XNYS:DVN Devon Energy Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32318

 

 

DEVON ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   73-1567067

(State of other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

identification No.)

333 West Sheridan Avenue,

Oklahoma City, Oklahoma

  73102-5015
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (405) 235-3611

Former address: 20 North Broadway, Oklahoma City, Oklahoma 73102-8260

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  þ

On July 18, 2012, 404.5 million shares of common stock were outstanding.

 

 

 


Table of Contents

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Part I Financial Information   

Item 1. Consolidated Financial Statements

  

Consolidated Comprehensive Statements of Earnings

     3   

Consolidated Statements of Cash Flows

     4   

Consolidated Balance Sheets

     5   

Consolidated Statements of Stockholders’ Equity

     6   

Notes to Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     20   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     29   

Item 4. Controls and Procedures

     30   
Part II Other Information   

Item 1. Legal Proceedings

     31   

Item 1A. Risk Factors

     31   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     31   

Item 3. Defaults Upon Senior Securities

     31   

Item 4. Mine Safety Disclosures

     31   

Item 5. Other Information

     31   

Item 6. Exhibits

     32   

Signatures

     33   

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements regarding our expectations and plans, as well as future events or conditions. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2011 reserve reports and other data in our possession or available from third parties. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, such as changes in the supply of and demand for oil, natural gas and NGLs and related products and services; exploration or drilling programs; political or regulatory events; general economic and financial market conditions; and other factors discussed in this report.

All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.

 

2


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

 

     Three Months      Six Months  
     Ended June 30,      Ended June 30,  
     2012     2011      2012     2011  
     (Unaudited)  
    

(In millions, except

per share amounts)

 

Revenues:

         

Oil, gas and NGL sales

   $ 1,617     $ 2,200      $ 3,532     $ 4,060  

Oil, gas and NGL derivatives

     665       416        810       248  

Marketing and midstream revenues

     277       604        714       1,059  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     2,559       3,220        5,056       5,367  
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses and other, net:

         

Lease operating expenses

     513       453        1,027       877  

Marketing and midstream operating costs and expenses

     209       456        534       789  

Depreciation, depletion and amortization

     684       550        1,364       1,056  

General and administrative expenses

     176       135        344       265  

Taxes other than income taxes

     100       120        202       228  

Interest expense

     99       85        186       166  

Restructuring costs

     —          6        —          1  

Other, net

     44       37        54       27  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses and other, net

     1,825       1,842        3,711       3,409  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings from continuing operations before income taxes

     734       1,378        1,345       1,958  

Current income tax expense (benefit)

     31       36        49       (53

Deferred income tax expense

     226       1,158        405       1,438  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings from continuing operations

     477       184        891       573  

Earnings (loss) from discontinued operations, net of tax

     —          2,559        (21     2,586  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings

   $ 477     $ 2,743      $ 870     $ 3,159  
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic net earnings per share:

         

Basic earnings from continuing operations per share

   $ 1.18     $ 0.44      $ 2.20     $ 1.35  

Basic earnings (loss) from discontinued operations per share

     —          6.06        (0.05     6.09  
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic net earnings per share

   $ 1.18     $ 6.50      $ 2.15     $ 7.44  
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted net earnings per share:

         

Diluted earnings from continuing operations per share

   $ 1.18     $ 0.43      $ 2.20     $ 1.34  

Diluted earnings (loss) from discontinued operations per share

     —          6.05        (0.05     6.07  
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted net earnings per share

   $ 1.18     $ 6.48      $ 2.15     $ 7.41  
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive earnings:

         

Net earnings

   $ 477     $ 2,743      $ 870     $ 3,159  

Other comprehensive earnings, net of tax:

         

Foreign currency translation

     (171     65        (19     250  

Pension and postretirement plans

     5       5        9       11  
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive earnings, net of tax

     (166     70        (10     261  
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive earnings

   $ 311     $ 2,813      $ 860     $ 3,420  
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months  
     Ended June 30,  
     2012     2011  
     (Unaudited)  
     (In millions)  

Cash flows from operating activities:

    

Net earnings

   $ 870     $ 3,159  

Loss (earnings) from discontinued operations, net of tax

     21       (2,586

Adjustments to reconcile earnings from continuing operations to net cash from operating activities:

    

Depreciation, depletion and amortization

     1,364       1,056  

Deferred income tax expense

     405       1,438  

Unrealized change in fair value of financial instruments

     (362     (74

Other noncash charges

     114       82  

Net decrease (increase) in working capital

     22       (89

Decrease in long-term other assets

     3       45  

Decrease in long-term other liabilities

     (11     (201
  

 

 

   

 

 

 

Cash from operating activities – continuing operations

     2,426       2,830  

Cash from operating activities – discontinued operations

     26       (20
  

 

 

   

 

 

 

Net cash from operating activities

     2,452       2,810  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (4,267     (3,720

Purchases of short-term investments

     (1,471     (4,520

Redemptions of short-term investments

     2,030       1,298  

Proceeds from property and equipment divestitures

     864       5  

Other

     14       (32
  

 

 

   

 

 

 

Cash from investing activities—continuing operations

     (2,830     (6,969

Cash from investing activities—discontinued operations

     58       3,170  
  

 

 

   

 

 

 

Net cash from investing activities

     (2,772     (3,799
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings of long-term debt, net of issuance costs

     2,465       —     

Net short-term (repayments) borrowings

     (1,498     2,340  

Credit facility borrowings

     750       —     

Credit facility repayments

     (750     —     

Proceeds from stock option exercises

     22       96  

Repurchases of common stock

     —          (1,290

Dividends paid on common stock

     (162     (140

Excess tax benefits related to share-based compensation

     1       12  
  

 

 

   

 

 

 

Net cash from financing activities

     828       1,018  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     38       32  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     546       61  

Cash and cash equivalents at beginning of period

     5,555       3,290  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 6,101     $ 3,351  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June 30,     December 31,  
     2012     2011  
     (Unaudited)        
     (In millions, except share data)  

ASSETS

  

Current assets:

    

Cash and cash equivalents

   $ 6,101     $ 5,555  

Short-term investments

     944       1,503  

Accounts receivable

     1,005       1,379  

Other current assets

     1,167       868  
  

 

 

   

 

 

 

Total current assets

     9,217       9,305  
  

 

 

   

 

 

 

Property and equipment, at cost:

    

Oil and gas, based on full cost accounting:

    

Subject to amortization

     64,965       61,696  

Not subject to amortization

     4,062       3,982  
  

 

 

   

 

 

 

Total oil and gas

     69,027       65,678  

Other

     5,545       5,098  
  

 

 

   

 

 

 

Total property and equipment, at cost

     74,572       70,776  

Less accumulated depreciation, depletion and amortization

     (47,331     (46,002
  

 

 

   

 

 

 

Property and equipment, net

     27,241       24,774  
  

 

 

   

 

 

 

Goodwill

     6,007       6,013  

Other long-term assets

     1,005       1,025  
  

 

 

   

 

 

 

Total assets

   $ 43,470     $ 41,117  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 1,510     $ 1,471  

Revenues and royalties payable

     591       678  

Short-term debt

     2,148       3,811  

Other current liabilities

     712       778  
  

 

 

   

 

 

 

Total current liabilities

     4,961       6,738  
  

 

 

   

 

 

 

Long-term debt

     8,455       5,969  

Asset retirement obligations

     1,942       1,496  

Other long-term liabilities

     799       721  

Deferred income taxes

     5,088       4,763  

Stockholders’ equity:

    

Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 404.5 million and 404.1 million shares in 2012 and 2011, respectively

     40       40  

Additional paid-in capital

     3,604       3,507  

Retained earnings

     17,016       16,308  

Accumulated other comprehensive earnings

     1,565       1,575  
  

 

 

   

 

 

 

Total stockholders’ equity

     22,225       21,430  
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

Total liabilities and stockholders’ equity

   $ 43,470     $ 41,117  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

     Common Stock    

Additional

Paid-In

    Retained    

Accumulated

Other

Comprehensive

    Treasury    

Total

Stockholders’

 
     Shares     Amount     Capital     Earnings     Earnings     Stock     Equity  
     (Unaudited)  
     (In millions)  

Six Months Ended June 30, 2012:

              

Balance as of December 31, 2011

     404     $ 40     $ 3,507     $ 16,308     $ 1,575     $ —        $ 21,430  

Net earnings

     —          —          —          870       —          —          870  

Other comprehensive earnings, net of tax

     —          —          —          —          (10     —          (10

Stock option exercises

     1       —          22       —          —          —          22  

Common stock repurchased

     —          —          —          —          —          (1     (1

Common stock retired

     —          —          (1     —          —          1       —     

Common stock dividends

     —          —          —          (162     —          —          (162

Share-based compensation

     —          —          75       —          —          —          75  

Share-based compensation tax benefits

     —          —          1       —          —          —          1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

     405     $ 40     $ 3,604     $ 17,016     $ 1,565     $ —        $ 22,225  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011:

              

Balance as of December 31, 2010

     432     $ 43     $ 5,601     $ 11,882     $ 1,760     $ (33   $ 19,253  

Net earnings

     —          —          —          3,159       —          —          3,159  

Other comprehensive earnings, net of tax

     —          —          —          —          261       —          261  

Stock option exercises

     2       —          96       —          —          —          96  

Common stock repurchased

     —          —          —          —          —          (1,285     (1,285

Common stock retired

     (16     (1     (1,292     —          —          1,293       —     

Common stock dividends

     —          —          —          (140     —          —          (140

Share-based compensation

     —          —          72       —          —          —          72  

Share-based compensation tax benefits

     —          —          12       —          —          —          12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

     418     $ 42     $ 4,489     $ 14,901     $ 2,021     $ (25   $ 21,428  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

The accompanying unaudited financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Devon’s 2011 Annual Report on Form 10-K.

The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon’s financial position as of June 30, 2012 and Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2012 and 2011.

Accounts Payable

Included in accounts payable at June 30, 2012, are liabilities of $99 million representing the amount by which checks issued, but not presented to Devon’s banks for collection, exceed balances in applicable bank accounts. Changes in these liabilities are reflected in cash flows from financing activities.

2. Derivative Financial Instruments

Objectives and Strategies

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production. These instruments are used to manage the inherent uncertainty of future revenues due to commodity price volatility and typically include financial price swaps, basis swaps, costless price collars and call options.

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates.

Devon does not hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

Counterparty Credit Risk

By using derivative financial instruments, Devon is exposed to credit 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 acceptable 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 contain provisions that provide for collateral payments, depending on levels of exposure and the credit rating of the counterparty.

As of June 30, 2012, Devon holds $107 million cash collateral. Such amount represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying balance sheet.

 

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Commodity Derivatives

As of June 30, 2012, Devon had the following open oil derivative positions. Devon’s oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.

 

     Price Swaps      Price Collars      Call Options Sold  

      Period      

   Volume
(Bbls/d)
     Weighted
Average  Price
($/Bbl)
     Volume
(Bbls/d)
     Weighted
Average Floor  Price
($/Bbl)
     Weighted
Average Ceiling  Price
($/Bbl)
     Volume
(Bbls/d)
     Weighted
Average  Price
($/Bbl)
 

Q3-Q4 2012

     54,000       $ 105.90         74,000       $ 89.71       $ 123.09         19,500       $ 95.00   

Q1-Q4 2013

     31,000       $ 104.13         45,000       $ 91.30       $ 116.23         6,000       $ 120.00   

Q1-Q4 2014

     4,000       $ 100.49         2,000       $ 90.00       $ 111.13         6,000       $ 120.00   

As of June 30, 2012, Devon had the following open natural gas derivative positions. Devon’s natural gas derivatives settle against the Inside FERC first of the month Henry Hub index.

 

     Price Swaps      Price Collars      Call Options Sold  

      Period      

   Volume
(MMBtu/d)
     Weighted
Average  Price
($/MMBtu)
     Volume
(MMBtu/d)
     Weighted
Average Floor  Price
($/MMBtu)
     Weighted
Average Ceiling  Price
($/MMBtu)
     Volume
(MMBtu/d)
     Weighted
Average  Price
($/MMBtu)
 

Q3-Q4 2012

     573,370       $ 4.04         991,685       $ 3.71       $ 4.40         487,500       $ 6.00   

Q1-Q4 2013

     150,000       $ 4.50                                           

Q1-Q4 2014

                                             150,000       $ 5.00   

Interest Rate Derivatives

As of June 30, 2012, Devon had the following open interest rate derivative positions:

 

Notional

   Fixed Rate Received     Variable
Rate Paid
   Expiration  
(In millions)                  

$ 100

     1.90   Federal funds rate      August 2012   

   750

     3.88   Federal funds rate      July 2013   

$ 850

     3.65     

Foreign Exchange Derivatives

As of June 30, 2012, Devon had the following open foreign exchange rate derivative position:

 

Forward Contract  

Currency

   Contract
Type
     CAD
Notional
     Fixed Rate
Received
     Expiration  
            (In millions)      (CAD-USD)         

Canadian Dollar

     Sell       $ 755         0.9708         September 2012   

Financial Statement Presentation

The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying comprehensive statements of earnings associated with derivative financial instruments. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s commodity derivatives are presented in the “Oil, gas and NGL derivatives” caption in the accompanying comprehensive statements of earnings. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s interest rate and foreign currency derivatives are presented in the “Other, net” caption in the accompanying comprehensive statements of earnings.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (In millions)  

Cash settlements:

        

Commodity derivatives

   $ 267      $ 59      $ 425      $ 145   

Interest rate derivatives

     (11     5        (1     21   

Foreign currency derivatives

     20        —          9        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash settlements

     276        64        433        166   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses):

        

Commodity derivatives

     398        357        385        103   

Interest rate derivatives

     (5     (30     (15     (29

Foreign currency derivatives

     (9     —          (8     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains

     384        327        362        74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain recognized on comprehensive statements of earnings

   $ 660      $ 391      $ 795      $ 240   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the derivative fair values included in the accompanying balance sheets.

 

    

Balance Sheet Caption

   June 30, 2012      December 31, 2011  
          (In millions)  

Asset derivatives:

        

Commodity derivatives

   Other current assets    $ 759       $ 611   

Commodity derivatives

   Other long-term assets      209         17   

Interest rate derivatives

   Other current assets      28         30   

Interest rate derivatives

   Other long-term assets      9         22   
     

 

 

    

 

 

 

Total asset derivatives

      $ 1,005       $ 680   
     

 

 

    

 

 

 

Liability derivatives:

        

Commodity derivatives

   Other current liabilities    $ 10       $ 82   

Commodity derivatives

   Other long-term liabilities      27         —     

Foreign exchange derivatives

   Other current liabilities      8         —     
     

 

 

    

 

 

 

Total liability derivatives

   $ 45       $ 82   
     

 

 

    

 

 

 

3. Restructuring Costs

In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of June 30, 2012, Devon had divested all of its U.S. Offshore and International assets. Since inception of the plan, Devon has incurred $202 million of restructuring costs associated with these divestitures.

The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings. Restructuring costs related to Devon’s discontinued operations totaled $(8) million and $(2) million in the second quarter and first six months of June 30, 2011. These costs primarily related to cash severance and share-based awards and are not included in the schedule below. There were no costs related to discontinued operations in the six months ended June 30, 2012.

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2012      2011      2012      2011  
     (In millions)  

Lease obligations

   $ —         $ 2       $ —         $ (2

Asset impairments

     —           2         —           2   

Other

     —           2         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring costs

   $ —         $ 6       $ —         $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The schedule below summarizes Devon’s restructuring liabilities. Devon’s restructuring liabilities for cash severance related to its discontinued operations totaled $10 million at June 30, 2011 and are not included in the schedule below.

 

     Other
Current
Liabilities
    Other
Long-Term
Liabilities
    Total  
     (In millions)  

Balance as of December 31, 2011

   $ 29      $ 16      $ 45   

Lease obligations settled

     (9     (1     (10

Cash severance settled

     (5     —          (5
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

   $ 15      $ 15      $ 30   
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2010

   $ 31      $ 51      $ 82   

Lease obligations settled

     (1     (7     (8

Cash severance settled

     (16     —          (16

Other

     —          (1     (1
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

   $ 14      $ 43      $ 57   
  

 

 

   

 

 

   

 

 

 

4. Other, net

The components of other, net in the accompanying comprehensive statements of earnings include the following:

 

     Three Months
Ended June  30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (In millions)  

Accretion of asset retirement obligations

   $ 28      $ 23      $ 55      $ 46   

Interest rate swaps – cash settlements

     11        (5     1        (21

Interest rate swaps – unrealized fair value changes

     5        30        15        29   

Interest income

     (9     (4     (16     (6

Other

     9        (7     (1     (21
  

 

 

   

 

 

   

 

 

   

 

 

 

Other, net

   $ 44      $ 37      $ 54      $ 27   
  

 

 

   

 

 

   

 

 

   

 

 

 

5. Earnings Per Share

The following table reconciles earnings from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share.

 

     Earnings     Common
Shares
    Earnings
per Share
 
     (In millions, except per share amounts)  

Three Months Ended June 30, 2012:

      

Earnings from continuing operations

   $ 477        404     

Attributable to participating securities

     (6     (4  
  

 

 

   

 

 

   

Basic earnings per share

     471        400      $ 1.18   

Dilutive effect of potential common shares issuable

     —          —       
  

 

 

   

 

 

   

Diluted earnings per share

   $ 471        400      $ 1.18   
  

 

 

   

 

 

   

Three Months Ended June 30, 2011:

      

Earnings from continuing operations

   $ 184        422     

Attributable to participating securities

     (2     (5  
  

 

 

   

 

 

   

Basic earnings per share

     182        417      $ 0.44   

Dilutive effect of potential common shares issuable

     —          2     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 182        419      $ 0.43   
  

 

 

   

 

 

   

 

10


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Earnings     Common
Shares
    Earnings
per Share
 
     (In millions, except per share amounts)  

Six Months Ended June 30, 2012:

      

Earnings from continuing operations

   $ 891        404     

Attributable to participating securities

     (10     (4  
  

 

 

   

 

 

   

Basic earnings per share

     881        400      $ 2.20   

Dilutive effect of potential common shares issuable

     —          1     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 881        401      $ 2.20   
  

 

 

   

 

 

   

Six Months Ended June 30, 2011:

      

Earnings from continuing operations

   $ 573        425     

Attributable to participating securities

     (6     (5  
  

 

 

   

 

 

   

Basic earnings per share

     567        420      $ 1.35   

Dilutive effect of potential common shares issuable

     —          2     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 567        422      $ 1.34   
  

 

 

   

 

 

   

Certain options to purchase shares of Devon’s common stock are excluded from the dilution calculation because the options are antidilutive. During the three-month and six-month periods ended June 30, 2012, 8.9 million shares and 6.7 million shares, respectively, were excluded from the diluted earnings per share calculations. During the three-month and six-month periods ended June 30, 2011, 3.1 million shares were excluded from the diluted earnings per share calculations.

6. Other Comprehensive Earnings

Components of other comprehensive earnings consist of the following:

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (In millions)  

Foreign currency translation:

        

Beginning accumulated foreign currency translation

   $ 1,954      $ 2,178      $ 1,802      $ 1,993   

Change in cumulative translation adjustment

     (179     67        (20     262   

Income tax expense

     8        (2     1        (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated foreign currency translation

     1,783        2,243        1,783        2,243   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and postretirement benefit plans:

        

Beginning accumulated pension and postretirement benefits

     (223     (227     (227     (233

Recognition of net actuarial loss and prior service cost in earnings

     7        8        13        17   

Income tax expense

     (2     (3     (4     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated pension and postretirement benefits

     (218     (222     (218     (222
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive earnings, net of tax

   $ 1,565      $ 2,021      $ 1,565      $ 2,021   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

7. Supplemental Information to Statements of Cash Flows

 

     Six Months Ended June 30,  
     2012     2011  
     (In millions)  

Net change in working capital:

    

Decrease (increase) in accounts receivable

   $ 384      $ (100

Increase in other current assets

     (191     (41

Increase in accounts payable

     13        9   

(Decrease) increase in revenues and royalties payable

     (139     130   

Decrease in other current liabilities

     (45     (87
  

 

 

   

 

 

 

Net decrease (increase) in working capital

   $ 22      $ (89
  

 

 

   

 

 

 

Supplementary cash flow data – total operations:

    

Interest paid (net of capitalized interest)

   $ 169      $ 160   

Income taxes paid (received)

   $ 88      $ (125

8. Short-Term Investments

The components of short-term investments include the following:

 

     June 30, 2012      December 31, 2011  
     (In millions)  

Canadian treasury, agency and provincial securities

   $ 644       $ 1,155   

U.S. treasuries

     300         201   

Other

     —           147   
  

 

 

    

 

 

 

Short-term investments

   $ 944       $ 1,503   
  

 

 

    

 

 

 

9. Accounts Receivable

The components of accounts receivable include the following:

 

     June 30, 2012     December 31, 2011  
     (In millions)  

Oil, gas and NGL sales

   $ 668      $ 928   

Joint interest billings

     199        247   

Marketing and midstream revenues

     105        174   

Other

     47        39   
  

 

 

   

 

 

 

Gross accounts receivable

     1,019        1,388   

Allowance for doubtful accounts

     (14     (9
  

 

 

   

 

 

 

Net accounts receivable

   $ 1,005      $ 1,379   
  

 

 

   

 

 

 

 

12


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

10. Other Current Assets

The components of other current assets include the following:

 

     June 30, 2012      December 31, 2011  
     (In millions)  

Derivative financial instruments

   $ 787       $ 641   

Inventories

     220         102   

Income taxes receivable

     40         35   

Current assets held for sale

     —           21   

Other

     120         69   
  

 

 

    

 

 

 

Other current assets

   $ 1,167       $ 868   
  

 

 

    

 

 

 

11. Property and Equipment

In April 2012, Devon closed its joint venture transaction with Sinopec International Petroleum Exploration & Production Corporation. Pursuant to the agreement, Sinopec paid approximately $900 million in cash and received a 33.3% interest in five of Devon’s new ventures exploration plays in the U.S. at closing of the transaction. Additionally, Sinopec is required to fund approximately $1.6 billion of Devon’s share of future exploration, development and drilling costs associated with these plays. Devon recognized the cash proceeds received at closing as a reduction to U.S. oil and gas property and equipment. No gain or loss was recognized.

12. Other Current Liabilities

The components of other current liabilities include the following:

 

     June 30, 2012      December 31, 2011  
     (In millions)  

Deferred income taxes payable

   $ 253       $ 172   

Accrued interest

     142         131   

Other

     317         475   
  

 

 

    

 

 

 

Other current liabilities

   $ 712       $ 778   
  

 

 

    

 

 

 

13. Debt

Long-Term Debt

In May 2012, Devon issued $2.5 billion of senior notes that are unsecured and unsubordinated obligations of Devon. Devon used the net proceeds to repay outstanding commercial paper and credit facility borrowings. The schedule below summarizes the key terms of these notes ($ in millions).

 

1.875% due May 15, 2017

   $ 750   

3.25% due May 15, 2022

     1,000   

4.75% due May 15, 2042

     750   

Discount and issuance costs

     (35
  

 

 

 

Net proceeds

   $ 2,465   
  

 

 

 

Commercial Paper

As of June 30, 2012, Devon had $2.1 billion of outstanding commercial paper at an average rate of 0.40 percent.

 

13


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Credit Lines

On April 7, 2012, $0.46 billion of Devon’s Senior Credit Facility matured and was not extended. After the maturity, Devon maintains a $2.19 billion syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). As of June 30, 2012, there were no borrowings under the Senior Credit Facility.

The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be less than 65 percent. As of June 30, 2012, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 23.8 percent.

14. Asset Retirement Obligations

The schedule below summarizes changes in Devon’s asset retirement obligations.

 

     Six Months Ended June 30,  
     2012     2011  
     (In millions)  

Asset retirement obligations as of beginning of period

   $ 1,563      $ 1,497   

Liabilities incurred

     33        23   

Liabilities settled

     (34     (39

Revision of estimated obligation

     399        16   

Accretion expense on discounted obligation

     55        46   

Foreign currency translation adjustment

     (10     28   
  

 

 

   

 

 

 

Asset retirement obligations as of end of period

     2,006        1,571   

Less current portion

     64        72   
  

 

 

   

 

 

 

Asset retirement obligations, long-term

   $ 1,942      $ 1,499   
  

 

 

   

 

 

 

During the first quarter of 2012, Devon recognized revisions to its asset retirement obligations totaling $399 million. The primary factor contributing to this revision was an overall increase in abandonment cost estimates for certain of its production operations facilities.

15. Retirement Plans

The following table presents the components of net periodic benefit cost for Devon’s pension and postretirement benefit plans.

 

                                                                                                       
     Pension Benefits     Postretirement Benefits  
     Three Months
Ended June  30,
    Six Months
Ended June 30,
    Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011     2012      2011     2012     2011  
     (In millions)  

Service cost

   $ 10      $ 9      $ 21      $ 18      $ —         $ 1      $ —        $ 1   

Interest cost

     15        15        30        30        —           —          1        1   

Expected return on plan assets

     (16     (11     (32     (21     —           —          —          —     

Amortization of prior service cost

     1        1        2        2        —           (1     (1     (1

Net actuarial loss

     6        8        12        16        —           —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 16      $ 22      $ 33      $ 45      $ —         $ —        $ —        $ 1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

16. Stockholders’ Equity

In the second quarter of 2012, Devon’s stockholders adopted the 2012 amendment to the 2009 Long-Term Incentive Plan (“2009 Plan Amendment”), which expires June 2, 2019. The 2009 Plan Amendment increases the number of shares authorized for issuance from 21.5 million shares to 47 million shares. To calculate shares issued under the 2009 Long-Term Incentive Plan subsequent to the 2009 Plan Amendment, options and stock appreciation rights represent one share and other awards represent 2.38 shares.

 

14


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Dividends

Devon paid common stock dividends of $162 million and $140 million in the first six months of 2012 and 2011, respectively. The quarterly cash dividend was $0.16 per share in the first quarter of 2011. Devon increased the dividend rate to $0.17 per share in the second quarter of 2011 and further increased the dividend rate to $0.20 per share in the first quarter of 2012.

17. 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. Actual amounts could differ materially from management’s estimates.

Royalty Matters

Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. The suits allege that the producers and related parties used below-market prices, made improper deductions, used improper measurement techniques and entered into gas purchase and processing agreements with affiliates that resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold. Devon’s largest exposure for such matters relates to royalties in the states of Oklahoma and New Mexico. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

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 remediation costs. Devon’s monetary exposure for environmental matters is not expected to be material.

Chief Redemption Matters

In 2006, Devon acquired Chief Holdings LLC (“Chief”) from the owners of Chief, including Trevor Rees-Jones, the majority owner of Chief. In 2008, a former owner of Chief filed a petition against Rees-Jones, as the former majority owner of Chief, and Devon, as Chief’s successor pursuant to the 2006 acquisition. The petition claimed, among other things, violations of the Texas Securities Act, fraud and breaches of Rees-Jones’ fiduciary responsibility to the former owner in connection with Chief’s 2004 redemption of the owner’s minority ownership stake in Chief.

On June 20, 2011, a court issued a judgment against Rees-Jones for $196 million, of which $133 million of the judgment was also issued against Devon. Both Rees-Jones and Devon are appealing the judgment. If the appeal is unsuccessful, Devon can and will seek full payment of the judgment and any related interest, costs and expenses from Rees-Jones pursuant to an existing indemnification agreement between Rees-Jones, certain other parties and Devon. Devon does not expect to have any net exposure as a result of the judgment. However, because Devon does not have a legal right of set off with respect to the judgment, Devon has recorded in the accompanying June 30, 2012 and December 31, 2011, balance sheets both a $133 million long-term liability relating to the judgment with an offsetting $133 million long-term receivable relating to its right to be indemnified by Rees-Jones and certain other parties pursuant to the indemnification agreement.

 

15


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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.

18. Fair Value Measurements

The following tables provide carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other payables and accrued expenses included in the accompanying balance sheets approximated fair value at June 30, 2012 and December 31, 2011. Therefore, such financial assets and liabilities are not presented in the following tables.

 

                 Fair Value Measurements Using:  
     Carrying
Amount
    Total Fair
Value
    Level 1
Inputs
     Level 2
Inputs
    Level 3
Inputs
 
     (In millions)  

June 30, 2012 assets (liabilities):

           

Cash equivalents

   $ 5,841      $ 5,841      $ 850       $ 4,991      $ —     

Short-term investments

   $ 944      $ 944      $ 300       $ 644      $ —     

Long-term investments

   $ 69      $ 69      $ —         $ —        $ 69   

Commodity derivatives

   $ 968      $ 968      $ —         $ 968      $ —     

Commodity derivatives

   $ (37   $ (37   $ —         $ (37   $ —     

Interest rate derivatives

   $ 37      $ 37      $ —         $ 37      $ —     

Foreign exchange derivatives

   $ (8   $ (8   $ —         $ (8   $ —     

Debt

   $ (10,603   $ (12,260   $ —         $ (12,241   $ (19

December 31, 2011 assets (liabilities):

           

Cash equivalents

   $ 5,123      $ 5,123      $ 929       $ 4,194      $ —     

Short-term investments

   $ 1,503      $ 1,503      $ 201       $ 1,302      $ —     

Long-term investments

   $ 84      $ 84      $ —         $ —        $ 84   

Commodity derivatives

   $ 628      $ 628      $ —         $ 628      $ —     

Commodity derivatives

   $ (82   $ (82   $ —         $ (82   $ —     

Interest rate derivatives

   $ 52      $ 52      $ —         $ 52      $ —     

Debt

   $ (9,780   $ (11,380   $ —         $ (11,295   $ (85

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

Level 1 Fair Value Measurements

Cash equivalents and short-term investments — Amounts consist primarily of U.S. and Canadian treasury securities and money market investments. The fair value approximates the carrying value.

Level 2 Fair Value Measurements

Cash equivalents and short-term investments — Amounts consist primarily of Canadian agency and provincial securities and commercial paper investments. The fair value is based upon quotes from brokers, which approximate the carrying value.

Commodity, interest rate and foreign exchange derivatives — The fair values of commodity and interest rate derivatives are estimated using internal discounted cash flow calculations based upon forward curves and quotes obtained from brokers for contracts with similar terms or quotes obtained from counterparties to the agreements.

Debt — Devon’s debt instruments do not actively trade in an established market. The fair values of its fixed-rate debt are estimated based on rates available for debt with similar terms and maturity. The fair values of Devon’s variable-rate commercial paper and credit facility borrowings are the carrying values.

 

16


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 auction failures and the lack of an active market for Devon’s auction rate securities, quoted market prices for these securities were not available. Therefore, Devon used valuation techniques that rely on unobservable 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 U.S. government guarantees 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 June 30, 2012 and December 31, 2011.

Debt — Devon’s Level 3 debt consisted of a non-interest bearing promissory note. Due to the lack of an active market, quoted marked prices for this note, or similar notes, were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair value of its promissory note. The fair value of this debt is estimated using internal discounted cash flow calculations based upon estimated future payment schedules and a 3.125% interest rate.

Included below is a summary of the changes in Devon’s Level 3 fair value measurements during the first six months of 2012 and 2011.

 

     Six Months Ended June 30,  
     2012     2011  
     (In millions)  

Long-term investments balance at beginning of period

   $ 84      $ 94   

Redemptions of principal

     (15     (1
  

 

 

   

 

 

 

Long-term investments balance at end of period

   $ 69      $ 93   
  

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2012     2011  
     (In millions)  

Debt balance at beginning of period

   $ (85   $ (144

Foreign exchange translation adjustment

     (1     (4

Accretion of promissory note

     —          (2

Redemptions of principal

     67        46   
  

 

 

   

 

 

 

Debt balance at end of period

   $ (19   $ (104
  

 

 

   

 

 

 

19. Discontinued Operations

In March 2012, Devon received $71 million upon closing the divestiture of its operations in Angola, which completed Devon’s offshore divestiture program that was announced in November 2009. In aggregate, Devon’s U.S. and International offshore divestitures generated total proceeds of $10.1 billion, or approximately $8 billion after-tax, assuming repatriation of a substantial portion of the foreign proceeds under current U.S. tax law.

Revenues related to Devon’s discontinued operations totaled $43 million in the six months ended June 30, 2011. Devon did not have revenues related to its discontinued operations during the second quarter of 2011 or the first six months of 2012. Earnings (loss) from discontinued operations before income taxes totaled $(16) million in the six months ended June 30, 2012 and $2.6 billion for the second quarter and first six months of 2011, respectively. Devon did not have any earnings in the second quarter of 2012. Earnings (loss) from discontinued operations in 2012 and 2011 were primarily due to Devon’s International divestiture transactions.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations at December 31, 2011. Devon did not have assets or liabilities held for sale at June 30, 2012.

 

    

Balance Sheet Caption

   December 31, 2011  
          (In millions)  

Other current assets

   Other current assets    $ 21   

Property and equipment, net

   Other long-term assets    $ 132   

Accounts payable

   Other current liabilities    $ 20   

Other current liabilities

   Other current liabilities    $ 28   

20. Segment Information

Devon manages its operations through distinct operating segments, or divisions, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its U.S. divisions into one reporting segment due to the similar nature of the businesses. However, Devon’s Canadian division is reported as a separate reporting segment primarily due to the significant differences between the U.S. and Canadian regulatory environments. Devon’s segments are all primarily engaged in oil and gas producing activities. Revenues are all from external customers.

 

     U.S.      Canada     Total  
     (In millions)  

Three Months Ended June 30, 2012:

       

Oil, gas and NGL sales

   $ 1,014       $ 603      $ 1,617   

Oil, gas and NGL derivatives

   $ 665       $ —        $ 665   

Marketing and midstream revenues

   $ 250       $ 27      $ 277   

Depreciation, depletion and amortization

   $ 439       $ 245      $ 684   

Interest expense

   $ 84       $ 15      $ 99   

Earnings from continuing operations before income taxes

   $ 727       $ 7      $ 734   

Income tax expense (benefit)

   $ 259       $ (2   $ 257   

Earnings from continuing operations

   $ 468       $ 9      $ 477   

Capital expenditures

   $ 1,985       $ 384      $ 2,369   

Three Months Ended June 30, 2011:

       

Oil, gas and NGL sales

   $ 1,438       $ 762      $ 2,200   

Oil, gas and NGL derivatives

   $ 416       $ —        $ 416   

Marketing and midstream revenues

   $ 554       $ 50      $ 604   

Depreciation, depletion and amortization

   $ 350       $ 200      $ 550   

Interest expense

   $ 40       $ 45      $ 85   

Earnings from continuing operations before income taxes

   $ 1,148       $ 230      $ 1,378   

Income tax expense

   $ 1,135       $ 59      $ 1,194   

Earnings from continuing operations

   $ 13       $ 171      $ 184   

Capital expenditures

   $ 1,499       $ 334      $ 1,833   

Six Months Ended June 30, 2012:

       

Oil, gas and NGL sales

   $ 2,250       $ 1,282      $ 3,532   

Oil, gas and NGL derivatives

   $ 810       $ —        $ 810   

Marketing and midstream revenues

   $ 649       $ 65      $ 714   

Depreciation, depletion and amortization

   $ 870       $ 494      $ 1,364   

Interest expense

   $ 155       $ 31      $ 186   

Earnings from continuing operations before income taxes

   $ 1,260       $ 85      $ 1,345   

Income tax expense

   $ 444       $ 10      $ 454   

Earnings from continuing operations

   $ 816       $ 75      $ 891   

Property and equipment, net

   $ 18,818       $ 8,423      $ 27,241   

Total assets

   $ 24,916       $ 18,554      $ 43,470   

Capital expenditures (2)

   $ 3,531       $ 1,183      $ 4,714   

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     U.S.      Canada      Total  
     (In millions)  

Six Months Ended June 30, 2011:

        

Oil, gas and NGL sales

   $ 2,650       $ 1,410       $ 4,060   

Oil, gas and NGL derivatives

   $ 248       $ —         $ 248   

Marketing and midstream revenues

   $ 977       $ 82       $ 1,059   

Depreciation, depletion and amortization

   $ 668       $ 388       $ 1,056   

Interest expense

   $ 77       $ 89       $ 166   

Earnings from continuing operations before income taxes

   $ 1,586       $ 372       $ 1,958   

Income tax expense

   $ 1,290       $ 95       $ 1,385   

Earnings from continuing operations

   $ 296       $ 277       $ 573   

Property and equipment, net

   $ 14,472       $ 7,955       $ 22,427   

Total continuing assets (1)

   $ 19,972       $ 18,435       $ 38,407   

Capital expenditures

   $ 2,751       $ 880       $ 3,631   

 

 

(1) Amounts in the table above do not include assets held for sale related to Devon’s discontinued operations, which totaled $130 million at June 30, 2011. There were no assets held for sale at June 30, 2012.
(2) Capital expenditures for the first six months of 2012 presented above include the $399 million revision to Devon’s asset retirement obligations presented in Note 14. Of the $399 million, $110 million relates to the U.S. and $289 million relates to Canada.

21. Subsequent Event

In August 2012, Devon announced a transaction with Sumitomo Corporation that Devon expects to close in the third quarter of 2012. Under the agreement, Sumitomo will pay $1.365 billion, including $340 million at closing and $1.025 billion toward Devon’s share of future drilling costs, and will receive a 30% interest in the Cline and Midland-Wolfcamp shale plays.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis addresses material changes in our results of operations and capital resources and uses for the three-month and six month periods ended June 30, 2012, compared to the three-month and six-month periods ended June 30, 2011, and in our financial condition and liquidity since December 31, 2011. For information regarding our critical accounting policies and estimates, see our 2011 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview of 2012 Results

During the second quarter and first six months of 2012, our continuing operations generated net earnings of $477 million, or $1.18 per diluted share, and $891 million, or $2.20 per diluted share, for the respective periods. This compares to net earnings of $184 million, or $0.43 per diluted share, and $573 million, or $1.34 per diluted share for the second quarter and first six months of 2011, respectively. Key measures of our financial performance are summarized below:

 

   

Total production rose by 3% and 6% during the second quarter and first six months of 2012, respectively. Our production growth was driven by oil production, which climbed 26% to 149 MBbls per day in the second quarter of 2012.

 

   

The combined realized price without hedges for oil, gas and NGLs decreased 29% to $26.18 per Boe and 19% to $28.28 per Boe in the second quarter and first six months of 2012, respectively.

 

   

Oil, gas and NGL derivatives generated a net gain of $665 million and $810 million in the second quarter and first six months of 2012, respectively, and generated a net gain of $416 million and $248 million in the second quarter and first six months of 2011, respectively. Included in these amounts were cash receipts of $267 million and $425 million in the second quarter and first six months of 2012, respectively, and $59 million and $145 million in the second quarter and first six months of 2011, respectively.

 

   

Marketing and midstream operating profit decreased 54% to $68 million and 33% to $180 million in the second quarter and first six months of 2012, respectively.

 

   

Per unit operating costs increased 10% to $8.30 per Boe and 9% to $8.23 per Boe in the second quarter and first six months of 2012, respectively.

 

   

Operating cash flow from continuing operations decreased 14% to $2.4 billion.

 

   

Capital spending totaled approximately $4.3 billion in the first six months of 2012.

Second Quarter Operational Developments

 

   

Permian Basin oil production increased 24 percent over the second quarter of 2011. Oil production accounted for nearly 60 percent of the 59,000 Boe per day produced in the Permian Basin during the second quarter.

 

   

We brought 19 Bone Spring wells online in the second quarter. Initial daily production averaged 680 Boe per day.

 

   

Net production from our Jackfish oil sands projects averaged a record 51,000 barrels per day in the second quarter. This represents a 63 percent increase in oil production over the year-ago quarter. Construction of our third Jackfish oil sands project is now approximately 40 percent complete. Plant startup is targeted for late 2014.

 

   

We filed a regulatory application in June for the first phase of our Pike, an oil sands project with gross production capacity of 105,000 barrels per day. Pike is located immediately adjacent to the company’s highly successful Jackfish projects.

 

   

In April, we closed our $2.5 billion joint venture agreement with Sinopec. The transaction included an approximate $900 million cash payment at closing, recovering significantly more than 100 percent of our initial land and exploration costs. The remaining $1.6 billion drilling-carry will fund 80 percent of the joint venture’s capital requirements over the next few years.

 

   

We continued to increase our exposure in the Mississippian oil play by adding 400,000 net acres in Oklahoma. In total, we now have 545,000 net acres in this emerging light-oil resource play.

 

   

We brought six Granite Wash wells online in the second quarter. Initial production from these wells averaged 1,270 Boe per day.

 

   

Net production from the Cana-Woodford Shale averaged 280 million cubic feet of natural gas equivalent per day in the second quarter of 2012. Liquids production increased 59 percent year-over-year, accounting for 30 percent of total Cana-Woodford production.

 

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Table of Contents

Results of Operations

Production, Prices and Revenues

 

                                                                                                     
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012      2011      Change(1)     2012      2011      Change(1)  

Oil (MBbls/d)

                

U.S.

     56         46         +21     55         44         +27

Canada

     93         72         +29     90         72         +25
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     149         118         +26     145         116         +26
  

 

 

    

 

 

      

 

 

    

 

 

    

Gas (MMcf/d)

                

U.S.

     2,050         2,029         +1     2,061         1,996         +3

Canada

     519         612         -15     538         591         -9
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     2,569         2,641         -3     2,599         2,587         0
  

 

 

    

 

 

      

 

 

    

 

 

    

NGLs (MBbls/d)

                

U.S.

     90         92         -2     96         88         +9

Canada

     12         10         +22     12         10         +19
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     102         102         0     108         98         +10
  

 

 

    

 

 

      

 

 

    

 

 

    

Combined (MBoe/d) (2)

                

U.S.

     488         476         +2     495         465         +7

Canada

     191         184         +4     191         180         +6
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     679         660         +3     686         645         +6
  

 

 

    

 

 

      

 

 

    

 

 

    

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.
(2) Gas production is converted to Boe at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. NGL production is converted to Boe on a one-to-one basis with oil.

 

                                                                                                     
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012(1)      2011(1)      Change     2012(1)      2011(1)      Change  

Oil (per Bbl)

                

U.S.

   $ 88.74       $ 98.28         -10   $ 93.98       $ 93.84         0

Canada

   $ 54.88       $ 73.65         -25   $ 58.47       $ 67.29         -13

Total

   $ 67.67       $ 83.31         -19   $ 72.02       $ 77.32         -7

Gas (per Mcf)

                

U.S.

   $ 1.72       $ 3.72         -54   $ 2.00       $ 3.61         -45

Canada

   $ 1.91       $ 4.08         -53   $ 2.24       $ 4.05         -45

Total

   $ 1.76       $ 3.80         -54   $ 2.05       $ 3.71         -45

NGLs (per Bbl)

                

U.S.

   $ 29.50       $ 40.43         -27   $ 31.56       $ 38.04         -17

Canada

   $ 45.87       $ 58.80         -22   $ 49.92       $ 56.49         -12

Total

   $ 31.42       $ 42.20         -26   $ 33.55       $ 39.90         -16

Combined (per Boe)

                

U.S.

   $ 22.86       $ 33.19         -31   $ 24.98       $ 31.53         -21

Canada

   $ 34.66       $ 45.55         -24   $ 36.83       $ 43.23         -15

Total

   $ 26.18       $ 36.63         -29   $ 28.28       $ 34.80         -19

 

(1) The prices presented exclude any effects due to oil, gas and NGL derivatives.

 

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The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the three months ended June 30, 2012 and 2011.

 

     Oil     Gas     NGLs     Total  
     (In millions)  

2011 sales

   $ 897      $ 913      $ 390      $ 2,200   

Changes due to volumes

     229        (25     2        206   

Changes due to prices

     (211     (478     (100     (789
  

 

 

   

 

 

   

 

 

   

 

 

 

2012 sales

   $ 915      $ 410      $ 292      $ 1,617   
  

 

 

   

 

 

   

 

 

   

 

 

 

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the six months ended June 30, 2012 and 2011.

 

     Oil     Gas     NGLs     Total  
     (In millions)  

2011 sales

   $ 1,616      $ 1,737      $ 707      $ 4,060   

Changes due to volumes

     428        17        76        521   

Changes due to prices

     (139     (785     (125     (1,049
  

 

 

   

 

 

   

 

 

   

 

 

 

2012 sales

   $ 1,905      $ 969      $ 658      $ 3,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Oil Sales

A 26 percent increase in production during the second quarter and first six months of 2012 caused oil sales to increase by $229 million and $428 million, respectively. The increases were primarily due to continued development of our Jackfish thermal heavy oil projects and Permian Basin properties.

Oil sales decreased $211 million and $139 million during the second quarter and first six months of 2012, respectively, as a result of 19 percent and 7 percent decreases, respectively, in our realized price without hedges. The largest contributor to the decreases in each period to our realized price was the widening differential to the NYMEX West Texas Intermediate index price attributable to our Canadian oil production.

Gas Sales

Gas sales decreased $478 million and $785 million in the second quarter and first six months of 2012, respectively, as a result of 54 percent and 45 percent decreases, respectively, in our realized price without hedges. These decreases were largely due to the broad deterioration of gas prices in the North American market.

Gas sales decreased $25 million during the second quarter due to a 3 percent decrease in production and increased $17 million during the first six months of 2012 as a result of a slight increase in production. Our gas production has remained somewhat steady as a result of the continued development activities in the liquids-rich gas portions of our Barnett and Cana-Woodford Shales. Production gains from development in these liquids-rich regions were partially offset by natural declines in our other operating areas, particularly those that produce dry gas.

NGL Sales

NGL sales decreased $100 million and $125 million in the second quarter and first six months of 2012, respectively, as a result of 26 percent and 16 percent decreases, respectively, in our realized price without hedges. The lower prices were largely due to decreases in NGL prices at the Mont Belvieu, Texas hub price.

NGL sales increased $2 million and $76 million in the second quarter and first six months of 2012, respectively, as a result of production increases in each period. The increases in production were primarily due to continued drilling in the liquids-rich gas portions of the Barnett Shale, Cana-Woodford Shale and Granite Wash.

 

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Oil, Gas and NGL Derivatives

The following tables provide financial information associated with our oil, gas and NGL hedges. The first table presents the cash settlements and unrealized gains and losses that are recognized as components of our revenues. The subsequent tables present our oil, gas and NGL prices with, and without, the effects of the cash settlements. The prices do not include the effects of unrealized gains and losses.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  
     (In millions)  

Cash settlements:

        

Gas derivatives

   $ 211      $ 74      $ 374      $ 165   

Oil derivatives

     57        (16     51        (21

NGL derivatives

     (1     1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash settlements

     267        59        425        145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on fair value changes:

        

Gas derivatives

     (280     49        (184     (8

Oil derivatives

     679        308        570        110   

NGL derivatives

     (1     —          (1     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains on fair value changes

     398        357        385        103   
  

 

 

   

 

 

   

 

 

   

 

 

 

Oil, gas and NGL derivatives

   $ 665      $ 416      $ 810      $ 248   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended June 30, 2012  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
    NGLs
(Per Bbl)
    Total
(Per Boe)
 

Realized price without hedges

   $ 67.67      $ 1.76      $ 31.42      $ 26.18   

Cash settlements of hedges

     4.17        0.90        —          4.33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized price, including cash settlements

   $ 71.84      $ 2.66      $ 31.42      $ 30.51   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended June 30, 2011  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
    NGLs
(Per Bbl)
    Total
(Per Boe)
 

Realized price without hedges

   $ 83.31      $ 3.80      $ 42.20      $ 36.63   

Cash settlements of hedges

     (1.49     0.31        0.05        0.99   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized price, including cash settlements

   $ 81.82      $ 4.11      $ 42.25      $ 37.62   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2012  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
    NGLs
(Per Bbl)
    Total
(Per Boe)
 

Realized price without hedges

   $ 72.02      $ 2.05      $ 33.55      $ 28.28   

Cash settlements of hedges

     1.92        0.79        0.01        3.40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized price, including cash settlements

   $ 73.94      $ 2.84      $ 33.56      $ 31.68   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2011  
     Oil
(Per Bbl)
    Gas
(Per Mcf)
    NGLs
(Per Bbl)
    Total
(Per Boe)
 

Realized price without hedges

   $ 77.32      $ 3.71      $ 39.90      $ 34.80   

Cash settlements of hedges

     (1.00     0.35        0.06        1.25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized price, including cash settlements

   $ 76.32      $ 4.06      $ 39.96      $ 36.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

A summary of our outstanding commodity derivatives is included in Note 2 to the financial statements included in “Item 1. Consolidated Financial Statements” of this report. Cash settlements presented in the tables above represent realized gains or losses related to these various instruments.

In addition to cash settlements, we also recognize unrealized changes in the fair values of our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationships between contract prices and the associated forward curves. Including the cash settlements discussed above, our oil, gas and NGL derivatives generated a net gain of $665 million and $416 million in the second quarter of 2012 and 2011, respectively. Including the cash settlements discussed above, our oil, gas and NGL derivatives generated a net gain of $810 million and $248 million in the first six months of 2012 and 2011, respectively.

 

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Marketing and Midstream Revenues and Operating Costs and Expenses

 

                                                                                                     
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012      2011      Change(1)     2012      2011      Change(1)  
     ($ in millions)  

Marketing and midstream:

                

Revenues

   $ 277       $ 604         -54   $ 714       $ 1,059         -33

Operating costs and expenses

     209         456         -54     534         789         -32
  

 

 

    

 

 

      

 

 

    

 

 

    

Operating profit

   $ 68       $ 148         -54   $ 180       $ 270         -33
  

 

 

    

 

 

      

 

 

    

 

 

    

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

During the second quarter and first six months of 2012, marketing and midstream operating profit decreased $80 million and $90 million, respectively, primarily due to lower gas and NGL prices.

Lease Operating Expenses (“LOE”)

 

                                                                                                     
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012      2011      Change(1)     2012      2011      Change(1)  

LOE ($ in millions):

                

U.S.

   $ 259       $ 224         +15   $ 511       $ 432         +18

Canada

     254         229         +11     516         445         +16
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 513       $ 453         +13   $ 1,027       $ 877         +17
  

 

 

    

 

 

      

 

 

    

 

 

    

LOE per Boe:

                

U.S.

   $ 5.84       $ 5.18         +13   $ 5.68       $ 5.15         +10

Canada

   $ 14.61       $ 13.71         +7   $ 14.83       $ 13.63         +9

Total

   $ 8.30       $ 7.55         +10   $ 8.23       $ 7.52         +9

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

LOE increased $0.75 per Boe and $0.71 per Boe during the second quarter and first six months of 2012, respectively. The largest contributor to the higher unit cost is related to our liquids production growth, particularly at our Jackfish thermal heavy oil projects in Canada and in the Permian Basin in the U.S. Such projects generally require a higher cost to produce per unit than our gas projects. We also experienced upward pressures on costs in certain operating areas, which also contributed to the higher LOE per Boe.

Depreciation, Depletion and Amortization (“DD&A”)

 

                                                                                                     
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012      2011      Change(1)     2012      2011      Change(1)  

DD&A ($ in millions):

                

Oil & gas properties

   $ 612       $ 485         +26   $ 1,228       $ 927         +32

Other properties

     72         65         +12     136         129         +6
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 684       $ 550         +24   $ 1,364       $ 1,056         +29
  

 

 

    

 

 

      

 

 

    

 

 

    

DD&A per Boe:

                

Oil & gas properties

   $ 9.89       $ 8.08         +22   $ 9.83       $ 7.95         +24

Other properties

     1.18         1.08         +9     1.09         1.10         -1
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 11.07       $ 9.16         21   $ 10.92       $ 9.05         21
  

 

 

    

 

 

      

 

 

    

 

 

    

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

 

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Oil and gas property DD&A increased during the second quarter and first six months of 2012 largely due to increases in the DD&A rates. The largest contributor to the higher rates were our drilling and development activities subsequent to the end of the second quarter of 2011.

Under the full-cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the full cost “ceiling” at the end of each quarter. The ceiling is calculated separately for each country and is the present value of estimated future net cash flows from proved oil and gas reserves, discounted 10 percent, net of related tax effects. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. If natural gas prices remain depressed, we expect to incur full-cost ceiling write-downs, or additional DD&A, related to our U.S. oil and gas properties in the third quarter of 2012.

General and Administrative Expenses (“G&A”)

 

                                                                             
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     Change(1)     2012     2011     Change(1)  
     ($ in millions)  

Gross G&A

   $ 296      $ 245        +21   $ 584      $ 483        +21

Capitalized G&A

     (92     (81     +14     (183     (162     +13

Reimbursed G&A

     (28     (29     -3     (57     (56     +1
  

 

 

   

 

 

     

 

 

   

 

 

   

Net G&A

   $ 176      $ 135        +30   $ 344      $ 265        +30
  

 

 

   

 

 

     

 

 

   

 

 

   

Net G&A per Boe

   $ 2.85      $ 2.26        +26   $ 2.76      $ 2.27        +21
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

Net G&A and net G&A per Boe increased during 2012 largely due to higher employee compensation and benefits. Employee costs increased primarily from an expansion of our workforce as part of growing production operations at certain of our key areas, including Jackfish, the Permian and the Cana-Woodford shale.

Taxes Other Than Income Taxes

 

                                                                             
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     Change(1)     2012     2011     Change(1)  
     ($ in millions)  

Production

   $ 51      $ 68        -25   $ 104      $ 124        -16

Ad valorem and other

     49        52        -5     98        104        -5
  

 

 

   

 

 

     

 

 

   

 

 

   

Taxes other than income taxes

   $ 100      $ 120        -16   $ 202      $ 228        -11
  

 

 

   

 

 

     

 

 

   

 

 

   

Percentage of oil, gas and NGL revenue:

            

Production

     3.16     3.10     +2     2.95     3.06     -4

Ad valorem and other

     3.04     2.34     +29     2.78     2.55     +9
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

     6.20     5.44     +14     5.73     5.61     +2
  

 

 

   

 

 

     

 

 

   

 

 

   

 

(1) Percentage changes are based on actual figures rather than the rounded figures presented.

Taxes other than income taxes as a percentage of our oil, gas and NGL revenues increased in both 2012 periods primarily due to ad valorem and other taxes, which do not change in direct correlation with oil, gas and NGL revenues.

Interest Expense

 

                                                                             
     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     Change(1)     2012     2011     Change(1)  
     ($ in millions)  

Interest based on debt outstanding

   $ 108      $ 100        +9   $ 207      $ 198        +5

Capitalized interest

     (13     (17     -28     (29     (37     -22

Other

     4        2        +18     8        5        +46
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest expense

   $ 99      $ 85        +17   $ 186      $ 166        +12
  

 

 

   

 

 

     

 

 

   

 

 

   

 

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Interest based on debt outstanding increased during the second quarter and first six months of 2012 as a result of additional debt borrowings. Borrowings were primarily used to fund capital expenditures in excess of our operating cash flow.

Other, net

 

                                                   
     Three Months
Ended June  30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (In millions)  

Accretion of asset retirement obligations

   $ 28      $ 23      $ 55      $ 46   

Interest rate swaps – cash settlements

     11        (5     1        (21

Interest rate swaps – unrealized fair value changes

     5        30        15        29   

Interest income

     (9     (4     (16     (6

Other

     9        (7     (1     (21
  

 

 

   

 

 

   

 

 

   

 

 

 

Other, net

   $ 44      $ 37      $ 54      $ 27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Taxes

The following table presents our total income tax expense and a reconciliation of our effective income tax rate to the U.S. statutory income tax rate.

 

                                                   
     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012     2011     2012     2011  

Total income tax expense (in millions)

   $ 257      $ 1,194      $ 454      $ 1,385   
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. statutory income tax rate

     35     35     35     35

State income taxes

     1     1     1     1

Taxation on Canadian operations

     (1 %)      (2 %)      (2 %)      (2 %) 

Assumed repatriations

     —          54     —          38

Other

     —          (1 %)      —          (1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax expense rate

     35     87     34     71
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (Loss) From Discontinued Operations

 

                                                   
     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2012      2011     2012     2011  
     (In millions)  

Operating earnings

   $ —         $ 12      $ —        $ 42   

Gain (loss) on sale of oil and gas properties

     —           2,546        (16     2,546   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     —           2,558        (16     2,588   

Income tax expense (benefit)

     —           (1     5        2   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (loss) from discontinued operations

   $ —         $ 2,559      $ (21   $ 2,586   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings decreased in 2012 primarily as a result of the $2.5 billion gain ($2.5 billion after-tax) recognized from the divestiture of our Brazil operations in the second quarter of 2011.

 

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Capital Resources, Uses and Liquidity

Sources and Uses of Cash

The following table presents the major source and use categories of our cash and cash equivalents.

 

     Six Months Ended June 30,  
     2012     2011  
     (In millions)  

Operating cash flow – continuing operations

   $ 2,426      $ 2,830   

Debt activity, net

     967        2,340   

Divestitures of property and equipment

     935        3,256   

Short-term investment activity, net

     559        (3,222

Capital expenditures

     (4,267     (3,720

Common stock repurchases and dividends

     (162     (1,430

Other

     88        7   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 546      $