DEVON ENERGY CORP/DE, 10-K filed on 2/25/2010
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data in Millions
Feb. 15, 2010
Year Ended
Dec. 31, 2009
Jun. 30, 2009
Document and Entity Information
 
 
 
Document Type
 
10-K 
 
Document Period End Date
 
12/31/2009 
 
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 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Well-known Seasoned Issuer
 
Yes 
 
Entity Common Stock, Shares Outstanding (in shares)
446.8 
 
 
Entity Public Float
 
 
$ 24 
Consolidated Balance Sheets (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$ 646 
$ 195 
Accounts receivable
1,208 
1,300 
Derivative financial instruments, at fair value
211 
282 
Current assets held for sale
657 
392 
Other current assets
270 
515 
Total current assets
2,992 
2,684 
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($4,078 million and $4,248 million excluded from amortization in 2009 and 2008, respectively)
60,475 
53,391 
Less accumulated depreciation, depletion and amortization
41,708 
31,360 
Property and equipment, net
18,767 
22,031 
Goodwill
5,930 
5,511 
Long-term assets held for sale
1,250 
1,128 
Other long-term assets, including $246 million and $199 million at fair value in 2009 and 2008, respectively
747 
554 
Total assets
29,686 
31,908 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Current liabilities:
 
 
Accounts payable - trade
1,137 
1,612 
Revenues and royalties due to others
486 
490 
Short-term debt
1,432 
180 
Current portion of asset retirement obligations, at fair value
95 
138 
Current liabilities associated with assets held for sale
234 
365 
Other current liabilities, including $38 million at fair value in 2009
418 
350 
Total current liabilities
3,802 
3,135 
Long-term debt
5,847 
5,661 
Asset retirement obligations, at fair value
1,418 
1,249 
Liabilities associated with assets held for sale, including $109 million and $98 million at fair value in 2009 and 2008, respectively
213 
166 
Other long-term liabilities
937 
1,023 
Deferred income taxes
1,899 
3,614 
Stockholders' equity:
 
 
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 446.7 million and 443.7 million shares in 2009 and 2008, respectively
45 
44 
Additional paid-in capital
6,527 
6,257 
Retained earnings
7,613 
10,376 
Accumulated other comprehensive income
1,385 
383 
Total stockholders' equity
15,570 
17,060 
Commitments and contingencies (Note 10)
 
 
Total liabilities and stockholders' equity
$ 29,686 
$ 31,908 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties excluded from amortization
$ 4,078 
$ 4,248 
Other long-term assets at fair value
246 
199 
Other current liabilities at fair value
38 
 
Liabilities associated with assets held for sale at fair value
109 
98 
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)
446.7 
443.7 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Revenues:
 
 
 
Oil, gas and NGL sales
$ 6,097 
$ 11,720 
$ 8,225 
Net gain (loss) on oil and gas derivative financial instruments
384 
(154)
14 
Marketing and midstream revenues
1,534 
2,292 
1,736 
Total revenues
8,015 
13,858 
9,975 
Expenses and other income, net:
 
 
 
Lease operating expenses
1,670 
1,851 
1,532 
Taxes other than income taxes
314 
476 
358 
Marketing and midstream operating costs and expenses
1,022 
1,611 
1,217 
Depreciation, depletion and amortization of oil and gas properties
1,832 
2,948 
2,412 
Depreciation and amortization of non-oil and gas properties
276 
255 
201 
Accretion of asset retirement obligations
91 
80 
70 
General and administrative expenses
648 
645 
513 
Restructuring costs
105 
Interest expense
349 
329 
430 
Change in fair value of other financial instruments
(106)
149 
(34)
Reduction of carrying value of oil and gas properties
6,408 
9,891 
Other income, net
(68)
(217)
(51)
Total expenses and other income, net
12,541 
18,018 
6,648 
Earnings (loss) from continuing operations before income taxes
(4,526)
(4,160)
3,327 
Income tax expense (benefit):
 
 
 
Current
241 
441 
235 
Deferred
(2,014)
(1,562)
607 
Total income tax expense (benefit)
(1,773)
(1,121)
842 
Earnings (loss) from continuing operations
(2,753)
(3,039)
2,485 
Discontinued operations:
 
 
 
Earnings from discontinued operations before income taxes
322 
1,258 
1,593 
Discontinued operations income tax expense
48 
367 
472 
Earnings from discontinued operations
274 
891 
1,121 
Net earnings (loss)
(2,479)
(2,148)
3,606 
Preferred stock dividends
10 
Net earnings (loss) applicable to common stockholders
(2,479)
(2,153)
3,596 
Basic net earnings (loss) per share:
 
 
 
Basic earnings (loss) from continuing operations per share (in dollars per share)
(6.2)
(6.86)
5.56 
Basic earnings from discontinued operations per share (in dollars per share)
0.62 
2.01 
2.52 
Basic net earnings (loss) per share (in dollars per share)
(5.58)
(4.85)
8.08 
Diluted net earnings (loss) per share:
 
 
 
Diluted earnings (loss) from continuing operations per share (in dollars per share)
(6.2)
(6.86)
5.5 
Diluted earnings from discontinued operations per share (in dollars per share)
0.62 
2.01 
2.5 
Diluted net earnings (loss) per share (in dollars per share)
$ (5.58)
$ (4.85)
$ 8 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Net earnings (loss)
$ (2,479)
$ (2,148)
$ 3,606 
Foreign currency translation:
 
 
 
Change in cumulative translation adjustment
993 
(1,960)
1,389 
Foreign currency translation income tax benefit (expense)
(62)
79 
(42)
Foreign currency translation total
931 
(1,881)
1,347 
Pension and postretirement benefit plans:
 
 
 
Net actuarial loss and prior service cost arising in current year
59 
(239)
(90)
Recognition of net actuarial loss and prior service cost in net earnings (loss)
54 
18 
14 
Curtailment of pension benefits
16 
Pension and postretirement benefit plans income tax benefit (expense)
(42)
80 
23 
Pension and postretirement benefit plans total
71 
(141)
(37)
Reclassification adjustment for realized gains included in net earnings
(1)
Other comprehensive earnings (loss), net of tax
1,002 
(2,022)
1,309 
Comprehensive income (loss)
$ (1,477)
$ (4,170)
$ 4,915 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions
Preferred Stock
Common Stock
Accumulated Other Comprehensive Income
Treasury Stock
Additional Paid-in Capital
Retained Earnings
Total
1/1/2007 - 12/31/2007
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stockholders' equity, beginning balance
$ 1 
$ 44 
$ 1,444 
$ (1)
$ 6,840 
$ 9,114 
$ 17,442 
Common Stock, Shares, Beginning Balance
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
3,606 
3,606 
Other comprehensive earnings (loss), net of tax
 
 
1,309 
 
 
 
1,309 
Other financial instruments
 
 
(364)
 
 
364 
Uncertain income tax positions
 
 
 
 
 
(11)
(11)
Pension and postretirement benefit plans
 
 
16 
 
 
(1)
15 
Stock option exercises
 
 
 
90 
 
91 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations
 
 
 
 
 
 
Common stock repurchased
 
 
 
(362)
 
 
(362)
Common stock repurchased, shares
 
(5)
 
 
 
 
 
Common stock retired
 
(1)
 
363 
(362)
 
Redemption of preferred stock
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
(249)
(249)
Preferred stock dividends
 
 
 
 
 
(10)
(10)
Share-based compensation
 
 
 
 
131 
 
131 
Share-based compensation tax benefits
 
 
 
 
44 
 
44 
Stockholders' equity, ending balance
44 
2,405 
6,743 
12,813 
22,006 
Common Stock, Shares, Ending Balance
 
444 
 
 
 
 
 
1/1/2008 - 12/31/2008
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stockholders' equity, beginning balance
44 
2,405 
6,743 
12,813 
22,006 
Common Stock, Shares, Beginning Balance
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
(2,148)
(2,148)
Other comprehensive earnings (loss), net of tax
 
 
(2,022)
 
 
 
(2,022)
Other financial instruments
 
 
 
 
 
 
 
Uncertain income tax positions
 
 
 
 
 
 
 
Pension and postretirement benefit plans
 
 
 
 
 
 
 
Stock option exercises
 
 
(8)
123 
 
116 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations
 
 
 
 
 
 
Common stock repurchased
 
 
 
(709)
 
 
(709)
Common stock repurchased, shares
 
(7)
 
 
 
 
 
Common stock retired
 
(1)
 
717 
(716)
 
Redemption of preferred stock
(1)
 
 
 
(149)
 
(150)
Common stock dividends
 
 
 
 
 
(284)
(284)
Preferred stock dividends
 
 
 
 
 
(5)
(5)
Share-based compensation
 
 
 
 
196 
 
196 
Share-based compensation tax benefits
 
 
 
 
60 
 
60 
Stockholders' equity, ending balance
44 
383 
6,257 
10,376 
17,060 
Common Stock, Shares, Ending Balance
 
444 
 
 
 
 
 
1/1/2009 - 12/31/2009
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stockholders' equity, beginning balance
44 
383 
6,257 
10,376 
17,060 
Common Stock, Shares, Beginning Balance
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
(2,479)
(2,479)
Other comprehensive earnings (loss), net of tax
 
 
1,002 
 
 
 
1,002 
Other financial instruments
 
 
 
 
 
 
 
Uncertain income tax positions
 
 
 
 
 
 
 
Pension and postretirement benefit plans
 
 
 
 
 
 
 
Stock option exercises
 
 
(5)
47 
 
43 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations
 
 
 
 
 
 
Common stock repurchased
 
 
 
(40)
 
 
(40)
Common stock repurchased, shares
 
 
 
 
 
 
 
Common stock retired
 
 
 
45 
(45)
 
Redemption of preferred stock
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
(284)
(284)
Preferred stock dividends
 
 
 
 
 
 
 
Share-based compensation
 
 
 
 
260 
 
260 
Share-based compensation tax benefits
 
 
 
 
 
Stockholders' equity, ending balance
 
45 
1,385 
6,527 
7,613 
15,570 
Common Stock, Shares, Ending Balance
 
447 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Cash and Cash Equivalents, Period Increase (Decrease) [Abstract]
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$ (2,479)
$ (2,148)
$ 3,606 
Net earnings from discontinued operations
(274)
(891)
(1,121)
Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
2,108 
3,203 
2,613 
Deferred income tax expense (benefit)
(2,014)
(1,562)
607 
Reduction of carrying value of oil and gas properties
6,408 
9,891 
Net unrealized loss (gain) on oil and gas derivative financial instruments
121 
(243)
26 
Other noncash charges
222 
410 
150 
Net decrease (increase) in working capital
149 
(207)
(512)
Decrease (increase) in long-term other assets
(6)
(53)
(60)
Increase (decrease) in long-term other liabilities
(3)
48 
(1)
Cash provided by operating activities - continuing operations
4,232 
8,448 
5,308 
Cash provided by operating activities - discontinued operations
505 
960 
1,343 
Net cash provided by operating activities
4,737 
9,408 
6,651 
Cash flows from investing activities:
 
 
 
Proceeds from sales of property and equipment
34 
117 
76 
Capital expenditures
(4,879)
(8,843)
(5,710)
Proceeds from exchange of Chevron Corporation common stock
280 
Purchases of short-term investments
(50)
(934)
Sales of long-term and short-term investments
300 
1,136 
Other
(17)
Cash used in investing activities - continuing operations
(4,855)
(8,196)
(5,432)
Cash provided by (used in) investing activities - discontinued operations
(499)
1,323 
(282)
Net cash used in investing activities
(5,354)
(6,873)
(5,714)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings of long-term debt, net of issuance costs
1,187 
Credit facility repayments
(3,191)
(757)
Credit facility borrowings
1,741 
2,207 
Net commercial paper borrowings (repayments)
426 
(804)
Debt repayments
(178)
(1,031)
(567)
Redemption of preferred stock
(150)
Proceeds from stock option exercises
42 
116 
91 
Repurchases of common stock
(665)
(326)
Dividends paid on common and preferred stock
(284)
(289)
(259)
Excess tax benefits related to share-based compensation
60 
44 
Net cash provided by (used in) financing activities
1,201 
(3,408)
(371)
Effect of exchange rate changes on cash
43 
(116)
51 
Net increase (decrease) in cash and cash equivalents
627 
(989)
617 
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)
384 
1,373 
756 
Cash and cash equivalents at end of period (including cash related to assets held for sale)
$ 1,011 
$ 384 
$ 1,373 
Summary of Significant Accounting Policies
1. Summary of Significant Accounting Policies

1.  Summary of Significant Accounting Policies

 

Accounting policies used by Devon Energy Corporation and subsidiaries ("Devon") reflect industry practices and conform to accounting principles generally accepted in the United States of America. The more significant of such policies are discussed below.

 

Nature of Business and Principles of Consolidation

 

Devon is engaged primarily in oil and gas exploration, development and production, and the acquisition of properties. Such activities are concentrated in the following North American onshore geographic areas:

 

• the Mid-Continent area of the central and southern United States, principally in north and east Texas, as well as Oklahoma;

• the Permian Basin within Texas and New Mexico;

• the Rocky Mountains area of the United States stretching from the Canadian border into northern New Mexico;

• the onshore areas of the Gulf Coast, principally in south Texas and south Louisiana; and

• the provinces of Alberta, British Columbia and Saskatchewan in Canada.

 

Devon also has offshore operations located in the Gulf of Mexico and certain countries outside North America, including Azerbaijan, Brazil and China. In November 2009, Devon announced plans to strategically reposition itself as a high-growth, North American onshore exploration and production company. As part of this strategic repositioning, Devon plans to bring forward the value of its offshore assets by divesting them. In 2008 and 2007 prior to these plans, Devon sold its assets in Egypt and West Africa. These divestiture activities are described more fully in Note 18.

 

Devon also has marketing and midstream operations that perform various activities to support the oil and gas operations of Devon and unrelated third parties. Such activities include marketing gas, crude oil and NGLs, as well as constructing and operating pipelines, storage and treating facilities and natural gas processing plants.

 

The accounts of Devon's controlled subsidiaries are included in the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include the following:

 

• estimates of proved reserves and related estimates of the present value of future net revenues;

• the carrying value of oil and gas properties;

• estimates of the fair value of reporting units and related assessment of goodwill for impairment;

• asset retirement obligations;

• income taxes;

• derivative financial instruments;

• obligations related to employee pension and postretirement benefits; and

• legal and environmental risks and exposures.

 


Derivative Financial Instruments

 

Devon is exposed to certain risks relating to its ongoing business operations. Devon's largest areas of risk exposure relate to commodity prices, interest rates and Canadian to U.S. dollar exchange rates. As discussed more fully below, Devon uses derivative instruments primarily to manage commodity price risk and interest rate risk. Besides these derivative instruments, Devon also had an embedded option derivative related to the fair value of its debentures exchangeable into shares of Chevron common stock. Devon ceased to have this option when the exchangeable debentures matured on August 15, 2008.

 

Devonperiodically enters into derivative financial instruments with respect to a portion of its oil and gas production that hedge the future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility. Devon's derivative financial instruments include financial price swaps, basis swaps and costless price collars. Under the terms of the price swaps, Devon will receive a fixed price for its production and pay 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. 

 

Devonperiodically 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.

 

All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheet. Changes in the fair value of these derivative financial instruments are recorded in the statement of operations unless specific hedge accounting criteria are met. If such criteria are met for cash flow hedges, the effective portion of the change in the fair value is recorded directly to accumulated other comprehensive income, a component of stockholders' equity, until the hedged transaction occurs. The ineffective portion of the change in fair value is recorded in the statement of operations. If such criteria are met for fair value hedges, the change in the fair value is recorded in the statement of operations with an offsetting amount recorded for the change in fair value of the hedged item. Cash settlements with counterparties to Devon's derivative financial instruments are also recorded in the statement of operations.

 

A derivative financial instrument qualifies for hedge accounting treatment if Devon designates the instrument as such on the date the derivative contract is entered into or the date of a business combination or other transaction that includes derivative contracts. Additionally, Devon must document the relationship between the hedging instrument and hedged item, as well as the risk-management objective and strategy for undertaking the instrument. Devon must also assess, both at the instrument's inception and on an ongoing basis, whether the derivative is highly effective in offsetting the change in cash flow of the hedged item. For derivative financial instruments held during the three-year period ended December 31, 2009, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment.

 

By using derivative financial instruments to hedge 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 our contracts. As of December 31, 2009, the credit ratings of all Devon's counterparties were investment grade.

 

Market risk is the change in the value of a derivative financial instrument that results from a change in commodity prices, interest rates or other relevant underlyings. The market risks associated with commodity price and interest rate contracts are managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The oil and gas reference prices upon which the commodity instruments are based reflect various market indices that have a high degree of historical correlation with actual prices received by Devon. Devon does not hold or issue derivative financial instruments for speculative trading purposes.

 

See Note 3 for the amounts included in Devon's accompanying consolidated balance sheets and consolidated statements of operations associated with its derivative financial instruments.

 

Fair Value Measurements

 

Certain of Devon's assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This is price is commonly referred to as the "exit price".

 

Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 2 measurements are based on inputs other than quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active. Level 3 measurements have the lowest priority and are based upon inputs that are not observable from objective sources. The most common Level 3 fair value measurement is an internally developed cash flow model. Devon uses appropriate valuation techniques based on the available inputs to measure the fair values of its assets and liabilities. When available, Devon measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

 

Discontinued Operations

 

As previously discussed, Devon is in the process of divesting its offshore assets in the Gulf of Mexico and certain International locations outside North America and previously sold its assets in Africa in 2008 and 2007. As a result of these divestitures and planned divestitures, all amounts related to Devon's International operations are classified as discontinued operations. The Gulf of Mexico properties being divested do not qualify as discontinued operations under accounting rules.  As such, amounts included in the accompanying consolidated financial statements and these notes that pertain to continuing operations include amounts related to Devon’s offshore Gulf of Mexico operations.

 

The captions assets held for sale and liabilities associated with assets held for sale in the accompanying consolidated balance sheets present the assets and liabilities associated with Devon's discontinued operations. Devon measures its assets held for sale at the lower of its carrying amount or estimated fair value less costs to sell. Additionally, Devon does not recognize depreciation, depletion and amortization on its long-lived assets held for sale.

 

Property and Equipment

 

Devon follows the full cost method of accounting for its oil and gas properties. Accordingly, all costs incidental to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Internal costs incurred that are directly identified with acquisition, exploration and development activities undertaken by Devon for its own account, and that are not related to production, general corporate overhead or similar activities, are also capitalized. Interest costs incurred and attributable to unproved oil and gas properties under current evaluation and major development projects of oil and gas properties are also capitalized. All costs related to production activities, including workover costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.

 

Under the full cost method of accounting, the net book value of oil and gas properties, less related deferred income taxes, may not exceed a calculated "ceiling." The ceiling limitation is the estimated after-tax future net revenues, discounted at 10% per annum, from proved oil, gas and NGL reserves plus the cost of properties not subject to amortization. Estimated future net revenues exclude future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties. Such limitations are imposed separately on a country-by-country basis and are tested quarterly.

 

Future net revenues are calculated using prices that represent the average of the first-day-of-the-month price for the 12-month period prior to the end of the period. Costs included in future net revenues are determined in a similar manner. Prior to December 31, 2009, prices and costs used to calculate future net revenues were those as of the end of the appropriate quarterly period. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including derivative contracts in place that qualify for hedge accounting treatment. None of Devon's derivative contracts held during the three-year period ended December 31, 2009 qualified for hedge accounting treatment.

 

Any excess of the net book value, less related deferred taxes, over the ceiling is written off as an expense. 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.

 

Capitalized costs are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six thousand cubic feet of gas to one barrel of oil. Depletion is calculated using the capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

 

Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Devon assesses its unproved properties for impairment quarterly. Significant unproved properties are assessed individually. Costs of insignificant unproved properties are transferred into the depletion calculation over average holding periods ranging from three years for onshore properties to seven years for offshore properties.

 

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves in a particular country.

 

Depreciation of midstream pipelines are provided on a unit-of-production basis. Depreciation and amortization of other property and equipment, including corporate and other midstream assets and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to 39 years.

 

Devonrecognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites, offshore production platforms, and midstream pipelines and processing plants when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.

 

Investments

 

Devon reports its investments and other marketable securities at fair value, except for debt securities in which management has the ability and intent to hold until maturity.

 

Devon's primary investments consist of auction rate securities that totaled $115 million and $122 million at December 31, 2009 and 2008, respectively. These securities are rated AAA—the highest rating—by one or more rating agencies and are collateralized by student loans that are substantially guaranteed by the United States government. Although Devon's auction rate securities generally have contractual maturities of more than 20 years, the underlying interest rates on such securities are scheduled to reset every seven to 28 days. Therefore, these auction rate securities were generally priced and subsequently traded as short-term investments because of the interest rate reset feature.

 

Since February 8, 2008, Devon has experienced difficulty selling its securities due to the failure of the auction mechanism, which provided liquidity to these securities. An auction failure means that the parties wishing to sell securities could not do so. The securities for which auctions have failed will continue to accrue interest and be auctioned every seven to 28 days until the auction succeeds, the issuer calls the securities or the securities mature.

 

From February 2008, when auctions began failing, to December 31, 2009, issuers have redeemed $37 million of Devon's auction rate securities holdings at par. However, based on continued auction failures and the current market for Devon's auction rate securities, Devon has classified its auction rate securities as long-term investments as of December 31, 2009. These securities are included in other long-term assets in the accompanying consolidated balance sheet. Devon has the ability to hold the securities until maturity. At this time, Devon does not believe the values of its long-term securities are impaired.

 


Goodwill 

 

Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. The impairment test requires allocating goodwill and all other assets and liabilities to assigned reporting units. The fair value of each reporting unit is estimated and compared to the net book value of the reporting unit. If the estimated fair value of the reporting unit is less than the net book value, including goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense. Because quoted market prices are not available for Devon's reporting units, the fair values of the reporting units are estimated based upon several valuation analyses, including comparable companies, comparable transactions and premiums paid.

 

Devonperformed annual impairment tests of goodwill in the fourth quarters of 2009, 2008 and 2007. Based on these assessments, no impairment of goodwill was required.

 

The table below provides a summary of Devon's goodwill, by assigned reporting unit, as of December 31, 2009 and 2008. The increase in goodwill from 2008 to 2009 is due to changes in the exchange rate between the U.S. dollar and the Canadian dollar.

 

 

December 31,

 

2009

2008

 

(In millions)

United States.........................................................................

$   3,046

$  3,046

Canada...................................................................................

     2,884

     2,465

  Total (continuing operations)...........................................

$   5,930

$  5,511

International (assets held for sale)....................................

$         68

$        68

 

Foreign Currency Translation Adjustments

 

The U.S. dollar is the functional currency for Devon's consolidated operations except its Canadian subsidiaries, which use the Canadian dollar as the functional currency. Therefore, the assets and liabilities of Devon's Canadian subsidiaries are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders' equity. The following table presents the balances of Devon's cumulative translation adjustments included in accumulated other comprehensive income (in millions).

 

December 31, 2006.....................................................................

   $  1,219

December 31, 2007.....................................................................

   $  2,566

December 31, 2008.....................................................................

   $      685

December 31, 2009.....................................................................

   $  1,616

 

Commitments and Contingencies

 

Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities for environmental remediation or restoration claims are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with Devon's accounting policy for property and equipment. Reference is made to Note 10 for a discussion of amounts recorded for these liabilities.

 

Revenue Recognition and Gas Balancing

 

Oil, gas and NGL revenues are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability of the revenue is probable. Delivery occurs and title is transferred when production has been delivered to a pipeline, railcar or truck or a tanker lifting has occurred. Cash received relating to future production is deferred and recognized when all revenue recognition criteria are met. Taxes assessed by governmental authorities on oil, gas and NGL revenues are presented separately from such revenues in the accompanying consolidated statements of operations.

 


Devon follows the sales method of accounting for gas production imbalances. The volumes of gas sold may differ from the volumes to which Devon is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the underproduced owner to recoup its entitled share through production. The liability is priced based on current market prices. No receivables are recorded for those wells where Devon has taken less than its share of production unless all revenue recognition criteria are met. If an imbalance exists at the time the wells' reserves are depleted, settlements are made among the joint interest owners under a variety of arrangements.

 

Marketing and midstream revenues are recorded at the time products are sold or services are provided to third parties at a fixed or determinable price, delivery or performance has occurred, title has transferred and collectability of the revenue is probable. Revenues and expenses attributable to gas and NGL purchase, transportation and processing contracts are reported on a gross basis when Devon takes title to the products and has risks and rewards of ownership.

 

Major Purchasers

 

During 2009, 2008 and 2007, no purchaser accounted for more than 10% of Devon's revenues from continuing operations.

 

General and Administrative Expenses

 

General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Devon and net of amounts capitalized pursuant to the full cost method of accounting.

 

Share Based Compensation

 

Devon grants stock options, restricted stock awards and other types of share-based awards to members of its Board of Directors and selected employees. All such awards are measured at fair value on the date of grant and are recognized as a component of general and administrative expenses or restructuring costs in the accompanying statements of operations over the applicable requisite service periods. Generally, Devon uses new shares to grant share-based awards and to issue shares upon stock option exercises.

 

Income Taxes

 

Devon is subject to current income taxes assessed by the federal and various state jurisdictions in the United States and by other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Devon recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in accrued expenses and other current liabilities. Interest and penalties related to unrecognized tax benefits are included in income tax expense. Additional information regarding Devon's unrecognized tax benefits, including changes in such amounts during 2009 and 2008, is provided in Note 17.

 

Pursuant to the planned divestitures of its International assets located outside North America, Devon expects to repatriate the earnings from the foreign subsidiaries that own the assets. As a result, Devon has recognized U.S. deferred income taxes on its foreign earnings as of December 31, 2009.

 


Net (Loss) Earnings Per Common Share

 

Devon’s basic earnings per share amounts have been computed based on the average number of shares of common stock outstanding for the period. Basic earnings per share includes the effect of participating securities, which primarily consist of Devon's outstanding restricted stock awards. Diluted earnings per share is calculated using the treasury stock method to reflect the potential dilution that could occur if Devon's dilutive outstanding stock options were exercised.

 

Statements of Cash Flows

 

For purposes of the consolidated statements of cash flows, Devon considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents.

 

Accounts Receivable
2. Accounts Receivable

2.  Accounts Receivable

 

The components of accounts receivable include the following:

 

 

December 31,

 

2009

2008

 

(In millions)

Oil, gas and NGL revenues................................................................................

$        752

$        711

Joint interest billings............................................................................................

           151

           241

Marketing and midstream revenues................................................................

           188

           153

Production tax credits........................................................................................

           110

           170

Other......................................................................................................................

             19

             30

  Gross accounts receivable...............................................................................

       1,220

       1,305

Allowance for doubtful accounts....................................................................

            (12)

              (5)

  Net accounts receivable...................................................................................

$     1,208

$     1,300

 

Derivative Financial Instruments
3. Derivative Financial Instruments

3.  Derivative Financial Instruments

 

As discussed in Note 1, Devon periodically enters into commodity and interest rate derivative financial instruments. Also, during the first eight months of 2008 and all of 2007, Devon held an embedded option derivative related to the fair value of its debentures exchangeable into shares of Chevron common stock.  

 

The following table presents the fair values of derivative assets and liabilities included in the accompanying consolidated balance sheets. None of Devon's derivative instruments included in the table have been designated as hedging instruments.

 

 

 

Balance Sheet Caption

Asset

Derivatives

Liability

Derivatives

 

 

(In millions)

December 31, 2009:

 

 

 

     Gas price swaps................

Derivative financial instruments, current..............................

$      169

$         —

     Gas basis swaps................

Derivative financial instruments, current..............................

             3

           —

     Oil price collars..................

Other current liabilities..............................................................

           —

           38

     Interest rate swaps...........

Derivative financial instruments, current..............................

           39

           —

     Interest rate swaps...........

Other long-term assets..............................................................

         131

           —

  Total derivatives..............................................................................................................................

$      342

$         38

 

 

 

 

December 31, 2008:

 

 

 

     Gas price collars................

Derivative financial instruments, current..............................

$      255

$         —

     Interest rate swaps...........

Derivative financial instruments, current..............................

           27

           —

     Interest rate swaps...........

Other long-term assets..............................................................

           77

           —

  Total derivatives..............................................................................................................................

$      359

$         —

 

The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying statements of operations associated with these derivative financial instruments. None of Devon's derivative instruments included in the table have been designated as hedging instruments.

 

 

Statement of Operations Caption

2009

2008

2007

 

 

(In millions)

Cash settlements:

 

 

 

 

 

  Gas price collars..............

Net gain (loss) on oil and gas derivative financial

  instruments....................................................................

 

$    450

 

$   (221)

 

$         2

 

  Gas price swaps..............

Net gain (loss) on oil and gas derivative financial

  instruments....................................................................

 

         55

 

     (203)

 

         38

 

  Oil price collars................

Net gain (loss) on oil and gas derivative financial

  instruments....................................................................

 

        —

 

         27

 

        —

  Interest rate swaps.........

Change in fair value of other financial instruments

         40

           1

        —

     Total cash settlements.................................................................................................

       545

     (396)

         40

 

 

 

 

 

Unrealized (losses) gains:

 

 

 

 

 

  Gas price collars..............

Net gain (loss) on oil and gas derivative financial

  instruments....................................................................

 

     (255)

 

       255

 

          (4)

 

  Gas price swaps..............

Net gain (loss) on oil and gas derivative financial

  instruments....................................................................

 

       169

 

        (12)

 

        (22)

 

  Gas basis swaps..............

Net gain (loss) on oil and gas derivative financial

  instruments....................................................................

 

           3

 

        —

 

        —

 

  Oil price collars................

Net gain (loss) on oil and gas derivative financial

  instruments....................................................................

 

        (38)

 

        —

 

        —

  Interest rate swaps.........

Change in fair value of other financial instruments

         66

       104

           1

  Embedded option...........

Change in fair value of other financial instruments

        —

       109

     (248)

     Total unrealized (losses) gains....................................................................................

        (55)

       456

     (273)

Net gain (loss) recognized on statement of operations...............................................

$    490

$       60

$   (233)

 

Other Current Assets
4. Other Current Assets

4.  Other Current Assets  

 

The components of other current assets include the following:

 

 

December 31,

 

2009

2008

 

(In millions)

Inventories...........................................................................................................

$        182

$        142

Prepaid assets......................................................................................................

             33

             36

Income taxes receivable....................................................................................

             53

           333

Other......................................................................................................................

               2

               4

  Other current assets..........................................................................................

$        270

$        515

 

Property and Equipment
5. Property and Equipment

5.  Property and Equipment

 

Property and equipment consists of the following:

 

 

December 31,

 

2009

2008

 

(In millions)

Oil and gas properties:

 

 

  Subject to amortization...................................................................................

$    52,352

$    45,678

  Not subject to amortization............................................................................

         4,078

         4,248

  Total....................................................................................................................

      56,430

      49,926

Accumulated depreciation, depletion and amortization.............................

     (40,312)

     (30,260)

     Net oil and gas properties.............................................................................

      16,118

      19,666

 

 

 

Other property and equipment.........................................................................

         4,045

         3,465

Accumulated depreciation and amortization...............................................

       (1,396)

       (1,100)

     Net other property and equipment.............................................................

         2,649

         2,365

Property and equipment, net of accumulated depreciation,

  depletion and amortization............................................................................

 

$    18,767

 

$    22,031

 

In the first quarter of 2009 and the fourth quarter of 2008, Devon reduced the carrying values of its oil and gas properties due to full cost ceiling limitations. These reductions are discussed in Note 15.

 

The following is a summary of Devon's oil and gas properties not subject to amortization as of December 31, 2009. The $4.1 billion total includes $2.1 billion related to Devon’s U.S. Offshore assets that are expected to be sold by the end of 2010. Evaluation of most of the remaining $2.0 billion of properties, and therefore the inclusion of their costs in amortized capital costs, is expected to be completed within three to seven years.

 

 

Costs Incurred In

 

 

 

2009

 

2008

 

2007

Prior to

2007

 

Total

 

(In millions)

Acquisition costs......................................................................

$     129

$ 1,567

$     126

$     780

$ 2,602

Exploration costs.....................................................................

       223

       303

         56

       174

       756

Development costs..................................................................

       326

       169

         34

         22

       551

Capitalized interest..................................................................

         74

         54

         37

            4

       169

  Total oil and gas properties not subject to amortization

$     752

$ 2,093

$     253

$     980

$ 4,078

 

Asset Retirement Obligations
7. Asset Retirement Obligations

7.  Asset Retirement Obligations

 

Following is a reconciliation of the asset retirement obligations for the years ended December 31, 2009 and 2008.

 

 

 

Year Ended

December 31,

 

2009

2008

 

(In millions)

Asset retirement obligations as of beginning of year....................................

$     1,387

$     1,245

  Liabilities incurred.............................................................................................

             56

             59

  Liabilities settled................................................................................................

         (123)

            (86)

  Revision of estimated obligation...................................................................

             33

           225

  Liabilities assumed by others..........................................................................

            (30)

             —

  Accretion expense on discounted obligation...............................................

             91

             80

  Foreign currency translation adjustment......................................................

             99

         (136)

Asset retirement obligations as of end of year..............................................

       1,513

       1,387

Less current portion............................................................................................

             95

           138

Asset retirement obligations, long-term...........................................................

$     1,418

$     1,249

 

During 2009 and 2008, Devon recognized revisions to its asset retirement obligations totaling $33 million and $225 million, respectively. The primary factors causing the 2009 fair value increase were an overall increase in abandonment cost estimates, partially offset by an increase in the discount rate used to calculate the present value of the obligations. The primary factors causing the 2008 fair value increase were an overall increase in abandonment cost estimates and a decrease in the discount rate used to present value the obligations. In addition, higher abandonment cost estimates related to certain offshore platforms that were destroyed by Hurricane Ike resulted in an $82 million increase in 2008. See additional discussion regarding this revision in Note 10 – Hurricane Contingencies.  

 

Retirement Plans
8. Retirement Plans

8.  Retirement Plans 

 

Devon has various non-contributory defined benefit pension plans, including qualified plans ("Qualified Plans") and nonqualified plans ("Supplemental Plans"). The Qualified Plans provide retirement benefits for U.S. and Canadian employees meeting certain age and service requirements. Benefits for the Qualified Plans are based on the employees' years of service and compensation and are funded from assets held in the plans' trusts. 

 

Devon's funding policy regarding the Qualified Plans is to contribute the amount of funds necessary for the Qualified Plans' assets to approximately equal the present value of benefits earned by the participants, as calculated in accordance with the provisions of the Pension Protection Act. As of December 31, 2009 and 2008, the fair values of the Qualified Plans' assets were $532 million and $430 million, respectively. The assets were $164 million less and $209 million less, respectively, than the related accumulated benefit obligation. The amount of contributions required during future periods will depend on investment returns from the plan assets during the same period as well as changes in long-term interest rates.

 

The Supplemental Plans provide retirement benefits for certain employees whose benefits under the Qualified Plans are limited by income tax regulations. The Supplemental Plans' benefits are based on the employees' years of service and compensation. For certain Supplemental Plans, Devon has established trusts to fund these plans' benefit obligations. The total value of these trusts was $39 million and $50 million at December 31, 2009 and 2008, respectively, and is included in noncurrent other assets in the consolidated balance sheets. For the remaining Supplemental Plans for which trusts have not been established, benefits are funded from Devon's available cash and cash equivalents.

 

Devon also has defined benefit postretirement plans ("Postretirement Plans") that provide benefits for substantially all U.S. employees. The Postretirement Plans provide medical and, in some cases, life insurance benefits and are, depending on the type of plan, either contributory or non-contributory. Benefit obligations for the Postretirement Plans are estimated based on Devon's future cost-sharing intentions. Devon's funding policy for the Postretirement Plans is to fund the benefits as they become payable with available cash and cash equivalents. 

 

Benefit Obligations and Funded Status

 

The following table presents the status of Devon's pension and other postretirement benefit plans for 2009 and 2008. The benefit obligation for pension plans represents the projected benefit obligation, while the benefit obligation for the postretirement benefit plans represents the accumulated benefit obligation. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels. The accumulated benefit obligation for pension plans at December 31, 2009 and 2008 was $873 million and $795 million, respectively. Devon’s benefit obligations and plan assets are measured each year as of December 31.

 

 

 

 

 

Pension

Benefits

Other

Postretirement

Benefits

 

2009

2008

2009

2008

 

(In millions)

Change in benefit obligation:

 

 

 

 

  Benefit obligation at beginning of year......................

$    931

$    849

$       56

$       71

  Service cost......................................................................

         43

         41

           1

           1

  Interest cost......................................................................

         58

         54

           3

           4

  Actuarial loss (gain)........................................................

           4

         17

           7

        (15)

  Curtailment (gain) loss...................................................

        (26)

         —

           1

         —

  Plan amendments...........................................................

         —

           9

         —

         —

  Foreign exchange rate changes....................................

           5

          (6)

         —

         —

  Participant contributions...............................................

         —

         —

           2

           2

  Benefits paid....................................................................

        (35)

        (33)

          (6)

          (7)

  Benefit obligation at end of year.................................

       980

       931

         64

         56

 

 

 

 

 

Change in plan assets:

 

 

 

 

  Fair value of plan assets at beginning of year...........

       430

       619

         —

         —

  Actual return on plan assets..........................................

         80

     (178)

         —

         —

  Employer contributions.................................................

         55

         25

           4

           5

  Participant contributions...............................................

         —

         —

           2

           2

  Benefits paid....................................................................

        (35)

        (33)

          (6)

          (7)

  Foreign exchange rate changes....................................

           2

          (3)

         —

         —

  Fair value of plan assets at end of year......................

       532

       430

         —

         —

 

 

 

 

 

Funded status at end of year..........................................

$   (448)

$   (501)

$     (64)

$     (56)

 

 

 

 

 

Amounts recognized in balance sheet:

 

 

 

 

  Noncurrent assets............................................................

$         2

$         2

$       —

$       —

  Current liabilities.............................................................

          (8)

        (10)

          (5)

          (5)

  Noncurrent liabilities.......................................................

     (442)

     (493)

        (59)

        (51)

  Net amount......................................................................

$   (448)

$   (501)

$     (64)

$     (56)

 

 

 

 

 

Amounts recognized in accumulated other

  comprehensive income:

 

 

 

 

    Net actuarial loss (gain)...............................................

$    334 

$    440

$        (6)

$     (13)

    Prior service cost............................................................

         20

         28

         11

         13

    Total................................................................................

$    354

$    468

$         5

$       —

 

The plan assets for pension benefits in the table above exclude the assets held in trusts for the Supplemental Plans. However, employer contributions for pension benefits in the table above include $9 million for both 2009 and 2008, which were transferred from the trusts established for the Supplemental Plans.

 

Certain of Devon's pension plans have a projected benefit obligation and accumulated benefit obligation in excess of plan assets at December 31, 2009 and 2008 as presented in the table below.

 

 

December 31,

 

2009

2008

 

(In millions)

Projected benefit obligation................................................................

$      967

$      921

Accumulated benefit obligation.........................................................

$      860

$      784

Fair value of plan assets......................................................................

$      517

$      417

 

The plan assets included in the above table exclude the Supplemental Plan trusts, which had a total value of $39 million and $50 million at December 31, 2009 and 2008, respectively. 

 

Net Periodic Benefit Cost and Other Comprehensive Income

 

The following table presents the components of net periodic benefit cost and other comprehensive income for Devon's pension and other postretirement benefit plans for 2009, 2008 and 2007.

 

 

 

 

Pension Benefits

Other

Postretirement Benefits

 

2009

2008

2007

2009

2008

2007

 

(In millions)

Net periodic benefit cost:

 

 

 

 

 

 

  Service cost.................................................................

$     43

$     41

$     30

$       1

$       1

$       1

  Interest cost.................................................................

       58

       54

       46

          3

          4

          3

  Expected return on plan assets................................

      (35)

      (50)

      (49)

        —

        —

        —

  Curtailment and settlement expense......................

          5

        —

          1

          1

        —

        —

  Plan amendment........................................................

        —

        —

        —

        —

        —

          1

  Recognition of net actuarial loss (gain).................

       45

       14

       12

        (1)

        —

          1

  Recognition of prior service cost.............................

          3

          2

          1

          2

          2

        —

    Total net periodic benefit cost...............................

     119

       61

       41

          6

          7

          6

Other comprehensive income

 

 

 

 

 

 

  Actuarial (gain) loss arising in current year...........

      (66)

     245

       54

          7

      (15)

        (3)

  Prior service cost arising in current year.................

        —

          9

       17

        —

        —

       22

  Recognition of net actuarial (loss) gain in net

    periodic benefit cost................................................

 

      (45)

 

      (14)

 

      (12)

 

          1

 

        —

 

        (1)

  Recognition of prior service cost, including

    curtailment, in net periodic benefit cost...............

 

        (8)

 

        (2)

 

        (1)

 

        (2)

 

        (2)

 

        —

  Curtailment of pension benefits..............................

        —

        —

      (16)

        —

        —

        —

  Change in additional minimum pension liability.

        —

        —

        —

        —

        —

        —

    Total other comprehensive income (loss)............

    (119)

     238

       42

          6

      (17)

       18

Total recognized...........................................................

$     —

$   299

$     83

$     12

$    (10)

$     24

 

The following table presents the estimated net actuarial loss and prior service cost for the pension and other postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2010.

 

 

 

Pension

Benefits

Other

Postretirement

     Benefits    

 

(In millions)

Net actuarial loss..................................................................

$       27

$              —

Prior service cost...................................................................

           3

                   1

  Total.....................................................................................

$       30

$                 1

 

Assumptions

 

The following table presents the weighted average actuarial assumptions that were used to determine benefit obligations and net periodic benefit costs for 2009, 2008 and 2007.

 

 

 

 

Pension Benefits

Other

Postretirement Benefits

 

2009

2008

2007

2009

2008

2007

 

 

Assumptions to determine benefit obligations:

 

 

 

 

 

 

  Discount rate.......................................................................

  6.00%

  6.00%

  6.22%

  5.70%

  6.00%

  6.00%

  Rate of compensation increase.......................................

  6.95%

  7.00%

  7.00%

    N/A

    N/A

    N/A

Assumptions to determine net periodic benefit cost:

 

 

 

 

 

 

  Discount rate.......................................................................

  6.00%

  6.18%

  5.96%

  6.00%

  6.00%

  5.75%

  Expected return on plan assets........................................

  7.18%

  8.40%

  8.40%

    N/A

    N/A

    N/A

  Rate of compensation increase.......................................

  6.95%

  7.00%

  7.00%

    N/A

    N/A

    N/A

 

Discount rate – Future pension and postretirement obligations are discounted at the end of each year based on the rate at which obligations could be effectively settled, considering the timing of estimated future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk. High quality corporate bond yield indices, such as Moody's Aa, are considered when selecting the discount rate.

 

Rate of compensation increase – For measurement of the 2009 benefit obligation for the pension plans, the 6.95% compensation increase in the table above represents the assumed increase through 2011. The rate was assumed to decrease to 5% in the year 2012 and remain at that level thereafter.

 

Expected return on plan assets   The expected rate of return on plan assets was determined by evaluating input from external consultants and economists as well as long-term inflation assumptions. Devon expects the long-term asset allocation to approximate the targeted allocation. Therefore, the expected long-term rate of return on plan assets is based on the target allocation of investment types in such assets. See plan assets discussion below for more information on Devon's target allocations.

 

Other assumptions – For measurement of the 2009 benefit obligation for the other postretirement medical plans, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2010. The rate was assumed to decrease annually to an ultimate rate of 5% in the year 2029 and remain at that level thereafter. Assumed health care cost-trend rates affect the amounts reported for retiree health care costs. A one-percentage-point change in the assumed health care cost-trend rates would have the following effects on the December 31, 2009 other postretirement benefits obligation and the 2010 service and interest cost components of net periodic benefit cost.

 

 

One

Percent

Increase

One

Percent

Decrease

 

(In millions)

Effect on benefit obligation........................................................

$           5

$          (4)

Effect on service and interest costs...........................................

$         —

$         —

 

Pension Plan Assets

 

Devon's overall investment objective for its pension plans' assets is to achieve long-term growth of invested capital and income to ensure benefit payments can be funded when required. To assist in achieving this objective, Devon has established certain investment strategies, including target allocation percentages and permitted and prohibited investments, designed to mitigate risks inherent with investing.

 

The vast majority of Devon’s plan assets are invested in diversified asset types to generate long-term growth and income. The remaining plan assets, generally less than 5%, are invested in assets that can be used for near-term benefit payments. Derivatives or other speculative investments considered high risk are generally prohibited.

 

At the end of 2009, Devon's target allocations for plan assets are 47.5% for equity securities, 40% for fixed-income securities and 12.5% for other investment types. At the end of 2008, Devon's target allocation was 60% for equity securities and 40% for fixed income securities. The fair values of Devon's pension assets at December 31, 2009 and 2008, are presented by asset class in the following tables.


 

 

As of December 31, 2009

 

 

 

Fair Value Measurements Using:

 

Actual

Allocation

Total

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

 

(In millions)

Equity securities:

 

 

 

 

 

  United States large cap.............................

         18.8%

$           100

$              —

$           100

$              —

  United States small cap............................

         15.2%

                81

                81

                —

                —

  International large cap.............................

         15.2%

                81

                44

                37

                —

  Total equity securities...............................

         49.2%

              262

              125

              137

                —

Fixed-income securities:

 

 

 

 

 

  Corporate bonds........................................

         25.1%

              133

              133

                —

                —

  United States Treasury obligations........

           9.8%

                52

                52

                —

                —

  Other bonds................................................

           3.9%

                21

                21

                —

                —

  Total fixed-income securities..................

         38.8%

              206

              206

                —

                —

Other securities:

 

 

 

 

 

  Short-term investment funds..................

           2.4%

                13

                —

                13

                —

  Hedge funds...............................................

           9.6%

                51

                —

                —

                51

  Total other securities.................................

         12.0%

                64

 

                13

                51

Total investments........................................

      100.0%

$           532

$           331

$           150

$              51

 

 

As of December 31, 2008

 

 

 

Fair Value Measurements Using:

 

Actual

Allocation

Total

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

 

(In millions)

Equity securities:

 

 

 

 

 

  United States large cap.............................

         25.8%

$           111

$              —

$           111

$              —

  United States small cap............................

         14.9%

                64

                64

                —

                —

  International large cap.............................

         14.0%

                60

                34

                26

                —

  Total equity securities...............................

         54.7%

              235

                98

              137

                —

Fixed-income securities:

 

 

 

 

 

  Corporate bonds........................................

         29.1%

              125

              125

                —

                —

  United States Treasury obligations........

           8.8%

                38

                38

                —

                —

  Other bonds................................................

           3.0%

                13

                13

                —

                —

  Total fixed-income securities..................

         40.9%

              176

              176

                —

                —

Other securities –

  Short-term investment funds..................

 

           4.4%

 

                19

 

                —

 

                19

 

                —

Total investments........................................

      100.0%

$           430

$           274

$           156

$              —

 

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

 

Equity securities – Devon's equity securities consist of investments in United States large and small capitalization companies and international large capitalization companies. These equity securities are actively traded securities that can be redeemed upon demand. The fair values of these Level 1 securities are based upon quoted market prices.

 

Devon's equity securities also include commingled funds that invest in large capitalization companies. These equity securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by the investment managers.

 

Fixed-income securities – Devon's fixed-income securities consist of bonds issued by investment-grade companies from diverse industries, United States Treasury obligations and asset-backed securities. Devon's fixed-income securities are actively traded securities that can be redeemed upon demand. The fair values of these Level 1 securities are based upon quoted market prices.

 

Other securities – Devon's other securities include commingled, short-term investment funds. These securities can be redeemed on demand but are not actively traded. The fair values of these Level 2 securities are based upon the net asset values provided by investment managers.

 

Devon's other securities also include a hedge fund of funds that invests both long and short using a variety of investment strategies. Management of the hedge fund has the ability to shift investments from value to growth strategies, from small to large capitalization stocks, and from a net long position to a net short position. Devon's hedge fund is not actively traded and Devon is subject to redemption restrictions with regards to this investment. The fair value of this Level 3 investment represents the fair value as determined by the hedge fund manager.

 

The change in Devon's Level 3 plan assets between 2008 and 2009 related entirely to purchases made in 2009.

 

Expected Cash Flows

 

The following table presents expected cash flow information for Devon's pension and other postretirement benefit plans.

 

 

 

Pension

Benefits

Other

Postretirement

Benefits

 

(In millions)

Devon's 2010 contributions

$         34

$                 5

Benefit payments:

 

 

  2010.............................................................................................

$         39

$                 5

  2011.............................................................................................

$         41

$                 5

  2012.............................................................................................

$         45

$                 6

  2013.............................................................................................

$         49

$                 6

  2014.............................................................................................

$         53

$                 6

  2015 to 2019..............................................................................

$       338

$               29

 

Expected contributions included in the table above include amounts related to Devon's Qualified Plans, Supplemental Plans and Postretirement Plans. Of the benefits expected to be paid in 2010, $7 million of pension benefits is expected to be funded from the trusts established for the Supplemental Plans and all $5 million of other postretirement benefits is expected to be funded from Devon's available cash and cash equivalents. Expected employer contributions and benefit payments for other postretirement benefits are presented net of employee contributions.

 

Other Benefit Plans

 

Devon's 401(k) Plan covers all its employees in the United States. At its discretion, Devon may match a certain percentage of the employees' contributions to the plan. The matching percentage is determined annually by the Board of Directors.

 

In 2007, Devon adopted an enhanced defined contribution structure related to its 401(k) Plan effective January 1, 2008. Participants who elected to participate in this enhanced defined contribution structure, as well as all employees hired on or after October 1, 2007, continue to receive a discretionary match of a percentage of their contributions to the 401(k) Plan. These participants also receive additional, nondiscretionary contributions by Devon calculated as a percentage of annual compensation. The percentage will vary based on the employees' years of service.

 

Devon has defined contribution pension plans for its Canadian employees. Devon makes a contribution to each employee that is based upon the employee's base compensation and classification. Such contributions are subject to maximum amounts allowed under the Income Tax Act (Canada). Devon also has a savings plan for its Canadian employees. Under the savings plan, Devon contributes a base percentage amount to all employees and the employee may elect to contribute an additional percentage amount (up to a maximum amount) which is matched by additional Devon contributions.

 

The following table presents Devon's expense related to these defined contribution plans during 2009, 2008 and 2007.

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

401(k) plan....................................................................

$     20

$     21

$     18

Enhanced contribution plan......................................

       14

       12

        —

Canadian pension and savings plans.......................

       15

       16

       14

     Total expense..........................................................

$     49

$     49

$     32

 

Stockholders' Equity
9. Stockholders' Equity

9.  Stockholders' Equity

 

The authorized capital stock of Devon consists of 1 billion shares of common stock, par value $0.10 per share, and 4.5 million shares of preferred stock, par value $1.00 per share. The preferred stock may be issued in one or more series, and the terms and rights of such stock will be determined by the Board of Directors.   

 

Devon's Board of Directors has designated 2.9 million shares of the preferred stock as Series A Junior Participating Preferred Stock (the "Series A Junior Preferred Stock"). At December 31, 2009, there were no shares of Series A Junior Preferred Stock issued or outstanding. The Series A Junior Preferred Stock is entitled to receive cumulative quarterly dividends per share equal to the greater of $1.00 or 200 times the aggregate per share amount of all dividends (other than stock dividends) declared on common stock since the immediately preceding quarterly dividend payment date or, with respect to the first payment date, since the first issuance of Series A Junior Preferred Stock. Holders of the Series A Junior Preferred Stock are entitled to 200 votes per share (subject to adjustment to prevent dilution) on all matters submitted to a vote of the stockholders. The Series A Junior Preferred Stock is neither redeemable nor convertible. The Series A Junior Preferred Stock ranks prior to the common stock but junior to all other classes of Preferred Stock.

 

Preferred Stock Redemption

 

On June 20, 2008, Devon redeemed all 1.5 million outstanding shares of its 6.49% Series A cumulative preferred stock. Each share of preferred stock was redeemed for cash at a redemption price of $100 per share, plus accrued and unpaid dividends up to the redemption date.

 

Stock Repurchases

 

Devon’s Board of Directors previously approved an ongoing, annual stock repurchase program to minimize dilution resulting from restricted stock issued to, and options exercised by, employees. Also, Devon’s Board of Directors approved a program in 2007 to repurchase up to 50 million shares. This program was created as a potential use of the proceeds received from Devon’s West African property divestitures. Both of these plans expired on December 31, 2009, and no new plans have been authorized. Devon's Board of Directors also approved a separate 50 million share repurchase program in August 2005, which expired on December 31, 2007.

 

During 2007 and 2008, Devon repurchased 10.6 million shares at a total cost of $1.0 billion, or an average of $93.76 per share, under its repurchase programs. No shares were repurchased in 2009. The following table summarizes Devon's repurchases under approved plans during 2008 and 2007 (amounts and shares in millions).

 

 

2008

2007

Repurchase Program

Amount

Shares

Per Share

Amount

Shares

Per Share

Annual program......

$      178

          2.0

$   87.83

$         —

           —

$         —

2007 program..........

         487

          4.5

$ 109.25

         326

          4.1

$   79.80

  Totals......................

$      665

          6.5

$ 102.56

$      326

          4.1

$   79.80

 

Dividends

 

Devon paid common stock dividends of $284 million (or $0.64 per share), $284 million (or $0.64 per share) and $249 million (or $0.56 per share) in 2009, 2008 and 2007 respectively.  Devon paid dividends of $5 million in 2008 and $10 million in 2007 to preferred stockholders.  The decrease in preferred stock dividend in 2008 is due to the redemption of the preferred stock in the second quarter of 2008.

 

Commitments and Contingencies
10. 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.

 

In 1995, the United States Congress passed the Deep Water Royalty Relief Act. The intent of this legislation was to encourage deep water exploration in the Gulf of Mexico by providing relief from the obligation to pay royalties on certain federal leases. Deep water leases issued in certain years by the Minerals Management Service (the "MMS") have contained price thresholds, such that if the market prices for oil or gas exceeded the thresholds for a given year, royalty relief would not be granted for that year.

 

In October 2007, a federal district court ruled in favor of a plaintiff who had challenged the legality of including price thresholds in deep water leases. Additionally, in January 2009 a federal appellate court upheld this district court ruling. This judgment was later appealed to the United States Supreme Court, which, in October 2009, declined to review the appellate court's ruling. The Supreme Court's decision ended the MMS's judicial course to enforce the price thresholds.

 

Prior to September 30, 2009, Devon had $84 million accrued for potential royalties on various deep water leases. Based upon the Supreme Court's decision, Devon reduced to zero the $84 million loss contingency accrual in the third quarter of 2009. The $84 million expense reduction is included in other income in the accompanying 2009 consolidated statement of operations.

 

Hurricane Contingencies

 

Prior to September 1, 2006, Devon maintained a comprehensive insurance program that included coverage for physical damage to its offshore facilities caused by hurricanes. This program also included substantial business interruption coverage, which entitled Devon to be reimbursed for the portion of production suspended longer than forty-five days, subject to upper limits to oil and gas prices. Also, the terms of the historical insurance included a standard, per-event deductible of $1 million for offshore losses as well as a $15 million aggregate annual deductible.

 

Devon suffered insured damages in the third quarter of 2005 related to hurricanes that struck the Gulf of Mexico. During 2006 and 2007, Devon received $480 million as a full settlement of the amount due from its primary insurers and certain of its secondary insurers. During the fourth quarter of 2008, Devon received $106 million as full settlement of the amount due from its remaining secondary insurers. Devon's claims under its then existing insurance arrangements included both physical damages and business interruption claims. Devon used $424 million of these proceeds as reimbursement of repair costs and deductible amounts, resulting in excess recoveries. The $162 million of excess recoveries was recorded as other income in the accompanying consolidated statement of operations for 2008.

 

The policy underlying the insurance program terms described above expired on August 31, 2006. Due to significant changes in the insurance marketplace, Devon no longer has coverage for damage that may be caused by named windstorms in the Gulf of Mexico. As a result, Devon's current insurance program includes coverage for physical damage and business interruption but does not have such coverage for damages or business interruption caused from named windstorms in the Gulf of Mexico.

 

During the third quarter of 2008, Hurricanes Ike and Gustav damaged certain of Devon's oil and gas facilities and transportation systems in the Gulf of Mexico. These damages relate to both production operations that have been repaired and restored and production operations that will not be restored. These damages are uninsured losses because they resulted from named windstorms in the Gulf of Mexico.

 

For the damaged facilities and transportation systems which have been repaired or restored, Devon recognized a loss of $31 million in 2008. This loss is included in lease operating expenses in the accompanying consolidated statement of operations. The facilities for which Devon did not restore production operations consisted of certain platforms that were completely destroyed. Devon began performing asset retirement activities associated with the destroyed platforms and related wells in 2008. The time and effort required to complete such activities is expected to be significant due to the hazardous conditions created by the hurricanes. As a result, the estimated costs to complete the asset retirement activities were $82 million higher than Devon's previously estimated asset retirement obligations related to the destroyed platforms and related wells. Therefore, in 2008, Devon increased its asset retirement obligations by $82 million with a corresponding increase to oil and gas property and equipment in the accompanying consolidated balance sheet.

 

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.

 

Commitments

 

Devon has certain drilling and facility obligations under contractual agreements with third-party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction. Included in the $3.2 billion total of "Drilling and Facility Obligations" in the table below is $1.4 billion that relates to long-term contracts for three deepwater drilling rigs and certain other contracts for onshore drilling and facility obligations in which drilling or facilities construction has not commenced. The $1.4 billion represents the gross commitment under these contracts. Devon's ultimate payment for these commitments will be reduced by any amounts billed to its partners until Devon sells the associated offshore properties. Payments for these commitments, net of amounts billed to partners, will be capitalized as a component of oil and gas properties.

 

Additionally, Devon's commitment under these contracts may be further reduced if the buyers of its offshore assets assume all or a portion of the obligations. If the buyers do not assume these obligations, Devon will attempt to sublease the rigs to reduce its commitment. However, if the buyers do not assume the obligations and Devon is not able to sublease the rigs, Devon would be contractually committed to the amounts related to the remaining lease periods.

 

Devon has certain firm transportation agreements that represent "ship or pay" arrangements whereby Devon has committed to ship certain volumes of oil, gas and NGLs for a fixed transportation fee. Devon has entered into these agreements to aid the movement of its production to market. Devon expects to have sufficient production to utilize the majority of these transportation services.

 

Devon leases certain office space and equipment under operating lease arrangements. Total rental expense included in general and administrative expenses under operating leases, net of sub-lease income, was $56 million, $44 million and $42 million in 2009, 2008 and 2007, respectively.

 

Devon assumed two offshore platform spar leases through the 2003 Ocean merger. The spars are being used in the development of the Nansen and Boomvang fields in the Gulf of Mexico. The Boomvang field was divested as part of the 2005 property divestiture program. The Nansen operating lease is for a 20-year term and contains various options whereby Devon may purchase the lessors' interests in the spar. Total rental expense included in lease operating expenses under the Nansen operating lease was $12 million in 2009, 2008 and 2007. Devon has guaranteed that the Nansen spar will have a residual value at the end of the operating lease equal to at least 10% of the fair value of the spar at the inception of the lease. The total guaranteed value is $14 million in 2022. However, such amount may be reduced under the terms of the lease agreement. As a result of the sale of the Boomvang field, Devon is subleasing the Boomvang Spar. If the sublessee were to default on its obligation, Devon would continue to be obligated to pay the periodic lease payments and any guaranteed value required at the end of the term.

 

Devon has a floating, production, storage and offloading facility ("FPSO") that is being used in the Panyu project offshore China and is being leased under operating lease arrangements. This lease expires in September 2018. Devon is also leasing an FPSO that is being used in the Polvo project offshore Brazil. This lease expires in 2014. Devon has also leased an FPSO that will be used when production from its Cascade development in the Gulf of Mexico begins in 2010. This lease expires in 2015. Total rental expense included in lease operating expenses for these FPSO's was $36 million, $25 million and $17 million in 2009, 2008 and 2007, respectively. Devon expects the eventual buyers of these offshore assets will assume the FPSO leases. However, the amounts in the schedule below reflect its full commitments under the leases.

 

The following is a schedule by year of future minimum payments for drilling and facility obligations, firm transportation agreements and leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2009. The schedule includes separate amounts for Devon's continuing and discontinued operations.

 

 

 

 

Year Ending December 31,

Drilling

and

Facility

Obligations

 

Firm

Transportation

Agreements

 

Office and

Equipment

Leases

 

 

Spar

Leases

 

 

FPSO

Leases

 

(In millions)

Continuing operations:

 

 

 

 

 

  2010............................................................

$         992

$              298

$         57

$     11

$       58

  2011............................................................

           516

                 267

           54

       11

         37

  2012............................................................

           302

                 241

           40

       22

         38

  2013............................................................

           257

                 217

           34

       13

         38

  2014............................................................

             97

                 202

           15

       27

         38

  Thereafter...................................................

                1

                 714

         147

       78

         16