Devon Energy Earns $1.0 Billion in Third-Quarter 2011; Liquids Production Increases 17 Percent

Devon Energy Corporation (NYSE:DVN) today reported net earnings of $1.0 billion for the quarter ended September 30, 2011, or $2.51 per common share ($2.50 per diluted share). This compares with third-quarter 2010 net earnings of $2.1 billion, or $4.81 per common share ($4.79 per diluted share). The company’s third-quarter 2010 earnings were enhanced by a one-time gain of $1.5 billion resulting from the divestiture of assets in Azerbaijan.

Earnings Increased to $1.54 per Share Excluding Items Not Estimated by Analysts

Devon’s third-quarter 2011 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most significant of the adjusting items was an unrealized gain on oil, gas and natural gas liquids derivatives of $642 million before-tax ($415 million after-tax). Excluding these adjusting items, the company earned $638 million or $1.54 per diluted share in the third quarter. The adjusting items are discussed in more detail later in this news release.

Strong Liquids Production Growth and Higher Prices Drive Sales

Devon continued to deliver strong oil and natural gas liquids production growth in the third quarter of 2011. In aggregate, liquids production averaged 226,000 barrels per day. This represents a 17 percent increase in liquids production compared to the third quarter of 2010.

Total production of oil, natural gas and natural gas liquids averaged 661,000 oil-equivalent barrels (Boe) per day in the third quarter of 2011, an eight percent increase over the year-ago quarter.

Higher overall production and improved oil and natural gas liquids prices drove sales of oil, natural gas and natural gas liquids to $2.1 billion in the third quarter of 2011. This represents a 25 percent increase over the year-ago quarter.

Devon’s marketing and midstream operating profit rose 11 percent over the third quarter of 2010, to $138 million. The increase was attributable to higher natural gas liquids prices and production.

Oil and Natural Gas Liquids Production Growth Leads Operating Highlights

• In the Permian Basin, Devon increased oil and natural gas liquids production 17 percent compared to the third quarter of 2010. Liquids production accounted for 75 percent of the 50,000 oil-equivalent barrels per day produced in the Permian Basin during the third quarter.
• At the Bone Spring play in the Permian Basin, the company added 11 new wells to production in the third quarter of 2011. Initial daily production from the 11 wells averaged 540 Boe per day per well.
• In Canada, average net production from Devon’s 100 percent-owned Jackfish 1 and Jackfish 2 projects reached a record 36,000 barrels per day during the third quarter. Devon’s net production from its Jackfish 2 oil sands project continued to ramp-up ahead of schedule.
• Also in Canada, Devon completed 19 exploration wells targeting oil and liquids-rich opportunities across its more than 4 million net acres in the Western Canadian Sedimentary Basin. The company tied in 10 of these wells to production in the third quarter. This activity was highlighted by results in the Ferrier area where the company commenced production on three Cardium wells with initial production averaging 770 Boe per day per well.
• Third-quarter production from the Cana-Woodford Shale increased 71 percent compared to the year-ago quarter. Net production averaged a record 200 million cubic feet of natural gas equivalent per day in the quarter, including 8,100 barrels per day of liquids. The company’s Cana-Woodford gas processing facility remains on schedule to be fully operational in the fourth quarter.
• The company’s Barnett Shale production totaled 1.3 billion cubic feet of natural gas equivalent per day in the third quarter, an eight percent increase over the third-quarter 2010. Liquids production in the Barnett Shale averaged 46,000 barrels per day, a 15 percent year-over-year increase.
• Devon brought 10 operated Granite Wash wells online in the third quarter. Initial production from these wells averaged 1,250 barrels of oil-equivalent per day, including 180 barrels of oil and 405 barrels of natural gas liquids per day. The company has an average working interest of 86 percent in these wells.

Balance Sheet and Liquidity Remain Strong; Share Repurchase Plan on Schedule

Devon generated $1.9 billion of cash flow before balance sheet changes in the third quarter of 2011, a six percent increase over the year-ago quarter. The company comfortably funded its total capital program during the third quarter and returned nearly $800 million to its shareholders in the form of stock buybacks and dividend payments.

In May 2010, Devon commenced a program to repurchase $3.5 billion of its common stock. During the third-quarter 2011 the company repurchased $697 million of common stock. As of September 30, 2011, the company had repurchased $3.2 billion of stock and expects to complete the stock repurchase program during the fourth quarter of 2011.

Devon exited the third quarter of 2011 with cash and short-term investments of $6.8 billion and a net debt to adjusted capitalization ratio of 10 percent. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.

Expenses in Line with Forecasts

The company’s lease operating expenses (LOE) totaled $475 million in the third quarter. On a unit of production basis, LOE increased six percent compared to the third quarter of 2010. The increase in LOE reflects higher industry costs and the impact of a stronger Canadian dollar.

Taxes other than income were $108 million in the third quarter of 2011. The year-over-year increase of 14 percent was driven by higher production taxes resulting from the significant increase in oil and natural gas liquids revenues.

Third-quarter 2011 general and administrative expenses (G&A) totaled $138 million, or $2.27 per Boe. G&A per Boe declined three percent compared to the third quarter of 2010.

Total depreciation, depletion and amortization expenses (DD&A) were $566 million in the third quarter of 2011. Compared to the year-ago quarter, unit DD&A increased 14 percent, to $9.32 per Boe.

Interest expense for the third quarter was $104 million, a $21 million increase over the third quarter of 2010. Higher average debt balances drove the increase.

Third-quarter income tax expense from continuing operations totaled $498 million, or 32 percent of pre-tax earnings. After adjusting for items generally excluded by securities analysts, Devon’s third quarter tax rate was 35 percent of pre-tax earnings from continuing operations.

Divestitures Impact Reported Financial and Operational Results

In accordance with accounting standards, Devon has classified the assets, liabilities, and results of its international segment as discontinued operations for all accounting periods presented in this release. Included with this release is a table of revenues, expenses, production by category, and the amounts classified as discontinued operations for each period presented.

Items Typically Excluded from Analyst’s 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 third-quarter 2011 are described below:

Items affecting continuing operations:

• A change in the fair value of oil, gas and NGL derivative instruments increased third-quarter earnings by $642 million pre-tax ($415 million after tax).
• Income tax accrual adjustments increased third-quarter earnings by $42 million.
• The reversal of previously accrued restructuring costs increased third-quarter earnings by $3 million pre-tax ($2 million after tax).
• A change in fair value of interest-rate and other financial instruments decreased third-quarter earnings by $92 million pre-tax ($59 million after tax).

The following tables summarize the effects of these items on third-quarter 2011 earnings, income taxes and cash flow.

In aggregate, these items increased third-quarter 2011 net earnings by $400 million, or $0.97 per common share ($0.96 cents per diluted share). These items and their associated tax effects increased third-quarter 2011 cash flow before balance sheet changes by $130 million.

Conference Call to be Webcast Today

Devon will discuss its third-quarter 2011 financial and operating results in a conference call that will be webcast today 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.

Devon Energy Corporation is an Oklahoma City-based independent energy company engaged in oil and gas exploration and production. Devon is a leading 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.

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, probable and possible reserves that meet the SEC's definitions for such terms, and price and cost sensitivities for such reserves, and prohibits disclosure of resources that do not constitute such reserves. This release may contain certain terms, such as resource potential and exploration target size. These estimates are by their nature more speculative than estimates of proved, probable and possible reserves and accordingly are subject to substantially greater risk of being actually realized. The SEC guidelines strictly prohibit us from including these estimates in filings with the SEC. U.S. investors are urged to consider closely the disclosure in our Form 10-K for the fiscal year ended December 31, 2010, 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 or from the SEC’s website at www.sec.gov.

DEVON ENERGY CORPORATION

FINANCIAL AND OPERATIONAL INFORMATION

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.

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.