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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
OR
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, SUITE 1500
OKLAHOMA CITY, OKLAHOMA 73102-8260
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
Not applicable
(Former name, former address and former fiscal year, if changed from last
report)
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 X No .
The number of shares outstanding of Registrant's common stock, par
value $.10, as of July 31, 2001, was 125,984,000.
DEVON ENERGY CORPORATION
Index to Form 10-Q/A Quarterly Report
to the Securities and Exchange Commission
Page No.
--------
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, June 30, 2001 (Unaudited) 4
and December 31, 2000
Consolidated Statements of Operations (Unaudited) 5
for the Three Months and Six Months Ended June 30, 2001
and 2000
Consolidated Statements of Comprehensive Operations 6
(Unaudited) for the Three Months and Six Months Ended
June 30, 2001 and 2000
Consolidated Statements of Cash Flows (Unaudited) 7
for the Six Months Ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements 8
DEFINITIONS
As used in this document:
"Mcf" means thousand cubic feet
"MMcf" means million cubic feet
"Bcf" means billion cubic feet
"Bbl" means barrel
"MBbls" means thousand barrels
"MMBbls" means million barrels
"Boe" means equivalent barrels of oil
"Mboe" means thousand equivalent barrels of oil
"Oil" includes crude oil and condensate
"NGL" means natural gas liquids
2
DEVON ENERGY CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(FORMING A PART OF FORM 10-Q QUARTERLY REPORT
TO THE SECURITIES AND EXCHANGE COMMISSION)
3
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 477,822 228,050
Accounts receivable 550,661 615,463
Inventories 40,193 47,272
Deferred income taxes 8,979 8,979
Investments and other current assets 33,858 34,373
------------ ------------
Total current assets 1,111,513 934,137
------------ ------------
Property and equipment, at cost, based on the full
cost method of accounting for oil and gas properties 10,865,921 9,709,352
Less accumulated depreciation, depletion
and amortization 5,225,784 4,799,816
------------ ------------
5,640,137 4,909,536
Investment in Chevron Corporation common stock, at fair value 641,865 598,867
Goodwill, net of amortization 277,767 289,489
Other assets 132,756 128,449
------------ ------------
Total assets $ 7,804,038 6,860,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 296,516 305,210
Revenues and royalties due to others 125,012 151,951
Income taxes payable 48,649 65,674
Accrued interest payable 23,488 23,191
Merger related expenses payable 19,013 36,981
Accrued expenses and other current liabilities 75,159 45,980
------------ ------------
Total current liabilities 587,837 628,987
------------ ------------
Other liabilities 167,977 164,469
Debentures exchangeable into shares of Chevron
Corporation common stock 642,329 760,313
Other long-term debt 1,438,819 1,288,523
Deferred revenue 81,472 113,756
Fair value of derivative instruments 17,979 --
Deferred income taxes 1,010,384 626,826
Stockholders' equity:
Preferred stock of $1.00 par value ($100 liquidation value)
Authorized 4,500,000 shares; issued 1,500,000 in 2001 and 2000 1,500
1,500
Common stock of $.10 par value
Authorized 400,000,000 shares; issued 129,628,000 in 2001 and
128,638,000 in 2000 12,963 12,864
Additional paid-in capital 3,590,233 3,563,994
Retained earnings (accumulated deficit) 304,130 (214,708)
Accumulated other comprehensive loss (43,313) (85,397)
Unamortized restricted stock awards (487) (649)
Treasury stock, at cost; 153,000 shares in 2001 (7,785) --
------------ ------------
Total stockholders' equity 3,857,241 3,277,604
------------ ------------
Total liabilities and stockholders' equity $ 7,804,038 6,860,478
============ ============
See accompanying notes to consolidated financial statements.
4
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(UNAUDITED)
REVENUES
Oil sales $ 234,574 274,778 488,556 544,935
Gas sales 443,014 327,460 1,168,178 568,277
Natural gas liquids sales 31,964 33,539 64,301 70,916
Other 15,610 12,707 27,714 24,772
---------- ---------- ---------- ----------
Total revenues 725,162 648,484 1,748,749 1,208,900
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Lease operating expenses 115,455 111,100 238,103 217,807
Transportation costs 18,419 12,932 35,823 24,745
Production taxes 29,549 22,473 74,058 41,871
Depreciation, depletion and amortization of property and
equipment 184,702 172,251 367,594 337,503
Amortization of goodwill 8,461 10,361 16,923 20,693
General and administrative expenses 24,628 24,023 46,890 48,873
Interest expense 34,402 40,875 68,940 80,951
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- -- -- 2,408
Change in fair value of derivative instruments (7,460) -- 6,582 --
Reduction of carrying value of oil and gas properties 76,942 -- 76,942 --
---------- ---------- ---------- ----------
Total costs and expenses 485,098 394,015 931,855 774,851
---------- ---------- ---------- ----------
Earnings before income tax expense and cumulative effect of
change in accounting principle 240,064 254,469 816,894 434,049
INCOME TAX EXPENSE (BENEFIT)
Current (1,204) 36,358 142,892 72,505
Deferred 104,878 64,777 186,797
---------- ---------- ---------- ----------
103,023
Total income tax expense 103,674 101,135 329,689 175,528
---------- ---------- ---------- ----------
Earnings before cumulative effect of change in accounting principle 136,390 153,334 487,205 258,521
Cumulative effect of change in accounting principle, net of income
tax expense of $31,617 -- -- 49,452 --
---------- ---------- ---------- ----------
Net earnings 136,390 153,334 536,657 258,521
Preferred stock dividends 2,434 2,434 4,868 4,868
---------- ---------- ---------- ----------
Net earnings applicable to common shareholders $ 133,956 150,900 531,789 253,653
========== ========== ========== ==========
Net earnings before cumulative effect of change in accounting
principle per average common share outstanding:
Basic $ 1.03 1.19 3.73 2.00
========== ========== ========== ==========
Diluted $ 1.01 1.17 3.59 1.97
========== ========== ========== ==========
Net earnings per average common share outstanding:
Basic $ 1.03 1.19 4.11 2.00
========== ========== ========== ==========
Diluted $ 1.01 1.17 3.96 1.97
========== ========== ========== ==========
Weighted average common shares outstanding-basic 129,488 126,994 129,260 126,675
========== ========== ========== ==========
Weighted average common shares outstanding-diluted 135,403 129,455 135,402 128,681
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED)
Net earnings $136,360 153,334 536,657 258,521
Other comprehensive earnings (loss), net of tax:
Foreign currency translation adjustments 15,882 (5,420) (3,752) (5,775)
Cumulative effect of change in accounting principle -- -- (36,579) --
Reclassification adjustment for derivative losses reclassified
into oil and gas sales 10,320 -- 14,963 --
Change in fair value of outstanding hedging positions 27,766 -- 41,225 --
Unrealized gains (losses) on marketable securities 11,682 (31,489) 26,229 (6,042)
-------- -------- -------- --------
Comprehensive earnings $202,010 116,425 578,743 246,704
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
6
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
--------------------------
2001 2000
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 536,657 258,521
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation, depletion and amortization of property
and equipment 367,594 337,503
Amortization of goodwill 16,923 20,693
Reduction of carrying value of oil and gas properties 76,942 --
Accretion of interest on zero coupon convertible senior debentures 7,007 114
Amortization of discounts (premiums) on other long-term debt 4,027 (1,946)
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- 2,408
Gain on sale of assets 327 44
Change in fair value of derivative instruments 6,582 --
Cumulative effect of change in accounting principle (49,452) --
Deferred income taxes 186,797 103,023
Other 1,042 2,174
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 54,393 (130,584)
Inventories 8,088 (4,808)
Prepaid expenses 17,755 (14,164)
Other assets (15,806) (9,027)
(Decrease) increase in:
Accounts payable (12,423) 46,484
Income taxes payable (17,007) 47,270
Accrued expenses and other current liabilities (10,779) (15,813)
Deferred revenue (32,269) 45,500
Long-term other liabilities (19,680) (21,176)
----------- -----------
Net cash provided by operating activities 1,126,718 666,442
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 25,940 43,064
Capital expenditures (1,018,759) (719,027)
Decrease in other assets -- 186
----------- -----------
Net cash used in investing activities (992,819) (675,777)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings of long-term debt, net of issuance costs 365,668 1,126,321
Principal payments on long-term debt (257,667) (984,412)
Issuance of common stock, net of issuance costs 39,674 27,426
Repurchase of common stock (13,337) (10,600)
Issuance of treasury stock -- 11,600
Dividends paid on common stock (12,951) (8,663)
Dividends paid on preferred stock (4,868) (4,868)
Decrease in long-term other liabilities (60) (6,601)
----------- -----------
Net cash provided by financing activities 116,459 150,203
----------- -----------
Effect of exchange rate changes on cash (587) (764)
----------- -----------
Net increase in cash and cash equivalents 249,771 140,104
Cash and cash equivalents at beginning of period 228,050 173,167
----------- -----------
Cash and cash equivalents at end of period $ 477,822 313,271
=========== ===========
See accompanying notes to consolidated financial statements.
7
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On August 29, 2000, Devon Energy Corporation ("Devon") and Santa Fe
Snyder Corporation ("Santa Fe Snyder") completed a merger of the two companies
(the "Santa Fe Snyder merger"). At that date, Santa Fe Snyder became a
wholly-owned subsidiary of Devon. The Santa Fe Snyder merger was accounted for
under the pooling-of-interests method of accounting for business combinations.
All operational and financial information contained herein includes the combined
amounts of Devon and Santa Fe Snyder for all periods presented.
The accompanying consolidated financial statements and notes thereto
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain footnote 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 thereto should be read
in conjunction with the consolidated financial statements and notes thereto
included in Devon's 2000 Annual Report on Form 10-K.
In the opinion of Devon's management, all adjustments (all of which are
normal and recurring) have been made which are necessary to fairly state the
consolidated financial position of Devon and its subsidiaries as of June 30,
2001, and the results of their operations and their cash flows for the
three-month and six-month periods ended June 30, 2001 and 2000. Certain of the
2000 amounts in the accompanying consolidated financial statements have been
reclassified to conform to the 2001 presentation.
2. PENDING ACQUISITION
On August 14, 2001, Devon and Mitchell Energy & Development Corporation
("Mitchell Energy") announced that Devon will acquire Mitchell Energy for cash
and stock. In the transaction, Mitchell Energy stockholders would receive, for
each Mitchell common share, $31 cash and 0.585 of a share of Devon common stock.
The transaction is subject to approval by the stockholders of both companies, as
well as certain regulatory approvals. If approved, the transaction is expected
to be consummated shortly after the stockholder meetings.
Mitchell Energy's estimated June 30, 2001 proved oil and gas reserves
totaled 2.5 trillion cubic feet of gas equivalent located in the United States.
In the transaction, Devon would also acquire Mitchell Energy's natural gas
processing plants, pipelines and other midstream assets valued between $800
million and $1 billion.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, Devon adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
SFAS No. 133." SFAS No. 133 and SFAS No. 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair values. In
accordance with the transition provisions of SFAS No. 133, Devon recorded a
net-of-tax cumulative-effect-type adjustment of a $36.6 million loss in
accumulated other comprehensive loss to recognize at fair value all derivatives
that are designated as cash-flow hedging instruments. Additionally, Devon
recorded a net-of-tax cumulative-effect-type adjustment to net earnings for a
$49.5 million gain ($0.38 per basic share and $0.37 per diluted share) related
to the fair value of derivative instruments that do not qualify as hedges. This
gain related principally to the option embedded in Devon's debentures that are
exchangeable into shares of Chevron Corporation common stock.
All derivatives are recognized on the balance sheet at their fair
value. All of Devon's derivatives that qualify for hedge accounting treatment
are either "cash flow" hedges or "foreign currency cash flow" hedges
(collectively, "cash flow hedges"). Devon designates its cash flow hedge
derivatives as such on the date the derivative contract is entered into. Devon
formally
8
documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge
transactions. Devon also assesses, both at the hedge's inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of hedged items.
During the first half of 2001, there were no gains or losses
reclassified into earnings as a result of the discontinuance of hedge accounting
treatment for any of Devon's derivatives.
By using derivative instruments to hedge exposures to changes in
commodity prices and exchange rates, Devon exposes itself to credit risk and
market risk. Credit risk is the failure of the counterparty to perform under the
terms of the derivative contract. To mitigate this risk, the hedging instruments
are usually placed with counterparties that Devon believes are minimal credit
risks.
Market risk is the adverse effect on the value of a derivative
instrument that results from a change in interest rates, commodity prices, or
currency exchange rates. The market risk associated with commodity price and
foreign exchange contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken.
Devon periodically enters into financial hedging activities with
respect to a portion of its projected oil and natural gas production through
various financial transactions to manage its exposure to oil and gas price
volatility. These transactions include financial price swaps whereby Devon will
receive a fixed price for its production and pay a variable market price to the
contract counterparty. These transactions also include costless price collars
that set a floor and ceiling price for the hedged production. If the applicable
monthly price indices are outside of the ranges set by the floor and ceiling
prices in the various collars, Devon and the counterparty to the collars will
settle the difference. These financial hedging activities are intended to
support oil and natural gas prices at targeted levels and to manage Devon's
exposure to oil and gas price fluctuations. The oil and gas reference prices
upon which these price hedging instruments are based reflect various market
indices that have a high degree of historical correlation with actual prices
received by Devon.
Devon also periodically enters into foreign exchange rate swaps to
manage its exposure to oil and gas price volatility. The foreign exchange rate
swaps mitigate the effect of volatility in the Canadian-to-U.S. dollar exchange
rate on Canadian oil revenues that are predominantly based on U.S. dollar
prices.
Devon does not hold or issue derivative instruments for trading
purposes. All of Devon's commodity price swaps and costless price collars and
foreign exchange rate swaps in place at January 1, 2001 and June 30, 2001 have
been designated as cash flow hedges. Changes in the fair value of these
derivatives are reported on the balance sheet in "Accumulated other
comprehensive loss" ("AOCL"). These amounts are reclassified to oil and gas
sales when the forecasted transaction takes place.
Devon assesses the effectiveness of its hedges based on changes in the
derivative's intrinsic value. The change in the time value of the derivative is
excluded from the assessment of hedge effectiveness and, along with any
ineffectiveness, is recorded on the statement of
9
operations in "Change in fair value of derivative instruments." For the three-
and six-month periods ended June 30, 2001, Devon recorded a net charge of less
than $0.1 million which represented the ineffectiveness of the various cash flow
hedges.
As of June 30, 2001, $14.2 million of net deferred gains on derivative
instruments accumulated in AOCL are expected to be reclassified to earnings
during the next 12 months. Transactions and events expected to occur over the
next 12 months that will necessitate reclassifying these derivatives' losses to
earnings are the production and sale of oil and gas which includes the
production hedged under the various derivative instruments. The maximum term
over which Devon is hedging exposures to the variability of cash flows for
commodity price risk is 18 months.
Devon recorded a gain of $7.5 million and an expense of $6.6 million in
the three-month and six-month periods ended June 30, 2001, respectively, for the
change in fair value of derivative instruments. Substantially all of this
expense related to the fair value change in the option that is embedded in
Devon's debentures which are exchangeable into shares of Chevron Corporation
common stock.
4. EARNINGS PER SHARE
The following tables reconcile the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three-month and six-month periods ended June 30, 2001 and 2000.
NET EARNINGS NET
APPLICABLE COMMON EARNINGS
TO COMMON SHARES PER
STOCKHOLDERS OUTSTANDING SHARE
------------ ----------- ---------
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2001:
Basic earnings per share $133,956 129,488 $ 1.03
========
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $1,382) 2,161 4,377
Potential common shares issuable upon the exercise
of outstanding stock options -- 1,538
-------- --------
Diluted earnings per share $136,117 135,403 $ 1.01
======== ======== ========
10
4. EARNINGS PER SHARE (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2000:
Basic earnings per share $150,900 126,994 $ 1.19
========
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $46) 71 192
Potential common shares issuable upon the exercise
of outstanding stock options -- 2,269
-------- -------
Diluted earnings per share $150,971 129,455 $ 1.17
======== ======== ========
SIX MONTHS ENDED JUNE 30, 2001:
Basic earnings per share $531,789 129,260 $ 4.11
========
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $2,762) 4,321 4,377
Potential common shares issuable upon the exercise
of outstanding stock options -- 1,765
-------- -------
Diluted earnings per share $536,110 135,402 $ 3.96
======== ======== ========
SIX MONTHS ENDED JUNE 30, 2000:
Basic earnings per share $253,653 126,675 $ 2.00
========
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $46) 71 96
Potential common shares issuable upon the exercise
of outstanding stock options -- 1,910
-------- -------
Diluted earnings per share $253,724 128,681 $ 1.97
======== ======== ========
11
4. EARNINGS PER SHARE (CONTINUED)
Options to purchase approximately 1.0 million shares of Devon's common
stock with exercise prices ranging from $56.76 per share to $89.66 per share
(with a weighted average price of $65.31 per share) were outstanding at June 30,
2001, but were not included in the computation of diluted earnings per share for
the second quarter of 2001 because the options' exercise price exceeded the
average market price of Devon's common stock during the second quarter.
Similarly, options to purchase approximately 1.4 million shares of Devon's
common stock with exercise prices ranging from $55.53 per share to $92.78 per
share (with a weighted average price of $65.97 per share) were excluded from the
diluted earnings per share calculation for the second quarter of 2000.
Options to purchase approximately 1.0 million shares of Devon's common
stock, with exercise prices from $57.72 to $89.66 per share (with a weighted
average price of $65.34 per share), were excluded from the diluted earnings per
share calculation for first six months of 2001. Similarly, options to purchase
approximately 1.8 million shares of Devon's common stock with exercise prices
ranging from $49.94 per share to $92.78 per share (with a weighted average price
of $62.08 per share) were excluded from the diluted earnings per share
calculation for the first six months of 2000. The excluded options for each of
the 2001 periods expire between September 13, 2001 and May 17, 2011.
5. STOCK BUYBACK
Effective June 27, 2001, the board of directors authorized the
repurchase of up to $1 billion of Devon's common stock. The repurchase program
also applies to securities that are convertible into, or otherwise equity-linked
to, Devon's common stock. Under the repurchase program, share purchases may be
made from time to time depending upon market conditions and may be made in the
open market and in privately negotiated transactions. The repurchase program may
be discontinued at any time. During the second quarter of 2001, Devon
repurchased 153,000 shares of common stock at an aggregate cost of $7.8 million
or $51.05 per share. As of July 31, 2001, Devon had repurchased 3,754,000 shares
of common stock at an aggregate cost of $190.4 million or $50.71 per share.
In addition to the aforementioned share repurchase program begun in the
second quarter of 2001, Devon also repurchased shares of its common stock in the
first quarter of 2001 under an odd-lot repurchase program. Pursuant to this
program, Devon purchased and retired 232,000 shares of its common stock for a
total cost of $13.3 million, or $57.40 per share.
6. LONG-TERM DEBT
As of June 30, 2001, Devon had borrowings outstanding under its
unsecured long-term credit facilities (the "Credit Facilities") of $92.2 million
at an average rate of 4.8%. Also, as of June 30, 2001, Devon had $199.8 million
of borrowings under its commercial paper program at an average rate of 4.2%.
Because Devon had the intent and ability to refinance the balance due with
borrowings under its Credit Facilities, the $199.8 million outstanding under the
commercial paper program was classified as long-term debt on the June 30, 2001
consolidated balance sheet.
12
7. REDUCTION OF CARRYING VALUE OF OIL AND GAS PROPERTIES
During the second quarter of 2001, Devon elected to discontinue
operations in Malaysia, Qatar and on certain properties in Brazil. Accordingly,
during the second quarter of 2001, Devon recorded a $76.9 million charge
associated with the impairment of these properties. The after-tax effect of this
reduction was $62.1 million.
8. SEGMENT INFORMATION
Devon manages its business by country. As such, Devon identifies its
segments based on geographic areas. Devon has three segments: its operations in
the U.S., its operations in Canada and its international operations outside of
North America. Substantially all of these segments' operations involve oil and
gas producing activities. Following is certain financial information regarding
Devon's segments. The revenues reported are all from external customers.
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
AS OF JUNE 30, 2001:
Current assets $ 755,110 68,761 287,642 1,111,513
Property and equipment, net of accumulated depreciation,
depletion and amortization 4,280,010 650,731 709,396
5,640,137
Investment in Chevron Corporation common stock 641,865 -- -- 641,865
Goodwill, net of amortization 230,431 -- 47,336 277,767
Other assets 119,123 82 13,551 132,756
---------- ---------- ---------- ----------
Total assets $6,026,539 719,574 1,057,925 7,804,038
========== ========== ========== ==========
Current liabilities 366,257 73,644 147,936
587,837
Other liabilities 132,246 888 34,843 167,977
Debentures exchangeable into shares of Chevron
Corporation common stock 642,329 -- -- 642,329
Other long-term debt 1,346,573 92,246 -- 1,438,819
Deferred revenue 80,444 537 491 81,472
Fair value of derivative instruments 12,110 5,869 -- 17,979
Deferred income taxes 874,839 113,475 22,070 1,010,384
Stockholders' equity 2,571,741 432,915 852,585 3,857,241
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $6,026,539 719,574 1,057,925 7,804,038
========== ========== ========== ==========
13
8. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2001:
REVENUES
Oil sales $ 144,352 28,977 61,245 234,574
Gas sales 387,627 52,104 3,283 443,014
Natural gas liquids sales 27,472 4,197 295 31,964
Other 10,362 637 4,611 15,610
--------- --------- --------- ---------
Total revenues 569,813 85,915 69,434 725,162
--------- --------- --------- ---------
COSTS AND EXPENSES
Lease operating expenses 79,343 16,782 19,330 115,455
Transportation costs 15,414 3,005 -- 18,419
Production taxes 28,910 475 164 29,549
Depreciation, depletion and amortization of property
and equipment 147,444 20,000 17,258 184,702
Amortization of goodwill 8,450 -- 11 8,461
General and administrative expenses 25,266 1,914 (2,552) 24,628
Interest expense 32,750 1,397 255 34,402
Change in fair value of derivative instruments (7,460) -- -- (7,460)
Reduction of carrying value of oil and gas properties -- -- 76,942 76,942
--------- --------- --------- ---------
Total costs and expenses 330,117 43,573 111,408 485,098
--------- --------- --------- ---------
Earnings (loss) before income tax expense 239,696 42,342 (41,974) 240,064
INCOME TAX EXPENSE (BENEFIT)
Current (8,790) 974 6,612 (1,204)
Deferred 97,114 14,892 (7,128) 104,878
--------- --------- --------- ---------
Total income tax expense (benefit) 88,324 15,866 (516) 103,674
--------- --------- --------- ---------
Net earnings (loss) 151,372 26,476 (41,458) 136,390
Preferred stock dividends 2,434 -- -- 2,434
--------- --------- --------- ---------
Net earnings (loss) applicable to common shareholders $ 148,938 26,476 (41,458) 133,956
========= ========= ========= =========
Capital expenditures $ 565,937 48,477 58,419 672,833
========= ========= ========= =========
14
8. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2000:
REVENUES
Oil sales $187,842 27,695 59,241 274,778
Gas sales 287,964 36,496 3,000 327,460
Natural gas liquids sales 29,270 4,169 100 33,539
Other 10,466 1,231 1,010 12,707
-------- -------- -------- --------
Total revenues 515,542 69,591 63,351 648,484
-------- -------- -------- --------
COSTS AND EXPENSES
Lease operating expenses 79,802 12,921 18,377 111,100
Transportation costs 9,992 2,940 -- 12,932
Production taxes 22,076 297 100 22,473
Depreciation, depletion and amortization of property
and equipment 144,836 16,359 11,056 172,251
Amortization of goodwill 10,355 -- 6 10,361
General and administrative expenses 20,725 2,541 757 24,023
Interest expense 38,007 2,568 300 40,875
-------- -------- -------- --------
Total costs and expenses 325,793 37,626 30,596 394,015
-------- -------- -------- --------
Earnings before income tax expense 189,749 31,965 32,755 254,469
INCOME TAX EXPENSE
Current 32,379 279 3,700 36,358
Deferred 39,751 14,353 10,673 64,777
-------- -------- -------- --------
Total income tax expense 72,130 14,632 14,373 101,135
-------- -------- -------- --------
Net earnings 117,619 17,333 18,382 153,334
Preferred stock dividends 2,434 -- -- 2,434
-------- -------- -------- --------
Net earnings applicable to common shareholders $115,185 17,333 18,382 150,900
======== ======== ======== ========
Capital expenditures $206,744 42,131 34,097 282,972
======== ======== ======== ========
15
8. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
----------- ----------- ----------- -----------
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2001:
REVENUES
Oil sales $ 310,900 56,764 120,892 488,556
Gas sales 1,030,808 131,569 5,801 1,168,178
Natural gas liquids sales 54,635 9,321 345 64,301
Other 23,943 1,690 2,081 27,714
----------- ----------- ----------- -----------
Total revenues 1,420,286 199,344 129,119 1,748,749
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Lease operating expenses 167,806 32,119 38,178 238,103
Transportation costs 30,050 5,773 -- 35,823
Production taxes 72,826 893 339 74,058
Depreciation, depletion and amortization of property
and equipment 296,578 39,285 31,731 367,594
Amortization of goodwill 16,901 -- 22 16,923
General and administrative expenses 45,709 3,824 (2,643) 46,890
Interest expense 64,918 3,512 510 68,940
Change in fair value of derivative instruments 6,582 -- -- 6,582
Reduction of carrying value of oil and gas properties -- -- 76,942 76,942
----------- ----------- ----------- -----------
Total costs and expenses 701,370 85,406 145,079 931,855
----------- ----------- ----------- -----------
Earnings (loss) before income tax expense and cumulative
effect of change in accounting principle 718,916 113,938 (15,960) 816,894
INCOME TAX EXPENSE
Current 131,087 1,910 9,895 142,892
Deferred 140,748 45,604 445 186,797
----------- ----------- ----------- -----------
Total income tax expense 271,835 47,514 10,340 329,689
----------- ----------- ----------- -----------
Earnings (loss) before cumulative effect of change in
accounting principle 447,081 66,424 (26,300) 487,205
Cumulative effect of change in accounting principle 49,452 -- -- 49,452
----------- ----------- ----------- -----------
Net earnings (loss) 496,533 66,424 (26,300) 536,657
Preferred stock dividends 4,868 -- -- 4,868
----------- ----------- ----------- -----------
Net earnings (loss) applicable to common shareholders $ 491,665 66,424 (26,300) 531,789
=========== =========== =========== ===========
Capital expenditures $ 796,691 109,841 112,227 1,018,759
=========== =========== =========== ===========
16
8. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2000:
REVENUES
Oil sales $ 377,676 57,168 110,091 544,935
Gas sales 494,833 67,844 5,600 568,277
Natural gas liquids sales 62,271 8,545 100
70,916
Other 21,916 2,322 534 24,772
--------- --------- --------- ---------
Total revenues 956,696 135,879 116,325 1,208,900
--------- --------- --------- ---------
COSTS AND EXPENSES
Lease operating expenses 157,220 25,225 35,362 217,807
Transportation costs 19,017 5,728 -- 24,745
Production taxes 41,147 524 200 41,871
Depreciation, depletion and amortization of property
and equipment 284,812 32,353 20,338 337,503
Amortization of goodwill 20,681 -- 12 20,693
General and administrative expenses 42,752 4,795 1,326 48,873
Interest expense 75,355 4,996 600 80,951
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- 2,408 -- 2,408
--------- --------- --------- ---------
Total costs and expenses 640,984 76,029 57,838 774,851
--------- --------- --------- ---------
Earnings before income tax expense 315,712 59,850 58,487 434,049
INCOME TAX EXPENSE
Current 64,326 979 7,200 72,505
Deferred 56,247 27,263 19,513 103,023
--------- --------- --------- ---------
Total income tax expense 120,573 28,242 26,713 175,528
--------- --------- --------- ---------
Net earnings 195,139 31,608 31,774 258,521
Preferred stock dividends 4,868 -- -- 4,868
--------- --------- --------- ---------
Net earnings applicable to common shareholders $ 190,271 31,608 31,774 253,653
========= ========= ========= =========
Capital expenditures $ 546,471 78,157 94,399 719,027
========= ========= ========= =========
17
9. 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 which
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.
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
("CERCLA") and similar state statutes. In response to liabilities associated
with these activities, accruals have been established when reasonable estimates
are possible. Such accruals primarily include estimated costs associated with
remediation. Devon has not used discounting in determining its accrued
liabilities for environmental remediation, and no claims for possible recovery
from third party insurers or other parties related to environmental costs have
been recognized in Devon's consolidated financial statements. Devon adjusts the
accruals when new remediation responsibilities are discovered and probable costs
become estimable, or when current remediation estimates must be adjusted to
reflect new information.
Certain of Devon's subsidiaries acquired in the PennzEnergy merger are
involved in matters in which it has been alleged that such subsidiaries are
potentially responsible parties ("PRPs") under CERCLA or similar state
legislation with respect to various waste disposal areas owned or operated by
third parties. As of June 30, 2001, Devon's consolidated balance sheet included
$7.7 million of accrued liabilities, reflected in "Other liabilities," for
environmental remediation. Devon does not currently believe there is a
reasonable possibility of incurring additional material costs in excess of the
current accruals recognized for such environmental remediation activities. With
respect to the sites in which Devon subsidiaries are PRPs, Devon's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Devon's current belief that its share of wastes at a
particular site is or will be viewed by the Environmental Protection Agency or
other PRPs as being de minimis. As a result, Devon's monetary exposure is not
expected to be material.
Royalty Matters
More than 30 oil companies, including Devon, are involved in disputes
in which it is alleged that such companies and related parties underpaid
royalty, overriding royalty and working interests owners in connection with the
production of crude oil. The proceedings include suits in federal court in
Texas, Louisiana, Mississippi and Wyoming that have been consolidated into one
proceeding in Texas. To avoid expensive and protracted litigation, certain
parties, including Devon, have entered into a global settlement agreement which
provides for a settlement of all claims of all members of the settlement class.
The court held a fairness hearing and issued an Amended Final Judgment approving
the settlement on September 10, 1999. However, certain entities have appealed
their objections to the settlement. Devon's share of the proposed settlement,
which was accrued at June 30, 2001, is not material to its financial position,
results of operations or liquidity.
18
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Also, pending in federal court in Texas is a similar suit alleging
underpaid royalties to the United States in connection with natural gas and
natural gas liquids produced and sold from United States owned and/or controlled
lands. The claims were filed by private litigants against Devon and numerous
other producers, under the federal False Claims Act. The United States served
notice of its intent to intervene as to certain defendants, but not Devon. Devon
and certain other defendants are challenging the constitutionality of whether a
claim under the federal False Claims Act can be maintained absent government
intervention. Devon believes that it has acted reasonably and paid royalties in
good faith. Devon does not currently believe that it is subject to material
exposure in association with this litigation. As a result, Devon's monetary
exposure in this suit is not expected to be material.
Maersk Rig Contract
In December 1997, the working interest owner partner of Pennzoil
Venezuela Corporation, S.A. ("PVC"), a subsidiary of Devon as a result of the
PennzEnergy merger, entered into a contract with Maersk Jupiter Drilling, S.A.
("Maersk") for the provision of a rig for drilling services relative to the
anticipated drilling program associated with Devon's Block 70/80 in Lake
Maracaibo, Venezuela. The rig was assembled and delivered by Maersk to Lake
Maracaibo where it performed an abbreviated drilling program for both Blocks
68/79 and 70/80. It is currently stacked in Lake Maracaibo. The contract, which
expires October 1, 2001, provides for early termination, with a charge for such
termination which is currently estimated at $42,000 per day with certain
escalation factors for the balance of the term. As of June 30, 2001, Devon's
consolidated balance sheet included accrued liabilities, reflected in "Other
liabilities," for the expected cost to terminate/settle the contract. Devon does
not currently believe there is a reasonable possibility of incurring additional
material costs in excess of the liability recognized for such
termination/settlement of the contract.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEVON ENERGY CORPORATION
Date: December 18, 2001 /s/ Danny J. Heatly
---------------------------------
Danny J. Heatly
Vice President - Accounting
20