DEVON ENERGY CORP/DE, 10-K filed on 2/25/2011
Annual Report
Document and Entity Information
In Billions, except Share data in Millions
Year Ended
Dec. 31, 2010
Feb. 10, 2011
Jun. 30, 2010
Document and Entity Information
 
 
 
Document Type
10-K 
 
 
Document Period End Date
2010-12-31 
 
 
Amendment Flag
FALSE 
 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
 
Entity Central Index Key
0001090012 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Current Fiscal Year End Date
12/31 
 
 
Document Fiscal Year Focus
2010 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Common Stock, Shares Outstanding
 
427 
 
Entity Public Float
 
 
27 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
Current assets:
 
 
Cash and cash equivalents
$ 2,866 
$ 646 
Accounts receivable
1,202 
1,208 
Current assets held for sale
563 
657 
Other current assets
924 
481 
Total current assets
5,555 
2,992 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
56,012 
52,352 
Not subject to amortization
3,434 
4,078 
Total oil and gas
59,446 
56,430 
Other
4,429 
4,045 
Total property and equipment, at cost
63,875 
60,475 
Less accumulated depreciation, depletion and amortization
(44,223)
(41,708)
Property and equipment, net
19,652 
18,767 
Goodwill
6,080 
5,930 
Long-term assets held for sale
859 
1,250 
Other long-term assets
781 
747 
Total assets
32,927 
29,686 
Current liabilities:
 
 
Accounts payable - trade
1,411 
1,137 
Revenues and royalties due to others
538 
486 
Short-term debt
1,811 
1,432 
Current liabilities associated with assets held for sale
305 
234 
Other current liabilities
518 
513 
Total current liabilities
4,583 
3,802 
Long-term debt
3,819 
5,847 
Asset retirement obligations
1,423 
1,418 
Liabilities associated with assets held for sale
26 
213 
Other long-term liabilities
1,067 
937 
Deferred income taxes
2,756 
1,899 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 431.9 million and 446.7 million shares in 2010 and 2009, respectively
43 
45 
Additional paid-in capital
5,601 
6,527 
Retained earnings
11,882 
7,613 
Accumulated other comprehensive earnings
1,760 
1,385 
Treasury stock, at cost. 0.4 million shares in 2010
(33)
 
Total stockholders' equity
19,253 
15,570 
Commitments and contingencies (Note 10)
 
 
Total liabilities and stockholders' equity
$ 32,927 
$ 29,686 
CONSOLIDATED BALANCE SHEETS (PARENTHETICAL) (USD $)
In Millions, except Per Share data
Dec. 31, 2010
Dec. 31, 2009
CONSOLIDATED BALANCE SHEETS
 
 
Common stock, par value (in dollars per share)
$ 0.1 
$ 0.1 
Common stock, shares authorized (in shares)
1,000 
1,000 
Common stock, shares issued (in shares)
432 
447 
Treasury stock, shares
 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2010
2009
2008
Revenues:
 
 
 
Oil, gas and NGL sales
$ 7,262 
$ 6,097 
$ 11,720 
Oil, gas and NGL derivatives
811 
384 
(154)
Marketing and midstream revenues
1,867 
1,534 
2,292 
Total revenues
9,940 
8,015 
13,858 
Expenses and other, net:
 
 
 
Lease operating expenses
1,689 
1,670 
1,851 
Taxes other than income taxes
380 
314 
476 
Marketing and midstream operating costs and expenses
1,357 
1,022 
1,611 
Depreciation, depletion and amortization of oil and gas properties
1,675 
1,832 
2,948 
Depreciation and amortization of non-oil and gas properties
255 
276 
255 
Accretion of asset retirement obligations
92 
91 
80 
General and administrative expenses
563 
648 
645 
Restructuring costs
57 
105 
 
Interest expense
363 
349 
329 
Interest-rate and other financial instruments
(14)
(106)
149 
Reduction of carrying value of oil and gas properties
 
6,408 
9,891 
Other, net
(45)
(68)
(217)
Total expenses and other, net
6,372 
12,541 
18,018 
Earnings (loss) from continuing operations before income taxes
3,568 
(4,526)
(4,160)
Income tax expense (benefit):
 
 
 
Current
516 
241 
441 
Deferred
719 
(2,014)
(1,562)
Total income tax expense (benefit)
1,235 
(1,773)
(1,121)
Earnings (loss) from continuing operations
2,333 
(2,753)
(3,039)
Discontinued operations:
 
 
 
Earnings from discontinued operations before income taxes
2,385 
322 
1,258 
Discontinued operations income tax expense
168 
48 
367 
Earnings from discontinued operations
2,217 
274 
891 
Net earnings (loss)
4,550 
(2,479)
(2,148)
Preferred stock dividends
 
 
Net earnings (loss) applicable to common stockholders
4,550 
(2,479)
(2,153)
Basic earnings (loss) from continuing operations per share
5.31 
(6.2)
(6.86)
Basic earnings from discontinued operations per share
5.04 
0.62 
2.01 
Basic net earnings (loss) per share
10.35 
(5.58)
(4.85)
Diluted earnings from continuing operations per share
5.29 
(6.2)
(6.86)
Diluted earnings from discontinued operations per share
5.02 
0.62 
2.01 
Diluted net earnings (loss) per share
$ 10.31 
$ (5.58)
$ (4.85)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
Consolidated Statements of Comprehensive Earnings (Loss)
 
 
 
Net earnings (loss)
$ 4,550 
$ (2,479)
$ (2,148)
Foreign currency translation:
 
 
 
Change in cumulative translation adjustment
397 
993 
(1,960)
Foreign currency translation income tax benefit (expense)
(20)
(62)
79 
Foreign currency translation total
377 
931 
(1,881)
Pension and postretirement benefit plans:
 
 
 
Net actuarial gain (loss) and prior service cost arising in current year
(33)
59 
(239)
Recognition of net actuarial loss and prior service cost in net earnings (loss)
31 
54 
18 
Pension and postretirement benefit plans income tax benefit (expense)
 
(42)
80 
Pension and postretirement benefit plans total
(2)
71 
(141)
Other comprehensive earnings (loss), net of tax
375 
1,002 
(2,022)
Comprehensive earnings (loss)
$ 4,925 
$ (1,477)
$ (4,170)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
In Millions
Preferred Stock [Member]
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Total
Balance, at Dec. 31, 2007
44 
6,743 
12,813 
2,405 
 
22,006 
Balance, shares, at Dec. 31, 2007
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
(2,148)
 
 
(2,148)
Other comprehensive earnings (loss), net of tax
 
 
 
 
(2,022)
 
(2,022)
Stock option exercises
 
123 
 
 
(8)
116 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
 
(709)
(709)
Common stock repurchased, shares
 
(7)
 
 
 
 
 
Common stock retired
 
(1)
(716)
 
 
717 
 
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 
Balance, at Dec. 31, 2008
 
44 
6,257 
10,376 
383 
 
17,060 
Balance, shares, at Dec. 31, 2008
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
(2,479)
 
 
(2,479)
Other comprehensive earnings (loss), net of tax
 
 
 
 
1,002 
 
1,002 
Stock option exercises
 
47 
 
 
(5)
43 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
 
(40)
(40)
Common stock retired
 
 
(45)
 
 
45 
 
Common stock dividends
 
 
 
(284)
 
 
(284)
Share-based compensation
 
 
260 
 
 
 
260 
Share-based compensation tax benefits
 
 
 
 
 
Balance, at Dec. 31, 2009
 
45 
6,527 
7,613 
1,385 
 
15,570 
Balance, shares, at Dec. 31, 2009
 
447 
 
 
 
 
 
Net earnings (loss)
 
 
 
4,550 
 
 
4,550 
Other comprehensive earnings (loss), net of tax
 
 
 
 
375 
 
375 
Stock option exercises
 
 
117 
 
 
(6)
111 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
 
(1,246)
(1,246)
Common stock retired
 
(2)
(1,217)
 
 
1,219 
 
Common stock retired, shares
 
(19)
 
 
 
 
 
Common stock dividends
 
 
 
(281)
 
 
(281)
Share-based compensation
 
 
158 
 
 
 
158 
Share-based compensation tax benefits
 
 
16 
 
 
 
16 
Balance, at Dec. 31, 2010
 
43 
5,601 
11,882 
1,760 
(33)
19,253 
Balance, shares, at Dec. 31, 2010
 
432 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
Cash flows from operating activities:
 
 
 
Earnings (loss) from continuing operations
$ 2,333 
$ (2,753)
$ (3,039)
Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
1,930 
2,108 
3,203 
Deferred income tax expense (benefit)
719 
(2,014)
(1,562)
Reduction of carrying value of oil and gas properties
 
6,408 
9,891 
Unrealized change in fair value of financial instruments
107 
55 
(456)
Other noncash charges
215 
288 
623 
Net decrease (increase) in working capital
(273)
149 
(207)
Decrease (increase) in long-term other assets
32 
(6)
(53)
Increase (decrease) in long-term other liabilities
(41)
(3)
48 
Cash from operating activities - continuing operations
5,022 
4,232 
8,448 
Cash from operating activities - discontinued operations
456 
505 
960 
Net cash from operating activities
5,478 
4,737 
9,408 
Cash flows from investing activities:
 
 
 
Proceeds from property and equipment divestitures
4,310 
34 
117 
Capital expenditures
(6,476)
(4,879)
(8,843)
Proceeds from exchange of Chevron Corporation common stock
 
 
280 
Purchases of short-term investments
(145)
 
(50)
Redemptions of long-term investments
21 
300 
Other
(19)
(17)
 
Cash from investing activities - continuing operations
(2,309)
(4,855)
(8,196)
Cash from investing activities - discontinued operations
2,197 
(499)
1,323 
Net cash from investing activities
(112)
(5,354)
(6,873)
Cash flows from financing activities:
 
 
 
Net commercial paper (repayments) borrowings
(1,432)
426 
Debt repayments
(350)
(178)
(1,031)
Proceeds from borrowings of long-term debt, net of issuance costs
 
1,187 
 
Credit facility repayments
 
 
(3,191)
Credit facility borrowings
 
 
1,741 
Redemption of preferred stock
 
 
(150)
Proceeds from stock option exercises
111 
42 
116 
Repurchases of common stock
(1,168)
 
(665)
Dividends paid on common and preferred stock
(281)
(284)
(289)
Excess tax benefits related to share-based compensation
16 
60 
Net cash from financing activities
(3,104)
1,201 
(3,408)
Effect of exchange rate changes on cash
17 
43 
(116)
Net increase (decrease) in cash and cash equivalents
2,279 
627 
(989)
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)
1,011 
384 
1,373 
Cash and cash equivalents at end of period (including cash related to assets held for sale)
$ 3,290 
$ 1,011 
$ 384 
Summary of Significant Accounting Policies
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 the acquisition, exploration, development and production of oil and gas 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.

 

In November 2009, Devon announced plans to strategically reposition itself as a North American onshore exploration and development company. During 2010, Devon divested its properties in the Gulf of Mexico, Azerbaijan, China and other International regions. Additionally, Devon has entered into agreements to sell its remaining offshore assets in Brazil and Angola. These activities are more fully described in Note 5.

 

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;

• derivative financial instruments;

• income taxes;

• asset retirement obligations;

• 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, including risks related 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. Devon does not hold or issue derivative financial instruments for speculative trading purposes. 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.

 

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production that hedge the future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to commodity price volatility. Devon's derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional gas index prices and pays a variable differential on the same two index prices to the contract counterparty. The price collars set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty to the collars. Under the terms of a call option, Devon received a cash premium for selling call options. The call options then give the counterparty the right to place us into a price swap at a predetermined fixed price.

 

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

 

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. For derivative financial instruments held during the three-year period ended December 31, 2010, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. Cash settlements with counterparties to Devon's derivative financial instruments are also recorded in the statement of operations.

 

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, 2010, 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.

 

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.

 

 


 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

Accounts Receivable
Accounts Receivable

2.  Accounts Receivable

 

The components of accounts receivable include the following:

 

 

December 31,

 

2010

2009

 

(In millions)

Oil, gas and NGL sales

$        786

$        752

Joint interest billings

           182

           151

Marketing and midstream revenues

           163

           188

Production tax credits

             46

           110

Other

             35

             19

  Gross accounts receivable

       1,212

       1,220

Allowance for doubtful accounts

            (10)

            (12)

  Net accounts receivable

$     1,202

$     1,208

Derivative Financial Instruments
Derivative Financial Instruments

3.  Derivative Financial Instruments

 

The following table presents the derivative fair values included in the accompanying consolidated balance sheets. Devon has elected not to designate any of its derivative instruments for hedge accounting treatment.

 

 

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.

 

 

Statement of Operations Caption

2010

2009

2008

 

 

(In millions)

Cash settlements:

 

 

 

 

  Commodity derivatives

Oil, gas and NGL derivatives

$  888

$   505

$ (397)

  Interest rate derivatives

Interest-rate and other financial instruments

       44

       40

          1

     Total cash settlements

     932

     545

    (396)

 

 

 

 

 

Unrealized gains (losses):

 

 

 

 

  Commodity derivatives

Oil, gas and NGL derivatives

      (77)

    (121)

     243

  Interest rate derivatives

Interest-rate and other financial instruments

      (30)

       66

     104

  Embedded option

Interest-rate and other financial instruments

        —

        —

     109

     Total unrealized gains (losses)

    (107)

      (55)

     456

Net gain recognized on statement of operations

$   825

$   490

$     60

Other Current Assets
Other Current Assets

4.  Other Current Assets  

 

The components of other current assets include the following:

 

 

December 31,

 

2010

2009

 

(In millions)

Derivative financial instruments

$        348

$        211

Income tax receivable

           270

             53

Short-term investments

           145

            —

Inventories

           120

           182

Other

             41

             35

  Other current assets

$        924

$        481

Property and Equipment
Property and Equipment

5.  Property and Equipment

 

Property and equipment consists of the following:  

 

 

December 31,

 

2010

2009

 

(In millions)

Oil and gas properties:

 

 

  Subject to amortization

$    56,012

$    52,352

  Not subject to amortization

         3,434

         4,078

  Total

      59,446

      56,430

Accumulated depreciation, depletion and amortization

     (42,676)

     (40,312)

     Net oil and gas properties

      16,770

      16,118

 

 

 

Other property and equipment

         4,429

         4,045

Accumulated depreciation and amortization

       (1,547)

       (1,396)

     Net other property and equipment

         2,882

         2,649

Property and equipment, net

$    19,652

$    18,767

 


 

The following is a summary of Devon's oil and gas properties not subject to amortization as of December 31, 2010.

 

 

Costs Incurred In

 

 

 

2010

 

2009

 

2008

Prior to

2008

 

Total

 

(In millions)

Acquisition costs

$ 1,188

$     121

$ 1,049

$     671

$ 3,029

Exploration costs

       130

         40

         39

            5

       214

Development costs

       159

            1

            9

         

       169

Capitalized interest

         22

         

         

         

         22

  Total oil and gas properties not subject to amortization

$ 1,499

$     162

$ 1,097

$     676

$ 3,434

 

Offshore Divestitures

 

      In November 2009, Devon announced plans to reposition itself strategically as a North America onshore exploration and production company. As part of this strategic repositioning, Devon is bringing forward the value of its offshore assets by divesting them. 

 

Closed Transactions

 

The following table presents Devon's offshore divestiture transactions that closed in 2010. Gross proceeds represent contract prices based upon a January 1, 2010 effective date for the Gulf of Mexico and Azerbaijan divestitures, a May 1, 2010 effective date for the China – Panyu divestiture and a September 1, 2010 effective date for the China-Exploration divestiture. After-tax proceeds represent gross proceeds adjusted for customary purchase price adjustments, selling costs and income taxes. The purchase price adjustments consist primarily of net cash flow subsequent to the effective date of the divestitures. Proved reserves in the following table are based upon estimated proved reserves as of the divestiture dates.

 

 

Gross Proceeds

After-Tax Proceeds

Proved Reserves

 

(In millions)

(MMBoe)

(Unaudited)

Gulf of Mexico (continuing operations)

    $           4,145

    $           3,222

                     91

Azerbaijan (discontinued operations)

                 2,000

                 1,925

                     56

China – Panyu (discontinued operations)

                     515

                     405

                     13

China – Exploration (discontinued operations)

                       77

                       59

                     —

Other (discontinued operations)

                       38

                       38

                     20

     Total

    $           6,775

    $           5,649

                   180

 

        Proceeds from these divestitures are being used to retire debt and repurchase Devon common shares. Additionally, Devon is using divestiture proceeds to fund North America Onshore exploration and development opportunities, including a joint-venture investment in the Pike oil sands discussed below.

 

Under full cost accounting rules, sales or other dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of gain or loss. However, if not recognizing a gain or loss on the disposition would otherwise significantly alter the relationship between a cost center's capitalized costs and proved reserves, then a gain or loss must be recognized.

 

The Gulf of Mexico divestitures presented above did not significantly alter such relationship for Devon's United States cost center. Therefore, Devon did not recognize a gain in connection with the Gulf of Mexico divestitures. The Azerbaijan divestiture included all of Devon's properties in its Azerbaijan cost center. As a result, Devon recognized a $1,543 million ($1,524 million after-tax) gain during 2010 in connection with the Azerbaijan divestiture. Panyu was Devon's only producing property in its China cost center. As a result, Devon recognized a $308 million ($235 million after-tax) gain in connection with the Panyu divestiture in  2010. These gains are included in "earnings from discontinued operations" in the accompanying 2010 consolidated statement of operations.


 

Pending Transactions

 

Devon has entered into agreements to sell its remaining offshore assets in Brazil and Angola and is waiting for the respective governments to approve the divestitures. The Brazil divestiture is valued at $3.2 billion, and Devon expects to record a gain upon the close of this transaction. For the Angola divestiture, Devon will receive $70 million at closing, and has the potential to receive future consideration that is contingent upon the buyer achieving certain milestones.

 

Deepwater Drilling Rigs

       

As part of its offshore operations, Devon was leasing three deepwater drilling rigs. The Seadrill West Sirius and Ocean Endeavor deepwater drilling rigs were used in Devon's Gulf of Mexico operations. The Transocean Deepwater Discovery is currently being used in Devon's operations in Brazil.

 

In conjunction with the deepwater Gulf of Mexico divestiture that closed in the second quarter of 2010, the buyer assumed Devon's lease and remaining commitments for the Seadrill West Sirius rig. Subsequent to closing all its Gulf of Mexico divestitures, Devon agreed to pay $31 million to the owner of the Ocean Endeavor rig to terminate the lease. The $31 million lease termination cost is included in oil and gas property and equipment in the accompanying December 31, 2010, consolidated balance sheet. The buyer of Devon's assets in Brazil will assume Devon's lease and remaining commitments for the Transocean Deepwater Discovery rig when the divestiture transaction closes.

 

Oil Sands Joint Venture

 

In conjunction with certain offshore divestitures in the second quarter of 2010, Devon formed a heavy oil joint venture to operate and develop the Pike oil sands leases in Alberta, Canada. As a result, Devon acquired a 50 percent interest in the Pike oil sands leases for $500 million. Devon will also fund $155 million of Canadian dollar capital costs on behalf of its joint-venture partner in the form of a non-interest bearing promissory note. The majority of the capital costs are expected to be paid during 2011 and 2012. See Note 6 for more information regarding the promissory note.

 

Reductions of Carrying Value

 

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.

Asset Retirement Obligations
Asset Retirement Obligations

7.  Asset Retirement Obligations

 

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

 

 

 

Year Ended

December 31,

 

2010

2009

 

(In millions)

Asset retirement obligations as of beginning of year

$     1,513

$     1,387

  Liabilities incurred

             55

             56

  Liabilities settled

         (129)

         (123)

  Revision of estimated obligation

           194

             33

  Liabilities assumed by others

         (269)

            (30)

  Accretion expense on discounted obligation

             92

             91

  Foreign currency translation adjustment

             41

             99

Asset retirement obligations as of end of year

       1,497

       1,513

Less current portion

             74

             95

Asset retirement obligations, long-term

$     1,423

$     1,418

During 2010 and 2009, Devon recognized revisions to its asset retirement obligations totaling $194 million and $33 million, respectively. The primary factors causing the 2010 and 2009 increases were an overall increase in abandonment cost estimates and a decrease in the discount rate used to present value the obligations.

 

During 2010, Devon reduced its asset retirement obligations by $269 million primarily for those obligations that were assumed by purchasers of Devon's Gulf of Mexico oil and gas properties.

Retirement Plans
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 certain 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. 

 

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 $36 million and $39 million at December 31, 2010 and 2009, respectively, and is included in other long-term assets in the accompanying 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. 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, 2010 and 2009 was $1,010 million and $873 million, respectively. Devon's benefit obligations and plan assets are measured each year as of December 31.

 

 

 

 

 

Pension

Benefits

Other

Postretirement

Benefits

 

2010

2009

2010

2009

 

(In millions)

Change in benefit obligation:

 

 

 

 

  Benefit obligation at beginning of year

$    980

$    931

$       64

$       56

  Service cost

         33

         43

           1

           1

  Interest cost

         58

         58

           3

           3

  Actuarial loss (gain)

         82

           4

           1

           7

  Curtailment (gain) loss

         —

        (26)

         —

           1

  Plan amendments

           5

         —

        (22)

         —

  Foreign exchange rate changes

           2

           5

         —

         —

  Participant contributions

         —

         —

           2

           2

  Benefits paid

        (36)

        (35)

          (6)

          (6)

  Benefit obligation at end of year

   1,124

       980

         43

         64

 

 

 

 

 

Change in plan assets:

 

 

 

 

  Fair value of plan assets at beginning of year

       532

       430

         —

         —

  Actual return on plan assets

         69

         80

         —

         —

  Employer contributions

         66

         55

           4

           4

  Participant contributions

         —

         —

           2

           2

  Benefits paid

        (36)

        (35)

          (6)

          (6)

  Foreign exchange rate changes

           1

           2

         —

         —

  Fair value of plan assets at end of year

       632

       532

         —

         —

 

 

 

 

 

Funded status at end of year

$   (492)

$   (448)

$     (43)

$     (64)

 

 

 

 

 

Amounts recognized in balance sheet:

 

 

 

 

  Noncurrent assets

$         2

$         2

$       —

$       —

  Current liabilities

          (9)

          (8)

          (4)

          (5)

  Noncurrent liabilities

     (485)

     (442)

        (39)

        (59)

  Net amount

$   (492)

$   (448)

$     (43)

$     (64)

 

 

 

 

 

Amounts recognized in accumulated other

  comprehensive earnings:

 

 

 

 

    Net actuarial loss (gain)

$    357 

$    334 

$        (5)

$        (6)

    Prior service cost (credit)

         21

         20

        (12)

         11

    Total

$    378

$    354

$     (17)

$         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 $8 million and $9 million for 2010 and 2009, respectively, 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, 2010 and 2009 as presented in the table below.

 

 

December 31,

 

2010

2009

 

(In millions)

Projected benefit obligation

$   1,110

$      967

Accumulated benefit obligation

$      996

$      860

Fair value of plan assets

$      616

$      517

 

The plan assets included in the above table exclude the Supplemental Plan trusts, which had a total value of $36 million and $39 million at December 31, 2010 and 2009, respectively. 

 

Net Periodic Benefit Cost and Other Comprehensive Earnings

 

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

 

 

 

 

Pension Benefits

Other

Postretirement Benefits

 

2010

2009

2008

2010

2009

2008

 

(In millions)

Net periodic benefit cost:

 

 

 

 

 

 

  Service cost

$     33

$     43

$     41

$       1

$       1

$       1

  Interest cost

       58

       58

       54

          3

          3

          4

  Expected return on plan assets

      (37)

      (35)

      (50)

        —

        —

        —

  Curtailment and settlement expense

        —

          5

        —

        —

          1

        —

  Recognition of net actuarial loss (gain)

       28

       45

       14

        —

        (1)

        —

  Recognition of prior service cost

          3

          3

          2

          1

          2

          2

    Total net periodic benefit cost

       85

     119

       61

          5

          6

          7

Other comprehensive earnings:

 

 

 

 

 

 

  Actuarial (gain) loss arising in current year

       49

      (66)

     245

          1

          7

      (15)

  Prior service cost (credit) arising in current year...

          5

        —

          9

      (22)

        —

        —

  Recognition of net actuarial (loss) gain in net

    periodic benefit cost

 

      (27)

 

      (45)

 

      (14)

 

        —

 

          1

 

        —

  Recognition of prior service cost, including

    curtailment, in net periodic benefit cost

 

        (3)

 

        (8)

 

        (2)

 

        (1)

 

        (2)

 

        (2)

    Total other comprehensive earnings (loss)

       24

    (119)

     238

      (22)

          6

      (17)

Total recognized

$   109

$     —

$   299

$    (17)

$     12

$    (10)

 

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 earnings into net periodic benefit cost during 2011.

 

 

 

Pension

Benefits

Other

Postretirement

     Benefits    

 

(In millions)

Net actuarial loss

$       32

$               —

Prior service cost (credit)

           3

                  (2)

  Total

$       35

$                (2)

 


 

Assumptions

 

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

 

 

 

Pension Benefits

Other

Postretirement Benefits

 

2010

2009

2008

2010

2009

2008

 

 

Assumptions to determine benefit obligations:

 

 

 

 

 

 

  Discount rate

  5.50%

  6.00%

  6.00%

  4.90%

  5.70%

  6.00%

  Rate of compensation increase

  6.94%

  6.95%

  7.00%

    N/A

    N/A

    N/A

Assumptions to determine net periodic benefit cost:

 

 

 

 

 

 

  Discount rate

  6.00%

  6.00%

  6.18%

  5.70%

  6.00%

  6.00%

  Expected return on plan assets

  6.94%

  7.18%

  8.40%

    N/A

    N/A

    N/A

  Rate of compensation increase

  6.94%

  6.95%

  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 are considered when selecting the discount rate.

 

Rate of compensation increase – For measurement of the 2010 benefit obligation for the pension plans, the 6.94% 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 2010 benefit obligation for the other postretirement medical plans, an 8.3% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2011. 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, 2010 other postretirement benefits obligation and the 2011 service and interest cost components of net periodic benefit cost.

 

 

One

Percent

Increase

One

Percent

Decrease

 

(In millions)

Effect on benefit obligation

$           2

$          (2)

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 2010 and 2009, Devon's target allocations for plan assets were 47.5% for equity securities, 40% for fixed-income securities and 12.5% for other investment types. The fair values of Devon's pension assets at December 31, 2010 and 2009 are presented by asset class in the following tables.

 

 

As of December 31, 2010

 

 

 

Fair Value Measurements Using:

 

Actual

Allocation

Total

 Level 1 Inputs

Level 2 Inputs

Level 3

Inputs

 

($ In millions)

Equity securities:

 

 

 

 

 

  United States large cap

         22.3%

$           141

$              —

$           141

$              —

  United States small cap

         14.1%

                89

                89

                —

                —

  International large cap

         14.4%

                91

                50

                41

                —

  Total equity securities

         50.8%

              321

              139

              182

                —

Fixed-income securities:

 

 

 

 

 

  Corporate bonds

         22.0%

              139

              139

                —

                —

  United States Treasury obligations

         10.9%

                69

                69

                —

                —

  Other bonds

           4.6%

                29

                29

                —

                —

  Total fixed-income securities

         37.5%

              237

              237

                —

                —

Other securities:

 

 

 

 

 

  Short-term investment funds

           2.5%

                16

                —

                16

                —

  Hedge funds

           9.2%

                58

                —

                —

                58

  Total other securities

         11.7%

                74

                —

                16

                58

Total investments

      100.0%

$           632

$           376

$           198

$              58

 

 

As of December 31, 2009

 

 

 

Fair Value Measurements Using:

 

Actual

Allocation

Total

 Level 1 Inputs

Level 2 Inputs

Level 3

Inputs

 

(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

 

The following methods and assumptions were used to estimate the fair values of the assets 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.

 

Included below is a summary of the changes in Devon's Level 3 plan assets.

 

 

 

Hedge Funds

 

(In millions)

December 31, 2008

$               —

Purchases

                 51

December 31, 2009

                 51

Purchases

                   3

Investment returns

                   4

December 31, 2010

$              58

 

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 2011 contributions

$         93

$                 4

Benefit payments:

 

 

  2011

$         42

$                 4

  2012

$         45

$                 4

  2013

$         49

$                 4

  2014

$         52

$                 4

  2015

$         54

$                 4

  2016 to 2020

$       328

$               21

 

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 2011, $9 million of pension benefits is expected to be funded from the trusts established for the Supplemental Plans and all $4 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.

 

Devon also has an enhanced defined contribution structure related to its 401(k) Plan. Participants who elected to participate in this enhanced defined contribution structure when it was established, as well as all employees hired after the enhanced defined contribution structure was established, receive a discretionary match of a percentage of their contributions to the 401(k) Plan. The 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.

 

 

Year Ended December 31,

 

2010

2009

2008

 

(In millions)

401(k) plan

$     18

$     20

$     21

Enhanced contribution plan

       14

       14

       12

Canadian pension and savings plans

       17

       15

       16

     Total expense

$     49

$     49

$     49

Stockholders' Equity
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, 2010, 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 100 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 100 votes per share on all matters submitted to a vote of the stockholders. The Corporation, at its option, may redeem shares of the Series A Junior Participating Preferred Stock in whole at any time and in part from time to time, at a redemption price equal to 100 times the current per share market price of the Common Stock on the date of the mailing of the notice of redemption. The Series A Junior Preferred Stock ranks prior to the common stock but junior to all other classes of Preferred Stock.

 

Stock Repurchases

 

During 2010, Devon's Board of Directors announced a share repurchase program that authorizes the repurchase of up to $3,500 million of its common shares. This program, which expires December 31, 2011, was created as a result of the success experienced from the offshore divestiture program described in Note 5.

 

During 2008, Devon's Board of Directors 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.

 

The following table summarizes Devon's repurchases under approved plans (amounts and shares in millions).

 

 

2010

2008

Repurchase Program

Amount

Shares

Per Share

Amount

Shares

Per Share

2010 program

$   1,201

        18.3

$   65.58

$         —

           —

$         —

Annual program

           —

           —

           —

         178

          2.0

$   87.83

2007 program

           —

           —

           —

         487

          4.5

$ 109.25

  Totals

$   1,201

        18.3

$   65.58

$      665

          6.5

$ 102.56

 

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.

 

Dividends

 

Devon paid common stock dividends of $281 million (or $0.64 per share) in 2010 and $284 million (or $0.64 per share) in both 2009 and 2008, respectively. Devon paid dividends of $5 million in 2008 to preferred stockholders.

Commitments and Contingencies
Commitments and Contingencies

10.  Commitments and Contingencies

 

Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon's estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon's financial position or results of operations after consideration of recorded accruals although actual amounts could differ materially from management's estimate.

 

Environmental Matters

 

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

 

Royalty Matters