UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-30176
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1567067
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 North Broadway, Suite 1500
Oklahoma City, Oklahoma 73102-8260
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
Not applicable
(Former name, former address and former fiscal year,
if changed from last report)
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 X No .
The number of shares outstanding of Registrant's common
stock, par value $.10, as of July 31, 2000, was 87,015,045.
1 of 37 total pages
(Exhibit Index is found at page 36)
<PAGE>
DEVON ENERGY CORPORATION
Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, June 30, 2000 (Unaudited) 4
and December 31, 1999
Consolidated Statements of Operations (Unaudited) 5
for the Three Months and Six Months Ended June 30, 2000
and 1999
Consolidated Statements of Comprehensive Operations 6
(Unaudited) for the Three Months and Six Months Ended
June 30, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited) 7
for the Six Months Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 29
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
DEFINITIONS
As used in this document:
"Mcf" means thousand cubic feet
"MMcf" means million cubic feet
"Bcf" means billion cubic feet
"Bbl" means barrel
"MBbls" means thousand barrels
"MMBbls" means million barrels
"Boe" means equivalent barrels of oil
"Mboe" means thousand equivalent barrels of oil
"Oil" includes crude oil and condensate
"NGL" means natural gas liquids
<PAGE>
DEVON ENERGY CORPORATION
Part I. Financial Information
Item 1. Consolidated Financial Statements
June 30, 2000 and 1999
(Forming a part of Form 10-Q Quarterly Report
to the Securities and Exchange Commission)
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share Data)
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 298,971 167,167
Accounts receivable 296,605 209,405
Inventories 14,462 13,441
Deferred income taxes 4,886 4,886
Investments and other current assets 13,718 22,295
Total current assets 628,642 417,194
Property and equipment, at cost, based
on the full cost method of accounting
for oil and gas properties 5,189,889 4,974,810
Less accumulated depreciation,
depletion and amortization 2,010,128 1,818,890
3,179,761 3,155,920
Investment in Chevron Corporation
common stock, at fair value 601,527 614,382
Goodwill, net of amortization 299,481 322,800
Other assets 118,525 112,864
Total assets $4,827,936 4,623,160
Liabilities and stockholders' equity
Current liabilities:
Accounts payable:
Trade 95,420 75,625
Revenues and royalties due to others 57,000 58,130
Income taxes payable 57,401 11,287
Accrued interest payable 22,359 26,270
PennzEnergy Company merger related
expenses payable 23,780 32,504
Accrued expenses 16,585 23,628
Total current liabilities 272,545 227,444
Other liabilities 160,062 192,210
Debentures exchangeable into shares of
Chevron Corporation common stock 760,313 760,313
Other long-term debt 1,025,514 1,026,808
Deferred income taxes 431,882 390,865
Stockholders' equity:
Preferred stock of $1.00 par value
($100 liquidation value).
Authorized 4,500,000 shares;
issued 1,500,000 in 2000 and 1999 1,500 1,500
Common stock of $.10 par value.
Authorized 400,000,000 shares; issued
86,982,000 in 2000 and 86,085,000
in 1999 8,698 8,608
Additional paid-in capital 2,273,989 2,246,652
Accumulated deficit (26,408) (164,698)
Accumulated other comprehensive loss (80,159) (66,542)
Total stockholders' equity 2,177,620 2,025,520
Total liabilities and stockholders'
equity $4,827,936 4,623,160
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
<CAPTION>
Three Months Ended Six MonthsEnded
June 30, June 30,
2000 1999 2000 1999
(Unaudited)
Revenues
<S> <C> <C> <C> <C>
Oil sales $148,249 36,871 293,793 64,784
Gas sales 210,754 59,387 366,286 112,938
Natural gas liquids sales 30,433 5,835 65,703 9,764
Other 11,407 2,219 22,772 4,092
Total revenues 400,843 104,312 748,554 191,578
Costs and expenses
Lease operating expenses 70,794 27,100 136,687 54,520
Production taxes 11,370 3,446 21,790 6,415
Depreciation, depletion and
amortization of property
and equipment 113,151 35,763 221,703 69,321
Amortization of goodwill 10,361 -- 20,693 --
General and administrative
expenses 16,123 6,952 32,773 13,175
Interest expense 25,675 7,115 50,951 13,779
Deferred effect of changes in
foreign currency exchange
rate on subsidiary's long-term
debt -- (5,585) 2,408 (8,746)
Distributions on preferred securities
of subsidiary trust -- 2,430 -- 4,859
Total costs and expenses 247,474 77,221 487,005 153,323
Earnings before income tax expense 153,369 27,091 261,549 38,255
Income tax expense
Current 33,658 2,399 63,505 4,302
Deferred 28,977 8,483 46,223 11,764
Total income tax expense 62,635 10,882 109,728 16,066
Net earnings 90,734 16,209 151,821 22,189
Preferred stock dividends 2,434 -- 4,868 --
Net earnings applicable to common
shareholders $ 88,300 16,209 146,953 22,189
Net earnings per average common
share outstanding:
Basic $1.02 0.33 1.70 0.46
Diluted $1.00 0.33 1.67 0.46
Weighted average common shares
outstanding:
Basic 86,756 48,679 86,481 48,575
Diluted 88,381 54,086 87,827 53,773
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Operations
(In Thousands)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(Unaudited)
<S> <C> <C> <C> <C>
Net earnings $90,734 16,209 151,821 22,189
Other comprehensive earnings (loss),
net of tax:
Foreign currency translation
adjustments (5,420) 3,008 (5,775) 4,632
Unrealized gains (losses) on
marketable securities (32,989) -- (7,842) --
Comprehensive earnings $52,325 19,217 138,204 26,821
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<CAPTION>
Six Months Ended June 30,
2000 1999
(Unaudited)
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 151,821 22,189
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation, depletion and
amortization of property and
equipment 221,703 69,321
Amortization of goodwill 20,693 --
Amortization of premiums on
debentures (1,932) --
Deferred effect of changes in
foreign currency exchange
rate on subsidiary's long-term
debt 2,408 (8,746)
Loss (gain) on sale of assets 44 (33)
Deferred income taxes 46,223 11,764
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (88,384) 1,306
Inventories (1,008) 154
Investments and other current
assets 8,636 87
Other assets 673 (38)
Increase (decrease) in:
Accounts payable 19,684 (7,897)
Income taxes payable 46,970 --
Accrued expenses (20,513) (802)
Long-term other liabilities (25,476) (1,394)
Net cash provided by operating
activities 381,542 85,911
Cash flows from investing activities
Proceeds from sale of property and
equipment 42,664 4,906
Capital expenditures (303,827) (139,895)
Decrease in other assets 186 570
Net cash used in investing
activities (260,977) (134,419)
Cash flows from financing activities
Proceeds from borrowings on revolving
lines of credit 610,696 538,014
Principal payments on revolving lines
of credit (727,112) (501,072)
Principal payments on other long-term
debt (225,000) --
Proceeds from issuance of convertible
senior debentures, net of issuance
costs 346,125 --
Issuance of common stock, net of
issuance costs 27,426 10,152
Dividends paid on common stock (8,663) (4,862)
Dividends paid on preferred stock (4,868) --
(Decrease) increase in long-term other
liabilities (6,601) 1,049
Net cash provided by financing
activities 12,003 43,281
Effect of exchange rate changes on cash (764) 67
Net increase (decrease) in cash and cash
equivalents 131,804 (5,160)
Cash and cash equivalents at beginning
of period 167,167 19,154
Cash and cash equivalents at end of
period $298,971 13,994
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and notes
thereto have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been omitted. The accompanying consolidated
financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes
thereto included in Devon's 1999 Annual Report on Form 10-K.
In the opinion of Devon's management, all adjustments (all
of which are normal and recurring) have been made which are
necessary to fairly state the consolidated financial position of
Devon and its subsidiaries as of June 30, 2000, and the results
of their operations and their cash flows for the three-month and
six-month periods ended June 30, 2000 and 1999.
2. Pending Merger
On May 26, 2000, Devon and Santa Fe Snyder Corporation
("Santa Fe Snyder") announced their intention to merge the two
companies. In the merger, Santa Fe Snyder stockholders will
receive 0.22 shares of Devon common stock for each share of Santa
Fe Snyder common stock owned. The merger is subject to approval
by the stockholders of both companies at separate meetings on
August 29, 2000, as well as certain regulatory approvals. If
approved, the merger is expected to be consummated shortly after
the stockholder meetings. The merger will be accounted for under
the pooling-of-interests method of accounting for business
combinations as an acquisition of Santa Fe Snyder by Devon.
Therefore, Devon's operating results for all prior and future
periods will include the combined amounts of Devon and Santa Fe
Snyder as if the two companies had always been combined.
Santa Fe Snyder's year-end 1999 proved oil and gas reserves
totaled 386 million Boe, including 257 million Boe in the United
States and 129 million Boe in other countries. Santa Fe Snyder's
year-end 1999 undeveloped leasehold included 15.9 million net
acres, including 1.2 million net acres in the United States and
14.7 million net acres internationally.
On July 21, 2000, Devon and Santa Fe Snyder filed definitive
proxy materials concerning this pending merger. The proxy
materials contain further disclosures regarding the merger and
certain financial and operational data concerning both companies.
Pro Forma Information
Set forth below is certain unaudited pro forma financial
information for the three-month and six-month periods ended June
30, 2000 and 1999. This information has been prepared under the
pooling-of-interests method of accounting for business
combinations, and as such, includes the results of both companies
as if the two companies had always been combined. Santa Fe
Snyder's historical financial data has been restated to conform
to Devon's accounting policies. The pro forma information is
presented for illustrative purposes only. If the merger had
occurred in the past, the combined company's operating results
might have been different from those presented in the following
table. The pro forma information should not be relied upon as an
indication of the operating results that the combined company
would have achieved if the merger had occurred earlier. The pro
forma information also should not be used as an indication of the
future results that the combined company will achieve after the
merger.
The following should be considered in connection with the pro
forma financial information presented:
Devon merged with PennzEnergy Company ("PennzEnergy")
on August 17, 1999. This merger was accounted for as a
purchase. Accordingly, Devon's results for the second
quarter and first six months of 1999 do not include any
effects from the PennzEnergy merger.
Santa Fe Snyder was formed on May 5, 1999, as a result
of the merger of Santa Fe Energy Resources, Inc. and
Snyder Oil Corporation. This merger was accounted for
as a purchase by Santa Fe of Snyder. Accordingly, Santa
Fe Snyder's results for the second quarter and first
six months of 1999 include the results of the Snyder
merger for only two months.
Santa Fe Snyder's results for the second quarter of
1999 include $16.8 million of costs related to the
Snyder merger.
In the second quarter of 1999, Santa Fe Snyder reduced
the carrying value of its oil and gas properties by
$463.8 million ($301.5 million after-tax), due to the
full cost ceiling limitation.
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Information
Three Months Ended Six MonthsEnded
June 30, June 30,
2000 1999 2000 1999
(Unaudited)
Revenues
<S> <C> <C> <C> <C>
Oil sales $272,649 98,171 540,593 164,484
Gas sales 319,054 107,887 552,086 186,238
Natural gas liquids sales 33,533 7,935 70,903 13,564
Other 12,707 2,919 24,772 5,492
Total revenues 637,943 216,912 1,188,354 372,778
Costs and expenses
Lease operating expenses 114,494 59,600 223,887 115,820
Production taxes 21,470 6,246 39,990 12,215
Depreciation, depletion and
amortization of property and
equipment 172,251 60,063 337,503 119,821
Amortization of goodwill 10,361 -- 20,693 --
General and administrative expenses 24,023 15,452 48,873 26,775
Expenses related to prior merger -- 16,800 -- 16,800
Interest expense 40,875 17,415 80,951 30,579
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt -- (5,585) 2,408 (8,746)
Distributions on preferred securities
of subsidiary trust -- 2,430 -- 4,859
Reduction of carrying value of oil and
gas properties -- 463,800 -- 463,800
Total costs and expenses 383,474 636,221 754,305 781,923
Earnings (loss) before income tax expense
(benefit) and extraordinary item 254,469 (419,309) 434,049 (409,145)
Income tax expense (benefit)
Current 36,358 1,799 72,505 4,402
Deferred 64,777 (138,817) 103,023 (137,836)
Total income tax expense
(benefit) 101,135 (137,018) 175,528 (133,434)
Earnings (loss) before extraordinary
item 153,334 (282,291) 258,521 (275,711)
Extraordinary item -- (4,200) -- (4,200)
Net earnings (loss) 153,334 (286,491) 258,521 (279,911)
Preferred stock dividends 2,434 -- 4,868 --
Net earnings (loss) applicable to
common shareholders $150,900 (286,491) 253,653 (279,911)
Net earnings per average common
share outstanding:
Basic before extraordinary item $1.19 (3.50) 2.00 (3.64)
Basic after extraordinary item $1.19 (3.55) 2.00 (3.69)
Diluted before extraordinary item $1.17 (3.50) 1.97 (3.64)
Diluted after extraordinary item $1.17 (3.55) 1.97 (3.69)
Weighted average common shares
outstanding - basic 126,994 80,645 126,675 75,833
Weighted average common shares
outstanding - diluted 129,455 86,448 128,681 81,339
Production Data
Oil (MBbls) 11,179 6,522 22,094 12,877
Gas (MMcf) 106,201 61,852 209,970 113,264
NGL (MBbls) 1,762 775 3,696 1,523
Mboe 30,641 17,605 60,785 33,277
</TABLE>
<PAGE>
3.
Long-Term Debt
In June 2000, Devon privately sold zero-coupon convertible
senior debentures ("convertible debentures"). The convertible
debentures were sold at a price of $464.13 per debenture with a
yield to maturity of 3.875% per annum. Each debenture is
convertible into 5.7593 shares of Devon common stock. Devon may
call the bonds at any time after five years, and a shareholder
has the right to require Devon to repurchase the bonds after
five, 10 and 15 years, at the issue price plus accrued original
issue discount and interest. The proceeds to the company were
approximately $346.1 million, net of debt issuance costs of
approximately $6.6 million. Devon used the proceeds from the
sale of these convertible debentures to pay off its domestic
credit facility and money market note borrowings. The remaining
proceeds from the convertible debentures have been invested in
short-term money market investments.
In March 2000, Devon entered into a new unsecured, fixed-
rate money market note with The Chase Manhattan Bank. This note
is short-term and permits multiple borrowings. Devon currently
has the ability to borrow up to a $200 million limit. As of June
30, 2000, $25 million was outstanding under this note at an
average interest rate of 6.92%. The balance was paid off at its
maturity on July 7, 2000, with proceeds from the convertible
debentures. Because Devon had the intent and ability to
refinance the balance due with proceeds from its convertible
debentures, the $25 million outstanding under the short-term note
was classified as long-term debt on the June 30, 2000
consolidated balance sheet.
4. Earnings Per Share
The following tables reconcile the net earnings and common
shares outstanding used in the calculations of basic and diluted
earnings per share for the three-month and six-month periods
ended June 30, 2000 and the three-month period ended June 30,
1999. The diluted earnings per share calculation for the six
months ended June 30, 1999, produced results that are anti-
dilutive. This calculation increased net earnings by $3.0
million and increased the common shares outstanding 5.2 million
shares.
<TABLE>
<CAPTION>
Net Earnings Net
Applicable to Common Earnings
Common Shares Per
Shareholders Outstanding Share
(In Thousands)
Three Months Ended June 30, 2000:
<S> <C> <C> <C>
Basic earnings per share $88,300 86,756 $1.02
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $46,000) 71 192
Potential common shares issuable upon the exercise
of outstanding stock options - 1,433
Diluted earnings per share $88,371 88,381 $1.00
Three Months Ended June 30, 1999:
Basic earnings per share $16,209 48,679 $0.33
Dilutive effect of:
Potential common shares issuable upon conversion
of Trust Convertible Preferred securities (the
increase in net earnings is net of income tax expense
of $963,000) 1,506 4,902
Potential common shares issuable upon the exercise
of outstanding stock options - 505
Diluted earnings per share $17,715 54,086 $0.33
</TABLE>
Options to purchase approximately 1.1 million shares of
Devon's common stock, with exercise prices from $55.54 to $92.78
per share (with a weighted average price of $68.30 per share),
were excluded from the diluted earnings per share calculation for
second quarter 2000. The excluded options expire between July
24, 2000 and May 18, 2010.
Options to purchase approximately 0.7 million shares of
Devon's common stock, with exercise prices from $34.75 to $42.90
per share (with a weighted average price of $37.11 per share),
were excluded from the diluted earnings per share calculation for
second quarter 1999. The excluded options expire between January
31, 2000 and May 20, 2008.
<PAGE>
4. Earnings Per Share (Continued)
<TABLE>
<CAPTION>
Net Earnings Net
Applicable to Common Earnings
Common Shares Per
Shareholders Outstanding Share
(In Thousands)
Six Months Ended June 30, 2000:
<S> <C> <C> <C>
Basic earnings per share $146,953 86,481 $1.70
Dilutive effect of:
Potential common shares issuable upon conversion
of senior convertible debentures (the increase in net
earnings is net of income tax expense of $46,000) 71 96
Potential common shares issuable upon the exercise
of outstanding stock options - 1,250
Diluted earnings per share $147,024 87,827 $1.67
</TABLE>
Options to purchase approximately 1.2 million shares of Devon's
common stock, with exercise prices from $49.94 to $92.78 per
share (with a weighted average price of $66.39 per share), were
excluded from the diluted earnings per share calculation for the
six months ended June 30, 2000. The excluded options expire
between July 24, 2000 and May 18, 2010. All options were
excluded from the diluted earnings per share calculation for the
six months ended June 30, 1999.
<PAGE>
5. Segment Information
Devon manages its business by country. As such, Devon
identifies its segments based on geographic areas. Devon has
three segments: its operations in the U.S., its operations in
Canada and its international operations outside of North America.
Substantially all of these segments' operations involve oil and
gas producing activities. Following is certain financial
information regarding Devon's segments. The revenues reported
are all from external customers.
<TABLE>
<CAPTION>
Inter-
U.S. Canada national Total
(In Thousands)
As of June 30, 2000:
<S> <C> <C> <C> <C>
Current assets $ 538,123 63,016 27,503 628,642
Property and equipment, net of accumulated
depreciation, depletion and amortization 2,360,109 498,363 321,289 3,179,761
Investment in Chevron Corporation common stock 601,527 - - 601,527
Goodwill, net of amortization 270,060 - 29,421 299,481
Other assets 119,481 86 (1,042) 118,525
Total assets $3,889,300 561,465 377,171 4,827,936
Current liabilities 208,682 44,905 18,958 272,545
Debentures exchangeable into shares of Chevron
Corporation common stock 760,313 - - 760,313
Other long-term debt 863,274 162,240 - 1,025,514
Deferred income taxes 376,207 28,744 26,931 31,882
Other liabilities 145,480 2,354 12,228 160,062
Stockholders' equity 1,535,344 323,222 319,054 2,177,620
Total liabilities and stockholders'
equity $3,889,300 561,465 377,171 4,827,936
Three Months ended June 30, 2000:
Revenues
Oil sales $ 117,862 26,746 3,641 148,249
Gas sales 176,243 34,511 - 210,754
Natural gas liquids sales 26,270 4,163 - 30,433
Other 9,866 1,231 310 11,407
Total revenues 330,241 66,651 3,951 400,843
Costs and expenses
Lease operating expenses 56,796 12,921 1,077 70,794
Production taxes 11,073 297 - 11,370
Depreciation, depletion and amortization
of property and equipment 96,336 16,359 456 113,151
Amortization of goodwill 10,355 - 6 10,361
General and administrative expenses 11,925 2,541 1,657 16,123
Interest expense 23,107 2,568 - 25,675
Total costs and expenses 209,592 34,686 3,196 247,474
Earnings (loss) before income tax expense 120,649 31,965 755 153,369
Income tax expense
Current 33,379 279 - 33,658
Deferred 14,451 14,353 173 28,977
Total income tax expense 47,830 14,632 173 62,635
Net earnings 72,819 17,333 582 90,734
Preferred stock dividends 2,434 - - 2,434
Net earnings applicable to common shareholders $ 70,385 17,333 582 88,300
Capital expenditures $ 137,393 42,131 5,748 185,272
</TABLE>
<PAGE>
5. Segment Information (Continued)
<TABLE>
<CAPTION>
Inter-
U.S. Canada national Total
(In Thousands)
Three Months ended June 30, 1999:
Revenues
<S> <C> <C> <C> <C>
Oil sales $ 19,930 16,941 - 36,871
Gas sales 32,448 26,939 - 59,387
Natural gas liquids sales 3,685 2,150 - 5,835
Other 678 1,541 - 2,219
Total revenues 56,741 47,571 - 104,312
Costs and expenses
Lease operating expenses 14,343 12,757 - 27,100
Production taxes 3,165 281 - 3,446
Depreciation, depletion and amortization
of property and equipment 18,762 17,001 - 35,763
Amortization of goodwill - - - -
General and administrative expenses 4,044 2,908 - 6,952
Interest expense 846 6,269 - 7,115
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt - (5,585) - (5,585)
Distributions on preferred securities of
subsidiary trust 2,430 - - 2,430
Total costs and expenses 43,590 33,631 - 77,221
Earnings before income tax expense 13,151 13,940 - 27,091
Income tax expense
Current 1,890 509 - 2,399
Deferred 2,231 6,252 - 8,483
Total income tax expense 4,121 6,761 - 10,882
Net earnings $ 9,030 7,179 - 16,209
Capital expenditures $ 39,138 17,959 - 57,097
</TABLE>
<PAGE>
5. Segment Information (Continued)
<TABLE>
<CAPTION>
Inter-
U.S. Canada national Total
(In Thousands)
Six Months ended June 30, 2000:
Revenues
<S> <C> <C> <C> <C>
Oil sales $232,838 55,264 5,691 293,793
Gas sales 302,253 64,033 - 366,286
Natural gas liquids sales 57,171 8,532 - 65,703
Other 20,316 2,322 134 22,772
Total revenues 612,578 130,151 5,825 748,554
Costs and expenses
Lease operating expenses 109,500 25,225 1,962 136,687
Production taxes 21,266 524 - 21,790
Depreciation, depletion and
amortization of property
and equipment 188,712 32,353 638 221,703
Amortization of goodwill 20,681 - 12 20,693
General and administrative
expenses 25,052 4,795 2,926 32,773
Interest expense 45,955 4,996 - 50,951
Deferred effect of changes in
foreign currency exchange
rate on subsidiary's long-term
debt - 2,408 - 2,408
Total costs and expenses 411,166 70,301 5,538 487,005
Earnings before income tax expense 201,412 59,850 287 261,549
Income tax expense
Current 62,526 979 - 63,505
Deferred 18,747 27,263 213 46,223
Total income tax expense 81,273 28,242 213 109,728
Net earnings $120,139 31,608 74 151,821
Preferred stock dividends 4,868 - - 4,868
Net earnings applicable to common
shareholders $115,271 31,608 74 146,953
Capital expenditures $217,871 78,157 7,799 303,827
</TABLE>
<PAGE>
5. Segment Information (Continued)
<TABLE>
<CAPTION>
Inter-
U.S. Canada national Total
(In Thousands)
Six Months ended June 30, 1999:
Revenues
<S> <C> <C> <C> <C>
Oil sales $ 34,397 30,387 - 64,784
Gas sales 60,609 52,329 - 112,938
Natural gas liquids sales 6,203 3,561 - 9,764
Other 1,378 2,714 - 4,092
Total revenues 102,587 88,991 - 191,578
Costs and expenses
Lease operating expenses 29,266 25,254 - 54,520
Production taxes 5,757 658 - 6,415
Depreciation, depletion and
amortization of property
and equipment 36,771 32,550 - 69,321
Amortization of goodwill - - - -
General and administrative expenses 6,958 6,217 - 13,175
Interest expense 1,488 12,291 - 13,779
Deferred effect of changes in foreign
currency exchange rate on subsidiary's
long-term debt - (8,746) - (8,746)
Distributions on preferred securities
of subsidiary trust 4,859 - - 4,859
Total costs and expenses 85,099 68,224 - 153,323
Earnings before income tax expense 17,488 20,767 - 38,255
Income tax expense
Current 2,710 1,592 - 4,302
Deferred 2,326 9,438 - 11,764
Total income tax expense 5,036 11,030 - 16,066
Net earnings $ 12,452 9,737 - 22,189
Capital expenditures $ 81,604 58,291 - 139,895
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion addresses material changes in
results of operations for the three- month and six-month periods
ended June 30, 2000, compared to the three-month and six-month
periods ended June 30, 1999, and in financial condition since
December 31, 1999. The discussion should be read in conjunction
with Devon's 1999 annual report on Form 10-K.
Overview
Devon's revenues and net earnings for the quarter ended June
30, 2000, were the highest of any quarter in its history. Net
earnings for the second quarter of 2000 were $90.7 million, or
$1.02 per share. This compares to net earnings of $16.2 million,
or $0.33 per share for the second quarter of 1999. Net earnings
for the first half of 2000 were $151.8 million, or $1.70 per
share. These compare to net earnings for the first half of 1999
of $22.2 million, or $0.46 per share. The increase in second
quarter and first half earnings was due to sharply higher oil and
natural gas production coupled with higher overall oil and
natural gas prices. The increase in second quarter and first
half production resulted primarily from the August 17, 1999,
merger of PennzEnergy into Devon.
Results of Operations
Total revenues increased $296.5 million, or 284%, in the
second quarter of 2000, and $557.0 million, or 291%, in the first
half of 2000. This was the result of increases in the average
prices of oil, gas and NGL, along with higher production on a
combined Boe basis. Oil, gas and NGL revenues were up $287.3
million, or 281%, for the second quarter of 2000 compared to the
second quarter of 1999, and $538.3 million, or 287% for the first
half of 2000 compared to the first half of 1999. The three-month
and six-month period comparisons of production and price changes
are shown in the following tables. (Note: Unless otherwise
stated, all dollar amounts are expressed in U.S. dollars.)
The PennzEnergy merger was accounted for under the purchase
method of accounting for business combinations. Therefore,
Devon's second quarter 1999 and first half 1999 results discussed
in this report do not include any effect of PennzEnergy's
operations.
<TABLE>
<CAPTION>
Total
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 Change 2000 1999 Change
Production
<S> <C> <C> <C> <C> <C> <C>
Oil (MBbls) 5,821 2,506 +132% 11,516 5,071 +127%
Gas (MMcf) 70,212 36,280 +94% 139,026 71,402 +95%
NGL (MBbls) 1,613 515 +213% 3,389 991 +242%
<FN>
Oil, Gas and NGL (MBoe)1 19,136 9,067 +111% 38,076 17,962 +112%
Average Prices
Oil (Per Bbl) $25.47 14.71 +73% 25.51 12.78 +100%
Gas (Per Mcf) 3.00 1.64 +83% 2.63 1.58 +67%
NGL (Per Bbl) 18.87 11.33 +67% 19.39 9.85 +97%
<FN>
Oil, Gas and NGL (Per Boe)1 20.35 11.26 +81% 19.06 10.44 +83%
<CAPTION>
(In Thousands)
Revenues
Oil $148,249 36,871 +302% 293,793 64,784 +353%
Gas 210,754 59,387 +255% 366,286 112,938 +224%
NGL 30,433 5,835 +422% 65,703 9,764 +573%
Combined $389,436 102,093 +281% 725,782 187,486 +287%
<CAPTION>
Domestic
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 Change 2000 1999 Change
Production
Oil (MBbls) 4,302 1,231 +249% 8,497 2,530 +236%
Gas (MMcf) 53,804 16,933 +218% 106,240 33,294 +219%
NGL (MBbls) 1,445 351 +312% 3,047 665 +358%
<FN>
Oil, Gas and NGL (MBoe)1 14,714 4,404 +234% 29,251 8,744 +235%
Average Prices
Oil (Per Bbl) $27.40 16.19 +69% 27.40 13.60 +102%
Gas (Per Mcf) 3.28 1.92 +71% 2.85 1.82 +56%
NGL (Per Bbl) 18.18 10.50 +73% 18.76 9.33 +101%
<FN>
Oil, Gas and NGL (Per Boe)1 21.77 12.73 +71% 20.25 11.57 +75%
<CAPTION>
(In Thousands)
Revenues
Oil $117,862 19,930 +491% 232,838 34,397 +577%
Gas 176,243 32,448 +443% 302,253 60,609 +399%
NGL 26,270 3,685 +613% 57,171 6,203 +822%
Combined $320,375 56,063 +471% 592,262 101,209 +485%
<CAPTION>
Canada
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 Change 2000 1999 Change
Production
Oil (MBbls) 1,162 1,275 -9% 2,364 2,541 -7%
Gas (MMcf) 16,408 19,347 -15% 32,786 38,108 -14%
NGL (MBbls) 168 164 +2% 342 326 +5%
<FN>
Oil, Gas and NGL (MBoe)1 4,065 4,663 -13% 8,170 9,218 -11%
Average Prices
Oil (Per Bbl) $23.02 13.29 +73% 23.38 11.96 +95%
Gas (Per Mcf) 2.10 1.39 +51% 1.95 1.37 +42%
NGL (Per Bbl) 24.78 13.11 +89% 24.95 10.92 +128%
<FN>
Oil, Gas and NGL (Per Boe)1 16.09 9.87 +63% 15.65 9.36 +67%
<CAPTION>
(In Thousands)
Revenues
Oil $26,746 16,941 +58% 55,264 30,387 +82%
Gas 34,511 26,939 +28% 64,033 52,329 +22%
NGL 4,163 2,150 +94% 8,532 3,561 +140%
Combined $65,420 46,030 +42% 127,829 86,277 +48%
_______________
<FN>
1 Gas volumes are converted to Boe or MBoe at the rate of six
Mcf of gas per barrel of oil, based upon the approximate relative
energy content of natural gas and oil, which rate is not
necessarily indicative of the relationship of oil and gas prices.
The respective prices of oil, gas and NGL are affected by market
and other factors in addition to relative energy content.
</TABLE>
In addition to the volumes included in the prior tables for
domestic and Canadian production, in the second quarter and first
half of 2000 Devon also produced 265,000 barrels and 539,000
barrels of oil in Venezuela, respectively, and 92,000 barrels and
116,000 barrels of oil in Azerbaijan, respectively. The oil
revenues generated by this production were $3.6 million and $5.7
million for the second quarter and first half of 2000,
respectively. This production was added by the PennzEnergy
merger.
Oil Revenues. Oil revenues increased $111.4 million, or
302%, in the second quarter of 2000. Oil revenues increased $62.6
million due to a $10.76 per barrel increase in the average price
of oil in 2000. An increase in 2000's production of 3.3 million
barrels caused oil revenues to increase by $48.8 million. The
PennzEnergy merger added 3.5 million barrels of oil in the second
quarter of 2000. This increase was partially offset by a 0.2
million barrel decline in second quarter 2000 production from
Devon's other properties. This reduction was primarily the
result of natural decline.
Oil revenues increased $229.0 million, or 353%, in the first
half of 2000. An increase in production of 6.4 million barrels,
or 127%, caused oil revenues to increase by $82.3 million. Oil
revenues increased $146.7 million due to a $12.73 per barrel
increase in the average price of oil in 2000. The PennzEnergy
merger added 6.9 million barrels of oil in the first half of
2000. This increase was partially offset by a 0.5 million barrel
decline in first half 2000 production from Devon's other
properties. This reduction was primarily the result of natural
decline.
Gas Revenues. Gas revenues increased $151.4 million, or
255%, in the second quarter of 2000. Production rose 33.9 Bcf in
the 2000 period, which added $55.6 million of gas revenues. A
$1.36 per Mcf increase in the average gas price in the second
quarter of 2000 contributed $95.8 million of the increase in gas
revenues.
The largest contributor to the 2000 production increase was
production added by the PennzEnergy merger. The PennzEnergy
properties added 36.5 Bcf of production in the second quarter of
2000. Gas production from Devon's historical domestic properties
also increased 0.4 Bcf in the 2000 quarter.
These domestic increases were partially offset by a decline
in Canadian gas production of 2.9 Bcf, or 15% in the 2000
quarter. Approximately half of the decline, or 1.5 Bcf, was
related to production from certain Canadian properties that were
included in the 1999 quarter but were sold prior to the 2000
quarter. Additionally, 0.8 Bcf of the decline was the result of
increased Canadian government royalties which fluctuate based on
pricing. The remainder of the reduction was related to natural
decline and the shut-in of some wells partially offset by new
development during the 2000 quarter
Gas revenues increased $253.4 million, or 224%, in the first
half of 2000. Production rose 67.6 Bcf in the 2000 period, which
added $107.0 million of gas revenues. A $1.05 per Mcf increase in
the average gas price in the first half of 2000 contributed
$146.4 million of the increase in gas revenues.
Again, the largest contributor to the 2000 production
increase was production added by the PennzEnergy merger. The
PennzEnergy properties added 70.4 Bcf of production in the first
half of 2000. Gas production from Devon's historical domestic
properties also increased by 2.5 Bcf in the first half of 2000.
This was primarily the result of a 2.9 Bcf increase in production
from Devon's San Juan Basin and Powder River Basin coal seam gas
properties. These properties produced 15.4 Bcf in the first half
of 2000 compared to 12.5 Bcf in the first half of 1999. This
increase was primarily the result of mechanical improvements
implemented at the Northeast Blanco Unit coal seam gas property
and additional wells drilled in the Powder River Basin.
These domestic increases were partially offset by a decline
in Canadian gas production of 5.3 Bcf, or 14% in the first half
of 2000. Approximately half of the decline, or 2.5 Bcf, was
related to production from certain Canadian properties that were
included in the first half of 1999 but were sold prior to the
first half of 2000. Additionally, 1.2 Bcf of the decline was the
result of increased Canadian government royalties which fluctuate
based on pricing. The remainder of the reduction was primarily
the result of natural decline partially offset by new
development.
NGL Revenues. NGL revenues increased $24.6 million, or
422%, in the second quarter of 2000. An increase in the average
price of $7.54 per barrel, or 67%, caused NGL revenues to
increase $12.2 million in the 2000 quarter. A production
increase of 1.1 million barrels caused revenues to increase $12.4
million. Production from the PennzEnergy merger properties
during first quarter 2000 accounted for 1.1 million barrels.
NGL revenues increased $55.9 million, or 573%, in the first
half of 2000. An increase in the average price of $9.54 per
barrel, or 97%, caused NGL revenues to increase $32.3 million in
the first half of 2000. A production increase of 2.4 million
barrels caused revenues to increase $23.6 million. Production
from the PennzEnergy merger properties during first half of 2000
accounted for 2.3 million barrels.
Other Revenues. Other revenues increased $9.2 million, or
414%, in the 2000 quarter. The 2000 period included $4.6 million
of dividend income from the 7.1 million shares of Chevron
Corporation common stock acquired in the PennzEnergy merger.
This dividend income, along with increases in third-party gas
processing revenues and interest income were the primary reasons
for the substantial increase in other revenues. The increase in
interest income was primarily related to an increased amount of
cash on hand in the second quarter of 2000.
Other revenues increased $18.7 million, or 457%, in the
first half of 2000. The 2000 period included $9.2 million of
dividend income from the 7.1 million shares of Chevron
Corporation common stock acquired in the PennzEnergy merger.
This dividend income, along with increases in third-party gas
processing revenues and interest income were the primary reasons
for the substantial increase in other revenues.
Production and Operating Expenses. The components of
production and operating expenses are set forth in the following
tables.
<TABLE>
<CAPTION>
Total
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 Change 2000 1999 Change
Absolute (Thousands)
Recurring operations and maintenance
<S> <C> <C> <C> <C> <C> <C>
expenses $68,127 25,776 +164% 130,962 51,808 +153%
Well workover expenses 2,667 1,324 +101% 5,725 2,712 +111%
Production taxes 11,370 3,446 +230% 21,790 6,415 +240%
Total production and operating
expenses $82,164 30,546 +169% 158,477 60,935 +160%
Per Boe
Recurring operations and maintenance
expenses 3.56 2.84 +25% 3.44 2.88 +19%
Well workover expenses 0.14 0.15 -6% 0.15 0.15 0%
Production taxes 0.59 0.38 +56% 0.57 0.36 +60%
Total production and operating
expenses $4.29 3.37 +27% 4.16 3.39 +23%
<CAPTION>
Domestic
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 Change 2000 1999 Change
Absolute (Thousands)
Recurring operations and maintenance
expenses $54,246 13,490 +302% 104,026 27,298 +281%
Well workover expenses 2,550 853 +199% 5,474 1,968 +178%
Production taxes 11,073 3,165 +250% 21,266 5,757 +269%
Total production and operating
expenses $67,869 17,508 +288% 130,766 35,023 +273%
Per Boe
Recurring operations and maintenance
expenses 3.69 3.06 +20% 3.56 3.12 +14%
Well workover expenses 0.17 0.20 -11% 0.19 0.23 -17%
Production taxes 0.75 0.72 +5% 0.73 0.66 +10%
Total production and operating
expenses $4.61 3.98 +16% 4.47 4.01 +12%
<CAPTION>
Canada
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 Change 2000 1999 Change
Absolute (Thousands)
Recurring operations and maintenance
expenses $12,804 12,286 +4% 24,974 24,510 +2%
Well workover expenses 117 471 -75% 251 744 -66%
Production taxes 297 281 +6% 524 658 -20%
Total production and operating
expenses $13,218 13,038 +1% 25,749 25,912 -1%
Per Boe
Recurring operations and maintenance
expenses 3.15 2.64 +19% 3.06 2.66 +15%
Well workover expenses 0.03 0.10 -71% 0.03 0.08 -62%
Production taxes 0.07 0.06 +21% 0.06 0.07 -10%
Total production and operating
expenses $3.25 2.80 +16% 3.15 2.81 +12%
</TABLE>
In addition to the expenses included in the prior tables for
domestic and Canadian operations, the second quarter and first
half of 2000 also included $1.1 million and $2.0 million,
respectively, of recurring lease operating expenses on properties
outside of North America. These expenses were related to
properties added by the PennzEnergy merger.
Recurring operations and maintenance expenses increased
$42.3 million, or 164%, in the second quarter of 2000. Domestic
expenses increased $40.8 million in second quarter 2000 due to
$39.9 million of expenses from the PennzEnergy properties. Other
than the added costs from the PennzEnergy properties, recurring
expenses in Devon's other domestic properties increased $0.9
million in second quarter 2000. Recurring operations and
maintenance expenses were lower than normal in the second quarter
of 1999 as certain non-essential services in Devon's primary oil
producing properties were delayed due to the 1999 quarter's low
oil prices. However, with the subsequent increase in oil prices,
these delays did not continue in the second quarter of 2000.
Canada's recurring expenses were $0.5 million higher in the 2000
quarter due primarily to higher fuel costs related to increased
heavy oil production.
Production taxes increased $7.9 million, or 230%, in the
2000 quarter. The majority of Devon's production taxes are
assessed on its onshore domestic properties. In the U.S., most
of the production taxes are based on a fixed percentage of
revenues. Therefore, the 471% increase in domestic oil, gas and
NGL revenues in the second quarter of 2000 was the primary cause
of the production tax increase. Production taxes did not
increase proportionately to the increase in revenues. This was
primarily due to the addition in 1999 of gas revenues from
offshore Gulf of Mexico properties acquired in the PennzEnergy
merger. Revenues generated from such offshore properties do not
incur state production taxes.
Recurring operations and maintenance expenses increased
$79.2 million, or 153%, in the first half of 2000. Domestic
expenses increased $76.7 million in first half of 2000 due to
$74.7 million of expenses from the PennzEnergy properties. Other
than the added costs from the PennzEnergy properties, recurring
expenses in Devon's other domestic properties increased $2.0
million in first half of 2000. Recurring operations and
maintenance expenses were lower than normal in the first half of
1999 as certain non-essential services in Devon's primary oil
producing properties were delayed due to the 1999 period's low
oil prices. However, with the subsequent increase in oil prices,
these delays did not continue in the first half of 2000.
Canada's recurring expenses were $0.5 million higher in the first
half of 2000 due primarily to higher fuel costs related to
increased heavy oil production.
Production taxes increased $15.4 million, or 240%, in the
first half of 2000. The majority of Devon's production taxes are
assessed on its onshore domestic properties. In the U.S., most
of the production taxes are based on a fixed percentage of
revenues. Therefore, the 485% increase in domestic oil, gas and
NGL revenues in the first half of 2000 was the primary cause of
the production tax increase. Production taxes did not increase
proportionately to the increase in revenues. This was primarily
due to the addition in 1999 of gas revenues from offshore Gulf of
Mexico properties acquired in the PennzEnergy merger. Revenues
generated from such offshore properties do not incur state
production taxes.
Depreciation, Depletion and Amortization Expenses ("DD&A").
Oil and gas property related DD&A increased $72.8 million, or
209%, from $34.8 million in the second quarter of 1999 to $107.6
million in the second quarter of 2000. Oil and gas property
related DD&A expense increased $38.7 million due to the 111%
increase in combined oil, gas and NGL production in 2000.
Additionally, an increase in the combined U.S., Canadian and
international DD&A rate from $3.84 per Boe in the 1999 quarter to
$5.62 per Boe in the 2000 quarter caused oil and gas property
related DD&A to increase $34.1 million. The $1.78 increase in the
2000 rate over the 1999 rate was primarily the result of the
PennzEnergy merger.
Oil and gas property related DD&A increased $143.6 million,
or 213%, from $67.4 million in the first half of 1999 to $211.0
million in the first half of 2000. Oil and gas property related
DD&A expense increased $75.5 million due to the 112% increase in
combined oil, gas and NGL production in 2000. Additionally, an
increase in the combined U.S., Canadian and international DD&A
rate from $3.75 per Boe in the first half of 1999 to $5.54 per
Boe in the first half of 2000 caused oil and gas property related
DD&A to increase $68.1 million. The $1.79 increase in the 2000
rate over the 1999 rate was primarily the result of the
PennzEnergy merger.
Non-oil and gas property DD&A expense increased $4.6 million
to $5.5 million in the second quarter of 2000 compared to $0.9
million the second quarter of 1999. Non-oil and gas property
DD&A expense increased $8.8 million to $10.7 million in the first
half of 2000 compared to $1.9 million in the first half of 1999.
Depreciation of the non-oil and gas properties acquired in the
PennzEnergy merger and depreciation on Devon's newly constructed
gas pipeline and gathering system in Wyoming accounted for the
increase.
Amortization of Goodwill. In connection with the
PennzEnergy merger, Devon recorded $336.3 million of goodwill.
The goodwill was allocated $306.9 million to domestic properties
and $29.4 million to international properties. The goodwill is
being amortized using the units-of-production method.
Substantially all of the $10.4 million and $20.7 million of
amortization recognized in the second quarter and first half of
2000, respectively, was related to the domestic balance.
General and Administrative Expenses ("G&A"). Devon's net G&A
consists of three primary components. The largest of these
components is the gross amount of expenses incurred for personnel
costs, office expenses, professional fees and other G&A items.
The gross amount of these expenses is partially reduced by two
offsetting components. One is the amount of G&A capitalized
pursuant to the full-cost method of accounting. The other is the
amount of G&A reimbursed by working interest owners of properties
for which Devon serves as the operator. These reimbursements are
received during both the drilling and operational stages of a
property's life. The gross amount of G&A incurred, less the
amounts capitalized and reimbursed, is recorded as net G&A in the
consolidated statements of operations. The following table is a
summary of G&A expenses by component for the second quarter and
first half of 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C>
Gross G&A $31,904 13,866 64,573 26,983
Capitalized G&A (8,015) (3,066) (16,103) (5,613)
Reimbursed G&A (7,766) (3,848) (15,697) (8,195)
Net G&A $16,123 6,952 32,773 13,175
</TABLE>
Net G&A increased $9.2 million and $19.6 million, or 132%
and 149%, in the second quarter and first half of 2000 compared
to the same periods of 1999, respectively. Gross G&A increased
$18.0 million and $37.6 million, or 130% and 139%, in the second
quarter and first half of 2000 compared to the same periods of
1999, respectively. The increase in gross expenses in the second
quarter and first half of 2000 was primarily related to
additional costs incurred as a result of the PennzEnergy merger.
Net G&A was reduced $4.9 million and $10.5 million in the
second quarter and first half of 2000, respectively, due to an
increase in the amount capitalized as part of oil and gas
properties. G&A was also reduced $3.9 million and $7.5 million
in the second quarter and first half of 2000, respectively, by an
increase in the amount of reimbursements on operated properties
in the 2000 quarter. The increase in capitalized and reimbursed
G&A was primarily related to the PennzEnergy merger.
Interest Expense. Interest expense increased $18.6 million,
or 261%, in the second quarter of 2000. An increase in the
average debt balance outstanding from $454.1 million in the
second quarter of 1999 to $1.6 billion in the second quarter of
2000 caused interest expense to increase by $18.4 million. The
increase in the average debt balance in the second quarter of
2000 was attributable to the long-term debt assumed in the
PennzEnergy merger. An increase in the annualized interest rate
on outstanding debt from 6.0% in the second quarter of 1999 to
6.4% in the second quarter of 2000 caused interest expense to
increase by $0.5 million. The remaining decrease of $0.3 million
was caused by other factors as shown in the following table.
Interest expense increased $37.2 million, or 270%, in the
first half of 2000. An increase in the average debt balance
outstanding from $426.3 million in the first half of 1999 to $1.6
billion in the first half of 2000 caused interest expense to
increase by $37.6 million. The increase in the average debt
balance in the first half of 2000 was attributable to the long-
term debt assumed in the PennzEnergy merger. An increase in the
annualized interest rate on outstanding debt from 6.2% in the
first half of 1999 to 6.3% in the first half of 2000 caused
interest expense to increase by $0.2 million. The remaining
decrease of $0.6 million was caused by other factors as shown in
the following table.
The following schedule includes the components of interest
expense for the second quarter and first half of 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(In Thousands)
<S> <C> <C> <C> <C>
Interest based on debt outstanding $25,723 6,765 50,998 13,185
Facility and agency fees 332 152 622 298
Amortization of capitalized loan costs 147 96 294 165
Capitalized interest (546) -- (1,042) --
Other 19 102 79 131
Total interest expense $25,675 7,115 50,951 13,779
</TABLE>
Deferred Effect of Changes in Foreign Currency Exchange Rate
on Subsidiary's Long-term Debt. Until mid-January 2000, Devon's
Canadian subsidiary Northstar Energy Corporation had certain
fixed-rate senior notes which were denominated in U.S. dollars.
Changes in the exchange rate between the U.S. dollar and the
Canadian dollar from the dates the notes were issued to the dates
of repayment increased or decreased the expected amount of
Canadian dollars eventually required to repay the notes. Such
changes in the Canadian dollar equivalent balance of the debt
were required to be included in determining net earnings for the
period in which the exchange rate changed. In mid-January 2000,
the U.S. dollar denominated notes were retired prior to maturity
with cash on hand and borrowings under Devon's long-term credit
facilities. The Canadian-to-U.S. dollar exchange rate dropped
slightly in January prior to the debt retirement. As a result,
$2.4 million of expense was recognized in the first quarter of
2000.
Distributions on Preferred Securities of Subsidiary Trust.
During the second quarter and first half of 1999, Devon had
$149.5 million of 6.5% Trust Convertible Preferred Securities
outstanding. Distributions on these securities accrued and were
paid at the rate of 1.625% per quarter. On November 30, 1999,
Devon exercised its right to redeem such securities, and
substantially all of the securities were exchanged for shares of
Devon common stock. As a result, no distributions were recorded
in the 2000 periods.
Income Taxes. During interim periods, income tax expense is
based on the estimated effective income tax rate that is expected
for the entire fiscal year. The effective tax rates estimated
for the three-month and six-month periods ended June 30, 2000 and
1999 were not materially different. The estimated effective tax
rate in the second quarter of 2000 was 41% compared to 40% in the
second quarter of 1999. The estimated effective tax rate was 42%
in both the first half of 2000 and the first half of 1999.
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), requires that the tax
benefit of available tax carryforwards be recorded as an asset to
the extent that management assesses the utilization of such
carryforwards to be "more likely than not". When the future
utilization of some portion of the carryforwards is determined
not to be "more likely than not", SFAS 109 requires that a
valuation allowance be provided to reduce the recorded tax
benefits from such assets.
Included as deferred tax assets at June 30, 2000, were
approximately $226 million of net operating loss carryforwards.
The carryforwards include U.S. federal net operating loss
carryforwards, the majority of which do not begin to expire until
2008, U.S. state net operating loss carryforwards which expire
primarily between 2000 and 2013, Canadian carryforwards which
expire primarily between 2000 and 2005 and minimum tax credits
which have no expiration. Devon expects the tax benefits from
the net operating loss carryforwards to be utilized between 2000
and 2006. Such expectation is based upon current estimates of
taxable income during this period, considering limitations on the
annual utilization of these benefits as set forth by federal tax
regulations. Significant changes in such estimates caused by
variables such as future oil and gas prices or capital
expenditures could alter the timing of the eventual utilization
of such carryforwards. There can be no assurance that Devon will
generate any specific level of continuing taxable earnings.
However, Devon's management believes that future taxable income
will more likely than not be sufficient to utilize substantially
all its tax carryforwards prior to their expirations.
Capital Expenditures, Capital Resources and Liquidity
The following discussion of capital expenditures, capital
resources and liquidity should be read in conjunction with the
consolidated statements of cash flows included in Part I, Item 1
included elsewhere herein.
Capital Expenditures. Approximately $303.8 million was
spent in the first six months of 2000 for capital expenditures.
This total includes $257.6 million for the acquisition, drilling
or development of oil and gas properties, $24.5 million related
to the construction of an extensive gas gathering system, related
CO2 removal facilities and gas processing project all located in
the Powder River Basin of Wyoming, and $21.7 million for other
fixed assets.
Approximately $139.9 million was spent for capital
expenditures in the first half of 1999. This total includes
$101.7 million for the acquisition, drilling or development of
oil and gas properties, $36.9 million related to the construction
of the new gas pipeline and gathering system in Wyoming, and $1.3
million for other fixed assets.
Capital Resources and Liquidity. Net cash provided by
operating activities ("operating cash flow") continued to be the
primary source of capital and liquidity in the first half of
2000. Operating cash flow in the first half of 2000 was $381.5
million, compared to $85.9 million in the first half of 1999.
The increase in operating cash flow in the first half of 2000 was
primarily caused by the rise in revenues, partially offset by
increased expenses, as discussed earlier in this section.
Devon's cash flow for the first six months of 2000 was more
than adequate to fund its capital expenditures. Excess available
cash flow, along with cash on hand at the beginning of the year
and a portion of the proceeds from the late-June issue of
convertible debentures, were used to retire long-term debt. At
June 30, 2000, Devon's availability under its $750 million long-
term credit facilities totaled $563 million. Devon also had
approximately $186 million of unused proceeds from its
convertible debenture issue temporarily invested in cash
equivalents at June 30, 2000.
Impact of Recently Issued Accounting Standards Not Yet
Adopted. In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133") and in June 2000 issued SFAS 138, which amended
certain provisions of SFAS 133. SFAS 133, as amended,
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires the
recognition of all derivatives as either assets or liabilities in
the statement of financial position and measurement of those
instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The
accounting for changes in the fair value of a derivative (that is
gains and losses) depends on the intended use of the derivative
and whether it qualifies as a hedge. Devon plans to adopt the
provisions of SFAS 133, as amended, in the first quarter of the
year ending December 31, 2001, and is currently evaluating the
effects of this pronouncement.
Pending Merger. On May 26, 2000, Devon and Santa Fe Snyder
announced their intention to merge the two companies. In the
merger, Santa Fe Snyder stockholders will receive 0.22 shares of
Devon common stock for each share of Santa Fe Snyder common stock
owned. The merger is subject to approval by the stockholders of
both companies at separate meetings on August 29, 2000, as well
as certain regulatory approvals. If approved, the merger is
expected to be consummated shortly after the stockholder
meetings. The merger will be accounted for under the pooling-of-
interests method of accounting for business combinations as an
acquisition of Santa Fe Snyder by Devon. Therefore, Devon's
operating results for all prior and future periods will include
the combined amounts of Devon and Santa Fe Snyder as if the
companies had always been combined.
Santa Fe Snyder's year-end 1999 proved oil and gas reserves
totaled 386 million Boe, including 257 million Boe in the United
States and 129 million Boe in other countries. Santa Fe Snyder's
year-end 1999 undeveloped leasehold included 15.9 million net
acres, including 1.2 million net acres in the United States and
14.7 million net acres internationally.
On July 21, 2000, Devon and Santa Fe Snyder filed definitive
proxy materials concerning this pending merger. The proxy
materials contain further disclosures regarding the merger and
certain financial and operational data concerning both companies.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The information included in "Quantitative and Qualitative
Disclosures About Market Risk" in Item 7A of Devon's 1999 Annual
Report on Form 10-K is incorporated herein by reference. Such
information includes a description of Devon's potential exposure
to market risks, including commodity price risk, interest rate
risk and foreign currency risk. As of June 30, 2000, there have
been no material changes in Devon's market risk exposure from
that disclosed in the 1999 Form 10-K.
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of shareholders was held in
Oklahoma City, Oklahoma at 10:00 a.m. local time, on Thursday May
18, 2000.
(b) Proxies for the meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934, as
amended. There was no solicitation in opposition to the nominees
for election as directors as listed in the proxy statement and
all nominees were elected.
(c) Out of a total of 86,490,732 shares of the Company's common
stock outstanding and entitled to vote, 76,755,006 shares were
present at the meeting in person or by proxy, representing
approximately 89 percent of the total outstanding. The only
matter voted upon at the meeting was the election of four
directors to serve on the Company's board of directors until the
2003 annual meeting of shareholders. The vote tabulation with
respect to each nominee was as follows:
<TABLE>
<CAPTION>
Authority
Nominee For Withheld
<S> <C> <C>
John A. Hagg 76,592,852 167,105
Henry R. Hamman 76,578,542 181,415
J. Larry Nichols 76,196,810 181,415
Robert B. Weaver 76,169,768 181,415
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are
as follows:
Exhibit
No.
2.1 Amendment No. One to Agreement and Plan of Merger by and
among Registrant, Devon Merger Co. and Santa Fe Snyder
Corporation dated as of May 25, 2000 (incorporated by reference
to Exhibit 2.1 to Registrant's Form 8-K filed July 12, 2000).
2.2 Agreement and Plan of Merger, dated as of May 25, 2000, by
and among Registrant, Devon Merger Co. and Santa Fe Snyder
Corporation (incorporated by reference to Annex A to Registrant's
definitive proxy statement for a special meeting of shareholders
filed July 21, 2000).
2.3 Amended and Restated Agreement and Plan of Merger among
Registrant, Devon Energy Corporation (Oklahoma) (formerly Devon
Energy Corporation, an Oklahoma corporation), Devon Oklahoma
Corporation and PennzEnergy Company dated as of May 19, 1999
(incorporated by reference to Exhibit 2.1 to Registrant's Form S-
4, File No. 333-82903).
2.4 Amended and Restated Combination Agreement between
Registrant and Northstar Energy Corporation dated as of June 29,
1998 (incorporated by reference to Annex B to Registrant's
definitive proxy statement for a special meeting of shareholders,
filed November 6, 1998).
3.1 Registrant's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3 to Registrant's Form 8-K
filed August 18, 1999).
3.2 Registrant's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to Registrant's definitive proxy
statement for a special meeting of shareholders filed July 21,
2000).
4.1 Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Registrant's Form 8-K filed August 18, 1999).
4.2 Registration Rights Agreement dated as of June 22, 2000 by
and among Registrant and Morgan Stanley & Co. Incorporated and
Salomon Smith Barney Inc. (incorporated by reference to Exhibit
4.1 to Registrant's Form 8-K filed July 12, 2000).
4.3 Amendment to Rights Agreement dated as of May 25, 2000
between Registrant and Fleet National Bank (f/k/a BankBoston,
N.A.) (incorporated by reference to Exhibit 4.2 to Registrant's
definitive proxy statement for a special meeting of shareholders
filed July 21, 2000).
4.4 Rights Agreement dated as of August 17, 1999 between
Registrant and BankBoston, N.A. (incorporated by reference to
Exhibit 4.2 to Registrant's Form 8-K filed August 18, 1999).
4.5 Certificate of Designations of Series A Junior Participating
Preferred Stock of Registrant (incorporated by reference to
Exhibit 4.3 to Registrant's Form 8-K filed August 18, 1999).
4.6 Certificate of Designations of the 6.49% Cumulative
Preferred Stock, Series A of Registrant (incorporated by
reference to Exhibit 4.4 to Registrant's Form 8-K filed August
18, 1999).
4.7 Description of Capital Stock of Registrant (incorporated by
reference to Exhibit 4.9 to Registrant's Form 8-K filed August
18, 1999).
4.8 Indenture dated as of June 27, 2000 between Registrant and
The Bank of New York, setting forth the terms of the Zero Coupon
Convertible Senior Debentures due 2020 (incorporated by reference
to Exhibit 4.2 to Registrant's Form 8-K filed July 12, 2000).
4.9 Indenture dated as of December 15, 1992 between Registrant
(as successor by merger to PennzEnergy, as successor by merger to
Pennzoil Company) and Texas Commerce Bank National Association,
Trustee (incorporated by reference to Exhibit 4(o) to Pennzoil
Company's Form 10-K filed March 10, 1993 (SEC File No. 1-5591)).
4.10 Third Supplemental Indenture dated as of August 3, 1998 to
Indenture dated as of December 15, 1992 among Registrant (as
successor by merger to PennzEnergy) and Chase Bank of Texas,
National Association, setting forth the terms of the 4.90%
Exchangeable Senior Debentures due August 15, 2008 (incorporated
by reference to Exhibit 4(g) to PennzEnergy Company's 1998 Form
10-K filed March 23, 1999.)
4.11 Fourth Supplemental Indenture dated as of August 3, 1998 to
Indenture dated as of December 15, 1992 among Registrant (as
successor by merger to PennzEnergy) and Chase Bank of Texas,
National Association, setting forth the terms of the 4.95%
Exchangeable Senior Debentures due August 15, 2008 (incorporated
by reference to Exhibit 4(h) to PennzEnergy Company's 1998 Form
10-K filed March 23, 1999.)
4.12 Fifth Supplemental Indenture dated as of August 17, 1999 to
Indenture dated as of December 15, 1992 among Registrant (as
successor by merger to PennzEnergy) and Chase Bank of Texas,
National Association (incorporated by reference to Exhibit 4.7 to
Registrant's Form 8-K filed August 18, 1999).
4.13 Indenture dated as of February 15, 1986 among Registrant (as
successor by merger to PennzEnergy) and Chase Bank of Texas,
National Association (incorporated by reference to Exhibit 4(a)
to Pennzoil Company's Form 10-Q filed July 31, 1986 (SEC File No.
1-5591).
4.14 First Supplemental Indenture dated as of August 17, 1999 to
Indenture dated as of February 15, 1986 among Registrant (as
successor by merger to PennzEnergy) and Chase Bank of Texas,
National Association (incorporated by reference to Exhibit 4.8 to
Registrant's Form 8-K filed August 18, 1999).
4.15 Amending Support Agreement dated as of August 17, 1999
between Registrant and Northstar Energy Corporation (incorporated
by reference to Exhibit 4.5 to Registrant's Form 8-K filed August
18, 1999).
4.16 Support Agreement, dated December 10, 1998, between the
Registrant and Northstar Energy Corporation
(incorporated by reference to Exhibit 4.1 to Devon
Energy Corporation (Oklahoma)'s (predecessor of
Registrant) Form 8-K dated as of December 11,
1998).
4.17 Exchangeable Share Provisions (incorporated by reference to
Exhibit 4.2 to Devon Energy Corporation (Oklahoma)'s (predecessor
of Registrant) Form 8-K filed December 23, 1998).
4.18 Amended Exchangeable Share Provisions dated as of August 17,
1999 (incorporated by reference to Exhibit 4.17 to Registrant's
Form 10-K for the fiscal year ended December 31, 1999).
27 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K - Reports on Form 8-K filed since April
1, 2000, are described below:
<TABLE>
<CAPTION>
Filing Date Contents
<S> <C>
May 26, 2000 Announcement on the planned merger with
Santa Fe Snyder
June 5, 2000 Announcement of sale of the SACROC unit
June 21, 2000 Preliminary unaudited pro forma financial
data concerning the Santa Fe Snyder merger
June 22, 2000 Announcement of the private placement of
zero-coupon convertible debentures
July 12, 2000 Amendment to the Santa Fe Snyder merger
agreement; indenture and registration rights
agreement regarding the zero-coupon con-
vertible debentures; and certain consents
July 27, 2000 Press release concerning the second quarter
2000 earnings announcement (a Form 8-K/A was
filed August 1, 2000, revising certain data
in the July 27, 2000, Form 8-K)
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DEVON ENERGY CORPORATION
Date: August 11, 2000 /s/Danny J. Heatly
Danny J. Heatly
Vice President - Accounting
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
2.1 Amendment No. One to Agreement and Plan of Merger by and
among Registrant, Devon Merger Co. and Santa Fe Snyder
Corporation dated as of May 25, 2000 *
2.2 Agreement and Plan of Merger, dated as of May 25, 2000, by
and among Registrant, Devon Merger Co. and Santa Fe Snyder
Corporation *
2.3 Amended and Restated Agreement and Plan of Merger among
Registrant, Devon Energy Corporation (Oklahoma) (formerly
Devon Energy Corporation, an Oklahoma corporation), Devon
Oklahoma Corporation and PennzEnergy Company dated as of
May 19, 1999 *
2.4 Amended and Restated Combination Agreement between the
Registrant and Northstar Energy Corporation dated as of
June 29, 1998 *
3.1 Registrant's Restated Certificate of Incorporation *
3.2 Registrant's Amended and Restated Bylaws *
4.1 Form of Common Stock Certificate *
4.2 Registration Rights Agreement dated as of June 22,
2000 by and among Registrant and Morgan Stanley &
Co. Incorporated and Salomon Smith Barney Inc. *
4.3 Amendment to Rights Agreement dated as of May 25,
2000 between Registrant and Fleet National Bank
(f/k/a BankBoston, N.A.) *
4.4 Rights Agreement dated as of August 17, 1999
between Registrant and BankBoston, N.A. *
4.5 Certificate of Designations of Series A Junior
Participating Preferred Stock of Registrant. *
4.6 Certificate of Designations of the 6.49%
Cumulative Preferred Stock, Series A of Registrant *
4.7 Description of Capital Stock of Registrant *
4.8 Indenture dated as of June 27, 2000 between
Registrant and The Bank of New York, setting forth
the terms of the Zero Coupon Convertible Senior
Debentures due 2020 *
4.9 Indenture dated as of December 15, 1992 between
Registrant (as successor by merger to PennzEnergy,
successor by merger to Pennzoil Company) and Texas
Commerce Bank National Association, Trustee *
4.10 Third Supplemental Indenture dated as of August 3,
1998 to Indenture dated as of December 15, 1992
among Registrant (as successor by merger to
PennzEnergy) and Chase Bank of Texas, National
Association, setting forth the terms of the 4.90%
Exchangeable Senior Debentures due August 15, 2008 *
4.11 Fourth Supplemental Indenture dated as of August
3, 1998 to Indenture dated as of December 15, 1992
among Registrant (as successor by merger to
PennzEnergy) and Chase Bank of Texas, National
Association, setting forth the terms of the 4.95%
Exchangeable Senior Debentures due August 15, 2008 *
4.12 Fifth Supplemental Indenture dated as of August
17, 1999 to Indenture dated as of December 15,
1992 among Registrant (as successor by merger to
PennzEnergy) and Chase Bank of Texas, National
Association *
4.13 Indenture dated as of February 15, 1986 among
Registrant (as successor by merger to PennzEnergy)
and Chase Bank of Texas, National Association *
4.14 First Supplemental Indenture dated as of August
17, 1999 to Indenture dated as of February 15,
1986 among Registrant (as successor by merger to
PennzEnergy) and Chase Bank of Texas, National
Association *
4.15 Amending Support Agreement dated as of August 17,
1999 between Registrant and Northstar Energy
Corporation *
4.16 Support Agreement, dated December 10, 1998,
between the Registrant and Northstar Energy
Corporation *
4.17 Exchangeable Share Provisions *
4.18 Amended Exchangeable Share Provisions dated as of
August 17, 1999 . *
27 Financial Data Schedule (filed electronically only)
_________________________________
* Incorporated by reference.
