Form 10-Q
Table of Contents

 

 

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

For the quarterly period ended September 30, 2012

or

 

¨ 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.)

333 West Sheridan Avenue,

Oklahoma City, Oklahoma

  73102-5015
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (405) 235-3611

Former name, address and former fiscal year, if changed from last report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

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  ¨

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.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨    No  þ

On October 24, 2012, 405 million shares of common stock were outstanding.

 

 

 


Table of Contents

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Part I Financial Information   

Item 1. Consolidated Financial Statements

     3   

Consolidated Comprehensive Statements of Earnings

     3   

Consolidated Statements of Cash Flows

     4   

Consolidated Balance Sheets

     5   

Consolidated Statements of Stockholders’ Equity

     6   

Notes to Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     32   

Item 4. Controls and Procedures

     33   
Part II Other Information   

Item 1. Legal Proceedings

     34   

Item 1A. Risk Factors

     34   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3. Defaults Upon Senior Securities

     34   

Item 4. Mine Safety Disclosures

     34   

Item 5. Other Information

     34   

Item 6. Exhibits

     35   

Signatures

     36   

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements regarding our expectations and plans, as well as future events or conditions. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2011 reserve reports and other data in our possession or available from third parties. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, such as changes in the supply of and demand for oil, natural gas and NGLs and related products and services; exploration or drilling programs; political or regulatory events; general economic and financial market conditions; and other factors discussed in this report.

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 above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.

 

2


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

 

     Three Months     Nine Months  
     Ended September 30,     Ended September 30,  
     2012     2011     2012     2011  
     (Unaudited)  
    

(In millions, except

per share amounts)

 

Revenues:

        

Oil, gas and NGL sales

   $ 1,738     $ 2,111     $ 5,270     $ 6,171  

Oil, gas and NGL derivatives

     (295     738       515       986  

Marketing and midstream revenues

     422       653       1,136       1,712  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,865       3,502       6,921       8,869  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses and other, net:

        

Lease operating expenses

     513       475       1,540       1,352  

Marketing and midstream operating costs and expenses

     313       515       847       1,304  

Depreciation, depletion and amortization

     716       566       2,080       1,622  

General and administrative expenses

     150       138       494       403  

Taxes other than income taxes

     104       108       306       336  

Interest expense

     110       104       296       270  

Restructuring costs

     —          (3     —          (2

Asset impairments

     1,128       —          1,128       —     

Other, net

     (8     61       46       88  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other, net

     3,026       1,964       6,737       5,373  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (1,161     1,538       184       3,496  

Current income tax expense (benefit)

     (41     (248     8       (301

Deferred income tax expense (benefit)

     (401     746       4       2,184  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     (719     1,040       172       1,613  

Earnings (loss) from discontinued operations, net of tax

     —          (2     (21     2,584  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (719   $ 1,038     $ 151     $ 4,197  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net earnings (loss) per share:

        

Basic earnings (loss) from continuing operations per share

   $ (1.80   $ 2.51     $ 0.42     $ 3.83  

Basic earnings (loss) from discontinued operations per share

     —          —          (0.05     6.14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net earnings (loss) per share

   $ (1.80   $ 2.51     $ 0.37     $ 9.97  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net earnings (loss) per share:

        

Diluted earnings (loss) from continuing operations per share

   $ (1.80   $ 2.50     $ 0.42     $ 3.82  

Diluted earnings (loss) from discontinued operations per share

     —          —          (0.05     6.11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net earnings (loss) per share

   $ (1.80   $ 2.50     $ 0.37     $ 9.93  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings (loss):

        

Net earnings (loss)

   $ (719   $ 1,038     $ 151     $ 4,197  

Other comprehensive earnings (loss), net of tax:

        

Foreign currency translation

     311       (615     292       (365

Pension and postretirement plans

     3       6       12       17  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive earnings (loss), net of tax

     314       (609     304       (348
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings (loss)

   $ (405   $ 429     $ 455     $ 3,849  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months  
     Ended September 30,  
     2012     2011  
     (Unaudited)  
     (In millions)  

Cash flows from operating activities:

    

Net earnings

   $ 151     $ 4,197  

(Earnings) loss from discontinued operations, net of tax

     21       (2,584

Adjustments to reconcile earnings from continuing operations to net cash from operating activities:

    

Depreciation, depletion and amortization

     2,080       1,622  

Asset impairments

     1,128       —     

Deferred income tax expense

     4       2,184  

Unrealized change in fair value of financial instruments

     173       (661

Other noncash charges

     136       185  

Net decrease (increase) in working capital

     48       (308

Decrease (increase) in long-term other assets

     (22     51  

Increase (decrease) in long-term other liabilities

     68       (459
  

 

 

   

 

 

 

Cash from operating activities – continuing operations

     3,787       4,227  

Cash from operating activities – discontinued operations

     26       (13
  

 

 

   

 

 

 

Net cash from operating activities

     3,813       4,214  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (6,228     (5,515

Purchases of short-term investments

     (2,969     (5,751

Redemptions of short-term investments

     2,308       4,665  

Proceeds from property and equipment divestitures

     1,397       13  

Other

     18       (23
  

 

 

   

 

 

 

Cash from investing activities—continuing operations

     (5,474     (6,611

Cash from investing activities—discontinued operations

     58       3,162  
  

 

 

   

 

 

 

Net cash from investing activities

     (5,416     (3,449
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings of long-term debt, net of issuance costs

     2,465       2,221  

Net short-term borrowings (repayments)

     (898     3,196  

Debt repayments

     —          (1,760

Credit facility borrowings

     750       —     

Credit facility repayments

     (750     —     

Proceeds from stock option exercises

     25       101  

Repurchases of common stock

     —          (1,987

Dividends paid on common stock

     (242     (209

Excess tax benefits related to share-based compensation

     5       11  
  

 

 

   

 

 

 

Net cash from financing activities

     1,355       1,573  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     31       (10
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (217     2,328  

Cash and cash equivalents at beginning of period

     5,555       3,290  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 5,338     $ 5,618  
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     September 30,     December 31,  
     2012     2011  
     (Unaudited)        
     (In millions, except share data)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 5,338     $ 5,555  

Short-term investments

     2,164       1,503  

Accounts receivable

     1,113       1,379  

Other current assets

     818       868  
  

 

 

   

 

 

 

Total current assets

     9,433       9,305  
  

 

 

   

 

 

 

Property and equipment, at cost:

    

Oil and gas, based on full cost accounting:

    

Subject to amortization

     67,345       61,696  

Not subject to amortization

     3,827       3,982  
  

 

 

   

 

 

 

Total oil and gas

     71,172       65,678  

Other

     5,643       5,098  
  

 

 

   

 

 

 

Total property and equipment, at cost

     76,815       70,776  

Less accumulated depreciation, depletion and amortization

     (49,669     (46,002
  

 

 

   

 

 

 

Property and equipment, net

     27,146       24,774  
  

 

 

   

 

 

 

Goodwill

     6,114       6,013  

Other long-term assets

     855       1,025  
  

 

 

   

 

 

 

Total assets

   $ 43,548     $ 41,117  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 1,485     $ 1,471  

Revenues and royalties payable

     696       678  

Short-term debt

     2,780       3,811  

Other current liabilities

     535       778  
  

 

 

   

 

 

 

Total current liabilities

     5,496       6,738  
  

 

 

   

 

 

 

Long-term debt

     8,455       5,969  

Asset retirement obligations

     2,009       1,496  

Other long-term liabilities

     863       721  

Deferred income taxes

     4,944       4,763  

Stockholders’ equity:

    

Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 405 million and 404 million shares in 2012 and 2011, respectively

     41       40  

Additional paid-in capital

     3,644       3,507  

Retained earnings

     16,217       16,308  

Accumulated other comprehensive earnings

     1,879       1,575  
  

 

 

   

 

 

 

Total stockholders’ equity

     21,781       21,430  
  

 

 

   

 

 

 

Commitments and contingencies (Note 18)

    

Total liabilities and stockholders’ equity

   $ 43,548     $ 41,117  
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

    Common Stock     Additional
Paid-In
    Retained     Accumulated
Other
Comprehensive
    Treasury     Total
Stockholders’
 
    Shares     Amount     Capital     Earnings     Earnings     Stock     Equity  
    (Unaudited)  
    (In millions)  

Nine Months Ended September 30, 2012:

             

Balance as of December 31, 2011

    404     $ 40     $ 3,507     $ 16,308     $ 1,575     $ —        $ 21,430  

Net earnings

    —          —          —          151       —          —          151  

Other comprehensive earnings, net of tax

    —          —          —          —          304       —          304  

Stock option exercises

    1       1       27       —          —          (2     26  

Common stock repurchased

    —          —          —          —          —          (4     (4

Common stock retired

    —          —          (6     —          —          6       —     

Common stock dividends

    —          —          —          (242     —          —          (242

Share-based compensation

    —          —          111       —          —          —          111  

Share-based compensation tax benefits

    —          —          5       —          —          —          5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

    405     $ 41     $ 3,644     $ 16,217     $ 1,879     $ —        $ 21,781  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2011:

             

Balance as of December 31, 2010

    432     $ 43     $ 5,601     $ 11,882     $ 1,760     $ (33   $ 19,253  

Net earnings

    —          —          —          4,197       —          —          4,197  

Other comprehensive loss, net of tax

    —          —          —          —          (348     —          (348

Stock option exercises

    2       —          101       —          —          —          101  

Common stock repurchased

    —          —          —          —          —          (2,008     (2,008

Common stock retired

    (26     (2     (1,991     —          —          1,993       —     

Common stock dividends

    —          —          —          (209     —          —          (209

Share-based compensation

    —          —          105       —          —          —          105  

Share-based compensation tax benefits

    —          —          11       —          —          —          11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011

    408     $ 41     $ 3,827     $ 15,870     $ 1,412     $ (48   $ 21,102  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

The accompanying unaudited 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 financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Devon’s 2011 Annual Report on Form 10-K.

The accompanying unaudited interim 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, 2012 and Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2012 and 2011.

2. Derivative Financial Instruments

Objectives and Strategies

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production. These instruments are used to manage the inherent uncertainty of future revenues due to commodity price volatility and typically include financial price swaps, basis swaps, costless price collars and call options.

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates.

Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

Counterparty Credit Risk

By using derivative financial instruments, Devon is exposed to credit 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 placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts contain provisions that provide for collateral payments, depending on levels of exposure and the credit rating of the counterparty.

As of September 30, 2012, Devon held $49 million of cash collateral. Such amount represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying balance sheet.

Commodity Derivatives

As of September 30, 2012, Devon had the following open oil derivative positions. Devon’s oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.

 

     Price Swaps      Price Collars      Call Options Sold  

Period

   Volume
(Bbls/d)
     Weighted
Average  Price
($/Bbl)
     Volume
(Bbls/d)
     Weighted
Average Floor  Price
($/Bbl)
     Weighted
Average Ceiling  Price
($/Bbl)
     Volume
(Bbls/d)
     Weighted
Average  Price
($/Bbl)
 

Q4 2012

     57,000       $ 105.47         77,000       $ 89.72       $ 122.39         19,500       $ 95.00   

Q1-Q4 2 013

     31,000       $ 104.13         45,000       $ 91.30       $ 116.23         6,000       $ 120.00   

Q1-Q4 2014

     4,000       $ 100.49         2,000       $ 90.00       $ 111.13         6,000       $ 120.00   

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

    

Basis Swaps

 

Period

  

Index

   Volume
(Bbls/d)
     Weighted Average
Differential  to WTI
($/Bbl)
 

Q4 2012

   Western Canadian Select      15,000       $ (17.29

As of September 30, 2012, Devon had the following open natural gas derivative positions. Devon’s natural gas derivatives settle against the Inside FERC first of the month Henry Hub index.

 

     Price Swaps      Price Collars      Call Options Sold  

Period

   Volume
(MMBtu/d)
     Weighted
Average  Price
($/MMBtu)
     Volume
(MMBtu/d)
     Weighted
Average Floor  Price
($/MMBtu)
     Weighted
Average Ceiling  Price
($/MMBtu)
     Volume
(MMBtu/d)
     Weighted
Average  Price
($/MMBtu)
 

Q4 2012

     654,239       $ 3.92         1,323,696       $ 3.50       $ 4.17         487,500       $ 6.00   

Q1-Q4 2013

     185,000       $ 4.37         94,219       $ 3.40       $ 4.00                   

Q1-Q4 2014

     240,000       $ 4.09                                 150,000       $ 5.00   

Interest Rate Derivatives

As of September 30, 2012, Devon had the following open interest rate derivative positions:

 

Notional

   Weighted Average
Fixed Rate Received
   

Variable

Rate Paid

  

Expiration

(In millions)                

$ 750

     3.88   Federal funds rate    July 2013

Foreign Currency Derivatives

As of September 30, 2012, Devon had the following open foreign currency rate derivative positions:

 

Forward Contract

 

Currency

   Contract
Type
   CAD
Notional
     Weighted Average
Fixed Rate Received
   Expiration  
          (In millions)      (CAD-USD)       

Canadian Dollar

   Sell    $ 755       1.02      December 2012   

Financial Statement Presentation

The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying comprehensive statements of earnings associated with 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, gas and NGL derivatives” caption in the accompanying comprehensive statements of earnings. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s interest rate and foreign currency derivatives are presented in the “Other, net” caption in the accompanying comprehensive statements of earnings.

 

     Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2012     2011      2012     2011  
     (In millions)  

Cash settlements:

         

Commodity derivatives

   $ 243      $ 96       $ 668      $ 241   

Interest rate derivatives

     10        52         9        73   

Foreign currency derivatives

     (38     22         (29     22   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total cash settlements

     215        170         648        336   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2012     2011     2012     2011  
     (In millions)  

Unrealized gains (losses):

        

Commodity derivatives

     (538     642        (153     745   

Interest rate derivatives

     (9     (55     (24     (84

Foreign currency derivatives

     12        —          4        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains (losses)

     (535     587        (173     661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) recognized on comprehensive statements of earnings

   $ (320   $ 757      $ 475      $ 997   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

   

Balance Sheet Caption

   September 30, 2012      December 31, 2011  
         (In millions)  

Asset derivatives:

       

Commodity derivatives

  Other current assets    $ 358       $ 611   

Commodity derivatives

  Other long-term assets      75         17   

Interest rate derivatives

  Other current assets      28         30   

Interest rate derivatives

  Other long-term assets      —           22   

Foreign currency derivatives

  Other current assets      4         —     
    

 

 

    

 

 

 

Total asset derivatives

   $ 465       $ 680   
    

 

 

    

 

 

 

Liability derivatives:

       

Commodity derivatives

  Other current liabilities    $ 13       $ 82   

Commodity derivatives

  Other long-term liabilities      27         —     
    

 

 

    

 

 

 

Total liability derivatives

   $ 40       $ 82   
    

 

 

    

 

 

 

3. Restructuring Costs

Divestiture of Offshore Assets

In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of September 30, 2012, Devon had divested all of its U.S. Offshore and International assets and incurred $202 million of restructuring costs associated with the divestitures.

The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings. Restructuring costs related to Devon’s discontinued operations totaled $(2) million in the first nine months ended September 30, 2011. These costs primarily related to cash severance and share-based awards and are not included in the schedule below. There were no costs related to discontinued operations in the nine months ended September 30, 2012.

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2012      2011     2012      2011  
     (In millions)  

Lease obligations

   $ —         $ (3   $ —         $ (5

Asset impairments

     —           —          —           2   

Other

     —           —          —           1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Restructuring costs

   $ —         $ (3   $ —         $ (2
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

The schedule below summarizes Devon’s restructuring liabilities. Devon’s restructuring liabilities for cash severance related to its discontinued operations totaled $2 million at September 30, 2011 and are not included in the schedule below.

 

     Other
Current
Liabilities
    Other
Long-Term
Liabilities
    Total  
           (In millions)        

Balance as of December 31, 2011

   $ 29      $ 16      $ 45   

Lease obligations settled

     (9     (3     (12

Cash severance settled

     (7     —          (7
  

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

   $ 13      $ 13      $ 26   
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2010

   $ 31      $ 51      $ 82   

Lease obligations settled

     (1     (10     (11

Cash severance settled

     (13     —          (13

Other

     2        (6     (4
  

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011

   $ 19      $ 35      $ 54   
  

 

 

   

 

 

   

 

 

 

Consolidation of U.S. Operations

In October 2012, Devon announced plans to consolidate its U.S. personnel into a single operations group centrally located at the company’s corporate headquarters in Oklahoma City. As a result, Devon will close its office in Houston and transfer operational responsibilities for assets in South Texas, East Texas and Louisiana to Oklahoma City. Devon expects to relocate a number of employees from Houston to Oklahoma City. This initiative is expected to be substantially complete by the end of the first quarter 2013.

4. Other, net

The components of other, net in the accompanying comprehensive statements of earnings include the following:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2012     2011     2012     2011  
     (In millions)  

Accretion of asset retirement obligations

   $ 27      $ 23      $ 82      $ 69   

Interest rate derivatives

     (1     3        15        11   

Foreign currency derivatives

     26        (22     25        (22

Foreign exchange loss (gain)

     (28     53        (26     39   

Interest income

     (8     (8     (24     (14

Other

     (24     12        (26     5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other, net

   $ (8   $ 61      $ 46      $ 88   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

5. Earnings Per Share

The following table reconciles earnings (loss) from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share.

 

     Earnings (loss)     Common
Shares
    Earnings (loss)
per  Share
 
     (In millions, except per share amounts)  

Three Months Ended September 30, 2012:

      

Loss from continuing operations

   $ (719     405     

Attributable to participating securities

     (1     (5  
  

 

 

   

 

 

   

Basic and diluted loss per share

   $ (720     400      $ (1.80
  

 

 

   

 

 

   

Three Months Ended September 30, 2011:

      

Earnings from continuing operations

   $ 1,040        414     

Attributable to participating securities

     (11     (4  
  

 

 

   

 

 

   

Basic earnings per share

     1,029        410      $ 2.51   

Dilutive effect of potential common shares issuable

     —          1     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 1,029        411      $ 2.50   
  

 

 

   

 

 

   

Nine Months Ended September 30, 2012:

      

Earnings from continuing operations

   $ 172        404     

Attributable to participating securities

     (2     (4  
  

 

 

   

 

 

   

Basic earnings per share

     170        400      $ 0.42   

Dilutive effect of potential common shares issuable

     —          1     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 170        401      $ 0.42   
  

 

 

   

 

 

   

Nine Months Ended September 30, 2011:

      

Earnings from continuing operations

   $ 1,613        421     

Attributable to participating securities

     (16     (4  
  

 

 

   

 

 

   

Basic earnings per share

     1,597        417      $ 3.83   

Dilutive effect of potential common shares issuable

     —          1     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 1,597        418      $ 3.82   
  

 

 

   

 

 

   

Certain options to purchase shares of Devon’s common stock are excluded from the dilution calculation because the options are antidilutive. During the three-month and nine-month periods ended September 30, 2012, 9.0 million shares and 8.9 million shares, respectively, were excluded from the diluted earnings per share calculations. During the three-month and nine-month periods ended September 30, 2011, 5.3 million shares and 3.1 million shares, respectively, were excluded from the diluted earnings per share calculations.

6. Other Comprehensive Earnings

Components of other comprehensive earnings consist of the following:

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2012     2011     2012     2011  
     (In millions)  

Foreign currency translation:

        

Beginning accumulated foreign currency translation

   $ 1,783      $ 2,243      $ 1,802      $ 1,993   

Change in cumulative translation adjustment

     325        (644     305        (382

Income tax benefit (expense)

     (14     29        (13     17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated foreign currency translation

     2,094        1,628        2,094        1,628   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

    Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
    2012     2011     2012     2011  
    (In millions)  

Pension and postretirement benefit plans:

       

Beginning accumulated pension and postretirement benefits

    (218     (222     (227     (233

Recognition of net actuarial loss and prior service cost in earnings

    6        9        19        26   

Income tax expense

    (3     (3     (7     (9
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated pension and postretirement benefits

    (215     (216     (215     (216
 

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive earnings, net of tax

  $ 1,879      $ 1,412      $ 1,879      $ 1,412   
 

 

 

   

 

 

   

 

 

   

 

 

 

7. Supplemental Information to Statements of Cash Flows

 

     Nine Months Ended
September 30,
 
     2012     2011  
     (In millions)  

Net change in working capital:

    

Decrease (increase) in accounts receivable

   $ 275      $ (118

Increase in other current assets

     (234     (149

Increase in accounts payable

     77        58   

Increase (decrease) in revenues and royalties payable

     (34     121   

Decrease in other current liabilities

     (36     (220
  

 

 

   

 

 

 

Net decrease (increase) in working capital

   $ 48      $ (308
  

 

 

   

 

 

 

Supplementary cash flow data – total operations:

    

Interest paid (net of capitalized interest)

   $ 260      $ 298   

Income taxes paid (received)

   $ 88      $ (113

8. Short-Term Investments

The components of short-term investments include the following:

 

    September 30, 2012      December 31, 2011  
    (In millions)  

Canadian treasury, agency and provincial securities

  $ 1,684       $ 1,155   

U.S. treasuries

    480         201   

Other

    —           147   
 

 

 

    

 

 

 

Short-term investments

  $ 2,164       $ 1,503   
 

 

 

    

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

9. Accounts Receivable

The components of accounts receivable include the following:

 

     September 30, 2012     December 31, 2011  
     (In millions)  

Oil, gas and NGL sales

   $ 713      $ 928   

Joint interest billings

     207        247   

Marketing and midstream revenues

     137        174   

Other

     66        39   
  

 

 

   

 

 

 

Gross accounts receivable

     1,123        1,388   

Allowance for doubtful accounts

     (10     (9
  

 

 

   

 

 

 

Net accounts receivable

   $ 1,113      $ 1,379   
  

 

 

   

 

 

 

10. Other Current Assets

The components of other current assets include the following:

 

     September 30, 2012      December 31, 2011  
     (In millions)  

Derivative financial instruments

   $ 390       $ 641   

Inventories

     185         102   

Income taxes receivable

     137         35   

Current assets held for sale

     —           21   

Other

     106         69   
  

 

 

    

 

 

 

Other current assets

   $ 818       $ 868   
  

 

 

    

 

 

 

11. Property and Equipment

Sinopec Transaction

In April 2012, Devon closed its joint venture transaction with Sinopec International Petroleum Exploration & Production Corporation. Pursuant to the agreement, Sinopec paid approximately $900 million in cash and received a 33.3% interest in five of Devon’s new ventures exploration plays in the U.S. at closing of the transaction. Additionally, Sinopec is required to fund approximately $1.6 billion of Devon’s share of future exploration, development and drilling costs associated with these plays. Devon recognized the cash proceeds received at closing as a reduction to U.S. oil and gas property and equipment. No gain or loss was recognized.

Sumitomo Transaction

In September 2012, Devon closed its joint venture transaction with Sumitomo Corporation. At closing, Sumitomo paid approximately $400 million in cash and received a 30% interest in the Cline and Midland-Wolfcamp shale plays in Texas. Additionally, Sumitomo is required to fund approximately $1.0 billion of Devon’s share of future exploration, development and drilling costs associated with these plays. Devon recognized the cash proceeds received at closing as a reduction to U.S. oil and gas property and equipment. No gain or loss was recognized.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Asset Impairments

In the third quarter of 2012, Devon recognized asset impairments related to its U.S. oil and gas property and equipment and its U.S. midstream assets as presented below.

 

     September 30, 2012  
     Gross      Net of Taxes  
     (In millions)  

U.S. oil and gas assets

   $ 1,106       $ 705   

Midstream assets

     22         14   
  

 

 

    

 

 

 

Total asset impairments

   $ 1,128       $ 719   
  

 

 

    

 

 

 

U.S. Oil and Gas Impairment

Under the full-cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the full cost “ceiling” at the end of each quarter. The ceiling is calculated separately for each country and is based on the present value of estimated future net cash flows from proved oil and gas reserves, discounted at 10 percent per annum, net of related tax effects. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months.

The U.S. oil and gas impairment resulted primarily from a decline in the U.S. full cost ceiling. The lower ceiling value resulted primarily from decreases in the 12-month average trailing prices for natural gas and NGLs, which have reduced proved reserve values.

Additionally, if natural gas and NGL prices remain depressed, Devon may incur a full cost ceiling impairment related to its oil and gas property and equipment in the fourth quarter of 2012.

Midstream Impairment

Due to declining natural gas production resulting from low natural gas and NGL prices, Devon determined that the carrying amounts of certain of its midstream facilities located in south and east Texas were not recoverable from estimated future cash flows. Consequently, the assets were written down to their estimated fair values, which were determined using discounted cash flow models. The fair value of Devon’s midstream assets is considered a Level 3 fair value measurement.

12. Goodwill

During the first nine months of 2012, Devon’s Canadian goodwill increased $101 million entirely due to foreign currency translation.

13. Accounts Payable

Included in accounts payable at September 30, 2012, are liabilities of $51 million representing the amount by which checks issued, but not presented to Devon’s banks for collection, exceed balances in applicable bank accounts. Changes in these liabilities are reflected in cash flows from financing activities.

 

14


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

14. Debt

Long-Term Debt

In May 2012, Devon issued $2.5 billion of senior notes that are unsecured and unsubordinated obligations of Devon. Devon used the net proceeds to repay outstanding commercial paper and credit facility borrowings. The schedule below summarizes the key terms of these notes ($ in millions).

 

1.875% due May 15, 2017

   $ 750   

3.25% due May 15, 2022

     1,000   

4.75% due May 15, 2042

     750   

Discount and issuance costs

     (35
  

 

 

 

Net proceeds

   $ 2,465   
  

 

 

 

Commercial Paper

As of September 30, 2012, Devon had $2.8 billion of outstanding commercial paper at an average rate of 0.37 percent.

Credit Lines

Devon previously maintained a $2.19 billion syndicated, unsecured revolving line of credit. As of September 30, 2012, there were no borrowings under this line of credit. Devon terminated this line of credit and established a new $3.0 billion syndicated, unsecured revolving line of credit (the “Senior Credit Facility”) on October 24, 2012. The Senior Credit Facility will mature on October 24, 2017. However, prior to the maturity date, Devon has the option to extend the maturity for up to two additional one-year periods, subject to the approval of the lenders.

The terminated line of credit and the Senior Credit Facility each contain only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be no greater than 65 percent. As of September 30, 2012, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 24.7 percent.

15. Asset Retirement Obligations

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

 

     Nine Months Ended September 30,  
     2012     2011  
     (In millions)  

Asset retirement obligations as of beginning of period

   $ 1,563      $ 1,497   

Liabilities incurred

     60        38   

Liabilities settled

     (75     (56

Revision of estimated obligation

     411        19   

Accretion expense on discounted obligation

     82        69   

Foreign currency translation adjustment

     35        (41
  

 

 

   

 

 

 

Asset retirement obligations as of end of period

     2,076        1,526   

Less current portion

     67        66   
  

 

 

   

 

 

 

Asset retirement obligations, long-term

   $ 2,009      $ 1,460   
  

 

 

   

 

 

 

During the first nine months of 2012, Devon recognized revisions to its asset retirement obligations totaling $411 million. The primary factor contributing to this revision was an overall increase in abandonment cost estimates for certain of its production operations facilities.

 

15


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

16. Retirement Plans

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

 

     Pension Benefits     Postretirement Benefits  
     Three Months  Ended
September 30,
    Nine Months Ended
September 30,
    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012     2011     2012     2011     2012     2011      2012     2011  
     (In millions)  

Service cost

   $ 11      $ 10      $ 32      $ 28      $ 1      $ —         $ 1      $ 1   

Interest cost

     15        15        45        45        —          —           1        1   

Expected return on plan assets

     (16     (11     (48     (32     —          —           —          —     

Amortization of prior service cost

     1        1        3        3        —          —           (1     (1

Net actuarial loss

     6        8        18        24        (1     —           (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 17      $ 23      $ 50      $ 68      $ —        $ —         $ —        $ 1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

17. Stockholders’ Equity

In the second quarter of 2012, Devon’s stockholders adopted the 2012 amendment to the 2009 Long-Term Incentive Plan (“2009 Plan Amendment”), which expires June 2, 2019. The 2009 Plan Amendment increases the number of shares authorized for issuance from 21.5 million shares to 47 million shares. To calculate shares issued under the 2009 Long-Term Incentive Plan subsequent to the 2009 Plan Amendment, options and stock appreciation rights represent one share and other awards represent 2.38 shares.

Dividends

Devon paid common stock dividends of $242 million and $209 million in the first nine months of 2012 and 2011, respectively. The quarterly cash dividend was $0.16 per share in the first quarter of 2011. Devon increased the dividend rate to $0.17 per share in the second quarter of 2011 and further increased the dividend rate to $0.20 per share in the first quarter of 2012.

18. 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. Actual amounts could differ materially from management’s estimates.

Royalty Matters

Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. The suits allege that the producers and related parties used below-market prices, made improper deductions, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold. Devon’s largest exposure for such matters relates to royalties in the states of Oklahoma and New Mexico. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

 

16


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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

Chief Redemption Matters

In 2006, Devon acquired Chief Holdings LLC (“Chief”) from the owners of Chief, including Trevor Rees-Jones, the majority owner of Chief. In 2008, a former owner of Chief filed a petition against Rees-Jones, as the former majority owner of Chief, and Devon, as Chief’s successor pursuant to the 2006 acquisition. The petition claimed, among other things, violations of the Texas Securities Act, fraud and breaches of Rees-Jones’ fiduciary responsibility to the former owner in connection with Chief’s 2004 redemption of the owner’s minority ownership stake in Chief.

On June 20, 2011, a court issued a judgment against Rees-Jones for $196 million, of which $133 million of the judgment was also issued against Devon. Both Rees-Jones and Devon are appealing the judgment. If the appeal is unsuccessful, Devon can and will seek full payment of the judgment and any related interest, costs and expenses from Rees-Jones pursuant to an existing indemnification agreement between Rees-Jones, certain other parties and Devon. Devon does not expect to have any net exposure as a result of the judgment. However, because Devon does not have a legal right of set off with respect to the judgment, Devon has recorded in the accompanying September 30, 2012 and December 31, 2011, balance sheets both a $133 million long-term liability relating to the judgment with an offsetting $133 million long-term receivable relating to its right to be indemnified by Rees-Jones and certain other parties pursuant to the indemnification agreement.

Other Matters

Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject.

19. Fair Value Measurements

The following tables provide carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other payables and accrued expenses included in the accompanying balance sheets approximated fair value at September 30, 2012 and December 31, 2011. Therefore, such financial assets and liabilities are not presented in the following tables.

 

                 Fair Value Measurements Using:  
     Carrying
Amount
    Total Fair
Value
    Level 1
Inputs
     Level 2
Inputs
    Level 3
Inputs
 
     (In millions)  

September 30, 2012 assets (liabilities):

           

Cash equivalents

   $ 4,952      $ 4,952      $ 527       $ 4,425      $ —     

Short-term investments

   $ 2,164      $ 2,164      $ 480       $ 1,684      $ —     

Long-term investments

   $ 64      $ 64      $ —         $ —        $ 64   

Commodity derivatives

   $ 433      $ 433      $ —         $ 433      $ —     

Commodity derivatives

   $ (40   $ (40   $ —         $ (40   $ —     

Interest rate derivatives

   $ 28      $ 28      $ —         $ 28      $ —     

Foreign currency derivatives

   $ 4      $ 4      $ —         $ 4      $ —     

Debt

   $ (11,235   $ (13,134   $ —         $ (13,130   $ (4

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

                 Fair Value Measurements Using:  
     Carrying
Amount
    Total Fair
Value
    Level 1
Inputs
     Level 2
Inputs
    Level 3
Inputs
 
     (In millions)  

December 31, 2011 assets (liabilities):

           

Cash equivalents

   $ 5,123      $ 5,123      $ 929       $ 4,194      $ —     

Short-term investments

   $ 1,503      $ 1,503      $ 201       $ 1,302      $ —     

Long-term investments

   $ 84      $ 84      $ —         $ —        $ 84   

Commodity derivatives

   $ 628      $ 628      $ —         $ 628      $ —     

Commodity derivatives

   $ (82   $ (82   $ —         $ (82   $ —     

Interest rate derivatives

   $ 52      $ 52      $ —         $ 52      $ —     

Debt

   $ (9,780   $ (11,380   $ —         $ (11,295   $ (85

The following methods and assumptions were used to estimate the fair values in the tables above.

Level 1 Fair Value Measurements

Cash equivalents and short-term investments — Amounts consist primarily of U.S. and Canadian treasury securities and money market investments. The fair value approximates the carrying value.

Level 2 Fair Value Measurements

Cash equivalents and short-term investments — Amounts consist primarily of Canadian agency and provincial securities and commercial paper investments. The fair value is based upon data from independent third parties, which approximate the carrying value.

Commodity, interest rate and foreign currency derivatives — The fair values of commodity, interest rate and foreign currency derivatives are estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.

Debt — Devon’s debt instruments do not actively trade in an established market. The fair values of its fixed-rate debt are estimated based on rates available for debt with similar terms and maturity. The fair values of Devon’s variable-rate commercial paper and credit facility borrowings are the carrying values.

Level 3 Fair Value Measurements

Long-term investments — Devon’s long-term investments presented in the tables above consisted entirely of auction rate securities. Due to auction failures and the lack of an active market for Devon’s auction rate securities, quoted market prices for these securities were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair values of its long-term auction rate securities. These inputs were based on continued receipts of principal at par, the collection of all accrued interest to date, the probability of full repayment of the securities considering the U.S. government guarantees substantially all of the underlying student loans, and the AAA credit rating of the securities. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of September 30, 2012 and December 31, 2011.

Debt — Devon’s Level 3 debt consisted of a non-interest bearing promissory note. Due to the lack of an active market, quoted marked prices for this note, or similar notes, were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair value of its promissory note. The fair value of this debt is estimated using internal discounted cash flow calculations based upon estimated future payment schedules and a 3.125% interest rate.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Included below is a summary of the changes in Devon’s Level 3 fair value measurements during the first nine months of 2012 and 2011.

 

     Nine Months Ended September 30,  
     2012     2011  
     (In millions)  

Long-term investments balance at beginning of period

   $ 84      $ 94   

Redemptions of principal

     (20     (10
  

 

 

   

 

 

 

Long-term investments balance at end of period

   $ 64      $ 84   
  

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
     2012     2011  
     (In millions)  

Debt balance at beginning of period

   $ (85   $ (144

Foreign exchange translation adjustment

     (2     3   

Accretion of promissory note

     —          (4

Redemptions of principal

     83        53   
  

 

 

   

 

 

 

Debt balance at end of period

   $ (4   $ (92
  

 

 

   

 

 

 

20. Discontinued Operations

In March 2012, Devon received $71 million upon closing the divestiture of its operations in Angola, which completed Devon’s offshore divestiture program that was announced in November 2009. In aggregate, Devon’s U.S. and International offshore divestitures generated total proceeds of $10.1 billion, or approximately $8 billion after-tax, assuming repatriation of a substantial portion of the foreign proceeds under current U.S. tax law.

Revenues related to Devon’s discontinued operations totaled $43 million in the nine months ended September 30, 2011. Devon did not have revenues related to its discontinued operations during the second or third quarter of 2011 or the first nine months of 2012. Earnings (loss) from discontinued operations before income taxes totaled $(16) million in the nine months ended September 30, 2012 and $2.6 billion for the first nine months of 2011, respectively. Devon did not have any earnings in the third quarter of 2012 or 2011. Earnings (loss) from discontinued operations in 2012 and 2011 were primarily due to Devon’s International divestiture transactions.

The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations at December 31, 2011. Devon did not have assets or liabilities held for sale at September 30, 2012.

 

     December 31, 2011  
     (In millions)  

Other current assets

   $ 21   

Property and equipment, net

     132   
  

 

 

 

Total assets

   $ 153   
  

 

 

 

Accounts payable

   $ 20   

Other current liabilities

     28   
  

 

 

 

Total liabilities

   $ 48   
  

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

21. Segment Information

Devon manages its operations through distinct operating segments, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its U.S. operating segments into one reporting segment due to the similar nature of the businesses. However, Devon’s Canadian operating segment is reported as a separate reporting segment primarily due to the significant differences between the U.S. and Canadian regulatory environments. Devon’s segments are all primarily engaged in oil and gas producing activities. Revenues are all from external customers.

 

     U.S.     Canada     Total  
     (In millions)  

Three Months Ended September 30, 2012:

  

Oil, gas and NGL sales

   $ 1,144      $ 594      $ 1,738   

Oil, gas and NGL derivatives

   $ (290   $ (5   $ (295

Marketing and midstream revenues

   $ 415      $ 7      $ 422   

Depreciation, depletion and amortization

   $ 478      $ 238      $ 716   

Interest expense

   $ 94      $ 16      $ 110   

Asset impairments

   $ 1,128      $ —        $ 1,128   

Earnings (loss) from continuing operations before income taxes

   $ (1,169   $ 8      $ (1,161

Income tax expense (benefit)

   $ (438   $ (4   $ (442

Earnings (loss) earnings from continuing operations

   $ (731   $ 12      $ (719

Capital expenditures

   $ 1,598      $ 382      $ 1,980   

Three Months Ended September 30, 2011:

      

Oil, gas and NGL sales

   $ 1,406      $ 705      $ 2,111   

Oil, gas and NGL derivatives

   $ 738      $ —        $ 738   

Marketing and midstream revenues

   $ 586      $ 67      $ 653   

Depreciation, depletion and amortization

   $ 359      $ 207      $ 566   

Interest expense

   $ 60      $ 44      $ 104   

Earnings from continuing operations before income taxes

   $ 1,379      $ 159      $ 1,538   

Income tax expense

   $ 458      $ 40      $ 498   

Earnings from continuing operations

   $ 921      $ 119      $ 1,040   

Capital expenditures

   $ 1,556      $ 394      $ 1,950   

Nine Months Ended September 30, 2012:

      

Oil, gas and NGL sales

   $ 3,394      $ 1,876      $ 5,270   

Oil, gas and NGL derivatives

   $ 520      $ (5   $ 515   

Marketing and midstream revenues

   $ 1,064      $ 72      $ 1,136   

Depreciation, depletion and amortization

   $ 1,348      $ 732      $ 2,080   

Interest expense

   $ 249      $ 47      $ 296   

Asset impairments

   $ 1,128      $ —        $ 1,128   

Earnings from continuing operations before income taxes

   $ 91      $ 93      $ 184   

Income tax expense

   $ 6      $ 6      $ 12   

Earnings from continuing operations

   $ 85      $ 87      $ 172   

Property and equipment, net

   $ 18,306      $ 8,840      $ 27,146   

Total assets

   $ 24,425      $ 19,123      $ 43,548   

Capital expenditures (1)

   $ 5,129      $ 1,565      $ 6,694   

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     U.S.      Canada      Total  
     (In millions)  

Nine Months Ended September 30, 2011:

        

Oil, gas and NGL sales

   $ 4,056       $ 2,115       $ 6,171   

Oil, gas and NGL derivatives

   $ 986       $ —         $ 986   

Marketing and midstream revenues

   $ 1,563       $ 149       $ 1,712   

Depreciation, depletion and amortization

   $ 1,027       $ 595       $ 1,622   

Interest expense

   $ 137       $ 133       $ 270   

Earnings from continuing operations before income taxes

   $ 2,965       $ 531       $ 3,496   

Income tax expense

   $ 1,748       $ 135       $ 1,883   

Earnings from continuing operations

   $ 1,217       $ 396       $ 1,613   

Property and equipment, net

   $ 15,639       $ 7,531       $ 23,170   

Total continuing assets (2)

   $ 21,903       $ 17,826       $ 39,729   

Capital expenditures

   $ 4,310       $ 1,274       $ 5,584   

 

 

(1) Capital expenditures for the first nine months of 2012 presented above include the $411 million revision to Devon’s asset retirement obligations presented in Note 15. Of the $411 million, $122 million relates to the U.S. and $289 million relates to Canada.
(2) Amounts in the table above do not include assets held for sale related to Devon’s discontinued operations, which totaled $137 million at September 30, 2011. There were no assets held for sale at September 30, 2012.

 

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis addresses material changes in our results of operations and capital resources and uses for the three-month and nine-month periods ended September 30, 2012, compared to the three-month and nine-month periods ended September 30, 2011, and in our financial condition and liquidity since December 31, 2011 and should be read in conjunction with “Item 1. Consolidated Financial Statements” of this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Annual Report on Form 10-K.

Overview of 2012 Results

During the third quarter of 2012, our continuing operations incurred a net loss of $719 million, or $1.80 per diluted share, due to noncash asset impairments and commodity derivative fair value changes. During the first nine months of 2012 our continuing operations generated earnings of $172 million, or $0.42 per diluted share. This compares to net earnings of $1.0 billion, or $2.50 per diluted share, and $1.6 billion, or $3.82 per diluted share for the third quarter and first nine months of 2011, respectively. Key components of our financial performance are summarized below:

 

   

Total production rose by 3% and 5% during the third quarter and first nine months of 2012, respectively. Our production growth was driven by oil production, which climbed 14% to 143 MBbls per day in the third quarter of 2012 in spite of the scheduled shut-down for facilities maintenance at our Jackfish 1 oil sands project.

 

   

The combined realized price without hedges for oil, gas and NGLs decreased 20% to $27.85 per Boe and 19% to $28.14 per Boe in the third quarter and first nine months of 2012, respectively.

 

   

Fair value changes and cash settlements on oil, gas and NGL derivatives resulted in a net loss of $295 million and a net gain of $515 million in the third quarter and first nine months of 2012, respectively, and a net gain of $738 million and $986 million in the third quarter and first nine months of 2011, respectively.

 

   

Marketing and midstream operating profit decreased 21% to $109 million and 29% to $289 million in the third quarter and first nine months of 2012, respectively.

 

   

LOE increased 5% and 8% to $8.22 per Boe in the third quarter and first nine months of 2012, respectively.

 

   

Noncash asset impairments were $1.1 billion in the third quarter of 2012, or $719 million net of income taxes.

 

   

Operating cash flow decreased 10% to $3.8 billion for the first nine months of 2012.

 

   

Capital spending, net of divestiture proceeds, totaled approximately $4.8 billion in the first nine months of 2012.

Third Quarter Operational Developments

 

   

Permian Basin oil production increased 35 percent over the third quarter of 2011. Oil production accounted for nearly 60 percent of our 65,000 Boe per day produced in the Permian during the third quarter. In the Bone Spring and Delaware plays in the Permian Basin, we added 25 new wells to production in the third quarter 2012. Initial 30-day production from these wells averaged 575 Boe per day. Also in the Permian, we brought five Midland-Wolfcamp Shale wells online in the third quarter with initial 30-day production averaging 560 Boe per day.

 

   

In September, we closed our $1.4 billion joint venture agreement with Sumitomo covering 650,000 net acres in the Permian Basin. Our two new exploration joint ventures in 2012 have delivered almost $4 billion in value.

 

   

In Canada, net production from our Jackfish projects averaged 44,000 barrels per day in the third quarter. This represents a 24 percent increase in oil production over the year-ago quarter. Construction of our third Jackfish oil sands project is now approximately 45 percent complete, with plant startup expected by year-end 2014.

 

   

Our third quarter activity in the Mississippian Lime play in Oklahoma was highlighted by the increase in activity to 13 operated rigs. Results from the Mississippian play continue to support our target economics.

 

   

We brought seven operated Granite Wash wells online in the third quarter. The average 30-day production rate from these wells was 1,065 Boe per day.

 

   

Our Cana-Woodford Shale production averaged 283 MMcf per day in the third quarter 2012. Third-quarter liquids production increased 64 percent compared to the prior-year quarter to 13,000 barrels per day.

 

   

Net production in the Barnett Shale totaled 1.4 Bcf per day in the third quarter. Liquids production increased 11 percent compared to the third quarter of 2011 to 51,000 barrels per day.

 

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Table of Contents

Results of Operations

Production, Prices and Revenues

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012      FY2011      Change (1)     FY2012      FY2011      Change (1)  

Oil (MBbls/d)

                

U.S.

     59         47         +26     56         45         +27

Canada

     84         78         +7     88         74         +19
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     143         125         +14     144         119         +22
  

 

 

    

 

 

      

 

 

    

 

 

    

Gas (MMcf/d)

                

U.S.

     2,067         2,028         +2     2,063         2,007         +3

Canada

     487         580         -16 %     521         587         -11 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     2,554         2,608         -2 %     2,584         2,594         -0 %
  

 

 

    

 

 

      

 

 

    

 

 

    

NGLs (MBbls/d)

                

U.S.

     101         91         +11     98         89         +10

Canada

     9         10         -9 %     11         10         +9
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     110         101         +9     109         99         +10
  

 

 

    

 

 

      

 

 

    

 

 

    

Combined (MBoe/d) (2)

                

U.S.

     504         476         +6     498         468         +6

Canada

     174         185         -6 %     186         182         +2
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     678         661         +3     684         650         +5
  

 

 

    

 

 

      

 

 

    

 

 

    

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.
(2) Gas production is converted to Boe at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. NGL production is converted to Boe on a one-to-one basis with oil.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012 (1)      FY2011 (1)      Change     FY2012 (1)      FY2011 (1)      Change  

Oil (per Bbl)

                

U.S.

   $ 84.84       $ 86.30         -2 %   $ 90.79       $ 91.18         -0 %

Canada

   $ 58.75       $ 61.70         -5 %   $ 58.56       $ 65.30         -10 %

Total

   $ 69.53       $ 70.89         -2 %   $ 71.19       $ 75.04         -5 %

Gas (per Mcf)

                

U.S.

   $ 2.37       $ 3.71         -36 %   $ 2.12       $ 3.64         -42 %

Canada

   $ 2.31       $ 3.93         -41 %   $ 2.26       $ 4.01         -44 %

Total

   $ 2.36       $ 3.76         -37 %   $ 2.15       $ 3.73         -42 %

NGLs (per Bbl)

                

U.S.

   $ 25.07       $ 40.95         -39 %   $ 29.31       $ 39.05         -25 %

Canada

   $ 46.41       $ 54.85         -15 %   $ 48.92       $ 55.92         -13 %

Total

   $ 26.86       $ 42.35         -37 %   $ 31.27       $ 40.74         -23 %

Combined (per Boe)

                

U.S.

   $ 24.64       $ 32.11         -23 %   $ 24.86       $ 31.73         -22 %

Canada

   $ 37.14       $ 41.42         -10 %   $ 36.93       $ 42.61         -13 %

Total

   $ 27.85       $ 34.72         -20 %   $ 28.14       $ 34.78         -19 %

 

(1) The prices presented exclude any effects due to oil, gas and NGL derivatives.

 

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Table of Contents

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the three months ended September 30, 2012 and 2011.

 

     Three Months Ended September 30,  
     Oil     Gas     NGLs     Total  
     (In millions)  

2011 sales

   $ 816      $ 902      $ 393      $ 2,111   

Change due to volumes

     114        (19     35        130   

Change due to prices

     (18     (329     (156     (503
  

 

 

   

 

 

   

 

 

   

 

 

 

2012 sales

   $ 912      $ 554      $ 272      $ 1,738   
  

 

 

   

 

 

   

 

 

   

 

 

 

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the nine months ended September 30, 2012 and 2011.

 

     Nine Months Ended September 30,  
     Oil     Gas     NGLs     Total  
     (In millions)  

2011 sales

   $ 2,432      $ 2,639      $ 1,100      $ 6,171   

Change due to volumes

     537        (1     111        647   

Change due to prices

     (152     (1,115     (281     (1,548
  

 

 

   

 

 

   

 

 

   

 

 

 

2012 sales

   $ 2,817      $ 1,523      $ 930      $ 5,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Oil Sales

Oil sales increased $114 million and $537 million during the third quarter and first nine months of 2012, respectively, as a result of 14 percent and 22 percent production increases, respectively. The increases were primarily due to continued development of our Permian Basin properties and Jackfish thermal heavy oil projects.

Oil sales decreased $18 million and $152 million during the third quarter and first nine months of 2012, respectively, as a result of 2 percent and 5 percent decreases, respectively, in our realized price without hedges. The largest contributor to the price decreases in each period was the widening differential to the NYMEX West Texas Intermediate index price attributable to our Canadian oil production.

Gas Sales

Gas sales decreased $329 million and $1.1 billion in the third quarter and first nine months of 2012, respectively, as a result of 37 percent and 42 percent decreases, respectively, in our realized price without hedges. These decreases were largely due to the broad deterioration of gas prices in the North American market.

Gas sales decreased $19 million during the third quarter due to a 2 percent decrease in production and decreased $1 million during the first nine months of 2012 as a result of a slight decrease in production. Our gas production has remained somewhat steady as a result of the continued development activities in the liquids-rich gas portions of our Barnett and Cana-Woodford Shales. Production gains from development in these liquids-rich regions were partially offset by natural declines in our operating areas that produce dry gas.

NGL Sales

NGL sales decreased $156 million and $281 million in the third quarter and first nine months of 2012, respectively, as a result of 37 percent and 23 percent decreases, respectively, in our realized price without hedges. The lower prices were largely due to decreases in NGL prices at the Mont Belvieu, Texas hub.

NGL sales increased $35 million and $111 million in the third quarter and first nine months of 2012, respectively, as a result of 9 percent and 10 percent production increases, respectively. The increases in production were primarily due to continued drilling in the liquids-rich gas portions of the Barnett Shale, Cana-Woodford Shale and Granite Wash.

 

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Table of Contents

Oil, Gas and NGL Derivatives

The following tables provide financial information associated with our oil, gas and NGL hedges. The first table presents the cash settlements and unrealized gains and losses that are recognized as components of our revenues. The subsequent tables present our oil, gas and NGL prices with, and without, the effects of the cash settlements. The prices do not include the effects of unrealized gains and losses.

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    FY2012     FY2011     FY2012     FY2011  
    (In millions)  

Cash settlements:

       

Gas derivatives

  $ 156      $ 97      $ 530      $ 262   

Oil derivatives

    86        (2     137        (23

NGL derivatives

    1        1        1        2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cash settlements

    243        96        668        241   
 

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on fair value changes:

       

Gas derivatives

    (207     157        (391     149   

Oil derivatives

    (331     482        239        592   

NGL derivatives

    —          3        (1     4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains (losses) on fair value changes

    (538     642        (153     745   
 

 

 

   

 

 

   

 

 

   

 

 

 

Oil, gas and NGL derivatives

  $ (295   $ 738      $ 515      $ 986   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended September 30, 2012  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 69.53      $ 2.36       $ 26.86       $ 27.85   

Cash settlements of hedges

     6.58        0.66         0.03         3.89   
  

 

 

   

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 76.11      $ 3.02       $ 26.89       $ 31.74   
  

 

 

   

 

 

    

 

 

    

 

 

 
     Three Months Ended September 30, 2011  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 70.89      $ 3.76       $ 42.35       $ 34.72   

Cash settlements of hedges

     (0.13     0.40         0.09         1.58   
  

 

 

   

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 70.76      $ 4.16       $ 42.44       $ 36.30   
  

 

 

   

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2012  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 71.19      $ 2.15       $ 31.27       $ 28.14   

Cash settlements of hedges

     3.47        0.75         0.02         3.56   
  

 

 

   

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 74.66      $ 2.90       $ 31.29       $ 31.70   
  

 

 

   

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2011  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 75.04      $ 3.73       $ 40.74       $ 34.78   

Cash settlements of hedges

     (0.70     0.37         0.07         1.35   
  

 

 

   

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 74.34      $ 4.10       $ 40.81       $ 36.13   
  

 

 

   

 

 

    

 

 

    

 

 

 

Cash settlements presented in the tables above represent realized gains or losses related to various commodity derivatives. A summary of our open commodity derivative positions is included in Note 2 to the financial statements included in “Item 1. Consolidated Financial Statements” of this report.

 

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Table of Contents

In addition to cash settlements, we also recognize unrealized changes in the fair values of our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationships between contract prices and the associated forward curves. Including the cash settlements discussed above, our oil, gas and NGL derivatives incurred a net loss of $295 million and generated a net gain of $738 million in the third quarter of 2012 and 2011, respectively. Including the cash settlements discussed above, our oil, gas and NGL derivatives generated a net gain of $515 million and $986 million in the first nine months of 2012 and 2011, respectively.

Marketing and Midstream Revenues and Operating Costs and Expenses

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012      FY2011      Change (1)     FY2012      FY2011      Change (1)  
     ($ in millions)  

Marketing and midstream:

                

Revenues

   $ 422       $ 653         -35 %   $ 1,136       $ 1,712         -34 %

Operating Costs and expenses

     313         515         -39 %     847         1,304         -35 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Operating Profit

   $ 109       $ 138         -21 %   $ 289       $ 408         -29 %
  

 

 

    

 

 

      

 

 

    

 

 

    

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

During the third quarter and first nine months of 2012, marketing and midstream operating profit decreased $29 million and $119 million, respectively, primarily due to lower gas and NGL prices.

Lease Operating Expenses (“LOE”)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012      FY2011      Change (1)     FY2012      FY2011      Change (1)  

LOE ($ in millions):

                

U.S.

   $ 263       $ 236         +11   $ 774       $ 668         +16

Canada

     250         239         +5     766         684         +12
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 513       $ 475         +8   $ 1,540       $ 1,352         +14
  

 

 

    

 

 

      

 

 

    

 

 

    

LOE per Boe:

                

U.S.

   $ 5.65       $ 5.38         +5   $ 5.67       $ 5.23         +8

Canada

   $ 15.65       $ 14.06         +11   $ 15.08       $ 13.78         +9

Total

   $ 8.22       $ 7.81         +5   $ 8.22       $ 7.62         +8

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

LOE increased $0.41 per Boe and $0.60 per Boe during the third quarter and first nine months of 2012, respectively. The largest contributor to the higher unit cost is related to our liquids production growth, particularly at our Jackfish thermal heavy oil projects in Canada and in the Permian Basin in the U.S. Such projects generally require a higher cost to produce per unit than our gas projects. We also experienced upward pressures on costs in certain operating areas, which also contributed to the higher LOE per Boe.

Depreciation, Depletion and Amortization (“DD&A”)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012      FY2011      Change (1)     FY2012      FY2011      Change (1)  

DD&A ($ in millions):

                

Oil & gas properties

   $ 642       $ 504         +27   $ 1,870       $ 1,431         +31

Other properties

     74         62         +17     210         191         +10
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 716       $ 566         +26   $ 2,080       $ 1,622         +28
  

 

 

    

 

 

      

 

 

    

 

 

    

 

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     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012      FY2011      Change (1)     FY2012      FY2011      Change (1)  

DD&A per Boe:

                

Oil & gas properties

   $ 10.29       $ 8.29         +24   $ 9.98       $ 8.07         +24

Other properties

     1.17         1.03         +14     1.12         1.07         +4
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 11.46       $ 9.32         +23   $ 11.10       $ 9.14         +21
  

 

 

    

 

 

      

 

 

    

 

 

    

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

Oil and gas property DD&A increased during the third quarter and first nine months of 2012 largely due to increases in the DD&A rates. The largest contributor to the higher rates were our drilling and development activities subsequent to the end of the third quarter of 2011.

General and Administrative Expenses (“G&A”)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012     FY2011     Change (1)     FY2012     FY2011     Change (1)  
     ($ in millions)  

Gross G&A

   $ 281      $ 253        +11   $ 865      $ 736        +18

Capitalized G&A

     (99     (85     +16     (282     (247     +14

Reimbursed G&A

     (32     (30     +7     (89     (86     +3
  

 

 

   

 

 

     

 

 

   

 

 

   

Net G&A

   $ 150      $ 138        +9   $ 494      $ 403        +23
  

 

 

   

 

 

     

 

 

   

 

 

   

Net G&A per Boe

   $ 2.40      $ 2.27        +6   $ 2.64      $ 2.27        +16
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

Net G&A and net G&A per Boe increased during 2012 largely due to higher employee compensation and benefits. Employee costs increased primarily from an expansion of our workforce as part of growing production operations at certain of our key areas, including Jackfish, the Permian and the Cana-Woodford shale.

Taxes Other Than Income Taxes

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012     FY2011     Change (1)     FY2012     FY2011     Change (1)  
     ($ in millions)  

Production

   $ 60      $ 63        -4 %   $ 164      $ 187        -12 %

Ad valorem and other

     44        45        -3 %     142        149        -5 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Taxes other than income taxes

   $ 104      $ 108        -4 %   $ 306      $ 336        -9 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Percentage of oil, gas and NGL revenue:

            

Production

     3.45     2.97     +16     3.12     3.03     +3

Ad valorem and other

     2.50     2.13     +18     2.68     2.41     +12
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

     5.95     5.10     +17     5.80     5.44     +7
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

Taxes other than income taxes as a percentage of our oil, gas and NGL revenues increased in both 2012 periods primarily due to ad valorem and other taxes, which do not change in direct correlation with oil, gas and NGL revenues.

 

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Interest Expense

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     FY2012     FY2011     Change (1)     FY2012     FY2011     Change (1)  
     ($ in millions)  

Interest based on debt outstanding

   $ 117      $ 120        -3 %   $ 324      $ 318        +2

Capitalized interest

     (9     (19     -52 %     (38     (56     -32 %

Other

     2        3        -18 %     10        8        +20
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest expense

   $ 110      $ 104        +6   $ 296      $ 270        +10
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest based on debt outstanding remained relatively flat in 2012 as a result of lower weighted average interest rates offset by additional debt borrowings. Borrowings were primarily used to fund capital expenditures in excess of our operating cash flow and divestiture proceeds.

Asset Impairments

In the third quarter of 2012, we recognized asset impairments related to our U.S. oil and gas property and equipment and our U.S. midstream assets as presented below.

 

     September 30, 2012  
     Gross      Net of
Taxes
 
     (In millions)  

U.S. oil and gas assets

   $ 1,106       $ 705   

Midstream assets

     22         14   
  

 

 

    

 

 

 

Total asset impairments

   $ 1,128       $ 719   
  

 

 

    

 

 

 

U.S. Oil and Gas Impairment

Under the full-cost method of accounting, capitalized costs of oil and gas properties are subject to a full cost ceiling test, which is discussed in Note 11 to the financial statements under “Item 1. Consolidated Financial Statements” of this report.

The U.S. oil and gas impairment resulted primarily from a decline in the U.S. full cost ceiling. The lower ceiling value resulted primarily from decreases in the 12-month average trailing prices for natural gas and NGLs, which have reduced proved reserve values.

Additionally, if natural gas and NGL prices remain depressed, we may incur a full cost ceiling impairment related to our oil and gas property and equipment in the fourth quarter of 2012.

Midstream Impairment

Due to declining natural gas production resulting from low natural gas and NGL prices, we determined that the carrying amounts of certain of its midstream facilities located in south and east Texas were not recoverable from estimated future cash flows. Consequently, the assets were written down to their estimated fair values, which were determined using discounted cash flow models.

 

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Other, net

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    FY2012     FY2011     FY2012     FY2011  
    (In millions)  

Accretion of asset retirement obligations

  $ 27      $ 23      $ 82      $ 69   

Interest rate derivatives

    (1     3        15        11   

Foreign currency derivatives

    26        (22     25        (22

Foreign exchange loss (gain)

    (28     53        (26     39   

Interest income

    (8     (8     (24     (14

Other

    (24     12        (26     5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other, net

  $ (8   $ 61      $ 46      $ 88   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income Taxes

The following table presents our total income tax expense (benefit) and a reconciliation of our effective income tax rate to the U.S. statutory income tax rate.

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    FY2012     FY2011     FY2012     FY2011  

Total income tax expense (benefit) (in millions)

  $ (442   $ 498      $ 12      $ 1,883   
 

 

 

   

 

 

   

 

 

   

 

 

 

U.S. statutory income tax rate

    (35 %)      35     35     35

State income taxes

    (1 %)      1     (1 %)      1

Taxation on Canadian operations

    (1 %)      (1 %)      (14 %)      (2 %) 

Assumed repatriations

    —          —          —          21

Other

    (1 %)      (3 %)      (13 %)      (1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

    (38 %)      32     7     54
 

 

 

   

 

 

   

 

 

   

 

 

 

In the table above, the “other” effect is primarily comprised of permanent tax differences for which the dollar amounts do not increase or decrease as our pre-tax earnings do. Generally, such items typically have an insignificant impact on our effective income tax rate. However, these items have a more noticeable impact to our rate for the nine months ended September 30, 2012 because of the relatively low pre-tax earnings for that period.

Earnings (Loss) From Discontinued Operations

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    FY2012     FY2011     FY2012     FY2011  
    (In millions)  

Operating earnings (loss)

  $ —        $ (4   $ —        $ 38   

Gain (loss) on sale of oil and gas properties

    —          —          (16     2,546   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

    —          (4     (16     2,584   

Income tax expense (benefit)

    —          (2     5        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from discontinued operations

  $ —        $ (2   $ (21   $ 2,584   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings decreased in 2012 primarily as a result of the $2.5 billion gain ($2.5 billion after-tax) recognized from the divestiture of our Brazil operations in the second quarter of 2011.

 

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Capital Resources, Uses and Liquidity

Sources and Uses of Cash

The following table presents the major source and use categories of our cash and cash equivalents.

 

     Nine Months Ended September 30,  
     2012     2011  
     (In millions)  

Operating cash flow – continuing operations

   $ 3,787      $ 4,227   

Debt activity, net

     1,567        3,657   

Divestitures of property and equipment

     1,468        3,264   

Capital expenditures

     (6,228     (5,515

Short-term investment activity, net

     (661     (1,086

Common stock repurchases and dividends

     (242     (2,196

Other

     92        (23
  

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ (217   $ 2,328   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 5,338      $ 5,618   
  

 

 

   

 

 

 

Short-term investments at end of period

   $ 2,164      $ 1,231   
  

 

 

   

 

 

 

Operating Cash Flow – Continuing Operations

Net cash provided by operating activities (“operating cash flow”) was our primary source of capital in the first nine months of 2012. Our operating cash flow decreased approximately 10 percent during 2012 primarily due to lower commodity prices and higher expenses, partially offset by additional cash flow from our production growth.

During the first nine months of 2012, our operating cash flow funded approximately 80 percent of our cash payments for capital expenditures, net of divestiture proceeds. Leveraging our liquidity, we used debt to fund the remainder of our cash-based capital expenditures. This cash flow deficit was largely expected as we have allocated approximately 25% of our 2012 capital expenditure budget to exploratory projects and leasehold acquisitions that are not yet generating production revenues.

Debt Activity, Net

During the first nine months of 2012, we increased our debt borrowings by $1.6 billion as a result of issuing $2.5 billion of long-term debt partially offset by the repayment of approximately $0.9 billion of outstanding short-term debt. The additional debt borrowings were primarily used to fund capital expenditures in excess of our operating cash flow.

During the first nine months of 2011, we utilized commercial paper borrowings of $3.2 billion and received $0.5 billion from new debt issuances, net of debt maturities, to fund capital expenditures and common share repurchases.

Divestitures of Property and Equipment

During the third quarter of 2012, we closed our joint venture transaction with Sumitomo Corporation. At closing, Sumitomo paid approximately $400 million and received a 30% interest in the Cline and Midland-Wolfcamp shale plays in Texas. Additionally, Sumitomo is funding approximately $1.0 billion of our share of future exploration, development and drilling costs associated with these plays. Also during the third quarter of 2012, we sold our West Johnson County Plant in north Texas for approximately $90 million.

During the second quarter of 2012, we closed our joint venture transaction with Sinopec. Sinopec paid approximately $900 million in cash and received a 33.3% interest in five of our new ventures exploration plays in the U.S. Sinopec is also funding approximately $1.6 billion of our share of future exploration, development and drilling costs associated with these plays.

In the first quarter of 2012, we received $71 million from the divestiture of our Angola operations.

 

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During the second quarter of 2011, we completed the divestiture of our operations in Brazil, generating $3.3 billion in net proceeds.

Capital Expenditures

The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.

 

     Nine Months Ended September 30,  
     2012      2011  
     (In millions)  

U.S.

   $ 4,401       $ 3,665   

Canada

     1,157         1,224   
  

 

 

    

 

 

 

Total oil and gas

     5,558         4,889   

Midstream

     341         244   

Other

     329         382   
  

 

 

    

 

 

 

Total continuing operations

   $ 6,228       $ 5,515   
  

 

 

    

 

 

 

Our capital expenditures consist of amounts related to our oil and gas exploration and development operations, our midstream operations and other corporate activities. The vast majority of our capital expenditures are for the acquisition, drilling and development of oil and gas properties, which totaled $5.6 billion and $4.9 billion in the first nine months of 2012 and 2011, respectively. The 14% growth in exploration and development capital spending in the first nine months of 2012 was primarily due to increased new ventures exploratory activity and unproved leasehold acquisitions.

Capital expenditures for our midstream operations are primarily for the construction and expansion of natural gas processing plants, natural gas gathering systems and oil transportation facilities. Our midstream capital expenditures are largely impacted by oil and gas drilling activities.

Short-term Investment Activity, Net

During the first nine months of 2012 and 2011, we had net short-term investment purchases totaling $0.7 billion and $1.1 billion, respectively. The 2012 purchases were primarily related to the investment of a portion of our joint venture proceeds into marketable securities. The 2011 purchases were primarily related to the investment of a portion of the International offshore divestiture proceeds into marketable securities.

Common Stock Repurchases and Dividends

In connection with our offshore divestitures noted above, we conducted a $3.5 billion share repurchase program, which we completed in the fourth quarter of 2011. Since the third quarter of 2011, we have increased our quarterly dividend rate 18%.

The following table summarizes our repurchases and our common stock dividends (amounts and shares in millions) during the first nine months of 2012 and 2011.

 

     2012      2011  
     Amount      Shares      Per Share      Amount      Shares      Per Share  

Repurchases

   $ —           —         $ —         $ 1,987         25.6       $ 77.61