DEVON ENERGY CORP/DE - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended June 30, 2004


o		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

Former name, former address and former fiscal year, if changed from last report.
Not applicable

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 þ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ Noo

The number of shares outstanding of Registrant’s common stock, par value $.10, as of June 30, 2004, was 241,744,000.

DEFINITIONS

As used in this document:

“ AECO” means the price of gas delivered onto the NOVA Gas Transmission Ltd. System.

“ Bbl” or “ Bbls” means barrel or barrels.

“ Bcf” means billion cubic feet.

“ Boe” means barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of gas.

“ Brent” means pricing point for selling North Sea crude oil.

“ Btu” means British Thermal units, a measure of heating value.

“ Inside FERC” refers to the publication Inside F.E.R.C.’s Gas Market Report.

“ LIBOR” means London Interbank Offered Rate.

“ MBbls” means thousand barrels.

“ MMBbls” means million barrels.

“ MBoe” means thousand Boe.

“ MMBoe” means million Boe.

“ MMBtu” means million Btu.

“ Mcf” means thousand cubic feet.

“ MMcf” means million cubic feet.

“ NGL” or “ NGLs” means natural gas liquids.

“ NYMEX” means New York Mercantile Exchange.

“ Oil” includes crude oil and condensate.

“ Domestic” means the properties of Devon in the onshore continental United States and the offshore Gulf of Mexico.

“ Canada” means the division of Devon encompassing oil and gas properties located in Canada.

“ International” means the division of Devon encompassing oil and gas properties that lie outside the United States and Canada.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2004			2003
	(Unaudited)
	(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	1,147		$	1,273
Accounts receivable		1,104			946
Inventories		68			72
Fair value of financial instruments		—			13
Income taxes receivable		11			11
Investments and other current assets		34			49

Total current assets		2,364			2,364

Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($3,229 and $3,336 excluded from amortization in 2004 and 2003, respectively)		29,704			28,546
Less accumulated depreciation, depletion and amortization		11,193			10,212

		18,511			18,334
Investment in ChevronTexaco Corporation common stock, at fair value		667			613
Fair value of financial instruments		—			14
Goodwill		5,388			5,477
Other assets		374			360

Total assets	$	27,304		$	27,162

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	688		$	859
Revenues and royalties due to others		420			315
Income taxes payable		171			15
Current portion of long-term debt		412			338
Deferred revenue		28			56
Accrued interest payable		136			130
Fair value of financial instruments		368			153
Current portion of asset retirement obligation		41			42
Accrued expenses and other current liabilities		117			163

Total current liabilities		2,381			2,071

Other liabilities		354			349
Asset retirement obligation, long-term		658			629
Debentures exchangeable into shares of ChevronTexaco Corporation common stock		684			677
Other long-term debt		6,811			7,903
Preferred stock of a subsidiary		—			55
Fair value of financial instruments		121			52
Deferred income taxes		4,332			4,370
Stockholders’ equity:
Preferred stock of $1.00 par value.
Authorized 4,500,000 shares; issued 1,500,000 ($150 million aggregate liquidation value)		1			1
Common stock of $0.10 par value.
Authorized 800,000,000 shares; issued 244,328,000 in 2004 and 239,767,000 in 2003		24			24
Additional paid-in capital		9,254			9,066
Retained earnings		2,557			1,614
Accumulated other comprehensive income		283			569
Deferred compensation and other		(26	)		(32	)
Treasury stock at cost: 2,584,000 shares in 2004 and 3,677,000 shares in 2003		(130	)		(186	)

Total stockholders’ equity		11,963			11,056

Total liabilities and stockholders’ equity	$	27,304		$	27,162

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
				(Unaudited)
	(In millions, except per share amounts)
Revenues:
Oil sales	$	539		$	379		$	1,120		$	635
Gas sales		1,181			1,007			2,302			1,881
Natural gas liquids sales		122			92			241			199
Marketing and midstream revenues		377			335			794			769

Total revenues		2,219			1,813			4,457			3,484

Production and operating costs and expenses:
Lease operating expenses		252			223			509			388
Transportation costs		54			51			107			92
Production taxes		71			51			133			98
Marketing and midstream operating costs and expenses		299			277			630			633
Depreciation, depletion and amortization of property and equipment		552			427			1,124			723
Accretion of asset retirement obligation		10			9			22			16
General and administrative expenses		70			93			147			142
Expenses related to mergers		—			7			—			7

Total production and operating costs and expenses		1,308			1,138			2,672			2,099

Earnings from operations		911			675			1,785			1,385
Other income (expenses):
Interest expense		(134	)		(130	)		(252	)		(260	)
Dividends on subsidiary’s preferred stock		—			(1	)		—			(1	)
Effects of changes in foreign currency exchange rates		(9	)		29			(15	)		51
Change in fair value of financial instruments		(11	)		(1	)		(7	)		9
Other income		15			17			37			25

Net other expenses		(139	)		(86	)		(237	)		(176	)

Earnings before income tax expense and cumulative effect of change in accounting principle		772			589			1,548			1,209
Income tax expense:
Current		198			89			401			124
Deferred		72			144			151			309

Total income tax expense		270			233			552			433

Earnings before cumulative effect of change in accounting principle		502			356			996			776
Cumulative effect of change in accounting principle, net of income tax expense of $10 million		—			—			—			16

Net earnings		502			356			996			792
Preferred stock dividends		3			3			5			5

Net earnings applicable to common stockholders	$	499		$	353		$	991		$	787

Basic earnings per share:
Earnings from operations	$	2.07		$	1.67		$	4.13		$	4.18
Cumulative effect of change in accounting principle		—			—			—			0.09

Net earnings applicable to common stockholders	$	2.07		$	1.67		$	4.13		$	4.27

Diluted earnings per share:
Earnings from operations	$	2.02		$	1.62		$	4.02		$	4.03
Cumulative effect of change in accounting principle		—			—			—			0.08

Net earnings applicable to common stockholders	$	2.02		$	1.62		$	4.02		$	4.11

Weighted average common shares outstanding – basic		241			212			240			184

Weighted average common shares outstanding – diluted		249			221			248			193

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


										Accumulated
					Additional					Other			Deferred						Total
	Preferred		Common		Paid-In		Retained			Comprehensive			Compensation			Treasury			Stockholders’
	Stock		Stock		Capital		Earnings			Income			and Other			Stock			Equity
	(In millions)
Six Months Ended June 30, 2004
Balance as of December 31, 2003	$	1		24		9,066		1,614			569			(32	)		(186	)		11,056
Comprehensive income:
Net earnings		—		—		—		996			—			—			—			996
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments¹		—		—		—		—			(157	)		—			—			(157	)
Reclassification adjustment for derivative losses reclassified into oil and gas sales²		—		—		—		—			111			—			—			111
Change in fair value of financial instruments³		—		—		—		—			(274	)		—			—			(274	)
Unrealized gain on marketable securities⁴		—		—		—		—			34			—			—			34

Other comprehensive loss																				(286	)

Comprehensive income																				710
Stock issued		—		—		188		—			—			—			56			244
Dividends on common stock		—		—		—		(48	)		—			—			—			(48	)
Dividends on preferred stock		—		—		—		(5	)		—			—			—			(5	)
Amortization of restricted stock awards		—		—		—		—			—			6			—			6

Balance as of June 30, 2004		1		24		9,254		2,557			283			(26	)		(130	)		11,963

Six Months Ended June 30, 2003
Balance as of December 31, 2002	$	1		16		5,178		(84	)		(267	)		(3	)		(188	)		4,653
Comprehensive income:
Net earnings		—		—		—		792			—			—			—			792
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments⁵		—		—		—		—			541			—			—			541
Reclassification adjustment for derivative losses reclassified into oil and gas sales⁶		—		—		—		—			131			—			—			131
Change in fair value of financial instruments⁷		—		—		—		—			(182	)		—			—			(182	)
Unrealized gain on marketable securities⁸		—		—		—		—			26			—			—			26

Other comprehensive income																				516

Comprehensive income																				1,308
Stock issued		—		7		3,700		—			—			—			—			3,707
Stock repurchased		—		—		—		—			—			—			1			1
Dividends on common stock		—		—		—		(16	)		—			—			—			(16	)
Dividends on preferred stock		—		—		—		(5	)		—			—			—			(5	)
Grant of restricted stock awards		—		1		—		—			—			—			—			1
Amortization of restricted stock awards		—		—		—		—			—			2			—			2
Other		—		—		—		1			—			—			—			1

Balance as of June 30, 2003		1		24		8,878		688			249			(1	)		(187	)		9,652


¹ net of income tax benefit of:	$	24

² net of income tax expense of:		(77	)

³ net of income tax benefit of:		185

⁴ net of income tax expense of:		(20	)

⁵ net of income tax expense of:		(118	)

⁶ net of income tax expense of:		(82	)

⁷ net of income tax benefit of:		112

⁸ net of income tax expense of:		(15	)

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,
	2004			2003
	(Unaudited)
	(In millions)
Cash flows from operating activities:
Earnings before cumulative effect of change in accounting principle	$	996		$	776
Adjustments to reconcile earnings before cumulative effect of change in accounting principle to net cash provided by operating activities:
Depreciation, depletion and amortization of property and equipment		1,124			723
Accretion of asset retirement obligation		22			16
Accretion of discounts on long-term debt, net		5			12
Effects of changes in foreign currency exchange rates		15			(51	)
Change in fair value of derivative instruments		7			(9	)
Deferred income tax expense		151			309
Gain on sale of assets		(4	)		(2	)
Other		35			(16	)
Changes in assets and liabilities, net of acquisitions of businesses:
(Increase) decrease in:
Accounts receivable		(161	)		(194	)
Inventories		4			(7	)
Investments and other current assets		(31	)		(9	)
Increase (decrease) in:
Accounts payable		134			44
Income taxes payable		157			119
Accrued interest and expenses		(53	)		87</


	Page
	No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, June 30, 2004 (Unaudited) and December 31, 2003		6
Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2004 and 2003		7
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) for the Six Months Ended June 30, 2004 and 2003		8
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2004 and 2003		9
Notes to Consolidated Financial Statements (Unaudited)		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4. Controls and Procedures		41
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders		42
Item 6. Exhibits and Reports on Form 8-K 43		43
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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