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

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

Commission File Number 001-32318

DEVON ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		73-1567067
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)
20 North Broadway, Oklahoma City, Oklahoma		73102-8260
(Address of principal executive offices)		(Zip code)

     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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On October 28, 2010, 431.9 million shares of common stock were outstanding.

 

 

DEVON ENERGY CORPORATION

FORM 10-Q
For the Quarterly Period Ended September 30, 2010

INDEX

DEFINITIONS			3
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			4
PART I. Financial Information			5
Item 1. Consolidated Financial Statements			5
Consolidated Balance Sheets			5
Consolidated Statements of Operations			6
Consolidated Statements of Comprehensive Earnings (Loss)			7
Consolidated Statements of Stockholders’ Equity			8
Consolidated Statements of Cash Flows			9
Notes to Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			44
PART II. Other Information			45
Item 1. Legal Proceedings			45
Item 1A. Risk Factors			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 5. Other Information			45
Item 6. Exhibits			45
SIGNATURES			46
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

DEFINITIONS

Measurements of Oil, Natural Gas and Natural Gas Liquids

	•		“NGL” or “NGLs” means natural gas liquids.
	•		“Oil” includes crude oil and condensate.
	•		“Bbl” means barrel of oil. One barrel equals 42 U.S. gallons.

	-		“MBbls” means thousand barrels.
	-		“MMBbls” means million barrels.
	-		“MBbls/d” means thousand barrels per day.

•

“Mcf” means thousand cubic feet of natural gas.

	-		“MMcf” means million cubic feet.
	-		“Bcf” means billion cubic feet.
	-		“MMcf/d” means million cubic feet per day.

•

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

	-		“MBoe” means thousand Boe.
	-		“MMBoe” means million Boe.
	-		“MBoe/d” means thousand Boe per day.

•

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

	-		“MMBtu” means million Btu.
	-		“MMBtu/d” means million Btu per day.

Geographic Areas

	•		“Canada” means the operations of Devon encompassing oil and gas properties located in Canada.
	•		“International” means the discontinued operations of Devon that encompass oil and gas properties that lie outside the United States and Canada.
	•		“North America Onshore” means the operations of Devon encompassing oil and gas properties in the continental United States and Canada.
	•		“U.S. Offshore” means the operations of Devon encompassing oil and gas properties in the Gulf of Mexico.
	•		“U.S. Onshore” means the properties of Devon encompassing oil and gas properties in the continental United States.

Other

	•		“Federal Funds Rate” means the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.
	•		“Inside FERC” refers to the publication Inside F.E.R.C.’s Gas Market Report.
	•		“LIBOR” means London Interbank Offered Rate.
	•		“NYMEX” means New York Mercantile Exchange.
	•		“SEC” means United States Securities and Exchange Commission.

INFORMATION 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 our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare the December 31, 2009 reserve reports and other data in our possession or available from third parties. 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,” “continue” or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, our assumptions about:

	•		energy markets, including the supply and demand for oil, gas, NGLs and other products or services, and the prices of oil, gas, NGLs, including regional pricing differentials, and other products or services;
	•		production levels, including Canadian production subject to government royalties, which fluctuate with prices and production, and International production governed by payout agreements, which affect reported production;
	•		reserve levels;
	•		competitive conditions;
	•		technology;
	•		the availability of capital resources within the securities or capital markets and related risks such as general credit, liquidity, market and interest-rate risks;
	•		capital expenditure and other contractual obligations;
	•		currency exchange rates;
	•		the weather;
	•		inflation;
	•		the availability of goods and services;
	•		drilling risks;
	•		future processing volumes and pipeline throughput;
	•		general economic conditions, whether internationally, nationally or in the jurisdictions in which we or our subsidiaries conduct business;
	•		public policy and government regulatory changes, including changes in royalty, production tax and income tax regimes, changes in hydraulic fracturing regulation, changes in environmental regulation and liability under federal, state, local or foreign environmental laws and regulations;
	•		terrorism;
	•		occurrence, timing and completion of property acquisitions or divestitures; and
	•		risk factors disclosed under “Item 1A” in our 2009 Annual Report on Form 10-K as well as other factors disclosed under “Item 2. Properties — Proved Reserves and Estimated Future Net Revenue,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

     All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.

PART I. Financial Information

Item 1. Consolidated Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2010				2009
		(Unaudited)
		(In millions)
ASSETS
Current assets:
Cash and cash equivalents		$	3,608			$	646
Accounts receivable			1,028				1,208
Current assets held for sale			576				657
Other current assets			738				481
Total current assets			5,950				2,992
Property and equipment, at cost:
Oil and gas, based on full cost accounting:
Subject to amortization			53,563				52,352
Not subject to amortization			3,605				4,078
Total oil and gas			57,168				56,430
Other			4,330				4,045
Total property and equipment, at cost			61,498				60,475
Less accumulated depreciation, depletion and amortization			(43,299	)			(41,708	)
Property and equipment, net			18,199				18,767
Goodwill			5,977				5,930
Long-term assets held for sale			875				1,250
Other long-term assets			862				747
Total assets		$	31,863			$	29,686
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade		$	1,192			$	1,137
Revenues and royalties due to others			517				486
Short-term debt			1,808				1,432
Current liabilities associated with assets held for sale			377				234
Other current liabilities			556				513
Total current liabilities			4,450				3,802
Long-term debt			3,821				5,847
Asset retirement obligations			1,394				1,418
Liabilities associated with assets held for sale			69				213
Other long-term liabilities			1,072				937
Deferred income taxes			2,405				1,899
Stockholders’ equity:
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 432.2 million and 446.7 million shares in 2010 and 2009, respectively			43				45
Additional paid-in capital			5,714				6,527
Retained earnings			11,390				7,613
Accumulated other comprehensive earnings			1,512				1,385
Treasury stock, at cost. 0.1 million shares in 2010			(7	)			—
Total stockholders’ equity			18,652				15,570
Commitments and contingencies (Note 11)
Total liabilities and stockholders’ equity		$	31,863			$	29,686

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Unaudited)
		(In millions, except
		per share amounts)
Revenues:
Oil, gas and NGL sales		$	1,683			$	1,481			$	5,535			$	4,306
Oil, gas and NGL derivatives			209				23				874				190
Marketing and midstream revenues			461				344				1,396				1,074
Total revenues			2,353				1,848				7,805				5,570
Expenses and other, net:
Lease operating expenses			415				416				1,271				1,266
Taxes other than income taxes			95				81				288				249
Marketing and midstream operating costs and expenses			336				241				1,013				695
Depreciation, depletion and amortization of oil and gas properties			397				424				1,249				1,414
Depreciation and amortization of non-oil and gas properties			66				64				192				208
Accretion of asset retirement obligations			21				22				71				68
General and administrative expenses			131				136				399				472
Restructuring costs			63				—				55				—
Interest expense			83				90				280				263
Interest-rate and other financial instruments			55				(5	)			121				(20	)
Reduction of carrying value of oil and gas properties			—				—				—				6,408
Other, net			(8	)			(92	)			(34	)			(61	)
Total expenses and other, net			1,654				1,377				4,905				10,962
Earnings (loss) from continuing operations before income taxes			699				471				2,900				(5,392	)
Income tax expense (benefit):
Current			(310	)			85				696				135
Deferred			580				4				349				(2,217	)
Total income tax expense (benefit)			270				89				1,045				(2,082	)
Earnings (loss) from continuing operations			429				382				1,855				(3,310	)
Discontinued operations:
Earnings (loss) from discontinued operations before income taxes			1,710				121				2,320				198
Discontinued operations income tax expense			49				4				187				34
Earnings (loss) from discontinued operations			1,661				117				2,133				164
Net earnings (loss)		$	2,090			$	499			$	3,988			$	(3,146	)
Basic earnings (loss) from continuing operations per share		$	0.99			$	0.86			$	4.20			$	(7.46	)
Basic earnings (loss) from discontinued operations per share			3.82				0.27				4.82				0.37
Basic net earnings (loss) per share		$	4.81			$	1.13			$	9.02			$	(7.09	)
Diluted earnings (loss) from continuing operations per share		$	0.98			$	0.86			$	4.18			$	(7.46	)
Diluted earnings (loss) from discontinued operations per share			3.81				0.26				4.81				0.37
Diluted net earnings (loss) per share		$	4.79			$	1.12			$	8.99			$	(7.09	)

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(Unaudited)
		(In millions)
Net earnings (loss)		$	2,090			$	499			$	3,988			$	(3,146	)
Foreign currency translation:
Change in cumulative translation adjustment			223				520				119				826
Foreign currency translation income tax expense			(12	)			(31	)			(7	)			(50	)
Foreign currency translation total			211				489				112				776
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in earnings			8				12				24				36
Pension and postretirement benefit plans income tax expense			(3	)			(5	)			(9	)			(13	)
Pension and postretirement benefit plans total			5				7				15				23
Other comprehensive earnings (loss), net of tax			216				496				127				799
Comprehensive earnings (loss)		$	2,306			$	995			$	4,115			$	(2,347	)

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Retained				Comprehensive				Treasury				Stockholders’
		Shares				Amount				Capital				Earnings				Earnings				Stock				Equity
		(Unaudited)
		(In millions)
Nine Months Ended September 30, 2010:
Balance as of December 31, 2009			447			$	45			$	6,527			$	7,613			$	1,385			$	—			$	15,570
Net earnings (loss)			—				—				—				3,988				—				—				3,988
Other comprehensive earnings (loss), net of tax			—				—				—				—				127				—				127
Stock option exercises			—				—				18				—				—				—				18
Common stock repurchased			—				—				—				—				—				(950	)			(950	)
Common stock retired			(15	)			(2	)			(941	)			—				—				943				—
Common stock dividends			—				—				—				(211	)			—				—				(211	)
Share-based compensation			—				—				103				—				—				—				103
Share-based compensation tax benefits			—				—				7				—				—				—				7
Balance as of September 30, 2010			432			$	43			$	5,714			$	11,390			$	1,512			$	(7	)		$	18,652
Nine Months Ended September 30, 2009:
Balance as of December 31, 2008			444			$	44			$	6,257			$	10,376			$	383			$	—			$	17,060
Net earnings (loss)			—				—				—				(3,146	)			—				—				(3,146	)
Other comprehensive earnings (loss), net of tax			—				—				—				—				799				—				799
Stock option exercises			—				—				19				—				—				—				19
Common stock repurchased			—				—				—				—				—				(12	)			(12	)
Common stock retired			—				—				(12	)			—				—				12				—
Common stock dividends			—				—				—				(213	)			—				—				(213	)
Share-based compensation			—				—				140				—				—				—				140
Share-based compensation tax benefits			—				—				6				—				—				—				6
Balance as of September 30, 2009			444			$	44			$	6,410			$	7,017			$	1,182			$	—			$	14,653

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months
		Ended September 30,
		2010				2009
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Earnings (loss) from continuing operations		$	1,855			$	(3,310	)
Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			1,441				1,622
Deferred income tax expense (benefit)			349				(2,217	)
Reduction of carrying value of oil and gas properties			—				6,408
Unrealized change in fair value of financial instruments			(136	)			184
Other noncash charges			154				182
Net decrease in working capital			164				81
Decrease in long-term other assets			28				17
Increase (decrease) in long-term other liabilities			57				(32	)
Cash from operating activities — continuing operations			3,912				2,935
Cash from operating activities — discontinued operations			324				357
Net cash from operating activities			4,236				3,292
Cash flows from investing activities:
Proceeds from property and equipment divestitures			4,131				23
Capital expenditures			(4,793	)			(3,807	)
Redemptions of long-term investments			20				6
Other			(13	)			—
Cash from investing activities — continuing operations			(655	)			(3,778	)
Cash from investing activities — discontinued operations			2,298				(376	)
Net cash from investing activities			1,643				(4,154	)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt, net of issuance costs			—				1,187
Net commercial paper (repayments) borrowings			(1,432	)			363
Debt repayments			(350	)			(1	)
Proceeds from stock option exercises			18				19
Repurchases of common stock			(929	)			—
Dividends paid on common stock			(211	)			(213	)
Excess tax benefits related to share-based compensation			7				6
Net cash from financing activities			(2,897	)			1,361
Effect of exchange rate changes on cash			5				29
Net increase in cash and cash equivalents			2,987				528
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			1,011				384
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	3,998			$	912

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

     The accompanying unaudited consolidated financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in Devon’s 2009 Annual Report on Form 10-K.

     The unaudited interim consolidated financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon’s financial position as of September 30, 2010 and Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2010 and 2009.

2. Accounts Receivable

The components of accounts receivable include the following:

		September 30, 2010				December 31, 2009
		(In millions)
Oil, gas and NGL sales		$	612			$	752
Marketing and midstream revenues			160				188
Joint interest billings			158				151
Production tax credits			85				110
Other			22				19
Gross accounts receivable			1,037				1,220
Allowance for doubtful accounts			(9	)			(12	)
Net accounts receivable		$	1,028			$	1,208

3. Derivative Financial Instruments

     Devon periodically enters into commodity and interest rate derivative financial instruments. These instruments are used to manage the inherent uncertainty of future revenues due to oil, gas and NGL price volatility and to manage Devon’s exposure to interest rate volatility. Devon has elected not to designate any of its derivative instruments for hedge accounting treatment.

     The following table presents the derivative fair values included in the accompanying consolidated balance sheets.

		Balance Sheet Caption		September 30, 2010				December 31, 2009
				(In millions)
Asset derivatives:
Commodity derivatives		Other current assets		$	493			$	172
Commodity derivatives		Other long-term assets			45				—
Interest rate derivatives		Other current assets			—				39
Interest rate derivatives		Other long-term assets			48				131
Total asset derivatives				$	586			$	342
Liability derivatives:
Commodity derivatives		Other current liabilities		$	14			$	38
Commodity derivatives		Other long-term liabilities			96				—
Interest rate derivatives		Other current liabilities			38				—
Total liability derivatives				$	148			$	38

     The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying consolidated statements of operations associated with these derivative financial instruments. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s commodity derivatives are presented in the “Oil,

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

gas and NGL derivatives” caption in the accompanying consolidated statements of operations. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s interest rate derivatives are presented in the “Interest-rate and other financial instruments” caption in the accompanying consolidated statements of operations.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
						(In millions)
Cash settlements:
Commodity derivatives		$	232			$	127			$	580			$	359
Interest rate derivatives			17				14				37				35
Total cash settlements			249				141				617				394
Unrealized gains (losses):
Commodity derivatives			(23	)			(104	)			294				(169	)
Interest rate derivatives			(72	)			(9	)			(158	)			(15	)
Total unrealized gains (losses)			(95	)			(113	)			136				(184	)
Net gain (loss) recognized on statement of operations		$	154			$	28			$	753			$	210

4. Other Current Assets

     The components of other current assets include the following:

		September 30, 2010				December 31, 2009
		(In millions)
Derivative financial instruments		$	493			$	211
Inventories			141				182
Other			104				88
Other current assets		$	738			$	481

5. Property and Equipment

Offshore Divestitures

     In November 2009, Devon announced plans to reposition itself strategically as a North America onshore exploration and production company. As part of this strategic repositioning, Devon is bringing forward the value of its offshore assets by divesting them.

Closed Transactions

     The following table presents Devon’s offshore divestiture transactions that closed in the first nine months of 2010. Gross proceeds represent contract prices based upon a January 1, 2010 effective date for the Gulf of Mexico and Azerbaijan divestitures, a May 1, 2010 effective date for the China-Panyu divestiture, and a September 1, 2010 effective date for the China-Exploration divestiture. After-tax proceeds represent gross proceeds adjusted for customary purchase price adjustments, selling costs and income taxes. The purchase price adjustments consist primarily of net cash flow subsequent to the effective date of the divestitures. Proved reserves in the following table are based upon estimated proved reserves as of the divestiture dates.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

		Gross Proceeds				After-Tax Proceeds				Proved Reserves
		(In millions)								(MMBoe)
										(Unaudited)
Gulf of Mexico (continuing operations)		$	4,145			$	3,222				91
Azerbaijan (discontinued operations)			2,000				1,924				56
China — Panyu (discontinued operations)			515				405				13
China — Exploration (discontinued operations)			77				59				—
Total		$	6,737			$	5,610				160

     Proceeds from these divestitures are being used to retire debt and repurchase Devon common shares. Additionally, Devon is using divestiture proceeds to fund North America Onshore exploration and development opportunities, including a joint-venture investment in the Pike oil sands discussed below.

     Under full cost accounting rules, sales or other dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of gain or loss. However, if not recognizing a gain or loss on the disposition would otherwise significantly alter the relationship between a cost center’s capitalized costs and proved reserves, then a gain or loss must be recognized.

     The Gulf of Mexico divestitures presented above did not significantly alter such relationship for Devon’s United States cost center. Therefore, Devon did not recognize a gain in connection with the Gulf of Mexico divestitures. The Azerbaijan divestiture included all of Devon’s properties in its Azerbaijan cost center. As a result, Devon recognized a $1.5 billion ($1.5 billion after-tax) gain during the third quarter of 2010 in connection with the Azerbaijan divestiture. Panyu was Devon’s only producing property in its China cost center. As a result, Devon recognized a $308 million ($235 million after-tax) gain in connection with the Panyu divestiture in the second quarter of 2010. No gain was recognized upon the divestiture of Devon’s exploratory assets in China in the third quarter of 2010. These gains are included in “earnings from discontinued operations” in the accompanying 2010 consolidated statements of operations.

Pending Transaction

     Devon has entered into an agreement to sell its assets in Brazil for $3.2 billion. This transaction continues to progress through the approval process of the Brazilian government and is on track to close around the end of 2010. Devon expects to record a gain upon the close of the transaction.

Deepwater Drilling Rigs

     As part of its offshore operations, Devon was leasing three deepwater drilling rigs. The Seadrill West Sirius and Ocean Endeavor deepwater drilling rigs were used in Devon’s Gulf of Mexico operations. The Transocean Deepwater Discovery is being used in Devon’s operations in Brazil.

     In conjunction with the deepwater Gulf of Mexico divestiture that closed in the second quarter of 2010, the buyer assumed Devon’s lease and remaining commitments for the Seadrill West Sirius rig. Subsequent to closing all its Gulf of Mexico divestitures, Devon agreed to pay $31 million to the owner of the Ocean Endeavor rig to terminate the lease. The $31 million lease termination cost is included in oil and gas property and equipment in the accompanying September 30, 2010, consolidated balance sheet. The buyer of Devon’s assets in Brazil will assume Devon’s lease and remaining commitments for the Transocean Deepwater Discovery rig when the divestiture transaction closes.

Oil Sands Joint Venture

     In conjunction with certain offshore divestitures in the second quarter of 2010, Devon formed a heavy oil joint venture to operate and develop the Pike oil sands leases in Alberta, Canada. As a result, Devon acquired a 50 percent interest in the Pike oil sands leases for $500 million. Devon will also fund $155 million of Canadian dollar capital costs on behalf of its joint-venture partner in the form of a non-interest bearing promissory note. The majority of the capital costs are expected to be paid during 2011 and 2012. See Note 7 for more information regarding the promissory note.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

6. Goodwill

     During the first nine months of 2010, Devon’s Canadian goodwill increased $47 million. This increase was entirely due to foreign currency translation.

     Devon removed all its International goodwill in conjunction with the Azerbaijan divestiture that closed in the third quarter of 2010. Such goodwill totalled $68 million and was presented in long-term assets held for sale in the accompanying December 31, 2009 consolidated balance sheet.

7. Debt

Commercial Paper

     Devon repaid $1.4 billion of commercial paper borrowings during the first and second quarters of 2010 primarily with proceeds received from its Gulf of Mexico property divestitures.

     In May 2010, Devon reduced the maximum allowed borrowings under its commercial paper program from $2.85 billion to approximately $2.2 billion. At September 30, 2010, Devon had no outstanding commercial paper borrowings.

$350 Million 7.25% Senior Notes Due October 1, 2011

     On June 25, 2010, Devon redeemed $350 million of 7.25% senior notes prior to their scheduled maturity of October 1, 2011, primarily with proceeds received from its Gulf of Mexico divestitures. The notes were redeemed for $384 million, which represented 100 percent of the principal amount, a make-whole premium of $28 million and $6 million of accrued and unpaid interest. On the date of redemption, these notes also had an unamortized premium of $9 million. The $28 million make-whole premium and $9 million amortization of the remaining premium are included in interest expense in the accompanying 2010 consolidated statements of operations.

Non-Interest Bearing Promissory Note

     On June 29, 2010, Devon issued a four-year $155 million Canadian dollar non-interest bearing promissory note in connection with the formation of the Pike oil sands joint venture described in Note 5. The present value of the note was $139 million on the issue date based upon an effective interest rate of 3.125%. At September 30, 2010, the note had a carrying value of $143 million, of which $59 million is presented as short-term debt and the remainder is presented as long-term debt in the accompanying consolidated balance sheet.

Credit Lines

     In the second quarter of 2010, Devon cancelled its $700 million Short-Term Facility prior to its November 2, 2010 maturity date. Devon incurred no cost to cancel the facility and will avoid paying the facility fee that pertains to the cancellation period.

     Devon has a syndicated, unsecured revolving line of credit that can be accessed to provide liquidity as needed. The following schedule summarizes the capacity of Devon’s Senior Credit Facility by maturity date, as well as its available capacity as of September 30, 2010 (in millions).

April 7, 2012 maturity		$	463
April 7, 2013 maturity			2,187
Total Senior Credit Facility			2,650
Less:
Outstanding Senior Credit Facility borrowings			—
Outstanding commercial paper borrowings			—
Outstanding letters of credit			37
Total available capacity		$	2,613

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization to be less than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of September 30, 2010, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at September 30, 2010, as calculated pursuant to the terms of the agreement, was 15.3%.

Interest Expense

     The following schedule includes the components of interest expense.

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2010				2009				2010				2009
		(In millions)
Interest based on debt outstanding		$	98			$	112			$	307			$	330
Capitalized interest			(20	)			(22	)			(55	)			(71	)
Early retirement of debt			—				—				19				—
Other			5				—				9				4
Total		$	83			$	90			$	280			$	263

8. Asset Retirement Obligations

     The schedule below summarizes changes in Devon’s asset retirement obligations.

		Nine Months
		Ended September 30,
		2010				2009
		(In millions)
Asset retirement obligations as of beginning of period		$	1,513			$	1,387
Liabilities incurred			36				50
Liabilities settled			(94	)			(75	)
Revision of estimated obligation			194				22
Liabilities assumed by others			(256	)			(17	)
Accretion expense on discounted obligation			71				68
Foreign currency translation adjustment			10				82
Asset retirement obligations as of end of period			1,474				1,517
Less current portion			80				108
Asset retirement obligations, long-term		$	1,394			$	1,409

     During the first nine months of 2010 and 2009, Devon recognized revisions to its asset retirement obligations totaling $194 million and $22 million, respectively. The primary factors causing the 2010 and 2009 increases were an overall increase in abandonment cost estimates and a decrease in the discount rate used to present value the obligations.

     During the first nine months of 2010, Devon reduced its continuing operations asset retirement obligations by $256 million for those obligations that were assumed by purchasers of Devon’s Gulf of Mexico oil and gas properties.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

9. Retirement Plans

     The following table presents the components of net periodic benefit cost for Devon’s pension and other post retirement benefit plans.

		Pension Benefits																Other Postretirement Benefits
		Three Months								Nine Months								Three Months								Nine Months
		Ended September 30,								Ended September 30,								Ended September 30,								Ended September 30,
		2010				2009				2010				2009				2010				2009				2010				2009
														(In millions)
Service cost		$	9			$	11			$	25			$	33			$	—			$	—			$	—			$	—
Interest cost			15				14				43				42				1				1				3				3
Expected return on plan assets			(10	)			(9	)			(28	)			(27	)			—				—				—				—
Amortization of prior service cost			—				1				2				3				1				—				1				—
Net actuarial loss			7				11				21				33				—				—				—				—
Net periodic benefit cost		$	21			$	28			$	63			$	84			$	2			$	1			$	4			$	3

10. Stockholders’ Equity

Stock Repurchases

     During the first nine months of 2010, Devon repurchased 14.7 million common shares under its $3.5 billion stock repurchase program for $936 million, or $63.61 per share. This program expires December 31, 2011.

Dividends

     Devon paid common stock dividends of $211 million and $213 million (quarterly rates of $0.16 per share) in the first nine months of 2010 and 2009, respectively.

11. Commitments and Contingencies

     Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and that can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. However, actual amounts could differ materially from management’s estimate.

Environmental Matters

     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 and similar statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured costs associated with remediation. Devon’s monetary exposure for environmental matters is not expected to be material.

Royalty Matters

     Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits 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 NGLs produced and sold from federal and Indian-owned or controlled lands. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

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, neither Devon nor its property is subject to any material pending legal proceedings.

Commitments

     At the end of 2009, Devon’s commitments included $0.9 billion that related to long-term lease contracts for two deepwater drilling rigs being used in the Gulf of Mexico. As discussed in Note 5, Devon no longer has lease commitments for these two rigs.

     At the end of 2009, Devon’s commitments also included $0.5 billion that related to a long-term lease contract for a deepwater drilling rig being used in Brazil. Devon’s lease and remaining commitments for this rig will be assumed by the buyer of Devon’s assets in Brazil when the associated divestiture transaction closes.

     At the end of 2009, Devon’s commitments also included $0.4 billion that related to leases of floating, production, storage and offloading facilities being used in the Gulf of Mexico, Brazil and China. Devon’s commitments for the Gulf of Mexico and China leases were assumed by the purchasers in the first half of 2010. The Brazil lease will be assumed by the buyer when the associated divestiture transaction closes.

12. Fair Value Measurements

The following tables provide carrying value and fair value measurement information for Devon’s financial assets and liabilities.

										Fair Value Measurements Using:
										Quoted				Significant
										Prices in				Other				Significant
										Active				Observable				Unobservable
		Carrying				Total Fair				Markets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
										(In millions)
September 30, 2010 assets (liabilities):
Commodity derivatives		$	428			$	428			$	—			$	428			$	—
Interest rate derivatives		$	10			$	10			$	—			$	10			$	—
Debt		$	(5,629	)		$	(6,747	)		$	—			$	(6,604	)		$	(143	)
Long-term investments		$	95			$	95			$	—			$	—			$	95
December 31, 2009 assets (liabilities):
Commodity derivatives		$	134			$	134			$	—			$	134			$	—
Interest rate derivatives		$	170			$	170			$	—			$	170			$	—
Debt		$	(7,279	)		$	(8,214	)		$	(1,432	)		$	(6,782	)		$	—
Long-term investments		$	115			$	115			$	—			$	—			$	115

     Devon’s Level 3 fair value measurements included in the table above relate to a non-interest bearing promissory note and certain long-term investments. Included below is a summary of the changes in Devon’s Level 3 fair value measurements during the first nine months of 2010 and 2009.

						Long-Term
		Debt				Investments
		(In millions)
December 31, 2009		$	—			$	115
Issuance of promissory note			(139	)			—
Foreign exchange translation adjustment			(4	)			—
Accretion of promissory note			(1	)			—
Redemptions of principal			1				(20	)
September 30, 2010		$	(143	)		$	95
December 31, 2008		$	—			$	122
Redemptions of principal			—				(6	)
September 30, 2009		$	—			$	116

13. Restructuring Costs

Employee Severance

     In the fourth quarter of 2009, Devon recognized $153 million of estimated employee severance costs associated with the planned divestiture of its offshore assets that was announced in November 2009. This amount was based on estimates of the number of employees that will ultimately be impacted by the divestitures and included amounts related to cash severance costs and accelerated vesting of share-based grants. Of the $153 million total, $105 million related to Devon’s U.S. Offshore operations and the remainder related to its International discontinued operations.

     As discussed in Note 5, Devon had divested all its U.S. Offshore assets by the end of the second quarter of 2010 and a significant part of its International assets by the end of the third quarter of 2010. As a result of these divestitures and associated employee terminations, Devon decreased its estimate of employee severance costs in the second and third quarters of 2010 by $14 million and $21 million, respectively. As a result, Devon now estimates it will incur approximately $118 million of employee severance costs. The lower estimate results primarily from more offshore employees than previously estimated receiving comparable positions with the purchaser of the properties or in Devon’s U.S. Onshore operations. Of the $118 million total, $78 million relates to Devon’s U.S. Offshore operations and the remainder relates to its International discontinued operations. Of the $35 million reduction recognized during 2010, $27 million relates to Devon’s U.S. Offshore operations and the remainder relates to its International discontinued operations.

Lease Obligations

     As a result of the divestitures discussed above, Devon ceased using certain office space that was subject to non-cancellable operating lease arrangements. Consequently, in the third quarter of 2010, Devon recognized $70 million of restructuring costs that represent the present value of its future obligations under the leases, net of anticipated sublease income. Devon’s estimate of lease obligations was based upon certain key estimates that could change over the term of the leases. These estimates include the estimated sublease income that Devon may receive over the term of the leases, as well as the amount of variable operating costs that Devon will be required to pay under the leases.

Asset Impairments

     In the third quarter of 2010, Devon recognized $11 million of asset impairment charges for leasehold improvements and furniture associated with the office space it ceased using.

Financial Statement Presentation

     Recognition and adjustments to cash severance, accelerated vesting of share-based grants, lease obligations and asset impairments are included in restructuring costs in the accompanying 2010 consolidated statements of operations. Amounts related to cash severance and lease obligations are accrued for in other current liabilities and other long-term liabilities in the

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

accompanying consolidated balance sheets, while amounts related to accelerated share-based awards are recorded as a reduction to Devon’s additional paid-in capital in the accompanying consolidated balance sheets. Asset impairments are presented as a reduction to Devon’s net property and equipment in the accompanying consolidated 2010 balance sheet.

     The schedule below summarizes activity and balances associated with Devon’s restructuring liabilities.

		Other Current Liabilities												Other Long-Term Liabilities
		Continuing				Discontinued								Continuing				Discontinued
		Operations				Operations				Total				Operations				Operations				Total
		(In millions)
Balance as of December 31, 2009		$	61			$	23			$	84			$	—			$	—			$	—
Lease obligations incurred			17				—				17				53				—				53
Cash severance paid			(17	)			(3	)			(20	)			—				—				—
Cash severance revision			(18	)			(5	)			(23	)			—				—				—
Balance as of September 30, 2010		$	43			$	15			$	58			$	53			$	—			$	53

     The schedule below summarizes the components of restructuring costs in the accompanying consolidated statements of operations.

		Three Months Ended												Nine Months Ended
		September 30, 2010												September 30, 2010
		Continuing				Discontinued								Continuing				Discontinued
		Operations				Operations				Total				Operations				Operations				Total
		(In millions)
Cash severance		$	(13	)		$	(1	)		$	(14	)		$	(18	)		$	(4	)		$	(22	)
Share-based awards			(5	)			(2	)			(7	)			(9	)			(4	)			(13	)
Lease obligations			70				—				70				70				—				70
Asset impairments			11				—				11				11				—				11
Other			—				—				—				1				—				1
Restructuring costs		$	63			$	(3	)		$	60			$	55			$	(8	)		$	47

14. Reduction of Carrying Value of Oil and Gas Properties

     In the first quarter of 2009, Devon reduced the carrying value of its United States oil and gas properties $6,408 million, or $4,085 million after taxes, due to a full cost ceiling limitation. The reduction resulted from a significant decrease in the full cost ceiling compared to the immediately preceding quarter due to the effects of declining natural gas prices subsequent to December 31, 2008.

15. Income Taxes

     The Gulf of Mexico divestitures discussed in Note 5 have taxable gains that increase Devon’s current income tax expense of $858 million. However, the additional current income taxes are offset by a decrease in deferred income tax expense, resulting in no impact to Devon’s total income tax expense.

     Additionally, in conjunction with the filing of its 2009 income tax return in the third quarter of 2010, Devon recognized a $220 million decrease to current income tax expense that was offset by a like increase to deferred income tax expense. These amounts relate to a change in the timing of certain deductions which Devon elected to expense rather than capitalize for the 2009 tax year. Such deductions created a net operating loss for the 2009 tax year that Devon is using to reduce its 2010 current income taxes that would otherwise be due as a result of the taxable divestiture gains mentioned above.

     In the third quarter of 2009, Devon recognized $59 million of income tax benefits in conjunction with the initial or amended filings of its 2005, 2006, 2007 and 2008 income tax returns. These tax benefits consist of deferred tax benefits of $50 million and current tax benefits of $9 million. Of the $59 million, $41 million relates to taxation on foreign operations. The remaining $18 million relates to taxation on U.S. federal and state operations.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

16. Discontinued Operations

     Revenues related to Devon’s discontinued operations totaled $139 million and $573 million in the third quarter and first nine months of 2010, respectively, and $250 million and $646 million in the third quarter and first nine months of 2009, respectively.

     The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations.

		September 30,				December 31,
		2010				2009
		(In millions)
Cash and cash equivalents		$	390			$	365
Accounts receivable			49				165
Other current assets			137				127
Current assets		$	576			$	657
Property and equipment, net		$	816			$	1,099
Goodwill			—				68
Other long-term assets			59				83
Total long-term assets		$	875			$	1,250
Accounts payable		$	324			$	158
Other current liabilities			53				76
Current liabilities		$	377			$	234
Asset retirement obligations		$	29			$	109
Deferred income taxes			35				101
Other liabilities			5				3
Long-term liabilities		$	69			$	213