DEVON ENERGY CORP/DE, 10-Q filed on 8/4/2011
Quarterly Report
Document And Entity Information
In Millions
6 Months Ended
Jun. 30, 2011
Jul. 22, 2011
Document And Entity Information
 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 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
Q2 
 
Entity Common Stock, Shares Outstanding
 
416.5 
Consolidated Balance Sheets (USD $)
In Millions
Jun. 30, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 3,351 
$ 2,866 
Short-term investments
3,367 
145 
Accounts receivable
1,446 
1,202 
Current assets held for sale
36 
563 
Other current assets
711 
779 
Total current assets
8,911 1
5,555 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
59,423 
56,012 
Not subject to amortization
3,915 
3,434 
Total oil and gas
63,338 
59,446 
Other
4,732 
4,429 
Total property and equipment, at cost
68,070 
63,875 
Less accumulated depreciation, depletion and amortization
(45,643)
(44,223)
Property and equipment, net
22,427 
19,652 
Goodwill
6,176 
6,080 
Long-term assets held for sale
94 
859 
Other long-term assets
929 
781 
Total assets
38,537 
32,927 
Current liabilities:
 
 
Accounts payable - trade
1,365 
1,411 
Revenues and royalties due to others
669 
538 
Short-term debt
1,962 
1,811 
Current liabilities associated with assets held for sale
43 
305 
Other current liabilities
445 
518 
Total current liabilities
4,484 
4,583 
Long-term debt
5,968 
3,819 
Asset retirement obligations
1,499 
1,423 
Liabilities associated with assets held for sale
26 
Other long-term liabilities
808 
1,067 
Deferred income taxes
4,348 
2,756 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 418.3 million and 431.9 million shares in 2011 and 2010, respectively
42 
43 
Additional paid-in capital
4,489 
5,601 
Retained earnings
14,901 
11,882 
Accumulated other comprehensive earnings
2,021 
1,760 
Treasury stock, at cost. 0.3 and 0.4 million shares in 2011 and 2010, respectively
(25)
(33)
Total stockholders' equity
21,428 
19,253 
Commitments and contingencies (Note 11)
 
 
Total liabilities and stockholders' equity
$ 38,537 
$ 32,927 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Jun. 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)
418.3 
431.9 
Treasury stock, shares
0.3 
0.4 
Consolidated Statements Of Operations (USD $)
In Millions, except Per Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Revenues:
 
 
 
 
Oil, gas and NGL sales
$ 2,200 
$ 1,782 
$ 4,060 
$ 3,852 
Oil, gas and NGL derivatives
416 
45 
248 
665 
Marketing and midstream revenues
604 
405 
1,059 
935 
Total revenues
3,220 
2,232 
5,367 
5,452 
Expenses and other, net:
 
 
 
 
Lease operating expenses
453 
442 
877 
856 
Taxes other than income taxes
120 
92 
228 
193 
Marketing and midstream operating costs and expenses
456 
280 
789 
677 
Depreciation, depletion and amortization of oil and gas properties
485 
426 
927 
852 
Depreciation and amortization of non-oil and gas properties
65 
63 
129 
126 
Accretion of asset retirement obligations
23 
24 
46 
50 
General and administrative expenses
135 
130 
265 
268 
Restructuring costs
(8)
(8)
Interest expense
85 
111 
166 
197 
Interest-rate and other financial instruments
25 
81 
66 
Other, net
(11)
(22)
(27)
(26)
Total expenses and other, net
1,842 
1,619 
3,409 
3,251 
Earnings from continuing operations before income taxes
1,378 
613 
1,958 
2,201 
Income tax expense (benefit):
 
 
 
 
Current
36 
707 
(53)
1,006 
Deferred
1,158 
(446)
1,438 
(231)
Total income tax expense
1,194 
261 
1,385 
775 
Earnings from continuing operations
184 
352 
573 
1,426 
Discontinued operations:
 
 
 
 
Earnings from discontinued operations before income taxes
2,558 
473 
2,588 
610 
Discontinued operations income tax (benefit) expense
(1)
119 
138 
Earnings from discontinued operations
2,559 
354 
2,586 
472 
Net earnings
$ 2,743 
$ 706 
$ 3,159 
$ 1,898 
Basic net earnings per share:
 
 
 
 
Basic earnings from continuing operations per share
$ 0.44 
$ 0.79 
$ 1.35 
$ 3.20 
Basic earnings from discontinued operations per share
$ 6.06 
$ 0.80 
$ 6.09 
$ 1.06 
Basic net earnings per share
$ 6.50 
$ 1.59 
$ 7.44 
$ 4.26 
Diluted net earnings per share:
 
 
 
 
Diluted earnings from continuing operations per share
$ 0.43 
$ 0.79 
$ 1.34 
$ 3.19 
Diluted earnings from discontinued operations per share
$ 6.05 
$ 0.79 
$ 6.07 
$ 1.05 
Diluted net earnings per share
$ 6.48 
$ 1.58 
$ 7.41 
$ 4.24 
Consolidated Statements Of Comprehensive Earnings (USD $)
In Millions
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Consolidated Statements Of Comprehensive Earnings
 
 
 
 
Net earnings
$ 2,743 
$ 706 
$ 3,159 
$ 1,898 
Foreign currency translation:
 
 
 
 
Change in cumulative translation adjustment
67 
(326)
262 
(104)
Foreign currency translation income tax (expense) benefit
(2)
17 
(12)
Foreign currency translation total
65 
(309)
250 
(99)
Pension and postretirement benefit plans:
 
 
 
 
Recognition of net actuarial loss and prior service cost in net earnings
17 
16 
Pension and postretirement benefit plans income tax expense
(3)
(3)
(6)
(6)
Pension and postretirement benefit plans total
11 
10 
Other comprehensive earnings (loss), net of tax
70 
(304)
261 
(89)
Comprehensive earnings
$ 2,813 
$ 402 
$ 3,420 
$ 1,809 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Total
Balance, at Dec. 31, 2009
$ 45 
$ 6,527 
$ 7,613 
$ 1,385 
 
$ 15,570 
Balance, shares, at Dec. 31, 2009
447 
 
 
 
 
 
Net earnings
 
 
1,898 
 
 
1,898 
Other comprehensive earnings (loss), net of tax
 
 
 
(89)
 
(89)
Stock option exercises
 
15 
 
 
 
15 
Common stock repurchased
 
 
 
 
(503)
(503)
Common stock retired
(1)
(437)
 
 
438 
 
Common stock retired, shares
(7)
 
 
 
 
 
Common stock dividends
 
 
(142)
 
 
(142)
Share-based compensation
 
75 
 
 
 
75 
Share-based compensation tax benefits
 
 
 
 
Balance, at Jun. 30, 2010
44 
6,186 
9,369 
1,296 
(65)
16,830 
Balance, shares, at Jun. 30, 2010
440 
 
 
 
 
 
Balance, at Dec. 31, 2010
43 
5,601 
11,882 
1,760 
(33)
19,253 
Balance, shares, at Dec. 31, 2010
432 
 
 
 
 
 
Net earnings
 
 
3,159 
 
 
3,159 
Other comprehensive earnings (loss), net of tax
 
 
 
261 
 
261 
Stock option exercises
 
96 
 
 
 
96 
Stock option exercises, shares
 
 
 
 
 
Common stock repurchased
 
 
 
 
(1,285)
(1,285)
Common stock retired
(1)
(1,292)
 
 
1,293 
 
Common stock retired, shares
(16)
 
 
 
 
 
Common stock dividends
 
 
(140)
 
 
(140)
Share-based compensation
 
72 
 
 
 
72 
Share-based compensation tax benefits
 
12 
 
 
 
12 
Balance, at Jun. 30, 2011
$ 42 
$ 4,489 
$ 14,901 
$ 2,021 
$ (25)
$ 21,428 
Balance, shares, at Jun. 30, 2011
418 
 
 
 
 
 
Consolidated Statements Of Cash Flows (USD $)
In Millions
6 Months Ended
Jun. 30,
2011
2010
Cash flows from operating activities:
 
 
Net earnings
$ 3,159 
$ 1,898 
Earnings from discontinued operations, net of tax
(2,586)
(472)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
 
 
Depreciation, depletion and amortization
1,056 
978 
Deferred income tax expense (benefit)
1,438 
(231)
Unrealized change in fair value of financial instruments
(74)
(231)
Other noncash charges
82 
81 
Net (increase) decrease in working capital
(89)
581 
Decrease in long-term other assets
45 
14 
(Decrease) increase in long-term other liabilities
(201)
Cash from operating activities - continuing operations
2,830 
2,619 
Cash from operating activities - discontinued operations
(20)
273 
Net cash from operating activities
2,810 
2,892 
Cash flows from investing activities:
 
 
Capital expenditures
(3,720)
(3,221)
Proceeds from property and equipment divestitures
4,129 
Purchases of short-term investments
(4,520)
 
Redemptions of short-term investments
1,298 
 
Redemptions of long-term investments
18 
Other
(33)
 
Cash from investing activities - continuing operations
(6,969)
926 
Cash from investing activities - discontinued operations
3,170 
429 
Net cash from investing activities
(3,799)
1,355 
Cash flows from financing activities:
 
 
Net commercial paper borrowings (repayments)
2,340 
(1,432)
Debt repayments
 
(350)
Proceeds from stock option exercises
96 
15 
Repurchases of common stock
(1,290)
(430)
Dividends paid on common stock
(140)
(142)
Excess tax benefits related to share-based compensation
12 
Net cash from financing activities
1,018 
(2,333)
Effect of exchange rate changes on cash
32 
(9)
Net increase in cash and cash equivalents
61 
1,905 
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)
$ 3,351 
$ 2,916 
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 June 30, 2011 and Devon's results of operations and cash flows for the three-month and six-month periods ended June 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.

Short-Term Investments
Short-term investments

2.    Short-Term Investments

 

Devon periodically invests excess cash in U.S. Treasury and other marketable securities that are presented as short-term investments in the accompanying June 30, 2011 consolidated balance sheet. During the first half of 2011, Devon invested a portion of the International offshore divestiture proceeds it had received into United States Treasury securities, causing short-term investments to increase. The carrying value of these investments approximates their fair value. As of June 30, 2011, the average remaining maturity of these investments was 67 days, with a weighted average yield of 0.06 percent.

Accounts Receivable
Accounts Receivable

3.  Accounts Receivable

 

The components of accounts receivable include the following:

 

 

June 30, 2011

December 31, 2010

 

(In millions)

Oil, gas and NGL sales

$                    879

$                  786

Joint interest billings

                       245

                     204

Marketing and midstream revenues

                       136

                     165

Other

                       195

                       57

    Gross accounts receivable

                   1,455

                 1,212

Allowance for doubtful accounts

                          (9)

                      (10)

    Net accounts receivable

$                 1,446

$               1,202

 

Derivative Financial Instruments
Derivative Financial Instruments

4.  Derivative Financial Instruments

 

Objectives and Strategies

 

Devon periodically enters into commodity and interest rate derivative financial instruments. These instruments are used to manage the inherent uncertainty of future revenues due to oil, gas and NGL price volatility and to manage exposure to interest rate volatility.  Devon does not hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

 

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

 

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon's interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount. Devon also had forward starting swaps and U.S. Treasury locks. In conjunction with Devon's debt issuance discussed in Note 7, Devon received $35 million from the net settlement of its forward starting swaps and U.S. Treasury locks in July 2011.

 

Counterparty Risk

 

By using derivative financial instruments to manage exposures to changes in commodity prices and interest rates, Devon exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are minimal credit risks. It is Devon's policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon's derivative contracts generally require cash collateral to be posted if either its or the counterparty's credit rating falls below investment grade. The mark-to-market exposure threshold, above which collateral must be posted, decreases as the debt rating falls further below investment grade. Such thresholds generally range from zero to $55 million for the majority of Devon's contracts. As of June 30, 2011, the credit ratings of all Devon's counterparties were investment grade.

 

Commodity Derivatives

 

As of June 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)

Q3-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 June 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)

Q3-Q4 2011

712,500

$5.51

215,000

4.75

5.17

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)

Q3-Q4 2011

Panhandle Eastern Pipeline

150,000

$(0.33)

 

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

 

Basis Swaps

 

 

 

Production Period

 

 

 

Pay

 

 

Volume

(Bbls/d)

 

Weighted Average

Differential to WTI

($/Bbl)

Q3-Q4 2011

Natural Gasoline

416

$(9.75)

Q1-Q4 2012

Natural Gasoline

500

$(10.10)

Q1-Q4 2013

Natural Gasoline

500

$(6.80)

 

Interest Rate Derivatives

 

As of June 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)

 

 

 

$           300

4.30%

Six month LIBOR

July 18, 2011

              100

1.90%

Federal funds rate

August 3, 2012

              500

3.90%

Federal funds rate

July 18, 2013

              250

3.85%

Federal funds rate

July 22, 2013

$        1,150

3.82%

 

 

 

Forward Starting Swaps

 

Notional

Fixed Rate

Paid

Variable

Rate Received

 

Expiration

(In millions)

 

 

 

$           950

3.92%

Three month LIBOR

July 7, 2011

 

U.S. Treasury Locks

 

Notional

Fixed Rate

Paid

Variable

Rate Received

 

Expiration

(In millions)

 

 

 

$           350

1.56%

Five year U.S. Treasury

July 6, 2011

              300

2.96%

Ten year U.S. Treasury

July 6, 2011

$           650

2.21%

 

 

Financial Statement Presentation

 

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

 

 

Balance Sheet Caption

June 30, 2011

December 31, 2010

 

 

(In millions)

Asset derivatives:

 

 

 

  Commodity derivatives

Other current assets

$                      240

$                      248

  Commodity derivatives

Other long-term assets

                           81

                             1

  Interest rate derivatives

Other current assets

                           78

                        100

  Interest rate derivatives

Other long-term assets

                           33

                          40

    Total asset derivatives

$                      432

$                      389

Liability derivatives:

 

 

 

  Commodity derivatives

Other current liabilities

$                        83

$                        50

  Commodity derivatives

Other long-term liabilities

                           78

                        142

    Total liability derivatives

$                      161

$                      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 derivatives are presented in the "Interest-rate and other financial instruments" caption in the accompanying consolidated statements of operations.

 

 

Three Months Ended June 30,

Six Months Ended June 30,

 

2011

2010

2011

2010

 

(In millions)

Cash settlements:

 

 

 

 

    Commodity derivatives

$               59

$             252

$             145

$             348

    Interest rate derivatives

                    5

                    4

                  21

                  20

    Total cash settlements

                  64

               256

               166

               368

 

 

 

 

 

Unrealized gains (losses):

 

 

 

 

    Commodity derivatives

               357

              (207)

               103

               317

    Interest rate derivatives

                (30)

                (85)

                (29)

                (86)

    Total unrealized gains (losses)

               327

              (292)

                  74

               231

Net gain (loss) recognized on statement of operations

$             391

$              (36)

$             240

$             599

Other Current Assets
Other Current Assets

5.     Other Current Assets

 

  The components of other current assets include the following:

 

June 30, 2011

December 31, 2010

 

(In millions)

    Derivative financial instruments

$                  318

$                  348

    Income taxes receivable

                     206

                     270

    Inventories

                     137

                     120

    Other

                       50

                       41

        Other current assets

$                  711

$                  779

 

Goodwill
Goodwill

6.    Goodwill

 

During the first six months of 2011, Devon's Canadian goodwill increased $96 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 June 30, 2011, Devon had no borrowings under the Senior Credit Facility.

 

The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon's ratio of total funded debt to total capitalization to be less than 65 percent. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of June 30, 2011, Devon was in compliance with this covenant. Devon's debt-to-capitalization ratio at June 30, 2011, as calculated pursuant to the terms of the agreement, was 19.3 percent.

 

Commercial Paper

 

In March 2011, Devon's Board of Directors authorized an increase in its commercial paper program from $2.2 billion to $5.0 billion. Commercial paper debt generally has a maturity of between 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 second quarter of 2011 with approximately $6.7 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, during the first six months of 2011, Devon borrowed $2.3 billion of commercial paper in the United States primarily to fund capital expenditures, common stock repurchases and dividends in excess of cash flow generated by its United States operating activities. As of June 30, 2011, Devon's average borrowing rate on its $2.3 billion of commercial paper borrowings was 0.27 percent.

 

In July 2011, Devon received net proceeds totaling $2,224 million from the issuance of $500 million of 2.40% senior notes due July 15, 2016, $500 million of 4.00% senior notes due July 15, 2021 and $1,250 million of 5.60% senior notes due July 15, 2041. The net proceeds from issuance of this long-term debt is being used to repay substantially all of Devon's outstanding commercial paper as of June 30, 2011 as it matures. Therefore, $2,224 million of Devon's outstanding commercial paper is classified as long-term debt in the accompanying June 30, 2011 consolidated balance sheet.

Asset Retirement Obligations
Asset Retirement Obligations

8.     Asset Retirement Obligations

 

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

 

 

Six Months

Ended June 30,

 

2011

2010

 

(In millions)

Asset retirement obligations as of beginning of period

$         1,497

$         1,513

  Liabilities incurred

                 23

                 25

  Liabilities settled

                (39)

                (71)

  Revision of estimated obligation

                 16

               194

  Liabilities assumed by others

                 —

             (256)

  Accretion expense on discounted obligation

                 46

                 50

  Foreign currency translation adjustment

                 28

                (14)

Asset retirement obligations as of end of period

           1,571

           1,441

Less current portion

                 72

                 95

Asset retirement obligations, long-term

$         1,499

$         1,346

 

During the first six 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 six 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 June 30,

Six Months

Ended June 30,

Three Months

Ended June 30,

Six Months

Ended June 30,

 

2011

2010

2011

2010

2011

2010

2011

2010

 

(In millions)

  Service cost

$          9

$          8

$        18

$        16

$          1

$        —

$          1

$        —

  Interest cost

          15

          14

          30

          28

          —

            1

            1

            2

  Expected return on plan assets

         (11)

           (9)

         (21)

         (18)

          —

          —

          —

          —

  Amortization of prior service cost

            1

            1

            2

            2

           (1)

          —

           (1)

          —

  Net actuarial loss

            8

            7

          16

          14

          —

          —

          —

          —

     Net periodic benefit cost

$        22

$        21

$        45

$        42

$        —

$          1

$          1

$          2

 

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. Devon now expects to contribute $346 million to its qualified pension plans in 2011, including $246 million that was contributed in the first six months of 2011 and $100 million that was contributed in July 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 six months of 2011, Devon repurchased 15.2 million common shares under its $3.5 billion stock repurchase program announced in 2010 for $1.3 billion, or $84.52 per share. As of June 30, 2011, Devon had repurchased 33.5 million common shares for $2.5 billion, or $74.16 per share, under this program, which expires December 31, 2011.

 

Dividends

 

Devon paid common stock dividends of $140 million and $142 million in the first six months of 2011 and 2010, respectively. The quarterly cash dividend was $0.16 per share in the first and second quarter of 2010 and the first quarter of 2011. In the second quarter of 2011, Devon increased the dividend rate to $0.17 per share.

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

 

           
     

Fair Value Measurements Using

 

Carrying Amount

Total Fair Value

 Level 1

Inputs

Level 2

Inputs

Level 3

Inputs

 

(In millions)

June 30, 2011 assets (liabilities):

 

 

 

 

 

    Short-term investments

$        3,367

$        3,367

$        3,367

$              —

$              —

    Long-term investments

$              93

$              93

$              —

$              —

$              93

    Commodity derivatives

$           321

$           321

$              —

$           321

$              —

    Commodity derivatives

$          (161)

$          (161)

$              —

$          (161)

$              —

    Interest rate derivatives

$           111

$           111

$              —

$           111

$              —

    Debt

$       (7,930)

$       (8,867)

$       (2,340)

$       (6,423)

$          (104)

 

           

 

 

 

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):

 

 

 

 

 

    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)

 


 

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 six months of 2011 and 2010.

 

 

     

 

Six Months

Ended June 30,

 

2011

2010

 

(In millions)

Long-term investments balance at beginning of period

$               94

$            115

  Redemptions of principal

                  (1)

                (18)

Long-term investments balance at end of period

 

$               93

$               97

 

     

 

Six Months

Ended June 30,

 

2011

2010

 

(In millions)

Debt balance at beginning of period

$           (144)

$               —

  Issuance of promissory note

                 —

             (139)

  Foreign exchange translation adjustment

                  (4)

                 —

  Accretion of promissory note

                  (2)

                 —

  Redemptions of principal

                 46

                 —

Debt balance at end of period

$           (104)

$           (139)

Restructuring Costs
Restructuring Costs

13.  Restructuring Costs 

 

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

 

Through the end of the second quarter of 2011, Devon had incurred $204 million of restructuring costs associated with these divestitures. This amount is comprised of $120 million of employee severance costs, $81 million associated with abandoned office leases and $3 million of other miscellaneous costs.

 

Financial Statement Presentation

 

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

 

 

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

             (16)

               —

             (16)

               (4)

               —

               (4)

  Lease obligations settled

               (1)

               (7)

               (8)

               —

               —

               —

  Lease obligations revision

               (1)

               (1)

               (2)

               —

               —

               —

  Cash severance revision

                 1

               —

                 1

               (2)

               —

               (2)

Balance as of June 30, 2011

$            14

$            43

$            57

$            10

$            —

$            10

 

Balance as of December 31, 2009

$            61

$            —

$            61

$            23

$            —

$            23

  Cash severance settled

               (5)

               —

               (5)

               (1)

               —

               (1)

  Cash severance revision

               (5)

               —

               (5)

               (3)

               —

               (3)

Balance as of June 30, 2010

$            51

$            —

$            51

$            19

$            —

$            19

 

 


 

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

 

 

Three Months Ended June 30, 2011

Six Months Ended June 30, 2011

 

Continuing Operations

Discontinued Operations

 

Total

Continuing Operations

Discontinued Operations

 

Total

 

(In millions)

Cash severance

$              1

$            (8)

$            (7)

$              1

$            (2)

$             (1)

Asset impairments

                2

              —

                2

                 2

               —

                 2

Lease obligations

                2

              —

                2

               (2)

               —

               (2)

Share-based awards

              —

              —

              —

               (1)

               —

               (1)

Other

                1

              —

                1

                 1

              —

                 1

Restructuring costs

$              6

$            (8)

$            (2)

$              1

$            (2)

$             (1)

 

 

Three Months Ended June 30, 2010

Six Months Ended June 30, 2010

 

Continuing Operations

Discontinued Operations

 

Total

Continuing Operations

Discontinued Operations

 

Total

 

(In millions)

Cash severance

$             (5)

$             (3)

$             (8)

$             (5)

$             (3)

$             (8)

Share-based awards

               (4)

               (2)

               (6)

               (4)

               (2)

               (6)

Other

                 1

               —

                 1

                 1

               —

                 1

Restructuring costs

$             (8)

$             (5)

$           (13)

$             (8)

$             (5)

$           (13)

.

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 of America. 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 both the second quarter and first six months of 2011, respectively.

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 portion of the foreign proceeds under current U.S. tax law.

 

Revenues related to Devon's discontinued operations totaled $43 million in the first six months of 2011 and $222 million and $434 million in the second quarter and first six months of 2010, respectively. Devon did not have revenues related to its discontinued operations in the second quarter of 2011.

 

Earnings from discontinued operations in the second quarter and first six months of 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 $744 million of 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.

 

 

June 30,

December 31,

 

2011

2010

 

(In millions)

  Cash and cash equivalents

$                    

$                  424

  Accounts receivable

                         2

                       43

  Other current assets

                       34

                       96

    Current assets

$                     36

$                  563

 

 

 

  Property and equipment, net

$                     92

$                  848

  Other long-term assets

                         2

                       11

    Total long-term assets

$                     94

$                  859

 

 

 

  Accounts payable

$                       4

$                  260

  Other current liabilities

                       39

                       45

    Current liabilities

$                     43

$                  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 June 30, 2011:

 

 

 

  Earnings from continuing operations

$           184

             422

 

  Attributable to participating securities

                (2)

                (5)

 

  Basic earnings per share

             182

             417

$             0.44

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  2

 

 

  Diluted earnings per share

$           182

             419

$             0.43


 

 

Earnings

Common Shares

Earnings

per Share

 

(In millions, except per share amounts)

Three Months Ended June 30, 2010:

 

 

 

  Earnings from continuing operations

$           352

             445

 

  Attributable to participating securities

                (4)

                (5)

 

  Basic earnings per share

             348

             440

$             0.79

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  1

 

 

  Diluted earnings per share

$           348

             441

$             0.79

 

 

 

 

Six Months Ended June 30, 2011:

 

 

 

  Earnings from continuing operations

$           573

             425

 

  Attributable to participating securities

                (6)

                (5)

 

  Basic earnings per share

             567

             420

$             1.35

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  2

 

 

  Diluted earnings per share

$           567

             422

$             1.34

 

 

 

 

Six Months Ended June 30, 2010:

 

 

 

  Earnings from continuing operations

$       1,426

             446

 

  Attributable to participating securities

              (17)

                (5)

 

  Basic earnings per share

          1,409

             441

$             3.20

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options

 

                —

 

                  1

 

 

  Diluted earnings per share

$       1,409

             442

$             3.19

 

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 six-month periods ended June 30, 2011, 3.1 million shares were excluded from the diluted earnings per share calculations. During the three-month and six-month periods ended June 30, 2010, 7.9 million shares and 6.4 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 June 30, 2011:

 

 

 

 

Current assets (1)

$      1,916

$      6,959

$            36

$      8,911

Property and equipment, net

      14,472

        7,955

             —

      22,427

Goodwill

        3,046

        3,130

             —

        6,176

Other assets

            538

            391

              94

        1,023

     Total assets

$    19,972

$    18,435

$         130

$    38,537

 

 

 

 

 

Current liabilities

$      1,995

$      2,446

$            43

$      4,484

Long-term debt

        4,725

        1,243

             —

        5,968

Asset retirement obligations

            578

            921

             —

        1,499

Other liabilities

            742

              66

                2

            810

Deferred income taxes

        2,939

        1,409

             —

        4,348

Stockholders' equity

        8,993

      12,350

              85

      21,428

     Total liabilities and stockholders' equity

$    19,972

$    18,435

$         130

$    38,537

____________________________

(1)   Current assets in the Canadian segment include $6.1 billion of cash, cash equivalents and short-term investments that were generated from Devon's International offshore divestiture program and have not been repatriated to the United States.


 


 

U.S.

Canada

Total

 

(In millions)

Three Months Ended June 30, 2011:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     1,438

$         762

 $    2,200

  Oil, gas and NGL derivatives

           416

              —

           416

  Marketing and midstream revenues

           554

             50

           604

     Total revenues

        2,408

           812

        3,220

Expenses and other, net:

 

 

 

  Lease operating expenses

           224

           229

           453

  Taxes other than income taxes

           107

             13

           120

  Marketing and midstream operating costs and expenses

           413

             43

           456

  Depreciation, depletion and amortization of oil and gas

     properties

 

           291

 

           194

 

           485

  Depreciation and amortization of non-oil and gas properties

             59

                6

             65

  Accretion of asset retirement obligations

                8

             15

             23

  General and administrative expenses

             94

             41

           135

  Restructuring costs

                6

              —

                6

  Interest expense

             40

             45

             85

  Interest-rate and other financial instruments

             25

              —

             25

  Other, net

              (7)

              (4)

            (11)

     Total expenses and other, net

        1,260

           582

        1,842

Earnings from continuing operations before income taxes

        1,148

           230

        1,378

Income tax expense:

 

 

 

  Current

             35

                1

             36

  Deferred

        1,100

             58

        1,158

     Total income tax expense

        1,135

             59

        1,194

Earnings from continuing operations

$           13

$         171

$         184

 

 

 

 

Capital expenditures, continuing operations

$     1,499

$         334

$     1,833


 

 

U.S.

Canada

Total

 

(In millions)

Three Months Ended June 30, 2010:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     1,144

$         638

 $    1,782

  Oil, gas and NGL derivatives

             32

             13

             45

  Marketing and midstream revenues

           372

             33

           405

     Total revenues

        1,548

           684

        2,232

Expenses and other, net:

 

 

 

  Lease operating expenses

           243

           199

           442

  Taxes other than income taxes

             83

                9

             92

  Marketing and midstream operating costs and expenses

           252

             28

           280

  Depreciation, depletion and amortization of oil and gas

     properties

 

           248

 

           178

 

           426

  Depreciation and amortization of non-oil and gas properties

             57

                6

             63

  Accretion of asset retirement obligations

             12

             12

             24

  General and administrative expenses

             98

             32

           130

  Restructuring costs

              (8)

              —

              (8)

  Interest expense

             55

             56

           111

  Interest-rate and other financial instruments

             81

              —

             81

  Other, net

            (26)

                4

            (22)

     Total expenses and other, net

        1,095

           524

        1,619

Earnings from continuing operations before income taxes

           453

           160

           613

Income tax expense (benefit):

 

 

 

  Current

           631

             76

           707

  Deferred

          (421)

            (25)

          (446)

     Total income tax expense

           210

             51

           261

Earnings from continuing operations

$         243

$         109

$         352

 

 

 

 

Capital expenditures, continuing operations

$     1,145

$         774

$     1,919

 


 

 

 

U.S.

Canada

Total

 

(In millions)

Six Months Ended June 30, 2011:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales

$     2,650

$     1,410

 $    4,060

  Oil, gas and NGL derivatives

           248

              —

           248

  Marketing and midstream revenues

           977

             82

        1,059

     Total revenues

        3,875

        1,492

        5,367

Expenses and other, net:

 

 

 

  Lease operating expenses

           432

           445

           877

  Taxes other than income taxes

           201

             27

           228

  Marketing and midstream operating costs and expenses

           721

             68

           789

  Depreciation, depletion and amortization of oil and gas

     properties

 

           551

 

           376

 

           927

  Depreciation and amortization of non-oil and gas properties

           117

             12

           129

  Accretion of asset retirement obligations

             17

             29

             46

  General and administrative expenses

           185

             80

           265

  Restructuring costs

                1

              —

                1

  Interest expense

             77

             89

           166

  Interest-rate and other financial instruments

                8

              —

                8

  Other, net

            (21)

              (6)

            (27)

     Total expenses and other, net

        2,289

        1,120