UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2004
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 001-32318
Devon Energy Corporation
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
73-1567067 (I.R.S. Employer Identification Number) |
| 20 North Broadway Oklahoma City, Oklahoma (Address of Principal Executive Offices) |
73102-8260 (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 No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
The number of shares outstanding of Registrant’s common stock, par value $.10, as of September 30, 2004, was 243,011,000.
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2
DEVON ENERGY CORPORATION
Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission
3
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.
4
DEVON ENERGY CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
(Forming a part of Form 10-Q Quarterly Report
to the Securities and Exchange Commission)
5
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
| (In millions, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,761 | $ | 1,273 | ||||
Accounts receivable |
1,102 | 946 | ||||||
Fair value of derivative financial instruments |
7 | 13 | ||||||
Investments and other current assets |
151 | 132 | ||||||
Total current assets |
3,021 | 2,364 | ||||||
Property and equipment, at cost, based on the full cost method of accounting for oil
and gas properties ($3,085 and $3,336 excluded from amortization in 2004 and 2003,
respectively) |
30,884 | 28,546 | ||||||
Less accumulated depreciation, depletion and amortization |
11,988 | 10,212 | ||||||
| 18,896 | 18,334 | |||||||
Investment in ChevronTexaco Corporation common stock, at fair value |
761 | 613 | ||||||
Fair value of derivative financial instruments |
13 | 14 | ||||||
Goodwill |
5,525 | 5,477 | ||||||
Other assets |
374 | 360 | ||||||
Total assets |
$ | 28,590 | $ | 27,162 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable: |
||||||||
Trade |
$ | 680 | $ | 859 | ||||
Revenues and royalties due to others |
430 | 315 | ||||||
Income taxes payable |
225 | 15 | ||||||
Current portion of long-term debt |
685 | 338 | ||||||
Accrued interest payable |
91 | 130 | ||||||
Fair value of derivative financial instruments |
662 | 153 | ||||||
Current portion of asset retirement obligation |
42 | 42 | ||||||
Accrued expenses and other current liabilities |
151 | 219 | ||||||
Total current liabilities |
2,966 | 2,071 | ||||||
Other liabilities |
350 | 349 | ||||||
Asset retirement obligation, long-term |
684 | 629 | ||||||
Debentures exchangeable into shares of ChevronTexaco Corporation common stock |
688 | 677 | ||||||
Other long-term debt |
6,582 | 7,903 | ||||||
Preferred stock of a subsidiary |
— | 55 | ||||||
Fair value of derivative financial instruments |
163 | 52 | ||||||
Deferred income taxes |
4,502 | 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 245,853,000 in 2004 and 239,767,000 in 2003 |
25 | 24 | ||||||
Additional paid-in capital |
9,304 | 9,066 | ||||||
Retained earnings |
3,047 | 1,614 | ||||||
Accumulated other comprehensive income |
451 | 569 | ||||||
Deferred compensation and other |
(25 | ) | (32 | ) | ||||
Treasury stock at cost: 2,842,000 shares in 2004 and 3,677,000 shares in 2003 |
(148 | ) | (186 | ) | ||||
Total stockholders’ equity |
12,655 | 11,056 | ||||||
Total liabilities and stockholders’ equity |
$ | 28,590 | $ | 27,162 | ||||
See accompanying notes to consolidated financial statements.
6
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (Unaudited) | ||||||||||||||||
| (In millions, except per share amounts) | ||||||||||||||||
Revenues: |
||||||||||||||||
Oil sales |
$ | 559 | $ | 469 | $ | 1,679 | $ | 1,104 | ||||||||
Gas sales |
1,147 | 1,049 | 3,450 | 2,930 | ||||||||||||
Natural gas liquids sales |
153 | 95 | 393 | 294 | ||||||||||||
Marketing and midstream revenues |
408 | 335 | 1,202 | 1,104 | ||||||||||||
Total revenues |
2,267 | 1,948 | 6,724 | 5,432 | ||||||||||||
Production and operating costs and expenses: |
||||||||||||||||
Lease operating expenses |
264 | 238 | 773 | 626 | ||||||||||||
Transportation costs |
59 | 57 | 166 | 149 | ||||||||||||
Production taxes |
48 | 54 | 182 | 152 | ||||||||||||
Marketing and midstream operating costs and expenses |
319 | 268 | 949 | 901 | ||||||||||||
Depreciation, depletion and amortization of property and equipment |
572 | 508 | 1,696 | 1,231 | ||||||||||||
Accretion of asset retirement obligation |
11 | 10 | 32 | 26 | ||||||||||||
General and administrative expenses |
59 | 79 | 206 | 221 | ||||||||||||
Expenses related to mergers |
— | — | — | 7 | ||||||||||||
Total production and operating costs and expenses |
1,332 | 1,214 | 4,004 | 3,313 | ||||||||||||
Earnings from operations |
935 | 734 | 2,720 | 2,119 | ||||||||||||
Other income (expenses): |
||||||||||||||||
Interest expense |
(109 | ) | (120 | ) | (361 | ) | (380 | ) | ||||||||
Dividends on subsidiary’s preferred stock |
— | — | — | (1 | ) | |||||||||||
Effects of changes in foreign currency exchange rates |
21 | 1 | 6 | 52 | ||||||||||||
Change in fair value of derivative financial instruments |
(47 | ) | (1 | ) | (54 | ) | 8 | |||||||||
Other income |
17 | 4 | 54 | 29 | ||||||||||||
Net other expenses |
(118 | ) | (116 | ) | (355 | ) | (292 | ) | ||||||||
Earnings before income tax expense and cumulative effect of change
in accounting principle |
817 | 618 | 2,365 | 1,827 | ||||||||||||
Income tax expense: |
||||||||||||||||
Current |
168 | 41 | 568 | 165 | ||||||||||||
Deferred |
132 | 165 | 284 | 474 | ||||||||||||
Total income tax expense |
300 | 206 | 852 | 639 | ||||||||||||
Earnings before cumulative effect of change in accounting principle |
517 | 412 | 1,513 | 1,188 | ||||||||||||
Cumulative effect of change in accounting principle, net of income
tax expense of $10 million |
— | — | — | 16 | ||||||||||||
Net earnings |
517 | 412 | 1,513 | 1,204 | ||||||||||||
Preferred stock dividends |
2 | 2 | 7 | 7 | ||||||||||||
Net earnings applicable to common stockholders |
$ | 515 | $ | 410 | $ | 1,506 | $ | 1,197 | ||||||||
Basic earnings per share: |
||||||||||||||||
Earnings before change in accounting principle |
$ | 2.12 | $ | 1.76 | $ | 6.25 | $ | 5.89 | ||||||||
Cumulative effect of change in accounting principle |
— | — | — | 0.08 | ||||||||||||
Net earnings applicable to common stockholders |
$ | 2.12 | $ | 1.76 | $ | 6.25 | $ | 5.97 | ||||||||
Diluted earnings per share: |
||||||||||||||||
Earnings before change in accounting principle |
$ | 2.07 | $ | 1.71 | $ | 6.07 | $ | 5.69 | ||||||||
Cumulative effect of change in accounting principle |
— | — | — | 0.07 | ||||||||||||
Net earnings applicable to common stockholders |
$ | 2.07 | $ | 1.71 | $ | 6.07 | $ | 5.76 | ||||||||
Weighted average common shares outstanding – basic |
242 | 232 | 241 | 200 | ||||||||||||
Weighted average common shares outstanding – diluted |
250 | 241 | 249 | 209 | ||||||||||||
See accompanying notes to consolidated financial statements.
7
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
(Unaudited)
| 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) | ||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2004 |
||||||||||||||||||||||||||||||||
Balance as of December 31, 2003 |
$ | 1 | $ | 24 | $ | 9,066 | $ | 1,614 | $ | 569 | $ | (32 | ) | $ | (186 | ) | $ | 11,056 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
— | — | — | 1,513 | — | — | — | 1,513 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of
tax: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments1 |
— | — | — | — | 129 | — | — | 129 | ||||||||||||||||||||||||
Reclassification adjustment for derivative
losses reclassified into oil and gas sales2 |
— | — | — | — | 223 | — | — | 223 | ||||||||||||||||||||||||
Change in fair value of derivative financial
instruments3 |
— | — | — | — | (564 | ) | — | — | (564 | ) | ||||||||||||||||||||||
Unrealized gain on marketable securities4 |
— | — | — | — | 94 | — | — | 94 | ||||||||||||||||||||||||
Other comprehensive loss |
(118 | ) | ||||||||||||||||||||||||||||||
Comprehensive income |
1,395 | |||||||||||||||||||||||||||||||
Stock issued |
— | 1 | 236 | — | — | — | 38 | 275 | ||||||||||||||||||||||||
Dividends on common stock |
— | — | — | (73 | ) | — | — | — | (73 | ) | ||||||||||||||||||||||
Dividends on preferred stock |
— | — | — | (7 | ) | — | — | — | (7 | ) | ||||||||||||||||||||||
Grant of restricted stock awards |
— | — | 2 | — | — | (2 | ) | — | — | |||||||||||||||||||||||
Amortization of restricted stock awards |
— | — | — | — | — | 8 | — | 8 | ||||||||||||||||||||||||
Other |
— | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||
Balance as of September 30, 2004 |
$ | 1 | $ | 25 | $ | 9,304 | $ | 3,047 | $ | 451 | $ | (25 | ) | $ | (148 | ) | $ | 12,655 | ||||||||||||||
Nine Months Ended September 30, 2003 |
||||||||||||||||||||||||||||||||
Balance as of December 31, 2002 |
$ | 1 | $ | 16 | $ | 5,178 | $ | (84 | ) | $ | (267 | ) | $ | (3 | ) | $ | (188 | ) | $ | 4,653 | ||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
— | — | — | 1,204 | — | — | — | 1,204 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of
tax: |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments5 |
— | — | — | — | 560 | — | — | 560 | ||||||||||||||||||||||||
Reclassification adjustment for derivative
losses reclassified into oil and gas sales6 |
— | — | — | — | 165 | — | — | 165 | ||||||||||||||||||||||||
Change in fair value of derivative financial
instruments7 |
— | — | — | — | (112 | ) | — | — | (112 | ) | ||||||||||||||||||||||
Unrealized gain on marketable securities8 |
— | — | — | — | 22 | — | — | 22 | ||||||||||||||||||||||||
Other comprehensive income |
635 | |||||||||||||||||||||||||||||||
Comprehensive income |
1,839 | |||||||||||||||||||||||||||||||
Stock issued |
— | 7 | 3,721 | — | — | — | 1 | 3,729 | ||||||||||||||||||||||||
Dividends on common stock |
— | — | — | (28 | ) | — | — | — | (28 | ) | ||||||||||||||||||||||
Dividends on preferred stock |
— | — | — | (7 | ) | — | — | — | (7 | ) | ||||||||||||||||||||||
Grant of restricted stock awards |
— | 1 | — | — | — | (1 | ) | — | — | |||||||||||||||||||||||
Amortization of restricted stock awards |
— | — | — | — | — | 2 | — | 2 | ||||||||||||||||||||||||
Other |
— | — | — | — | — | 2 | — | 2 | ||||||||||||||||||||||||
Balance as of September 30, 2003 |
$ | 1 | $ | 24 | $ | 8,899 | $ | 1,085 | $ | 368 | $ | — | $ | (187 | ) | $ | 10,190 | |||||||||||||||
1 net of income tax expense of: |
$ | (11 | ) | |
2 net of income tax expense of: |
(156 | ) | ||
3 net of income tax benefit of: |
386 | |||
4 net of income tax expense of: |
(55 | ) | ||
5 net of income tax expense of: |
(123 | ) | ||
6 net of income tax expense of: |
(107 | ) | ||
7 net of income tax benefit of: |
62 | |||
8 net of income tax expense of: |
(13 | ) |
See accompanying notes to consolidated financial statements.
8
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended | ||||||||
| September 30, |
||||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
| (In millions) | ||||||||
Cash flows from operating activities: |
||||||||
Earnings before cumulative effect of change in accounting principle |
$ | 1,513 | $ | 1,188 | ||||
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 |
1,696 | 1,231 | ||||||
Accretion of asset retirement obligation |
32 | 26 | ||||||
Accretion of discounts on long-term debt, net |
8 | 15 | ||||||
Effects of changes in foreign currency exchange rates |
(6 | ) | (52 | ) | ||||
Change in fair value of derivative financial instruments |
54 | (8 | ) | |||||
Deferred income tax expense |
284 | 474 | ||||||
(Gain) loss on sale of assets |
(4 | ) | 2 | |||||
Other |
45 | (25 | ) | |||||
Changes in assets and liabilities, net of acquisitions of businesses: |
||||||||
Increase in: |
||||||||
Accounts receivable |
(142 | ) | (122 | ) | ||||
Investments and other current assets |
(22 | ) | (23 | ) | ||||
Increase (decrease) in: |
||||||||
Accounts payable |
176 | 19 | ||||||
Income taxes payable |
212 | 126 | ||||||
Accrued interest and expenses |
(129 | ) | (66 | ) | ||||
Long-term other liabilities |
(25 | ) | (5 | ) | ||||
Net cash provided by operating activities |
3,692 | 2,780 | ||||||