Devon Energy Reports Third-Quarter 2014 Results

Devon Energy Corporation (DVN) today reported net earnings of $1.0 billion or $2.48 per common share ($2.47 per diluted share) for the quarter ended Sept. 30, 2014. This compares with third-quarter 2013 net earnings of $429 million or $1.06 per common share ($1.05 per diluted share).

Adjusting for items securities analysts typically exclude from their published estimates, the company earned $552 million or $1.34 per diluted share in the third quarter. This represents a 4 percent increase in adjusted earnings compared to the third quarter of 2013.

Devon generated cash flow from operations totaling $1.6 billion in the third quarter. Combined with $2.3 billion of pre-tax proceeds from the sale of non-core U.S. assets, Devon’s total cash inflows for the quarter approached $4 billion.

“Devon’s repositioned portfolio delivered outstanding growth in production and margins in the third quarter,” said John Richels, president and CEO. “With our strong position in many of North America’s best resource plays and our focused efforts to deliver high-quality performance, we saw profitability continue to expand.”

“Based on our strong year-to-date results and the confidence we have in our portfolio, we are raising our full-year production growth outlook to 14 percent, up from our previous guidance of 11 percent,” Richels said. “And we are delivering this incremental production growth without any increase in capital spending.”

Oil Production Exceeds Expectations

In the third quarter, total production from Devon’s retained assets averaged 640,000 oil-equivalent barrels (Boe) per day. This result exceeded the company’s guidance range and represents a 19 percent increase year over year. Oil and liquids production accounted for 55 percent of the company’s retained asset production mix in the third quarter.

Devon delivered record oil production in North America during the third quarter of 2014. Oil production from retained assets averaged 216,000 barrels per day, exceeding the top end of the company’s guidance range by 6,000 barrels per day. This represents a 44 percent increase compared to the third quarter of 2013. The most significant growth came from the company’s U.S. operations, where oil production increased a substantial 77 percent year over year.

Growth in U.S. production was largely attributable to strong results from Devon’s oil development plays. In the third quarter, the company’s world-class Eagle Ford assets continued to deliver prolific well results. Net production in the Eagle Ford increased to an average of 87,000 Boe per day in September, an increase of 76 percent compared to Devon’s first month of ownership in March 2014. In the Permian Basin, led by outstanding results from the Bone Spring play, total production increased to 98,000 Boe per day. This represents a 20 percent increase in Permian production compared to the year-ago quarter.

In Canada, Devon achieved first oil from its Jackfish 3 project in the third quarter, commencing another leg of multi-year oil production growth from its heavy oil business. Additionally, the start-up of Jackfish 3 will begin a new era from the Jackfish complex, with the potential to generate up to a $1 billion per year of free cash flow, after maintenance capital.

Devon Raises Full-Year Production Outlook

Detailed forward-looking guidance for the fourth quarter of 2014 is provided later in the release. Based on year-to-date results and Devon’s fourth-quarter outlook, most operating and financial metrics remain relatively unchanged compared to previous full-year guidance disclosures. A notable update is the company raising the midpoint of its 2014 production outlook from retained assets by 3 percent to approximately 617,000 Boe per day. This incremental production growth is expected to be delivered without additional capital spending.

Operations Report

For additional details on Devon’s core and emerging assets, please refer to the company’s third-quarter 2014 operations report at www.devonenergy.com. Highlights from the operations report include:

• Raising the Bone Spring type curve
• Eagle Ford on track to meet production targets
• Canadian heavy-oil results outperform guidance
• Raising Cana-Woodford type curve
• Powder River Basin delivers high-rate development wells

Oil Revenue Grows and Margins Expand

Revenue from oil, natural gas and natural gas liquids sales totaled $2.6 billion in the third quarter, an 11 percent increase compared to the third quarter of 2013. This growth in revenue was attributable to the company’s significant increase in oil production, partially offset by the sale of gas-weighted divestiture assets in both the U.S. and Canada. Third-quarter oil sales accounted for 63 percent of Devon’s total upstream revenues.

Devon’s marketing and midstream operating profit reached $219 million, which exceeded the company’s guidance and represented a 68 percent increase compared to the third quarter of 2013. The year-over-year increase in operating profit was due to expanded margins related to EnLink Midstream.

The company’s strong cost-containment efforts were reflected in third-quarter expense results. Pre-tax cash costs totaled $16.06 per Boe, a 3 percent decrease compared to the previous quarter. Costs in several categories were lower than guidance, most notably Devon’s largest cash cost, lease operating expenses (LOE). On a unit-of-production basis, LOE totaled $9.47 per Boe, flat compared to the year-ago period and 1 percent lower than the second quarter of 2014.

Overall, the benefits of higher-margin oil production and a low-cost structure resulted in expanded cash margin for Devon. Pre-tax cash margin reached $29.42 per Boe in the third quarter, a 20 percent increase compared to the year-ago period.

Balance Sheet and Liquidity Remain Strong

With investment-grade credit ratings and cash balances of $3.4 billion at the end of the third quarter, Devon’s financial position remains exceptionally strong. At Sept. 30, the company’s net debt totaled $8.7 billion, of which $1.9 billion was attributable to the consolidation of EnLink Midstream and is non-recourse to Devon.

Subsequent to quarter end, in mid-October, Devon announced the redemption of $1.9 billion in senior notes, utilizing a portion of its asset divestiture proceeds. This redemption includes all of the company’s outstanding 2.4% senior notes due 2016, 1.2% senior notes due 2016 and 1.875% senior notes due 2017. Upon redemption later in the month, Devon will complete the debt repayment plan associated with its portfolio transformation.

Attractive Hedges Protect Future Cash Flow

With rapid growth in high-margin production, the company has taken measures to protect its future cash flow. For the fourth quarter of 2014, the company has entered into various swap-and-collar contracts to hedge approximately 60 percent of its expected oil production at an average floor price of $92 per barrel. Nearly 80 percent of Devon’s expected fourth-quarter natural gas production is locked in at an average floor price of $4.28 per thousand cubic feet.

For full-year 2015, the company has 138,000 barrels per day protected through swaps and collars at an average floor price of $91 per barrel. Devon also has 0.5 billion cubic feet per day hedged at an average floor price of $4.20. These hedge positions cover more than 50 percent of Devon’s expected oil production in 2015 and around 30 percent of gas production.

Portfolio Transformation Complete

On Aug. 29, Devon closed the sale of its U.S. non-core assets for $2.3 billion, officially completing its portfolio transformation announced last November. In less than a year, the company transformed its portfolio through three significant steps: an accretive Eagle Ford entry, the creation of EnLink Midstream, and the sale of more than $5 billion of non-core properties in both the U.S. and Canada.

Devon’s retained asset portfolio is now concentrated in some of the most attractive North American resource plays. This formidable and focused asset base creates a platform that supports competitive, high-margin growth for many years.

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 general accepted accounting principles). Adjusted earnings, net debt and pre-tax cash margin are non-GAAP financial measures referenced within this release. Reconciliations of these non-GAAP measures are provided later in this release.

Conference Call Webcast and Supplemental Earnings Materials

Please note that as soon as practicable today, Devon will post additional information, consisting of an operations report and management commentary with associated slides, to its website atwww.devonenergy.com. The company’s third-quarter 2014 conference call will be held at 10 a.m. Central (11 a.m. Eastern) on Wednesday, Nov. 5, 2014, and will serve primarily as a forum for analyst and investor questions and answers.

Forward-Looking Statements

This press release includes “forward-looking statements” as defined by the Securities and Exchange Commission (SEC). 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; the extent to which we are successful in acquiring and discovering additional reserves; unforeseen changes in the rate of production from our oil and gas properties; uncertainties in future exploration and drilling results; uncertainties inherent in estimating the cost of drilling and completing wells; drilling risks; competition for leases, materials, people and capital; midstream capacity constraints and potential interruptions in production; risk related to our hedging activities; environmental risks; political changes; changes in laws or regulations; our limited control over third parties who operate our oil and gas properties; our ability to successfully complete mergers, acquisitions and divestitures; and other risks identified in our Form 10-K and our other filings with the SEC. 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 SEC 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, available atwww.devonenergy.com. 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.

About Devon Energy

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.

(1) The reported Canadian gas volumes include volumes that are produced from certain of our leases and then transported to our Jackfish operations where the gas is used as fuel. However, the revenues and expenses related to this consumed gas are eliminated in our consolidated financials.

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.

ADJUSTED EARNINGS
(in millions)

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. Devon believes these non-GAAP measures facilitate comparisons of its performance to earnings estimates published by securities analysts. Devon also believes these non-GAAP measures can facilitate comparisons of its performance between periods and to the performance of its peers. The following table summarizes the effects of these items on third-quarter 2014 earnings.

(1) In the third quarter of 2014, Devon completed its U.S. non-core divestiture program. In conjunction with the divestiture closing, Devon recognized $543 million of current income tax expense. The current tax expense was entirely offset by the recognition of deferred tax benefits.

NET DEBT
(in millions)

Devon defines net debt as debt less cash and cash equivalents as presented in the following table. Devon believes that netting these sources of cash against debt provides a clearer picture of the future demands on cash to repay debt.

PRE-TAX CASH MARGIN

Devon defines pre-tax cash margin as revenues from commodity sales and marketing and midstream operations, less expenses for lease operations, marketing and midstream operations, cash-based general and administrative, production and property taxes and net financing costs, with the result divided by total production. Devon believes that pre-tax cash margin can facilitate comparisons of our performance between periods and to the performance of our peers.

Devon’s oil derivatives that settle against the average of the prompt month NYMEX West Texas Intermediate futures price. Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index.