DEVON ENERGY CORP/DE, 10-K filed on 2/25/2010
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data in Millions
Feb. 15, 2010
Year Ended
Dec. 31, 2009
Jun. 30, 2009
Document and Entity Information
 
 
 
Document Type
 
10-K 
 
Document Period End Date
 
12/31/2009 
 
Amendment Flag
 
FALSE 
 
Entity Registrant Name
 
Devon Energy Corp/DE 
 
Entity Central Index Key
 
0001090012 
 
Entity Current Reporting Status
 
Yes 
 
Entity Voluntary Filers
 
No 
 
Current Fiscal Year End Date
 
12/31 
 
Entity Filer Category
 
Large Accelerated Filer 
 
Entity Well-known Seasoned Issuer
 
Yes 
 
Entity Common Stock, Shares Outstanding (in shares)
446.8 
 
 
Entity Public Float
 
 
$ 24 
Consolidated Balance Sheets (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$ 646 
$ 195 
Accounts receivable
1,208 
1,300 
Derivative financial instruments, at fair value
211 
282 
Current assets held for sale
657 
392 
Other current assets
270 
515 
Total current assets
2,992 
2,684 
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($4,078 million and $4,248 million excluded from amortization in 2009 and 2008, respectively)
60,475 
53,391 
Less accumulated depreciation, depletion and amortization
41,708 
31,360 
Property and equipment, net
18,767 
22,031 
Goodwill
5,930 
5,511 
Long-term assets held for sale
1,250 
1,128 
Other long-term assets, including $246 million and $199 million at fair value in 2009 and 2008, respectively
747 
554 
Total assets
29,686 
31,908 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Current liabilities:
 
 
Accounts payable - trade
1,137 
1,612 
Revenues and royalties due to others
486 
490 
Short-term debt
1,432 
180 
Current portion of asset retirement obligations, at fair value
95 
138 
Current liabilities associated with assets held for sale
234 
365 
Other current liabilities, including $38 million at fair value in 2009
418 
350 
Total current liabilities
3,802 
3,135 
Long-term debt
5,847 
5,661 
Asset retirement obligations, at fair value
1,418 
1,249 
Liabilities associated with assets held for sale, including $109 million and $98 million at fair value in 2009 and 2008, respectively
213 
166 
Other long-term liabilities
937 
1,023 
Deferred income taxes
1,899 
3,614 
Stockholders' equity:
 
 
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 446.7 million and 443.7 million shares in 2009 and 2008, respectively
45 
44 
Additional paid-in capital
6,527 
6,257 
Retained earnings
7,613 
10,376 
Accumulated other comprehensive income
1,385 
383 
Total stockholders' equity
15,570 
17,060 
Commitments and contingencies (Note 10)
 
 
Total liabilities and stockholders' equity
$ 29,686 
$ 31,908 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties excluded from amortization
$ 4,078 
$ 4,248 
Other long-term assets at fair value
246 
199 
Other current liabilities at fair value
38 
 
Liabilities associated with assets held for sale at fair value
109 
98 
Common stock, par value (in dollars per share)
0.1 
0.1 
Common stock, shares authorized (in shares)
1,000 
1,000 
Common stock, shares issued (in shares)
446.7 
443.7 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2009
2008
2007
Revenues:
 
 
 
Oil, gas and NGL sales
$ 6,097 
$ 11,720 
$ 8,225 
Net gain (loss) on oil and gas derivative financial instruments
384 
(154)
14 
Marketing and midstream revenues
1,534 
2,292 
1,736 
Total revenues
8,015 
13,858 
9,975 
Expenses and other income, net:
 
 
 
Lease operating expenses
1,670 
1,851 
1,532 
Taxes other than income taxes
314 
476 
358 
Marketing and midstream operating costs and expenses
1,022 
1,611 
1,217 
Depreciation, depletion and amortization of oil and gas properties
1,832 
2,948 
2,412 
Depreciation and amortization of non-oil and gas properties
276 
255 
201 
Accretion of asset retirement obligations
91 
80 
70 
General and administrative expenses
648 
645 
513 
Restructuring costs
105 
Interest expense
349 
329 
430 
Change in fair value of other financial instruments
(106)
149 
(34)
Reduction of carrying value of oil and gas properties
6,408 
9,891 
Other income, net
(68)
(217)
(51)
Total expenses and other income, net
12,541 
18,018 
6,648 
Earnings (loss) from continuing operations before income taxes
(4,526)
(4,160)
3,327 
Income tax expense (benefit):
 
 
 
Current
241 
441 
235 
Deferred
(2,014)
(1,562)
607 
Total income tax expense (benefit)
(1,773)
(1,121)
842 
Earnings (loss) from continuing operations
(2,753)
(3,039)
2,485 
Discontinued operations:
 
 
 
Earnings from discontinued operations before income taxes
322 
1,258 
1,593 
Discontinued operations income tax expense
48 
367 
472 
Earnings from discontinued operations
274 
891 
1,121 
Net earnings (loss)
(2,479)
(2,148)
3,606 
Preferred stock dividends
10 
Net earnings (loss) applicable to common stockholders
(2,479)
(2,153)
3,596 
Basic net earnings (loss) per share:
 
 
 
Basic earnings (loss) from continuing operations per share (in dollars per share)
(6.2)
(6.86)
5.56 
Basic earnings from discontinued operations per share (in dollars per share)
0.62 
2.01 
2.52 
Basic net earnings (loss) per share (in dollars per share)
(5.58)
(4.85)
8.08 
Diluted net earnings (loss) per share:
 
 
 
Diluted earnings (loss) from continuing operations per share (in dollars per share)
(6.2)
(6.86)
5.5 
Diluted earnings from discontinued operations per share (in dollars per share)
0.62 
2.01 
2.5 
Diluted net earnings (loss) per share (in dollars per share)
$ (5.58)
$ (4.85)
$ 8 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Net earnings (loss)
$ (2,479)
$ (2,148)
$ 3,606 
Foreign currency translation:
 
 
 
Change in cumulative translation adjustment
993 
(1,960)
1,389 
Foreign currency translation income tax benefit (expense)
(62)
79 
(42)
Foreign currency translation total
931 
(1,881)
1,347 
Pension and postretirement benefit plans:
 
 
 
Net actuarial loss and prior service cost arising in current year
59 
(239)
(90)
Recognition of net actuarial loss and prior service cost in net earnings (loss)
54 
18 
14 
Curtailment of pension benefits
16 
Pension and postretirement benefit plans income tax benefit (expense)
(42)
80 
23 
Pension and postretirement benefit plans total
71 
(141)
(37)
Reclassification adjustment for realized gains included in net earnings
(1)
Other comprehensive earnings (loss), net of tax
1,002 
(2,022)
1,309 
Comprehensive income (loss)
$ (1,477)
$ (4,170)
$ 4,915 
Consolidated Statements of Stockholders' Equity (USD $)
In Millions
Preferred Stock
Common Stock
Accumulated Other Comprehensive Income
Treasury Stock
Additional Paid-in Capital
Retained Earnings
Total
1/1/2007 - 12/31/2007
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stockholders' equity, beginning balance
$ 1 
$ 44 
$ 1,444 
$ (1)
$ 6,840 
$ 9,114 
$ 17,442 
Common Stock, Shares, Beginning Balance
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
3,606 
3,606 
Other comprehensive earnings (loss), net of tax
 
 
1,309 
 
 
 
1,309 
Other financial instruments
 
 
(364)
 
 
364 
Uncertain income tax positions
 
 
 
 
 
(11)
(11)
Pension and postretirement benefit plans
 
 
16 
 
 
(1)
15 
Stock option exercises
 
 
 
90 
 
91 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations
 
 
 
 
 
 
Common stock repurchased
 
 
 
(362)
 
 
(362)
Common stock repurchased, shares
 
(5)
 
 
 
 
 
Common stock retired
 
(1)
 
363 
(362)
 
Redemption of preferred stock
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
(249)
(249)
Preferred stock dividends
 
 
 
 
 
(10)
(10)
Share-based compensation
 
 
 
 
131 
 
131 
Share-based compensation tax benefits
 
 
 
 
44 
 
44 
Stockholders' equity, ending balance
44 
2,405 
6,743 
12,813 
22,006 
Common Stock, Shares, Ending Balance
 
444 
 
 
 
 
 
1/1/2008 - 12/31/2008
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stockholders' equity, beginning balance
44 
2,405 
6,743 
12,813 
22,006 
Common Stock, Shares, Beginning Balance
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
(2,148)
(2,148)
Other comprehensive earnings (loss), net of tax
 
 
(2,022)
 
 
 
(2,022)
Other financial instruments
 
 
 
 
 
 
 
Uncertain income tax positions
 
 
 
 
 
 
 
Pension and postretirement benefit plans
 
 
 
 
 
 
 
Stock option exercises
 
 
(8)
123 
 
116 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations
 
 
 
 
 
 
Common stock repurchased
 
 
 
(709)
 
 
(709)
Common stock repurchased, shares
 
(7)
 
 
 
 
 
Common stock retired
 
(1)
 
717 
(716)
 
Redemption of preferred stock
(1)
 
 
 
(149)
 
(150)
Common stock dividends
 
 
 
 
 
(284)
(284)
Preferred stock dividends
 
 
 
 
 
(5)
(5)
Share-based compensation
 
 
 
 
196 
 
196 
Share-based compensation tax benefits
 
 
 
 
60 
 
60 
Stockholders' equity, ending balance
44 
383 
6,257 
10,376 
17,060 
Common Stock, Shares, Ending Balance
 
444 
 
 
 
 
 
1/1/2009 - 12/31/2009
 
 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
Stockholders' equity, beginning balance
44 
383 
6,257 
10,376 
17,060 
Common Stock, Shares, Beginning Balance
 
444 
 
 
 
 
 
Net earnings (loss)
 
 
 
 
 
(2,479)
(2,479)
Other comprehensive earnings (loss), net of tax
 
 
1,002 
 
 
 
1,002 
Other financial instruments
 
 
 
 
 
 
 
Uncertain income tax positions
 
 
 
 
 
 
 
Pension and postretirement benefit plans
 
 
 
 
 
 
 
Stock option exercises
 
 
(5)
47 
 
43 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations
 
 
 
 
 
 
Common stock repurchased
 
 
 
(40)
 
 
(40)
Common stock repurchased, shares
 
 
 
 
 
 
 
Common stock retired
 
 
 
45 
(45)
 
Redemption of preferred stock
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
(284)
(284)
Preferred stock dividends
 
 
 
 
 
 
 
Share-based compensation
 
 
 
 
260 
 
260 
Share-based compensation tax benefits
 
 
 
 
 
Stockholders' equity, ending balance
 
45 
1,385 
6,527 
7,613 
15,570 
Common Stock, Shares, Ending Balance
 
447 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
Cash and Cash Equivalents, Period Increase (Decrease) [Abstract]
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$ (2,479)
$ (2,148)
$ 3,606 
Net earnings from discontinued operations
(274)
(891)
(1,121)
Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
2,108 
3,203 
2,613 
Deferred income tax expense (benefit)
(2,014)
(1,562)
607 
Reduction of carrying value of oil and gas properties
6,408 
9,891 
Net unrealized loss (gain) on oil and gas derivative financial instruments
121 
(243)
26 
Other noncash charges
222 
410 
150 
Net decrease (increase) in working capital
149 
(207)
(512)
Decrease (increase) in long-term other assets
(6)
(53)
(60)
Increase (decrease) in long-term other liabilities
(3)
48 
(1)
Cash provided by operating activities - continuing operations
4,232 
8,448 
5,308 
Cash provided by operating activities - discontinued operations
505 
960 
1,343 
Net cash provided by operating activities
4,737 
9,408 
6,651 
Cash flows from investing activities:
 
 
 
Proceeds from sales of property and equipment
34 
117 
76 
Capital expenditures
(4,879)
(8,843)
(5,710)
Proceeds from exchange of Chevron Corporation common stock
280 
Purchases of short-term investments
(50)
(934)
Sales of long-term and short-term investments
300 
1,136 
Other
(17)
Cash used in investing activities - continuing operations
(4,855)
(8,196)
(5,432)
Cash provided by (used in) investing activities - discontinued operations
(499)
1,323 
(282)
Net cash used in investing activities
(5,354)
(6,873)
(5,714)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings of long-term debt, net of issuance costs
1,187 
Credit facility repayments
(3,191)
(757)
Credit facility borrowings
1,741 
2,207 
Net commercial paper borrowings (repayments)
426 
(804)
Debt repayments
(178)
(1,031)
(567)
Redemption of preferred stock
(150)
Proceeds from stock option exercises
42 
116 
91 
Repurchases of common stock
(665)
(326)
Dividends paid on common and preferred stock
(284)
(289)
(259)
Excess tax benefits related to share-based compensation
60 
44 
Net cash provided by (used in) financing activities
1,201 
(3,408)
(371)
Effect of exchange rate changes on cash
43 
(116)
51 
Net increase (decrease) in cash and cash equivalents
627 
(989)
617 
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)
384 
1,373 
756 
Cash and cash equivalents at end of period (including cash related to assets held for sale)
$ 1,011 
$ 384 
$ 1,373 
Summary of Significant Accounting Policies
1. Summary of Significant Accounting Policies

1.  Summary of Significant Accounting Policies

 

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

 

Nature of Business and Principles of Consolidation

 

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

 

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

• the Permian Basin within Texas and New Mexico;

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

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

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

 

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

 

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

 

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

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

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

• the carrying value of oil and gas properties;

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

• asset retirement obligations;

• income taxes;

• derivative financial instruments;

• obligations related to employee pension and postretirement benefits; and

• legal and environmental risks and exposures.

 


Derivative Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

By using derivative financial instruments to hedge exposures to changes in commodity prices and interest rates, Devon exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are minimal credit risks. It is Devon's policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon's derivative contracts generally require cash collateral to be posted if either its or the counterparty's credit rating falls below investment grade. The mark-to-market exposure threshold, above which collateral must be posted, decreases as the debt rating falls further below investment grade. Such thresholds generally range from zero to $50 million for the majority of our contracts. As of December 31, 2009, the credit ratings of all Devon's counterparties were investment grade.

 

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

 

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

 

Fair Value Measurements

 

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

 

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

 

Discontinued Operations

 

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

 

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

 

Property and Equipment

 

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

 

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

 

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

 

Any excess of the net book value, less related deferred taxes, over the ceiling is written off as an expense. An expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period.

 

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

 

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

 

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

 

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

 

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

 

Investments

 

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

 

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

 

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

 

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

 


Goodwill 

 

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

 

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

 

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

 

 

December 31,

 

2009

2008

 

(In millions)

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

$   3,046

$  3,046

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

     2,884

     2,465

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

$   5,930

$  5,511

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

$         68

$        68

 

Foreign Currency Translation Adjustments

 

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

 

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

   $  1,219

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

   $  2,566

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

   $      685

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

   $  1,616

 

Commitments and Contingencies

 

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

 

Revenue Recognition and Gas Balancing

 

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

 


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

 

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

 

Major Purchasers

 

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

 

General and Administrative Expenses

 

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

 

Share Based Compensation

 

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

 

Income Taxes

 

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

 

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

 

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

 


Net (Loss) Earnings Per Common Share

 

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

 

Statements of Cash Flows

 

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

 

Accounts Receivable
2. Accounts Receivable

2.  Accounts Receivable

 

The components of accounts receivable include the following:

 

 

December 31,

 

2009

2008

 

(In millions)

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

$        752

$        711

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

           151

           241

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

           188

           153

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

           110

           170

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

             19

             30

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

       1,220

       1,305

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

            (12)

              (5)

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

$     1,208

$     1,300

 

Derivative Financial Instruments
3. Derivative Financial Instruments

3.  Derivative Financial Instruments

 

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

 

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

 

 

 

Balance Sheet Caption

Asset

Derivatives

Liability

Derivatives

 

 

(In millions)

December 31, 2009:

 

 

 

     Gas price swaps................

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

$      169

$         —

     Gas basis swaps................

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

             3

           —

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

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

           —

           38

     Interest rate swaps...........

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

           39

           —

     Interest rate swaps...........

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

         131

           —

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

$      342

$         38

 

 

 

 

December 31, 2008:

 

 

 

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

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

$      255

$         —

     Interest rate swaps...........

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

           27

           —

     Interest rate swaps...........

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

           77

           —

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

$      359

$         —

 

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

 

 

Statement of Operations Caption

2009

2008

2007

 

 

(In millions)

Cash settlements:

 

 

 

 

 

  Gas price collars..............

Net gain (loss) on oil and gas derivative financial

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

 

$    450

 

$   (221)

 

$         2

 

  Gas price swaps..............

Net gain (loss) on oil and gas derivative financial

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

 

         55

 

     (203)

 

         38

 

  Oil price collars................

Net gain (loss) on oil and gas derivative financial

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

 

        —

 

         27

 

        —

  Interest rate swaps.........

Change in fair value of other financial instruments

         40

           1

        —

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

       545

     (396)

         40

 

 

 

 

 

Unrealized (losses) gains:

 

 

 

 

 

  Gas price collars..............

Net gain (loss) on oil and gas derivative financial

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

 

     (255)

 

       255

 

          (4)

 

  Gas price swaps..............

Net gain (loss) on oil and gas derivative financial

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

 

       169

 

        (12)

 

        (22)

 

  Gas basis swaps..............

Net gain (loss) on oil and gas derivative financial

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

 

           3

 

        —

 

        —

 

  Oil price collars................

Net gain (loss) on oil and gas derivative financial

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

 

        (38)

 

        —

 

        —

  Interest rate swaps.........

Change in fair value of other financial instruments

         66

       104

           1

  Embedded option...........

Change in fair value of other financial instruments

        —

       109

     (248)

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

        (55)

       456

     (273)

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

$    490

$       60

$   (233)

 

Other Current Assets
4. Other Current Assets

4.  Other Current Assets  

 

The components of other current assets include the following:

 

 

December 31,

 

2009

2008

 

(In millions)

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

$        182

$        142

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

             33

             36

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

             53

           333

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

               2

               4

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

$        270

$        515

 

Property and Equipment
5. Property and Equipment

5.  Property and Equipment

 

Property and equipment consists of the following:

 

 

December 31,

 

2009

2008

 

(In millions)

Oil and gas properties:

 

 

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

$    52,352

$    45,678

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

         4,078

         4,248

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

      56,430

      49,926

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

     (40,312)

     (30,260)

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

      16,118

      19,666

 

 

 

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

         4,045

         3,465

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

       (1,396)

       (1,100)

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

         2,649

         2,365

Property and equipment, net of accumulated depreciation,

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

 

$    18,767

 

$    22,031

 

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

 

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

 

 

Costs Incurred In

 

 

 

2009

 

2008

 

2007

Prior to

2007

 

Total

 

(In millions)

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

$     129

$ 1,567

$     126

$     780

$ 2,602

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

       223

       303

         56

       174

       756

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

       326

       169

         34

         22

       551

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

         74

         54

         37

            4

       169

  Total oil and gas properties not subject to amortization

$     752

$ 2,093

$     253

$     980

$ 4,078

 

Asset Retirement Obligations
7. Asset Retirement Obligations

7.  Asset Retirement Obligations

 

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

 

 

 

Year Ended

December 31,

 

2009

2008

 

(In millions)

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

$     1,387

$     1,245

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

             56

             59

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

         (123)

            (86)

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

             33

           225

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

            (30)

             —

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

             91

             80

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

             99

         (136)

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

       1,513

       1,387

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

             95

           138

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

$     1,418

$     1,249

 

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

 

Retirement Plans
8. Retirement Plans

8.  Retirement Plans 

 

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

 

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

 

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

 

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

 

Benefit Obligations and Funded Status

 

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

 

 

 

 

 

Pension

Benefits

Other

Postretirement

Benefits

 

2009

2008

2009

2008

 

(In millions)

Change in benefit obligation:

 

 

 

 

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

$    931

$    849

$       56

$       71

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

         43

         41

           1

           1

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

         58

         54

           3

           4

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

           4

         17

           7

        (15)

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

        (26)

         —

           1

         —

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

         —

           9

         —

         —

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

           5

          (6)

         —

         —

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

         —

         —

           2

           2

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

        (35)

        (33)

          (6)

          (7)

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

       980

       931

         64

         56

 

 

 

 

 

Change in plan assets:

 

 

 

 

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

       430

       619

         —

         —

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

         80

     (178)

         —

         —

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

         55

         25

           4

           5

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

         —

         —

           2

           2

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

        (35)

        (33)

          (6)

          (7)

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

           2

          (3)

         —

         —

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

       532

       430

         —

         —

 

 

 

 

 

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

$   (448)

$   (501)

$     (64)

$     (56)

 

 

 

 

 

Amounts recognized in balance sheet:

 

 

 

 

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

$         2

$         2

$       —

$       —

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

          (8)

        (10)

          (5)

          (5)

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

     (442)

     (493)

        (59)

        (51)

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

$   (448)

$   (501)

$     (64)

$     (56)

 

 

 

 

 

Amounts recognized in accumulated other

  comprehensive income:

 

 

 

 

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

$    334 

$    440

$        (6)

$     (13)

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

         20

         28

         11

         13

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

$    354

$    468

$         5

$       —

 

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

 

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

 

 

December 31,

 

2009

2008

 

(In millions)

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

$      967

$      921

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

$      860

$      784

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

$      517

$      417

 

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

 

Net Periodic Benefit Cost and Other Comprehensive Income

 

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

 

 

 

 

Pension Benefits

Other

Postretirement Benefits

 

2009

2008

2007

2009

2008

2007

 

(In millions)

Net periodic benefit cost:

 

 

 

 

 

 

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

$     43

$     41

$     30

$       1

$       1

$       1

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

       58

       54

       46

          3

          4

          3

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

      (35)

      (50)

      (49)

        —

        —

        —

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

          5

        —

          1

          1

        —

        —

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

        —

        —

        —

        —

        —

          1

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

       45

       14

       12

        (1)

        —

          1

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

          3

          2

          1

          2

          2

        —

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

     119

       61

       41

          6

          7

          6

Other comprehensive income

 

 

 

 

 

 

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

      (66)

     245

       54

          7

      (15)

        (3)

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

        —

          9

       17

        —

        —

       22

  Recognition of net actuarial (loss) gain in net

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

 

      (45)

 

      (14)

 

      (12)

 

          1

 

        —

 

        (1)

  Recognition of prior service cost, including

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

 

        (8)

 

        (2)

 

        (1)

 

        (2)

 

        (2)

 

        —

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

        —

        —

      (16)

        —

        —

        —

  Change in additional minimum pension liability.

        —

        —

        —

        —

        —

        —

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

    (119)

     238

       42

          6

      (17)

       18

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

$     —

$   299

$     83

$     12

$    (10)

$     24

 

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

 

 

 

Pension

Benefits

Other

Postretirement

     Benefits    

 

(In millions)

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

$       27

$              —

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

           3

                   1

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

$       30

$                 1

 

Assumptions

 

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

 

 

 

 

Pension Benefits

Other

Postretirement Benefits

 

2009

2008

2007

2009

2008

2007

 

 

Assumptions to determine benefit obligations:

 

 

 

 

 

 

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

  6.00%

  6.00%

  6.22%

  5.70%

  6.00%

  6.00%

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

  6.95%

  7.00%

  7.00%

    N/A

    N/A

    N/A

Assumptions to determine net periodic benefit cost:

 

 

 

 

 

 

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

  6.00%

  6.18%

  5.96%

  6.00%

  6.00%

  5.75%

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

  7.18%

  8.40%

  8.40%

    N/A

    N/A

    N/A

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

  6.95%

  7.00%

  7.00%

    N/A

    N/A

    N/A

 

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

 

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

 

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

 

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

 

 

One

Percent

Increase

One

Percent

Decrease

 

(In millions)

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

$           5

$          (4)

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

$         —

$         —

 

Pension Plan Assets

 

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

 

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

 

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


 

 

As of December 31, 2009

 

 

 

Fair Value Measurements Using:

 

Actual

Allocation

Total

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

 

(In millions)

Equity securities:

 

 

 

 

 

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

         18.8%

$           100

$              —

$           100

$              —

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

         15.2%

                81

                81

                —

                —

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

         15.2%

                81

                44

                37

                —

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

         49.2%

              262

              125

              137

                —

Fixed-income securities:

 

 

 

 

 

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

         25.1%

              133

              133

                —

                —

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

           9.8%

                52

                52

                —

                —

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

           3.9%

                21

                21

                —

                —

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

         38.8%

              206

              206

                —

                —

Other securities:

 

 

 

 

 

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

           2.4%

                13

                —

                13

                —

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

           9.6%

                51

                —

                —

                51

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

         12.0%

                64

 

                13

                51

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

      100.0%

$           532

$           331

$           150

$              51

 

 

As of December 31, 2008

 

 

 

Fair Value Measurements Using:

 

Actual

Allocation

Total

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

 

(In millions)

Equity securities:

 

 

 

 

 

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

         25.8%

$           111

$              —

$           111

$              —

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

         14.9%

                64

                64

                —

                —

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

         14.0%

                60

                34

                26

                —

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

         54.7%

              235

                98

              137

                —

Fixed-income securities:

 

 

 

 

 

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

         29.1%

              125

              125

                —

                —

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

           8.8%

                38

                38

                —

                —

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

           3.0%

                13

                13

                —

                —

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

         40.9%

              176

              176

                —

                —

Other securities –

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

 

           4.4%

 

                19

 

                —

 

                19

 

                —

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

      100.0%

$           430

$           274

$           156

$              —

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Expected Cash Flows

 

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

 

 

 

Pension

Benefits

Other

Postretirement

Benefits

 

(In millions)

Devon's 2010 contributions

$         34

$                 5

Benefit payments:

 

 

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

$         39

$                 5

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

$         41

$                 5

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

$         45

$                 6

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

$         49

$                 6

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

$         53

$                 6

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

$       338

$               29

 

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

 

Other Benefit Plans

 

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

 

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

 

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

 

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

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

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

$     20

$     21

$     18

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

       14

       12

        —

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

       15

       16

       14

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

$     49

$     49

$     32

 

Stockholders' Equity
9. Stockholders' Equity

9.  Stockholders' Equity

 

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

 

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

 

Preferred Stock Redemption

 

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

 

Stock Repurchases

 

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

 

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

 

 

2008

2007

Repurchase Program

Amount

Shares

Per Share

Amount

Shares

Per Share

Annual program......

$      178

          2.0

$   87.83

$         —

           —

$         —

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

         487

          4.5

$ 109.25

         326

          4.1

$   79.80

  Totals......................

$      665

          6.5

$ 102.56

$      326

          4.1

$   79.80

 

Dividends

 

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

 

Commitments and Contingencies
10. Commitments and Contingencies

10.  Commitments and Contingencies

 

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

 

Environmental Matters

 

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

 

Royalty Matters

 

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

 

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

 

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

 

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

 

Hurricane Contingencies

 

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

 

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

 

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

 

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

 

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

 

Other Matters

 

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

 

Commitments

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

Year Ending December 31,

Drilling

and

Facility

Obligations

 

Firm

Transportation

Agreements

 

Office and

Equipment

Leases

 

 

Spar

Leases

 

 

FPSO

Leases

 

(In millions)

Continuing operations:

 

 

 

 

 

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

$         992

$              298

$         57

$     11

$       58

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

           516

                 267

           54

       11

         37

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

           302

                 241

           40

       22

         38

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

           257

                 217

           34

       13

         38

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

             97

                 202

           15

       27

         38

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

                1

                 714

         147

       78

         16

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

        2,165

             1,939

        347

     162

       225

Discontinued operations:

 

 

 

 

 

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

           622

                   —

           15

       —

         37

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

           182

                   —

           —

       —

         37

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

           170

                   —

           —

       —

         37

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

           110

                   —

           —

       —

         37

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

              —

                   —

           —

       —

         23

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

              —

                   —

           —

       —

         29

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

        1,084

                   —

           15

       —

       200

Total operations..........................................

$     3,249

$           1,939

$      362

$  162

$    425

 

Fair Value Measurements
11. Fair Value Measurements

11.  Fair Value Measurements   

 

Certain of Devon's assets and liabilities are reported at fair value in the accompanying balance sheets. Such assets and liabilities include amounts for both financial and nonfinancial instruments. The following tables provide fair value measurement information for such assets and liabilities as of December 31, 2009 and 2008.

 

The carrying values of cash and cash equivalents, accounts receivable and accounts payable (including income taxes payable and accrued expenses) included in the accompanying consolidated balance sheets approximated fair value at December 31, 2009 and 2008. These assets and liabilities are not presented in the following tables.

 

Information regarding the fair values of Devon's pension plan assets is provided in Note 8.


 

 

As of December 31, 2009

 

 

 

Fair Value Measurements Using:

 

Carrying Amount

Total Fair Value

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

 

(In millions)

Financial assets (liabilities):

 

 

 

 

 

    Gas price swaps......................................

$           169

$           169

$              —

$           169

$              —

    Gas basis swaps.....................................

$                3

$                3

$              —

$                3

$              —

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

$            (38)

$            (38)

$              —

$            (38)

$              —

    Interest rate swaps.................................

$           170

$           170

$              —

$           170

$              —

    Debt..........................................................

$       (7,279)

$       (8,214)

$       (1,432)

$       (6,782)

$              —

    Long-term investments.........................

$           115

$           115

$              —

$              —

$           115

Asset retirement obligations (1)...............

$       (1,622)

$       (1,622)

$              —

$              —

$       (1,622)

 

 

As of December 31, 2008

 

 

 

Fair Value Measurements Using:

 

Carrying Amount

Total Fair Value

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

 

(In millions)

Financial assets (liabilities):

 

 

 

 

 

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

$           255

$           255

$              —

$           255

$              —

    Interest rate swaps.................................

$           104

$           104

$              —

$           104

$              —

    Debt..........................................................

$       (5,841)

$       (6,106)

$      (1,005)

$       (5,101)

$              —

    Long-term investments.........................

$           122

$           122

$              —

$              —

$           122

Asset retirement obligations (1)...............

$       (1,485)

$       (1,485)

$              —

$              —

$       (1,485)

____________________________

(1)     Includes $109 million and $98 million of asset retirement obligations related to Devon’s discontinued operations at December 31, 2009 and 2008, respectively.

 

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

 

Level 1 Fair Value Measurements

 

Debt — The fair value of Devon's variable-rate commercial paper borrowings is the carrying value.

 

Level 2 Fair Value Measurements

 

Oil and gas price swaps, basis swaps and collars — The fair values of the oil and gas price collars, gas swaps and gas basis swaps are estimated using internal discounted cash flow calculations based upon forward commodity price curves, quotes obtained from brokers for contracts with similar terms or quotes obtained from counterparties to the agreements. The most significant input to the cash flow calculations is Devon’s estimate of future commodity prices. Devon bases its estimate of future prices upon published forward commodity price curves such as the Inside FERC Henry Hub forward curve for gas instruments and the NYMEX West Texas Intermediate forward curve for oil instruments. Another key input to the cash flow calculations is Devon’s estimate of volatility for these forward curves, which is based primarily upon implied volatility. The resulting estimated future cash inflows or outflows over the lives of the contracts are discounted primarily using LIBOR and money market futures rates. These pricing and discounting inputs are sensitive to the period of the contract, as well as changes in forward prices and regional price differentials.

 

Interest rate swaps — The fair values of the interest rate swaps are estimated using internal discounted cash flow calculations based upon forward interest-rate yield curves or quotes obtained from counterparties to the agreements. The most significant input to Devon’s cash flow calculations is its estimate of future interest rate yields. Devon bases its estimate of future yields upon its own internal model that utilizes forward curves such as the LIBOR or the Federal Funds Rate provided by third parties. The resulting estimated future cash inflows or outflows over the lives of the contracts are discounted primarily using LIBOR and money market futures rates. These yield and discounting inputs are sensitive to the period of the contract, as well as changes in forward interest rate yields.

 

Debt — Devon's fixed-rate debt instruments do not actively trade in an established market. The fair values of this debt are estimated by discounting the principal and interest payments at rates available for debt with similar terms and maturity.

 

Level 3 Fair Value Measurements

 

Long-term investments— Devon’s long-term investments presented in the tables above consisted entirely of auction rate securities. Due to the auction failures discussed in Note 1 and the lack of an active market for Devon’s auction rate securities, quoted market prices for these securities were not available as of December 31, 2009 and December 31, 2008. Therefore, Devon used valuation techniques that rely on unobservable, or Level 3, inputs to estimate the fair values of its long-term auction rate securities. These inputs were based on the AAA credit rating of the securities, the probability of full repayment of the securities considering the United States government guarantees of substantially all of the underlying student loans, the collection of all accrued interest to date and continued receipts of principal at par. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of December 31, 2009 and December 31, 2008. At this time, Devon does not believe the values of its long-term securities are impaired. The changes in these Level 3 assets during 2008 and 2009 consisted entirely of redemptions of principal.

 

Asset retirement obligations — The fair values of the asset retirement obligations are estimated using internal discounted cash flow calculations based upon Devon's estimates of future retirement costs. Reconciliations of the beginning and ending balances of Devon's asset retirement obligations, including revisions of the estimated fair values in 2009 and 2008, are presented in Note 7.

 

Share-Based Compensation
12. Share-Based Compensation

12.  Share-Based Compensation 

 

On June 3, 2009, Devon's stockholders adopted the 2009 Long-Term Incentive Plan, which expires on June 2, 2019. This plan authorizes the Compensation Committee, which consists of non-management members of Devon's Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards, Canadian restricted stock units, performance units, stock appreciation rights and cash-out rights to eligible employees. The plan also authorizes the grant of nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to directors. A total of 21.5 million shares of Devon common stock have been reserved for issuance pursuant to the plan. To calculate shares issued under the plan, options granted represent one share and other awards represent 1.84 shares.

 

Devon also has stock option plans that were adopted in 2005, 2003 and 1997 under which stock options and restricted stock awards were issued to key management and professional employees. Options granted under these plans remain exercisable by the employees owning such options, but no new options or restricted stock awards will be granted under these plans. Devon also has stock options outstanding that were assumed as part of the acquisitions of Ocean, Mitchell Energy & Development Corp. and Santa Fe Snyder.

 

With the approval of Devon's Compensation Committee, Devon modified the share-based compensation arrangements for certain of Devon’s executives in the second quarter of 2008. The modified compensation arrangements provide that executives who meet certain years-of-service and age criteria can retire and continue vesting in outstanding share-based grants. As a condition to receiving the benefits of these modifications, the executives must agree not to use or disclose Devon's confidential information and not to solicit Devon's employees and customers. The executives are required to agree to these conditions at retirement and again in each subsequent year until all grants have vested.

 

Although this modification does not accelerate the vesting of the executives' grants, it does accelerate the expense recognition as executives approach the years-of-service and age criteria. When the modification was made in the second quarter of 2008, certain executives had already met the years-of-service and age criteria. As a result, Devon recognized an additional $27 million of share-based compensation expense in the second quarter of 2008 related to this modification. This additional expense would have been recognized in future reporting periods if the modification had not been made and the executives continued their employment at Devon.

 


The following table presents the effects of share-based compensation included in Devon's accompanying statement of operations for the years ended December 31, 2009, 2008 and 2007.

 

 

2009

2008

2007

 

                  (In millions)

Gross general and administrative expense........................................................

$    209

$    212

$    146

Share-based compensation expense capitalized pursuant to the

  full cost method of accounting for oil and gas properties............................

 

$      66

 

$      54

 

$      44

Related income tax benefit..................................................................................

$      43

$      47

$      28

 

Stock Options

 

Under Devon's 2009 Long-Term Incentive Plan, the exercise price of stock options granted may not be less than the market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which may not exceed eight years from the date of grant. The recipient must pay the exercise price in cash or in common stock, or a combination thereof, at the time that the option is exercised. Options granted generally have a vesting period that ranges from three to four years.

 

The fair value of stock options on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires Devon to make several assumptions. The volatility of Devon's common stock is based on the historical volatility of the market price of Devon's common stock over a period of time equal to the expected term of the option and ending on the grant date. The dividend yield is based on Devon’s historical and current yield in effect at the date of grant. The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for the expected term of the option at the date of grant. The expected term of the options is based on historical exercise and termination experience for various groups of employees and directors. Each group is determined based on the similarity of their historical exercise and termination behavior.

 

The following table presents a summary of the grant-date fair values of stock options granted and the related assumptions for the years ended December 31, 2009, 2008 and 2007. All such amounts represent the weighted-average amounts for each year.

 

 

2009

2008

2007

Grant-date fair value.............................................................................................

$      22.85

$      21.77

$      26.43

Volatility factor......................................................................................................

         47.7%

         44.3%

         31.6%

Dividend yield.........................................................................................................

           0.9%

           0.9%

           0.7%

Risk-free interest rate.............................................................................................

           2.1%

           1.2%

           5.0%

Expected term (in years).......................................................................................

      4.0

      3.8

      4.0

 

The following table presents a summary of Devon's outstanding stock options as of December 31, 2009, including changes during the year then ended.

 

 

 

 

 

 

 

 

 

Options

 

Weighted

Average

Exercise

Price

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

(In thousands)

 

(In Years)

(In millions)

Outstanding at December 31, 2008..............................

       11,894

  $  55.16

 

 

  Granted.............................................................................

         2,026

  $  63.13

 

 

  Exercised..........................................................................

        (1,497)

  $  31.27

 

 

  Forfeited...........................................................................

           (263)

  $  71.82

 

 

Outstanding at December 31, 2009..............................

       12,160

  $  59.07

         3.6

      $ 205

Vested and expected to vest at December 31, 2009..

       12,128

  $  59.05

         3.6

      $ 204

Exercisable at December 31, 2009................................

         8,371

  $  54.74

         2.8

      $ 176

 

The aggregate intrinsic value of stock options that were exercised during 2009, 2008 and 2007 was $51 million, $263 million and $151 million, respectively. As of December 31, 2009, Devon's unrecognized compensation cost related to unvested stock options was $66 million. Such cost is expected to be recognized over a weighted-average period of 2.6 years. 

 

Restricted Stock Awards and Units  

 

Under Devon's 2009 Long-Term Incentive Plan, restricted stock awards and units are subject to the terms, conditions, restrictions and limitations, if any, that the Compensation Committee deems appropriate, including restrictions on continued employment. Generally, restricted stock awards and units vest over a minimum restriction period of at least three years from the date of grant. During the vesting period, recipients of restricted stock awards receive dividends that are not subject to restrictions or other limitations. The fair value of restricted stock awards and units on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of restricted stock awards and units as the closing price of Devon's common stock on the grant date of the award or unit.

 

The following table presents a summary of Devon's unvested restricted stock awards as of December 31, 2009, including changes during the year then ended.

 

 

 

 

 

 

Restricted

Stock

Awards

Weighted

Average

Grant-Date

Fair Value

 

(In thousands)

 

Unvested at December 31, 2008......................

        6,334

  $  72.66

  Granted...............................................................

        2,656

  $  63.59

  Vested..................................................................

       (2,679)

  $  70.16

  Forfeited..............................................................

          (146)

  $  73.59

Unvested at December 31, 2009......................

        6,165

  $  69.76

 

The aggregate fair value of restricted stock awards that vested during 2009, 2008 and 2007 was $165 million, $185 million and $136 million, respectively. As of December 31, 2009, Devon's unrecognized compensation cost related to unvested restricted stock awards and units was $316 million. Such cost is expected to be recognized over a weighted-average period of 2.2 years.

 

Restructuring Costs
13. Restructuring Costs

13. Restructuring Costs 

 

In the fourth quarter of 2009, Devon recognized $153 million of estimated employee severance costs associated with the planned divestitures of its offshore assets that was announced in November 2009. This amount was based on estimates of the number of employees that will ultimately be impacted by the divestitures, and includes $63 million related to accelerated vesting of share-based grants. Of the $153 million total, $105 million relates to Devon's U.S. Offshore operations and the remainder relates to its International discontinued operations.

 

As of the date these financial statements were prepared, only one of the properties Devon intends to sell had actually been sold. Furthermore, the vast majority of employees will not be impacted by the divestitures until the properties are sold. Therefore, Devon's estimate of employee severance costs recognized in the fourth quarter of 2009 was based upon certain key estimates that could change as properties are sold. These estimates include the number of impacted employees, the number of employees offered comparable positions with the buyers and the date of separation for impacted employees.

 

Other Financial Instruments
14. Other Financial Instruments

14.  Other Financial Instruments

 

Until October 31, 2008, Devon owned 14.2 million shares of Chevron common stock. These shares were held in connection with debt owed by Devon that contained an exchange option. The exchange option allowed the debt holders, prior to the debt's maturity of August 15, 2008, to exchange the debt for shares of Chevron common stock owned by Devon. However, Devon had the option to settle any exchanges with cash equal to the market value of Chevron common stock at the time of the exchange. Devon settled exchange requests during 2008 and 2007 by paying $1.0 billion during 2008 and $0.2 billion during 2007. On October 31, 2008, Devon transferred its 14.2 million shares of Chevron common stock to Chevron. In exchange, Devon received Chevron's interest in the Drunkard's Wash coalbed natural gas field in east-central Utah and $280 million in cash.

 

The shares of Chevron common stock and the exchange option embedded in the debt were always recorded on Devon’s balance sheet at fair value. However, pursuant to accounting rules prior to January 1, 2007, only the change in fair value of the embedded option had historically been included in Devon’s results of operations. Conversely, the change in fair value of the Chevron common stock had not been included in Devon's results of operations, but instead had been recorded directly to stockholders' equity as part of "accumulated other comprehensive income." Effective January 1, 2007, under new accounting rules, Devon elected to begin recognizing the change in fair value of the Chevron common stock in its results of operations. Accordingly, beginning with the first quarter of 2007, the change in fair value of the Chevron common stock owned by Devon, along with the change in fair value of the related exchange option, were both included in Devon’s results of operations. Also, as a result of this change, Devon reclassified $364 million of after-tax unrealized gains related to Devon’s investment in Chevron common stock from accumulated other comprehensive income to retained earnings in the first quarter of 2007. 

 

The following table presents the changes in fair value and cash settlements related to Devon’s other financial instruments, as well as its investment in Chevron Common Stock as presented in the accompanying consolidated statements of operations.

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

(Gains) and losses from:

 

 

 

  Interest rate swaps – fair value changes (See Note 3)................

$        (66)

$     (104)

$          (1)

  Interest rate swaps – settlements (See Note 3)............................

          (40)

            (1)

            —

  Chevron common stock..................................................................

            —

         363

        (281)

  Option embedded in exchangeable debentures..........................

            —

        (109)

         248

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

$     (106)

$       149

$        (34)

 

Reduction of Carrying Value of Oil and Gas Properties
15. Reduction of Carrying Value of Oil and Gas Properties

15.  Reduction of Carrying Value of Oil and Gas Properties

 

During 2009 and 2008, Devon reduced the carrying values of certain of its oil and gas properties due to full cost ceiling limitations.  A summary of these reductions and additional discussion is provided below.

 

 

Year Ended December 31,

 

2009

2008

 

 

 

Gross

Net of

Taxes

 

Gross

Net of

Taxes

 

(In millions)

 

 

 

 

 

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

$ 6,408

$ 4,085

$ 6,538

$ 4,168

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

        —

        —

   3,353

   2,488

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

$ 6,408

$ 4,085 

$ 9,891

$ 6,656

 

The 2009 reduction was recognized in the first quarter and the 2008 reductions were recognized in the fourth quarter. The reductions resulted from significant decreases in each country's full cost ceiling compared to the immediately preceding quarter. The lower United States ceiling value in the first quarter of 2009 largely resulted from the effects of declining natural gas prices subsequent to December 31, 2008. The lower ceiling values in the fourth quarter of 2008 largely resulted from the effects of sharp declines in oil, gas and NGL prices compared to September 30, 2008.

 

Other Income
16. Other Income

16.  Other Income

 

The components of other income include the following:

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

Interest and dividend income.............................................

$           8

$         54

$         48

Reduction of deep water royalties (see Note 10)............

           84

            —

            —

Hurricane insurance proceeds (see Note 10)....................

            —

         162

            —

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

          (24)

              1

              3

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

$         68

$       217

$         51

 

Income Taxes
17. Income Taxes

17.  Income Taxes

 

Income Tax (Benefit) Expense

 

The (loss) earnings from continuing operations before income taxes and the components of income tax (benefit) expense for the years 2009, 2008 and 2007 were as follows:

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

(Loss) earnings from continuing operations before income

  taxes:

 

 

 

  U.S..................................................................................................

$  (4,961)

$ (2,190)

$  2,642

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

         435

   (1,970)

        685

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

$  (4,526)

$ (4,160)

$  3,327

Current income tax expense:

 

 

 

  U.S. federal...................................................................................

$         45

$      258

$        83

  Various states...............................................................................

           18

          31

          17

  Canada and various provinces.................................................

         178

        152

        135

  Total current tax expense..........................................................

         241

        441

        235

Deferred income tax (benefit) expense:

 

 

 

  U.S. federal...................................................................................

    (1,846)

       (875)

        745

  Various states...............................................................................

       (111)

         (65)

          28

  Canada and various provinces.................................................

          (57)

       (622)

       (166)

  Total deferred tax (benefit) expense........................................

    (2,014)

   (1,562)

        607

Total income tax (benefit) expense...........................................

$  (1,773)

$ (1,121)

$      842

 

The taxes on the results of discontinued operations presented in the accompanying consolidated statements of operations were all related to Devon's international operations outside North America.

 

Total income tax (benefit) expense differed from the amounts computed by applying the U.S. federal income tax rate to (loss) earnings from continuing operations before income taxes as a result of the following:

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

Expected income tax (benefit) expense based on U.S. statutory tax rate of 35%.............................................................

 

$  (1,584)

 

$ (1,456)

 

$  1,164

State income taxes.........................................................................

          (99)

         (29)

          30

Taxation on Canadian operations..............................................

          (31)

         227

          (10)

Repatriations and tax policy election changes.........................

          —

        312

          —

Canadian statutory rate reduction..............................................

          —

          —

      (261)

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

          (59)

      (175)

         (81)

    Total income tax (benefit) expense........................................

$  (1,773)

$ (1,121)

$     842

 

During 2008, Devon repatriated $2.6 billion from certain foreign subsidiaries to the United States. Also in the second quarter of 2008, Devon made certain tax policy election changes to minimize the taxes Devon otherwise would pay for the cash repatriations, as well as the taxable gains associated with the sales of assets in West Africa. As a result of the repatriations, as well as the tax policy election changes, Devon recognized additional tax expense of $312 million during 2008. Of the $312 million, $295 million was recognized as current income tax expense, and $17 million was recognized as deferred tax expense.

 

In 2007, deferred income taxes were reduced $261 million due to a Canadian statutory rate reduction that was enacted in that year.

 


Deferred Tax Assets and Liabilities

 

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2009 and 2008 are presented below:

 

 

         December 31,           

 

       2009   

   2008       

 

(In millions)

Deferred tax assets:

 

 

  Net operating loss carryforwards...................................................

$           11

$           13

  Asset retirement obligations............................................................

           474

           442

  Pension benefit obligations.............................................................

           130

           172

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

           133

             74

      Total deferred tax assets.............................................................

           748

           701

Deferred tax liabilities:

 

 

  Property and equipment, principally due to nontaxable

     business combinations, differences in depreciation, and the

     expensing of intangible drilling costs for tax purposes............

 

 

      (2,315)

 

 

      (4,163)

  Fair value of financial instruments................................................

         (108)

         (132)

  Long-term debt..................................................................................

         (162)

            (69)

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

            (62)

            —

  Total deferred tax liabilities............................................................

      (2,647)

      (4,364)

     Net deferred tax liability...............................................................

$    (1,899)

$    (3,663)

 

As shown in the above table, Devon has recognized $748 million of deferred tax assets as of December 31, 2009. Included in total deferred tax assets is $11 million related to various carryforwards available to offset future income taxes. The carryforwards consist of $151 million of state net operating loss carryforwards, which expire primarily between 2010 and 2029. The tax benefits of carryforwards are recorded as an asset to the extent that management assesses the utilization of such carryforwards to be "more likely than not." When the future utilization of some portion of the carryforwards is determined not to be "more likely than not," a valuation allowance is provided to reduce the recorded tax benefits from such assets.

 

Devon expects the tax benefits from the net operating loss carryforwards to be utilized between 2010 and 2014. Such expectation is based upon current estimates of taxable income during this period, considering limitations on the annual utilization of these benefits as set forth by tax regulations. Significant changes in such estimates caused by variables such as future oil and gas prices or capital expenditures could alter the timing of the eventual utilization of such carryforwards. There can be no assurance that Devon will generate any specific level of continuing taxable earnings. However, management believes that Devon's future taxable income will more likely than not be sufficient to utilize substantially all its tax carryforwards prior to their expiration.

 

Unrecognized Tax Benefits

 

The following table presents changes in Devon's unrecognized tax benefits for the year ended December 31, 2009 (in millions).

 

Balance as of December 31, 2008.............................................................

$        260

Increases (decreases) due to:

 

  Tax positions taken in current year.........................................................

             20

  Accrual of interest related to tax positions taken..................................

               7

  Lapse of statute of limitations..................................................................

            (15)

  Settlements...................................................................................................

              (5)

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

               5

Balance as of December 31, 2009.............................................................

$        272

 

Devon’s unrecognized tax benefit balance at December 31, 2009 and 2008 included $35 million and $29 million of interest and penalties, respectively. If recognized, all of Devon's unrecognized tax benefits as of December 31, 2009 would affect Devon's effective income tax rate.

 

Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

 

Jurisdiction

Tax Years Open

U.S. federal.............................................................................................

2005-2009

Various U.S. states................................................................................

2005-2009

Canada federal......................................................................................

2001-2009

Various Canadian provinces...............................................................

2001-2009

 

Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process. As a result, Devon cannot reasonably anticipate the extent that the liabilities for unrecognized tax benefits will increase or decrease within the next twelve months.

 

Discontinued Operations
18. Discontinued Operations

18.  Discontinued Operations   

 

For the three-year period ended December 31, 2009, Devon's discontinued operations include amounts related to its assets in Azerbaijan, Brazil, China and other minor International properties that it is in the process of divesting. Additionally, during 2007 and 2008, Devon's discontinued operations included amounts related to its assets in Egypt and West Africa, including Equatorial Guinea, Cote d'Ivoire, Gabon and other countries in the region, until they were sold.

 

Devon's African sales generated total proceeds of $3.0 billion. The following table presents the gains on the African divestiture transactions by year.

 

 

Year Ended December 31,

 

2009

2008

2007

 

 

 

Gross

Net of

Taxes

 

Gross

Net of

Taxes

 

Gross

Net of

Taxes

 

(In millions)

  Egypt........................................................................

$      —

$      —

$      —

$      —

$     90

$     90

  Equatorial Guinea.................................................

        —

        —

      619

      544

       —

       —

  Gabon......................................................................

        —

        —

      117

      122

       —

       —

  Cote d’Ivoire..........................................................

         17

         17

         83

         95

       —

       —

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

        —

        —

        —

           8

       —

       —

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

$      17

$      17

$    819

$    769

$     90 

$     90 

 

Revenues related to Devon's discontinued operations totaled $945 million, $1.7 billion and $2.2 billion during 2009, 2008 and 2007, respectively. Earnings from discontinued operations before income taxes totaled $322 million, $1.3 billion and $1.6 billion during 2009, 2008 and 2007, respectively.

 


The following table presents the main classes of assets and liabilities associated with Devon's discontinued operations as of December 31, 2009 and 2008.     

 

 

December 31,

 

2009

2008

 

(In millions)

Assets:

 

 

  Cash and cash equivalents............................................................

$      365

$     189

  Accounts receivable........................................................................

        165

       112

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

        127

          91

    Current assets.................................................................................

$      657

$     392

 

 

 

  Property and equipment, net of accumulated depreciation,  

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

 

$   1,099

 

$     954

  Goodwill............................................................................................

           68

          68

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

           83

       106

    Total long-term assets..................................................................

$   1,250

$  1,128

 

 

 

Liabilities:

 

 

  Accounts payable...........................................................................

$      158

$     220

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

           76

       145

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

$      234

$     365

 

 

 

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

$      109

$       98

  Deferred income taxes...................................................................

        101

          65

  Other liabilities.................................................................................

             3

            3

    Long-term liabilities......................................................................

$      213

$     166

 

Reductions of Carrying Value of Oil and Gas Properties

 

During 2009, 2008 and 2007, Devon reduced the carrying values of certain of its oil and gas properties that are now held for sale. These reductions primarily resulted from full cost ceiling limitations. A summary of these reductions and additional discussion is provided below.

 

 

Year Ended December 31,

 

2009

2008

2007

 

 

 

Gross

Net of

Taxes

 

Gross

Net of

Taxes

 

Gross

Net of

Taxes

 

(In millions)

(In millions)

(In millions)

  Brazil........................................................................

$    103

$    103

$    437

$    437

$      —

$      —

  Nigeria......................................................................

        —

        —

        —

        —

         68

         13

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

           5

           2

         57

         28

        —

        —

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

$    108

$    105

$    494

$    465

$      68 

$      13 

 

Brazil's 2009 reduction resulted largely from an exploratory well drilled at the BM-BAR-3 block in the offshore Barreirinhas Basin. After drilling this well in the first quarter of 2009, Devon concluded that the well did not have adequate reserves for commercial viability. As a result, the seismic, leasehold and drilling costs associated with this well contributed to the reduction recognized in the first quarter of 2009.

 

Brazil's 2008 reduction was recognized in the fourth quarter of 2008 and resulted primarily from a significant decrease in its full cost ceiling. The lower ceiling value largely resulted from the effects of sharp declines in oil prices compared to previous quarter-end prices.

 

Based on unsuccessful drilling activities in Nigeria, Devon reduced the carrying value of its Nigerian oil and gas properties in 2007.

 

(Loss) Earnings Per Share
19. (Loss) Earnings Per Share

19.  (Loss) Earnings Per Share  

 

The following table reconciles earnings from continuing operations and common shares outstanding used in the calculations of basic and diluted (loss) earnings per share for 2009, 2008 and 2007. Because a net loss from continuing operations was incurred during 2009 and 2008, the dilutive shares produce an antidilutive net loss per share result. Therefore, the diluted loss per share from continuing operations reported in the accompanying 2009 and 2008 consolidated statements of operations are the same as the basic loss per share amounts.

 

 

 

(Loss)

Earnings

 

Common

Shares

(Loss)

Earnings

per Share

 

(In millions, except per share amounts)

Year Ended December 31, 2009:

 

 

 

  Loss from continuing operations......................................................

$       (2,753)

             444

 

  Attributable to participating securities.............................................

                31

                (5)

 

  Basic and diluted loss per share........................................................

$       (2,722)

             439

$       (6.20)

Year Ended December 31, 2008:

 

 

 

  Loss from continuing operations......................................................

$       (3,039)

             444

 

  Attributable to participating securities.............................................

              31

                (5)

 

  Less preferred stock dividends..........................................................

                 (5)

 

 

  Basic and diluted loss per share........................................................

$       (3,013)

             439

$       (6.86)

Year Ended December 31, 2007:

 

 

 

  Earnings from continuing operations...............................................

$        2,485

             445

 

  Attributable to participating securities.............................................

              (23)

                (4)

 

  Less preferred stock dividends..........................................................

               (10)

 

 

  Basic earnings per share.....................................................................

           2,452

             441

$         5.56

  Dilutive effect of potential common shares issuable

     upon the exercise of outstanding stock options..........................

                                      —

 

                  5

 

 

  Diluted earnings per share..................................................................

$        2,452

             446

$         5.50

 

Certain options to purchase shares of Devon's common stock were excluded from the dilution calculations because the options were antidilutive. These excluded options totaled 9 million, 5 million and 2 million in 2009, 2008 and 2007, respectively.

 

Segment Information
20. Segment Information

20.  Segment Information

 

Devon manages its operations through seven 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 business. However, Devon's Canadian and International divisions are reported as separate reporting segments primarily due to significant differences in the respective regulatory environments.

 

Devon's segments are all primarily engaged in oil and gas producing activities, and certain information regarding such activities for each segment is included in Note 22. Following is certain financial information regarding Devon's segments for 2009, 2008 and 2007. The revenues reported are all from external customers.

 

 

U.S.

Canada

International

Total

 

(In millions)

As of December 31, 2009:

 

 

 

 

Current assets, including current assets held for sale..............

$       1,449

$          886

$          657

$       2,992

Property and equipment, net.......................................................

       13,199

         5,568

               —

       18,767

Goodwill..........................................................................................

         3,046

         2,884

               —

         5,930

Other assets, including long-term assets held for sale.............

             674

               73

         1,250

         1,997

     Total assets................................................................................

$     18,368

$       9,411

$       1,907

$     29,686

 

Current liabilities, including current liabilities held for sale....

 

$       2,993

 

$          575

 

$          234

 

$       3,802

Long-term debt..............................................................................

         2,866

         2,981

               —

         5,847

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

             754

             664

               —

         1,418

Other liabilities, including long-term liabilities held for sale...

             890

               47

             213

         1,150

Deferred income taxes..................................................................

             860

         1,039

               —

         1,899

Stockholders' equity......................................................................

       10,005

         4,105

         1,460

       15,570

     Total liabilities and stockholders' equity..............................

$     18,368

$       9,411

$       1,907

$     29,686

 


 

 

U.S.

Canada

Total

 

(In millions)

Year Ended December 31, 2009:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales...............................................................

$       3,958

$       2,139

$       6,097

  Net gain on oil and gas derivative financial instruments.....

             382

                 2

             384

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

         1,498

               36

         1,534

     Total revenues..........................................................................

         5,838

         2,177

         8,015

Expenses and other income, net:

 

 

 

  Lease operating expenses..........................................................

             997

             673

         1,670

  Taxes other than income taxes................................................

             278

               36

             314

  Marketing and midstream operating costs and expenses...

         1,004

               18

         1,022

  Depreciation, depletion and amortization of oil and

     gas properties............................................................................

 

         1,247

 

             585

 

         1,832

  Depreciation and amortization of non-oil and gas

     properties...................................................................................

 

             251

 

               25

 

             276

  Accretion of asset retirement obligations...............................

               53

               38

               91

  General and administrative expenses.....................................

             529

             119

             648

  Restructuring costs......................................................................

             105

               —

             105

  Interest expense..........................................................................

             125

             224

             349

  Change in fair value of other financial instruments.............

           (106)

               —

           (106)

  Reduction of carrying value of oil and gas properties.........

         6,408

               —

         6,408

  Other (income) expense, net.....................................................

              (92)

               24

              (68)

     Total expenses and other income, net.................................

       10,799

         1,742

       12,541

(Loss) earnings from continuing operations before income

   taxes.............................................................................................

 

        (4,961)

 

             435

 

        (4,526)

Income tax (benefit) expense:

 

 

 

  Current..........................................................................................

               63

             178

             241

  Deferred........................................................................................

        (1,957)

              (57)

        (2,014)

     Total income tax (benefit) expense......................................

        (1,894)

             121

        (1,773)

(Loss) earnings from continuing operations.............................

$      (3,067)

$          314

$      (2,753)

 

 

 

 

Capital expenditures, before revision of future

  asset retirement obligations.......................................................

 

$       3,536

 

$       1,114

 

$       4,650

Revision of future asset retirement obligations.......................

               48

              (15)

               33

Capital expenditures, continuing operations...........................

$       3,584

$       1,099

$       4,683

 


 

 

U.S.

Canada

International

Total

 

(In millions)

As of December 31, 2008:

 

 

 

 

Current assets, including current assets held for sale..............

$       1,925

$          367

$          392

$       2,684

Property and equipment, net......................................................

       17,676

         4,355

               —

       22,031

Goodwill..........................................................................................

         3,046

         2,465

               —

         5,511

Other assets, including long-term assets held for sale.............

             482

               72

         1,128

         1,682

     Total assets...............................................................................

$     23,129

$       7,259

$       1,520

$     31,908

 

Current liabilities, including current liabilities held for sale....

 

$       2,227

 

$          543

 

$          365

 

$       3,135

Long-term debt..............................................................................

         2,683

         2,978

               —

         5,661

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

             694

             555

               —

         1,249

Other liabilities, including long-term liabilities held for sale...

             983

               40

             166

         1,189

Deferred income taxes.................................................................

         2,734

             880

               —

         3,614

Stockholders' equity.....................................................................

       13,808

         2,263

             989

       17,060

     Total liabilities and stockholders' equity..............................

$     23,129

$       7,259

$       1,520

$     31,908

 

 

U.S.

Canada

Total

 

(In millions)

Year Ended December 31, 2008:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales...............................................................

$       8,206

$       3,514

$     11,720

  Net loss on oil and gas derivative financial instruments......

          (154)

             —

          (154)

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

         2,247

               45

         2,292

     Total revenues..........................................................................

       10,299

         3,559

       13,858

Expenses and other income, net:

 

 

 

  Lease operating expenses..........................................................

         1,075

             776

         1,851

  Taxes other than income taxes................................................

             438

               38

             476

  Marketing and midstream operating costs and expenses...

         1,593

               18

         1,611

  Depreciation, depletion and amortization of oil and

     gas properties............................................................................

 

         1,998

 

             950

 

         2,948

  Depreciation and amortization of non-oil and gas

     Properties...................................................................................

 

             229

 

               26

 

             255

  Accretion of asset retirement obligations...............................

               42

               38

               80

  General and administrative expenses.....................................

             513

             132

             645

  Interest expense..........................................................................

             117

             212

             329

  Change in fair value of other financial instruments.............

             149

               —

             149

  Reduction of carrying value of oil and gas properties.........

         6,538

         3,353

         9,891

  Other income, net........................................................................

           (203)

              (14)

           (217)

     Total expenses and other income, net.................................

       12,489

         5,529

       18,018

Loss from continuing operations before income taxes..........

        (2,190)

        (1,970)

        (4,160)

Income tax (benefit) expense:

 

 

 

  Current..........................................................................................

             289

             152

             441

  Deferred........................................................................................

           (940)

           (622)

        (1,562)

     Total income tax benefit........................................................

           (651)

           (470)

        (1,121)

Loss from continuing operations...............................................

$      (1,539)

$      (1,500)

$      (3,039)

 

 

 

 

Capital expenditures, before revision of future

  asset retirement obligations.......................................................

 

$       8,313

 

$       1,639

 

$       9,952

Revision of future asset retirement obligations.......................

             152

               73

             225

Capital expenditures, continuing operations...........................

$       8,465

$       1,712

$     10,177

 


 

 

U.S.

Canada

Total

 

(In millions)

Year Ended December 31, 2007:

 

 

 

Revenues:

 

 

 

  Oil, gas and NGL sales...............................................................

$       5,814

$       2,411

$       8,225

  Net gain on oil and gas derivative financial instruments.....

               14

             —

               14

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

         1,693

               43

         1,736

     Total revenues..........................................................................

         7,521

         2,454

         9,975

Expenses and other income, net:

 

 

 

  Lease operating expenses..........................................................

             905

             627

         1,532

  Taxes other than income taxes................................................

             327

               31

             358

  Marketing and midstream operating costs and expenses...

         1,200

               17

         1,217

  Depreciation, depletion and amortization of oil and

     gas properties............................................................................

 

         1,672

 

             740

 

         2,412

  Depreciation and amortization of non-oil and gas

     properties...................................................................................

 

             180

 

               21

 

             201

  Accretion of asset retirement obligations...............................

               38

               32

               70

  General and administrative expenses.....................................

             395

             118

             513

  Interest expense..........................................................................

             228

             202

             430

  Change in fair value of other financial instruments.............

              (32)

                (2)

              (34)

  Other income, net........................................................................

              (34)

              (17)

              (51)

     Total expenses and other income, net.................................

         4,879

         1,769

         6,648

Earnings from continuing operations before income taxes..

         2,642

             685

         3,327

Income tax expense (benefit):

 

 

 

  Current..........................................................................................

             100

             135

             235

  Deferred........................................................................................

             773

           (166)

             607

     Total income tax expense (benefit)......................................

             873

              (31)

             842

Earnings from continuing operations........................................

$       1,769

$          716

$       2,485

 

 

 

 

Capital expenditures, before revision of future

  asset retirement obligations.......................................................

 

$       4,522

 

$       1,350

 

$       5,872

Revision of future asset retirement obligations.......................

             210

               99

             309

Capital expenditures, continuing operations...........................

$       4,732

$       1,449

$       6,181

 

Supplemental Information to Statements of Cash Flows
21. Supplemental Information to Statements of Cash Flows

21.  Supplemental Information to Statements of Cash Flows

 

Additional information related to Devon’s 2009, 2008 and 2007 statements of cash flows are presented below:

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

Net decrease (increase) in working capital:

 

 

 

  Decrease (increase) in accounts receivable..............................................

$       142

$       187

$     (286)

  Decrease (increase) in other current assets...............................................

         212

          (46)

          (31)

  (Decrease) increase in accounts payable.................................................

          (91)

         159

           45

  Increase in revenues and royalties due to others....................................

           —

           11

           79

  Decrease in income taxes payable............................................................

          (48)

        (309)

          (80)

  Decrease in other current liabilities............................................................

          (66)

        (209)

        (239)

     Net decreases (increase) in working capital..........................................

$       149

$     (207)

$     (512)

 

 

 

 

Supplementary cash flow data:

 

 

 

  Interest paid (net of capitalized interest)..................................................

$       314

$       336

$       406

  Income taxes paid (continuing and discontinued operations).............

$         68

$   1,436

$       588

 

 

 

 

Noncash investing activity – exchange of investment in Chevron

  common stock for oil and gas properties.................................................

 

$        —

 

$       610

 

$        —

 


Supplemental Information on Oil and Gas Operations (Unaudited)
22. Supplemental Information on Oil and Gas Operations (Unaudited)

22.  Supplemental Information on Oil and Gas Operations (Unaudited)

 

Supplemental unaudited information regarding Devon's oil and gas activities is presented in this note. The information is provided separately by country and continent. Additionally, the costs incurred and reserves information for the United States is segregated between Devon's onshore and offshore operations. Unless otherwise noted, this supplemental information excludes amounts for all periods presented related to Devon's discontinued operations. 

 

Costs Incurred

 

The following tables reflect the costs incurred in oil and gas property acquisition, exploration, and development activities.

 

 

Year Ended December 31, 2009

 

 

U.S. Onshore

U.S. Offshore

Total

U.S.

 

Canada

 North America

Property acquisition costs:

(In millions)

  Proved properties..........................................................

$         17

$          —

$         17

$         18

$         35

  Unproved properties.....................................................

            52

            11

            63

            72

         135

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

         122

         260

         382

         152

         534

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

      2,011

         537

      2,548

         835

      3,383

     Costs incurred.............................................................

$    2,202

$       808

$    3,010

$    1,077

$    4,087

 

 

Year Ended December 31, 2008

 

 

U.S. Onshore

U.S. Offshore

Total

U.S.

 

Canada

North America

Property acquisition costs:

(In millions)

  Proved properties..........................................................

$       822

$          —

$       822

$          —

$       822

  Unproved properties.....................................................

      1,226

         185

      1,411

         352

      1,763

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

         206

         638

         844

         173

      1,017

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

      4,182

         551

      4,733

      1,131

      5,864

     Costs incurred.............................................................

$    6,436

$    1,374

$    7,810

$    1,656

$    9,466

 

 

Year Ended December 31, 2007

 

 

U.S. Onshore

U.S. Offshore

Total

U.S.

 

Canada

North America

Property acquisition costs:

(In millions)

  Proved properties..........................................................

$            3

$          —

$            3

$            7

$         10

  Unproved properties.....................................................

            77

            79

         156

            49

         205

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

         195

         374

         569

         211

         780

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

      3,183

         359

      3,542

      1,098

      4,640

     Costs incurred.............................................................

$    3,458

$       812

$    4,270

$    1,365

$    5,635

 

Pursuant to the full cost method of accounting, Devon capitalizes certain of its general and administrative expenses that are related to property acquisition, exploration and development activities. Such capitalized expenses, which are included in the costs shown in the preceding tables, were $332 million, $337 million and $277 million in the years 2009, 2008 and 2007, respectively. Also, Devon capitalizes interest costs incurred and attributable to unproved oil and gas properties and major development projects of oil and gas properties. Capitalized interest expenses, which are included in the costs shown in the preceding tables, were $74 million, $71 million and $48 million in the years 2009, 2008 and 2007, respectively.

 

Results of Operations

 

The following tables include revenues and expenses directly associated with Devon's oil and gas producing activities, including general and administrative expenses directly related to such producing activities. They do not include any allocation of Devon's interest costs or general corporate overhead and, therefore, are not necessarily indicative of the contribution to net earnings of Devon's oil and gas operations. Income tax expense has been calculated by applying statutory income tax rates to oil, gas and NGL sales after deducting costs, including depreciation, depletion and amortization and after giving effect to permanent differences.


 

 

Year Ended December 31, 2009

 

United States

 

Canada

North America

 

(In millions)

Oil, gas and NGL sales...........................................................

$    3,958

$   2,139

$    6,097

Lease operating expenses.....................................................

        (997)

        (673)

     (1,670)

Taxes other than income taxes...........................................

        (258)

           (35)

        (293)

Depreciation, depletion and amortization.........................

     (1,247)

        (585)

     (1,832)

Accretion of asset retirement obligations...........................

           (53)

           (38)

           (91)

General and administrative expenses.................................

        (145)

           (74)

        (219)

Reduction of carrying value of oil and gas properties.....

     (6,408)

            —

     (6,408)

Income tax benefit (expense)..............................................

      1,800

        (220)

      1,580

Results of operations.............................................................

$   (3,350)

$       514

$   (2,836)

Depreciation, depletion and amortization per Boe..........

$        7.47

$        8.84

$        7.86

 

 

Year Ended December 31, 2008

 

United States

 

Canada

North America

 

(In millions)

Oil, gas and NGL sales...........................................................

$   8,206

$    3,514

$  11,720

Lease operating expenses.....................................................

     (1,075)

        (776)

     (1,851)

Taxes other than income taxes...........................................

        (420)

           (37)

        (457)

Depreciation, depletion and amortization.........................

     (1,998)

        (950)

     (2,948)

Accretion of asset retirement obligations...........................

           (42)

           (38)

           (80)

General and administrative expenses.................................

        (148)

           (87)

        (235)

Reduction of carrying value of oil and gas properties.....

     (6,538)

     (3,353)

     (9,891)

Income tax benefit................................................................

          719

          405

      1,124

Results of operations.............................................................

$   (1,296)

$   (1,322)

$   (2,618)

Depreciation, depletion and amortization per Boe..........

$     12.31

$     15.59

$     13.20

 

 

Year Ended December 31, 2007

 

United States

 

Canada

North America

 

(In millions)

Oil, gas and NGL sales...........................................................

$   5,814

$    2,411

$    8,225

Lease operating expenses.....................................................

        (905)

        (627)

     (1,532)

Taxes other than income taxes...........................................

        (312)

           (31)

        (343)

Depreciation, depletion and amortization.........................

     (1,672)

        (740)

     (2,412)

Accretion of asset retirement obligations...........................

           (38)

           (32)

           (70)

General and administrative expenses.................................

        (143)

           (76)

        (219)

Income tax expense..............................................................

        (966)

           (49)

     (1,015)

Results of operations.............................................................

$    1,778

$       856

$    2,634

Depreciation, depletion and amortization per Boe..........

$     11.44

$     12.73

$     11.81

 

 In 2007, the total and Canadian income tax amounts in the table above were reduced by $261 million due to statutory rate reductions that were enacted in that year.

 


Proved Reserves

 

The following tables present Devon’s estimated proved developed and proved undeveloped reserves by product for each significant country for the three years ended December 31, 2009. The significant changes in Devon's reserves are discussed following the tables.

 

 

Oil (MMBbls)

 

U.S. Onshore

U.S. Offshore

Total

U.S.

 

Canada

North America

Proved developed and undeveloped reserves:

 

 

 

 

 

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

       127

         43

       170

       329

       499

  Revisions due to prices.................................................

            4

          —

            4

         16

         20

  Revisions other than price...........................................

            3

            3

            6

         13

         19

  Extensions and discoveries.........................................

            8

            1

            9

         46

         55

  Purchase of reserves.....................................................

            1

          —

            1

          —

            1

  Production......................................................................

        (11)

          (8)

        (19)

        (16)

        (35)

  Sale of reserves..............................................................

          (1)

          —

          (1)

          —

          (1)

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

       131

         39

       170

       388

       558

  Revisions due to prices.................................................

        (17)

          (3)

        (20)

      (349)

      (369)

  Revisions other than price...........................................

            2

            3

            5

            2

            7

  Extensions and discoveries.........................................

         11

            1

         12

       120

       132

  Purchase of reserves.....................................................

         18

          —

         18

          —

         18

  Production......................................................................

        (11)

          (6)

        (17)

        (22)

        (39)

  Sale of reserves..............................................................

          (1)

          —

          (1)

          (5)

          (6)

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

       133

         34

       167

       134

       301

  Revisions due to prices.................................................

            9

            2

         11

       291

       302

  Revisions other than price...........................................

          —

            1

            1

          (8)

          (7)

  Extensions and discoveries.........................................

            9

            2

         11

       122

       133

  Purchase of reserves.....................................................

          —

          —

          —

          —

          —

  Production......................................................................

        (12)

          (5)

        (17)

        (25)

        (42)

  Sale of reserves..............................................................

          —

          (1)

          (1)

          —

          (1)

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

       139

         33

       172

       514

       686

Proved developed reserves as of:

 

 

 

 

 

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

       116

         31

       147

       112

       259

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

       122

         26

       148

       195

       343

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

       111

         22

       133

       110

       243

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

       119

         21

       140

       149

       289

Proved undeveloped reserves as of:

 

 

 

 

 

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

         11

         12

         23

       217

       240

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

            9

         13

         22

       193

       215

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

         22

         12

         34

         24

         58

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

         20

         12

         32

       365

       397

 


 

 

Gas (Bcf)

 

U.S. Onshore

U.S. Offshore

Total

U.S.

 

Canada

North America

Proved developed and undeveloped reserves:

 

 

 

 

 

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

    5,979

       376

    6,355

    1,896

    8,251

  Revisions due to prices.................................................

       117

            2

       119

         50

       169

  Revisions other than price...........................................

       175

          (1)

       174

        (19)

       155

  Extensions and discoveries.........................................

    1,055

         78

    1,133

       139

    1,272

  Purchase of reserves.....................................................

         10

          —

         10

            5

         15

  Production......................................................................

      (558)

        (77)

      (635)

      (227)

      (862)

  Sale of reserves..............................................................

        (13)

          —

        (13)

          —

        (13)

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

    6,765

       378

    7,143

    1,844

    8,987

  Revisions due to prices.................................................

      (367)

          (2)

      (369)

      (219)

      (588)

  Revisions other than price...........................................

         85

         21

       106

        (12)

         94

  Extensions and discoveries.........................................

    1,916

         50

    1,966

       111

    2,077

  Purchase of reserves.....................................................

       250

          —

       250

            2

       252

  Production......................................................................

      (669)

        (57)

      (726)

      (212)

      (938)

  Sale of reserves..............................................................

          (1)

          —

          (1)

          (4)

          (5)

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

    7,979

       390

    8,369

    1,510

    9,879

  Revisions due to prices.................................................

      (661)

          (4)

      (665)

        (29)

      (694)

  Revisions other than price...........................................

       119

        (62)

         57

        (14)

         43

  Extensions and discoveries.........................................

    1,387

         64

    1,451

         67

    1,518

  Purchase of reserves.....................................................

            1

          —

            1

            6

            7

  Production......................................................................

      (698)

        (45)

      (743)

      (223)

      (966)

  Sale of reserves..............................................................

          —

          (1)

          (1)

        (29)

        (30)

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

    8,127

       342

    8,469

    1,288

    9,757

Proved developed reserves as of:

 

 

 

 

 

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

    4,672

       244

    4,916

    1,560

    6,476

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

    5,547

       196

    5,743

    1,506

    7,249

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

    6,469

       212

    6,681

    1,357

    8,038

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

    6,447

       185

    6,632

    1,213

    7,845

Proved undeveloped reserves as of:

 

 

 

 

 

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

    1,307

       132

    1,439

       336

    1,775

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

    1,218

       182

    1,400

       338

    1,738

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

    1,510

       178

    1,688

       153

    1,841

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

    1,680

       157

    1,837

         75

    1,912

 


 

 

Natural Gas Liquids (MMBbls)

 

U.S. Onshore

U.S. Offshore

Total

U.S.

 

Canada

North America

Proved developed and undeveloped reserves:

 

 

 

 

 

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

       230

            3

       233

         42

       275

  Revisions due to prices.................................................

            5

          —

            5

          —

            5

  Revisions other than price...........................................

         22

          (1)

         21

          (1)

         20

  Extensions and discoveries.........................................

         45

          —

         45

            2

         47

  Purchase of reserves.....................................................

          —

          —

         —

          —

          —

  Production......................................................................

        (21)

          (1)

        (22)

          (4)

        (26)

  Sale of reserves..............................................................

          —

          —

          —

          —

          —

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

       281

            1

       282

         39

       321

  Revisions due to prices.................................................

        (18)

          —

        (18)

          (2)

        (20)

  Revisions other than price...........................................

            5

            1

            6

          —

            6

  Extensions and discoveries.........................................

         65

          —

         65

            2

         67

  Purchase of reserves.....................................................

            6

          —

            6

          —

            6

  Production......................................................................

        (24)

          —

        (24)

          (4)

        (28)

  Sale of reserves..............................................................

          —

          —

          —

          —

          —

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

       315

            2

       317

         35

       352

  Revisions due to prices.................................................

        (11)

          —

        (11)

            2

          (9)

  Revisions other than price...........................................

         36

            1

         37

          —

         37

  Extensions and discoveries.........................................

         70

         70

            1

         71

  Purchase of reserves.....................................................

          —

          —

          —

          —

          —

  Production......................................................................

        (25)

          (1)

        (26)

          (4)

        (30)

  Sale of reserves..............................................................

          —

          —

          —

          —

          —

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

       385

            2

       387

         34

       421

Proved developed reserves as of:

 

 

 

 

 

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

       194

            2

       196

         33

       229

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

       243

            1

       244

         30

       274

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

       260

            1

       261

         31

       292

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

       293

            1

       294

         32

       326

Proved undeveloped reserves as of:

 

 

 

 

 

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

         36

            1

         37

            9

         46

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

         38

          —

         38

            9

         47

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

         55

            1

         56

            4

         60

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

         92

            1

         93

            2

         95

 


 

 

Total (MMBoe) (1)

 

U.S. Onshore

U.S. Offshore

Total

U.S.

 

Canada

North America

Proved developed and undeveloped reserves:

 

 

 

 

 

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

    1,353

       109

    1,462

       687

    2,149

  Revisions due to prices.................................................

         28

            1

         29

         25

         54

  Revisions other than price...........................................

         55

            1

         56  

            7

         63

  Extensions and discoveries.........................................

       228

         14

       242

         72

       314

  Purchase of reserves.....................................................

            2

          —

            2

            1

            3

  Production......................................................................

      (124)

        (22)

      (146)

        (58)

      (204)

  Sale of reserves..............................................................

          (3)

          —

          (3)

          —

          (3)

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

    1,539

       103

    1,642

       734

    2,376

  Revisions due to prices.................................................

        (97)

          (3)

      (100)

      (387)

      (487)

  Revisions other than price...........................................

         21

            7

         28

          —

         28

  Extensions and discoveries.........................................

       395

         10

       405

       141

       546

  Purchase of reserves.....................................................

         66

          —

         66

          —

         66

  Production......................................................................

      (146)

        (16)

      (162)

        (61)

      (223)

  Sale of reserves..............................................................

          (1)

          —

          (1)

          (6)

          (7)

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

    1,777

       101

    1,878

       421

    2,299

  Revisions due to prices.................................................

      (113)

            1

      (112)

       289

       177

  Revisions other than price...........................................

         57

          (8)

         49

        (11)

         38

  Extensions and discoveries.........................................

       311

         12

       323

       135

       458

  Purchase of reserves.....................................................

          —

          —

          —

            1

            1

  Production......................................................................

      (154)

        (13)

      (167)

        (66)

      (233)

  Sale of reserves..............................................................

          —

          (1)

          (1)

          (6)

          (7)

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

    1,878

         92

    1,970

       763

    2,733

Proved developed reserves as of:

 

 

 

 

 

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

    1,089

         74

    1,163

       405

    1,568

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

    1,290

         59

    1,349

       476

    1,825

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

    1,449

         59

    1,508

       367

    1,875

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

    1,486

         53

    1,539

       383

    1,922

Proved undeveloped reserves as of:

 

 

 

 

 

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

       264

         35

       299

       282

       581

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

       249

         44

       293

       258

       551

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

       328

         42

       370

         54

       424

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

       392

         39

       431

       380

       811

____________________________

(1)   Gas reserves are converted to Boe at the rate of six Mcf per Bbl of oil, based upon the approximate relative energy content of gas and oil. This rate is not necessarily indicative of the relationship of natural gas and oil prices. Natural gas liquids reserves are converted to Boe on a one-to-one basis with oil.

 

SEC's Modernization of Oil and Gas Reporting

 

At the end of 2009, Devon adopted the SEC's Modernization of Oil and Gas Reporting, as well as the conforming rule changes issued by the Financial Accounting Standards Board. Upon adoption, the two primary rule changes that impacted Devon's year-end reserves estimates were those related to assumptions for pricing and reasonable certainty.

 

The SEC's prior rules required proved reserve estimates to be calculated using prices as of the end of the period and held constant over the life of the reserves. The revised rules require reserves estimates to be calculated using an average of the first-day-of-the-month price for the preceding 12-month period.

 

The revised rules amend the definition of proved reserves to permit the use of reliable technologies to establish the reasonable certainty of proved reserves. This revision includes provisions for establishing levels of lowest known hydrocarbons and highest known oil through reliable technology other than well penetrations. This revision also allows proved reserves to be claimed beyond development spacing areas that are immediately adjacent to developed spacing areas if economic producibility can be established with reasonable certainty based on reliable technologies. As a result of adopting these provisions of the new rules, Devon's 2009 reserves increased approximately 65 MMBoe, or 2%. This increase is included in the 2009 extensions and discoveries total.

 

Price Revisions

 

2009 – Reserves increased 177 MMBoe due to higher oil prices, partially offset by lower gas prices. The increase in oil reserves primarily related to Devon's Jackfish thermal heavy oil reserves in Canada. At the end of 2008, 331 MMBoe of reserves related to Jackfish were not considered proved. However, due to higher prices, these reserves were considered proved as of December 31, 2009. Significantly lower gas prices caused Devon's reserves to decrease 116 MMBoe, which primarily related to its United States reserves. 

 

2008 – Due to significantly lower oil, gas and NGL prices as of December 31, 2008 compared to December 31, 2007, 487 MMBoe of reserves were not considered proved as of December 31, 2008. Of the 487 MMBoe price revisions, 331 MMBoe related to Jackfish steam-assisted gravity drainage project in Canada.

 

The 487 MMBoe price revision also included 28 MMBoe related to Devon's proved reserves in the Canadian province of Alberta. In December 2008, the provincial government of Alberta enacted a new royalty regime. The new regime for conventional oil, gas, NGL and heavy oil production was effective January 1, 2009. As a result of the newly enacted royalties, Devon's proved reserves decreased as of December 31, 2008.

 

Revisions Other Than Price

 

The 2009 total revision included 48 MMBoe related to the Barnett Shale. The 2008 total included performance revisions of 22 MMBoe in the Barnett Shale. The 2007 total included performance revisions of 39 MMBoe at the Barnett Shale, 13 MMBoe at Jackfish and 13 MMBoe at Carthage.

 

Extensions and Discoveries

 

2009 – Of the 458 MMBoe of 2009 extensions and discoveries, 204 MMBoe related to the Barnett Shale area in Texas, 118 MMBoe related to Jackfish, 49 MMBoe related to the Cana-Woodford Shale area in western Oklahoma, 14 MMBoe related to the Rocky Mountain area, 11 MMBoe related to Deepwater Production in the Gulf, 8 MMBoe related to the Carthage Conventional area in east Texas, and 7 MMBoe related to the Haynesville Shale area in east Texas.

 

The 2009 extensions and discoveries included 371 MMBoe related to additions from Devon’s infill drilling activities, including 203 MMBoe at the Barnett Shale, 118 MMBoe at Jackfish and 24 MMBoe at the Cana-Woodford Shale.

 

2008 – Of the 546 MMBoe of 2008 extensions and discoveries, 252 MMBoe related to the Barnett Shale, 101 MMBoe related to Jackfish, 44 MMBoe related to Carthage Conventional, 21 MMBoe related to the Cana-Woodford Shale, 19 MMBoe related to the Lloydminster heavy oil development in Canada and 17 MMBoe related to the Arkoma-Woodford Shale area in southeastern Oklahoma.

 

The 2008 extensions and discoveries included 420 MMBoe related to additions from Devon’s infill drilling activities, including 243 MMBoe at the Barnett Shale, 101 MMBoe at Jackfish, 22 MMBoe at Carthage Conventional, 18 MMBoe at Lloydminster and 11 MMBoe at the Cana-Woodford Shale.

 

2007 – Of the 314 MMBoe of 2007 extensions and discoveries, 119 MMBoe related to the Barnett Shale, 34 MMBoe related to Carthage, 22 MMBoe related to Jackfish, 20 MMBoe related to Lloydminster, 17 MMBoe related to Washakie and 15 MMBoe related to the Arkoma-Woodford Shale.

 

The 2007 extensions and discoveries included 154 MMBoe related to additions from Devon’s infill drilling activities, including 96 MMBoe at the Barnett Shale and 19 MMBoe at Lloydminster.

 

Purchase of Reserves

 

The 2008 total included 34 MMBoe located in Utah and 27 MMBoe located in the Permian Basin.

 


Prepared and Audited Reserves

 

Set forth below is a summary of the reserves that were evaluated, either by preparation or audit, by independent petroleum consultants for each of the years ended 2009, 2008 and 2007.

 

 

2009

2008

2007

 

Prepared

Audited

Prepared

Audited

Prepared

Audited

U.S. Onshore...........................

     —

    93%

     —

    92%

     —

    88%

U.S. Offshore..........................

  100%

    —

  100%

    —

  100%

    —

  U.S..........................................

       5%

    89%

       5%

    87%

       6%

    82%

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

     —

    91%

     —

    78%

     34%

    51%

  North America.....................

       3%

    89%

       4%

    85%

     15%

    73%

 

"Prepared" reserves are those quantities of reserves that were prepared by an independent petroleum consultant. "Audited" reserves are those quantities of reserves that were estimated by Devon employees and audited by an independent petroleum consultant. An audit is an examination of a company's proved oil and gas reserves and net cash flow by an independent petroleum consultant that is conducted for the purpose of expressing an opinion as to whether such estimates, in aggregate, are reasonable and have been estimated and presented in conformity with generally accepted petroleum engineering and evaluation principles.

 

The domestic reserves were evaluated by the independent petroleum consultants of LaRoche Petroleum Consultants, Ltd. and Ryder Scott Company, L.P. in each of the years presented. The Canadian reserves were evaluated by the independent petroleum consultants of AJM Petroleum Consultants in each of the years presented.

 

Standardized Measure

 

The tables below reflect the standardized measure of discounted future net cash flows related to Devon's interest in proved reserves.

 

 

Year Ended December 31, 2009

 

United

States

 

Canada

North America

 

(In millions)

Future cash inflows...........................................................................

$  44,571

$  28,442

$  73,013

Future costs:

 

 

 

  Development....................................................................................

     (6,814)

     (4,132)

   (10,946)

  Production........................................................................................

   (22,184)

     (9,847)

   (32,031)

Future income tax expense.............................................................

     (3,572)

     (3,408)

     (6,980)

Future net cash flows........................................................................

    12,001

    11,055

    23,056

10% discount to reflect timing of cash flows...............................

     (6,121)

     (5,532)

   (11,653)

Standardized measure of discounted future net cash flows.....

$    5,880

$    5,523

$  11,403

 

 

Year Ended December 31, 2008

 

United

States

 

Canada

North America

 

(In millions)

Future cash inflows...........................................................................

$  51,284

$  11,459

$  62,743

Future costs:

 

 

 

  Development....................................................................................

     (6,887)

     (1,623)

     (8,510)

  Production........................................................................................

   (24,113)

     (5,742)

   (29,855)

Future income tax expense.............................................................

     (5,585)

        (942)

     (6,527)

Future net cash flows........................................................................

    14,699

      3,152

    17,851

10% discount to reflect timing of cash flows...............................

     (7,318)

     (1,140)

     (8,458)

Standardized measure of discounted future net cash flows.....

$    7,381

$    2,012

$    9,393

 


 

 

Year Ended December 31, 2007

 

United

States

 

Canada

North America

 

(In millions)

Future cash inflows...........................................................................

$  72,109

$  28,684

$ 100,793

Future costs:

 

 

 

  Development....................................................................................

     (5,673)

     (3,380)

     (9,053)

  Production........................................................................................

   (24,606)

   (10,941)

   (35,547)

Future income tax expense.............................................................

   (12,704)

     (3,570)

   (16,274)

Future net cash flows........................................................................

    29,126

    10,793

    39,919

10% discount to reflect timing of cash flows...............................

   (14,312)

     (5,025)

   (19,337)

Standardized measure of discounted future net cash flows.....

$  14,814

$    5,768

$  20,582

 

Future cash inflows, development costs and production costs were computed using the same assumptions for prices and costs that were used to estimate Devon’s proved oil and gas reserves at the end of each year. For 2009, the prices averaged $47.80 per barrel of oil, $3.12 per Mcf of gas and $22.78 per barrel of natural gas liquids. Of the $10.9 billion of future development costs as of the end of 2009, $2.0 billion, $1.6 billion and $0.9 billion are estimated to be spent in 2010, 2011 and 2012, respectively.

 

Future development costs include not only development costs, but also future dismantlement, abandonment and rehabilitation costs. Included as part of the $10.9 billion of future development costs are $1.1 billion of future dismantlement, abandonment and rehabilitation costs.

 

Future production costs include general and administrative expenses directly related to oil and gas producing activities. Future income tax expenses are computed by applying the appropriate statutory tax rates to the future pre-tax net cash flows relating to proved reserves, net of the tax basis of the properties involved. The future income tax expenses give effect to permanent differences and tax credits, but do not reflect the impact of future operations.

 

The principal changes in the standardized measure of discounted future net cash flows attributable to Devon's proved reserves are as follows:

 

 

Year Ended December 31,

 

2009

2008

2007

 

(In millions)

Beginning balance.......................................................................

$       9,393

$    20,582

$    13,474

Oil, gas and NGL sales, net of production costs.....................

        (3,915)

        (9,177)

        (6,131)

Net changes in prices and production costs............................

        (1,672)

     (13,839)

         7,896

Extensions and discoveries, net of future development

   costs.............................................................................................

         2,378

         1,729

         4,130

Purchase of reserves, net of future development costs.........

                 6

            214

               50

Development costs incurred that reduced future

   development costs....................................................................

 

         1,012

 

         1,660

 

         1,559

Revisions of quantity estimates................................................

         4,051

        (1,294)

            564

Sales of reserves in place............................................................

             (37)

                (2)

             (51)

Accretion of discount..................................................................

         1,281

         2,894

         1,933

Net change in income taxes.......................................................

             (51)

         4,934

        (2,494)

Other, primarily changes in timing and foreign

   exchange rates...........................................................................

 

        (1,043)

 

         1,692

 

           (348)

Ending balance.............................................................................

$    11,403

$       9,393

$    20,582

 


Supplemental Quarterly Financial Information (Unaudited)
23. Supplemental Quarterly Financial Information (Unaudited)

23.  Supplemental Quarterly Financial Information (Unaudited)

 

Following is a summary of the unaudited interim results of operations for the years ended December 31, 2009 and 2008.

 

 

2009

 

 

First

Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter

Full

Year

 

(In millions, except per share amounts)

Revenues.....................................................................

$   1,900

$   1,822

$   1,848

$   2,445

$   8,015

 

 

 

 

 

 

(Loss) earnings from continuing operations..........

$  (3,882)

$       190

$       382

         557

$  (2,753)

(Loss) earnings from discontinued operations......

          (77)

         124

         117

         110

         274

Net (loss) earnings......................................................

$  (3,959)

$       314

$       499

         667

$  (2,479)

 

 

 

 

 

 

Basic net (loss) earnings per common share:

 

 

 

 

 

  (Loss) earnings from continuing operations........

$     (8.74)

$      0.43

$      0.86

$      1.25

$    (6.20)

  (Loss) earnings from discontinued operations....

       (0.18)

        0.28

        0.27

        0.25

        0.62

  Net (loss) earnings....................................................

$     (8.92)

$      0.71

$      1.13

$      1.50

$    (5.58)

 

 

 

 

 

 

Diluted net (loss) earnings per common share:

 

 

 

 

 

  (Loss) earnings from continuing operations........

$     (8.74)

$      0.42

$      0.86

$      1.25

$    (6.20)

  (Loss) earnings from discontinued operations....

       (0.18)

        0.28

        0.26

        0.24

        0.62

  Net (loss) earnings....................................................

$     (8.92)

$      0.70

$      1.12

$      1.49

$    (5.58)

 

 

2008

 

 

First

Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter

Full

Year

 

(In millions, except per share amounts)

Revenues.....................................................................

$   2,503

$   3,152

$   5,651

$   2,552

$ 13,858

 

 

 

 

 

 

Earnings (loss) from continuing operations...........

$       415

$       423

$   2,393

    (6,270)

$  (3,039)

Earnings (loss) from discontinued operations.......

         334

         878

         225

        (546)

         891

Net earnings (loss)......................................................

$       749

$   1,301

$   2,618

    (6,816)

$  (2,148)

 

 

 

 

 

 

Basic net earnings (loss) per common share:

 

 

 

 

 

  Earnings (loss) from continuing operations.........

$      0.93

$      0.94

$      5.42

$  (14.19)

$    (6.86)

  Earnings (loss) from discontinued operations.....

        0.75

        1.97

        0.51

       (1.23)

        2.01

  Net earnings (loss)....................................................

$      1.68

$      2.91

$      5.93

$  (15.42)

$    (4.85)

 

 

 

 

 

 

Diluted net earnings (loss) per common share:

 

 

 

 

 

  Earnings (loss) from continuing operations.........

$      0.92

$      0.93

$      5.37

$  (14.19)

$    (6.86)

  Earnings (loss) from discontinued operations.....

        0.74

        1.95

        0.51

       (1.23)

        2.01

  Net earnings (loss)....................................................

$      1.66

$      2.88

$      5.88

$  (15.42)

$    (4.85)

 

Earnings (Loss) from Continuing Operations

 

The first quarter of 2009 includes a reduction of the carrying values of United States oil and gas properties totaling $6.4 billion ($4.1 billion after income taxes, or $9.20 per diluted share).

 

The fourth quarter of 2009 includes restructuring costs that relate to Devon's planned asset divestitures and total $105 million ($67 million after income taxes, or $0.15 per diluted share).

 

The first and second quarters of 2008 include unrealized losses on Devon’s commodity hedges of $780 million ($499 million after income taxes, or $1.11 per diluted share) and $912 million ($584 million after income taxes, or $1.30 per diluted share), respectively, as a result of increases in gas prices subsequent to the trade dates. The third quarter of 2008 includes a net unrealized gain of $1.8 billion ($1.2 billion after income taxes, or $2.63 per diluted share), resulting from a decrease in gas prices.

 


The second quarter of 2008 includes an increase to income tax expense of $312 million (or $0.70 per diluted share) due to repatriations from certain foreign subsidiaries to the United States and tax policy election changes.

 

The fourth quarter of 2008 includes reductions of the carrying values of United States and Canadian oil and gas properties totaling $9.9 billion ($6.7 billion after income taxes, or $15.06 per diluted share).

 

Earnings (Loss) from Discontinued Operations

 

The first quarter of 2009 includes reductions of the carrying values of oil and gas properties totaling $108 million ($105 million after income taxes, or $0.24 per diluted share).

 

The fourth quarter of 2009 includes restructuring costs that relate to Devon's planned asset divestitures and total $48 million ($31 million after income taxes, or $0.07 per diluted share).

 

The second quarter of 2008 includes a $623 million gain ($529 million after income taxes, or $1.17 per diluted share) as a result of completing the sale of Devon's Equatorial Guinea operations.  Also, during the second quarter of 2008, Devon closed the sale of its Gabon operations, which resulted in a $114 million gain ($111 million after income taxes, or $0.25 per diluted share).

 

The third quarter of 2008 includes an $83 million gain ($101 million after income taxes, or $0.23 per diluted share) as a result of completing the sale of Devon’s assets in Cote d'Ivoire.

 

The fourth quarter of 2008 includes reductions of the carrying values of oil and gas properties totaling $494 million ($465 million after income taxes, or $1.05 per diluted share).