Devon Energy Reports 2011 Results; Record Net Earnings, Reserves and Production

Devon Energy Corporation (NYSE:DVN) today reported record net earnings for the year ended December 31, 2011, of $4.7 billion, or $11.29 per common share ($11.25 per diluted common share). This compares to full-year 2010 net earnings of $4.6 billion, or $10.35 per common share ($10.31 per diluted common share).

For the quarter ended December 31, 2011, Devon reported net earnings of $507 million, or $1.25 per common share ($1.25 per diluted common share). Adjusting for items typically excluded by securities analysts, the company earned $628 million, or $1.55 per diluted common share. The adjusting items are discussed in detail later in this news release.

Devon generated cash flow before balance sheet changes from continuing operations of $6.5 billion in 2011, a 23 percent increase over the prior year. Other sources of cash included $3.2 billion of divestiture proceeds resulting from the sale of assets in Brazil.

“Devon delivered an outstanding performance in 2011. We drove production from our North American onshore asset base up eight percent, increased proved reserves to an all-time high and completed our highly-successful strategic repositioning, including $3.5 billion of share repurchases,” commented John Richels, president and chief executive officer.

Proved Reserves Increase to Record Levels

At December 31, 2011, Devon’s estimated proved reserves reached a record 3 billion oil-equivalent barrels (Boe). During 2011, the company added 386 million Boe through successful drilling (extensions, discoveries, and revisions other than price). Associated drill-bit capital invested during the year totaled $6.9 billion, including $1.5 billion spent on exploration and acreage acquisitions.

“Devon’s liquids-focused drilling program delivered excellent results in 2011. Our total drill-bit reserve additions comfortably outpaced production, including a liquids reserve replacement rate exceeding 230 percent,” said Dave Hager, executive vice president, exploration and production. “These reserves were added at attractive finding and development costs while investing $1.5 billion on acreage acquisitions and exploration activity focused on enhancing growth in future years.”

Proved reserves from oil and natural gas liquids increased to 42 percent of the company’s total proved reserves at December 31, 2011. Proved developed reserves reached 2.2 billion Boe at year-end, or 74 percent of total proved reserves.

Robust Liquids Growth and Strategic Leasehold Additions Lead Operating Highlights

• Devon increased its fourth-quarter liquids production by 21 percent compared to the year-ago period, to 238,000 barrels per day.
• This liquids growth drove total fourth-quarter North American onshore production ten percent higher than the year-ago quarter to a record 680,000 equivalent barrels per day.
• In the fourth quarter, Devon’s exploration and production capital totaled $1.9 billion. This amount includes $400 million of opportunistic leasehold acquisition, consisting of acreage additions in the Ohio Utica and leasehold capture in an undisclosed, new oil opportunity.
• In the Permian Basin, Devon increased oil and natural gas liquids production 22 percent compared to the fourth-quarter 2010. Liquids production accounted for nearly 75 percent of the 53,000 equivalent barrels per day produced in the Permian Basin during the quarter.
• The company completed eight operated Bone Spring wells within the Permian Basin in the fourth quarter. Initial daily production from the eight wells averaged more than 600 Boe per day per well.
• In total, net production from Devon’s Jackfish 1 and Jackfish 2 projects averaged a record 43,000 barrels per day in the fourth quarter, representing a 91 percent increase over the year-ago quarter. The company’s Jackfish 2 production exited the fourth quarter at 14,000 barrels per day and will continue to ramp-up throughout 2012.
• In early December, Devon received regulatory approval for its third 35,000 barrel per day Jackfish project. Devon has begun construction, with plant startup targeted for late 2014.
• Immediately adjacent to Jackfish, Devon is currently drilling appraisal wells and acquiring seismic on its Pike oil sands lease to determine the optimal development plan. In total, the company expects that Pike will support up to five 35,000 barrel per day projects.
• Fourth-quarter production from Devon’s Cana-Woodford Shale play in western Oklahoma increased 83 percent over the fourth quarter of 2010. Net production averaged a record 250 million cubic feet of gas equivalent per day, including 3,100 barrels of oil and 7,400 barrels per day of natural gas liquids.
• Devon’s Barnett Shale production averaged a record 1.32 billion cubic feet of gas equivalent per day in the fourth quarter of 2011, an 11 percent increase over the fourth quarter of 2010. Liquids production accounted for 21 percent of total production, averaging 47,000 barrels per day during the quarter.
• Devon brought six operated Granite Wash wells online in the fourth quarter. Initial production from these wells averaged 1,300 barrels of oil-equivalent per day. Fourth-quarter production from the company’s Granite Wash play reached 19,100 barrels per day, a 47 percent increase over 2010.
• In January, Devon announced a signed agreement whereby Sinopec will pay $2.5 billion to acquire 33 percent of Devon’s interest in 1.4 million net acres across five new venture plays (Mississippian, Tuscaloosa, Niobrara, Ohio Utica and Michigan Basin). The transaction price includes a $900 million cash payment at closing and a $1.6 billion drilling carry, funding 70 percent of Devon’s capital requirements during the carry period. By year-end 2012, the companies expect to have drilled approximately 125 gross wells.
• Devon’s marketing and midstream operating profit totaled $542 million in 2011, a six percent increase over 2010. The increase in operating profit was attributable to higher gas throughput and higher natural gas liquids pricing.

Liquids Sales Increase

Production from Devon’s North American onshore operations averaged 658,000 oil-equivalent barrels per day in 2011, an increase of eight percent over 2010. Sales of oil, gas and natural gas liquids from continuing operations increased 14 percent to $8.3 billion in 2011. Higher liquids production and pricing contributed to the increase. In 2011, liquids sales comprised nearly 60 percent of Devon’s total upstream revenues.

Cost Management Mitigates Inflation

Devon’s 2011 earnings reflect the company’s successful cost management efforts. In spite of rising industry costs and a stronger Canadian dollar, Devon’s total pre-tax cash costs increased only two percent in 2011 to $13.38 per Boe.

Lease operating expenses totaled $1.9 billion in 2011. Lease operating expense per unit of production climbed four percent in 2011 to $7.71 per barrel. The increase reflects the impact of a higher Canadian exchange rate and higher overall service costs.

General and administrative expenses (G&A) totaled $585 million, or $2.44 per Boe for the full-year 2011. Operating efficiencies achieved through the company’s strategic repositioning reduced G&A per Boe one percent compared to the prior year.

Taxes other than income increased $44 million to $424 million in 2011. Higher production taxes, resulting from a significant rise in oil and natural gas liquids revenue, drove the year-over-year increase.

Depreciation, depletion and amortization (DD&A) totaled $2.2 billion for 2011, or $9.37 per Boe. This represents a 10 percent increase in unit DD&A over 2010.

Full-year 2011 income tax expense from continuing operations was $2.2 billion, or 50 percent of pre-tax earnings. This unusually high tax rate resulted from a $744 million charge related to foreign earnings assumed to be repatriated under U.S. tax law. After adjusting for this and other non-recurring items, Devon’s 2011 income tax rate totaled 34 percent of pre-tax earnings from continuing operations.

Share Repurchase Program Completed; Financial Position Remains Strong

On November 16, 2011, the company completed its $3.5 billion share repurchase program announced in May of 2010. In total, under the share repurchase authorization, the company repurchased 49.2 million shares or 11 percent of its outstanding shares.

As of December 31, 2011, Devon’s cash and short-term investments totaled $7.1 billion, and its net debt to adjusted capitalization ratio was 11 percent.

Divestitures Impact Financial Reporting

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.

Prior-year results from continuing operations include data from the company’s now divested Gulf of Mexico operations. Provided within this release is information that will enable the reader to isolate results of the company’s go-forward North American onshore operations.

Non-GAAP Reconciliations

Pursuant to regulatory disclosure requirements, Devon is required to reconcile non-GAAP financial measures to the related GAAP information (GAAP refers to generally accepted accounting principles). Drill-bit capital, cash flow before balance sheet changes, net debt and adjusted capitalization are non-GAAP financial measures referenced within this release. Reconciliations of these non-GAAP measures are provided on pages 14 and 15.

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. The following tables summarize the fourth-quarter 2011 effects of these items on earnings and cash flow.

Conference Call to be Webcast Today

Devon will discuss its 2011 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 is accessible from Devon’s internet home page at www.devonenergy.com.

This press release may include "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 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.

Devon capitalizes certain general and administrative expenses related to property acquisition, exploration and development activities. These capitalized expenses were $337 million and $311 million in 2011 and 2010, respectively. Devon also capitalizes certain interest expenses related to property acquisition, exploration and development activities. These capitalized expenses were $45 million and $37 million in 2011 and 2010, respectively. These capitalized general and administrative expenses and interest expenses are included in the costs shown in the preceding tables.

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.