Devon Energy has reported a $4.2 billion non-cash, after-tax decrease in the carrying value of oil and gas properties led to the quarterly net loss.
Earnings 48 Cents Per Share Excluding Items Not Estimated By Analysts
The company’s first-quarter 2009 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most major of these items was a $4.2 billion after-tax decrease in the carrying value of oil and gas properties. Excluding the decrease in carrying value of oil and gas properties and other adjusting items, Devon Energy earned $216 million or 48 cents per diluted common share in the first quarter of 2009.
Production Growth Offset by Lower Realized Prices
Combined oil, gas and natural gas liquids production averaged 685 thousand oil-equivalent barrels (Boe) per day in the first quarter of 2009. This was a 7% raise in production compared with the year-ago quarter. The production growth was concentrated in onshore fields within the US and Canada.
Although production raised, sales of oil, gas and natural gas liquids declined 53% to $1.5 billion in the first quarter of 2009. Considerably lower prices for all three products more than equalized the quarter-over-quarter increase in oil-equivalent production.
Devon Energy’s realized price for natural gas declined 49% in the first quarter of 2009, to $3.73 per thousand cubic feet. This compares with $7.31 per thousand cubic feet in the first quarter of 2008. Devon Energy’s average realized oil price declined 62% to $33.61 per barrel in the first quarter of 2009 compared with $88.23 per barrel in the year-ago quarter. The company realized natural gas liquids price decreased 61% to $18.60 per barrel from $47.40 per barrel in the first quarter of 2008.
Operating Highlights Show Production Gains
Devon Energy drilled 451 wells in the first quarter of 2009 compared with 646 wells it drilled in the year-ago quarter. The company has decreased drilling activity and related capital expenditures in response to declines in natural gas and oil prices. Despite the decreased level of drilling, Devon Energy achieved several notable operational accomplishments in the first quarter:
— Devon Energy raised its net production from the Barnett shale field in north Texas to an all-time high of 1.2 billion cubic feet of gas equivalent per day.
— The company raised its net production in the Arkoma-Woodford shale in eastern Oklahoma to 86 million cubic feet of gas equivalent per day.
— In its emerging Cana-Woodford shale play in western Oklahoma, Devon Energy established production from nine wells in the first quarter with an average initial production rate of 4.3 million cubic feet of gas per day.
— At Groesbeck in east Texas, Devon Energy drilled two high-volume wells in the Nan-Su-Gail field in the first quarter. The Neal B 14H (93% working interest) had initial production of 23 million cubic feet of gas per day. The Hill 17H (100% working interest) initiated production at 19 million cubic feet of gas per day
— In the Powder River basin in Wyoming, the company’s net production reached an all-time high of 114 million cubic feet of gas per day
— In Canada, Devon Energy started injecting steam into the final pair of wells at its Jackfish oil sands project in March 2009. All 24 well-pairs are now operational.
— Jackfish production reached 28,000 barrels of oil per day in March 2009.
The company anticipates Jackfish to reach its design capacity of 35,000 barrels of oil per day in the second or third quarter of 2009.
Marketing and Midstream Profit Declines with Prices:
Marketing and midstream operating profit was $142 million in the first quarter of 2009. This was an 18% decrease compared in the year-ago quarter. The decrease was largely attributable to lower natural gas and natural gas liquids prices.
Costs Begin Improving:
First-quarter 2009 expenses in most categories decreased in comparison to the year-ago quarter. Unit lease operating expenses (LOE) decreased by 2% to $8.50 per Boe in the first quarter of 2009. The decrease in unit LOE mainly reflects lower Canadian exchange rates.
Production taxes declined 68% to $42 million in the first quarter of 2009 compared with the year-ago quarter. The decline in production taxes tracks the first-quarter decline in oil and natural gas sales.
Depreciation, depletion and amortization (DD&A) of oil and gas properties declined 19% to $599 million in the first quarter of 2009. Unit DD&A decreased 23% to $9.72 per Boe compared with the year-ago quarter.
First-quarter 2009 general and administrative expenses (G&A) increased 12% to $166 million compared with the first quarter of 2008. Devon Energy anticipates G&A to trend down for the remainder of the year.
Interest expense for the first quarter of 2009 decreased to $83 million. This 19% decline compared with the year-ago quarter reflects decreased long-term debt levels and lower interest rates.
Retaining Balance Sheet Strength and Liquidity
Devon Energy’s net debt to adjusted capitalization ratio was 34% at March 31, 2009. Cash on hand at quarter-end was $397 million and unused credit facilities totaled over $2.3 billion. First-quarter 2009 cash flow before balance sheet changes totaled $988 million. The company funded $1.5 billion of capital expenditures and paid common dividends of $70 million in the first quarter of 2009.
Items Excluded from Published Earnings Estimates
Devon Energy 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 first quarter of 2009 were as follows:
— An unrealized gain on oil and natural gas derivative instruments raised first-quarter earnings by $36 million pre-tax ($23 million after tax)
— A change in fair value of other financial instruments declined first-quarter earnings by $11 million pre-tax ($8 million after tax)
— A decrease in the carrying value of oil and gas properties reduced first-quarter earnings by $6.5 billion pre-tax ($4.2 billion after tax).
