DEVON ENERGY CORP/DE, 10-Q filed on 11/2/2011
Quarterly Report
Document And Entity Information
In Millions
9 Months Ended
Sep. 30, 2011
Oct. 21, 2011
Document And Entity Information
 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2011 
 
Amendment Flag
FALSE 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
Entity Central Index Key
0001090012 
 
Entity Current Reporting Status
Yes 
 
Entity Voluntary Filers
No 
 
Current Fiscal Year End Date
--12-31 
 
Document Fiscal Year Focus
2011 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q3 
 
Entity Common Stock, Shares Outstanding
 
403.9 
Consolidated Balance Sheets (USD $)
In Millions
Sep. 30, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 5,618 
$ 2,866 
Short-term investments
1,231 
145 
Accounts receivable
1,430 
1,202 
Current assets held for sale
26 
563 
Other current assets
1,302 
779 
Total current assets
9,607 1
5,555 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
59,331 
56,012 
Not subject to amortization
4,061 
3,434 
Total oil and gas
63,392 
59,446 
Other
4,778 
4,429 
Total property and equipment, at cost
68,170 
63,875 
Less accumulated depreciation, depletion and amortization
(45,000)
(44,223)
Property and equipment, net
23,170 
19,652 
Goodwill
5,951 
6,080 
Long-term assets held for sale
111 
859 
Other long-term assets
1,027 
781 
Total assets
39,866 
32,927 
Current liabilities:
 
 
Accounts payable - trade
1,512 
1,411 
Revenues and royalties due to others
659 
538 
Short-term debt
3,288 
1,811 
Current liabilities associated with assets held for sale
50 
305 
Other current liabilities
522 
518 
Total current liabilities
6,031 
4,583 
Long-term debt
5,969 
3,819 
Asset retirement obligations
1,460 
1,423 
Liabilities associated with assets held for sale
26 
Other long-term liabilities
493 
1,067 
Deferred income taxes
4,809 
2,756 
Stockholders' equity:
 
 
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 408.0 million and 431.9 million shares in 2011 and 2010, respectively
41 
43 
Additional paid-in capital
3,827 
5,601 
Retained earnings
15,870 
11,882 
Accumulated other comprehensive earnings
1,412 
1,760 
Treasury stock, at cost. 0.8 million and 0.4 million shares in 2011 and 2010, respectively
(48)
(33)
Total stockholders' equity
21,102 
19,253 
Commitments and contingencies (Note 11])
 
 
Total liabilities and stockholders' equity
$ 39,866 
$ 32,927 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Sep. 30, 2011
Dec. 31, 2010
Consolidated Balance Sheets
 
 
Common stock, par value (in dollars per share)
$ 0.1 
$ 0.1 
Common stock, shares authorized (in shares)
1,000.0 
1,000.0 
Common stock, shares issued (in shares)
408.0 
431.9 
Treasury stock, shares
0.8 
0.4 
Consolidated Statements Of Operations (USD $)
In Millions, except Per Share data
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Revenues:
 
 
 
 
Oil, gas and NGL sales
$ 2,111 
$ 1,683 
$ 6,171 
$ 5,535 
Oil, gas and NGL derivatives
738 
209 
986 
874 
Marketing and midstream revenues
653 
461 
1,712 
1,396 
Total revenues
3,502 
2,353 
8,869 
7,805 
Expenses and other, net:
 
 
 
 
Lease operating expenses
475 
415 
1,352 
1,271 
Taxes other than income taxes
108 
95 
336 
288 
Marketing and midstream operating costs and expenses
515 
336 
1,304 
1,013 
Depreciation, depletion and amortization of oil and gas properties
504 
397 
1,431 
1,249 
Depreciation and amortization of non-oil and gas properties
62 
66 
191 
192 
Accretion of asset retirement obligations
23 
21 
69 
71 
General and administrative expenses
138 
131 
403 
399 
Restructuring costs
(3)
63 
(2)
55 
Interest expense
104 
83 
270 
280 
Interest-rate and other financial instruments
40 
56 
33 
121 
Other, net
(2)
(9)
(14)
(34)
Total expenses and other, net
1,964 
1,654 
5,373 
4,905 
Earnings from continuing operations before income taxes
1,538 
699 
3,496 
2,900 
Income tax expense (benefit):
 
 
 
 
Current
(248)
(310)
(301)
696 
Deferred
746 
580 
2,184 
349 
Total income tax expense
498 
270 
1,883 
1,045 
Earnings from continuing operations
1,040 
429 
1,613 
1,855 
Discontinued operations:
 
 
 
 
Earnings (loss) from discontinued operations before income taxes
(4)
1,710 
2,584 
2,320 
Discontinued operations income tax expense (benefit)
(2)
49 
 
187 
Earnings (loss) from discontinued operations
(2)
1,661 
2,584 
2,133 
Net earnings
$ 1,038 
$ 2,090 
$ 4,197 
$ 3,988 
Basic net earnings per share:
 
 
 
 
Basic earnings from continuing operations per share
$ 2.51 
$ 0.99 
$ 3.83 
$ 4.20 
Basic earnings from discontinued operations per share
 
$ 3.82 
$ 6.14 
$ 4.82 
Basic net earnings per share
$ 2.51 
$ 4.81 
$ 9.97 
$ 9.02 
Diluted net earnings per share:
 
 
 
 
Diluted earnings from continuing operations per share
$ 2.50 
$ 0.98 
$ 3.82 
$ 4.18 
Diluted earnings from discontinued operations per share
 
$ 3.81 
$ 6.11 
$ 4.81 
Diluted net earnings per share
$ 2.50 
$ 4.79 
$ 9.93 
$ 8.99 
Consolidated Statements Of Comprehensive Earnings (USD $)
In Millions
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Consolidated Statements Of Comprehensive Earnings
 
 
 
 
Net earnings
$ 1,038 
$ 2,090 
$ 4,197 
$ 3,988 
Foreign currency translation:
 
 
 
 
Change in cumulative translation adjustment
(644)
223 
(382)
119 
Foreign currency translation income tax expense (benefit)
29 
(12)
17 
(7)
Foreign currency translation total
(615)
211 
(365)
112 
Pension and postretirement benefit plans:
 
 
 
 
Recognition of net actuarial loss and prior service cost in earnings
26 
24 
Pension and postretirement benefit plans income tax expense
(3)
(3)
(9)
(9)
Pension and postretirement benefit plans total
17 
15 
Other comprehensive (loss) earnings, net of tax
(609)
216 
(348)
127 
Comprehensive earnings
$ 429 
$ 2,306 
$ 3,849 
$ 4,115 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Total
Balance, at Dec. 31, 2009
$ 45 
$ 6,527 
$ 7,613 
$ 1,385 
 
$ 15,570 
Balance, shares, at Dec. 31, 2009
447 
 
 
 
 
 
Net earnings
 
 
3,988 
 
 
3,988 
Other comprehensive (loss) earnings, net of tax
 
 
 
127 
 
127 
Stock option exercises
 
18 
 
 
 
18 
Common stock repurchased
 
 
 
 
(950)
(950)
Common stock retired
(2)
(941)
 
 
943 
 
Common stock retired, shares
(15)
 
 
 
 
 
Common stock dividends
 
 
(211)
 
 
(211)
Share-based compensation
 
103 
 
 
 
103 
Share-based compensation tax benefits
 
 
 
 
Balance, at Sep. 30, 2010
43 
5,714 
11,390 
1,512 
(7)
18,652 
Balance, shares, at Sep. 30, 2010
432 
 
 
 
 
 
Balance, at Dec. 31, 2010
43 
5,601 
11,882 
1,760 
(33)
19,253 
Balance, shares, at Dec. 31, 2010
432 
 
 
 
 
 
Net earnings
 
 
4,197 
 
 
4,197 
Other comprehensive (loss) earnings, net of tax
 
 
 
(348)
 
(348)
Stock option exercises
 
101 
 
 
 
101 
Stock option exercises, shares
 
 
 
 
 
Common stock repurchased
 
 
 
 
(2,008)
(2,008)
Common stock retired
(2)
(1,991)
 
 
1,993 
 
Common stock retired, shares
(26)
 
 
 
 
 
Common stock dividends
 
 
(209)
 
 
(209)
Share-based compensation
 
105 
 
 
 
105 
Share-based compensation tax benefits
 
11 
 
 
 
11 
Balance, at Sep. 30, 2011
$ 41 
$ 3,827 
$ 15,870 
$ 1,412 
$ (48)
$ 21,102 
Balance, shares, at Sep. 30, 2011
408 
 
 
 
 
 
Consolidated Statements Of Cash Flows (USD $)
In Millions
9 Months Ended
Sep. 30,
2011
2010
Cash flows from operating activities:
 
 
Net earnings
$ 4,197 
$ 3,988 
Earnings from discontinued operations, net of tax
(2,584)
(2,133)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
 
 
Depreciation, depletion and amortization
1,622 
1,441 
Deferred income tax expense
2,184 
349 
Unrealized change in fair value of financial instruments
(661)
(136)
Other noncash charges
185 
154 
Net (increase) decrease in working capital
(308)
164 
Decrease in long-term other assets
51 
28 
(Decrease) increase in long-term other liabilities
(459)
57 
Cash from operating activities - continuing operations
4,227 
3,912 
Cash from operating activities - discontinued operations
(13)
324 
Net cash from operating activities
4,214 
4,236 
Cash flows from investing activities:
 
 
Capital expenditures
(5,515)
(4,793)
Proceeds from property and equipment divestitures
13 
4,131 
Purchases of short-term investments
(5,751)
 
Redemptions of short-term investments
4,665 
 
Redemptions of long-term investments
10 
20 
Other
(33)
(13)
Cash from investing activities - continuing operations
(6,611)
(655)
Cash from investing activities - discontinued operations
3,162 
2,298 
Net cash from investing activities
(3,449)
1,643 
Cash flows from financing activities:
 
 
Net commercial paper borrowings (repayments)
3,196 
(1,432)
Proceeds from borrowings of long-term debt, net of issuance costs
2,221 
 
Debt repayments
(1,760)
(350)
Proceeds from stock option exercises
101 
18 
Repurchases of common stock
(1,987)
(929)
Dividends paid on common stock
(209)
(211)
Excess tax benefits related to share-based compensation
11 
Net cash from financing activities
1,573 
(2,897)
Effect of exchange rate changes on cash
(10)
Net increase in cash and cash equivalents
2,328 
2,987 
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)
3,290 
1,011 
Cash and cash equivalents at end of period (including cash related to assets held for sale)
$ 5,618 
$ 3,998 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.     Summary of Significant Accounting Policies 

 

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

 

The unaudited interim consolidated financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon's financial position as of September 30, 2011 and Devon's results of operations and cash flows for the three-month and nine-month periods ended September 30, 2011 and 2010.

 

Recently Issued Accounting Standards Not Yet Adopted

 

In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This update does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. However, beginning in Devon's 2011 Annual Report on Form 10-K, this update will require certain additional disclosures related to Devon's fair value measurements. Devon does not expect the adoption of this update will materially impact its financial statement disclosures.

 

In June 2011, the FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income. Beginning in Devon's 2011 Annual Report on Form 10-K, this update will give Devon the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Devon has not determined which presentation option it will choose but does not expect its selection to materially impact the presentation of its financial statements.

 

In September 2011, the FASB issued Accounting Standards Update 2011-08: Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Devon will adopt the provisions for this update in its annual impairment test as of October 31, 2011. Devon does not expect the adoption of this update will impact its goodwill value.

Short-Term Investments
Short-Term investments

2.    Short-Term Investments

 

Devon periodically invests excess cash in U.S. Treasuries, commercial paper and other marketable securities with original maturities exceeding three months. Such securities are presented as short-term investments in the accompanying consolidated balance sheets.

 

During the first nine months of 2011, Devon invested a portion of the International offshore divestiture proceeds it had received, causing short-term investments to increase. The carrying value of these investments approximates their fair value. As of September 30, 2011, the average remaining maturity of our short-term investments was 97 days, with a weighted average yield of 0.2 percent.

Accounts Receivable
Accounts Receivable

3. Accounts Receivable

 

The components of accounts receivable include the following:

 

 

September 30, 2011

December 31, 2010

 

(In millions)

Oil, gas and NGL sales

$                    819

$                  786

Joint interest billings

                       269

                     204

Marketing and midstream revenues

                       185

                     165

Other

                       166

                       57

    Gross accounts receivable

                   1,439

                 1,212

Allowance for doubtful accounts

                          (9)

                      (10)

    Net accounts receivable

$                 1,430

$               1,202

 

Derivative Financial Instruments
Derivative Financial Instruments

4. Derivative Financial Instruments

 

Objectives and Strategies

 

Devon periodically enters into derivative financial instruments to manage its exposure to market risks, such as changes in commodity prices, interest rates and currency exchange rates. Devon does not hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

 

Devon's commodity derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional gas index prices and pays a variable differential on the same two index prices to the contract counterparty. The price collars set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty to the collars. Under the terms of the call options, Devon sold to counterparties the right to purchase production at a predetermined price.

 

Devon's interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount.

 

Devon's foreign currency contracts include forward contracts that hedge certain monetary assets denominated in Canadian dollars.

 

Credit Risk

 

Through its derivative financial instruments, Devon exposes itself to credit risk, which arises from 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 $55 million for the majority of Devon's contracts. As of September 30, 2011, the credit ratings of all Devon's counterparties were investment grade.

 


 

Commodity Derivatives

 

As of September 30, 2011, Devon had the following open oil derivative positions. Devon's oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.

Production Period

 

Price Swaps

 

Price Collars

 

Call Options Sold

 

 

Period

 

Volume

(Bbls/d)

Weighted

Average Price

($/Bbl)

 

Volume

(Bbls/d)

Weighted

Average Floor Price

($/Bbl)

Weighted

Average Ceiling Price

($/Bbl)

 

Volume

(Bbls/d)

Weighted

Average Price

($/Bbl)

Q4 2011

45,000

$75.00

$108.89

19,500

$95.00

Q1-Q4 2012...

22,000

$107.17

54,000

$85.74

$126.42

19,500

$95.00

Q1-Q4 2013...

7,000

$90.00

$125.12

 

As of September 30, 2011, Devon had the following open natural gas derivative positions. Devon's natural gas derivative swaps, collars and call options settle against the Inside FERC first of the month Henry Hub index.

 

Production Period

 

Price Swaps

 

Price Collars

 

Call Options Sold

 

 

Period

 

Volume

(MMBtu/d)

Weighted

Average Price

($/MMBtu)

 

Volume

(MMBtu/d)

Weighted

Average Floor Price

($/MMBtu)

Weighted

Average Ceiling Price

($/MMBtu)

 

Volume

(MMBtu/d)

Weighted

Average Price

($/MMBtu)

Q4 2011

712,500

$5.51

287,935

4.66

5.07

Q1-Q4 2012...

325,000

$5.09

490,000

4.75

5.57

487,500

$6.00

 

Basis Swaps

 

 

 

Production Period

 

 

 

Index

 

 

Volume

(MMBtu/d)

Weighted Average

Differential to Henry Hub

($/MMBtu)

Q4 2011

Panhandle Eastern Pipeline

150,000

$(0.33)

 

As of September 30, 2011, Devon had the following open NGL derivative positions:

 

Basis Swaps

 

 

Production Period

 

 

Pay

 

Volume

(Bbls/d)

Weighted Average

Differential to WTI

($/Bbl)

Q4 2011

Natural Gasoline

332

$(9.75)

Q1-Q4 2012

Natural Gasoline

500

$(10.10)

Q1-Q4 2013

Natural Gasoline

500

$(6.80)

 

Interest Rate Derivatives

 

As of September 30, 2011, Devon had the following open interest rate derivative positions:

 

Fixed-to-Floating Swaps

 

Notional

Fixed Rate

Received

Variable

Rate Paid

 

Expiration

(In millions)

 

 

 

$           100

1.90%

Federal funds rate

August 3, 2012

              500

3.90%

Federal funds rate

July 18, 2013

              250

3.85%

Federal funds rate

July 22, 2013

$           850

3.65%

 

 


 

Foreign Currency Derivative

 

As of September 30, 2011, Devon had the following open foreign currency derivative position:

 

 

 

Forward Contract

 

Currency

Contract Type

CAD

Notional

Fixed Rate

Received

 

Expiration

 

 

(In millions)

(CAD-USD)

 

Canadian Dollar

Sell

$           305

0.9615

December 30, 2011

 

Financial Statement Presentation

 

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

 

 

Balance Sheet Caption

September 30, 2011

December 31, 2010

 

 

(In millions)

Asset derivatives:

 

 

 

  Commodity derivatives

Other current assets

$                      672

$                      248

  Commodity derivatives

Other long-term assets

                        188

                             1

  Interest rate derivatives

Other current assets

                           29

                        100

  Interest rate derivatives

Other long-term assets

                           27

                          40

    Total asset derivatives

$                      916

$                      389

Liability derivatives:

 

 

 

  Commodity derivatives

Other current liabilities

$                        38

$                        50

  Commodity derivatives

Other long-term liabilities

                           20

                        142

    Total liability derivatives

$                        58

$                      192

 

The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying consolidated statements of operations associated with these derivative financial instruments. Cash settlements and unrealized gains and losses on fair value changes associated with Devon's commodity derivatives are presented in the "Oil, gas and NGL derivatives" caption in the accompanying consolidated statements of operations. Cash settlements and unrealized gains and losses on fair value changes associated with Devon's interest rate and foreign currency derivatives are presented in the "Interest-rate and other financial instruments" caption in the accompanying consolidated statements of operations.

 

 

Three Months Ended September 30,

Nine Months Ended September 30,

 

2011

2010

2011

2010

 

(In millions)

Cash settlements:

 

 

 

 

    Commodity derivatives

$               96

$             232

$             241

$             580

    Interest rate derivatives

                  52

                  17

                  73

                  37

    Foreign currency derivatives

                  22

                

                  22

                

    Total cash settlements

               170

               249

               336

               617

 

 

 

 

 

Unrealized gains (losses):

 

 

 

 

    Commodity derivatives

               642

                (23)

               745

               294

    Interest rate derivatives

                (55)

                (72)

                (84)

              (158)

    Total unrealized gains (losses)

               587

                (95)

               661

               136

Net gain (loss) recognized on statement of operations

$             757

$             154

$             997

$             753

Other Current Assets
Other Current Assets

5.     Other Current Assets

 

The components of other current assets include the following:

 

September 30, 2011

December 31, 2010

 

(In millions)

    Derivative financial instruments

$                  701

$                  348

    Income taxes receivable

                     420

                     270

    Inventories

                       98

                     120

    Other

                       83

                       41

        Other current assets

$               1,302

$                  779

Goodwill
Goodwill

6.    Goodwill

 

During the first nine months of 2011, Devon's Canadian goodwill decreased $129 million entirely due to foreign currency translation.

Debt
Debt

7.     Debt  

 

Credit Lines

 

Devon has a $2.7 billion syndicated, unsecured revolving line of credit (the "Senior Credit Facility"). As of September 30, 2011, Devon had no borrowings under the Senior Credit Facility, but its borrowing capacity was reduced $0.1 billion by outstanding letters of credit.

 

The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon's ratio of total funded debt to total capitalization to be less than 65 percent. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of September 30, 2011, Devon was in compliance with this covenant. Devon's debt-to-capitalization ratio at September 30, 2011, as calculated pursuant to the terms of the agreement, was 22 percent.

 

2.40% Notes Due July 15, 2016, 4.00% Notes Due July 15, 2021 and 5.60% Notes Due July 15, 2041

 

In July 2011, Devon issued $2.25 billion of senior notes. The $2.22 billion of net proceeds received after discounts and issuance costs, were used to repay outstanding commercial paper balances as of June 30, 2011. These notes are unsecured and unsubordinated obligations of Devon.

 

Commercial Paper

 

In March 2011, Devon's Board of Directors authorized an increase in its commercial paper program from $2.2 billion to $5.0 billion. Commercial paper debt generally has a maturity of between 1 and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market.

 

Although Devon ended the third quarter of 2011 with approximately $6.8 billion of cash and short-term investments, the vast majority of this amount consists of proceeds from its International divestitures. Based on Devon's evaluation of future cash needs across its operations in the United States and Canada, these proceeds remain outside of the United States.

 

Consequently, subsequent to the commercial paper repayment in July 2011 noted above, Devon utilized additional commercial paper borrowings primarily to fund debt maturities, capital expenditures, common stock repurchases and dividends in excess of cash flow generated by its United States operating activities. As of September 30, 2011, Devon's average borrowing rate on its $3.2 billion of commercial paper borrowings was 0.27 percent. At December 31, 2010, Devon had no borrowings of commercial paper.

Asset Retirement Obligations
Asset Retirement Obligations

8.     Asset Retirement Obligations

 

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

 

 

Nine Months

Ended September 30,

 

2011

2010

 

(In millions)

Asset retirement obligations as of beginning of period

$         1,497

$         1,513

  Liabilities incurred

                 38

                 36

  Liabilities settled

                (56)

                (94)

  Revision of estimated obligation

                 19

               194

  Liabilities assumed by others

                 —

             (256)

  Accretion expense on discounted obligation

                 69

                 71

  Foreign currency translation

                (41)

                 10

Asset retirement obligations as of end of period

           1,526

           1,474

Less current portion

                 66

                 80

Asset retirement obligations, long-term

$         1,460

$         1,394

 

During the first nine months of 2010, Devon recognized a revision to its asset retirement obligations totaling $194 million. The increase was primarily due to an overall increase in abandonment cost estimates and a decrease in the discount rate used to calculate the present value of the obligations.

 

During the first nine months of 2010, Devon reduced its asset retirement obligations by $256 million for those obligations that were assumed by purchasers of Devon's Gulf of Mexico oil and gas properties in 2010.

Retirement Plans
Retirement Plans

9.     Retirement Plans

Net Periodic Benefit Cost

 

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

 

 

Pension Benefits

Other Postretirement Benefits

 

Three Months

Ended September 30,

Nine Months

Ended September 30,

Three Months

Ended September 30,

Nine Months

Ended September 30,

 

2011

2010

2011

2010

2011

2010

2011

2010

 

(In millions)

  Service cost

$        10

$          9

$        28

$        25

$        —

$        —

$          1

$        —

  Interest cost

          15

          15

          45

          43

          —

            1

            1

            3

  Expected return on plan assets

         (11)

         (10)

         (32)

         (28)

          —

          —

          —

          —

  Amortization of prior service cost

            1

          —

            3

            2

          —

            1

           (1)

            1

  Net actuarial loss

            8

            7

          24

          21

          —

          —

          —

          —

     Net periodic benefit cost

$        23

$        21

$        68

$        63

$        —

$          2

$          1

$          4

 

Pension Plan Assets

 

Devon previously disclosed in its financial statements for the year ended December 31, 2010, that it expected to contribute $84 million to its qualified pension plans in 2011. During 2011, Devon increased its estimated contribution to $446 million and has fully funded the contribution as of September 30, 2011. The increase in Devon's 2011 contributions is due to increased discretionary funding.

 

As a result of the discretionary contributions noted above, Devon amended its target allocation for its pension plan assets in the second quarter of 2011. Devon previously disclosed a target allocation of 47.5% for equity securities, 40% for fixed income and 12.5% for other investment types. Devon now expects an allocation of 70% fixed income, 20% equity and 10% for other investment types for its pension assets.

Stockholders' Equity
Stockholders' Equity

10. Stockholders' Equity

 

Stock Repurchases

 

During the first nine months of 2011, Devon repurchased 26.0 million common shares for $2.0 billion, or $76.95 per share, under its $3.5 billion stock repurchase program announced in 2010. As of September 30, 2011, Devon had repurchased 44.3 million common shares for $3.2 billion, or $72.25 per share, under this program, which expires December 31, 2011.

 

Dividends

 

Devon paid common stock dividends of $209 million and $211 million in the first nine months of 2011 and 2010, respectively. These amounts reflect quarterly cash dividend rates of $0.16 per share in 2010 and the first quarter of 2011 and $0.17 per share in the second and third quarters of 2011.

Commitments And Contingencies
Commitments And Contingencies

11.   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.

 

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.

 

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 costs associated with remediation. Devon's monetary exposure for environmental matters is not expected to be material.

 

Chief Redemption Matters

 

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

 

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

 

Other Matters

 

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

 

Commitments

 

At the end of 2010, Devon's commitments included approximately $0.6 billion related to lease contracts for a deepwater drilling rig and a floating, production, storage and offloading facility being used in Brazil. Devon's remaining commitments for these leases were assumed by the buyer of its assets upon closing the Brazil divestiture transaction discussed in Note 15.

 

Fair Value Measurements
Fair Value Measurements

12.    Fair Value Measurements

 

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

 

The carrying values of cash, accounts receivable, other current receivables, accounts payable and other payables and accrued expenses included in the accompanying consolidated balance sheets approximated fair value at September 30, 2011 and December 31, 2010. These assets and liabilities are not presented in the following tables.

 


 

 

 

Fair Value Measurements Using:

 

Carrying Amount

Total Fair Value

 Level 1

Inputs

Level 2

Inputs

Level 3

Inputs

 

(In millions)

September 30, 2011 assets (liabilities):

 

 

 

 

 

    Cash equivalents

$        5,161

$        5,161

$        1,262

$        3,899

$             

    Short-term investments

$        1,231

$        1,231

$           289

$           942

$             

    Long-term investments

$              84

$              84

$             

$             

$              84

    Commodity derivatives

$           860

$           860

$             

$           860

$             

    Commodity derivatives

$            (58)

$            (58)

$             

$            (58)

$             

    Interest rate derivatives

$              56

$              56

$             

$              56

$             

    Debt

$       (9,257)

$    (10,625)

$             

$    (10,533)

$            (92)

 


 

 

 

Fair Value Measurements Using:

 

Carrying Amount

Total Fair Value

 Level 1

Inputs

Level 2

Inputs

Level 3

Inputs

 

(In millions)

December 31, 2010 assets (liabilities):

 

 

 

 

 

    Cash equivalents

$        2,335

$        2,355

$        2,335

$             

$             

    Short-term investments

$           145

$           145

$           145

$             

$             

    Long-term investments

$              94

$              94

$             

$             

$              94

    Commodity derivatives

$           249

$           249

$             

$           249

$             

    Commodity derivatives

$          (192)

$          (192)

$             

$          (192)

$             

    Interest rate derivatives

$           140

$           140

$             

$           140

$             

    Debt

$       (5,630)

$       (6,629)

$             

$       (6,485)

$          (144)

 


 

Level 1 Fair Value Measurements

 

Cash equivalents Amounts consist primarily of U.S. treasuries with original maturities less than 90 days, whose carrying value approximates fair value.

 

Short-term investments - Amounts consist primarily of U.S. treasuries with original maturities more than 90 days, whose carrying value approximates fair value.

 

Level 2 Fair Value Measurements

 

Cash equivalents and short-term investments – Amounts consist primarily of commercial paper investments with original maturities more than 90 days. The fair value is based upon quotes from brokers which generally approximate fair value.

 

Debt – The fair value of Devon's variable-rate commercial paper borrowings is the carrying value. The fair value is based upon quotes from brokers which generally approximate fair value.

 

Level 3 Fair Value Measurements

 

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

 

 

Nine Months

Ended September 30,

 

2011

2010

 

(In millions)

Long-term investments balance at beginning of period

$               94

$            115

  Redemptions of principal

                (10)

                (20)

Long-term investments balance at end of period

 

$               84

$               95

 

 

Nine Months

Ended September 30,

 

2011

2010

 

(In millions)

Debt balance at beginning of period

$           (144)

$               —

  Issuance of promissory note

                 —

             (139)

  Foreign currency translation

                   3

                  (4)

  Accretion of promissory note

                  (4)

                  (1)

  Redemptions of principal

                 53

                   1

Debt balance at end of period

$             (92)

$           (143)

Restructuring Costs
Restructuring Costs

13. Restructuring Costs

 

In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of September 30, 2011, Devon had divested all of its U.S. Offshore assets and substantially all of its International assets.

 

Through the end of the third quarter of 2011, Devon had incurred $202 million of restructuring costs associated with these divestitures. This amount is comprised of $120 million of employee severance costs, $78 million associated with abandoned office leases and $4 million of other miscellaneous costs.

 

Financial Statement Presentation

 

The schedule below summarizes activity and balances associated with Devon's restructuring liabilities.

 

Continuing Operations

Discontinued Operations

 

Other Current Liabilities

Other

Long-Term Liabilities

 

 

Total

Other Current Liabilities

Other

Long-Term Liabilities

 

 

Total

 

(In millions)

Balance as of December 31, 2010

$            31

$            51

$            82

$            16

$            —

$            16

  Cash severance settled

             (13)

               —

             (13)

             (12)

               —

             (12)

  Cash severance revision

                 1

               —

                 1

               (2)

               —

               (2)

  Lease obligations settled

               (1)

             (10)

             (11)

               —

               —

               —

  Lease obligations revision

                 1

               (6)

               (5)

               —

               —

               —

Balance as of September 30, 2011

$            19

$            35

$            54

$              2

$            —

$              2

 

Balance as of December 31, 2009

$            61

$            —

$            61

$            23

$            —

$            23

  Cash severance settled

             (17)

               —

             (17)

               (3)

               —

               (3)

  Lease obligations incurred

              17

              53

              70

               —

               —

               —

  Cash severance revision

             (18)

               —

             (18)

               (5)

               —

               (5)

Balance as of September 30, 2010

$            43

$            53

$            96

$            15

$            —

$            15

 

The schedule below summarizes the components of restructuring costs in the accompanying 2011 and 2010 consolidated statements of operations.

 

Income Taxes
Income Taxes

14. Income Taxes

 

In the second quarter of 2011, a portion of Devon's foreign earnings were no longer deemed to be permanently reinvested in accordance with accounting principles generally accepted in the United States. Accordingly, Devon recognized $725 million of deferred tax expense and $19 million of current income tax expense during the second quarter of 2011 related to assumed repatriations of such earnings under current U.S. tax law. These earnings were primarily related to the gains generated from Devon's International divestiture transactions. Excluding the $744 million of tax expense, Devon's effective income tax rate was 33% in the first nine months of 2011.

 

Also, in the second and third quarters of 2010, Devon recognized $52 million and $23 million, respectively, of deferred income tax expense related to assumed repatriations of earnings in accordance with accounting principles generally accepted in the United States. Excluding these amounts, Devon's effective income tax rate was 34% in the first nine months ended of 2010.

Discontinued Operations
Discontinued Operations

15.   Discontinued Operations

          

In May 2011, Devon completed the divestiture of its operations in Brazil. With the close of the Brazil transaction, Devon has substantially completed its planned offshore divestitures. In aggregate, Devon's U.S. and International offshore sales have generated total proceeds of $10 billion, or approximately $8 billion after-tax, assuming repatriation of a substantial portion of the foreign proceeds under current U.S. tax law.

 

Revenues related to Devon's discontinued operations totaled $43 million in the first nine months of 2011 and $139 million and $573 million in the third quarter and first nine months of 2010, respectively. Devon did not have revenues related to its discontinued operations in the third quarter of 2011.

 


 

Earnings from discontinued operations in 2011 and 2010 were largely impacted by gains on Devon's International divestiture transactions. The following table presents the gains on the divestitures according to the quarters in which the divestitures closed in 2011 and 2010. The after-tax amounts in the table below exclude income tax expense related to assumed repatriations discussed in Note 14.

 

 

Second Quarter 2011

Third Quarter 2010

Second Quarter 2010

 

 

 

Gross

After

Taxes

 

Gross

After

Taxes

 

Gross

After

Taxes

 

(In millions)

  Brazil

$ 2,546

$ 2,546

$       —

$       —

$       —

$       —

  Azerbaijan

         —

         —

   1,543

   1,524

         —

         —

  China - Panyu

         —

         —

         —

         —

      308

      235

  Other

         —

         —

          (8)

          (2)

         —

         —

     Total

$ 2,546

$ 2,546

$ 1,535

$ 1,522

$    308

$    235

 

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

 

 

September 30,

December 31,

 

2011

2010

 

(In millions)

  Cash and cash equivalents

$                    

$                  424

  Accounts receivable

                         1

                       43

  Other current assets

                       25

                       96

    Current assets

$                     26

$                  563

 

 

 

  Property and equipment, net

$                  105

$                  848

  Other long-term assets

                         6

                       11

    Long-term assets

$                  111

$                  859

 

 

 

  Accounts payable

$                     13

$                  260

  Other current liabilities

                       37

                       45

    Current liabilities

$                     50

$                  305

 

 

 

    Long-term liabilities

$                       2

$                     26

 

Earnings Per Share
Earnings Per Share

16.   Earnings Per Share

 

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

 

 

 

Earnings

Common Shares

Earnings

per Share

 

(In millions, except per share amounts)

Three Months Ended September 30, 2011:

 

 

 

  Earnings from continuing operations

$       1,040

             414

 

  Attributable to participating securities

              (11)

                (4)

 

  Basic earnings per share

          1,029

             410

$             2.51

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  1

 

 

  Diluted earnings per share

$       1,029

             411

$             2.50

 

 

 

 

Three Months Ended September 30, 2010:

 

 

 

  Earnings from continuing operations

$           429

             435

 

  Attributable to participating securities

                (4)

                (5)

 

  Basic earnings per share

             425

             430

$             0.99

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  1

 

 

  Diluted earnings per share

$           425

             431

$             0.98

 

 

 

 

Nine Months Ended September 30, 2011:

 

 

 

  Earnings from continuing operations

$       1,613

             421

 

  Attributable to participating securities

              (16)

                (4)

 

  Basic earnings per share

          1,597

             417

$             3.83

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  1

 

 

  Diluted earnings per share

$       1,597

             418

$             3.82

 

 

 

 

Nine Months Ended September 30, 2010:

 

 

 

  Earnings from continuing operations

$       1,855

             442

 

  Attributable to participating securities

              (21)

                (5)

 

  Basic earnings per share

          1,834

             437

$             4.20

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  2

 

 

  Diluted earnings per share

$       1,834

             439

$             4.18

Certain options to purchase shares of Devon's common stock are excluded from the dilution calculation because the options are antidilutive. During the three-month and nine-month periods ended September 30, 2011, 5.3 million shares and 3.1 million shares, respectively, were excluded from the diluted earnings per share calculations. During the three-month and nine-month periods ended September 30, 2010, 8.6 million shares and 7.9 million shares, respectively, were excluded from the diluted earnings per share calculations.

Segment Information
Segment Information

17.   Segment Information

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

 

 

U.S.

Canada

International

Total

 

(In millions)

As of September 30, 2011:

 

 

 

 

Current assets (1)

$      2,556

$      7,025

$            26

$      9,607

Property and equipment, net

      15,639

        7,531

             —

      23,170

Goodwill

        3,046

        2,905

             —

        5,951

Other assets

            662

            365

            111

        1,138

     Total assets

$    21,903

$    17,826

$         137

$    39,866

 

 

 

 

 

Current liabilities

$      5,321

$         660

$            50

$      6,031

Long-term debt

        4,734

        1,235

             —

        5,969

Asset retirement obligations

            593

            867

             —

        1,460

Other liabilities

            426

              67

                2

            495

Deferred income taxes

        3,486

        1,323

             —

        4,809

Stockholders' equity

        7,343

      13,674

              85

      21,102

     Total liabilities and stockholders' equity

$    21,903

$    17,826

$         137

$    39,866

____________________________

 




 

U.S.

Canada

Total

 

(In millions)

Three Months Ended September 30, 2011:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     1,406

$         705

 $    2,111

  Oil, gas and NGL derivatives

           738

              —

           738

  Marketing and midstream revenues

           586

             67

           653

     Total revenues

        2,730

           772

        3,502

Expenses and other, net:

 

 

 

  Lease operating expenses

           236

           239

           475

  Taxes other than income taxes

             96

             12

           108

  Marketing and midstream operating costs and expenses

           457

             58

           515

  Depreciation, depletion and amortization of oil and gas

     properties

 

           302

 

           202

 

           504

  Depreciation and amortization of non-oil and gas properties

             57

                5

             62

  Accretion of asset retirement obligations

                9

             14

             23

  General and administrative expenses

             99

             39

           138

  Restructuring costs

              (3)

              —

              (3)

  Interest expense

             60

             44

           104

  Interest-rate and other financial instruments

             38

                2

             40

  Other, net

              —

              (2)

              (2)

     Total expenses and other, net

        1,351

           613

        1,964

Earnings from continuing operations before income taxes

        1,379

           159

        1,538

Income tax expense (benefit):

 

 

 

  Current

          (240)

              (8)

          (248)

  Deferred

           698

             48

           746

     Total income tax expense

           458

             40

           498

Earnings from continuing operations

$         921

$         119

$     1,040

 

 

 

 

Capital expenditures, continuing operations

$     1,556

$         394

$     1,950


 

U.S.

Canada

Total

 

(In millions)

Three Months Ended September 30, 2010:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     1,104

$         579

 $    1,683

  Oil, gas and NGL derivatives

           214

              (5)

           209

  Marketing and midstream revenues

           432

             29

           461

     Total revenues

        1,750

           603

        2,353

Expenses and other, net:

 

 

 

  Lease operating expenses

           208

           207

           415

  Taxes other than income taxes

             85

             10

             95

  Marketing and midstream operating costs and expenses

           314

             22

           336

  Depreciation, depletion and amortization of oil and gas

     properties

 

           234

 

           163

 

           397

  Depreciation and amortization of non-oil and gas properties

             60

                6

             66

  Accretion of asset retirement obligations

                8

             13

             21

  General and administrative expenses

             97

             34

           131

  Restructuring costs

             63

              —

             63

  Interest expense

             36

             47

             83

  Interest-rate and other financial instruments

             55

                1

             56

  Other, net

              (7)

              (2)

              (9)

     Total expenses and other, net

        1,153

           501

        1,654

Earnings from continuing operations before income taxes

           597

           102

           699

Income tax expense (benefit):

 

 

 

  Current

          (349)

             39

          (310)

  Deferred

           590

            (10)

           580

     Total income tax expense

           241

             29

           270

Earnings from continuing operations

$         356

$           73

$         429

 

 

 

 

Capital expenditures, continuing operations

$     1,358

$         308

$     1,666


 

U.S.

Canada

Total

 

(In millions)

Nine Months Ended September 30, 2011:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     4,056

$     2,115

 $    6,171

  Oil, gas and NGL derivatives