Devon Energy Corporation has reported a net loss of $4.0 billion for the quarter ended March 31, 2009, or $8.92 per common share ($8.92 per diluted common share). A $4.2 billion non-cash, after-tax reduction in the carrying value of oil and gas properties led to the quarterly net loss. In the first quarter of 2008, Devon reported net earnings of $749 million, or $1.68 per common share ($1.66 per diluted common share).
Earnings 48 Cents per Share Excluding Items Not Estimated by Analysts
Devon's first-quarter 2009 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most significant of these items was a $4.2 billion after-tax reduction in the carrying value of oil and gas properties. Excluding the reduction in carrying value of oil and gas properties and other adjusting items, Devon earned $216 million or 48 cents per diluted common share in the first quarter of 2009.
The non-cash charge resulted from application of the ceiling test as prescribed by the Securities and Exchange Commission (SEC) for companies that follow the full-cost method of accounting. Under the full-cost method of accounting, a company's net book value of its oil and gas properties, less related deferred income taxes, may not exceed a calculated "ceiling." The test is performed separately for each country in which the company operates. The ceiling is the estimated after-tax stream of future net revenues from proved oil and gas properties, discounted at 10 percent per year using costs and prices held flat, plus the cost of unevaluated properties. Any excess is written off as a non-cash expense. The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the ceiling. Full-cost companies must use the prices in effect at the end of each accounting quarter to calculate the ceiling value of reserves. Future net revenues are calculated assuming continuation of prices and costs in effect at the time of the calculation, except for changes that are fixed and determinable by existing contracts. Although the SEC recently modified its rules applicable to the ceiling test, the new rules do not take effect until year-end 2009.
Production Growth Offset by Lower Realized Prices
Combined oil, gas and natural gas liquids production averaged 685 thousand oil-equivalent barrels (Boe) per day in the first quarter of 2009. This was a seven percent increase in production compared with the first quarter of 2008. The production growth was concentrated in onshore fields within the United States and Canada.
Although production increased, sales of oil, gas and natural gas liquids decreased 53 percent to $1.5 billion in the first quarter of 2009. Significantly lower prices for all three products more than offset the quarter-over-quarter increase in oil-equivalent production.
Devon's realized price for natural gas decreased 49 percent in the first quarter of 2009, to $3.73 per thousand cubic feet. This compares with $7.31 per thousand cubic feet in the first quarter of 2008. Devon's average realized oil price decreased 62 percent to $33.61 per barrel in the first quarter of 2009 compared with $88.23 per barrel in the prior-year period. Devon's realized natural gas liquids price decreased 61 percent to $18.60 per barrel from $47.40 per barrel in the first quarter of 2008.
Operating Highlights Show Production Gains
Devon drilled 451 wells in the first quarter of 2009 compared with 646 wells it drilled in the first quarter of 2008. The company has reduced drilling activity and related capital expenditures in response to declines in natural gas and oil prices. Despite the reduced level of drilling, Devon achieved several notable operational accomplishments in the first quarter:
• Devon increased its net production from the Barnett Shale field in north Texas to an all-time high of 1.2 billion cubic feet of gas equivalent per day. The company is by far the largest producer in the Barnett.
• The company increased its net production in the Arkoma-Woodford Shale in eastern Oklahoma to 86 million cubic feet of gas equivalent per day.
• In its emerging Cana-Woodford Shale play in western Oklahoma, Devon established production from nine wells in the first quarter with an average initial production rate of 4.3 million cubic feet of gas per day.
• At Groesbeck in east Texas, Devon drilled two high-volume wells in the Nan-Su-Gail field in the first quarter. The Neal B 14H (93 percent working interest) had initial production of 23 million cubic feet of gas per day. The Hill 17H (100 percent working interest) initiated production at 19 million cubic feet of gas per day.
• In the Powder River Basin in Wyoming, Devon's net production reached an all-time high of 114 million cubic feet of gas per day.
• In Canada, Devon began injecting steam into the final pair of wells at its Jackfish oil sands project in March. All 24 well-pairs are now operational.
• Jackfish production reached 28,000 barrels of oil per day in March. The company expects Jackfish to reach its design capacity of 35,000 barrels of oil per day in the second or third quarter of 2009.
Marketing and Midstream Profit Declines with Prices
Marketing and midstream operating profit was $142 million in the first quarter of 2009. This was an 18 percent decrease compared with the first quarter of 2008. The decrease was largely attributable to lower natural gas and natural gas liquids prices.
Costs Begin Improving
First-quarter 2009 expenses in most categories decreased in comparison to the first quarter of 2008. Unit lease operating expenses (LOE) decreased by two percent to $8.50 per Boe in the first quarter of 2009. The decrease in unit LOE primarily reflects lower Canadian exchange rates.
Production taxes declined 68 percent to $42 million in the first quarter of 2009 compared with the first quarter of 2008. The decline in production taxes tracks the first-quarter decline in oil and natural gas sales.
Depreciation, depletion and amortization (DD&A) of oil and gas properties decreased 19 percent to $599 million in the first quarter of 2009. Unit DD&A decreased 23 percent to $9.72 per Boe compared with the first quarter of 2008.
First-quarter 2009 general and administrative expenses (G&A) increased 12 percent to $166 million compared with the first quarter of 2008. The company expects G&A to trend down for the remainder of the year.
Interest expense for the first quarter of 2009 decreased to $83 million. This 19 percent decrease compared with the first quarter of 2008 reflects decreased long-term debt levels and lower interest rates.
Retaining Balance Sheet Strength and Liquidity
Devon's net debt to adjusted capitalization ratio was 34 percent at March 31, 2009. Cash on hand at quarter-end was $397 million and unused credit facilities totaled over $2.3 billion. First-quarter 2009 cash flow before balance sheet changes totaled $988 million. The company funded $1.5 billion of capital expenditures and paid common dividends of $70 million in the first quarter of 2009. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.
Items Excluded from Published Earnings Estimates
Devon's reported net earnings include items of income and expense that are typically excluded by securities analysts in their published estimates of the company's financial results. These items and their effects upon reported earnings for the first quarter of 2009 were as follows:
• An unrealized gain on oil and natural gas derivative instruments increased first-quarter earnings by $36 million pre-tax ($23 million after tax).
• A change in fair value of other financial instruments decreased first-quarter earnings by $11 million pre-tax ($8 million after tax).
• A reduction in the carrying value of oil and gas properties decreased first-quarter earnings by $6.5 billion pre-tax ($4.2 billion after tax).