SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event report): September 30, 1999
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 001-30176 73-1567067
(State or Other Jurisdiction of (Commission File Number) (IRS Employer
Incorporation or Organization) Identification Number)
20 NORTH BROADWAY, SUITE 1500, OKLAHOMA CITY, OK 73102
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
Page 1 of 9 pages
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Item 5. Other Events
Revisions to 1999 Estimates
The 1998 annual report on Form 10-K of Devon Energy
Corporation ("Devon"), and a Form 8-K filed on February 8,
1999, contained forward-looking information for the year
1999. Certain of the information in these two reports
relating to oil and gas prices was revised in a Form 8-K
filed on April 28, 1999.
On August 17, 1999, Devon closed its merger with
PennzEnergy Company ("PennzEnergy"). The merger was
accounted for using the purchase method of accounting for
business combinations. Accordingly, Devon's 1999 results of
operations will include the effects of the PennzEnergy
operations for the last 4 1/2 months of the year. As a result
of the additional revenues and expenses to be recorded
during this period, Devon is revising substantially all of
its previous full-year 1999 estimates in this Form 8-K.
Although the PennzEnergy merger has no effect on Devon's
Canadian operations, Devon's prior estimates of its Canadian
operating results have also been revised where necessary.
The revised forward-looking statements provided in this
discussion are based on management's examination of
historical operating trends, the December 31, 1998 reserve
reports of independent petroleum engineers, other data in
Devon's possession or available from third parties and
actual results for the first eight months of 1999. Devon
cautions that its future oil, gas and NGLs production,
revenues and expenses are subject to all of the risks and
uncertainties normally incident to the exploration for and
development and production and sale of oil and gas. These
risks include, but are not limited to, price, volatility,
inflation or lack of availability of goods and services,
environmental risks, drilling risks, regulatory changes, the
uncertainty inherent in estimating future oil and gas
production or reserves, and other risks as outlined below.
The financial results of Devon's Canadian operations are
subject to currency exchange rate risks. Additional risks
are discussed below in the context of line items most
affected by such risks.
Specific Assumptions and Risks Related to Price and
Production Estimates Prices for oil, natural gas and NGLs
are determined primarily by prevailing market conditions.
Regional and world-wide economic growth, weather and other
substantially variable factors influence market conditions
for these products. These factors are beyond Devon's
control and are difficult to predict. In addition to
volatility in general, Devon's oil, gas and NGLs prices may
vary considerably due to differences between regional
market, transportation availability and demand for different
grades of oil, gas and NGLs. Because of the high percentage
of Devon's revenues that is attributable to sales of oil,
gas and NGLs, Devon's financial results and resources are
highly influenced by this price volatility.
Estimates for Devon's future production of oil, natural
gas and NGLs are based on the assumption that market demand
and prices for oil and gas will continue at levels that
allow for profitable production of these products. There
can be no assurance of such stability.
The production, transportation and marketing of oil,
natural gas and NGLs are complex processes which are subject
to disruption due to transportation and processing
availability, mechanical failure, human error,
meteorological events and numerous other factors. The
following forward-looking statements were prepared assuming
demand, curtailment, producibility and general market
conditions for Devon's oil, natural gas and NGLs for the
last quarter of 1999 will be substantially similar to those
of the first three quarters of the year, unless otherwise
noted. Given the general limitations expressed herein,
Devon's forward-looking statements for 1999 are set forth
below. Unless otherwise noted, all of the following dollar
amounts are expressed in U.S. dollars. Those amounts
related to Canadian operations have been converted to U.S.
dollars using an exchange rate of $0.67 U.S. dollar to one
Canadian dollar. The actual 1999 exchange rate may vary
materially from this estimated rate. Such variations could
have a material effect on the estimates related to Devon's
Canadian operations.
Impact of PennzEnergy Merger The PennzEnergy merger
was closed on August 17, 1999, and was accounted for using
the purchase method of accounting. Therefore, the merger
will affect Devon's 1999 results for only the last 4 1/2
months of the year.
Definitions Devon's previous estimates of 1999's
results included separate estimates for its domestic and
Canadian operations. With the PennzEnergy merger, Devon has
added properties that are outside of North America.
However, current production from these added international
properties is not material to Devon's expected 1999 results.
Therefore, the following estimates of "domestic" or "U.S."
operations also include the revenues and expenses for all
non-U.S. properties other than Canada.
The following discussion includes references to various
abbreviations relating to volumetric production terms. The
definitions of these abbreviations are as follows:
"Bcf" means billion cubic feet.
"Boe" means equivalent barrels of oil, calculated by
converting six Mcf of gas to one barrel of oil.
"Mcf" means thousand cubic feet.
"MMBtu" means million British thermal units, a measure
of heating value.
"MMcf" means million cubic feet.
Revised Estimates The following are Devon's estimates
of its 1999 results as revised for the impact of the
PennzEnergy merger and other factors.
Oil Production Devon expects its oil production in
1999 to total between 14.5 million barrels and 15.8 million
barrels. Domestic production is expected to be between 9.5
million barrels and 10.6 million barrels, and Canadian
production is expected to be between 5.0 million barrels and
5.2 million barrels.
Oil Prices Devon expects its 1999 net oil prices per
barrel will average between $0.80 to $1.10 above West Texas
Intermediate ("WTI") posted prices for its domestic
production. Approximately 180,000 barrels of Canadian oil
production in the first quarter were fixed at a price of
approximately $17.80 per barrel. For the remainder of
1999's Canadian oil production, Devon expects to receive a
price between $1.25 and $1.75 below WTI posted prices. This
range of expected differentials for Canadian oil production
is unchanged from that estimated in Devon's Form 8-K filed
on April 28, 1999.
Gas Production Devon expects its 1999 gas production
to total between 188 Bcf and 203 Bcf. It is expected that
San Juan Basin coal seam gas production will be between 22
Bcf and 23 Bcf, and all other domestic production will be
between 94 Bcf and 105 Bcf. Canadian production is expected
to be between 72 Bcf and 75 Bcf.
Gas Prices - Fixed Through various fixed price
contracts or hedging instruments, Devon has fixed the price
it will receive in 1999 on a portion of its natural gas
production. The table below includes the 1999 volumes and
the respective prices that have been fixed.
<TABLE>
<CAPTION>
Volumes Price Per
Area (MMcf) Mcf
<S> <C> <C>
San Juan Basin 13,100 $1.82
Rocky Mountains 7,600 $1.93
Other U.S. 1,500 $2.05
Total U.S. 22,200 $1.87
Canada 40,700 $1.33
</TABLE>
The above price for the San Juan Basin gas includes
approximately $0.41 per Mcf from the 1995 transaction
covering the majority of Devon's San Juan Basin coal seam
gas properties (the "San Juan Basin Transaction"). Also,
the above San Juan Basin price is net of approximately $0.63
per Mcf for transportation costs and quality adjustments.
Gas Prices - Floating For the gas production for which
prices have not been fixed, Devon expects its 1999 San Juan
Basin coal seam average price will be between $0.30 and
$0.60 per Mcf less than Texas Gulf Coast spot averages
("TGC"). This includes the additional $0.41 per Mcf from
the San Juan Basin Transaction and the $0.63 per Mcf
reduction for transportation and quality adjustments, both
referred to in the previous paragraph. Devon's other
domestic production is expected to average from $0.05 per
Mcf less than TGC to $0.25 more than TGC, and the Canadian
production is expected to average $0.60 to $0.75 less than
the New York Mercantile Exchange price ("NYMEX"). This
range for Canadian gas price differentials is unchanged from
the estimate included in the April 28, 1999 Form 8-K.
NGLs Production Devon expects its production of 1999
NGLs to total between 3.4 million barrels and 3.8 million
barrels. Between 2.8 million barrels and 3.1 million
barrels are expected to be produced domestically, and
between 0.6 million barrels and 0.7 million barrels are
expected to be produced in Canada.
Other Revenues Devon's other revenues in 1999 are
expected to be between $17.5 million and $18.9 million.
Domestic other revenues are expected to be $12.4 million to
$13.6 million and Canadian other revenues are expected to be
$5.1 million to $5.3 million. The majority of these other
revenues are related to third party gas processing
activities and dividend income expected from Devon's 7.1
million shares of Chevron Corporation common stock acquired
in the PennzEnergy merger.
Production and Operating Expenses Devon's production
and operating expenses vary in response to several factors.
Among the most significant of these factors are additions or
deletions to Devon's property base, changes in production
taxes, general changes in the prices of services and
materials that are used in the operation of the properties
and the amount of repair and workover activity required.
Oil, gas and NGLs prices will have a direct effect on
production taxes to be incurred in 1999. Future prices
could also have an effect on whether proposed workover
projects are economically feasible. These factors, coupled
with the uncertainty of future oil, gas and NGLs prices,
increase the uncertainty inherent in estimating future
production and operating costs. Given these uncertainties,
Devon estimates that 1999's total production and operating
costs will be between $179 million and $197 million. The
U.S. portion of such estimate is between $129 million and
$144 million, while the Canadian costs are expected to total
between $50 million and $53 million.
Depreciation, Depletion and Amortization ("DD&A") The
1999 oil and gas property DD&A rate will depend on various
factors. Most notable among such factors are the amount of
proved reserves that could be added from drilling or
acquisition efforts in 1999 compared to the costs incurred
for such efforts, and the revisions to Devon's 1998 year-end
reserve estimates that will be made during 1999.
The proved reserves added in the PennzEnergy merger
will have a significant effect on Devon's DD&A rate for the
last 4 1/2 months of 1999. Devon's consolidated DD&A rate for
the first 7 1/2 months of 1999 was $3.78 per Boe. After the
PennzEnergy merger, it is estimated that Devon's DD&A rate
during the last 4 1/2 months of the year will be between $5.95
and $6.25 per Boe on a consolidated basis. On average for
the total year, Devon expects its consolidated DD&A rate
will be between $5.00 and $5.25 per Boe. This range of full-
year DD&A rates should result in oil and gas property
related DD&A expense for 1999 of between $250 million and
$275 million.
The domestic DD&A rate for the year is expected to be
between $5.80 and $6.10 per Boe. Domestic DD&A expense for
oil and gas properties for 1999 is expected to be between
$186 and $209 million. The Canadian DD&A rate for the year
is expected to be between $3.50 and $3.75 per Boe. Canadian
DD&A expense for oil and gas properties for 1999 is expected
to be between $64 million and $66 million.
Additionally, Devon expects its 1999 non-oil and gas
property related DD&A expense to total between $6.4 million
and $6.7 million in the U.S. and between $0.6 million and
$0.7 million in Canada.
General and Administrative Expenses ("G&A") Devon's
G&A includes the costs of many different goods and services
used in support of its business. These goods and services
are subject to general price level increases or decreases.
In addition, Devon's G&A varies with its level of activity
and the related staffing needs as well as with the amount of
professional services required during any given period.
Should Devon's needs or the prices of the required goods and
services differ significantly from current expectations,
actual G&A could vary materially from the estimate. Given
these limitations, consolidated G&A in 1999 is expected to
be between $50 million and $56 million. Domestic G&A is
expected to be between $39 million and $44 million, and
Canadian G&A is expected to be between $11 million and $12
million.
Interest Expense Future interest rates and oil,
natural gas and NGLs prices have historically been
significant uncertainties which affected Devon's estimates
of future interest expense. However, including the debt
assumed in the PennzEnergy merger, Devon's September 30,
1999, debt balance includes $1.8 billion with fixed interest
rates and only $0.2 million with floating interest rates.
The high percentage of debt with fixed rates eliminates
substantially all of the potential effect on interest
expense from the uncertainty of future interest rates.
On September 27, 1999, Devon closed the public sale of
an additional 9.9 million shares of its common stock for net
proceeds of $385.9 million. These proceeds will be used
primarily to retire $350 million of long-term debt assumed
in the PennzEnergy merger that bears interest at
approximately 10% per year. This debt will be retired in
late October and mid-November of 1999 in accordance with the
maturity dates and early retirement provisions of the
related debt instruments. Given these facts, Devon
estimates its interest expense in 1999 will total between
$61 million and $68 million. Domestic interest expense is
expected to be between $38 million and $43 million, and
Canadian interest expense is expected to be between $23
million and $25 million.
Deferred Effect of Changes in Foreign Currency Exchange
Rate on Subsidiary's Long-term Debt Devon's Canadian
subsidiary has $225 million of long-term debt which is
denominated in U.S. dollars. The effect of fluctuations in
the Canadian-to-U.S. exchange rate on the Canadian dollar
equivalent balance of this debt is required to be recognized
as such exchange rate changes occur. Through September 30,
1999, exchange rate changes had caused a reduction in
expenses of approximately $9.1 million. The full-year 1999
effect recognized will be dependent on the exchange rate as
of December 31, 1999.
Distributions on TCP Securities Devon's 6.5% Trust
Convertible Preferred Securities (the "TCP Securities") are
convertible into common shares of Devon at the option of the
holder. Devon can redeem the TCP Securities for cash at
104.55% of face value in 1999, and thereafter at premiums
that decline ratably to 100% in 2006. However, if Devon
were to offer to redeem the TCP Securities, the holders
could decide instead to convert the TCP Securities into 4.9
million shares of Devon common stock. At the September 30,
1999 closing price of $41.4375 for Devon's common stock, the
TCP holders would most likely decide to convert their TCP
Securities into shares of Devon common stock and Devon would
have no cash requirement for redemptions. Assuming that no
redemptions or conversions occur in the fourth quarter of
the year, Devon will make $9.7 million of distributions in
1999.
Reduction of Carrying Value of Oil and Gas Properties
As of September 30, 1999, Devon does not expect to record a
reduction of its carrying value of oil and gas properties
under the full cost accounting ceiling test. However, the
PennzEnergy merger has resulted in additional full cost
pools which are required to be maintained separately for
each country. At this time, the allocation of the merger
purchase price among the individual full cost pools is
preliminary. Significant changes in the ultimate purchase
price or in the allocation of the purchase price among the
individual full cost pools, or reductions in oil and gas
prices, could cause a reduction to the carrying value of oil
and gas properties to be recorded later in 1999 or in
subsequent periods.
Income Taxes Devon expects its consolidated financial
income tax rate in 1999 to be between 35% and 45%. These
rates are the combined current and deferred tax rates.
There are certain items, both in the U.S. and Canada, that
will have a fixed impact on 1999's income tax expense
regardless of the level of pre-tax earnings that are
produced. These items include Section 29 tax credits in the
U.S., which reduce income taxes based on production levels
of certain properties and are not necessarily affected by
pre-tax financial earnings. The amount of Section 29 tax
credits expected to be used to offset financial income tax
expense in 1999 is approximately $4 million. Also, Devon's
Canadian subsidiary is subject to Canada's "large
corporation tax" of approximately $2 million which is based
on total capitalization levels, not pre-tax earnings. The
Canadian financial income tax in 1999 will also be increased
by approximately $1 million due to the financial
amortization of certain costs that are not deductible for
income tax purposes. Significant changes in estimated
production levels of oil, gas and NGLs, the prices of such
products, or any of the various expense items could
materially alter the effect of the aforementioned items on
1999's financial income tax rates.
Based on its current expectations of 1999 taxable
income, Devon anticipates its current portion of 1999 income
taxes will be $7 million to $9 million in the U.S. and $2.5
million to $3.5 million in Canada. However, unanticipated
revenue and/or expense fluctuations could easily make these
tax estimates inaccurate.
Capital Expenditures Devon's capital expenditures
budget is based on an expected range of future oil, natural
gas and NGLs prices as well as the expected costs of the
capital additions. Should Devon's price expectations for
its future production change significantly, some projects
may be accelerated or deferred and, consequently, may
increase or decrease total 1999 capital expenditures. In
addition, if the actual costs of the budgeted items vary
significantly from the anticipated amounts, actual capital
expenditures could vary materially from Devon's estimates.
Given these limitations, Devon expects its 1999 capital
expenditures for drilling and development efforts to total
between $285 million and $310 million. These amounts
include between $205 million and $220 million in the U.S.
and between $80 million and $90 million in Canada. Devon
expects to spend $50 million to $60 million in the U.S. and
$15 million to $20 million in Canada for drilling and
facilities costs related to reserves classified as proved as
of year-end 1998. Devon also expects to spend another $70
million to $75 million in the U.S. and $35 million to $40
million in Canada on new, higher risk/reward projects.
In addition to the above expenditures for drilling and
development, Devon is participating in the construction of
an extensive gas gathering system and processing project in
the Powder River Basin of Wyoming. Devon expects its 1999
expenditures on this project to total between $80 million
and $85 million.
The PennzEnergy merger was a stock-for-stock
transaction valued for accounting purposes at approximately
$3 billion including liabilities assumed. Of the $3 billion
estimated total purchase price, approximately $2.1 billion
has been allocated to oil and gas properties. Through
September 30, 1999, other acquisitions of proved properties
have totaled approximately $10 million in the U.S. and $20
million in Canada. It is not possible to predict if other
acquisitions will occur by the end of 1999.
Other Cash Uses Devon's management expects the policy
of paying a quarterly dividend on common stock to continue.
With the current $0.05 per share quarterly dividend rate,
1999 dividends are expected to approximate $12.5 million.
Devon assumed $150 million of preferred stock in the
PennzEnergy merger. Dividends on this preferred stock are
payable at the rate of 6.49% per year, and are payable
quarterly. Devon's 1999 dividends on this preferred stock,
which will consist of the last two quarterly payments of the
year, will total approximately $4.9 million.
Capital Resources and Liquidity Capital expenditures
for the remainder of 1999 are expected to be funded
primarily through a combination of working capital and
operating cash flow. Devon also has its long-term credit
facilities available for use if the need arises.
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SIGNATURES
Pursuant to the requirements of the Securities and
Exchange Act of 1934, the registrant has duly caused this
repot to be signed on its behalf by the undersigned hereto
duly authorized.
DEVON ENERGY CORPORATION
By: /s/ Danny J. Heatly
Vice President - Accounting
Date: September 30, 1999
