DEVON ENERGY CORP/DE, 10-Q filed on 5/4/2011
Quarterly Report
Document and Entity Information
In Millions
3 Months Ended
Mar. 31, 2011
Apr. 25, 2011
Document and Entity Information
 
 
Document Type
10-Q 
 
Document Period End Date
2011-03-31 
 
Amendment Flag
FALSE 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
Entity Central Index Key
0001090012 
 
Entity Current Reporting Status
Yes 
 
Entity Voluntary Filers
No 
 
Current Fiscal Year End Date
12/31 
 
Document Fiscal Year Focus
2011 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q1 
 
Entity Common Stock, Shares Outstanding
 
423 
Consolidated Balance Sheets (USD $)
In Millions
3 Months Ended
Mar. 31, 2011
Year Ended
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 1,311 
$ 2,866 
Short-term investments
1,636 
145 
Accounts receivable
1,269 
1,202 
Current assets held for sale
533 
563 
Other current assets
850 
779 
Total current assets
5,599 
5,555 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
58,028 
56,012 
Not subject to amortization
3,508 
3,434 
Total oil and gas
61,536 
59,446 
Other
4,609 
4,429 
Total property and equipment, at cost
66,145 
63,875 
Less accumulated depreciation, depletion and amortization
(45,064)
(44,223)
Property and equipment, net
21,081 
19,652 
Goodwill
6,151 
6,080 
Long-term assets held for sale
913 
859 
Other long-term assets
806 
781 
Total assets
34,550 
32,927 
Current liabilities:
 
 
Accounts payable - trade
1,353 
1,411 
Revenues and royalties due to others
639 
538 
Short-term debt
3,003 
1,811 
Current liabilities associated with assets held for sale
264 
305 
Other current liabilities
495 
518 
Total current liabilities
5,754 
4,583 
Long-term debt
3,800 
3,819 
Asset retirement obligations
1,468 
1,423 
Liabilities associated with assets held for sale
34 
26 
Other long-term liabilities
1,066 
1,067 
Deferred income taxes
3,199 
2,756 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 425.2 million and 431.9 million shares in 2011 and 2010, respectively
43 
43 
Additional paid-in capital
5,028 
5,601 
Retained earnings
12,230 
11,882 
Accumulated other comprehensive earnings
1,951 
1,760 
Treasury stock, at cost. 0.3 and 0.4 million shares in 2011 and 2010 respectively
(23)
(33)
Total stockholders' equity
19,229 
19,253 
Commitments and contingencies (Note 10)
 
 
Total liabilities and stockholders' equity
$ 34,550 
$ 32,927 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Mar. 31, 2011
Dec. 31, 2010
Consolidated Balance Sheets
 
 
Common stock, par value (in dollars per share)
$ 0.1 
$ 0.1 
Common stock, shares authorized (in shares)
1,000 
1,000 
Common stock, shares issued (in shares)
425 
432 
Treasury stock, shares
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31,
2011
2010
Revenues:
 
 
Oil, gas and NGL sales
$ 1,860 
$ 2,070 
Oil, gas and NGL derivatives
(168)
620 
Marketing and midstream revenues
455 
530 
Total revenues
2,147 
3,220 
Expenses and other, net:
 
 
Lease operating expenses
424 
414 
Taxes other than income taxes
108 
101 
Marketing and midstream operating costs and expenses
333 
397 
Depreciation, depletion and amortization of oil and gas properties
442 
426 
Depreciation and amortization of non-oil and gas properties
64 
63 
Accretion of asset retirement obligations
23 
26 
General and administrative expenses
130 
138 
Restructuring costs
(5)
 
Interest expense
81 
86 
Interest-rate and other financial instruments
(17)
(15)
Other, net
(16)
(4)
Total expenses and other, net
1,567 
1,632 
Earnings from continuing operations before income taxes
580 
1,588 
Income tax (benefit) expense:
 
 
Current
(89)
299 
Deferred
280 
215 
Total income tax expense
191 
514 
Earnings from continuing operations
389 
1,074 
Discontinued operations:
 
 
Earnings from discontinued operations before income taxes
30 
137 
Discontinued operations income tax expense
19 
Earnings from discontinued operations
27 
118 
Net earnings
416 
1,192 
Basic net earnings per share:
 
 
Basic earnings from continuing operations per share
0.91 
2.40 
Basic earnings from discontinued operations per share
0.06 
0.27 
Basic net earnings per share
0.97 
2.67 
Diluted net earnings per share:
 
 
Diluted earnings from continuing operations per share
0.91 
2.39 
Diluted earnings from discontinued operations per share
0.06 
0.27 
Diluted net earnings per share
$ 0.97 
$ 2.66 
Consolidated Statements of Comprehensive Earnings (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Consolidated Statements of Comprehensive Earnings
 
 
Net earnings
$ 416 
$ 1,192 
Foreign currency translation:
 
 
Change in cumulative translation adjustment
195 
222 
Foreign currency translation income tax expense
(10)
(12)
Foreign currency translation total
185 
210 
Pension and postretirement benefit plans:
 
 
Recognition of net actuarial loss and prior service cost in net earnings
Pension and postretirement benefit plans income tax expense
(3)
(3)
Pension and postretirement benefit plans total
Other comprehensive earnings, net of tax
191 
215 
Comprehensive earnings
$ 607 
$ 1,407 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Total
Balance, at Dec. 31, 2009
45 
6,527 
7,613 
1,385 
 
15,570 
Balance, shares, at Dec. 31, 2009
447 
 
 
 
 
 
Net earnings
 
 
1,192 
 
 
1,192 
Other comprehensive earnings, net of tax
 
 
 
215 
 
215 
Stock option exercises
 
 
 
 
Common stock repurchased
 
 
 
 
(2)
(2)
Common stock retired
 
(2)
 
 
 
Common stock dividends
 
 
(72)
 
 
(72)
Share-based compensation
 
41 
 
 
 
41 
Share-based compensation tax benefits
 
 
 
 
Balance, at Mar. 31, 2010
45 
6,577 
8,733 
1,600 
 
16,955 
Balance, shares, at Mar. 31, 2010
447 
 
 
 
 
 
Balance, at Dec. 31, 2010
43 
5,601 
11,882 
1,760 
(33)
19,253 
Balance, shares, at Dec. 31, 2010
432 
 
 
 
 
 
Net earnings
 
 
416 
 
 
416 
Other comprehensive earnings, net of tax
 
 
 
191 
 
191 
Stock option exercises
 
88 
 
 
 
88 
Stock option exercises, shares
 
 
 
 
 
Common stock repurchased
 
 
 
 
(696)
(696)
Common stock retired
 
(706)
 
 
706 
 
Common stock retired, shares
(8)
 
 
 
 
 
Common stock dividends
 
 
(68)
 
 
(68)
Share-based compensation
 
36 
 
 
 
36 
Share-based compensation tax benefits
 
 
 
 
Balance, at Mar. 31, 2011
$ 43 
$ 5,028 
$ 12,230 
$ 1,951 
$ (23)
$ 19,229 
Balance, shares, at Mar. 31, 2011
425 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Cash flows from operating activities:
 
 
Net earnings
$ 416 
$ 1,192 
Earnings from discontinued operations, net of tax
(27)
(118)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
 
 
Depreciation, depletion and amortization
506 
489 
Deferred income tax expense
280 
215 
Unrealized change in fair value of financial instruments
253 
(523)
Other noncash charges
36 
56 
Net (increase) decrease in working capital
(171)
50 
Increase in long-term other assets
(4)
(2)
Decrease in long-term other liabilities
(23)
(18)
Cash from operating activities - continuing operations
1,266 
1,341 
Cash from operating activities - discontinued operations
(6)
154 
Net cash from operating activities
1,260 
1,495 
Cash flows from investing activities:
 
 
Capital expenditures
(1,827)
(1,247)
Purchases of short-term investments
(1,636)
 
Redemptions of short-term investments
145 
 
Redemptions of long-term investments
 
Proceeds from property and equipment divestitures
1,257 
Other
(9)
 
Cash from investing activities - continuing operations
(3,322)
18 
Cash from investing activities - discontinued operations
(52)
(107)
Net cash from investing activities
(3,374)
(89)
Cash flows from financing activities:
 
 
Net commercial paper borrowings (repayments)
1,197 
(1,192)
Proceeds from stock option exercises
88 
Repurchases of common stock
(706)
 
Dividends paid on common stock
(68)
(72)
Excess tax benefits related to share-based compensation
Net cash from financing activities
520 
(1,253)
Effect of exchange rate changes on cash
20 
18 
Net (decrease) increase in cash and cash equivalents
(1,574)
171 
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)
3,290 
1,011 
Cash and cash equivalents at end of period (including cash related to assets held for sale)
$ 1,716 
$ 1,182 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

1.     Summary of Significant Accounting Policies 

 

The accompanying unaudited consolidated financial statements and notes of Devon Energy Corporation ("Devon") have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in Devon's 2010 Annual Report on Form 10-K.   

 

The unaudited interim consolidated financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon's financial position as of March 31, 2011 and Devon's results of operations and cash flows for the three-month periods ended March 31, 2011 and 2010.

Accounts Receivable
Accounts Receivable

2.  Accounts Receivable

 

The components of accounts receivable include the following:

 

 

March 31, 2011

December 31, 2010

 

(In millions)

Oil, gas and NGL sales

$                    811

$                  786

Marketing and midstream revenues

                       204

                     165

Joint interest billings

                       181

                     182

Other

                         83

                       79

    Gross accounts receivable

                   1,279

                 1,212

Allowance for doubtful accounts

                        (10)

                      (10)

    Net accounts receivable

$                 1,269

$               1,202

Derivative Financial Instruments
Derivative Financial Instruments

3.  Derivative Financial Instruments

 

Objectives and Strategies

 

Devon periodically enters into commodity and interest rate derivative financial instruments. These instruments are used to manage the inherent uncertainty of future revenues due to oil, gas and NGL price volatility and to manage exposure to interest rate volatility.  Devon does not 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.

 

Devon's derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional gas index prices and pays a variable differential on the same two index prices to the contract counterparty. The price collars 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 will cash-settle the difference with the counterparty to the collars. Under the terms of the call options, Devon sold to counterparties the right to purchase production at a predetermined price.

 

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon's interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount. Devon also has forward starting swaps. Under the terms of the forward starting swaps, Devon will net settle these contracts in September 2011 or sooner should Devon elect. The net settlement amount will be based upon Devon paying a fixed rate and receiving a floating rate that is based upon the three-month LIBOR. The difference between the fixed and floating rate will be applied to the notional amount for the 30-year period from September 30, 2011 to September 30, 2041.

 

Counterparty Risk

 

By using derivative financial instruments to manage exposures to changes in commodity prices and interest rates, Devon exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are minimal 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 generally require cash collateral to be posted if either its or the counterparty's credit rating falls below investment grade. The mark-to-market exposure threshold, above which collateral must be posted, decreases as the debt rating falls further below investment grade. Such thresholds generally range from zero to $50 million for the majority of Devon's contracts. As of March 31, 2011, the credit ratings of all Devon's counterparties were investment grade.

 

Commodity Derivatives

 

As of March 31, 2011, Devon had the following open oil derivative positions:

 

Production Period

 

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)

Q2-Q4 2011

45,000

$75.00

$108.89

19,500

$95.00

Q1-Q4 2012

9,000

$104.20

35,000

$82.14

$126.42

19,500

$95.00

 

As of March 31, 2011, Devon had the following open natural gas derivative positions:

 

Production Period

 

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)

Q2 2011

912,500

$5.24

350,000

$4.18

$4.68

Q3 2011

712,500

$5.51

Q4 2011

712,500

$5.51

Q1-Q4 2012

130,000

$5.06

487,500

$6.00

 

Basis Swaps

 

 

 

Production Period

 

 

 

Index

 

 

Volume

(MMBtu/d)

Weighted Average

Differential to Henry Hub

($/MMBtu)

Q2-Q4 2011

Panhandle Eastern Pipeline

150,000

$0.33

 

As of March 31, 2011, Devon had the following open NGL derivative positions:

 

Basis Swaps

 

 

 

Production Period

 

 

 

Pay

 

 

Volume

(Bbls/d)

 

Weighted Average

Differential to WTI

($/Bbl)

Q2-Q4 2011

Natural Gasoline

500

$9.75

Q1-Q4 2012

Natural Gasoline

500

$10.10

Q1-Q4 2013

Natural Gasoline

500

$6.80

 


Interest Rate Derivatives

 

As of March 31, 2011, Devon had the following open interest rate swap derivative positions:

 

Fixed-to-Floating Swaps

 

Notional

Fixed Rate

Received

Variable

Rate Paid

 

Expiration

(In millions)

 

 

 

$           300

4.30%

Six month LIBOR

July 18, 2011

              100

1.90%

Federal funds rate

August 3, 2012

              500

3.90%

Federal funds rate

July 18, 2013

              250

3.85%

Federal funds rate

July 22, 2013

$        1,150

3.82%

 

 

 

Forward Starting Swaps

 

Notional

Fixed Rate

Paid

Variable

Rate Received

 

Expiration

(In millions)

 

 

 

$           950

3.92%

Three month LIBOR

September 30, 2011

 

Financial Statement Presentation

 

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

 

 

Balance Sheet Caption

March 31, 2011

December 31, 2010

 

 

(In millions)

Asset derivatives:

 

 

 

  Commodity derivatives

Other current assets

$                      183

$                      248

  Commodity derivatives

Other long-term assets

                             2

                             1

  Interest rate derivatives

Other current assets

                        112

                        100

  Interest rate derivatives

Other long-term assets

                           29

                          40

    Total asset derivatives

$                      326

$                      389

Liability derivatives:

 

 

 

  Commodity derivatives

Other current liabilities

$                      225

$                        50

  Commodity derivatives

Other long-term liabilities

                        157

                        142

    Total liability derivatives

$                      382

$                      192

 

The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying consolidated statements of operations associated with these derivative financial instruments.

 

 

 

Three Months

Ended March 31,

 

Statement of Operations Caption

2011

2010

 

 

(In millions)

Cash settlements:

 

 

 

  Commodity derivatives

Oil, gas and NGL derivatives

$       86

$       96

  Interest rate derivatives

Interest-rate and other financial instruments

         16

         16

     Total cash settlements

       102

       112

Unrealized (losses) gains:

 

 

 

  Commodity derivatives

Oil, gas and NGL derivatives

     (254)

       524

  Interest rate derivatives

Interest-rate and other financial instruments

           1

          (1)

     Total unrealized (losses) gains

     (253)

       523

Net (loss) gain recognized on statement of operations

$   (151)

$    635

Other Current Assets
Other Current Assets

4.     Other Current Assets

 

  The components of other current assets include the following: 

 

March 31, 2011

December 31, 2010

 

(In millions)

    Income taxes receivable

$                  374

$                  270

    Derivative financial instruments

                     295

                     348

    Inventories

                     116

                     120

    Other

                       65

                       41

        Other current assets

$                  850

$                  779

Goodwill
Goodwill

5.     Goodwill

 

During the first three months of 2011, Devon's Canadian goodwill increased $71 million entirely due to foreign currency translation.

Debt
Debt

6.     Debt

 

Credit Lines

 

Devon has a $2,650 million syndicated, unsecured revolving line of credit (the "Senior Credit Facility"). As of March 31, 2011, Devon had no borrowings under the Senior Credit Facility.

 

The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon's ratio of total funded debt to total capitalization to be less than 65 percent. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of March 31, 2011, Devon was in compliance with this covenant. Devon's debt-to-capitalization ratio at March 31, 2011, as calculated pursuant to the terms of the agreement, was 17.7 percent.

 

Commercial Paper

 

In March 2011, Devon's Board of Directors authorized an increase in its commercial paper program from $2.2 billion to $5.0 billion. Commercial paper debt generally has a maturity of between one and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market.

 

Although Devon began and ended the first quarter of 2011 with approximately $3.4 billion of cash and short-term investments, the vast majority of this amount consists of proceeds from its 2010 International divestitures. Based on Devon's evaluation of future cash needs across its operations in the United States and Canada, these proceeds remain outside of the United States.

 

Consequently, during the first quarter of 2011, Devon borrowed $1,197 million of commercial paper in the United States primarily to fund capital expenditures, common stock repurchases and dividends in excess of cash flow generated by its United States operating activities. As of March 31, 2011, Devon's average borrowing rate on its $1,197 million of commercial paper borrowings was 0.30 percent.
Asset Retirement Obligations
Asset Retirement Obligations

7.     Asset Retirement Obligations

 

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

 

 

Three Months

Ended March 31,

 

2011

2010

 

(In millions)

Asset retirement obligations as of beginning of period

$         1,497

$         1,513

  Liabilities incurred

                 11

                 16

  Liabilities settled

                (18)

                (47)

  Revision of estimated obligation

                   3

               205

  Liabilities assumed by others

                 —

                  (8)

  Accretion expense on discounted obligation

                 23

                 26

  Foreign currency translation adjustment

                 21

                 22

Asset retirement obligations as of end of period

           1,537

           1,727

Less current portion

                 69

                 90

Asset retirement obligations, long-term

$         1,468

$         1,637

 

During the first quarter of 2010, Devon recognized a revision to its asset retirement obligations totaling $205 million. The increase was primarily due to an overall increase in abandonment cost estimates and a decrease in the discount rate used to calculate the present value of the obligations.

Retirement Plans
Retirement Plans

8. Retirement Plans

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

    Pension Benefits     Other Postretirement Benefits
 
    Three Months       Three Months  
    Ended March 31,     Ended March 31,  
    2011   2010     2011   2010  
          (In millions)      
Net periodic benefit cost:                    
Service cost $ 9   $ 8   $ $
Interest cost   15     14     1   1
Expected return on plan assets   (10 )   (9 )    
Amortization of prior service cost   1     1      
Net actuarial loss   8     7      
Net periodic benefit cost $ 23   $ 21   $ 1 $ 1

 

Devon previously disclosed in its financial statements for the year ended December 31, 2010, that it expected to contribute $84 million to its qualified pension plans in 2011. Devon now expects to contribute $346 million to its qualified pension plans in 2011, including $32 million that was contributed in the first quarter. The increase in Devon's 2011 estimated contribution is due to increased discretionary funding.

Stockholders' Equity
Stockholders' Equity

9.     Stockholders' Equity

 

Stock Repurchases

 

During the first quarter of 2011, Devon repurchased 8.1 million common shares under its $3.5 billion stock repurchase program announced in 2010 for $696 million, or $85.95 per share. Through the end of the first quarter of 2011, Devon had repurchased 26.4 million common shares for $1.9 billion, or $71.83 per share, under this program, which expires December 31, 2011.

 


Dividends

 

Devon paid common stock dividends of $68 million and $72 million (quarterly rates of $0.16 per share) in the first quarter of 2011 and 2010, respectively. In March 2011, Devon announced an increase of its quarterly cash dividend to $0.17 per share that will begin in the second quarter of 2011.

Commitments and Contingencies
Commitments and Contingencies

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 although actual amounts could differ materially from management's estimate.

 

Environmental Matters

 

Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured costs associated with remediation. Devon's monetary exposure for environmental matters is not expected to be material.

 

Royalty Matters

 

Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold from federal and Indian owned or controlled lands. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

 

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.

 

Fair Value Measurements
Fair Value Measurements

11.  Fair Value Measurements

 

Certain of Devon's assets and liabilities are reported at fair value in the accompanying consolidated balance sheets. Such assets and liabilities include amounts for both financial and non-financial instruments. The following tables provide carrying value and fair value measurement information for Devon's financial assets and liabilities.

 

The carrying values of cash and cash equivalents, accounts receivable, other current receivables, accounts payable and other current payables and accrued expenses included in the accompanying consolidated balance sheets approximated fair value at March 31, 2011 and December 31, 2010.  These assets and liabilities are not presented in the following table.

 

 

 

Devon's Level 3 fair value measurements included in the table above relate to certain long-term investments and a non-interest bearing promissory note. Included below is a summary of the changes in Devon's Level 3 fair value measurements during the first three months of 2011 and 2010.

 

 

Three Months

Ended March 31,

 

2011

2010

 

(In millions)

Long-term investments balance at beginning of period

$               94

$            115

  Redemptions of principal

                 —

                  (8)

Long-term investments balance at end of period

 

$               94

$            107

 

Three Months

Ended March 31,

 

2011

2010

 

(In millions)

Debt balance at beginning of period

$           (144)

$               —

  Foreign exchange translation adjustment

                  (3)

                 —

  Accretion of promissory note

                  (1)

                 —

  Redemptions of principal

                 29

                 —

Debt balance at end of period

$           (119)

$               —

Restructuring Costs
Restructuring Costs

12. Restructuring Costs 

 

In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of March 31, 2011, Devon had divested all of its U.S. Offshore assets and a significant part of its International assets. Devon has entered into agreements to sell its remaining offshore assets in Brazil and Angola and is waiting for the respective governments to approve the divestitures.

 

Through the end of the first quarter of 2011, Devon had incurred $207 million of restructuring costs associated with these divestitures. This amount is comprised of $127 million of employee severance costs, $77 million associated with abandoned office leases and $3 million of other miscellaneous costs.

 

Financial Statement Presentation

 

The schedule below summarizes activity and balances associated with Devon's restructuring liabilities. There was no activity during the first quarter of 2010.

 

The schedule below summarizes the components of restructuring costs in the accompanying 2011 consolidated statement of operations. No restructuring costs were recorded in the three months ended March 31, 2010.

 

 

Three Months Ended March 31, 2011

 

Continuing Operations

Discontinued Operations

Total

 

(In millions)

Cash severance

$              —

$                6

$               6

Share-based awards

                 (1)

                —

                (1)

Lease obligations

                 (4)

                —

                (4)

  Restructuring costs

$              (5)

$                6

$               1

Discontinued Operations
Discontinued Operations

13.  Discontinued Operations

 

Revenues related to Devon's discontinued operations totaled $43 million and $212 million in the three months ended March 31, 2011 and March 31, 2010, respectively. Earnings from discontinued operations before income taxes totaled $30 million and $137 million in the three months ended March 31, 2011 and March 31, 2010, respectively.

 


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

 

 

March 31,

December 31,

 

2011

2010

 

(In millions)

  Cash and cash equivalents

$                  405

$                  424

  Accounts receivable

                       18

                       43

  Other current assets

                     110

                       96

    Current assets

$                  533

$                  563

 

 

 

  Property and equipment, net

$                  875

$                  848

  Other long-term assets

                       38

                       11

    Total long-term assets

$                  913

$                  859

 

 

 

  Accounts payable

$                  229

$                  260

  Other current liabilities

                       35

                       45

    Current liabilities

$                  264

$                  305

 

 

 

    Long-term liabilities

$                     34

$                     26

Earnings Per Share
Earnings Per Share

14.  Earnings Per Share

 

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

 

 

 

Earnings

Common Shares

Earnings

per Share

 

(In millions, except per share amounts)

Three Months Ended March 31, 2011:

 

 

 

  Earnings from continuing operations

$           389

             428

 

  Attributable to participating securities

                (4)

                (5)

 

  Basic earnings per share

             385

             423

$             0.91

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

                                      —

 

                  2

 

  Diluted earnings per share

$           385

             425

$             0.91

 

 

 

 

Three Months Ended March 31, 2010:

 

 

 

  Earnings from continuing operations

$       1,074

             447

 

  Attributable to participating securities

              (13)

                (6)

 

  Basic earnings per share

          1,061

             441

$             2.40

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

                                      —

 

                  2

 

  Diluted earnings per share

$       1,061

             443

$             2.39

 

Certain options to purchase shares of Devon's common stock are excluded from the dilution calculations because the options are antidilutive. These excluded options totaled 3.1 million and 6.4 million during the three-month periods ended March 31, 2011 and 2010, respectively.
Segment Information
Segment Information

15.   Segment Information

 

Devon manages its North American onshore operations through distinct operating segments, or divisions, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its United States divisions into one reporting segment due to the similar nature of the businesses. However, Devon's Canadian and International divisions are reported as separate reporting segments primarily due to significant differences in the respective regulatory environments.

 

 

U.S.

Canada

International

Total

 

(In millions)

As of March 31, 2011:

 

 

 

 

Current assets

$      2,641

$      2,425

$         533

$      5,599

Property and equipment, net

      13,314

        7,767

             —

      21,081

Goodwill

        3,046

        3,105

             —

        6,151

Other assets

            431

            375

            913

        1,719

     Total assets

$    19,432

$    13,672

$      1,446

$    34,550

 

 

 

 

 

Current liabilities

$      2,996

$      2,494

$         264

$      5,754

Long-term debt

        2,502

        1,298

             —

        3,800

Asset retirement obligations

            565

            903

             —

        1,468

Other liabilities

        1,002

              64

              34

        1,100

Deferred income taxes

        1,896

        1,303

             —

        3,199

Stockholders' equity

      10,471

        7,610

        1,148

      19,229

     Total liabilities and stockholders' equity

$    19,432

$    13,672

$      1,446

$    34,550

 


 

 

U.S.

Canada

Total

 

(In millions)

Three Months Ended March 31, 2011:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     1,212

$         648

 $    1,860

  Oil, gas and NGL derivatives

          (168)

              —

          (168)

  Marketing and midstream revenues

           423

             32

           455

     Total revenues

        1,467

           680

        2,147

Expenses and other, net:

 

 

 

  Lease operating expenses

           208

           216

           424

  Taxes other than income taxes

             94

             14

           108

  Marketing and midstream operating costs and expenses

           308

             25

           333

  Depreciation, depletion and amortization of oil and gas

     properties

 

           260

 

           182

 

           442

  Depreciation and amortization of non-oil and gas properties

             58

                6

             64

  Accretion of asset retirement obligations

                9

             14

             23

  General and administrative expenses

             91

             39

           130

  Restructuring costs

              (5)

              —

              (5)

  Interest expense

             37

             44

             81

  Interest-rate and other financial instruments

            (17)

              —

            (17)

  Other, net

            (14)

              (2)

            (16)

     Total expenses and other, net

        1,029

           538

        1,567

Earnings from continuing operations before income taxes

           438

           142

           580

Income tax (benefit) expense:

 

 

 

  Current

            (88)

              (1)

            (89)

  Deferred

           243

             37

           280

     Total income tax expense

           155

             36

           191

Earnings from continuing operations

$         283

$         106

$         389

 

 

 

 

Capital expenditures, before revision of future asset retirement

     obligations

 

$     1,250

 

$         532

 

$     1,782

Revision of future asset retirement obligations

            (11)

             14

                3

Capital expenditures, continuing operations

$     1,239

$         546

$     1,785

 


 

 

U.S.

Canada

Total

 

(In millions)

Three Months Ended March 31, 2010:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     1,370

$         700

 $    2,070

  Oil, gas and NGL derivatives

           625

              (5)

           620

  Marketing and midstream revenues

           496

             34

           530

     Total revenues

        2,491

           729

        3,220

Expenses and other, net:

 

 

 

  Lease operating expenses

           224

           190

           414

  Taxes other than income taxes

             90

             11

           101

  Marketing and midstream operating costs and expenses

           369

             28

           397

  Depreciation, depletion and amortization of oil and gas

     properties

 

           261

 

           165

 

           426

  Depreciation and amortization of non-oil and gas properties

             56

                7

             63

  Accretion of asset retirement obligations

             13

             13

             26

  General and administrative expenses

           108

             30

           138

  Interest expense

             30

             56

             86

  Interest-rate and other financial instruments

            (15)

              —

            (15)

  Other, net

              (3)

              (1)

              (4)

     Total expenses and other, net

        1,133

           499

        1,632

Earnings from continuing operations before income taxes

        1,358

           230

        1,588

Income tax expense (benefit):

 

 

 

  Current

           214

             85

           299

  Deferred

           235

            (20)

           215

     Total income tax expense

           449

             65

           514

Earnings from continuing operations

$         909

$         165

$     1,074

 

 

 

 

Capital expenditures, before revision of future asset retirement

     obligations

 

$     1,033

 

$         370

 

$     1,403

Revision of future asset retirement obligations

             83

           122

           205

Capital expenditures, continuing operations

$     1,116

$         492

$     1,608

Supplemental Information to Statements of Cash Flows
Supplemental Information to Statements of Cash Flows

16.  Supplemental Information to Statements of Cash Flows

 

 

Three Months

Ended March 31,

 

2011

2010

 

(In millions)

Net (increase) decrease in working capital:

 

 

  Increase in accounts receivable

$        (60)

$        (78)

  Increase in other current assets

        (110)

            (2)

  Increase (decrease) in accounts payable

           45

          (29)

  Increase in revenues and royalties due to others

         100

           58

  (Decrease) increase in other current liabilities

        (146)

         101

     Net (increase) decrease in working capital

$     (171)

$         50

 

 

 

Supplementary cash flow data – total operations:

 

 

  Interest paid (net of capitalized interest)

$       137

$       137

  Income taxes paid

$           9

$         50


Accounts Receivable (Tables)
Schedule of components of accounts receivable

 

March 31, 2011

December 31, 2010

 

(In millions)

Oil, gas and NGL sales

$                    811

$                  786

Marketing and midstream revenues

                       204

                     165

Joint interest billings

                       181

                     182

Other

                         83

                       79

    Gross accounts receivable

                   1,279

                 1,212

Allowance for doubtful accounts

                        (10)

                      (10)

    Net accounts receivable

$                 1,269

$               1,202

Derivative Financial Instruments (Tables)

Production Period

 

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)

Q2-Q4 2011

45,000

$75.00

$108.89

19,500

$95.00

Q1-Q4 2012

9,000

$104.20

35,000

$82.14

$126.42

19,500

$95.00

Production Period

 

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)

Q2 2011

912,500

$5.24

350,000

$4.18

$4.68

Q3 2011

712,500

$5.51

Q4 2011

712,500

$5.51

Q1-Q4 2012

130,000

$5.06

487,500

$6.00

Basis Swaps

 

 

 

Production Period

 

 

 

Index

 

 

Volume

(MMBtu/d)

Weighted Average

Differential to Henry Hub

($/MMBtu)

Q2-Q4 2011

Panhandle Eastern Pipeline

150,000

$0.33

Basis Swaps

 

 

 

Production Period

 

 

 

Pay

 

 

Volume

(Bbls/d)

 

Weighted Average

Differential to WTI

($/Bbl)

Q2-Q4 2011

Natural Gasoline

500

$9.75

Q1-Q4 2012

Natural Gasoline

500

$10.10

Q1-Q4 2013

Natural Gasoline

500

$6.80

Fixed-to-Floating Swaps

 

Notional

Fixed Rate

Received

Variable

Rate Paid

 

Expiration

(In millions)

 

 

 

$           300

4.30%

Six month LIBOR

July 18, 2011

              100

1.90%

Federal funds rate

August 3, 2012

              500

3.90%

Federal funds rate

July 18, 2013

              250

3.85%

Federal funds rate

July 22, 2013

$        1,150

3.82%

 

 

Forward Starting Swaps

 

Notional

Fixed Rate

Paid

Variable

Rate Received

 

Expiration

(In millions)

 

 

 

$           950

3.92%

Three month LIBOR

September 30, 2011

 

Balance Sheet Caption

March 31, 2011

December 31, 2010

 

 

(In millions)

Asset derivatives:

 

 

 

  Commodity derivatives

Other current assets

$                      183

$                      248

  Commodity derivatives

Other long-term assets

                             2

                             1

  Interest rate derivatives

Other current assets

                        112

                        100

  Interest rate derivatives

Other long-term assets

                           29

                          40

    Total asset derivatives

$                      326

$                      389

Liability derivatives:

 

 

 

  Commodity derivatives

Other current liabilities

$                      225

$                        50

  Commodity derivatives

Other long-term liabilities

                        157

                        142

    Total liability derivatives

$                      382

$                      192

 

 

Three Months

Ended March 31,

 

Statement of Operations Caption

2011

2010

 

 

(In millions)

Cash settlements:

 

 

 

  Commodity derivatives

Oil, gas and NGL derivatives

$       86

$       96

  Interest rate derivatives

Interest-rate and other financial instruments

         16

         16

     Total cash settlements

       102

       112

Unrealized (losses) gains:

 

 

 

  Commodity derivatives

Oil, gas and NGL derivatives

     (254)

       524

  Interest rate derivatives

Interest-rate and other financial instruments

           1

          (1)

     Total unrealized (losses) gains

     (253)

       523

Net (loss) gain recognized on statement of operations

$   (151)

$    635

Other Current Assets (Tables)
Schedule of components of other current assets

 

March 31, 2011

December 31, 2010

 

(In millions)

    Income taxes receivable

$                  374

$                  270

    Derivative financial instruments

                     295

                     348

    Inventories

                     116

                     120

    Other

                       65

                       41

        Other current assets

$                  850

$                  779

Asset Retirement Obligations (Tables)
Schedule of Asset Retirement Obligations

 

Three Months

Ended March 31,

 

2011

2010

 

(In millions)

Asset retirement obligations as of beginning of period

$         1,497

$         1,513

  Liabilities incurred

                 11

                 16

  Liabilities settled

                (18)

                (47)

  Revision of estimated obligation

                   3

               205

  Liabilities assumed by others

                 —

                  (8)

  Accretion expense on discounted obligation

                 23

                 26

  Foreign currency translation adjustment

                 21

                 22

Asset retirement obligations as of end of period

           1,537

           1,727

Less current portion

                 69

                 90

Asset retirement obligations, long-term

$         1,468

$         1,637

Retirement Plans (Tables)
Schedule of components of net periodic benefit cost and other comprehensive earnings for pension and other post-retirement benefit plans
    Pension Benefits     Other Postretirement Benefits
 
    Three Months       Three Months  
    Ended March 31,     Ended March 31,  
    2011   2010     2011   2010  
          (In millions)      
Net periodic benefit cost:                    
Service cost $ 9   $ 8   $ $
Interest cost   15     14     1   1
Expected return on plan assets   (10 )   (9 )    
Amortization of prior service cost   1     1      
Net actuarial loss   8     7      
Net periodic benefit cost $ 23   $ 21   $ 1 $ 1
Fair Value Measurements (Tables)