Devon Energy Corporation has reported net earnings for the quarter ended March 31, 2008, of $749 million, or $1.68 per common share ($1.66 per diluted common share). This is a 15 percent increase compared with Devon's first-quarter 2007 net earnings of $651 million, or $1.46 per common share ($1.44 per diluted common share).
Earnings $2.74 per Share Excluding Items Not Estimated by Analysts
First-quarter 2008 reported net earnings of $749 million were impacted by certain items securities analysts typically exclude from their published estimates. Excluding these items, Devon earned $1.2 billion or $2.74 per diluted share. By far the most significant of these items was a non-cash, unrealized loss on oil and natural gas derivative instruments of $780 million pre-tax ($500 million after tax).
Increased Production Drives 52 Percent Sales Growth
Combined oil, gas and natural gas liquids production from continuing operations averaged 640 thousand oil-equivalent barrels (Boe) per day in the first quarter of 2008. This was a nine percent increase in production from continuing operations compared with the first quarter of 2007. The production growth was concentrated in onshore fields within the United States and Canada. Devon has increased oil and natural gas production from retained properties for eight consecutive quarters.
Sales of oil, gas and natural gas liquids increased 52 percent to $3.2 billion in the first quarter of 2008. The combined effects of increased oil and gas production and higher oil, gas and natural gas liquids prices led to the increase in sales.
Barnett Shale Production Growth Leads Operating Highlights
Devon drilled 646 wells in the first quarter of 2008, with an overall success rate of 97 percent. Following are highlights of operations conducted in the first quarter of 2008:
• Devon's net production from the Barnett Shale field in north Texas averaged a record 995 million cubic feet of gas equivalent per day in the first quarter of 2008. This was 36 percent greater than its production in the first quarter of 2007. During April, the company's net Barnett Shale production surpassed one billion cubic feet of gas equivalent per day. This milestone event occurred approximately 21 months ahead of Devon's original target date.
• In east Texas in the Groesbeck area, the company initiated production on three significant horizontal natural gas wells in the first quarter. Initial daily production from the three horizontal wells averaged more than 19 million cubic feet of gas equivalent per well. Devon has 100 percent working interests in two of the wells and 93 percent in the third.
• In the Gulf of Mexico, Devon continued appraisal and development operations on its four significant discoveries in the deepwater Lower Tertiary trend: Cascade, St. Malo, Jack and Kaskida. The company conducted drilling operations on the St. Malo No. 3 and No. 4 wells in the quarter. It also commenced drilling the Jack No. 3 appraisal well. At Cascade, the company is moving forward with development plans and will begin drilling the first of two producing wells later in 2008.
• In April, Devon increased its interest in the Kaskida unit by exercising a preferential right. Devon now has a 26.67 percent working interest in the 51,800-acre Kaskida unit. Kaskida, discovered in 2006, is believed to be the largest of the company's four Lower Tertiary discoveries.
• In Canada, Devon established significant production from its Jackfish oil sands project in Alberta during the first quarter of 2008. First-quarter exit-rate production reached 10,000 barrels per day. Production from the 100 percent-owned Jackfish project is expected to ramp up throughout 2008. A peak rate of 35,000 barrels of oil per day is expected in early 2009.
• Also in Canada, Devon continued an active drilling program in the company's Lloydminster oil play, drilling 121 new wells in the first quarter. The company's production in Lloydminster has increased by 30 percent over the past 12 months to nearly 42,000 Boe per day.
African Divestitures Total $3 Billion
In 2006 and 2007, Devon announced it would divest its assets in Africa and terminate its African operations. In April 2008, Devon announced an agreement to sell its operations in Equatorial Guinea for $2.2 billion. To date, the company has announced sales agreements for its assets in six African countries with aggregate divestiture proceeds of more than $3 billion, before taxes. Devon expects to complete all of the announced transactions around mid-2008.
In accordance with accounting standards, Devon has classified the assets, liabilities and results of its operations in Africa as discontinued operations for all accounting periods presented in this release. Included with this release is a table of revenues, expenses and production categories and amounts reclassified as discontinued operations for each period presented.
Marketing and Midstream Profit Climbs 59 Percent
Marketing and midstream operating profit was $173 million in the quarter ended March 31, 2008, compared with $109 million in the same period in 2007. The 59 percent increase was largely attributable to higher natural gas and natural gas liquids prices.
Rising Expenses Reflect Higher Production and Activity Levels
Lease operating expenses (LOE) in the first quarter of 2008 increased to $506 million. On a unit of production basis, first-quarter 2008 LOE was $8.69 per Boe, or seven percent higher than the first quarter of 2007. The increase in unit LOE in the 2008 quarter reflects higher Canadian exchange rates, higher transportation costs and generally higher expenditures for oilfield services and supplies.
Depreciation, depletion and amortization (DD&A) of oil and gas properties increased to $737 million in the first quarter of 2008. Unit DD&A increased 14 percent to $12.64 per Boe.
As expected, first-quarter general and administrative expenses (G&A) increased to $148 million. Higher employee-related costs were the largest contributor to the quarterly increase in G&A. Devon has increased the size of its workforce to support expanding levels of large-scale exploration and development projects.
Interest expense for the first quarter of 2008 decreased to $102 million. This is seven percent less than first-quarter 2007 interest expense of $110 million.
Cash Flow at Record Level; Balance Sheet Strengthened
First-quarter cash flow before balance sheet changes reached a record $2.6 billion in 2008. This was a 74 percent increase compared with the first quarter of 2007. The company funded $2.0 billion of capital expenditures in the first quarter of 2008 and paid common and preferred dividends totaling $73 million. This resulted in free cash flow of nearly $600 million in the quarter. Cash on hand at March 31, 2008, increased to approximately $1.9 billion. A reconciliation of cash flow before balance sheet changes and free cash flow is provided later in this release.