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Devon Energy Reports 2008 Financial Results and Year-End Reserves

Posted on: Wednesday, 4 February 2009, 06:55 CST

OKLAHOMA CITY, Feb. 4 /PRNewswire-FirstCall/ -- Devon Energy Corporation (NYSE: DVN) today reported a net loss of $2.1 billion, or $4.85 per common share ($4.85 per diluted common share), for the year ended December 31, 2008. Increased natural gas and liquids production and sales were more than offset by a $7.1 billion non-cash, after-tax reduction in the carrying value of oil and gas properties, which is explained in detail below. In the year ended December 31, 2007, Devon earned $3.6 billion, or $8.08 per common share ($8.00 per diluted common share).

For the quarter ended December 31, 2008, Devon reported a net loss of $6.8 billion, or $15.42 per common share ($15.42 per diluted common share), also reflecting the $7.1 billion non-cash charge. In the fourth quarter of 2007, the company reported net earnings of $1.3 billion or, $2.96 per common share ($2.92 per diluted common share).

2008 Earnings $9.91 per Share Excluding Items Not Estimated by Analysts;

Non-Cash Ceiling Adjustment Triggered by Declining Prices

Devon's full-year and fourth-quarter 2008 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most significant of these items was a $7.1 billion after-tax reduction in the carrying value of oil and gas properties. This was the result of a non-cash, full-cost ceiling adjustment in the fourth quarter of 2008. This charge resulted from application of the ceiling test as prescribed by the Securities and Exchange Commission (SEC) for companies that follow the full-cost method of accounting.

Under the full-cost method of accounting, a company's net book value of its oil and gas properties, less related deferred income taxes, may not exceed a calculated "ceiling." The test is performed separately for each country in which the company operates. The ceiling is the estimated after-tax stream of future net revenues from proved oil and gas properties, discounted at 10 percent per year, using year-end costs and prices held flat plus the cost of unevaluated properties. Any excess is written off as a non-cash expense. The expense may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the ceiling. Full-cost companies must use the prices in effect at the end of each accounting quarter to calculate the ceiling value of reserves. Future net revenues are calculated assuming continuation of prices and costs in effect at the time of the calculation, except for changes that are fixed and determinable by existing contracts. Although the SEC recently modified its rules applicable to the ceiling test, the new rules do not take effect until year-end 2009.

Excluding the reduction in carrying value of oil and gas properties and other adjusting items, Devon earned $4.4 billion or $9.91 per diluted common share in 2008. In the fourth quarter of 2008, excluding adjusting items, the company earned $297 million, or 67 cents per diluted common share. The adjusting items are discussed in more detail later in this news release.

"Despite the effects of the sharp fourth-quarter declines in oil and natural gas prices, 2008 was a very successful year for the company," said J. Larry Nichols, chairman and chief executive officer. "Cash flow reached an all-time record of nearly $10 billion. We increased oil and gas production by six percent and drilled 2,441 wells with a 98 percent success rate. In addition, we added 584 million barrels of proved reserves before price revisions at a very attractive cost per barrel."

Cash Flow a Record $9.6 Billion

Cash flow before balance sheet changes increased 31 percent to a record $9.6 billion in 2008. Other sources of cash included $1.9 billion in after-tax proceeds from the African divestiture program and $280 million from an exchange of assets with Chevron Corporation. Devon utilized these sources of cash and cash on hand to fund $10.5 billion of capital expenditures, repurchase $815 million of common and preferred stock, pay $289 million in dividends and reduce total debt by $2.1 billion during the year. The company exited 2008 with cash of $379 million and a net debt to adjusted capitalization ratio of less than 25 percent. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.

Drill-bit Reserve Additions More Than Double Production

Capital and Reserve Summary (detailed tables and non-GAAP reconciliations are also Year Ended provided in this release) December 31, 2008 2007 Drill-bit Capital (in millions) $9,012 $5,812 Reserve Data (MMBoe) Discoveries and extensions 546 315 Revisions other than price 38 75 Drill-bit and performance reserve additions 584 390

In 2008, Devon added 584 million oil-equivalent barrels (Boe) to its proved oil and gas reserves through successful drilling (discoveries, extensions and performance revisions). The company invested $9 billion of associated drill-bit capital during the year.

Devon also acquired 66 million Boe through purchases of proved reserves. Revisions related to changes in year-end oil, natural gas and natural gas liquids prices decreased 2008 proved reserves by 473 million Boe. More than 70 percent of the price-related reserve revisions resulted from the impact of year-end prices on heavy oil reserves at Devon's Jackfish oil sands project in Canada.

Oil and gas production from continuing operations increased six percent to 238 million Boe in 2008. Estimated proved reserves at December 31, 2008, were 2,428 million Boe.

Proved developed reserves were 1,934 million Boe at December 31, 2008. This represented 80 percent of total proved reserves. Year-end proved reserves included 429 million barrels of crude oil, 9.9 trillion cubic feet of natural gas and 352 million barrels of natural gas liquids. Devon's reserve life index (proved reserves divided by annual production) is approximately 10 years.

Barnett Shale Growth and Start-Up at Jackfish Paced 2008 Operations

Devon drilled 2,441 wells in 2008 with a 98 percent success rate. Following are operational highlights from 2008:

• The company drilled 659 wells in the Barnett Shale field in north Texas during the year. Devon had 3,809 producing wells in the field at December 31, 2008.
• Devon produced 398 billion cubic feet of gas equivalent (Bcfe) from the Barnett Shale field in 2008. This was a 31 percent increase compared with its 2007 net Barnett production.
• Net production from the Barnett Shale reached nearly 1.2 Bcfe per day during the fourth quarter of 2008. Devon had exited 2007 producing about 950 million cubic feet equivalent (MMcfe) per day.
• In east Texas, Devon increased production from its Carthage area by nearly 10 percent in 2008 to more than 300 MMcfe per day. The company drilled 132 wells at Carthage during the year, including 20 horizontal wells.
• Devon added another 40,000 net acres to its industry-leading lease position in the Haynesville Shale play in eastern Texas and western Louisiana in the fourth quarter of 2008. The company now holds some 570,000 net acres in the Haynesville Shale and is evaluating its position through drilling, coring and testing.
• In the Arkoma Basin in Oklahoma, Devon increased net production from the Woodford Shale to about 64 million cubic feet of gas equivalent per day. This is a 165 percent increase compared with the fourth quarter of 2007. Also in 2008, the company completed construction and commenced operation of its Northridge gas processing plant, which can process up to 200 million cubic feet of natural gas per day.
• Devon began successful development of a new shale play in the Anadarko Basin in Oklahoma in 2008. The company has assembled a lease position of 112,000 net acres in the "Cana" play and drilled 10 Devon-operated wells during the year. Devon's net production from Cana was nearly 20 MMcfe per day at December 31, 2008. The company believes its net risked resource potential in the Cana play represents nearly four trillion cubic feet of natural gas equivalent.
• Devon continued to advance its Lower Tertiary projects in the Gulf of Mexico in 2008. At Cascade, the company commenced drilling the first of two initial producing wells and continued work on the production facilities and subsea equipment. When Cascade begins producing in 2010, it will utilize the Gulf's first floating production, storage and offloading vessel, or FPSO.
• Devon ramped up production from Jackfish, its 100-percent owned Canadian oil sands project, throughout 2008. Production reached 22,000 barrels per day in the fourth quarter and is expected to peak at 35,000 barrels per day in 2009.
• Jackfish is expected to produce at 35,000 barrels per day for more than 20 years. Devon sanctioned and began work on a second phase, Jackfish 2, in 2008. Jackfish 2 is also sized to produce 35,000 barrels per day, with production commencing by the end of 2011.

African Divestitures Substantially Completed

Devon completed the sales of its West African producing assets in 2008. The aggregate pre-tax value of the combined African divestitures was approximately $3 billion. In accordance with U.S. accounting standards, the company classified the assets, liabilities and results of its operations in Africa as discontinued operations for all accounting periods presented. Included in this release is a table of revenues, expenses and production categories and amounts reclassified as discontinued operations for each period presented.

Oil and Gas Sales Increase 36 Percent

Sales of oil, gas and natural gas liquids from continuing operations increased 36 percent to $13.1 billion in the year ended December 31, 2008. Comparable sales for the year ended December 31, 2007, were $9.6 billion. The combined effects of increased natural gas and liquids production and higher realized oil, natural gas and natural gas liquids prices led to the increase in sales.

Combined oil, gas and natural gas liquids production from continuing operations averaged 650 thousand Boe per day in 2008. This was a six percent increase compared with Devon's 2007 average daily production.

Marketing and midstream operating profit increased 31 percent to $668 million in 2008. The increase in operating profit was attributable to higher throughput and higher natural gas and natural gas liquids prices.

Expenses Generally in Line with Expectations

With the exception of depreciation, depletion and amortization of oil and gas properties (DD&A), most expense items were in line with expectations. Unit DD&A in 2008 increased to $13.68 per Boe compared with $11.85 per Boe in 2007. The higher than expected DD&A rate was attributable to the impact on estimated proved reserves of low commodity prices at December 31, 2008.

Items Excluded from Published Earnings Estimates

Devon's reported net earnings include items of income and expense that are typically excluded by securities analysts in their published estimates of the company's financial results. These items and their effects upon reported earnings for the full year and fourth quarter of 2008 were as follows:

Items affecting continuing operations-

• An unrealized gain on oil and natural gas derivative instruments increased full-year earnings by $243 million pre-tax ($156 million after tax) and increased fourth-quarter earnings by $103 million pre-tax ($65 million after tax).
• A change in fair value of other financial instruments decreased full-year earnings by $151 million pre-tax ($97 million after tax) and decreased fourth-quarter earnings by $129 million pre-tax ($82 million after tax).
• A reduction in the carrying value of oil and gas properties decreased full-year and fourth-quarter earnings by $10.4 billion pre-tax ($7.1 billion after tax).
• Income tax expense related to the repatriation of cash from outside the United States and a related change in an income tax election decreased full-year after-tax earnings by $312 million.
• A modification to the company's stock compensation vesting policy decreased full-year earnings by $27 million pre-tax ($17 million after tax).
• A reduction in Canadian statutory income tax rates increased full-year after-tax earnings by $7 million.

Items affecting discontinued operations-

• Divestitures of assets in Africa resulted in a full-year gain of $819 million pre-tax ($769 million after tax) and a fourth-quarter gain of $4 million pre-tax ($25 million after tax).
• A reduction in the carrying value of oil and gas properties decreased full-year and fourth-quarter earnings by $6 million pre-tax ($6 million after tax).
• The decisions to exit Africa generated other financial benefits that increased full-year earnings by $55 million pre-tax ($27 million after tax).

The following tables summarize the full-year and fourth-quarter effects of these items on 2008 earnings and income taxes.

Summary of Items Typically Excluded by Securities Analysts (in millions) Continuing Operations - Full Year 2008 Cash Flow Before After- Balance Pre-tax tax Sheet Earnings Income Tax Effect Earnings Changes Effect Current Deferred Total Effect Effect Unrealized gain on oil and gas derivative instruments $243 - 87 87 156 - Change in fair value of other financial instruments (151) - (54) (54) (97) - Reduction in the carrying value of oil and gas assets (10,379) - (3,264) (3,264) (7,115) - Taxes on repatriation and tax policy elections - 295 17 312 (312) (295) Stock compensation vesting (27) - (10) (10) (17) - Change in Canadian income tax rate - - (7) (7) 7 - Totals $(10,314) 295 (3,231) (2,936) (7,378) (295) Discontinued Operations - Full Year 2008 Cash Flow Before After- Balance Pre-tax tax Sheet Earnings Income Tax Effect Earnings Changes Effect Current Deferred Total Effect Effect Gain on sale of West African assets $819 518 (468) 50 769 - Reduction in the carrying value of oil and gas assets (6) - - - (6) - Financial benefits of decision to exit Africa 55 - 28 28 27 - Totals $868 518 (440) 78 790 - In aggregate, these items decreased full-year 2008 net earnings by $6.6 billion, or $14.85 per common share ($14.76 per diluted share). These items and their associated tax effects decreased full-year 2008 cash flow before balance sheet changes by $295 million. Summary of Items Typically Excluded by Securities Analysts (in millions) Continuing Operations - Fourth Quarter 2008 Cash Flow Before After- Balance Pre-tax tax Sheet Earnings Income Tax Effect Earnings Changes Effect Current Deferred Total Effect Effect Unrealized gain on oil and gas derivative instruments $103 - 38 38 65 - Change in fair value of other financial instruments (129) - (47) (47) (82) - Reduction in the carrying value of oil and gas assets (10,379) - (3,264) (3,264) (7,115) - Totals $(10,405) - (3,273) (3,273) (7,132) - Discontinued Operations - Fourth Quarter 2008 Cash Flow Before After- Balance Pre-tax tax Sheet Earnings Income Tax Effect Earnings Changes Effect Current Deferred Total Effect Effect Gain on sale of West African assets $4 - (21) (21) 25 - Reduction in the carrying value of oil and gas assets (6) - - - (6) - Totals $(2) - (21) (21) 19 - In aggregate, these items decreased fourth-quarter 2008 net earnings by $7.1 billion, or $16.09 per common share ($16.09 per diluted share).

Conference Call to be Webcast Today

Devon will discuss its 2008 financial and operating results in a conference call webcast today. The webcast will begin at 10 a.m. Central Time (11 a.m. Eastern Time). The webcast may be accessed from Devon's internet home page at www.devonenergy.com.

This press release includes "forward-looking statements" as defined by the Securities and Exchange Commission. Such statements are those concerning strategic plans, expectations and objectives for future operations. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the company expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Statements regarding future drilling and production are subject to all of the risks and uncertainties normally incident to the exploration for and development and production of oil and gas. These risks include, but are not limited to the volatility of oil, natural gas and NGL prices; uncertainties inherent in estimating oil, natural gas and NGL reserves; drilling risks; environmental risks; and political or regulatory changes. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. The forward-looking statements in this press release are made as of the date of this press release, even if subsequently made available by Devon on its website or otherwise. Devon does not undertake any obligation to update the forward-looking statements as a result of new information, future events or otherwise.

The United States Securities and Exchange Commission permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. This release may contain certain terms, such as resource potential, reserve potential, probable reserves, possible reserves and exploration target size. The SEC guidelines strictly prohibit us from including these terms in filings with the SEC. U.S. investors are urged to consider closely the disclosure in our Form 10-K, File No. 001-32318, available from us at Devon Energy Corporation, Attn. Investor Relations, 20 North Broadway, Oklahoma City, OK 73102. You can also obtain this form from the SEC by calling 1-800-SEC-0330.

Devon Energy Corporation is an Oklahoma City-based independent energy company engaged in oil and gas exploration and production. Devon is the largest U.S.-based independent oil and gas producer and is included in the S&P 500 Index. For more information about Devon, please visit our website at www.devonenergy.com.

DEVON ENERGY CORPORATION FINANCIAL AND OPERATIONAL INFORMATION PRODUCTION (net of royalties) Excludes discontinued Year Ended Quarter Ended operations December 31, December 31, 2008 2007 2008 2007 Total Period Production Natural Gas (Bcf) U.S. Onshore 668.1 557.9 181.2 150.1 U.S. Offshore 57.6 77.0 12.6 19.6 Total U.S. 725.7 634.9 193.8 169.7 Canada 212.1 226.0 53.6 55.8 International 2.2 1.7 0.7 0.5 Total Natural Gas 940.0 862.6 248.1 226.0 Oil (MMBbls) U.S. Onshore 11.3 11.2 3.0 2.8 U.S. Offshore 5.9 7.8 1.0 1.9 Total U.S. 17.2 19.0 4.0 4.7 Canada 21.6 16.1 6.2 4.4 International 14.2 19.5 3.4 4.3 Total Oil 53.0 54.6 13.6 13.4 Natural Gas Liquids (MMBbls) U.S. Onshore 23.6 20.6 6.5 5.7 U.S. Offshore 0.6 0.8 0.1 0.2 Total U.S. 24.2 21.4 6.6 5.9 Canada 4.0 4.3 1.0 1.1 International - - - - Total Natural Gas Liquids 28.2 25.7 7.6 7.0 Oil Equivalent (MMBoe) U.S. Onshore 146.2 124.8 39.7 33.5 U.S. Offshore 16.1 21.4 3.2 5.4 Total U.S. 162.3 146.2 42.9 38.9 Canada 60.9 58.1 16.1 14.8 International 14.6 19.8 3.5 4.4 Total Oil Equivalent 237.8 224.1 62.5 58.1 Average Daily Production Natural Gas (MMcf) U.S. Onshore 1,825.5 1,528.5 1,969.6 1,631.5 U.S. Offshore 157.3 210.9 136.3 213.4 Total U.S. 1,982.8 1,739.4 2,105.9 1,844.9 Canada 579.4 619.2 582.7 606.2 International 6.1 4.8 8.1 5.0 Total Natural Gas 2,568.3 2,363.4 2,696.7 2,456.1 Oil (MBbls) U.S. Onshore 30.7 30.7 32.1 30.6 U.S. Offshore 16.2 21.3 11.3 20.8 Total U.S. 46.9 52.0 43.4 51.4 Canada 59.0 44.2 67.4 48.2 International 38.8 53.4 36.2 47.2 Total Oil 144.7 149.6 147.0 146.8 Natural Gas Liquids (MBbls) U.S. Onshore 64.6 56.6 71.2 61.4 U.S. Offshore 1.5 2.1 1.1 2.0 Total U.S. 66.1 58.7 72.3 63.4 Canada 10.9 11.7 10.9 12.1 International - - - - Total Natural Gas Liquids 77.0 70.4 83.2 75.5 Oil Equivalent (MBoe) U.S. Onshore 399.5 342.0 431.5 363.9 U.S. Offshore 44.0 58.5 35.1 58.4 Total U.S. 443.5 400.5 466.6 422.3 Canada 166.5 159.1 175.4 161.3 International 39.8 54.2 37.6 48.0 Total Oil Equivalent 649.8 613.8 679.6 631.6 BENCHMARK PRICES Year Ended Quarter Ended (average prices) December 31, December 31, 2008 2007 2008 2007 Natural Gas ($/Mcf) - Henry Hub $9.04 $6.86 $6.95 $6.97 Oil ($/Bbl) - West Texas Intermediate (Cushing) $99.75 $72.39 $58.51 $90.92 REALIZED PRICES (excludes the effects of unrealized gains and losses from hedging) Quarter Ended December 31, 2008 Oil Gas NGLs Total (Per Bbl) (Per Mcf) (Per Bbl) (Per Boe) U.S. Onshore $55.11 $4.98 $20.52 $30.21 U.S. Offshore $56.80 $6.95 $34.28 $46.31 Total U.S. $55.56 $5.11 $20.73 $31.42 Canada $30.67 $6.02 $35.95 $34.02 International $46.24 $4.90 $- $45.63 Realized price without hedges $41.86 $5.30 $22.73 $32.88 Cash settlements $2.02 $0.52 $- $2.47 Realized price, including cash settlements $43.88 $5.82 $22.73 $35.35 Quarter Ended December 31, 2007 Oil Gas NGLs Total (Per Bbl) (Per Mcf) (Per Bbl) (Per Boe) U.S. Onshore $87.46 $5.69 $45.19 $40.47 U.S. Offshore $88.82 $7.26 $47.48 $59.81 Total U.S. $88.01 $5.87 $45.27 $43.15 Canada $54.54 $6.49 $56.64 $44.94 International $86.29 $7.58 $- $85.59 Realized price without hedges $76.46 $6.03 $47.08 $46.83 Cash settlements $- $0.04 $- $0.15 Realized price, including cash settlements $76.46 $6.07 $47.08 $46.98 Year Ended December 31, 2008 Oil Gas NGLs Total (Per Bbl) (Per Mcf) (Per Bbl) (Per Boe) U.S. Onshore $95.63 $7.43 $40.97 $47.91 U.S. Offshore $104.90 $9.53 $51.11 $74.55 Total U.S. $98.83 $7.59 $41.21 $50.55 Canada $71.04 $8.17 $61.45 $57.65 International $94.05 $8.27 $- $92.91 Realized price without hedges $86.22 $7.73 $44.08 $54.97 Cash settlements $0.51 $(0.45) $- $(1.67) Realized price, including cash settlements $86.73 $7.28 $44.08 $53.30 Year Ended December 31, 2007 Oil Gas NGLs Total (Per Bbl) (Per Mcf) (Per Bbl) (Per Boe) U.S. Onshore $67.34 $5.69 $36.08 $37.45 U.S. Offshore $71.95 $7.17 $36.78 $53.30 Total U.S. $69.23 $5.87 $36.11 $39.77 Canada $49.80 $6.24 $46.07 $41.51 International $70.60 $6.22 $- $70.11 Realized price without hedges $63.98 $5.97 $37.76 $42.90 Cash settlements $- $0.04 $- $0.18 Realized price, including cash settlements $63.98 $6.01 $37.76 $43.08 CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except Year Ended Quarter Ended per share amounts) December 31, December 31, 2008 2007 2008 2007 Revenues Oil sales $4,567 $3,493 $566 $1,032 Gas sales 7,263 5,149 1,316 1,362 NGL sales 1,243 970 174 327 Net (loss) gain on oil and gas derivative financial instruments (154) 14 257 13 Marketing and midstream revenues 2,292 1,736 397 463 Total revenues 15,211 11,362 2,710 3,197 Expenses and other income, net Lease operating expenses 2,217 1,828 583 502 Production taxes 522 340 60 85 Marketing and midstream operating costs and expenses 1,624 1,227 275 315 Depreciation, depletion and amortization of oil and gas properties 3,253 2,655 973 718 Depreciation and amortization of non-oil and gas properties 256 203 70 57 Accretion of asset retirement obligation 86 74 20 19 General and administrative expenses 653 513 179 155 Interest expense 329 430 68 105 Change in fair value of other financial instruments 149 (34) 127 (3) Reduction of carrying value of oil and gas properties 10,379 - 10,379 - Other income, net (224) (98) (103) (27) Total expenses and other income, net 19,244 7,138 12,631 1,926 (Loss) earnings from continuing operations before income tax expense (4,033) 4,224 (9,921) 1,271 Income tax (benefit) expense Current 619 500 (124) 41 Deferred (1,573) 578 (2,964) 126 Total income tax (benefit) expense (954) 1,078 (3,088) 167 (Loss) earnings from continuing operations (3,079) 3,146 (6,833) 1,104 Discontinued operations Earnings (loss) from discontinued operations before income tax expense 1,131 696 (2) 254 Income tax expense (benefit) 200 236 (19) 42 Earnings from discontinued operations 931 460 17 212 Net (loss) earnings (2,148) 3,606 (6,816) 1,316 Preferred stock dividends 5 10 - 3 Net (loss) earnings applicable to common stockholders $(2,153) $3,596 $(6,816) $1,313 Basic net (loss) earnings per share (Loss) earnings from continuing operations $(6.95) $7.05 $(15.46) $2.48 Earnings from discontinued operations 2.10 1.03 0.04 0.48 Net (loss) earnings $(4.85) $8.08 $(15.42) $2.96 Diluted net (loss) earnings per share (Loss) earnings from continuing operations $(6.95) $6.97 $(15.46) $2.45 Earnings from discontinued operations 2.10 1.03 0.04 0.47 Net (loss) earnings $(4.85) $8.00 $(15.42) $2.92 Weighted average common shares outstanding Basic 444 445 442 444 Diluted 447 450 444 449 CONSOLIDATED BALANCE SHEETS (in millions) December 31, 2008 2007 Assets Current assets Cash and cash equivalents $379 $1,364 Short-term investments, at fair value - 372 Accounts receivable 1,412 1,779 Income taxes receivable 334 30 Derivative financial instruments, at fair value 282 12 Current assets held for sale 27 120 Other current assets 250 237 Total current assets 2,684 3,914 Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($4,540 and $3,417 excluded from amortization in 2008 and 2007, respectively) 55,657 48,473 Less accumulated depreciation, depletion and amortization 32,683 20,394 Net property and equipment 22,974 28,079 Investment in Chevron Corporation common stock, at fair value - 1,324 Goodwill 5,579 6,172 Long-term assets held for sale 19 1,512 Other long-term assets, including $199 million at fair value in 2008 652 455 Total Assets $31,908 $41,456 Liabilities and Stockholders' Equity Current liabilities Accounts payable - trade $1,819 $1,360 Revenues and royalties due to others 496 578 Income taxes payable 37 97 Short-term debt 180 1,004 Current portion of asset retirement obligation, at fair value 138 82 Current liabilities associated with assets held for sale 13 145 Accrued expenses and other current liabilities 452 391 Total current liabilities 3,135 3,657 Debentures exchangeable into shares of Chevron Corporation common stock - 641 Other long-term debt 5,661 6,283 Derivative financial instruments, at fair value - 488 Asset retirement obligation, at fair value 1,347 1,236 Liabilities associated with assets held for sale - 404 Other long-term liabilities 1,026 699 Deferred income taxes 3,679 6,042 Stockholders' equity Preferred stock - 1 Common stock 44 44 Additional paid-in capital 6,257 6,743 Retained earnings 10,376 12,813 Accumulated other comprehensive income 383 2,405 Total Stockholders' Equity 17,060 22,006 Total Liabilities and Stockholders' Equity $31,908 $41,456 Common Shares Outstanding 444 444 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended (in millions) December 31, 2008 2007 Cash Flows From Operating Activities Net (loss) earnings $(2,148) $3,606 Earnings from discontinued operations, net of tax (931) (460) Adjustments to reconcile (loss) earnings from continuing operations to net cash provided by operating activities: Depreciation, depletion and amortization 3,509 2,858 Deferred income tax (benefit) expense (1,573) 578 Net gain on sales of non-oil and gas property and equipment (1) (1) Reduction of carrying value of oil and gas properties 10,379 - Other noncash charges 187 177 Net increase in operating working capital (138) (499) Increase in long-term other assets (59) (92) Increase (decrease) in long-term other liabilities 48 (5) Cash provided by operating activities - continuing operations 9,273 6,162 Cash provided by operating activities - discontinued operations 135 489 Net cash provided by operating activities 9,408 6,651 Cash Flows From Investing Activities Proceeds from sales of property and equipment 117 76 Capital expenditures (9,375) (6,158) Proceeds from exchange of investment in Chevron Corporation common stock 280 - Purchases of short-term investments (50) (934) Sales of short-term investments 300 1,136 Cash used in investing activities - continuing operations (8,728) (5,880) Cash provided by investing activities - discontinued operations 1,855 166 Net cash used in investing activities (6,873) (5,714) Cash Flows From Financing Activities Credit facility repayments (3,191) (757) Credit facility borrowings 1,741 2,207 Net commercial paper borrowings (repayments) 1 (804) Principal payments on debt (1,031) (567) Preferred stock redemption (150) - Proceeds from stock option exercises 116 91 Repurchases of common stock (665) (326) Dividends paid on common and preferred stock (289) (259) Excess tax benefits related to share-based compensation 60 44 Net cash used in financing activities (3,408) (371) Effect of exchange rate changes on cash (116) 51 Net (decrease) increase in cash and cash equivalents (989) 617 Cash and cash equivalents at beginning of period (including assets held for sale) 1,373 756 Cash and cash equivalents at end of period (including assets held for sale) $384 $1,373 RESERVE RECONCILIATION Total Total U.S. ------------------------------ ------------------------------ Oil Gas NGLs Total Oil Gas NGLs Total (MMBbls) (Bcf) (MMBbls) (MMBoe) (MMBbls) (Bcf) (MMBbls) (MMBoe) As of December 31, 2007: Proved developed 391 7,255 274 1,874 148 5,743 244 1,349 Proved undeveloped 286 1,739 47 622 22 1,400 38 293 Total proved 677 8,994 321 2,496 170 7,143 282 1,642 Production (53) (940) (28) (238) (17) (726) (24) (162) Discoveries and extensions 132 2,077 67 546 12 1,966 65 405 Divestitures (6) (5) - (7) (1) (1) - (1) Acquisitions 18 252 6 66 18 250 6 66 Revisions due to prices (355) (588) (20) (473) (20) (369) (18) (100) Revisions other than price 16 95 6 38 5 106 6 28 As of December 31, 2008: Proved developed 301 8,044 292 1,934 133 6,681 261 1,508 Proved undeveloped 128 1,841 60 494 34 1,688 56 370 Total Proved 429 9,885 352 2,428 167 8,369 317 1,878 U.S. Onshore U.S. Offshore ------------------------------ ------------------------------ Oil Gas NGLs Total Oil Gas NGLs Total (MMBbls) (Bcf) (MMBbls) (MMBoe) (MMBbls) (Bcf) (MMBbls) (MMBoe) As of December 31, 2007: Proved developed 122 5,547 243 1,290 26 196 1 59 Proved undeveloped 9 1,218 38 249 13 182 - 44 Total proved 131 6,765 281 1,539 39 378 1 103 Production (11) (669) (24) (146) (6) (57) - (16) Discoveries and extensions 11 1,916 65 395 1 50 - 10 Divestitures (1) (1) - (1) - - - - Acquisitions 18 250 6 66 - - - - Revisions due to prices (17) (367) (18) (97) (3) (2) - (3) Revisions other than price 2 85 5 21 3 21 1 7 As of December 31, 2008: Proved developed 111 6,469 260 1,449 22 212 1 59 Proved undeveloped 22 1,510 55 328 12 178 1 42 Total Proved 133 7,979 315 1,777 34 390 2 101 Canada International ------------------------------ ------------------------------ Oil Gas NGLs Total Oil Gas NGLs Total (MMBbls) (Bcf) (MMBbls) (MMBoe) (MMBbls) (Bcf) (MMBbls) (MMBoe) As of December 31, 2007: Proved developed 195 1,506 30 476 48 6 - 49 Proved undeveloped 193 338 9 258 71 1 - 71 Total proved 388 1,844 39 734 119 7 - 120 Production (22) (212) (4) (61) (14) (2) - (15) Discoveries and extensions 120 111 2 141 - - - - Divestitures (5) (4) - (6) - - - - Acquisitions - 2 - - - - - - Revisions due to prices (349) (219) (2) (387) 14 - - 14 Revisions other than price 2 (12) - - 9 1 - 10 As of December 31, 2008: Proved developed 110 1,357 31 367 58 6 - 59 Proved undeveloped 24 153 4 54 70 - - 70 Total Proved 134 1,510 35 421 128 6 - 129 COSTS INCURRED Total Total U.S. (in millions) Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Property Acquisition Costs: Total proved $822 $10 $822 $3 Total unproved 1,764 206 1,411 156 Exploration and development costs 7,464 5,885 5,577 4,111 Costs Incurred $10,050 $6,101 $7,810 $4,270 U.S. Onshore U.S. Offshore Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Property Acquisition Costs: Total proved $822 $3 $- $- Total unproved 1,226 77 185 79 Exploration and development costs 4,388 3,378 1,189 733 Costs Incurred $6,436 $3,458 $1,374 $812 Canada International Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Property Acquisition Costs: Total proved $- $7 $- $- Total unproved 352 49 1 1 Exploration and development costs 1,304 1,309 583 465 Costs Incurred $1,656 $1,365 $584 $466 Devon capitalizes certain general and administrative expenses related to property acquisition, exploration and development activities. These capitalized expenses were $406 million and $312 million in 2008 and 2007, respectively. Devon also capitalizes certain interest expenses related to property development activities. These capitalized expenses were $96 million and $65 million in 2008 and 2007, respectively. These capitalized general and administrative expenses and interest expenses are included in the costs shown in the preceding tables. DRILLING ACTIVITY Year Ended December 31, 2008 2007 Exploration Wells Drilled U.S. 28 35 Canada 90 122 International 8 1 Total 126 158 Exploration Wells Success Rate U.S. 75% 71% Canada 96% 98% International 0% 0% Total 85% 91% Development Wells Drilled U.S. 1,639 1,627 Canada 631 626 International 45 29 Total 2,315 2,282 Development Wells Success Rate U.S. 98% 98% Canada 99% 100% International 93% 100% Total 98% 99% Total Wells Drilled U.S. 1,667 1,662 Canada 721 748 International 53 30 Total 2,441 2,440 Total Wells Success Rate U.S. 98% 98% Canada 99% 99% International 79% 97% Total 98% 98% COMPANY OPERATED RIGS Year Ended December 31, 2008 2007 Number of Company Operated Rigs Running U.S. 82 72 Canada 13 14 International 1 1 Total 96 87 CAPITAL EXPENDITURES (in millions) Quarter Ended December 31, 2008 U.S. U.S. Onshore Offshore Canada International Total Capital Expenditures Exploration $96 175 53 50 $374 Development 1,085 230 347 52 1,714 (1) Unproved acreage acquisition 894 9 12 - 915 (2) Proved property acquisition 794 - - - 794 Exploration and development capital $2,869 414 412 102 $3,797 Capitalized G&A 107 Capitalized interest 26 Discontinued operations 4 Midstream capital 183 Other capital 76 Total Capital Expenditures $4,193 (1) $220 million is due to an asset exchange with Chevron and did not require the use of cash. (2) $390 million is due to an asset exchange with Chevron and did not require the use of cash. CAPITAL EXPENDITURES (in millions) Year Ended December 31, 2008 U.S. U.S. Onshore Offshore Canada International Total Capital Expenditures Exploration $ 192 539 164 249 $1,144 Development 3,903 491 986 222 5,602 (1) Unproved acreage acquisition 1,226 185 352 1 1,764 (2) Proved property acquisition 822 - - - 822 Exploration and development capital $6,143 1,215 1,502 472 $9,332 Capitalized G&A 406 Capitalized interest 96 Discontinued operations 34 Midstream capital 490 Other capital 186 Total Capital Expenditures $10,544 (1) $220 million is due to an asset exchange with Chevron and did not require the use of cash. (2) $390 million is due to an asset exchange with Chevron and did not require the use of cash. PRODUCTION FROM DISCONTINUED OPERATIONS Year Ended Quarter Ended December 31, December 31, 2008 2007 2008 2007 Production from Discontinued Operations Oil (MMBbls) 3.2 10.9 - 2.0 Natural Gas (Bcf) 2.6 5.0 - 1.2 Total Oil Equivalent (MMBoe) 3.6 11.8 - 2.2 STATEMENTS OF DISCONTINUED OPERATIONS (in millions) Year Ended Quarter Ended December 31, December 31, 2008 2007 2008 2007 Revenues Oil sales $323 $746 $- $175 Gas sales 11 15 - 3 Marketing and midstream revenues 15 20 - 7 Total revenues 349 781 - 185 Expenses and other income, net Lease operating expenses 25 75 - 16 Marketing and midstream operating costs and expenses 5 7 - 2 Depreciation, depletion and amortization of oil and gas properties - 20 - - Accretion of asset retirement obligation 1 3 - - Gain on sale of oil and gas properties (819) (90) (4) (90) Reduction of carrying value of assets held for sale 6 70 6 3 Total expenses and other income, net (782) 85 2 (69) Earnings (loss) before income tax expense 1,131 696 (2) 254 Income tax expense (benefit) Current 576 230 (67) 46 Deferred (376) 6 48 (4) Total income tax expense (benefit) 200 236 (19) 42 Earnings from discontinued operations $931 $460 $17 $212 RESERVE DATA FOR DISCONTINUED OPERATIONS Oil Gas NGLs Total (MMBbls) (Bcf) (MMBbls) (MMBoe) As of December 31, 2007: Proved developed 30 28 - 35 Proved undeveloped 30 62 - 40 Total proved 60 90 - 75 As of December 31, 2008: Proved developed - - - - Proved undeveloped - - - - Total proved - - - - NON-GAAP FINANCIAL MEASURES The United States Securities and Exchange Commission has adopted disclosure requirements for public companies such as Devon concerning Non-GAAP financial measures. (GAAP refers to generally accepted accounting principles.) The company must reconcile the Non-GAAP financial measure to related GAAP information. Cash flow before balance sheet changes is a Non-GAAP financial measure. Devon believes cash flow before balance sheet changes is relevant because it is a measure of cash available to fund the company's capital expenditures, dividends and to service its debt. Cash flow before balance sheet changes is also used by certain securities analysts as a measure of Devon's financial results. RECONCILIATION TO GAAP INFORMATION (in millions) Year Ended Quarter Ended December 31, December 31, 2008 2007 2008 2007 Net Cash Provided By Operating Activities (GAAP) $9,408 $6,651 $1,227 $1,542 Changes in assets and liabilities - continuing operations 149 596 540 633 Changes in assets and liabilities - discontinued operations 57 71 (31) 94 Cash flow before balance sheet changes (Non-GAAP) $9,614 $7,318 $1,736 $2,269 Devon believes that using net debt for the calculation of "net debt to adjusted capitalization" provides a better measure than using debt. Devon defines net debt as debt less cash and short-term investments. Devon believes that because cash and short-term investments can be used to repay indebtedness, netting cash and short-term investments against debt provides a clearer picture of the future demands on cash to repay debt. RECONCILIATION TO GAAP INFORMATION (in millions) December 31, 2008 2007 Total debt (GAAP) $5,841 $7,928 Adjustments: Cash and short-term investments 379 1,736 Net debt (Non-GAAP) $5,462 $6,192 Total debt $5,841 $7,928 Stockholders' equity 17,060 22,006 Total capitalization (GAAP) $22,901 $29,934 Net debt $5,462 $6,192 Stockholders' equity 17,060 22,006 Adjusted capitalization (Non-GAAP) $22,522 $28,198 Drill-bit capital is defined as costs incurred less proved acquisition costs, unproved acquisition costs resulting from business combinations and other significant similar transactions, and the net difference of accrued future asset retirement costs less actual cash retirement expenditures. Drill-bit capital is a non-GAAP measure. Devon believes drill-bit capital is relevant because it provides additional insight into costs associated with current year drilling, facilities and unproved acreage acquisitions unrelated to business combinations and other significant similar transactions. It should be noted that the actual costs of reserves added through Devon's drilling program will differ, sometimes significantly, from the direct comparison of capital spent and reserves added in any given period due to the timing of capital expenditures and reserve bookings. Certain securities analysts also use this methodology to measure Devon's performance. RECONCILIATION TO GAAP INFORMATION Total Total U.S. (in millions) Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Costs Incurred (GAAP) $10,050 $6,101 $7,810 $4,270 Less: Proved acquisition costs 822 10 822 3 Unproved portion of Chief acquisition - (13) - (13) Accrued asset retirement costs 297 365 177 223 Plus: Actual retirement expenditures 81 73 56 48 Drill-bit capital (Non-GAAP) $9,012 $5,812 $6,867 $4,105 U.S. Onshore U.S. Offshore Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Costs Incurred (GAAP) $6,436 $3,458 $1,374 $812 Less: Proved acquisition costs 822 3 - - Unproved portion of Chief acquisition - (13) - - Accrued asset retirement costs 102 96 75 127 Plus: Actual retirement expenditures 11 10 45 38 Drill-bit capital (Non-GAAP) $5,523 $3,382 $1,344 $723 Canada International Year Ended Year Ended December 31, December 31, 2008 2007 2008 2007 Costs Incurred (GAAP) $1,656 $1,365 $584 $466 Less: Proved acquisition costs - 7 - - Accrued asset retirement costs 102 129 18 13 Plus: Actual retirement expenditures 25 25 - - Drill-bit capital (Non-GAAP) $1,579 $1,254 $566 $453

SOURCE Devon Energy Corporation

Source: PR Newswire

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