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 March 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10067
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 73-1333969
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification Number)
20 N. Broadway, Suite 1500
Oklahoma City, Oklahoma
73102
(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 May 10, 1995, was 22,050,996.
1 of 27 total pages
(Exhibit Index is found at page 25)<PAGE>
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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, March 31, 1995 (Unaudited)
and December 31, 1994 4
Consolidated Statements of Operations (Unaudited),
For the Three Months Ended March 31, 1995 and 1994 5
Consolidated Statements of Stockholders' Equity
(Unaudited), For the Three Months Ended March 31,
1995 and 1994 6
Consolidated Statements of Cash Flows (Unaudited),
For the Three Months Ended March 31, 1995 and 1994 7
Notes to Consolidated Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
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DEVON ENERGY CORPORATION
Part I. Financial Information
Item 1. Consolidated Financial Statements
March 31, 1995 and 1994
(Forming a part of Form 10-Q Quarterly Report
to the Securities and Exchange Commission)
3
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<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1995 1994
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 15,625,621 8,336,371
Accounts receivable 12,434,948 15,626,799
Inventories 534,697 534,326
Prepaid expenses 1,092,253 564,371
Deferred income taxes 262,000 262,000
Total current assets 29,949,519 25,323,867
Property and equipment, at cost, based on the
full cost method of accounting for oil and
gas properties 537,840,166 523,941,141
Less: Accumulated depreciation,
depletion and amortization 211,905,804 202,634,961
325,934,362 321,306,180
Other assets 4,738,124 4,817,489
Total assets $360,622,005 351,447,536
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable:
Trade 3,638,578 6,394,897
Revenues and royalties due to others 8,733,415 7,398,199
Accrued expenses 2,366,426 3,225,493
Total current liabilities 14,738,419 17,018,589
Revenues and royalties due to others 1,383,135 1,383,135
Deposits (Note 3) 11,175,936 -
Long-term debt 94,000,000 98,000,000
Deferred revenue (Note 3) 4,499,378 1,299,947
Deferred income taxes 28,054,000 27,340,000
Stockholders' equity:
Preferred stock of $1.00 par value.
Authorized 3,000,000 shares; none
issued - -
Common stock of $.10 par value.
Authorized 120,000,000 shares; issued
22,050,996 in 1995 and 1994 2,205,100 2,205,100
Additional paid-in capital 166,654,305 166,654,305
Retained earnings 37,911,732 37,546,460
Total stockholders' equity 206,771,137 206,405,865
Total liabilities and stockholders'
equity $360,622,005 351,447,536
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months
Ended March 31,
1995 1994
(Unaudited)
Revenues
<S> <C> <C>
Gas sales $ 9,900,005 17,508,988
Oil sales 11,989,301 7,380,751
Natural gas liquids sales 1,630,262 888,565
Other 242,759 365,977
Total revenues 23,762,327 26,144,281
Costs and expenses
Production and operating expenses 8,441,777 7,589,220
Depreciation, depletion and
amortization 9,459,252 8,121,774
General and administrative
expenses 2,336,770 2,051,427
Interest expense 1,783,726 992,886
Total costs and expenses 22,021,525 18,755,307
Earnings before income taxes 1,740,802 7,388,974
Income tax expense
Current - 295,000
Deferred 714,000 2,217,000
Total income tax expense 714,000 2,512,000
Net earnings $ 1,026,802 4,876,974
Net earnings per average common share
outstanding $0.05 0.23
Weighted average common shares outstanding 22,050,996 20,843,967
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three Months
Ended March 31,
1995 1994
(Unaudited)
Common stock
<S> <C> <C>
Balance, beginning of period $ 2,205,100 2,084,232
Par value of common shares
issued - 280
Balance, end of period 2,205,100 2,084,512
Additional paid-in capital
Balance, beginning of period 166,654,305 144,403,743
Common shares issued - 28,545
Balance, end of period 166,654,305 144,432,288
Retained earnings
Balance, beginning of period 37,546,460 26,411,572
Dividends on common stock (661,530) (625,354)
Net earnings 1,026,802 4,876,974
Balance, end of period 37,911,732 30,663,192
Total stockholders' equity, end of period $206,771,137 177,179,992
See accompanying notes to consolidated financial statements.
</TABLE>
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<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months
Ended March 31,
1995 1994
(Unaudited)
Cash flows from operating activities
<S> <C> <C>
Net earnings $1,026,802 4,876,974
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 9,459,252 8,121,774
(Gain) loss on sale of assets (8,907) 238
Deferred income taxes 714,000 2,217,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,982,357 (49,093)
Inventories (371) 148,422
Prepaid expenses (527,882) (634,549)
Other assets 628,860 (868,652)
Increase (decrease) in:
Accounts payable 970,381 (1,983,239)
Income taxes payable - 25,842
Accrued expenses (859,067) (741,682)
Deferred revenue (Note 3) 3,199,431 (46,636)
Net cash provided by operating
activities 17,584,856 11,066,399
Cash flows from investing activities
Proceeds from sale of property and equipment 1,167,037 48,283
Increase in deposits (Note 3) 11,175,936 -
Capital expenditures (15,585,565) (10,189,403)
Payments made for acquisitions of business
(Note 2) (2,391,484) (9,283,543)
Net cash provided by (used in) investing
activities (5,634,076) (19,424,663)
Cash flows from financing activities
Proceeds from borrowings on revolving lines of
credit 2,000,000 8,500,000
Principal payments on revolving line of credit (6,000,000) (4,500,000)
Issuance of common stock - 28,825
Dividends paid on common stock (661,530) (625,354)
Net cash provided (used) by financing
activities (4,661,530) 3,403,471
Net increase (decrease) in cash 7,289,250 (4,954,793)
Cash and cash equivalents at beginning of period 8,336,371 19,550,288
Cash and cash equivalents at end of period $15,625,621 14,595,495
See accompanying notes to consolidated financial statements.
</TABLE>
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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 pursuant to such
rules and regulations. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with
the consolidated financial statements and notes included in
Devon's 1994 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 March 31,
1995, and the results of their operations and their cash flows
for the three month periods ended March 31, 1995 and 1994.
2. Acquisition
On May 18, 1994, Devon acquired Alta Energy Corporation
("Alta") via a merger between the two companies (the "Merger").
The accompanying consolidated statements of cash flows include
cash payments related to the Merger in both the three month
periods ended March 31, 1995 and 1994. The $9.3 million of cash
payments in the first quarter of 1994 represent payments made
prior to the consummation of the Merger. These payments included
$3.0 million for the purchase of Alta common and preferred stock,
$3.5 million paid to acquire certain of Alta's debt from its
creditors, and $2.8 million loaned to Alta. In addition to these
payments, Devon eventually paid an additional $33.1 million and
issued approximately 1,168,000 shares of its common stock by the
end of 1994.
Subsequently, in February 1995, Devon paid an additional
$2.4 million to the former Alta stockholders. This payment, in
accordance with the Merger agreement, was based upon the
evaluation of a well completed by Alta during the first half of
1994.
3. Contingent Transaction
In early 1995, Devon and an unrelated entity entered into a
transaction covering substantially all of Devon's San Juan Basin
gas properties. However, the transaction is subject to a
material unresolved contingency and a confidentiality agreement.
Until the contingency is resolved, Devon is deferring the
recognition of the operating statement impact from the
transaction. The pro forma information at the end of this note
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presents the potential impact on Devon's operating statement from
this contingent transaction.
As of March 31, 1995, Devon had received $14.4 million under
the terms of the transaction. Since the entire $14.4 million is
refundable, these funds are recorded as liabilities in the
accompanying March 31, 1995 consolidated balance sheet, pending
the resolution of the contingency. Approximately $3.2 million of
the total received to date will be recorded as revenues if the
contingency is favorably resolved. This amount is included in
deferred revenues in the March 31, 1995 balance sheet. The
remaining $11.2 million will affect only the balance sheet upon a
favorable resolution, and is recorded as deposits in the
accompanying balance sheet.
The contingency should be resolved by year-end 1995. Upon a
favorable resolution of the contingency, the cumulative
unrecorded effects of the transaction will be recorded, starting
from the January 1, 1995 effective date. Also, Devon will have
either consumed, or otherwise will no longer have available, a
substantial portion of the income tax benefits it currently
possesses. If the resolution is unfavorable, Devon will return
the cash received, thereby liquidating the liabilities, and its
results of operations will not be affected.
Though the $14.4 million which has been received through
March 31, 1995, is refundable pending the resolution of the
contingency, Devon's use of the funds is not restricted.
However, to secure the possible repayment of the cash it receives
under the terms of the transaction, Devon has established a
letter of credit in favor of the other entity which expires no
later than December 29, 1995. The amount of the letter of credit
increases throughout 1995, to a maximum of $20 million, based
upon the expected timing of Devon's cash receipts. As of March
31, 1995, the letter of credit was $15 million. Devon's
available borrowings under its credit lines are restricted by the
amount of the letter of credit. See Note 4.
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Assuming that the transaction had been effective as of the
beginning of each period presented below, and was not subject to
the contingency, Devon's pro forma results for the three months
ended March 31, 1995 and 1994 are as follows:
<TABLE>
Pro Forma Effects Attributable to Contingent Transaction
Pro Forma
Three Months Ended March 31,
1995 1994
Revenues
<S> <C> <C>
Gas sales $12,600,000 19,900,000
Oil sales 12,000,000 7,400,000
Natural gas liquids sales 1,600,000 900,000
Other 300,000 300,000
Total revenues 26,500,000 28,500,000
Costs and expenses
Production and operating expenses 8,400,000 7,500,000
Depreciation, depletion and
amortization 9,100,000 7,800,000
General and administrative expenses 2,300,000 2,000,000
Interest expense 1,800,000 900,000
Total costs and expenses 21,600,000 18,200,000
Earnings before income taxes 4,900,000 10,300,000
Income tax expense
Current 900,000 1,200,000
Deferred 1,200,000 2,400,000
Total income tax expense 2,100,000 3,600,000
Net earnings $ 2,800,000 6,700,000
Net earnings per average common share
outstanding $0.13 0.32
</TABLE>
10
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4. Amendment of Credit Agreement
On January 27, 1995, Devon's credit agreements
were amended primarily to allow for the establishment of letters
of credit as discussed in Note 3. In an unrelated event, in
March 1995, the total amount of borrowings allowed under Devon's
credit lines was revised downward from $225 million to $205
million. As of March 31, 1995, there was $94 million of debt
borrowed under the credit lines. Including the effect of the $15
million restriction from the letter of credit discussed in Note
3, Devon had $96 million available for future borrowings under
its credit lines as of March 31, 1995.
11
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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 months ended March
31, 1995, compared to the three months ended March 31, 1994, and
in financial condition since December 31, 1994. It is presumed
that readers have read or have access to Devon's 1994 annual
report on Form 10-K.
Overview
Devon produced record quantities of oil, and
record quantities of gas, oil and NGLs on a combined equivalent
unit basis, in the first quarter of 1995. These production
levels were attained because of the properties which were added
through a substantial acquisition in the second quarter of 1994.
Also on the positive side were increases in both oil and NGL
prices. First quarter 1995 prices for these products were at the
highest level since the second quarter of 1993. Unfortunately,
the gains achieved in oil and NGL revenues were overshadowed by
the negative impact of natural gas prices, and total revenues
dropped by $2.4 million, or 9%, in the first quarter of 1995.
First quarter 1995 gas prices continued their downward trend
which began following the first quarter of 1994. Since averaging
$1.70 per Mcf in the first quarter of 1994, gas prices have
dropped in each of the following quarters by $0.20, $0.19, $0.10
and $0.22. At $0.99 per Mcf, the average price for the first
quarter of 1995 was the lowest average price for any quarter in
Devon's seven year history as a public company.
Cash expenses rose by $1.6 million in the first
quarter of 1995, primarily due to the aforementioned acquisition
in 1994 and the impact of higher interest rates. The properties
acquired in the acquisition added $1.0 million of production and
operating expenses. Also, the interest rate on Devon's credit
lines increased 150 basis points in 1995, which accounted for
$0.6 million of the $0.8 million increase in interest expense.
The increase in cash expenses, combined with the drop in
revenues, caused the corporate cash margin to decrease from $15.2
million in 1994 to $11.2 million in 1995. Despite the reduced
cash margin, Devon was able to finance $18.0 million of capital
expenditures, and at the same time reduce long-term debt by $4.0
million and increase cash on hand by $7.3 million during the
first quarter of 1995. This was accomplished due to $14.4
million which was received under the terms of a contingent
transaction. See note 3 to the consolidated financial statements
in Part 1, Item 1 of this report, and "Capital Expenditures,
Capital Resources and Liquidity - Capital Resources and
Liquidity" in this section of the report.
Non-cash expenses dropped slightly from $10.3
million in 1994 to $10.2 million in 1995. Depreciation,
depletion and amortization expense increased by $1.3 million due
12
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to increases in both the per unit rate and the volumes of gas,
oil and NGLs produced. The other non-cash expense, deferred
income taxes, declined by $1.5 million due to the drop in pre-tax
earnings in 1995.
As a result of the decline in cash margin and
only a slight reduction in non-cash expenses, net earnings
decreased from $4.9 million, or $0.23 per share, in the first
quarter of 1994 to $1.0 million, or $0.05 per share, in 1995's
first quarter.
Results of Operations
Oil, gas and NGL revenues were down 9% for the
quarter ended March 31, 1995. The relative contributions of
production and price changes are shown below.
<TABLE>
Three Months Ended March 31,
1995 1994 Change
Production
<S> <C> <C> <C>
Gas (Mcf) 9,981,301 10,296,628 -3%
Oil (Bbls) 718,244 580,741 +24%
<F1>
NGL (Boe)1 138,689 108,017 +28%
<F1>
Oil, Gas and NGL (EMcf)1 15,122,899 14,429,176 +5%
Revenues
Gas $ 9,900,005 17,508,988 -43%
Oil 11,989,301 7,380,751 +62%
NGL 1,630,262 888,565 +83%
Combined $23,519,568 25,778,304 -9%
Average Prices
Gas (Per Mcf) $ 0.99 1.70 -42%
Oil (Per Bbl) $16.69 12.71 +31%
<F1>
NGL (Per Boe)1 $11.75 8.23 +43%
<F1>
Oil, Gas and NGL (Per EMcf)1 $ 1.56 1.79 -13%
<F1>
1 NGL is converted to barrels of oil equivalent ("Boe") at the
rate of 42 gallons of liquids per barrel of oil. Oil and NGL
are converted to equivalent thousand cubic feet ("EMcf") at
the rate of six EMcf per barrel of oil (or Boe of NGL).
These conversions are based upon the approximate relative
energy content of natural gas, oil and NGL, which rate is not
necessarily indicative of the relationship of oil, gas and
NGL prices. The respective prices of these products are
affected by market and other factors in addition to relative
energy content.
</TABLE>
13
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Gas Revenues. Gas revenues declined by $7.6
million, or 43%, in the first quarter of 1995. The average price
dropped by $0.71 per Mcf, or 42%, in the first quarter of 1995.
This price decline subtracted $7.1 million of gas revenues in the
1995 period. Also, declines in production of 0.3 Bcf, or 3%,
caused a $0.5 million drop in gas revenues.
Coal seam gas production dropped slightly, from
6.0 Bcf in 1994 to 5.9 Bcf in 1995. Conventional gas production
also declined from 4.3 Bcf in 1994 to 4.1 Bcf in 1995.
Conventional gas production in 1995 benefitted from the addition
of the Merger Properties, which produced 0.2 Bcf of gas in the
first quarter. This was offset, however, by a 0.2 Bcf reduction
due to properties which were sold subsequent to the first quarter
of 1994, and a 0.2 Bcf net reduction in all other conventional
production.
Coal seam gas averaged $0.75 per Mcf in 1995, or
49% lower than the $1.48 per Mcf price received in 1994. The
average price for conventional gas production was $1.33 per Mcf
in 1995, a 33% reduction from the $2.00 per Mcf received in 1994.
The price per Mcf for coal seam gas is less than Devon's
conventional gas (i.e., gas produced from other than coal
formations) due to the former's low Btu content and the cost of
removing carbon dioxide. These adjustments have been taken into
account in calculating the coal seam gas sales prices referred to
above.
Oil Revenues. Oil revenues increased by 62% from
$7.4 million in the first quarter of 1994 to $12.0 million in the
first quarter of 1995. Production gains of 138,000 barrels, or
24%, added $1.7 million of oil revenues in the 1995 period.
Also, the average oil price increased by $3.98 per barrel, or
31%, in 1995. This price increase added $2.9 million to 1995's
oil revenues.
The primary contributor to the increased oil
production was the added production from the oil properties
acquired in the May 1994 Merger (the "Merger Properties"). The
Merger Properties added approximately 139,000 barrels of
production during the first quarter of 1995.
NGL Revenues. NGL revenues increased by 83% from
$0.9 million in the first quarter of 1994 to $1.6 million in the
first quarter of 1995. Production increased in 1995 by 31,000
Boe, or 28%, which added $0.2 million to NGL revenues. The
Merger Properties contributed 14,000 Boe of the total increase in
1995. Also, the average price increased by $3.52 per Boe, or
43%, in 1995. This price increase added $0.5 million to NGL
revenues in 1995.
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Production and Operating Expenses. Production
and operating expenses were up 11% in the first quarter of 1995
as shown in the table below.
<TABLE>
Three Months Ended March 31,
1995 1994 Change
Absolute
Recurring operations and maintenance
<S> <C> <C> <C>
expenses $5,589,991 5,139,036 +9%
Well workover expenses 1,175,330 536,265 +119%
Production taxes 1,676,456 1,913,919 -12%
Total production and operating
expenses $8,441,777 7,589,220 +11%
Per EMcf
Recurring operations and maintenance
expenses $0.37 0.36 +3%
Well workover expenses 0.08 0.04 +100%
Production taxes 0.11 0.13 -15%
Total production and operating
expenses $0.56 0.53 +6%
</TABLE>
Recurring operations and maintenance expenses
increased in the first quarter of 1995 primarily due to the
additional expenses incurred on the Merger Properties acquired in
the second quarter of 1994. The Merger Properties added $0.7
million of such expenses in the first quarter of 1995. Recurring
expenses on Devon's properties other than the Merger Properties
declined by $0.2 million, or 5%, in the first quarter of 1995.
The Merger Properties are primarily oil producing
properties, which are traditionally more expensive to operate
than gas producing properties. The per unit rate of the Merger
Properties' recurring expenses in 1995 was $0.61 per EMcf,
compared to the rate of $0.35 per EMcf for the recurring expenses
of all other properties.
Well workover expenses increased by substantial
margins both on an absolute and a per unit basis. This is a
trend that should continue throughout 1995, as workover expenses
are expected to almost double 1994's yearly total of $2.9
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million. The expenses incurred in the first quarter of 1995
related to projects to increase production from certain wells as
well as routine repairs.
Depreciation, Depletion and Amortization Expenses
("DD&A"). Oil and gas property related DD&A increased $1.3
million, or 17%, from $7.8 million in the first quarter of 1994
to $9.1 million in the first quarter of 1995. The primary cause
of the DD&A increase was the increase in the DD&A rate per EMcf.
The DD&A rate in 1994's first quarter was $0.54 per EMcf.
Primarily due to the effect of the acquisition of the Merger
Properties, the DD&A rate rose to $0.60 in 1995's first quarter.
General and Administrative Expenses ("G&A"). G&A
increased $0.3 million, or 14%, in the first quarter of 1995
compared to the same period of 1994. Personnel expenses,
including salary, pension and insurance expenses, increased $0.4
million, or 21%, in the 1995 period. While salary expenses rose
by only 9% in the 1995 quarter, pension expense was up by 62% and
insurance expense increased by 17%. These increases were
partially offset by higher overhead reimbursements. Devon
receives an overhead reimbursement on the wells for which it
serves as the operator. Such reimbursements, which reduce net
G&A, increased $0.2 million in the 1995 quarter due primarily to
the increased number of wells which Devon now operates.
Interest Expense. Interest expense increased $0.8
million, or 80%, in the first quarter of 1995. Higher interest
rates caused $0.6 million of the increase. The annualized
interest rate on the debt outstanding during 1995's first quarter
was 6.7%, compared to 4.2% during the first quarter of 1994. The
overall average interest rate (including the effect of various
fees paid to the banks and the amortization of certain loan
costs) during 1995 was 7.5%, compared to an overall rate in the
first quarter of 1994 of 4.9%. An increase in the average debt
balance caused interest expense to rise by $0.2 million in 1995.
The average debt balance outstanding during the first quarter of
1995 was $94.8 million, or 18% higher than the $80.5 million
average balance during the first quarter of 1994. The increase
in the average balance was primarily caused by borrowings to fund
a portion of the Merger.
Income Taxes. During interim periods, income tax
expense is based on the estimated effective tax rate which is
expected for the entire fiscal year. The estimated effective
tax rate in the first quarter of 1995 was 41%, compared to 34% in
the first quarter of 1994. The increase in the 1995 rate is
primarily due to the effect of certain financial deductions for
DD&A which are not allowed for income tax purposes due to the tax
free nature of the Merger. Also, although the estimated 1994
income tax rate used in preparing the first quarter 1994
consolidated financial statements was 34%, the rate for the
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entire year of 1994 was actually 36%. The effect of this change
in the estimated income tax rate was recorded in the fourth
quarter of 1994.
Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement 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", Statement 109
requires that a valuation allowance be provided to reduce the
recorded tax benefits from such assets.
Approximately $13.1 million of deferred tax assets
were included in the deferred tax liability as of March 31, 1995.
Over 90% of such assets related to the tax benefits expected from
the future utilization of net operating loss carryforwards,
statutory depletion carryforwards, investment tax credit
carryforwards and minimum tax credit carryforwards. To assess
the likelihood of realizing tax benefits from the future
utilization of these carryforwards, management considered four
primary factors: (1) estimates of future yearly taxable income
which Devon is expected to generate; (2) the level of future
taxable income necessary to utilize the carryforwards; (3) the
expiration dates, if any, of such carryforwards, and (4) certain
limitations on the annual utilization of the carryforwards as set
forth by federal tax regulations.
Based upon current estimates of future production
and average prices, management believes that taxable income
during the carryforward periods will be sufficient to utilize
substantially all of the carryforwards currently available. The
tax benefit from net operating loss and investment tax credit
carryforwards, which totals approximately $6.9 million, is
expected to be realized between 1995 and 2002. This is well
before the 2006 expiration date for the majority of such
benefits. The remaining $6.2 million of tax benefits consist
primarily of statutory depletion and minimum tax credit
carryforwards. These carryforwards do not have expiration dates,
and are therefore available to reduce taxes in any future year.
However, based upon limitations imposed on the utilization of
certain of the depletion carryforwards acquired in the Merger, a
$100,000 valuation allowance was recorded at the time of the
Merger. No changes in this valuation allowance have occurred
through March 31, 1995.
Management's assessment of the future utilization
of Devon's deferred tax assets is based upon current estimates of
taxable income to be generated in 1995 and beyond. Significant
changes in such estimates from variables such as future oil and
gas prices or capital expenditures could alter the timing of the
17
<PAGE>
eventual utilization of such assets. There can be no assurance
that Devon will generate any specific level of continuing taxable
earnings.
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
1, Item 1 included herein.
Capital Expenditures. Cash used for capital
expenditures increased 53% from $10.2 million in the first
quarter of 1994 to $15.6 million in the first quarter of 1995.
Approximately $14.4 million was spent in 1995 on exploration and
development efforts, compared to $9.3 million spent in the first
quarter of 1994 for such efforts. Approximately $12.4 million of
1995's total expenditures related to the drilling and development
of the Grayburg-Jackson Field which was acquired in the Merger.
Cash Used in the Merger with Alta Energy
Corporation. The Merger was consummated in the second quarter of
1994. However, Devon incurred Merger-related costs both prior to
the Merger in the first quarter of 1994, and subsequent to the
Merger in the first quarter of 1995. Approximately $9.3 million
of cash was used in the first quarter of 1994, including $3.0
million to purchase Alta common and preferred stock, $3.5 million
to acquire certain of Alta's debt from its creditors, and $2.8
million loaned to Alta.
Subsequently, in February 1995, Devon paid an
additional $2.4 million to the former Alta stockholders. This
payment, in accordance with the Merger agreement, was based upon
the evaluation of a well completed by Alta during the first half
of 1994.
Capital Resources and Liquidity. Net cash
provided by operating activities continued to be a primary source
of capital and liquidity in the first quarter of 1995. Net cash
provided by operating activities increased by 59% from $11.1
million in the first quarter of 1994 to $17.6 million in the
first quarter of 1995.
Included in 1995's net cash provided by operating
activities was $3.2 million received in March 1995 pursuant to a
transaction entered into in early 1995 between Devon and an
unrelated entity. The transaction, which covers substantially
all of Devon's San Juan Basin gas properties, could have a
significant and very positive financial impact on Devon.
However, the transaction is subject to a material unresolved
contingency and a confidentiality agreement. Until the
18
<PAGE>
contingency is resolved, Devon is deferring the recognition of
the operating statement impact from the transaction.
In addition to the $3.2 million received in March
1995, Devon has also received $11.2 million which will affect
only the balance sheet if the contingency is favorably resolved.
Since the entire $14.4 million received to date is refundable,
these funds are recorded as liabilities in the accompanying March
31, 1995 consolidated balance sheet, pending the resolution of
the contingency.
The contingency should be resolved by year-end
1995. Upon a favorable resolution of the contingency, the
cumulative unrecorded effects of the transaction will be
recorded, starting from the January 1, 1995 effective date.
Also, Devon will have either consumed, or otherwise will no
longer have available, a substantial portion of the income tax
benefits it currently possesses. If the resolution is
unfavorable, Devon will return the cash received, thereby
liquidating the liability, and its results of operations will not
be affected.
If the contingency is resolved favorably, the
transaction could have a significant effect on Devon's 1995
results of operations and liquidity. Devon estimates that the
transaction could add between $6.5 million to $7.5 million to its
net earnings for the year 1995, an impact of $0.29 to $0.34 per
common share. Net cash provided by operating activities for the
year 1995 could also be boosted by $5.5 million to $6.5 million,
of which $3.2 million was received in the first quarter. A
disproportionate percentage was recognized in the first quarter
because none of the $5.2 million of additional income tax
payments which are estimated to be due as a result of the
transaction were required to be paid in the first quarter. Such
payments will be required during the last three quarters of the
year.
Though the $14.4 million which has been received
through March 31, 1995, is refundable pending the resolution of
the contingency, Devon's use of the funds is not restricted.
However, to secure the possible repayment of the cash it receives
under the terms of the transaction, Devon has established a
letter of credit in favor of the other entity which expires no
later than December 29, 1995. The amount of the letter of credit
increases throughout 1995, to a maximum of $20 million, based
upon the expected timing of Devon's cash receipts. As of March
31, 1995, the letter of credit was $15 million. Devon's
available borrowings under its credits lines are restricted by
the amount of the letter of credit.
Unrelated to the $15 million letter of credit
restriction discussed above, the total amount of borrowings
available under Devon's credit lines was also decreased from $225
million to $205 million in March 1995. However, even after these
events, Devon had $96 million in future borrowing availability as
of March 31, 1995. Currently, the capital resources available
from operating activities and credit lines are more than adequate
to cover Devon's known capital requirements.
19
<PAGE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Part II. Other Information
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 Agreement and Plan of Merger by and
among Devon Energy Corporation, Devon
Acquisition Corp. and Alta Energy
Corporation dated February 18, 1994
[incorporated by reference to Exhibit
2.1 to Registrant's Registration
Statement on Form S-4 (No. 33-76524)].
2.2 Amendment to Agreement and Plan of
Merger by and among Devon Energy
Corporation, Devon Acquisition Corp.
and Alta Energy Corporation dated April
13, 1994 [incorporated by reference to
Exhibit 2.2 to Amendment No. One to
Registrant's Registration Statement on
Form S-4 (No. 33-76524)].
4.1 Registrant's Certificate of
Incorporation, as amended [incorporated
by reference to Exhibit 3 to Amendment
No. 3 to Registrant's Registration
Statement on Form S-2 (No. 33-46792)].
4.2 Registrant's Bylaws [incorporated by
reference to Exhibit 3.2 to
Registrant's Registration Statement on
Form S-4 (No. 33-23564)].
4.3 Form of Common Stock Certificate
(incorporated herein by reference to
Exhibit 4.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter
ended March 31, 1994).
4.4 Rights Agreement between Devon Energy
Corporation, a Delaware corporation,
and MTrust Corp., National Association
(incorporated herein by reference to
Exhibit 10.3 to Registrant's
Registration Statement on Form 8-B).
20
<PAGE>
4.5 Change of Rights Agent by and between
Devon Energy Corporation, a Delaware
corporation, Society National Bank,
formerly known as MTrust Corp.,
National Association and First National
Bank of Boston (Massachusetts)
effective as of April 19, 1994
(incorporated herein by reference to
Exhibit 4.5 to Registrant's Quarterly
Report on Form 10-Q for the quarter
ended March 31, 1994).
10.1 Credit Agreement dated October 7,
1994, among Devon Energy Corporation
(Nevada), as Borrower, the Registrant and
Devon Energy Operating Corporation, as
Guarantors, NationsBank of Texas, N.A., as
Agent, and NationsBank of Texas, N.A., Bank
One, Texas, N.A., Bank of Montreal, and First
Union National Bank of North Carolina, as
Lenders (incorporated herein by reference to
Exhibit 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended
September 30, 1994).
10.2 First Amendment, dated January 27,
1995, to Credit Agreement among
Devon Energy Corporation (Nevada), as
Borrower, the Registrant and Devon Energy
Operating Corporation, as Guarantors,
NationsBank of Texas, N.A., as Agent, and
NationsBank of Texas, N.A., Bank
One, Texas, N.A., Bank of Montreal
and First Union National Bank of
North Carolina, as Lenders (incorporated
herein by reference to Exhibit 10.2 to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994).
10.3 Devon Energy Corporation [a Delaware
corporation] 1988 Stock Option Plan
[incorporated herein by reference to
Exhibit 10.4 to Registrant's Registration
Statement on Form S-4 (No. 33-23564)]. *
10.4 Devon Energy Corporation 1993 Stock Option Plan
(incorporated herein by reference to Exhibit A to
Registrant's Proxy Statement for the 1993 Annual
Meeting of Shareholders).*
10.5 Sale and Purchase Agreement by and
between Fina Oil and Chemical Company, a
Delaware corporation and Devon Energy
Corporation (Nevada), a Nevada corporation
(incorporated herein by reference to
Exhibit 2 to Registrant's Current Report on
Form 8 dated as of June 28, 1993).
21
<PAGE>
10.6 Severance Agreement between Devon Energy
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. J. Larry Nichols,
dated December 3, 1992 (incorporated
herein by reference to Exhibit 10.10 to
Registrant's Amendment No. 1 to Annual Report on
Form 10-K for the year ended December 31, 1992).*
10.7 Severance Agreement between Devon Energy
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. H.R. Sanders, Jr., dated
December 3, 1992 (incorporated herein by
reference to Exhibit 10.11 to Registrant's
Amendment No. 1 to Annual Report on
Form 10-K for the year ended December 31, 1992).*
10.8 Severance Agreement between Devon Energy
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. J. Michael Lacey,
dated December 3, 1992 (incorporated
herein by reference to Exhibit 10.12 to
Registrant's Amendment No. 1 to
Annual Report on Form 10-K for the
year ended December 31, 1992).*
10.9 Severance Agreement between Devon Energy
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. H. Allen Turner, dated
December 3, 1992 (incorporated herein by
reference to Exhibit 10.13 to Registrant's
Amendment No. 1 to Annual Report on
Form 10-K for the year ended December 31, 1992).*
10.10Severance Agreement between Devon Energy
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. Darryl G. Smette,
dated December 3, 1992 (incorporated
herein by reference to Exhibit 10.14 to
Registrant's Amendment No. 1 to Annual Report on
Form 10-K for the year ended December 31, 1992).*
10.11Severance Agreement between Devon Energy
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. William T. Vaughn,
dated December 3, 1992 (incorporated
herein by reference to Exhibit 10.15 to
Registrant's Amendment No. 1 to Annual Report on
Form 10-K for the year ended December 31, 1992).*
10.12Stock Purchase Agreement dated December 22, 1993,
between Registrant and John R. Fitzgerald
(incorporated herein by reference to
Exhibit 1 to Registrant's Schedule 13D dated
as of December 22, 1993).
22
<PAGE>
10.13Schedule identifying other Stock Purchase
Agreements entered into by Registrant
with certain holders of Alta Energy Corporation
common stock (incorporated herein by
reference to Exhibit 2 to Registrant's
Schedule 13D dated as of December 22, 1993).
10.14Stock Purchase Agreement dated January 14, 1994,
between GSS Investments Corp. [a wholly-owned
subsidiary of Registrant] and Princor Growth
Fund, Inc. (incorporated herein by reference to
Exhibit 3 to Amendment No. 2 to Registrant's
Schedule 13D dated as of January 7, 1994).
10.15Stock Purchase Agreement dated January 14, 1994,
between Registrant and Andrew P. Carstensen, Jr.
(incorporated herein by reference to
Exhibit 4 to Amendment No. 2 to Registrant's
Schedule 13D dated as of January 7, 1994).
11 Computation of earnings per share
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during
the three months ended March 31, 1995.
* Compensatory plans or arrangements.
23
<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: May 10, 1995 /s/William T. Vaughn
William T. Vaughn
Vice President - Finance
24
<PAGE>
EXHIBIT INDEX
Page
2.1 Agreement and Plan of Merger by and among Devon *
Energy Corporation, Devon Acquisition Corp. and
Alta Energy Corporation dated February 18, 1994.
2.2 Amendment to Agreement and Plan of Merger by and *
among Devon Energy Corporation, Devon Acquisition
Corp. and Alta Energy Corporation dated April 13,
1994.
4.1 Registrant's Certificate of Incorporation. *
4.2 Registrant's Bylaws. *
4.3 Form of Common Stock Certificate. *
4.4 Rights Agreement between Devon Energy *
Corporation, a Delaware corporation, and MTrust
Corp., National Association.
4.5 Change of Rights Agent by and between Devon *
Energy Corporation, a Delaware corporation,
Society National Bank, formerly known as MTrust
Corp., National Association and First National
Bank of Boston (Massachusetts) effective as of
April 19, 1994.
10.1 Credit Agreement dated October 7, 1994, among *
Devon Energy Corporation (Nevada), as Borrower,
the Registrant and Devon Energy Operating
Corporation, as Guarantors, NationsBank of Texas,
N.A., as Agent, and NationsBank of Texas, N.A.,
Bank One, Texas, N.A., Bank of Montreal, and
First Union National Bank of North Carolina, as
Lenders.
10.2 First Amendment, dated January 27, 1995, to *
Credit Agreement among Devon Energy Corporation
(Nevada), as Borrower, the Registrant and Devon
Energy Operating Corporation, as Guarantors,
NationsBank of Texas, N.A., as Agent, and
NationsBank of Texas, N.A., Bank One, Texas,
N.A., Bank of Montreal, and First Union National
Bank of North Carolina, as Lenders.
10.3 Devon Energy Corporation [a Delaware corporation] *
1988 Stock Option Plan.
25
<PAGE>
10.4 Devon Energy Corporation 1993 Stock Option Plan. *
10.5 Sale and Purchase Agreement by and between Fina *
Oil and Chemical Company, a Delaware corporation
and Devon Energy Corporation (Nevada), a Nevada
corporation.
10.6 Severance Agreement between Devon Energy *
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. J. Larry Nichols, dated
December 3, 1992.
10.7 Severance Agreement between Devon Energy *
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. H. R. Sanders, Jr., dated
December 3, 1992.
10.8 Severance Agreement between Devon Energy *
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. J. Michael Lacey, dated
December 3, 1992.
10.9 Severance Agreement between Devon Energy *
Corporation (Nevada), Devon Energy Corporation
(Delaware) and Mr. H. Allen Turner, dated
December 3, 1992.
10.10 Severance Agreement between Devon Energy *
Corporation (Nevada), Devon Energy
Corporation (Delaware) and Mr. Darryl G.
Smette, dated December 3, 1992.
10.11 Severance Agreement between Devon Energy *
Corporation (Nevada), Devon Energy
Corporation (Delaware) and Mr. William T.
Vaughn, dated December 3, 1992.
10.12 Stock Purchase Agreement dated December 22, *
1993, between Registrant and John R.
Fitzgerald.
10.13 Schedule identifying other Stock Purchase *
Agreements entered into by Registrant with
certain holders of Alta Energy Corporation
common stock.
10.14 Stock Purchase Agreement dated January 14, *
1994, between GSS Investments Corp. [a
wholly-owned subsidiary of Registrant] and
Princor Growth Fund, Inc.
10.15 Stock Purchase Agreement dated January 14, *
1994, between Registrant and Andrew P.
Carstensen, Jr.
11 Computation of earnings per share 27
* Incorporated by reference.
26
<PAGE>
<TABLE>
Exhibit 11
DEVON ENERGY CORPORATION
Computation of Earnings Per Share
Three Months Ended March 31,
1995 1994
PRIMARY EARNINGS PER SHARE
Computation for Statement of Operations
<S> <C> <C>
Net earnings per statement of operations $ 1,026,802 4,876,974
Weighted average common shares outstanding 22,050,996 20,843,967
Primary earnings per common share $0.05 0.23
Additional Primary Computation (A)
Net earnings per statement of operations $ 1,026,802 4,876,974
Adjustments to weighted average common
shares outstanding:
Weighted average as shown above 22,050,996 20,843,967
Add dilutive effect of outstanding stock
options (as determined using the treasury
stock method) 95,383 129,307
Weighted average common shares outstanding,
as adjusted 22,146,379 20,973,274
Net earnings per common share, as adjusted $0.05 0.23
FULLY DILUTED EARNINGS PER SHARE (A)
Net earnings per statement of operations $ 1,026,802 4,876,974
Weighted average common shares outstanding as
shown in primary computation above 22,050,996 20,843,967
Add fully dilutive effect of outstanding stock
options (as determined using the treasury stock
method) 111,854 129,307
Weighted average common shares outstanding,
as adjusted 22,162,850 20,973,274
Fully diluted earnings per common share $0.05 0.23
(A) These calculations are submitted in accordance with
Regulation S-K item 601(b)(11) although not required by
footnote 2 to paragraph 14 of APB Opinion No. 15 because
they result in dilution of less than 3%.
</TABLE>
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 15625621
<SECURITIES> 0
<RECEIVABLES> 12634948
<ALLOWANCES> 200000
<INVENTORY> 534697
<CURRENT-ASSETS> 29949519
<PP&E> 537840166
<DEPRECIATION> 211905804
<TOTAL-ASSETS> 360622005
<CURRENT-LIABILITIES> 14738419
<BONDS> 94000000
<COMMON> 2205100
0
0
<OTHER-SE> 204566037
<TOTAL-LIABILITY-AND-EQUITY> 360622005
<SALES> 23519568
<TOTAL-REVENUES> 23762327
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8441777
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1783726
<INCOME-PRETAX> 1740802
<INCOME-TAX> 714000
<INCOME-CONTINUING> 1026802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1026802
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
