DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS

2

DEFINITIONS

As used in this document:

"Mcf" means thousand cubic feet

"MMcf" means million cubic feet

"Bcf" means billion cubic feet

"MMBtu" means million British thermal units, a measure of heating
value

"Bbl" means barrel

"MBbls" means thousand barrels

"MMBbls" means million barrels

"Boe" means equivalent barrels of oil

"MBoe" means thousand equivalent barrels of oil

"MMBoe" means million equivalent barrels of oil

"Oil" includes crude oil and condensate

"NGLs" means natural gas liquids

"Domestic" means the properties of the Company in the onshore
continental United States and the offshore Gulf of Mexico

"Canada" means the division of the Company encompassing oil and gas
properties located in Canada

"International" means the division of the Company encompassing oil and
gas properties that lie outside the United States and Canada

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding the Company's future
financial position, business strategy, budgets, projected revenues, projected
costs and plans and objectives of management for future operations, are
forward-looking statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "project," "estimate," "anticipate," "believe," or
"continue" or the negative thereof or variations thereon or similar terminology.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations ("Cautionary
Statements") include, but are not limited to, the Company's assumptions about
energy markets, production levels, reserve levels, operating results,
competitive conditions, technology, the availability of capital resources,
capital expenditure obligations, the supply and demand for oil, natural gas,
NGLs and other products or services, the price of oil, natural gas, NGLs and
other products or services, currency exchange rates, the weather, inflation, the
availability of goods and services, drilling risks, future processing volumes
and pipeline throughput, general economic conditions, either internationally or
nationally or in the jurisdictions in which Devon or its subsidiaries are doing
business, legislative or regulatory changes, including changes in environmental
regulation, environmental risks and liability under federal, state and foreign
environmental laws and regulations, the securities or capital markets and other
factors disclosed under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Item 2. Properties -- Proved
Reserves and Estimated Future Net Revenue"
3

"Item 7A. Quantitative and Qualitative Disclosure About Market Risk" and
elsewhere in this report. All subsequent written and oral forward-looking
statements attributable to the Company, or persons acting on its behalf, are
expressly qualified in their entirety by the cautionary statements. The Company
assumes no duty to update or revise its forward-looking statements based on
changes in internal estimates or expectations or otherwise.

4

PART I

ITEM 1. BUSINESS

GENERAL

Devon Energy Corporation, including its subsidiaries, ("Devon" or the
"Company") is an independent energy company engaged primarily in oil and gas
exploration, development and production, the acquisition of producing
properties, the transportation of oil, gas, and NGLs and the processing of
natural gas. Through its predecessors, Devon began operations in 1971 as a
privately-held company. In 1988, the Company's common stock began trading
publicly on the American Stock Exchange under the symbol "DVN". In addition,
commencing on December 15, 1998, a new class of Devon exchangeable shares began
trading on The Toronto Stock Exchange under the symbol "NSX". These shares are
essentially equivalent to Devon common stock. However, because they are issued
by Devon's wholly-owned subsidiary, Northstar Energy Corporation ("Northstar"),
they qualify as a domestic Canadian investment for Canadian shareholders. They
are exchangeable at any time, on a one-for-one basis, for common shares of
Devon.

The principal and administrative offices of Devon are located at 20 North
Broadway, Oklahoma City, OK 73102-8260 (telephone 405/235-3611).

Devon operates oil and gas properties in the United States, Canada and
internationally. Devon's North American properties are concentrated within five
geographic areas. Operations in the United States are focused in the Permian
Basin, the Mid-Continent, the Rocky Mountains and onshore and offshore Gulf
Coast. Canadian operations are focused in the Western Canadian Sedimentary Basin
in Alberta and British Columbia. Operations outside North America currently
include Azerbaijan, Brazil, China and West Africa. In addition to its oil and
gas operations, Devon has a large marketing and midstream business. This
includes marketing natural gas, crude oil and NGLs. Marketing and midstream also
includes the construction and operation of pipelines, storage and treating
facilities and gas processing plants. (A detailed description of Devon's
significant properties and associated 2002 developments can be found under "Item
2. Properties beginning on page 13 hereof).

At December 31, 2002, Devon's estimated proved reserves were 1,609 MMBoe,
of which 60% were natural gas reserves and 40% were oil and NGLs reserves. The
present value of pre-tax future net revenues discounted at 10% per annum
assuming essentially constant prices ("10% Present Value") of such reserves was
$15.3 billion. After taxes, the present value was $10.4 billion. Devon is one of
the top five public independent oil and gas companies based in the United
States, as measured by oil and gas reserves.

AVAILABILITY OF REPORTS

Devon makes available free of charge on its internet website, www.dvn.com,
its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(a) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after it electronically files or furnishes them to the
Securities Exchange Commission.

STRATEGY

Devon's primary objectives are to build reserves, production, cash flow and
earnings per share by (a) acquiring oil and gas properties, (b) exploring for
new oil and gas reserves and (c) optimizing production and value from existing
oil and gas properties. Devon's management seeks to achieve these objectives by
(a) concentrating its properties in core areas to achieve economies of scale,
(b) acquiring and developing high profit margin properties, (c) continually
disposing of marginal and non-strategic properties, (d) balancing reserves
between oil and gas, (e) maintaining a high degree of financial flexibility, and
(f) enhancing the value of Devon's production through marketing and midstream
activities.

5

During 1988, Devon expanded its capital base with its first issuance of
common stock to the public. This transaction began a substantial expansion
program that has continued through the subsequent years. Devon has used a
two-pronged strategy of acquiring producing properties and engaging in drilling
activities to achieve this expansion. Total proved reserves increased from 8
MMBoe at year-end 1987 (without giving effect to the 1998 and 2000 mergers
accounted for as poolings of interests) to 1,609 MMBoe at year-end 2002.

Devon's objective, however, is to increase value per share, not simply to
increase total assets. Proved reserves have grown from 1.31 Boe per share at
year-end 1987 (without giving effect to the 1998 and 2000 poolings) to 10.03 Boe
per share at year-end 2002. This represents a compound annual growth rate of
14.5%. Another measure of value per share is oil and gas production per share.
Production increased from 0.18 Boe per share in 1987 (without giving effect to
the 1998 and 2000 poolings) to 1.17 Boe per share in 2002, a compound annual
growth rate of 13.3%.

DEVELOPMENT OF BUSINESS

On February 24, 2003, Devon and Ocean Energy Inc. ("Ocean") announced their
intention to merge. In the transaction, Devon will issue 0.414 of a share of its
common stock for each outstanding share of Ocean common stock. Also, Devon will
assume approximately $1.8 billion of debt from Ocean. The transaction is subject
to approval by the stockholders of both companies, as well as certain regulatory
approvals. If approved, the transaction is expected to be consummated shortly
after the stockholder meetings.

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. The Mitchell merger added approximately 404 million Boe to Devon's
proved reserves.

Following the Mitchell merger announcement in August 2001, Devon announced
on September 4, 2001, that it had entered into an agreement to acquire Anderson
Exploration Ltd. ("Anderson") for approximately $3.5 billion in cash. This
acquisition closed on October 15, 2001, and therefore had an impact on Devon's
results for the last two and one-half months of 2001. The Anderson acquisition
added approximately 534 million Boe to Devon's proved reserves.

To fund the cash portions of these two acquisitions, as well as to pay
related transaction costs and retire certain long-term debt assumed from
Mitchell and Anderson, Devon entered into long-term debt agreements in October
2001 that totaled $6 billion. Half of this total consisted of $3 billion of
notes and debentures issued on October 3, 2001. Of this total, $1.25 billion
bears interest at 7.875% and matures in September 2031. The remaining $1.75
billion bears interest at 6.875% and matures in September 2011.

The remaining $3 billion of the $6 billion of long-term debt is in the form
of a credit facility that bears interest at floating rates. As of December 31,
2002, $1.9 billion of the original $3 billion balance had been retired. The
primary sources of the repayments were the 2002 issuance of $1 billion of debt
securities, of which $0.8 billion was used to pay down debt, and $1.4 billion
from the sale of certain oil and gas properties, of which $1.1 billion was used
to pay down debt. As of December 31, 2002, the balance outstanding under the
term loan credit facility was $1.1 billion at an average rate of 2.5%. Principal
payments due on this debt are $0.3 billion in April 2006 and $0.8 billion in
October 2006.

During 2002, Devon disposed of approximately $1.4 billion of properties.
Also in 2002, Devon spent $1.5 billion in its exploration and drilling efforts.
See further discussion of Devon's 2002 exploration and drilling efforts in "Item
2. Properties."

FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHICAL AREAS

Note 13 to the consolidated financial statements included in Item 8.
Financial Statements and Supplementary Data of this report contains information
on Devon's segments and geographical areas.
6

DRILLING ACTIVITIES

Devon is engaged in numerous drilling activities on properties presently
owned and intends to drill or develop other properties acquired in the future.
Devon's 2003 drilling activities will be focused in the Rocky Mountains, Permian
Basin, Mid-Continent, Gulf of Mexico and onshore Gulf Coast areas in the U.S.,
the Western Sedimentary basin of Canada and in China and West Africa outside
North America.

The following tables set forth the results of Devon's drilling activity for
the past five years.

UNITED STATES PROPERTIES

CANADIAN PROPERTIES

INTERNATIONAL PROPERTIES

TOTAL PROPERTIES

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(1) Gross wells are the sum of all wells in which Devon owns an interest.

(2) Net wells are the sum of Devon's working interests in gross wells.

As of December 31, 2002, Devon was participating in the drilling of 76
gross (60.71 net) wells in the U.S., 49 gross (28.93 net) wells in Canada and 8
gross (0.89 net) wells internationally. Of these wells, through February 15,
2003, 51 gross (40.91 net) wells in the U.S. and 42 gross (25.07 net) wells in
Canada had been completed as productive. An additional 1 gross (.30 net) well in
the U.S., 1 gross (.50 net) well in Canada and 1 gross (0.50 net) well
internationally were dry holes. The remaining wells were still in process.

CUSTOMERS

Devon sells its gas production to a variety of customers including
pipelines, utilities, gas marketing firms, industrial users and local
distribution companies. Existing gathering systems and interstate and intrastate
pipelines are used to consummate gas sales and deliveries.

The principal customers for Devon's crude oil production are refiners,
remarketers and other companies, some of which have pipeline facilities near the
producing properties. In the event pipeline facilities are not conveniently
available, crude oil is trucked or barged to storage, refining or pipeline
facilities.

No purchaser accounted for over 10% of Devon's revenues in 2002.

OIL AND NATURAL GAS MARKETING

Oil Marketing. Devon's oil production is sold under both long-term (one
year or more) and short-term (less than one year) agreements at prices
negotiated with third parties

Natural Gas Marketing. Devon's gas production is also sold under both
long-term and short-term agreements at prices negotiated with third parties.
Although exact percentages vary daily, as of February 2003 approximately 75% of
Devon's natural gas production was sold under short-term contracts at variable
or market-sensitive prices. These market-sensitive sales are referred to as
"spot market" sales. Another 22% were committed under various long-term
contracts (one year or more) which dedicate the natural gas to a purchaser for
an extended period of time, but still at market sensitive prices. Devon's
remaining gas production was sold under fixed price contracts: 2% under
short-term agreements and 1% under long-term contracts.

Under both long-term and short-term contracts, typically either the entire
contract (in the case of short-term contracts) or the price provisions of the
contract (in the case of long-term contracts) are re-negotiated from daily
intervals up to one-year intervals. The spot market has become progressively
more competitive in recent years. As a result, prices on the spot market have
been volatile.

The spot market is subject to volatility as supply and demand factors in
various regions of North America fluctuate. In addition to fixed price
contracts, Devon periodically enters into hedging arrangements or firm delivery
commitments with a portion of its gas production. These activities are intended
to support targeted gas price levels and to manage the Company's exposure to gas
price fluctuations. (See "Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.")

COMPETITION

The oil and gas business is highly competitive. Devon encounters
competition by major integrated and independent oil and gas companies in
acquiring drilling prospects and properties, contracting for drilling equipment
and securing trained personnel. Intense competition occurs with respect to
marketing, particularly of natural gas. Certain competitors have resources that
substantially exceed those of Devon.

8

SEASONAL NATURE OF BUSINESS

Generally, but not always, the demand for natural gas decreases during the
summer months and increases during the winter months. Seasonal anomalies such as
mild winters sometimes lessen this fluctuation. In addition, pipelines,
utilities, local distribution companies and industrial users utilize natural gas
storage facilities and purchase some of their anticipated winter requirements
during the summer. This can also lessen seasonal demand fluctuations.

GOVERNMENT REGULATION

Devon's operations are subject to various levels of government controls and
regulations in the United States, Canada and internationally.

UNITED STATES REGULATION

In the United States, legislation affecting the oil and gas industry has
been pervasive and is under constant review for amendment or expansion. Pursuant
to such legislation, numerous federal, state and local departments and agencies
have issued extensive rules and regulations binding on the oil and gas industry
and its individual members, some of which carry substantial penalties for
failure to comply. Such laws and regulations have a significant impact on oil
and gas drilling, gas processing plants and production activities, increase the
cost of doing business and, consequently, affect profitability. Inasmuch as new
legislation affecting the oil and gas industry is commonplace and existing laws
and regulations are frequently amended or reinterpreted, Devon is unable to
predict the future cost or impact of complying with such laws and regulations.
Devon considers the cost of environmental protection a necessary and manageable
part of its business. Devon has been able to plan for and comply with new
environmental initiatives without materially altering its operating strategies.

Exploration and Production. Devon's United States operations are subject
to various types of regulation at the federal, state and local levels. Such
regulation includes requiring permits for the drilling of wells; maintaining
bonding requirements in order to drill or operate wells; implementing spill
prevention plans; submitting notification and receiving permits relating to the
presence, use and release of certain materials incidental to oil and gas
operations; and regulating the location of wells, the method of drilling and
casing wells, the use, transportation, storage and disposal of fluids and
materials used in connection with drilling and production activities, surface
usage and the restoration of properties upon which wells have been drilled, the
plugging and abandoning of wells and the transporting of production. Devon's
operations are also subject to various conservation matters, including the
regulation of the size of drilling and spacing units or proration units, the
number of wells which may be drilled in a unit, and the unitization or pooling
of oil and gas properties. In this regard, some states allow the forced pooling
or integration of tracts to facilitate exploration while other states rely on
voluntary pooling of lands and leases, which may make it more difficult to
develop oil and gas properties. In addition, state conservation laws establish
maximum rates of production from oil and gas wells, generally limit the venting
or flaring of gas, and impose certain requirements regarding the ratable
purchase of production. The effect of these regulations is to limit the amounts
of oil and gas Devon can produce from its wells and to limit the number of wells
or the locations at which Devon can drill.

Certain of Devon's oil and gas leases, including its offshore Gulf of
Mexico leases, most of its leases in the San Juan Basin and many of Devon's
leases in southeast New Mexico and Wyoming, are granted by the federal
government and administered by various federal agencies, including the Minerals
Management Service of the Department of the Interior ("MMS"). Such leases
require compliance with detailed federal regulations and orders which regulate,
among other matters, drilling and operations on lands covered by these leases,
and calculation and disbursement of royalty payments to the federal government.
The MMS has been particularly active in recent years in evaluating and, in some
cases, promulgating new rules and regulations regarding competitive lease
bidding and royalty payment obligations for production from federal lands. The
Federal Energy Regulatory Commission ("FERC") also has jurisdiction over certain
offshore activities pursuant to the Outer Continental Shelf Lands Act.

9

Environmental and Occupational Regulations. Various federal, state and
local laws and regulations concerning the discharge of incidental materials into
the environment, the generation, storage, transportation and disposal of
contaminants or otherwise relating to the protection of public health, natural
resources, wildlife and the environment, affect Devon's exploration,
development, processing, and production operations and the costs attendant
thereto. These laws and regulations increase Devon's overall operating expenses.
Devon maintains levels of insurance customary in the industry to limit its
financial exposure in the event of a substantial environmental claim resulting
from sudden, unanticipated and accidental discharges of oil, salt water or other
substances. However, 100% coverage is not maintained concerning any
environmental claim, and no coverage is maintained with respect to any penalty
or fine required to be paid by Devon because of its violation of any federal,
state or local law. Devon is committed to meeting its responsibilities to
protect the environment wherever it operates and anticipates making increased
expenditures of both a capital and expense nature as a result of the
increasingly stringent laws relating to the protection of the environment.
Devon's unreimbursed expenditures in 2002 concerning such matters were
immaterial, but Devon cannot predict with any reasonable degree of certainty its
future exposure concerning such matters.

Devon is also subject to laws and regulations concerning occupational
safety and health. Due to the continued changes in these laws and regulations,
and the judicial construction of same, Devon is unable to predict with any
reasonable degree of certainty its future costs of complying with these laws and
regulations. Devon considers the cost of safety and health compliance a
necessary and manageable part of its business. Devon has been able to plan for
and comply with new initiatives without materially altering its operating
strategies.

Devon maintains its own internal Environmental, Health and Safety
Department. This department is responsible for instituting and maintaining an
environmental and safety compliance program for Devon. The program includes
field inspections of properties and internal assessments of Devon's compliance
procedures.

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 past mergers 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 December 31, 2002, Devon's consolidated balance sheet included $8 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) Devon's participation in
consent decrees with both other PRPs and the Environmental Protection Agency,
which provide for performing the scope of work required for remediation and
contain covenants not to sue as protection to the PRPs, (ii) participation in
groups as a de minimis PRP, and (iii) the availability of other defenses to
liability. As a result, Devon's monetary exposure is not expected to be
material.

10

CANADIAN REGULATIONS

The oil and gas industry in Canada is subject to extensive controls and
regulations imposed by various levels of government. It is not expected that any
of these controls or regulations will affect Devon's Canadian operations in a
manner materially different than they would affect other oil and gas companies
of similar size. The following are the most important areas of control and
regulation.

The North American Free Trade Agreement. The North American Free Trade
Agreement ("NAFTA") which became effective on January 1, 1994 carries forward
most of the material energy terms contained in the Canada-U.S. Free Trade
Agreement. In the context of energy resources, Canada continues to remain free
to determine whether exports to the United States or Mexico will be allowed,
provided that any export restrictions do not (i) reduce the proportion of energy
exported relative to the supply of the energy resource; (ii) impose an export
price higher than the domestic price; or (iii) disrupt normal channels of
supply. All parties to NAFTA are also prohibited from imposing minimum export or
import price requirements.

Royalties and Incentives. Each province and the federal government of
Canada have legislation and regulations governing land tenure, royalties,
production rates and taxes, environmental protection and other matters under
their respective jurisdictions. The royalty regime is a significant factor in
the profitability of oil and natural gas production. Royalties payable on
production from lands other than Crown lands are determined by negotiations
between the parties. Crown royalties are determined by government regulation and
are generally calculated as a percentage of the value of the gross production
with the royalty rate dependent in part upon prescribed reference prices, well
productivity, geographical location, field discovery date and the type and
quality of the petroleum product produced. From time to time, the governments of
Canada, Alberta and British Columbia have also established incentive programs
such as royalty rate reductions, royalty holidays and tax credits for the
purpose of encouraging oil and natural gas exploration or enhanced recovery
projects. These incentives generally have the effect of increasing the cash flow
to the producer.

Pricing and Marketing. The price of oil and natural gas sold is determined
by negotiation between buyers and sellers. An order from the National Energy
Board ("NEB") is required for oil exports from Canada. Any oil export to be made
pursuant to an export contract of longer than one year, in the case of light
crude, and two years, in the case of heavy crude, duration (up to 25 years)
requires an exporter to obtain an export license from the NEB. The issue of such
a license requires the approval of the Government of Canada. Natural gas
exported from Canada is also subject to similar regulation by the NEB. Exporters
are free to negotiate prices and other terms with purchasers, provided that the
export contracts in excess of two years must continue to meet certain criteria
prescribed by the NEB. The governments of Alberta and British Columbia also
regulate the volume of natural gas which may be removed from those provinces for
consumption elsewhere based on such factors as reserve availability,
transportation arrangements and market considerations.

Environmental Regulation. The oil and natural gas industry is subject to
environmental regulation pursuant to local, provincial and federal legislation.
Environmental legislation provides for restrictions and prohibitions on releases
or emissions of various substances produced or utilized in association with
certain oil and gas industry operations. In addition, legislation requires that
well and facility sites be abandoned and reclaimed to the satisfaction of
provincial authorities. A breach of such legislation may result in the
imposition of fines and penalties. Devon is committed to meeting its
responsibilities to protect the environment wherever it operates and anticipates
making increased expenditures of both a capital and expense nature as a result
of the increasingly stringent laws relating to the protection of the
environment. Devon's unreimbursed expenditures in 2002 concerning such matters
were immaterial, but Devon cannot predict with any reasonable degree of
certainty its future exposure concerning such matters.

Kyoto Protocol. In December 2002 the Government of Canada ratified the
Kyoto Protocol. This protocol calls for Canada to reduce its greenhouse gas
emissions to 6 percent below 1990 levels during the period between 2008 and
2012. The protocol will only become legally binding when it is ratified by at
least 55 countries, covering at least 55 percent of the emissions addressed by
the protocol. If the protocol
11

becomes legally binding, it is expected to affect the operation of all
industries in Canada, including the oil and gas industry. As details of the
implementation of this protocol have yet to be announced, the effect on Devon
cannot be determined at this time.

Investment Canada Act. The Investment Canada Act requires Government of
Canada approval, in certain cases, of the acquisition of control of a Canadian
business by an entity that is not controlled by Canadians. In certain
circumstances, the acquisition of natural resource properties may be considered
to be a transaction requiring such approval.

INTERNATIONAL REGULATIONS

The oil and gas industry is subject to various types of regulation
throughout the world. Legislation affecting the oil and gas industry has been
pervasive and is under constant review for amendment or expansion. Pursuant to
such legislation, government agencies have issued extensive rules and
regulations binding on the oil and gas industry and its individual members, some
of which carry substantial penalties for failure to comply. Such laws and
regulations have a significant impact on oil and gas drilling and production
activities, increase the cost of doing business and, consequently, affect
profitability. Inasmuch as new legislation affecting the oil and gas industry is
commonplace and existing laws and regulations are frequently amended or
reinterpreted, Devon is unable to predict the future cost or impact of complying
with such laws and regulations. The following are significant areas of
regulation.

Exploration and Production. Devon's oil and gas concessions and permits
are granted by host governments and administered by various foreign government
agencies. Such foreign governments require compliance with detailed regulations
and orders which regulate, among other matters, drilling and operations on areas
covered by concessions and permits and calculation and disbursement of royalty
payments, taxes and minimum investments to the government.

Regulation includes requiring permits for the drilling of wells;
maintaining bonding requirements in order to drill or operate wells;
implementing spill prevention plans; submitting notification and receiving
permits relating to the presence, use and release of certain materials
incidental to oil and gas operations; and regulating the location of wells, the
method of drilling and casing wells, the use, transportation, storage and
disposal of fluids and materials used in connection with drilling and production
activities, surface usage and the restoration of properties upon which wells
have been drilled, the plugging and abandoning of wells and the transporting of
production. Devon's operations are also subject to regulations which may limit
the number of wells or the locations at which Devon can drill.

Production Sharing Contracts. Many of Devon's international licenses are
governed by Production Sharing Contracts (PSC) between the concessionaires and
the granting government agency. PSCs are contracts that define and regulate the
framework for investments, revenue sharing, and taxation of mineral interests in
foreign countries. Unlike most domestic leases, PSCs have defined production
terms and time limits of generally 30 years. Many PSCs allow for recovery of
investments including carried government percentages. PSCs generally contain
sliding scale revenue sharing provisions. For example, at either higher
production rates or higher cumulative rates of return, PSCs allow governments to
generally retain higher fractions of revenue.

Environmental Regulations. Various government laws and regulations
concerning the discharge of incidental materials into the environment, the
generation, storage, transportation and disposal of contaminants or otherwise
relating to the protection of public health, natural resources, wildlife and the
environment, affect Devon's exploration, development, processing and production
operations and the costs attendant thereto. In general, this consists of
preparing Environmental Impact Assessments in order to receive required
environmental permits to conduct drilling or construction activities. Such
regulations also typically include requirements to develop emergency response
plans, waste management plans, and spill contingency plans. In some countries,
the application of worldwide standards, such as ISO 14000 governing
Environmental Management Systems, are required to be implemented for
international oil and gas operations.

12

EMPLOYEES

As of December 31, 2002, Devon's staff consisted of 3,436 full-time
employees. Devon believes that it has good labor relations with its employees.

ITEM 2. PROPERTIES

Substantially all of Devon's properties consist of interests in developed
and undeveloped oil and gas leases and mineral acreage located in Devon's core
operating areas and mid-stream assets. These interests entitle Devon to drill
for and produce oil, natural gas and NGLs from specific areas. Devon's interests
are mostly in the form of working interests and, to a lesser extent, overriding
royalty, volumetric production payments, foreign government concessions, mineral
and net profits interests and other forms of direct and indirect ownership in
oil and gas properties.

Devon's most significant midstream asset is its 3,100 mile Bridgeport
pipeline system and 650 MMcfd Bridgeport gas processing plant located in North
Texas.

PROVED RESERVES AND ESTIMATED FUTURE NET REVENUE

Set forth below is a summary of the reserves which were evaluated by
independent petroleum consultants for each of the years ended 2002, 2001 and
2000.

Estimated reserves are those quantities of reserves which were estimated by
an independent petroleum consultant. Audited reserves are those quantities of
reserves which were estimated by Devon employees and audited by an independent
petroleum consultant.

The domestic reserves were evaluated by the independent petroleum
consultants of LaRoche Petroleum Consultants, Ltd. and Ryder Scott Company
Petroleum Consultants in each of the years presented. The Canadian reserves were
estimated by the independent petroleum consultants of AJM Petroleum Consultants
in 2002; Paddock Lindstrom & Associates and Gilbert Laustsen Jung Associates,
Ltd. in 2001; and Paddock Lindstrom & Associates in 2000. The International
reserves were estimated by the independent petroleum consultants of Ryder Scott
Company Petroleum Consultants in each of the years presented.

The following table sets forth Devon's estimated proved reserves, the
estimated future net revenues therefrom and the 10% Present Value thereof as of
December 31, 2002. These estimates correspond with the method used in presenting
the "Supplemental Information on Oil and Gas Operations" in Note 14 to

13

Devon's Consolidated Financial Statements included herein, except that federal
income taxes attributable to such future net revenues have been disregarded in
the presentation below.

- ---------------

(1) Gas reserves are converted to Boe at the rate of six Mcf per Bbl of oil,
based upon the approximate relative energy content of natural gas to oil,
which rate is not necessarily indicative of the relationship of gas to oil
prices. NGL reserves are converted to Boe on a one-to-one basis with oil.
The respective prices of gas and oil are affected by market conditions and
other factors in addition to relative energy content.

14

(2) Estimated future net revenue represents estimated future gross revenue to be
generated from the production of proved reserves, net of estimated
production and development costs. The amounts shown do not give effect to
non-property related expenses such as general and administrative expenses
not related directly to oil and gas producing, debt service and future
income tax expense or to depreciation, depletion and amortization.

These amounts were calculated using prices and costs in effect as of
December 31, 2002. These prices were not changed except where different
prices were fixed and determinable from applicable contracts. These
assumptions yield average prices over the life of Devon's properties of
$27.99 per Bbl of oil, $3.88 per Mcf of natural gas and $17.07 per Bbl of
NGLs. These prices compare to December 31, 2002, New York Mercantile
Exchange prices of $31.20 per Bbl for crude oil and of $4.74 per MMBtu for
natural gas.

(3) See Note 14 to the consolidated financial statements included in Item 8 of
this report.

No estimates of Devon's proved reserves have been filed with or included in
reports to any federal or foreign governmental authority or agency since the
beginning of the last fiscal year except (i) in filings with the SEC and
Canadian Securities Regulators and (ii) in filings with the Department of Energy
("DOE"). Reserve estimates filed by Devon with the SEC and Canadian Securities
Regulators correspond with the estimates of Devon reserves contained herein.
Reserve estimates filed with the DOE are based upon the same underlying
technical and economic assumptions as the estimates of Devon's reserves included
herein. However, the DOE requires reports to include the interests of all owners
in wells that Devon operates and to exclude all interests in wells that Devon
does not operate.

The prices used in calculating the estimated future net revenues
attributable to proved reserves do not necessarily reflect market prices for
oil, gas and NGL production subsequent to December 31, 2002. There can be no
assurance that all of the proved reserves will be produced and sold within the
periods indicated, that the assumed prices will be realized or that existing
contracts will be honored or judicially enforced.

The process of estimating oil, gas and NGLs reserves is complex, requiring
significant subjective decisions in the evaluation of available geological,
engineering and economic data for each reservoir. The data for a given reservoir
may change substantially over time as a result of, among other things,
additional development activity, production history and viability of production
under varying economic conditions. Consequently, material revisions to existing
reserve estimates may occur in the future.

PRODUCTION, REVENUE AND PRICE HISTORY

Certain information concerning oil and natural gas production, prices,
revenues (net of all royalties, overriding royalties and other third party
interests) and operating expenses for the three years ended December 31, 2002,
is set forth in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

WELL STATISTICS

The following table sets forth Devon's producing wells as of December 31,
2002:

- ---------------

(1) Gross wells are the total number of wells in which Devon owns a working
interest.

(2) Net refers to gross wells multiplied by Devon's fractional working interests
therein.

15

Devon also held numerous overriding royalty interests in oil and gas wells,
a portion of which are convertible to working interests after recovery of
certain costs by third parties. After converting to working interests, these
overriding royalty interests will be included in Devon's gross and net well
count.

DEVELOPED AND UNDEVELOPED ACREAGE

The following table sets forth Devon's developed and undeveloped oil and
gas lease and mineral acreage as of December 31, 2002.

- ---------------

(1) Gross acres are the total number of acres in which Devon owns a working
interest.

(2) Net refers to gross acres multiplied by Devon's fractional working interests
therein.

OPERATION OF PROPERTIES

The day-to-day operations of oil and gas properties are the responsibility
of an operator designated under pooling or operating agreements. The operator
supervises production, maintains production records, employs field personnel and
performs other functions. The charges under operating agreements customarily
vary with the depth and location of the well being operated.

Devon is the operator of 14,001 of its wells. As operator, Devon receives
reimbursement for direct expenses incurred in the performance of its duties as
well as monthly per-well producing and drilling overhead reimbursement at rates
customarily charged in the area to or by unaffiliated third parties. In
presenting its financial data, Devon records the monthly overhead reimbursements
as a reduction of general and administrative expense, which is a common industry
practice.

ORGANIZATION STRUCTURE

Devon's North American properties are concentrated within five geographic
areas. Operations in the United States are focused in the Permian Basin, the
Mid-Continent, the Rocky Mountains and onshore and offshore Gulf Coast regions.
Canadian operations are focused in the Western Canadian Sedimentary Basin in
Alberta and British Columbia. Operations outside North America currently include
Azerbaijan, Brazil, China and West Africa. Maintaining a tight geographic focus
in selected core areas has allowed Devon to improve operating and capital
efficiency.

16

UNITED STATES PROPERTIES

The Permian Basin

The Permian Basin includes portions of Southeast New Mexico and West Texas.
These assets include conventional oil and gas properties from a wide variety of
geologic formations and productive depths. The Permian Basin represented 9% of
Devon's proved reserves at December 31, 2002.

Devon's leasehold position in Southeast New Mexico encompasses more than
102,000 acres of developed lands and 237,000 acres of undeveloped land and
minerals. Historically, Devon has been a very active operator in this area
developing gas from the high productivity Morrow formation and oil in the lower
risk Delaware formation.

In the West Texas area of the Permian Basin, Devon maintains a base of oil
production with long-life reserves. Many of these reserves are from both
operated and non-operated positions in large enhanced oil recovery units such as
the Wasson ODC Unit, the Willard Unit, the Reeves Unit, the North Welch Unit and
the Anton Irish (Clearfork) Unit. These oil-producing units often exhibit long
lives with low decline rates. Devon also owns a significant acreage position in
West Texas with over 194,000 acres of developed lands and over 224,000 acres of
undeveloped land and minerals at December 31, 2002.

Mid-Continent

The Mid-Continent region includes portions of Texas, Oklahoma, Kansas,
Mississippi and Louisiana. These areas encompass a wide variety of geologic
formations and productive depths and produce both oil and natural gas. Devon's
Mid-Continent production has historically come from conventional oil and gas
properties, but Devon has recently established two non-conventional gas
operations in the Mid-Continent region: the Barnett Shale and the Cherokee
coalbed methane project. The Mid-Continent region represented 30% of Devon's
proved reserves at December 31, 2002.

The most significant asset acquired by Devon in its 2002 acquisition of
Mitchell was a substantial interest in the Barnett Shale of North Texas. The
Barnett Shale is known as a tight gas formation. This means that, in its natural
state, the formation is resistant to the production of natural gas. Mitchell
spent decades understanding how to efficiently develop and produce this gas. The
resulting technology yielded a low-risk and highly profitable natural gas
operation. Devon holds 525,000 net acres and over 1,100 producing wells in the
Barnett Shale. Devon's average working interest is approximately 95%. The
Barnett Shale is a unique, unconventional natural gas resource that offers
immediate low-risk production growth and the potential for additional drilling
locations.

Devon has experienced success extracting gas from the Barnett Shale by
using light sand fracturing. Light sand fracturing yields better results than
earlier techniques and is less expensive and can be used to complete new wells
and to refracture existing wells. Refractured wells often exceed their original
flow rates. Devon is also investigating horizontal drilling and closer well
spacing to further enhance the value of the Barnett Shale.

Devon's marketing and midstream business transports, treats and processes
its Barnett Shale production along with Barnett Shale production from unrelated
third parties. The transport system consists of approximately 3,100 miles of
pipeline, a 650 MMcf per day gas processing plant, and a 15,000 Bbls per day NGL
fractionator.

In 2003, Devon plans to drill up to 450 new Barnett Shale wells and
refracture 64 wells. Devon is also conducting exploratory pilot projects outside
the core development area in an effort to expand the productive area. The
Barnett Shale is expected to continue to be an important growth area for Devon
for the foreseeable future. Current production from the Barnett Shale is
approximately 345 MMcf and 21,700 Bbls of oil and NGLs per day net.

The other non-conventional asset Devon is developing in the Mid-Continent
region is the Cherokee coalbed methane project. Coalbed methane is natural gas
produced from underground coal deposits. Devon

17

acquired over 400,000 net acres within the Cherokee area of Southeast Kansas and
Northeast Oklahoma in 2001.

Devon's East Texas properties are a significant conventional asset. A large
portion of this asset base was initially acquired in 1999. The Carthage and
Bethany fields are two of the primary properties. These properties produce from
the Cotton Valley sands, the Travis Peak sands and from shallower sands and
carbonates. Devon operates over 500 producing wells in this area and utilizes a
one to two rig drilling program to continue the low-risk, infill development of
this area.

The 2002 acquisition of Mitchell added a complementary asset base to the
East Texas area. These properties are located on the western side of the East
Texas Basin and produce from the Bossier, Cotton Valley and Travis Peaks sands.
Devon operates approximately 400 producing wells in this area and plans to
continue the development drilling program with one to two rigs. Devon's current
net production in East Texas is approximately 123 MMcf and 3,800 Bbls of oil and
NGLs per day.

Rocky Mountain Region

Devon's operations in the Rocky Mountain region include properties in
Wyoming, Utah, and Northern New Mexico. These assets include conventional oil
and gas properties and coalbed methane projects. As of December 31, 2002, the
Rocky Mountain region comprised 11% of Devon's proved reserves.

Devon began producing coalbed methane in the San Juan Basin of New Mexico
in the mid-1980s and began drilling coalbed methane wells in the Powder River
Basin of Wyoming in 1998. As of December 31, 2002, Devon has drilled over 1,500
coalbed methane wells in the Powder River Basin. Devon's net coalbed methane gas
production from the basin was approximately 80 MMcf per day as of December 31,
2002, and Devon plans to drill more than 100 wells in the Powder River Basin in
2003. Current production in the basin is primarily from the Wyodak coal
formation.

The deeper Big George formation is currently being tested by Devon and
others with working interests in the area. Increased development in the Big
George is subject to an Environmental Impact Statement, which has been completed
and is expected to be approved within the next few months. Pending this approval
and the success of current pilot projects, the Big George could significantly
expand the coalbed methane play into the western portion of the Powder River
Basin. Devon's leasehold in this area would allow for the development of four
projects in the Big George.

Devon is also continuing to develop conventional gas operations at the
Washakie field in Wyoming. Devon drilled 31 wells in 2002 and plans to drill
another 30 wells in 2003. Devon has interests in over 200,000 acres. Devon's
current net production from Washakie is approximately 77 MMcf and 1,100 Bbls of
oil and NGLs per day.

GULF OF MEXICO AND GULF COAST

Devon is active in the offshore Gulf of Mexico and onshore South Texas and
South Louisiana. Devon operates 100 structures in the Gulf of Mexico
predominantly in the outer shelf area offshore Louisiana. The Gulf of Mexico and
Gulf Coast region represented 5% of Devon's proved reserves at December 31,
2002.

Devon is applying four-component, or 4-C, seismic technology to identify
prospects on large tracts of its shelf acreage. Traditional seismic techniques
have not been successful in imaging reservoirs lying below shallow gas
reservoirs and salt deposits, but 4-C seismic technology is allowing Devon's
geoscientists to more accurately picture these unexplored formations. Devon has
conducted two large 4-C seismic surveys offshore Louisiana and, in 2002, Devon
drilled four successful wells in the West Cameron area based on 4-C data. Devon
is also reprocessing large seismic data volumes using pre-stack depth migration
to prospect for oil and gas in the outer shelf. In addition, Devon is utilizing
new long cable 3-D seismic data to better image deep shelf prospects. Devon has
developed a significant inventory of drilling opportunities for deeper gas near
our infrastructure in offshore Louisiana and offshore Texas.

18

In the deepwater Gulf of Mexico, Devon participated in its first subsalt
discovery in 1999 in the Enchilada Field located in Garden Banks 128. Since then
Devon has operated several successful subsea completions ranging from Garden
Banks to Viosca Knoll. Devon has experience with the successful installation and
operation of subsea production equipment, which is an important component of any
deepwater program. Devon's Pecten discovery in Viosca Knoll Block 694, a subsea
tieback completed in 2001, is currently producing approximately 17 MMcf of gas
per day.

Because deepwater exploration requires significant capital expenditures,
Devon's strategy is to share projects with experienced partners to mitigate
risk. In 2002, Devon entered into a four-well joint venture with ChevronTexaco
that will earn Devon a 25% working interest in 71 deepwater blocks and 14
identified exploratory prospects. Devon also made a potentially significant
discovery in 2002 in 8,200 feet of water at Cascade located in Walker Ridge
Block 206 and plans to participate with other partners in four or five deepwater
wells in 2003, including a confirmation well at Cascade.

Devon's operations in the Gulf Coast region include operations onshore in
South Texas, where exploration for oil and gas is accelerating. Devon's
activities in this area have focused on exploration in the Edwards, Wilcox and
Frio/Vicksburg formations. Devon also acquired additional production and
undeveloped acreage in the South Texas area from its acquisition of Mitchell.

CANADA

Devon's acquisition of Anderson in late 2001 significantly increased the
relative importance of Devon's Canadian operations. The Anderson acquisition
strengthened Devon's holdings in the Deep Basin located in Western Alberta and
Eastern British Columbia, and the Foothills Region of Northeastern British
Columbia. As of December 31, 2002, 36% of Devon's proved reserves were in
Canada.

Devon had sought for years to obtain a significant acreage position in the
Deep Basin, but other operators, including Anderson, already controlled most of
the acreage. As a result of the Anderson acquisition, Devon now holds over
800,000 net acres in the Deep Basin. The profitability of Devon's operations in
the Deep Basin is enhanced by its ownership in nine gas processing plants in the
area. Devon plans to drill about 100 wells in the Deep Basin in 2003. These
reservoirs tend to be rich in liquids, producing up to 100 barrels of NGLs with
each MMcf of gas.

Late in 2002, Devon commenced production from the first of several wells it
has drilled in the Grizzly Valley area of the Foothills Region of Northeastern
British Columbia. Due to gas pipeline and processing limitations, initial
production has been limited to 10 MMcf of gas per day. However, a pipeline
extension slated for completion in the second quarter of 2003 should allow
production to increase to about 35 MMcf per day.

Devon acquired from Anderson approximately 1.5 million net acres in the
MacKenzie Delta region and the shallow waters of the Beaufort Sea in Northern
Canada. In 2002, a Devon well in the MacKenzie Delta encountered over 110 feet
of natural gas pay in the Kamik sand. Two to three more exploratory wells are
planned by Devon in the MacKenzie Delta in 2003.

Devon has been active for over a decade in Northeastern British Columbia,
an area in which Devon owns approximately 1.35 million net undeveloped acres of
land. In 2002, Devon participated in the drilling of 67 gross wells and plans to
participate in the drilling of approximately 93 wells in 2003.

The Peace River Arch area is a more mature area with both light oil and
natural gas potential. Most of Devon's position in the Peace River Arch was
acquired through the Anderson acquisition. Devon holds roughly 730,000 net
undeveloped acres in the Peace River Arch, and the average production in 2002
was approximately 140 MMcf of natural gas and 7,500 Bbls of NGLs per day net. In
2003, Devon plans to participate in the drilling of 71 gross wells in the Peace
River Arch. Devon has an interest in a production and processing infrastructure
in the Peace River Arch, which enhances Devon's operations in the area.

19

In the Northern Plains region of Northeastern Alberta, Devon has been
active for many years. While the area is a highly developed area with
winter-only access, Devon is very active, drilling in excess of 100 gross wells
per year. In 2002, average daily net production from the area was about 150 MMcf
of natural gas and approximately 3,400 Bbls of NGLs net. Natural gas is
encountered in multiple horizons at depths generally less than 1,300 feet. Devon
holds approximately 2 million net undeveloped acres in this area.

Devon has about 400,000 net undeveloped acres in the central and southern
region of Alberta and the average production from this area in 2002 was
approximately 80 MMcf of natural gas and 20,000 Bbls of NGLs per day net.
Planned activity in 2003 includes drilling approximately 70 gross wells that
vary from deep Devonian tests to shallow Cretaceous tests.

Devon is also active in exploration for and production of "cold-flow" heavy
oil in the Lloydminster area of Alberta and Saskatchewan where oil is found in
multiple horizons generally at depths of 1,000 to 2,000 feet. In 2003, Devon
plans to drill 134 gross wells with primarily a development focus. Average daily
production from the area in 2002 was approximately 37 MMcf of natural gas and
13,750 Bbls of crude oil net.

Devon is also active in the evaluation of thermal heavy oil in Alberta
through its 13% ownership interest in the Surmont project, operated by
ConocoPhillips, and is actively evaluating the development of a 100% working
interest heavy oil lease at Jackfish and an 83% working interest heavy oil
project at Dover. Each of these heavy oil projects target bitumen (heavy
tar-like oil) through the use of Steam Assisted Gravity Drainage whereby a pair
of horizontal wells are utilized. Steam is injected in one well and is used to
heat the bitumen to allow it to gravity drain to the other horizontal production
well.

INTERNATIONAL

Devon's international activities are currently focused in development
projects in Azerbaijan and China and deepwater exploration in the combined South
Atlantic Margin of Brazil and West Africa. In 2002, Devon divested all remaining
interests in Argentina, Indonesia and Egypt. As of December 31, 2002, 9% of
Devon's proved reserves were in countries outside North America.

In Azerbaijan, Devon has a 5.6% carried working interest in the large
Azeri-Chirag-Gunashli, or ACG, oil development project. Devon estimates that the
ACG field contains over 4.6 billion barrels of gross proved oil reserves. The
development project commenced in 2002. The Baku-T'Bilisi-Ceyhan (BTC) pipeline
to export oil for this project has been approved by the governments of
Azerbaijan, Georgia and Turkey.

In China, Devon is an acreage holder in the Pearl River Mouth Basin in the
South China Sea and has been successful in discovering two new fields. Devon is
currently developing the Devon operated Panyu development project and expects
oil production from two offshore platforms and into a floating production-
storage and offloading vessel to commence in late 2003. Gross capital
expenditures for the project are $340 million, with Devon owning a 24.5% working
interest. Peak production is expected to reach 58,000 Bbls of oil per day
(15,000 Bbls of oil per day net to Devon) in 2004.

Devon's international exploration efforts are strategically focused in the
combined South Atlantic deep water region of West Africa and Brazil. Devon's
presence in West Africa began in 1992 with exploration efforts resulting in the
discoveries of the Tchatamba fields in the shallow waters offshore Gabon. In
this region, Devon has five blocks and holds over 3.2 million net acres. Devon
plans to drill deepwater exploratory wells in its West Africa portfolio in Ghana
and Gabon in 2003. In Brazil, Devon will be acquiring a 3-D survey in a
Devon-operated deepwater block in early 2003 in order to identify future
drilling opportunities.

20

SIGNIFICANT PROPERTIES

The following table sets forth proved reserve information on the most
significant geographic areas in which Devon's properties are located as of
December 31, 2002.

- ---------------

(1) Gas reserves are converted to Boe at the rate of six Mcf of gas per Bbl of
oil, based upon the approximate relative energy content of natural gas to
oil, which rate is not necessarily indicative of the relationship of gas to
oil prices. NGL reserves are converted to Boe on a one-to-one basis with
oil. The respective prices of gas and oil are affected by market and other
factors in addition to relative energy content.

(2) Percentage which MMBoe for the basin or region bears to total MMBoe for all
proved reserves.

(3) Determined in accordance with SEC guidelines, except that no effect is given
to future income taxes.

(4) Percentages which present value for the basin or region bears to total
present value for all proved reserves.

(5) Determined in accordance with SEC guidelines.

(6) Canadian dollars converted to U.S. dollars at the rate of $1 Canadian:
$0.6331 U.S.

TITLE TO PROPERTIES

Title to properties is subject to contractual arrangements customary in the
oil and gas industry, liens for current taxes not yet due and, in some
instances, other encumbrances. Devon believes that such burdens do not
materially detract from the value of such properties or from the respective
interests therein or materially interfere with their use in the operation of the
business.

As is customary in the industry in the case of undeveloped properties,
little investigation of record title is made at the time of acquisition (other
than a preliminary review of local records). Investigations, generally including
a title opinion of outside counsel, are made prior to the consummation of an
acquisition of producing properties and before commencement of drilling
operations on undeveloped properties.

21

ITEM 3. LEGAL PROCEEDINGS

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 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.

Also, pending in federal court in Texas is a similar suit alleging
underpaid royalties to the United States in connection with natural gas and
natural gas liquids produced and sold from United States owned and/or controlled
lands. The claims were filed by private litigants against Devon and numerous
other producers, under the federal False Claims Act. The United States served
notice of its intent to intervene as to certain defendants, but not Devon. Devon
and certain other defendants are challenging the constitutionality of whether a
claim under the federal False Claims Act can be maintained absent government
intervention. Devon believes that it has acted reasonably and paid royalties in
good faith. Devon does not currently believe that it is subject to material
exposure in association with this litigation. As a result, Devon's monetary
exposure in this suit is not expected to be material.

Devon is a defendant in certain private royalty owner litigation filed in
Wyoming regarding deductibility of certain post production costs from royalties
payable by Devon. The plaintiffs in these lawsuits propose to expand them into
county or state-wide class actions relating specifically to transportation and
related costs associated with Devon's Wyoming gas production. A significant
portion of such production is, or will be, transported through facilities owned
by Thunder Creek Gas Services, L.L.C., of which Devon owns a 75% interest. Devon
believes that it has acted reasonably and paid royalties in good faith and in
accordance with its obligations under its oil and gas leases and applicable law,
and Devon does not believe that it is subject to material exposure in
association with this litigation.

OTHER MATTERS

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET PRICE

Devon's common stock has been traded on the American Stock Exchange (the
"AMEX") since September 29, 1988. Prior to September 29, 1988, Devon's common
stock was privately held. Commencing on December 15, 1998, a new class of Devon
exchangeable shares began trading on The Toronto Stock Exchange ("TSE") under
the symbol "NSX". These shares are essentially equivalent to Devon common stock.
However, because they are issued by Devon's wholly-owned subsidiary, Northstar,

22

they qualify as a domestic Canadian investment for Canadian shareholders. They
are exchangeable at any time, on a one-for-one basis, for common shares of Devon
at the holder's option.

The following table sets forth the high and low sales prices for Devon
common stock and exchangeable shares as reported by the AMEX and TSE for the
periods indicated.

DIVIDENDS

Devon commenced the payment of regular quarterly cash dividends on its
common stock on June 30, 1993, in the amount of $0.03 per share. Effective
December 31, 1996, Devon increased its quarterly dividend payment to $0.05 per
share. Devon anticipates continuing to pay regular quarterly dividends in the
foreseeable future. Dividends are also paid on the exchangeable shares at the
same rate and on the same dates as dividends paid on the common stock.

On February 25, 2003, there were 25,470 holders of record of Devon common
stock and 295 holders of record for the exchangeable shares.

23

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information (not covered by the
independent auditors' report) should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the notes thereto
included in "Item 8. Financial Statements and Supplementary Data." Note 2 to the
consolidated financial statements included in Item 8 of this report contains
information on mergers and acquisitions which occurred in 2002, 2001 and 2000,
as well as unaudited pro forma financial data for the years 2002 and 2001. Note
1 to the consolidated financial statements included in Item 8 contains
information on operations which were discontinued in 2002.

- ---------------

(1) Devon acquired other entities via mergers in 1998 and 2000, and both mergers
were accounted for using the pooling-of-interests method of accounting for
business combinations. Therefore, the cash dividends per share presented for
1998 through 2000 are not representative of the actual amounts paid by Devon
on an historical basis. For the years 1998 through 2000, Devon's historical
cash dividends per share were $0.20 in each year.

(2) For purposes of calculating the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividends,
(i) earnings consist of earnings before income taxes, plus fixed charges;
(ii) fixed charges consist of interest expense, distributions on preferred
securities of subsidiary trust, amortization of costs relating to
indebtedness and the preferred securities of subsidiary trust, and one-third
of rental expense estimated to be attributable to interest; and (iii)
preferred stock dividends consist of the amount of pre-tax earnings required
to pay dividends on the outstanding preferred stock. For the years 2002,
1999 and 1998, earnings were insufficient to cover fixed charges by $135
million, $264 million and $305 million, respectively. For the years 2002,
1999 and 1998, earnings were insufficient to cover combined fixed charges
and preferred stock dividends by $151 million, $270 million and $305
million, respectively.

(3) The preceding production, price and other data exclude the amounts related
to discontinued operations for all periods presented.

(4) Gas volumes are converted to Boe at the rate of six Mcf of gas per barrel of
oil, based upon the approximate relative energy content of natural gas and
oil, which rate is not necessarily indicative of the relationship of oil and
gas prices. NGL volumes are converted to Boe on a one-to-one basis with oil.
The respective prices of oil, gas and NGLs are affected by market and other
factors in addition to relative energy content.

26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis addresses changes in Devon's
financial condition and results of operations during the three year period of
2000 through 2002. Reference is made to "Item 6. Selected Financial Data" and
"Item 8. Financial Statements and Supplementary Data."

OVERVIEW

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. The Mitchell merger added approximately 404 million Boe to Devon's
proved reserves.

Following the Mitchell merger announcement in August 2001, Devon announced
on September 4, 2001, that it had entered into an agreement to acquire Anderson
Exploration Ltd. ("Anderson") for approximately $3.5 billion in cash. This
acquisition closed on October 15, 2001, and therefore had an impact on Devon's
results for the last two and one-half months of 2001. The Anderson acquisition
added approximately 534 million Boe to Devon's proved reserves.

To fund the cash portions of these two acquisitions, as well as to pay
related transaction costs and retire certain long-term debt assumed from
Mitchell and Anderson, Devon entered into long-term debt agreements in October
2001 that totaled $6 billion. Half of this total consisted of $3 billion of
notes and debentures issued on October 3, 2001. Of this total, $1.25 billion
bears interest at 7.875% and matures in September 2031. The remaining $1.75
billion bears interest at 6.875% and matures in September 2011.

The remaining $3 billion of the $6 billion of long-term debt is in the form
of a credit facility that bears interest at floating rates. As of December 31,
2002, $1.9 billion of the original $3 billion balance had been 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 $1.4 billion
from the sale of certain oil and gas properties, of which $1.1 billion was used
to pay down debt. As of December 31, 2002, the balance outstanding under the
term loan credit facility was $1.1 billion at an average rate of 2.5%. Principal
payments due on this debt are $0.3 billion in April 2006 and $0.8 billion in
October 2006.

The Mitchell and Anderson acquisitions followed another significant
acquisition. In August 2000, Devon closed its merger with Santa Fe Snyder
Corporation. This transaction added approximately 386 million Boe to Devon's
proved reserves.

In addition to the mergers and acquisitions, Devon's exploration and
development efforts have also been significant contributors to Devon's growth.
In 2002, Devon spent $1.5 billion in its exploration, drilling and development
efforts. These costs included drilling 1,685 wells, of which 1,599 were
completed as producers. In 2000 and 2001, Devon spent an aggregate of $2.0
billion in its exploration, drilling and development efforts. These costs
included drilling 2,873 wells, of which 2,705 were completed as producers.

The following statistics illustrate the effects that Devon's mergers and
acquisitions and its drilling and development activities have had on operations
during the last three years. This data compares Devon's 2002 results to those of
2000 for Devon combined with Santa Fe Snyder, which was acquired in a merger
accounted for under the pooling-of-interests method. Such comparison yields the
following fluctuations:

- Proved reserves increased 651 million Boe, or 68%.

- Combined oil, gas and NGL production increased 75 million Boe, or 66%.

- Total revenues increased $1.7 billion, or 67%.

- Net cash provided by operating activities increased $165 million, or 10%.

27

During 2002, Devon marked its 14th anniversary as a public company. While
Devon has consistently increased production over this 14-year period, volatility
in oil, gas and NGL prices has resulted in considerable variability in earnings
and cash flows. Prices for oil, natural gas and NGLs are determined primarily by
market conditions. Market conditions for these products have been, and will
continue to be, influenced by regional and worldwide economic activity, weather
and other factors that are beyond Devon's control. Devon's future earnings and
cash flows will continue to depend on market conditions.

Like all oil and gas exploration and production companies, Devon faces the
challenge of natural production decline. As initial pressures are depleted, oil
and gas production from a given well naturally decreases. Thus, an oil and gas
exploration and production company depletes part of its asset base with each
unit of oil or gas it produces. Historically, Devon has been able to overcome
this natural decline by adding, through drilling and acquisitions, more reserves
than it produces. Devon's future growth, if any, will depend on its ability to
continue to add reserves in excess of production.

Because oil, gas and NGL prices are influenced by many factors outside of
its control, Devon's management has focused its efforts on increasing oil and
gas reserves and production and controlling expenses. Over its 14-year history
as a public company, Devon has been able to reduce its controllable operating
costs per unit of production. Devon's future earnings and cash flows are
dependent on its ability to continue to contain operating costs at levels that
allow for profitable production.

RESULTS OF OPERATIONS

REVENUES

Changes in oil, gas and NGL production, prices and revenues from 2000 to
2002 are shown in the following tables. (Unless otherwise stated, all dollar
amounts in this report are expressed in U.S. dollars.)