UNITED STATES
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 reported): December 12, 2000
DEVON ENERGY CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 000-30176 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>
Item 5. Other Events
Definitions
The following discussion includes references to various
abbreviations relating to volumetric production terms and
other defined terms. These definitions are as follows:
"Bcf" means billion cubic feet.
"Boe" means equivalent barrels of oil, calculated
by converting six Mcf of natural gas to one barrel of oil.
"MBbls" means thousand barrels.
"MBoe" means thousand Boe.
"MMBbls" means million barrels.
"Mcf" means thousand cubic feet.
"MMcf" means million cubic feet.
"NGL" means natural gas liquids.
"Oil" includes crude oil and condensate.
"Gulf Division" means the division of the company
operating oil and gas properties located primarily in the
onshore South Texas and South Louisiana areas and offshore
in the Gulf of Mexico.
"Rocky Mountain Division" means the division of
the company operating oil and gas properties located in the
Rocky Mountains area of the United States stretching from
the Canadian border south into northern New Mexico.
"Permian/Mid-Continent Division" means the
division of the company operating all properties located in
the United States other than those operated by the Gulf
Division and Rocky Mountain Division.
"Canada" means all of the company's oil and gas
properties that lie in Canada.
"International" means all of the company's oil and
gas properties that lie outside the United States and
Canada.
Forward-Looking Estimates
The forward-looking statements provided in this
discussion are based on management's examination of
historical operating trends, the information which will be
used to prepare the December 31, 2000 reserve reports of
independent petroleum engineers and other data in Devon
Energy Corporation's ("Devon's") possession or available
from third parties. Devon cautions that its future oil,
natural gas and NGL 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. Also, the financial results
of Devon's foreign 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. Market
conditions for these products are influenced by regional and
world-wide economic growth, weather and other substantially
variable factors. These factors are beyond Devon's control
and are difficult to predict. In addition to volatility in
general, Devon's oil, gas and NGL prices may vary
considerably due to differences between regional markets,
transportation availability and demand for different grades
of oil, gas and NGLs. Over 97% of Devon's revenues are
attributable to sales of these three commodities.
Consequently, 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. Also, Devon's
International production of oil, natural gas and NGLs is
governed by payout agreements with the governments of the
countries in which Devon operates. If the payout under
these agreements is attained earlier than projected, Devon's
net production and proved reserves in such areas could be reduced.
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, including, but not limited to,
hurricanes, 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 during 2001 will be
substantially similar to those of 2000, unless otherwise
noted. Given the general limitations expressed herein,
Devon's forward-looking statements for 2001 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 $0.6695 U.S. dollar to
$1.00 Canadian dollar. The actual 2001 exchange rate may
vary materially from this estimated rate. Such variations
could have a material effect on the following Canadian estimates.
The forward-looking data provided below does not
include the financial and operating effects of potential
property acquisitions or divestitures during the year 2001.
The timing and ultimate results of such acquisition and
divestiture activity is difficult to predict.
Year-End 2000 Proved Oil and Gas Reserves
Devon's preliminary estimate of its December 31, 2000
proved oil and gas reserves is that such reserves will total
between 1.0 billion and 1.1 billion barrels of oil
equivalent. These preliminary estimates are subject to
completion of Devon's reserve estimation process, including
the effects of actual year-end 2000 prices. Devon will
announce its final reserve estimates in January 2001.
Year 2001 Potential Operating Items
Oil, Gas and NGL Production Set forth in the following
paragraphs are individual estimates of Devon's oil, gas and
NGL production in 2001. On a combined basis, Devon
estimates its 2001 oil, gas and NGL production will total
between 120.1 million and 128.3 million barrels of oil
equivalent. Devon's 2001 estimates of 2001 production do
not include certain oil, gas and NGL production from various
properties that were sold during 2000. These sold
properties produced approximately 2.6 million barrels of oil
equivalent in 2000 that will not be produced in 2001.
Oil Production Devon expects its oil production in
2001 to total between 40.3 million barrels and 42.8 million
barrels. The expected ranges of production by division are
as follows:
Expected Range
of Production
(MMBbls)
---------------
Permian/Mid-Continent 12.2 to 12.9
Gulf 10.1 to 10.8
Rocky Mountain 3.0 to 3.2
Canadian 5.3 to 5.6
International 9.7 to 10.3
Oil Prices - Fixed Devon has fixed the price it will
receive in 2001 on a portion of its oil production through
certain forward oil sales. Devon has executed forward oil
sales attributable to the Permian/Mid-Continent Division for
3.7 million barrels at an average price of $16.24 per
barrel, net of estimated transportation costs of $0.60 per
barrel. These fixed-price volumes represent 9% of Devon's
expected consolidated oil production in 2001. Santa Fe
Snyder Corporation, with whom Devon merged in August 2000,
entered into these forward oil sales agreements in late 1999
and early 2000, and used the proceeds to acquire interests
in producing properties in the Gulf of Mexico.
Oil Prices - Floating For the oil production for which
prices have not been fixed, Devon's 2001 average prices for
each of its divisions are expected to differ from the New
York Mercantile Exchange price ("NYMEX") as set forth in the
following table:
Expected Range of Oil Prices
Greater Than (Less Than) NYMEX
------------------------------
Permian/Mid-Continent ($3.10) to ($2.10)
Gulf ($3.50) to ($2.50)
Rocky Mountain ($2.50) to ($1.50)
Canadian ($5.00) to ($4.00)
International ($3.65) to ($2.65)
The above range of expected Canadian differentials
compared to NYMEX includes an estimated $0.11 per barrel
decrease resulting from foreign currency hedges. These
hedges, in which Devon will sell $10 million in 2001 at an
average Canadian-to-U.S. exchange rate of $0.710 and buy the
same amount of dollars at the floating exchange rate, offset
a portion of the exposure to currency fluctuations on those
Canadian oil sales that are based on U.S. prices. The $0.11
per barrel decrease is based on the assumption that the
average Canadian-to-U.S. conversion rate for the year 2001
is $0.6695.
Gas Production Devon expects its 2001 gas production
to total between 439 Bcf and 469 Bcf. The expected ranges of
production by division are as follows:
Expected Range of
Production (Bcf)
-----------------
Permian/Mid-Continent 114 to 121
Gulf 144 to 153
Rocky Mountain 115 to 123
Canadian 58 to 62
International 8 to 10
Gas Prices - Fixed Through various fixed price
contracts or hedging instruments, Devon has fixed the price
it will receive in 2001 on a portion of its natural gas
production. The Rocky Mountain Division has fixed volumes
of 7.3 Bcf at $1.96 per Mcf. Canada has fixed volumes of
21.4 Bcf at $1.52 per Mcf. These U.S. and Canadian volumes
with fixed prices represent 6% of Devon's expected
consolidated gas production in 2001.
Additionally, Devon has entered into a basis swap on
7.3 Bcf of 2001 gas production. Under the terms of the
basis swap, the counterparty pays Devon the average NYMEX
price for the last three trading days of each month, less
$0.30 per Mcf. In return, Devon pays the counterparty the
Colorado Interstate Gas Co. ("CIG") index price published in
"Inside FERC". The effect of this swap is included in Rocky
Mountain Division gas revenues.
Gas Prices - Floating For the natural gas production
for which prices have not been fixed, Devon's 2001 average
prices for each of its divisions are expected to differ from
NYMEX as set forth in the following table:
Expected Range of Gas Prices
Greater Than (Less Than) NYMEX
------------------------------
Permian/Mid-Continent ($0.45) to $0.05
Gulf ($0.20) to $0.30
Rocky Mountain ($1.15) to ($0.65)
Canadian ($1.00) to ($0.50)
International ($2.60) to ($2.10)
NGL Production Devon expects its 2001 production of
NGLs to total between 6.6 million barrels and 7.3 million
barrels. The expected ranges of production by division are
as follows:
Expected Range
of Production
(MMBbls)
--------------
Permian/Mid-Continent 4.3 to 4.6
Gulf 1.0 to 1.1
Rocky Mountain 0.6 to 0.7
Canadian 0.5 to 0.6
International 0.2 to 0.3
Other Revenues Devon's other revenues in 2001 are
expected to be between $53 million and $59 million.
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 to
or deletions from 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, natural gas and NGL prices will have a direct
effect on production taxes to be incurred in 2001. Future
prices also could have an effect on whether proposed
workover projects are economically feasible. These factors,
coupled with the uncertainty of future oil, natural gas and
NGL prices, increase the uncertainty inherent in estimating
future production and operating costs. Given these
uncertainties, Devon estimates that year 2001 total
production and operating costs will be between $532 million
and $564 million.
Depreciation, Depletion and Amortization ("DD&A") The
2001 oil and gas property DD&A rate will depend on various
factors. Most notable among such factors are the amount of
proved reserves that will be added from drilling or
acquisition efforts in 2001 compared to the costs incurred
for such efforts, and the revisions to Devon's year-end 2000
reserve estimates that, based on prior experience, are
likely to be made during 2001.
On average for 2001, Devon expects its consolidated oil
and gas property DD&A rate will be between $5.66 per Boe
and $6.01 per Boe. This range of full-year DD&A rates
should result in oil and gas property related DD&A expense
for 2001 of between $710 million and $754 million.
In addition to its oil and gas property DD&A expense,
Devon also expects to record goodwill amortization in 2001
of between $35 million and $37 million. The goodwill was
recorded in connection with the 1999 merger with PennzEnergy
Company. Additionally, Devon expects its 2001 DD&A expense
related to non-oil and gas property fixed assets to total
between $30 million and $32 million.
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 2001 is expected to
be between $89 million and $98 million.
Interest Expense Future interest rates and oil,
natural gas and NGL prices have a significant effect on
Devon's interest expense. Approximately $1.9 billion of
Devon's September 30, 2000, long-term debt balance of $2.2
billion bears interest at fixed rates. Such fixed rates
remove the uncertainty of future interest rates from some,
but not all, of Devon's long-term debt. Also, Devon can
only marginally influence the prices it will receive in 2001
from sales of oil, natural gas and NGLs and the resulting
cash flow. These factors increase the margin of error
inherent in estimating future interest expense. Other
factors which affect interest expense, such as the amount
and timing of capital expenditures, are within Devon's
control. Given the uncertainty of future interest rates and
commodity prices, and assuming that the fixed-rate debt
remains in place throughout the year, Devon estimates that
the consolidated interest expense in 2001 will be between
$131 million and $134 million.
Reduction of Carrying Value of Oil and Gas Properties
As of November 30, 2000, Devon does not expect to record a
reduction in 2001 of its carrying value of oil and natural
gas properties under the full-cost accounting ceiling test.
At this time the ceiling for each full-cost pool exceeds
Devon's carrying value of oil and natural gas properties,
less deferred income taxes. However, such excess could be
eliminated by declines in oil and/or natural gas prices
between now and the end of any quarter during 2001 or in
subsequent periods.
Income Taxes Devon expects its consolidated financial
income tax rate in 2001 to be between 35% and 45%. The
current income tax rate is expected to be between 20% and
25%. The deferred income tax rate is expected to be between
15% and 20%. There are certain items that will have a fixed
impact on 2001'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
generated to offset financial income tax expense in 2001 is
approximately $20 million. Also, Devon's Canadian
subsidiaries are subject to Canada's "large corporation tax"
of approximately $3 million which is based on total
capitalization levels, not pre-tax earnings. The financial
income tax in 2000 will also be increased by approximately
$14 million due to the financial amortization of certain
costs, such as goodwill amortization, 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
2001's financial income tax rates.
Capital Sources, Uses and Liquidity
Capital Expenditures Though Devon has completed
several major property acquisitions in recent years, these
transactions are opportunity driven. Thus, Devon does not
"budget", nor can it reasonably predict, the timing or size
of such possible acquisitions, if any.
Devon's capital expenditures budget is based on an
expected range of future oil, natural gas and NGL 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 2001
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 the limitations discussed, the company expects
its 2001 capital expenditures for drilling and development
efforts plus related facilities to total between $1.05
billion and $1.15 billion. These amounts include between
$160 million and $180 million for drilling and facilities
costs related to reserves expected to be classified as
proved as of year-end 2000. In addition, these amounts
include between $520 million and $560 million for other low
risk/reward projects and between $370 million and $410
million for new, higher risk/reward projects. The following
table shows expected drilling and facilities expenditures by
major operating division.
<TABLE>
Drilling and Production Facilities Expenditures (millions)
<CAPTION>
Permian/
Rocky Mid-
Mountain Continent Gulf Other
Division Division Division Canada International
-------- --------- -------- ------ -------------
<S> <C> <C> <C> <C> <C>
Related to Proved Reserves $45-$55 $70-$80 $0-$10 $10-$20 $20-$30
Lower Risk/Reward Projects $45-$55 $90-$100 $185-$215 $40-$50 $140-$170
Higher Risk/Reward Projects $20-$30 $40-$50 $110-$130 $105-$125 $80-$100
--------- --------- --------- --------- ---------
Total $110-$140 $200-$230 $295-$355 $155-$195 $240-$300
========= ========= ========= ========= =========
</TABLE>
In addition to the above expenditures for drilling and
development, Devon is participating through a joint venture
in the construction of gas transportation and processing
systems in the Powder River Basin of Wyoming. Devon expects
to spend from $15 million to $20 million as its share of the
project in 2001. Devon also expects to capitalize between
$70 million and $80 million of G&A expenses in accordance
with the full cost method of accounting. Devon also expects
to pay between $15 million and $20 million for plugging and
abandonment charges in 2001. Finally, Devon expects to
spend between $15 million and $20 million for non-oil and gas
property fixed assets.
Other Cash Uses Devon's management expects the policy
of paying a quarterly common stock dividend to continue.
With the current $0.05 per share quarterly dividend rate and
129 million shares of common stock outstanding, 2001
dividends are expected to approximate $26 million. Also,
Devon has $150 million of 6.49% cumulative preferred stock
upon which it will pay $9.7 million of dividends in 2001.
Capital Resources and Liquidity Devon's estimated 2001
cash uses, including its drilling and development
activities, are expected to be funded primarily through a
combination of working capital and operating cash flow, with
the remainder, if any, funded with borrowings from Devon's
credit facilities. The amount of operating cash flow to be
generated during 2001 is uncertain due to the factors
affecting revenues and expenses as previously cited.
However, Devon expects its combined capital resources to be
more than adequate to fund its anticipated capital
expenditures and other cash uses for 2001. As of September
30, 2000, Devon had $698 million available under its $1
billion credit facilities. If significant acquisitions or
other unplanned capital requirements arise during the year,
Devon could utilize its existing credit facilities and/or
seek to establish and utilize other sources of financing.
<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 hereto duly authorized.
DEVON ENERGY CORPORATION
By: DANNY J. HEATLY
Danny J. Heatly
Vice President - Accounting
Date: December 12, 2000
