SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: OCTOBER 31, 2001
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 000-30176 73-1567067
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 NORTH BROADWAY, SUITE 1500
OKLAHOMA CITY, OKLAHOMA 73102
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
ITEM 5. Other Events and Regulation FD Disclosure
Included herein are the consolidated financial statements and notes
thereto of Devon Energy Corporation as of September 30, 2001 and for the
three-month and nine-month periods ended September 30, 2001 and 2000. These
consolidated financial statements and notes thereto have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted. The accompanying consolidated
financial statements and notes thereto should be read in conjunction with the
consolidated financial statements and notes thereto included in Devon's 2000
Annual Report on Form 10-K.
2
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 239,265 228,050
Accounts receivable 491,099 615,463
Inventories 42,618 47,272
Deferred income taxes 8,979 8,979
Investments and other current assets 37,941 34,373
------------ ------------
Total current assets 819,902 934,137
------------ ------------
Property and equipment, at cost, based on the full cost method of accounting
for oil and gas properties ($453,667 and $315,260 excluded from
amortization in 2001 and 2000, respectively) 11,131,091 9,709,352
Less accumulated depreciation, depletion and amortization 5,387,568 4,799,816
------------ ------------
5,743,523 4,909,536
Investment in ChevronTexaco Corporation common stock, at fair value 601,083 598,867
Goodwill, net of amortization 269,305 289,489
Fair value of derivative instruments 151,415 --
Other assets 147,262 128,449
------------ ------------
Total assets $ 7,732,490 6,860,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade 337,577 305,210
Revenues and royalties due to others 115,131 151,951
Income taxes payable 17,402 65,674
Accrued interest payable 32,269 23,191
Merger related expenses payable 11,602 36,981
Accrued expenses and other current liabilities 47,817 45,980
------------ ------------
Total current liabilities 561,798 628,987
------------ ------------
Other liabilities 162,318 164,469
Debentures exchangeable into shares of ChevronTexaco
Corporation common stock 645,461 760,313
Other long-term debt 1,339,316 1,288,523
Deferred revenue 65,330 113,756
Deferred income taxes 1,112,822 626,826
Fair value of derivative instruments 76,440 --
Stockholders' equity:
Preferred stock of $1.00 par value ($100 liquidation value)
Authorized 4,500,000 shares; issued 1,500,000 in 2001 and 2000 1,500 1,500
Common stock of $.10 par value
Authorized 400,000,000 shares; issued 129,768,000 in 2001 and
128,638,000 in 2000 12,977 12,864
Additional paid-in capital 3,594,814 3,563,994
Retained earnings (accumulated deficit) 380,049 (214,708)
Accumulated other comprehensive loss (29,542) (85,397)
Unamortized restricted stock awards (406) (649)
Treasury stock, at cost; 3,754,000 shares in 2001 (190,387) --
------------ ------------
Total stockholders' equity 3,769,005 3,277,604
------------ ------------
Total liabilities and stockholders' equity $ 7,732,490 6,860,478
============ ============
See accompanying notes to consolidated financial statements.
3
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(UNAUDITED)
REVENUES
Oil sales $ 234,116 267,430 722,672 812,365
Gas sales 306,808 392,588 1,474,986 960,865
Natural gas liquids sales 30,445 35,457 94,746 106,373
Other 15,346 29,666 43,060 54,438
---------- ---------- ---------- ----------
Total revenues 586,715 725,141 2,335,464 1,934,041
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Lease operating expenses 124,781 108,902 362,884 326,709
Transportation costs 16,113 13,907 51,936 38,652
Production taxes 20,967 27,773 95,025 69,644
Depreciation, depletion and amortization of property and equipment 205,345 170,151 572,939 507,654
Amortization of goodwill 8,461 10,364 25,384 31,057
General and administrative expenses 26,977 25,304 73,867 74,177
Expenses related to prior merger -- 57,233 -- 57,233
Interest expense 35,885 40,445 104,825 121,396
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- -- -- 2,408
Change in fair value of derivative instruments (2,738) -- 3,844 --
Reduction of carrying value of oil and gas properties 10,911 -- 87,853 --
---------- ---------- ---------- ----------
Total costs and expenses 446,702 454,079 1,378,557 1,228,930
---------- ---------- ---------- ----------
Earnings before income tax expense and cumulative effect of change in
accounting principle 140,013 271,062 956,907 705,111
INCOME TAX EXPENSE (BENEFIT)
Current (25,679) 50,403 117,213 122,908
Deferred 80,960 55,747 267,757 158,770
---------- ---------- ---------- ----------
Total income tax expense 55,281 106,150 384,970 281,678
---------- ---------- ---------- ----------
Earnings before cumulative effect of change in accounting principle 84,732 164,912 571,937 423,433
Cumulative effect of change in accounting principle, net of income tax
expense of $31,617 -- -- 49,452 --
---------- ---------- ---------- ----------
Net earnings 84,732 164,912 621,389 423,433
Preferred stock dividends 2,433 2,433 7,301 7,301
---------- ---------- ---------- ----------
Net earnings applicable to common stockholders $ 82,299 162,479 614,088 416,132
========== ========== ========== ==========
Net earnings before cumulative effect of change in accounting principle per
average common share outstanding:
Basic $ 0.65 1.27 4.40 3.27
========== ========== ========== ==========
Diluted $ 0.64 1.22 4.26 3.20
========== ========== ========== ==========
Net earnings per average common share outstanding:
Basic $ 0.65 1.27 4.79 3.27
========== ========== ========== ==========
Diluted $ 0.64 1.22 4.63 3.20
========== ========== ========== ==========
Weighted average common shares outstanding-basic 126,335 127,857 128,274 127,065
========== ========== ========== ==========
Weighted average common shares outstanding-diluted 131,573 134,394 133,982 130,628
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(UNAUDITED)
Net earnings $ 84,732 164,912 621,389 423,433
Other comprehensive earnings (loss):
Foreign currency translation adjustments (17,068) (6,462) (20,820) (12,237)
Cumulative effect of change in accounting principle -- -- (36,579) --
Reclassification adjustment for derivative (gains) losses
reclassified into oil and gas sales (8,285) -- 6,678 --
Change in fair value of outstanding hedging positions 64,001 -- 105,224 --
Unrealized losses on marketable securities, net of tax benefit (24,877) (1,288) 1,352 (7,330)
---------- ---------- ---------- ----------
Comprehensive earnings $ 98,503 157,162 677,244 403,866
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 621,389 423,433
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation, depletion and amortization of property and equipment 572,939 507,654
Amortization of goodwill 25,384 31,057
Reduction of carrying value of oil and gas properties 87,853 --
Accretion of interest on long-term debt 11,598 3,531
Amortization of discounts (premiums) on other long-term debt 6,130 (2,891)
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- 2,408
Loss (gain) on sale of assets 247 (5,854)
Change in fair value of derivative instruments 3,844 --
Cumulative effect of change in accounting principle (49,452) --
Deferred income taxes 267,757 158,770
Other 965 (28)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 113,769 (153,432)
Inventories 5,723 (16,025)
Prepaid expenses 14,298 (22,751)
Other assets (28,923) (3,029)
(Decrease) increase in:
Accounts payable 17,463 95,842
Income taxes payable (48,176) 78,095
Accrued expenses and other current liabilities (51,711) 37,198
Deferred revenue (48,394) 23,545
Long-term other liabilities (22,195) (24,133)
------------ ------------
Net cash provided by operating activities 1,500,508 1,133,390
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 41,395 56,640
Capital expenditures (1,351,492) (947,974)
------------ ------------
Net cash used in investing activities (1,310,097) (891,334)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings of other long-term debt 1,271,746 2,258,549
Principal payments on revolving lines of credit (1,263,995) (2,473,568)
Issuance of common stock, net of issuance costs 30,932 37,500
Treasury stock purchased (190,387) (10,699)
Treasury stock issued -- 24,937
Dividends paid on common stock (19,331) (15,080)
Dividends paid on preferred stock (7,301) (7,301)
Decrease in long-term other liabilities -- (49,802)
------------ ------------
Net cash used in financing activities (178,336) (235,464)
------------ ------------
Effect of exchange rate changes on cash (860) (1,112)
------------ ------------
Net increase in cash and cash equivalents 11,215 5,480
Cash and cash equivalents at beginning of period 228,050 173,167
------------ ------------
Cash and cash equivalents at end of period $ 239,265 178,647
============ ============
See accompanying notes to consolidated financial statements.
6
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On August 29, 2000, Devon Energy Corporation ("Devon") and Santa Fe
Snyder Corporation ("Santa Fe Snyder") completed a merger of the two companies
(the "Santa Fe Snyder merger"). At that date, Santa Fe Snyder became a
wholly-owned subsidiary of Devon. The Santa Fe Snyder merger was accounted for
under the pooling-of-interests method of accounting for business combinations.
All operational and financial information contained herein includes the combined
amounts of Devon and Santa Fe Snyder for all periods presented.
The accompanying consolidated financial statements and notes thereto
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. The accompanying
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in Devon's 2000 Annual Report on Form 10-K.
In the opinion of Devon's management, all adjustments (all of which are
normal and recurring) have been made which are necessary to fairly state the
consolidated financial position of Devon and its subsidiaries as of September
30, 2001, and the results of their operations and their cash flows for the
three-month and nine-month periods ended September 30, 2001 and 2000. Certain of
the 2000 amounts in the accompanying consolidated financial statements have been
reclassified to conform to the 2001 presentation.
2. PENDING ACQUISITIONS
Mitchell Energy & Development Corp.
On August 14, 2001, Devon and Mitchell Energy & Development Corp.
("Mitchell Energy") announced that Devon will acquire Mitchell Energy for cash
and stock. In the transaction, Mitchell Energy stockholders would receive, for
each Mitchell common share, $31 cash and 0.585 of a share of Devon common stock.
The purchase price will approximate $3.2 billion. The cash portion of the
purchase price will be funded from a new $3.0 billion senior unsecured term loan
credit facility (see Note 3). The transaction is subject to approval by the
stockholders of both companies, as well as certain regulatory approvals. If
approved, the transaction is expected to be consummated shortly after the
stockholder meetings.
Mitchell Energy's estimated September 30, 2001 proved oil and gas
reserves totaled 408 million barrels of oil equivalent located in the United
States. In the transaction, Devon would also acquire Mitchell Energy's natural
gas processing plants, pipelines and other midstream assets valued at
approximately $840 million.
7
2. PENDING ACQUISITIONS (CONTINUED)
Anderson Exploration Ltd.
On October 12, 2001, Devon accepted all of the Anderson Exploration
Ltd. ("Anderson") common shares tendered by Anderson stockholders in the tender
offer, which represented approximately 97% of the outstanding Anderson common
shares. On October 17, 2001, Devon completed its acquisition of Anderson by a
compulsory acquisition under the Canada Business Corporations Act of the
remaining 3% of Anderson common shares. The cost to Devon of acquiring
Anderson's outstanding common shares and paying for the intrinsic value of
Anderson's outstanding options and appreciation rights was approximately $3.5
billion, which was funded from the sale of $3.0 billion of debt securities and
borrowings under the $3.0 billion senior unsecured term loan credit facility
(see Note 3).
Proved reserves acquired by Devon in the Anderson transaction totaled
approximately 522 million barrels of oil equivalent, all of which are located in
Canada.
3. LONG-TERM DEBT
Debt Securities
On October 3, 2001, Devon, through its wholly-owned financial
subsidiary Devon Financing Corporation, U.L.C. ("Devon Financing"), sold $1.75
billion of 6.875% notes due September 30, 2011 and $1.25 billion of 7.875%
debentures due September 30, 2031. The debt securities are unsecured and
unsubordinated obligations of Devon Financing. Devon has fully and
unconditionally guaranteed on an unsecured and unsubordinated basis the
obligations of Devon Financing under the debt securities. The proceeds from the
issuance of these debt securities were used to fund a portion of the Anderson
acquisition.
The $3.0 billion of debt securities were structured in a manner that
results in an expected weighted average after-tax borrowing rate of
approximately 1.76%.
Interest on the debt securities will be payable by Devon Financing
semiannually on March 30 and September 30 of each year, beginning on March 30,
2002. The indenture governing the debt securities limits both Devon Financing's
and Devon's ability to incur liens or enter into mergers or consolidations, or
transfer all or substantially all of their respective assets, unless the
successor company assumes Devon Financing's or Devon's obligations under the
indenture.
8
3. LONG-TERM DEBT (CONTINUED)
New Term Loan Credit Facility
On October 12, 2001, Devon and Devon Financing entered into a new $3.0
billion senior unsecured term loan credit facility arranged by UBS Warburg LLC
and Banc of America Securities LLC. The facility has a term of five years. Devon
and Devon Financing may borrow funds under this facility subject to conditions
usual in commercial transactions of this nature, including the absence of any
default under this facility. Interest on borrowings under this facility may be
based, at the borrower's option, on the London Interbank Offered Rate ("LIBOR")
or on UBS Warburg's base rate (which is the higher of UBS Warburg's prime
commercial lending rate and the weighted average of rates on overnight Federal
funds transactions with members of the Federal Reserve System plus 0.50%).
The interest rates will include a margin determined by Devon's
long-term senior unsecured debt rating. Notwithstanding the current debt rating,
the margin for borrowings based on LIBOR will be an additional 1.0% for the
six-month period following completion of the syndication of this facility to a
broader group of lenders, which is expected to occur in November 2001. Based on
LIBOR rates as of October 30, 2001, Devon's rate would be 3.17%. In addition,
the lenders under this facility will be charging Devon a per annum availability
fee on their daily average unused lending commitments equal to a percentage
determined by Devon's long-term senior unsecured debt rating.
On October 15, 2001, Devon used proceeds of $0.8 billion from
borrowings on this facility, along with the $3.0 billion of proceeds from the
debt securities referred to previously, to complete the Anderson acquisition,
and to pay down Anderson's outstanding bank debt and other related fees and
expenses. Devon expects substantially all of the remaining $2.2 billion of
availability to be utilized upon the closing of the Mitchell acquisition. No
borrowings under this facility may be made after September 13, 2002.
On a pro forma basis, assuming that $3.0 billion were drawn against
this facility, the terms of this facility would require repayment of the debt
during the following years:
(millions)
2001 $ -
2002 $ -
2003 $ -
2004 $ 0.2
2005 $ 1.2
2006 $ 1.6
9
3. LONG-TERM DEBT (CONTINUED)
The terms of this facility also provide that voluntary prepayments of
the debt are allocated to the earliest scheduled maturities first. For example,
if Devon were to prepay a portion of the $3.0 billion of debt with proceeds from
property sales, the amount of the prepayment would reduce the amounts otherwise
due first in 2004, then 2005 and finally 2006.
This credit facility contains certain covenants and restrictions,
including a maximum allowed debt-to-capitalization ratio as defined in the
credit facility.
Amendment of Existing Credit Facilities
On August 13, 2001, Devon renewed its unsecured long-term credit
facilities (the "Credit Facilities"). The Credit Facilities include a U.S.
facility of $725 million (the "U.S. Facility") and a Canadian facility of $275
million (the "Canadian Facility").
Amounts borrowed under the Credit Facilities bear interest at various
fixed rate options that Devon may elect for periods up to six months. Such rates
are generally less than the prime rate. Devon may also elect to borrow at the
prime rate. The Credit Facilities provide for an annual facility fee of $0.9
million that is payable quarterly.
The $725 million U.S. Facility consists of a Tranche A facility of $200
million and a Tranche B facility of $525 million. The Tranche A facility matures
on October 15, 2004. Devon may borrow funds under the Tranche B facility until
August 12, 2002 (the "Tranche B Revolving Period"). Devon may request that the
Tranche B Revolving Period be extended an additional 364 days by notifying the
agent bank of such request between 30 and 60 days prior to the end of the
Tranche B Revolving Period. Debt borrowed under the Tranche B facility matures
two years and one day following the end of the Tranche B Revolving Period. On
September 30, 2001, there were no borrowings outstanding under the $725 million
U.S. Facility.
Devon may borrow funds under the $275 million Canadian Facility until
August 12, 2002 (the "Canadian Facility Revolving Period"). Devon may request
that the Canadian Facility Revolving Period be extended an additional 364 days
by notifying the agent bank of such request between 45 and 90 days prior to the
end of the Canadian Facility Revolving Period. Debt outstanding as of the end of
the Canadian Facility Revolving Period is payable in semi annual installments of
2.5% each for the following five years, with the final installment due five
years and one day following the end of the Canadian Facility Revolving Period.
On September 30, 2001, there was $60.2 million borrowed under the $275 million
Canadian facility at an average interest rate of 3.9%.
Under the terms of the Credit Facilities, Devon has the right to
reallocate up to $100 million of the unused Tranche B facility maximum credit
amount to the Canadian Facility. Conversely, Devon also has the right to
reallocate up to $100 million of unused Canadian Facility maximum credit amount
to the Tranche B Facility.
10
3. LONG-TERM DEBT (CONTINUED)
The agreements governing the Credit Facilities contain certain
covenants and restrictions, including a maximum allowed debt-to-capitalization
ratio as defined in the agreements.
Commercial Paper
As of September 30, 2001, Devon had $129.8 million of borrowings under
its commercial paper program at an average rate of 3.2%. Because Devon had the
intent and ability to refinance the balance due with borrowings under its Credit
Facilities, the $129.8 million outstanding under the commercial paper program
was classified as long-term debt on the September 30, 2001 consolidated balance
sheet.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, Devon adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
SFAS No. 133." SFAS No. 133 and SFAS No. 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair values. In
accordance with the transition provisions of SFAS No. 133, Devon recorded a
net-of-tax cumulative-effect-type adjustment of $36.6 million loss in
accumulated other comprehensive loss to recognize at fair value all derivatives
that are designated as cash-flow hedging instruments. Additionally, Devon
recorded a net-of-tax cumulative-effect-type adjustment to net earnings of $49.5
million gain ($0.38 per basic share and $0.37 per diluted share) related to the
fair value of derivative instruments that do not qualify as hedges. This gain
related principally to the option embedded in Devon's debentures that are
exchangeable into shares of ChevronTexaco Corporation common stock.
All derivatives are recognized on the balance sheet at their fair
value. All of Devon's derivatives that qualify for hedge accounting treatment
are either "cash flow" hedges or "foreign currency cash flow" hedges
(collectively, "cash flow hedges"). Devon designates its cash flow hedge
derivatives as such on the date the derivative contract is entered into. Devon
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. Devon also assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items.
During the first nine months of 2001, there were no gains or losses
reclassified into earnings as a result of the discontinuance of hedge accounting
treatment for any of Devon's derivatives.
By using derivative instruments to hedge exposures to changes in
commodity prices and exchange rates, Devon exposes itself to credit risk and
market risk. Credit risk is the failure of the counterparty to perform under the
terms of the derivative contract. To mitigate this risk, the
11
hedging instruments are usually placed with counterparties that Devon believes
are minimal credit risks.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
Market risk is the adverse effect on the value of a derivative
instrument that results from a change in interest rates, commodity prices, or
currency exchange rates. The market risk associated with commodity price and
foreign exchange contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken.
Devon periodically enters into financial hedging activities with
respect to a portion of its projected oil and natural gas production through
various financial transactions to manage its exposure to oil and gas price
volatility. These transactions include financial price swaps whereby Devon will
receive a fixed price for its production and pay a variable market price to the
contract counterparty. These transactions also include costless price collars
that set a floor and ceiling price for the hedged production. If the applicable
monthly price indices are outside of the ranges set by the floor and ceiling
prices in the various collars, Devon and the counterparty to the collars will
settle the difference. These financial hedging activities are intended to
support oil and natural gas prices at targeted levels and to manage Devon's
exposure to oil and gas price fluctuations. The oil and gas reference prices
upon which these price hedging instruments are based reflect various market
indices that have a high degree of historical correlation with actual prices
received by Devon.
Devon also periodically enters into foreign exchange rate swaps to
manage its exposure to oil and gas price volatility. The foreign exchange rate
swaps mitigate the effect of volatility in the Canadian-to-U.S. dollar exchange
rate on Canadian oil revenues that are predominantly based on U.S. dollar
prices.
Devon does not hold or issue derivative instruments for trading
purposes. All of Devon's commodity price swaps and costless price collars and
foreign exchange rate swaps in place at January 1, 2001 and September 30, 2001
have been designated as cash flow hedges. Changes in the fair value of these
derivatives are reported on the balance sheet in "Accumulated other
comprehensive loss" ("AOCL"). These amounts are reclassified to oil and gas
sales when the forecasted transaction takes place.
During the third quarter of 2001, Devon entered into foreign exchange
forward contracts to mitigate the effect of volatility in the Canadian-to-U.S.
dollar exchange rate on the Anderson acquisition. Under SFAS 133, these
derivative instruments were not considered hedges and, as such, the change in
fair value of these contracts is included in the statements of operations as
part of the change in fair value of derivative instruments.
During the third quarter of 2001, Devon also entered into interest rate
locks to reduce exposure to the variability in market interest rates,
specifically U.S. Treasury rates, in anticipation of the sale of the debt
securities discussed in Note 3. These derivative instruments were designated as
cash flow hedges and, as such, the change in fair value of these contracts is
included on the balance sheet in AOCL.
12
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)
Devon assesses the effectiveness of its hedges based on changes in the
derivative's intrinsic value. The change in the time value of the derivative is
excluded from the assessment of hedge effectiveness and, along with any
ineffectiveness, is recorded on the statement of operations in "Change in fair
value of derivative instruments." For the three- and nine-month periods ended
September 30, 2001, Devon recorded a net charge of approximately $1.4 million
which represented the ineffectiveness of the various cash flow hedges.
As of September 30, 2001, $79.7 million of net deferred gains on
derivative instruments accumulated in AOCL are expected to be reclassified to
earnings during the next 12 months. Transactions and events expected to occur
over the next 12 months that will necessitate reclassifying these derivatives'
gains to earnings are the production and sale of oil and gas which includes the
production hedged under the various derivative instruments. The maximum term
over which Devon is hedging exposures to the variability of cash flows for
commodity price risk is 15 months.
Devon recorded in its statements of operations a gain of $4.1 million
and a loss of $2.4 million in the three-month and nine-month periods ended
September 30, 2001, respectively, for the change in fair value of derivative
instruments that do not qualify for hedge accounting treatment.
5. EARNINGS PER SHARE
The following tables reconcile the net earnings and common shares
outstanding used in the calculations of basic and diluted earnings per share for
the three-month and nine-month periods ended September 30, 2001 and 2000.
NET EARNINGS NET
APPLICABLE COMMON EARNINGS
TO COMMON SHARES PER
STOCKHOLDERS OUTSTANDING SHARE
------------- ------------ ------------
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2001:
Basic earnings per share $ 82,299 126,335 $ 0.65
============
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $1,408,000) 2,201 4,377
Potential common shares issuable upon the exercise
of outstanding stock options -- 861
------------ ------------
Diluted earnings per share $ 84,500 131,573 $ 0.64
============ ============ ============
13
5. EARNINGS PER SHARE (CONTINUED)
NET EARNINGS NET
APPLICABLE COMMON EARNINGS
TO COMMON SHARES PER
STOCKHOLDERS OUTSTANDING SHARE
------------- ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 2000:
Basic earnings per share $ 162,479 127,857 $ 1.27
============
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $1,355,000) 2,119 4,377
Potential common shares issuable upon the exercise
of outstanding stock options -- 2,160
------------ ------------
Diluted earnings per share $ 164,598 134,394 $ 1.22
============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 2001:
Basic earnings per share $ 614,088 128,274 $ 4.79
============
Dilutive effect of:
Potential common shares issuable upon the conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $4,170,000) 6,522 4,377
Potential common shares issuable upon the
exercise of outstanding stock options -- 1,331
------------ ------------
Diluted earnings per share $ 620,610 133,982 $ 4.63
============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Basic earnings per share $ 416,132 127,065 $ 3.27
============
Dilutive effect of:
Potential common shares issuable upon the conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $1,399,000) 2,189 1,534
Potential common shares issuable upon the
exercise of outstanding stock options -- 2,029
------------ ------------
Diluted earnings per share $ 418,321 130,628 $ 3.20
============ ============ ============
14
5. EARNINGS PER SHARE (CONTINUED)
Options to purchase approximately 3.0 million shares of Devon's common
stock with exercise prices ranging from $45.49 per share to $89.66 per share
(with a weighted average price of $55.58 per share) were excluded from the
diluted earnings per share calculation for the third quarter of 2001 because the
options' exercise price exceeded the average market price of Devon's common
stock during the third quarter. Similarly, options to purchase approximately 1.1
million shares of Devon's common stock with exercise prices ranging from $56.19
per share to $89.66 per share (with a weighted average price of $66.14 per
share) were excluded from the diluted earnings per share calculation for the
third quarter of 2000.
Options to purchase approximately 1.1 million shares of Devon's common
stock, with exercise prices from $52.39 to $89.66 per share (with a weighted
average price of $63.44 per share), were excluded from the diluted earnings per
share calculation for the first nine months of 2001 because the options'
exercise price exceeded the average market price of Devon's common stock during
the period. Similarly, options to purchase approximately 1.2 million shares of
Devon's common stock with exercise prices ranging from $52.89 per share to
$89.66 per share (with a weighted average price of $66.09 per share) were
excluded from the diluted earnings per share calculation for the first nine
months of 2000. The excluded options for each of the 2001 periods expire between
November 8, 2001 and June 30, 2011.
6. STOCK BUYBACK
Effective June 27, 2001, the board of directors authorized the
repurchase of up to $1 billion of Devon's common stock. The repurchase program
also applies to securities that are convertible into, or otherwise equity-linked
to, Devon's common stock. Under the repurchase program, share purchases may be
made from time to time depending upon market conditions and may be made in the
open market and in privately negotiated transactions. The repurchase program may
be discontinued at any time. Devon currently has suspended the share repurchase
program.
During the third quarter of 2001, Devon repurchased 3,601,000 shares of
common stock at an aggregate cost of $182.6 million or $50.70 per share. As of
September 30, 2001, Devon had repurchased 3,754,000 shares of common stock at an
aggregate cost of $190.4 million or $50.71 per share.
In addition to the aforementioned share repurchase program begun in the
second quarter of 2001, Devon also repurchased shares of its common stock in the
first quarter of 2001 under an odd-lot repurchase program. Pursuant to this
program, Devon purchased and retired 232,000 shares of its common stock for a
total cost of $13.3 million, or $57.40 per share.
15
7. REDUCTION OF CARRYING VALUE OF OIL AND GAS PROPERTIES
Under the full cost method of accounting, the net book value of oil and
gas properties less related deferred income taxes (the "costs to be recovered"),
may not exceed a calculated "full cost ceiling." The ceiling limitation is the
discounted estimated after-tax future net revenues from oil and gas properties.
The ceiling is imposed separately by country. In calculating future net
revenues, current prices and costs are generally held constant indefinitely. The
costs to be recovered are compared to the ceiling on a quarterly basis. If the
costs to be recovered exceed the ceiling, the excess is written off as an
expense, except as discussed in the following paragraph.
If, subsequent to the end of the quarter but prior to the applicable
financial statements being published, prices increase to levels such that the
ceiling would exceed the costs to be recovered, a write down otherwise indicated
at the end of the quarter is not required to be recorded. A write down indicated
at the end of a quarter is also not required if the value of additional reserves
proved up on properties after the end of the quarter but prior to the publishing
of the financial statements would result in the ceiling exceeding the costs to
be recovered, as long as the properties were owned at the end of the quarter.
An expense recorded in one period may not be reversed in a subsequent
period even though higher oil and gas prices may have increased the ceiling
applicable to the subsequent period.
Based on oil and natural gas cash market prices as of September 30,
2001, Devon's domestic and Canadian costs to be recovered exceeded the related
ceiling values by $497.5 million, and $45.1 million, respectively. These
after-tax amounts would have resulted in pre-tax reductions of the carrying
values of Devon's domestic and Canadian oil and gas properties of $815.5 million
and $78.6 million, respectively, in the third quarter of 2001. However, the cash
market prices of natural gas increased significantly during the month of October
2001. Based on cash market prices of oil and natural gas as of October 31, 2001,
when the accompanying consolidated financial statements were published, Devon's
domestic and Canadian ceilings as of September 30, 2001 exceeded the related
costs to be recovered by $414.2 million and $173.9 million, respectively.
Accordingly, Devon did not record a reduction of the carrying value of its
domestic and Canadian oil and gas properties in the quarter ended September 30,
2001.
During the third quarter of 2001, Devon elected to discontinue
operations in Thailand. During the second quarter of 2001, Devon elected to
discontinue operations in Malaysia, Qatar and on certain properties in Brazil.
After meeting the drilling and capital commitments on these properties, Devon
determined that the properties did not meet Devon's internal criteria to justify
further investment. Accordingly, during the third quarter and first nine months
of 2001, Devon recorded a $10.9 million and $87.9 million charge associated with
the impairment of these properties, respectively. The after-tax effect of these
reductions was $6.7 million and $68.8 million, respectively.
16
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest in the first nine months of 2001 and 2000
were approximately $78.1 million and $150.5 million, respectively. Cash payments
for federal, state and foreign income taxes in the first nine months of 2001 and
2000 were approximately $165.5 million and $52.3 million, respectively.
9. SEGMENT INFORMATION
Devon manages its business by country. As such, Devon identifies its
segments based on geographic areas. Devon has three segments: its operations in
the U.S., its operations in Canada and its international operations outside of
North America. Substantially all of these segments' operations involve oil and
gas producing activities. Following is certain financial information regarding
Devon's segments. The revenues reported are all from external customers.
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
AS OF SEPTEMBER 30, 2001:
Current assets $ 468,566 50,000 301,336 819,902
Property and equipment, net of accumulated depreciation,
depletion and amortization 4,395,745 632,877 714,901 5,743,523
Investment in ChevronTexaco Corporation common stock 601,083 -- -- 601,083
Goodwill, net of amortization 217,730 -- 51,575 269,305
Fair value of derivative instruments 149,437 1,978 -- 151,415
Other assets 135,172 75 12,015 147,262
---------- ---------- ---------- ----------
Total assets $5,967,733 684,930 1,079,827 7,732,490
========== ========== ========== ==========
Current liabilities 362,143 68,428 131,227 561,798
Debentures exchangeable into shares of ChevronTexaco
Corporation common stock 645,461 -- -- 645,461
Other long-term debt 1,279,143 60,173 -- 1,339,316
Deferred revenue 64,533 306 491 65,330
Deferred tax liabilities 950,695 126,691 35,436 1,112,822
Other liabilities 130,300 912 31,106 162,318
Fair value of derivative instruments 76,172 268 -- 76,440
Stockholders' equity 2,459,286 428,152 881,567 3,769,005
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $5,967,733 684,930 1,079,827 7,732,490
========== ========== ========== ==========
17
9. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2001:
REVENUES
Oil sales $ 147,753 28,333 58,030 234,116
Gas sales 269,367 33,558 3,883 306,808
Natural gas liquids sales 26,747 3,150 548 30,445
Other 10,197 476 4,673 15,346
---------- ---------- ---------- ----------
Total revenues 454,064 65,517 67,134 586,715
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Lease operating expenses 89,509 17,056 18,216 124,781
Transportation costs 13,262 2,851 -- 16,113
Production taxes 20,381 450 136 20,967
Depreciation, depletion and amortization of property
and equipment 168,452 21,439 15,454 205,345
Amortization of goodwill 8,451 -- 10 8,461
General and administrative expenses 24,780 1,630 567 26,977
Interest expense 34,602 1,028 255 35,885
Change in fair value of derivative instruments (2,738) -- -- (2,738)
Reduction of carrying value of oil and gas properties -- -- 10,911 10,911
---------- ---------- ---------- ----------
Total costs and expenses 356,699 44,454 45,549 446,702
---------- ---------- ---------- ----------
Earnings before income tax expense 97,365 21,063 21,585 140,013
INCOME TAX EXPENSE (BENEFIT)
Current (26,931) 507 745 (25,679)
Deferred 59,505 12,345 9,110 80,960
---------- ---------- ---------- ----------
Total income tax expense 32,574 12,852 9,855 55,281
---------- ---------- ---------- ----------
Net earnings 64,791 8,211 11,730 84,732
Preferred stock dividends 2,433 -- -- 2,433
---------- ---------- ---------- ----------
Net earnings applicable to common shareholders $ 62,358 8,211 11,730 82,299
========== ========== ========== ==========
Capital expenditures $ 277,148 44,279 11,306 332,733
========== ========== ========== ==========
18
9. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2000:
REVENUES
Oil sales $ 173,130 31,860 62,440 267,430
Gas sales 351,237 38,202 3,149 392,588
Natural gas liquids sales 30,985 4,356 116 35,457
Other 28,304 1,181 181 29,666
---------- ---------- ---------- ----------
Total revenues 583,656 75,599 65,886 725,141
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Lease operating expenses 80,889 13,315 14,698 108,902
Transportation costs 11,115 2,792 -- 13,907
Production taxes 27,356 295 122 27,773
Depreciation, depletion and amortization of property
and equipment 143,587 15,633 10,931 170,151
Amortization of goodwill 10,358 -- 6 10,364
General and administrative expenses 23,063 2,263 (22) 25,304
Expenses related to merger 57,233 -- -- 57,233
Interest expense 37,463 2,902 80 40,445
---------- ---------- ---------- ----------
Total costs and expenses 391,064 37,200 25,815 454,079
---------- ---------- ---------- ----------
Earnings before income tax expense 192,592 38,399 40,071 271,062
INCOME TAX EXPENSE
Current 46,168 595 3,640 50,403
Deferred 24,124 17,579 14,044 55,747
---------- ---------- ---------- ----------
Total income tax expense 70,292 18,174 17,684 106,150
---------- ---------- ---------- ----------
Net earnings 122,300 20,225 22,387 164,912
Preferred stock dividends 2,433 -- -- 2,433
---------- ---------- ---------- ----------
Net earnings applicable to common stockholders $ 119,867 20,225 22,387 162,479
========== ========== ========== ==========
Capital expenditures $ 173,542 29,449 25,956 228,947
========== ========== ========== ==========
19
9. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2001:
REVENUES
Oil sales $ 458,653 85,097 178,922 722,672
Gas sales 1,300,175 165,127 9,684 1,474,986
Natural gas liquids sales 81,382 12,471 893 94,746
Other 34,140 2,166 6,754 43,060
---------- ---------- ---------- ----------
Total revenues 1,874,350 264,861 196,253 2,335,464
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Lease operating expenses 257,315 49,175 56,394 362,884
Transportation costs 43,312 8,624 -- 51,936
Production taxes 93,207 1,343 475 95,025
Depreciation, depletion and amortization of property
and equipment 465,030 60,724 47,185 572,939
Amortization of goodwill 25,352 -- 32 25,384
General and administrative expenses 70,489 5,454 (2,076) 73,867
Interest expense 99,519 4,541 765 104,825
Change in fair value of derivative instruments 3,844 -- -- 3,844
Reduction of carrying value of oil and gas properties -- -- 87,853 87,853
---------- ---------- ---------- ----------
Total costs and expenses 1,058,068 129,861 190,628 1,378,557
---------- ---------- ---------- ----------
Earnings before income tax expense and cumulative
effect of change in accounting principle 816,282 135,000 5,625 956,907
INCOME TAX EXPENSE
Current 104,156 2,417 10,640 117,213
Deferred 200,252 57,950 9,555 267,757
---------- ---------- ---------- ----------
Total income tax expense 304,408 60,367 20,195 384,970
---------- ---------- ---------- ----------
Earnings (loss) before cumulative effect of change in
accounting principle 511,874 74,633 (14,570) 571,937
Cumulative effect of change in accounting principle 49,452 -- -- 49,452
---------- ---------- ---------- ----------
Net earnings (loss) 561,326 74,633 (14,570) 621,389
Preferred stock dividends 7,301 -- -- 7,301
---------- ---------- ---------- ----------
Net earnings (loss) applicable to common shareholders $ 554,025 74,633 (14,570) 614,088
========== ========== ========== ==========
Capital expenditures $1,073,839 154,120 123,533 1,351,492
========== ========== ========== ==========
20
9. SEGMENT INFORMATION (CONTINUED)
INTER-
U.S. CANADA NATIONAL TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2000:
REVENUES
Oil sales $ 550,806 89,028 172,531 812,365
Gas sales 846,070 106,046 8,749 960,865
Natural gas liquids sales 93,256 12,901 216 106,373
Other 50,220 3,503 715 54,438
---------- ---------- ---------- ----------
Total revenues 1,540,352 211,478 182,211 1,934,041
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Lease operating expenses 238,109 38,540 50,060 326,709
Transportation costs 30,132 8,520 -- 38,652
Production taxes 68,503 819 322 69,644
Depreciation, depletion and amortization of property
and equipment 428,399 47,986 31,269 507,654
Amortization of goodwill 31,039 -- 18 31,057
General and administrative expenses 65,815 7,058 1,304 74,177
Expenses related to merger 57,233 -- -- 57,233
Interest expense 112,818 7,898 680 121,396
Deferred effect of changes in foreign currency exchange
rate on subsidiary's long-term debt -- 2,408 -- 2,408
---------- ---------- ---------- ----------
Total costs and expenses 1,032,048 113,229 83,653 1,228,930
---------- ---------- ---------- ----------
Earnings before income tax expense 508,304 98,249 98,558 705,111
INCOME TAX EXPENSE
Current 110,494 1,574 10,840 122,908
Deferred 80,371 44,842 33,557 158,770
---------- ---------- ---------- ----------
Total income tax expense 190,865 46,416 44,397 281,678
---------- ---------- ---------- ----------
Net earnings 317,439 51,833 54,161 423,433
Preferred stock dividends 7,301 -- -- 7,301
---------- ---------- ---------- ----------
Net earnings applicable to common stockholders $ 310,138 51,833 54,161 416,132
========== ========== ========== ==========
Capital expenditures $ 720,013 107,606 120,355 947,974
========== ========== ========== ==========
21
10. COMMITMENTS AND CONTINGENCIES
Devon is party to various legal actions arising in the normal course of
business. Matters that are probable of unfavorable outcome to Devon and which
can be reasonably estimated are accrued. Such accruals are based on information
known about the matters, Devon's estimates of the outcomes of such matters and
its experience in contesting, litigating and settling similar matters. None of
the actions are believed by management to involve future amounts that would be
material to Devon's financial position or results of operations after
consideration of recorded accruals.
Environmental Matters
Devon is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") and similar state statutes. In response to liabilities associated
with these activities, accruals have been established when reasonable estimates
are possible. Such accruals primarily include estimated costs associated with
remediation. Devon has not used discounting in determining its accrued
liabilities for environmental remediation, and no claims for possible recovery
from third party insurers or other parties related to environmental costs have
been recognized in Devon's consolidated financial statements. Devon adjusts the
accruals when new remediation responsibilities are discovered and probable costs
become estimable, or when current remediation estimates must be adjusted to
reflect new information.
Certain of Devon's subsidiaries acquired in the PennzEnergy merger are
involved in matters in which it has been alleged that such subsidiaries are
potentially responsible parties ("PRPs") under CERCLA or similar state
legislation with respect to various waste disposal areas owned or operated by
third parties. As of September 30, 2001, Devon's consolidated balance sheet
included $7.7 million of accrued liabilities, reflected in "Other liabilities,"
for environmental remediation. Devon does not currently believe there is a
reasonable possibility of incurring additional material costs in excess of the
current accruals recognized for such environmental remediation activities. With
respect to the sites in which Devon subsidiaries are PRPs, Devon's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Devon's current belief that its share of wastes at a
particular site is or will be viewed by the Environmental Protection Agency or
other PRPs as being de minimis. As a result, Devon's monetary exposure is not
expected to be material.
22
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Royalty Matters
More than 30 oil companies, including Devon, are involved in disputes
in which it is alleged that such companies and related parties underpaid
royalty, overriding royalty and working interests owners in connection with the
production of crude oil. The proceedings include suits in federal court in
Texas, Louisiana, Mississippi and Wyoming that have been consolidated into one
proceeding in Texas. To avoid expensive and protracted litigation, certain
parties, including Devon, have entered into a global settlement agreement which
provides for a settlement of all claims of all members of the settlement class.
The court held a fairness hearing and issued an Amended Final Judgment approving
the settlement on September 10, 1999. However, certain entities appealed their
objections to the settlement terms. The appeals were recently withdrawn and we
expect to close the matter with payment expected to occur November 15, 2001.
Devon's share of the settlement, which is accrued in the September 30, 2001
consolidated balance sheet, is not material to its financial position, results
of operations or liquidity.
Also, pending in federal court in Texas is a similar suit alleging
underpaid royalties to the United States in connection with natural gas and
natural gas liquids produced and sold from United States owned and/or controlled
lands. The claims were filed by private litigants against Devon and numerous
other producers, under the federal False Claims Act. The United States served
notice of its intent to intervene as to certain defendants, but not Devon. Devon
and certain other defendants are challenging the constitutionality of whether a
claim under the federal False Claims Act can be maintained absent government
intervention. Devon believes that it has acted reasonably and paid royalties in
good faith. Devon does not currently believe that it is subject to material
exposure in association with this litigation. No liability has been recorded in
connection with this dispute.
Maersk Rig Contract
In December 1997, the working interest owner partner of Pennzoil
Venezuela Corporation, S.A. ("PVC"), a subsidiary of Devon as a result of the
PennzEnergy merger, entered into a contract with Maersk Jupiter Drilling, S.A.
("Maersk") for the provision of a rig for drilling services relative to the
anticipated drilling program associated with Devon's Block 70/80 in Lake
Maracaibo, Venezuela. The rig was assembled and delivered by Maersk to Lake
Maracaibo where it performed an abbreviated drilling program for both Blocks
68/79 and 70/80. It is currently stacked in Lake Maracaibo. The contract expires
in the fourth quarter of 2001. As of September 30, 2001, Devon's consolidated
balance sheet included accrued liabilities, reflected in "Other liabilities,"
for the expected cost to terminate/settle the contract. Devon does not currently
believe there is a reasonable possibility of incurring additional material costs
in excess of the liability recognized for such termination/settlement of the
contract.
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereto duly authorized.
DEVON ENERGY CORPORATION
By: /s/ Danny J. Heatly
-------------------------------
Danny J. Heatly
Vice President
Date: October 31, 2001
24