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 September 30, 1998
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)
Oklahoma 73-1474008
(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 November 9, 1998, was 32,319,897.
1 of 34 total pages
(Exhibit Index is found at page 32)
<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, September 30, 1998 4
(Unaudited) and December 31, 1997
Consolidated Statements of Operations (Unaudited), 5
For the Three Months and Nine Months Ended
September 30, 1998 and 1997
Consolidated Statements of Comprehensive Operations 6
(Unaudited), For the Three Months and Nine Months Ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows (Unaudited), 7
For the Nine Months Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements. 8
Item 2. Management's Discussion and Analysis of 15
Financial Condition and Results of Operations.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 26
2
<PAGE>
DEVON ENERGY CORPORATION
Part I. Financial Information
Item 1. Consolidated Financial Statements
September 30, 1998 and 1997
(Forming a part of Form 10-Q Quarterly Report
to the Securities and Exchange Commission)
3
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 7,150,368 42,064,344
Accounts receivable 39,960,269 47,507,805
Inventories 2,340,942 2,422,822
Prepaid expenses 1,183,241 799,923
Deferred income taxes 434,000 434,000
Total current assets 51,068,820 93,228,894
Property and equipment, at cost,
based on the full cost method of
accounting for oil and gas properties 1,231,195,602 1,103,320,502
Less: Accumulated depreciation,
depletion and amortization 558,754,200 365,517,722
672,441,402 737,802,780
Other assets 13,839,177 15,371,368
Total assets $ 737,349,399 846,403,042
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable:
Trade 14,185,878 9,628,890
Revenues and royalties due to others 6,619,286 11,531,296
Income taxes payable - 4,901,940
Accrued expenses 2,818,132 4,750,699
Total current liabilities 23,623,296 30,812,825
Revenues and royalties due to others 2,969,891 2,862,794
Other liabilities 24,343,111 18,177,130
Deferred income taxes 67,588,000 101,474,000
Company-obligated mandatorily redeemable
convertible preferred securities of
subsidiary trust holding solely 6.5%
convertible junior subordinated
debentures of Devon Energy Corporation 149,500,000 149,500,000
Stockholders' equity:
Preferred stock of $1.00 par value.
Authorized 3,000,000 shares; none
issued - -
Common stock of $.10 par value.
Authorized 400,000,000 shares; issued
32,319,894 in 1998 and 32,318,895
in 1997 3,231,990 3,231,890
Additional paid-in capital 392,937,092 392,919,170
Retained earnings 79,768,927 149,946,232
Accumulated other comprehensive
earnings (loss) - foreign currency
translation adjustments (6,612,908) (2,520,999)
Total stockholders' equity 469,325,101 543,576,293
Total liabilities and stockholders'
equity $ 737,349,399 846,403,042
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Revenues
<S> <C> <C> <C> <C>
Oil sales $ 19,905,958 31,267,250 65,470,104 100,857,256
Gas sales 32,491,082 34,044,149 102,769,643 107,458,126
Natural gas liquids sales 3,132,210 5,206,135 11,120,619 16,534,020
Other 1,542,930 2,342,969 5,145,988 5,562,529
Total revenues 57,072,180 72,860,503 184,506,354 230,411,931
Costs and expenses
Lease operating expenses 18,193,654 15,814,690 55,305,723 46,155,611
Production taxes 3,247,024 4,109,654 9,786,223 13,165,045
Depreciation, depletion and
amortization 23,173,694 20,246,574 68,197,427 60,388,870
General and administrative
expenses 3,166,842 2,992,104 9,907,254 9,228,599
Interest expense 133,234 90,146 183,973 249,184
Distributions on preferred
securities of subsidiary trust 2,429,374 2,429,375 7,288,125 7,288,126
Reduction of carrying value of
oil and gas properties
(Note 3) 126,900,000 - 126,900,000 -
Total costs and expenses 177,243,822 45,682,543 277,568,725 136,475,435
Earnings (loss) before income
taxes (120,171,642) 27,177,960 (93,062,371) 93,936,496
Income tax expense (benefit) (Note 3)
Current 846,000 5,546,000 5,482,000 14,091,000
Deferred (37,932,000) 5,326,000 (33,215,000) 23,484,000
Total income tax expense
(benefit) (37,086,000) 10,872,000 (27,733,000) 37,575,000
Net earnings (loss) $ (83,085,642) 16,305,960 (65,329,371) 56,361,496
Net earnings (loss) per average
common share outstanding (Note 2):
Basic $ (2.57) 0.51 (2.02) 1.75
Diluted (2.57) 0.47 (2.02) 1.62
Weighted average common shares
outstanding 32,319,894 32,235,002 32,319,543 32,181,077
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Operations
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings (loss) $(83,085,642) 16,305,960 (65,329,371) 56,361,496
Other comprehensive earnings (loss) -
foreign currency translation
adjustments (Note 1) (2,523,936) 5,819 (4,091,909) (444,979)
Comprehensive earnings (loss) $(85,609,578) 16,311,779 (69,421,280) 55,916,517
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months
Ended September 30,
1998 1997
Cash flows from operating activities
<S> <C> <C>
Net earnings (loss) $ (65,329,371) 56,361,496
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, depletion and amortization 68,197,427 60,388,870
(Gain) loss on sale of assets (133,663) (155,040)
Deferred income taxes (benefit) (33,215,000) 23,484,000
Reduction of carrying value of oil and gas
properties 126,900,000 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 7,464,975 (12,138,238)
Inventories 50,185 (73,883)
Prepaid expenses (626,579) (568,739)
Other assets 516,376 (767,123)
Increase (decrease) in:
Accounts payable 1,087,828 8,444,761
Income taxes payable (5,150,940) (4,705,447)
Accrued expenses (1,921,585) (1,173,599)
Revenues and royalties due to others 107,097 (196,312)
Long-term other liabilities 418,416 49,298
Net cash provided by operating activities 98,365,166 128,950,044
Cash flows from investing activities
Proceeds from sale of property and equipment 7,995,880 1,436,610
Capital expenditures (141,913,247) (91,418,731)
(Increase) decrease in other assets 60,830 (2,700,941)
Net cash used in investing activities (133,856,537) (92,683,062)
Cash flows from financing activities
Proceeds from borrowings on revolving lines of credit - 1,847,750
Principal payments on revolving lines of credit - (9,843,750)
Issuance of common stock 18,022 3,115,223
Dividends paid on common stock (4,847,934) (4,828,709)
Increase in long-term other liabilities 5,976,550 2,020,566
Net cash provided (used) by financing activities 1,146,638 (7,688,920)
Effect of exchange rate changes on cash (569,243) (31,746)
Net increase (decrease) in cash and cash equivalents (34,913,976) 28,546,316
Cash and cash equivalents at beginning of period 42,064,344 9,401,350
Cash and cash equivalents at end of period $ 7,150,368 37,947,666
See accompanying notes to consolidated financial statements.
</TABLE>
7
<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 1997 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 September 30, 1998, and the
results of their operations and their cash flows for the three
month and nine month periods ended September 30, 1998 and 1997.
Comprehensive Earnings (Loss) - Foreign Currency Translation
Adjustments
Devon adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," on January 1, 1998. SFAS
No. 130 was effective for fiscal years beginning after December
15, 1997. SFAS No. 130 established standards for reporting and
display of "comprehensive income" and its components in a set of
financial statements. It requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. Devon has included such a statement in the
accompanying consolidated financial statements.
Devon owns certain oil and gas properties in Canada. For
purposes of foreign currency translation, the Canadian dollar is
the functional currency for Devon's Canadian operations.
Translation adjustments resulting from translating the Canadian
subsidiary's foreign currency financial statements into U.S.
dollar equivalents are reported separately in the consolidated
statements of comprehensive operations, and accumulated in a
separate component of stockholders' equity in the consolidated
balance sheets. The amounts reported have no related income tax
expense or benefit.
Reclassifications
Certain items in the 1997 consolidated statement of cash
flows have been reclassified to correspond with the 1998
presentation.
8
<PAGE>
2. Earnings Per Share
The diluted loss per share calculations for the three month
and nine month periods ended September 30, 1998, produce results
that are anti-dilutive. (For the three month period, the diluted
calculation reduced the net loss by $1.5 million and increased
the common shares outstanding by 5.2 million shares. For the
nine month period, the diluted calculation reduced the net loss
by $4.5 million and increased the common shares outstanding by
5.2 million shares. These 1998 changes were caused by the same
factors as, and were similar in amounts to, those in the
following tables for the 1997 periods.) Therefore, the diluted
loss per share amounts for such periods reported in the
accompanying consolidated statements of operations are the same
as the basic loss per share amounts.
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 nine month periods
ended September 30, 1997.
<TABLE>
<CAPTION>
Net
Earnings
Net Common (Loss)
Earnings Shares Per
(Loss) Outstanding Share
Three Months Ended September 30, 1997:
<S> <C> <C> <C>
Basic earnings per share $16,305,960 32,235,002 $0.51
Dilutive effect of:
Potential common shares issuable upon the
conversion of Trust Convertible Preferred
securities (the increase in net earnings
is net of income tax expense of $963,000) 1,506,489 4,901,507
Potential common shares issuable upon the
exercise of outstanding stock options - 474,919
Diluted earnings per share $17,812,449 37,611,428 $0.47
Nine Months Ended September 30, 1997:
Basic earnings per share $56,361,496 32,181,077 $1.75
Dilutive effect of:
Potential common shares issuable upon the
conversion of Trust Convertible Preferred
securities (the increase in net earnings
is net of income tax expense of $2,889,000) 4,519,466 4,901,507
Potential common shares issuable upon the
exercise of outstanding stock options - 409,602
Diluted earnings per share $60,880,962 37,492,186 $1.62
</TABLE>
9
<PAGE>
3. Reduction of Carrying Value of Oil and Gas Properties
Under the full cost method of accounting, the net book value
of oil and gas properties, less related deferred income taxes,
may not exceed a calculated ceiling. The ceiling limitation is
the discounted estimated after-tax future net revenues from
proved oil and gas properties. The ceiling is imposed separately
by country. In calculating future net revenues, current prices
and costs are generally held constant indefinitely. The net book
value, less deferred tax liabilities, is compared to the ceiling
on a quarterly and annual basis. Any excess of the net book
value, less deferred taxes, is written off as an expense.
At December 31, 1997, Devon's net book value of oil and gas
properties less deferred taxes was well below the calculated
ceiling. This excess "cushion" was $146 million for Devon's U.S.
properties and $18 million for its Canadian properties. From
December 31, 1997, to September 30, 1998, the Texas Gulf Coast
gas price decreased approximately 35% and the price of West Texas
Intermediate crude oil decreased approximately 13%. As a result,
as of September 30, 1998, the book value of Devon's U.S.
properties, less deferred taxes, exceeded the full cost ceiling
by approximately $88 million. (Devon's Canadian properties had a
full cost cushion of approximately $8 million at September 30,
1998.) Accordingly, the carrying value of Devon's domestic oil
and gas properties was reduced by $126.9 million in the third
quarter of 1998. This reduction was partially offset by a
deferred income tax benefit of $38.9 million, resulting in a net
effect of $88 million.
4. Pending Merger
On June 29, 1998, Devon announced its intention to issue
approximately 15.5 million common shares in a merger with
Northstar Energy Corporation ("Northstar"), a Canadian
independent oil and gas producer. The merger is subject to
approval by the shareholders of both companies as well as certain
regulatory and court approvals. If approved, the merger is
expected to be consummated in the fourth quarter of 1998. The
merger is anticipated to be accounted for under the pooling-of-
interests method of accounting for business combinations.
Therefore, upon consummation of the merger, Devon's previously
reported financial results would be adjusted to combine its
results with those of Northstar and its predecessors.
Northstar's proved oil and gas reserves, all of which are
located in Canada, totaled 128 million barrels of oil equivalent
at December 31, 1997. These barrels included 6 million barrels
of oil equivalent owned through Northstar's share of an entity
accounted for under the equity method of accounting.
Devon filed a definitive proxy statement regarding this
pending merger on November 6, 1998. Such proxy includes a
description of the terms of the merger and other information
about both companies. The proxy can be accessed through the
Securities and Exchange Commission's EDGAR system, or at Devon's
web site at http://devonenergy.com.
10
<PAGE>
Following is Devon's unaudited pro forma combined balance
sheet as of September 30, 1998, assuming that the merger was
consummated on such date.
<TABLE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 1998
(In Thousands)
<CAPTION>
Merger Devon-
Related Northstar
Pro Forma Pro Forma
Devon Northstar Adjustments Combined
Assets:
<S> <C> <C> <C> <C>
<FN>
Current assets $ 51,069 63,695 (13,000) (a) $ 101,764
Oil and gas properties, net 651,441 308,936 960,377
Other property and equipment, net 21,000 4,773 25,773
<FN>
Deferred income taxes - 53,553 (53,553) (b) -
Other assets, net 13,839 1,645 15,484
Total assets $737,349 $432,602 $(66,553) $1,103,398
Liabilities:
Current liabilities 23,623 62,815 86,438
Revenues and royalties due to others 2,970 6,218 9,188
Other liabilities 24,343 - 24,343
Long-term debt - 303,517 303,517
<FN>
Deferred income taxes 67,588 - (53,553) (b) 14,035
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trust
holding solely 6.5% convertible
junior subordinated debentures
of Devon Energy Corporation 149,500 - 149,500
Stockholders' equity:
Preferred stock - - -
<FN>
Common stock 3,232 - 1,554 (c) 4,786
<FN>
Additional paid-in capital 392,937 397,178 (1,554) (c) 788,561
<FN>
Retained earnings (deficit) 79,769 (316,760) (13,000) (a) (249,991)
Accumulated other comprehensive
earnings (loss) - foreign currency
translation adjustments (6,613) (20,366) (26,979)
Total stockholders' equity 469,325 60,052 (13,000) 516,377
Total liabilities and
stockholders' equity $737,349 $432,602 $(66,553) $1,103,398
Following is a description of the pro forma adjustments
included in the above unaudited pro forma combined balance sheet
as of September 30, 1998:
<FN>
(a) To record the payment of estimated business combination
costs of $13 million, representing primarily professional and
advisory fees directly related to the merger. These one-time
business combination costs are not reflected in the following
unaudited pro forma statements of operations since they are non-
recurring in nature. These costs will be expensed by Devon in
the quarter in which the merger is consummated.
11
<PAGE>
<FN>
(b) To reclassify Northstar's deferred tax assets against
Devon's deferred tax liabilities.
<FN>
(c) To record the issuance of 15,542,618 shares, par value
$0.10, of Devon common stock in exchange for all 68,469,685
shares of Northstar common shares outstanding on September 30,
1998, based upon an exchange ratio which is indirectly equivalent
to 0.227 shares of Devon common stock for each Northstar common
share and assuming all exchangeable shares are exchanged for
Devon common stock on such basis.
</TABLE>
12
<PAGE>
Following are Devon's unaudited pro forma combined statements
of operations for the nine months ended September 30, 1998 and
1997, assuming that the merger was consummated on January 1,
1997.
<TABLE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1998 and 1997
(In Thousands, Except Per Share Data)
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
Devon- Devon-
Northstar Northstar
Pro Forma Pro Forma
Devon Northstar Combined Devon Northstar Combined
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Oil sales $ 65,470 45,931 $111,401 $100,857 53,016 $153,873
Gas sales 102,770 54,524 157,294 107,458 44,413 151,871
Natural gas liquids sales 11,120 2,469 13,589 16,534 1,380 17,914
Other 5,146 10,652 15,798 5,563 37,176 42,739
Total revenues 184,506 113,576 298,082 230,412 135,985 366,397
Costs and expenses:
Lease operating expenses 55,306 30,492 85,798 46,156 24,711 70,867
Production taxes 9,786 1,030 10,816 13,165 803 13,968
Depreciation, depletion and
amortization 68,197 24,716 92,913 60,389 55,751 116,140
General and administrative expenses 9,907 7,773 17,680 9,229 9,564 18,793
Interest expense 184 16,160 16,344 249 10,192 10,441
Deferred effect of changes in foreign
currency exchange on long-term debt - 15,433 15,433 - 406 406
Distributions on preferred securities of
subsidiary trust 7,288 - 7,288 7,288 - 7,288
Reduction of carrying value of oil and
gas properties 126,900 - 126,900 - - -
Total costs and expenses 277,568 95,604 373,172 136,476 101,427 237,903
Earnings (loss) before income taxes (93,062) 17,972 (75,090) 93,936 34,558 128,494
Income tax expense (benefit):
Current 5,482 1,032 6,514 14,091 1,465 15,556
Deferred (33,215) 8,408 (24,807) 23,484 15,414 38,898
Total income tax expense (benefit) (27,733) 9,440 (18,293) 37,575 16,879 54,454
Net earnings (loss) $(65,329) $ 8,532 $(56,797) $ 56,361 $17,679 $ 74,040
Net earnings (loss) per average common share
outstanding:
Basic $(2.02) (1.19) $1.75 1.58
Diluted $(2.02) (1.19) $1.62 1.49
Weighted average common shares
Outstanding - basic 32,320 47,816 32,181 46,925
</TABLE>
13
<PAGE>
Following are Devon's unaudited pro forma combined production,
average price and other data for the nine months ended September
30, 1998 and 1997, assuming that the merger was consummated on
January 1, 1997.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
Devon- Devon-
Northstar Northstar
Pro Forma Pro Forma
Devon Northstar Combined Devon Northstar Combined
Production:
<S> <C> <C> <C> <C> <C> <C>
Oil (thousand barrels) 5,044 4,006 9,050 5,218 3,362 8,580
Gas (thousand Mcf) 54,983 45,529 100,512 52,063 35,233 87,296
NGLSs (thousand barrels) 1,180 368 1,548 1,215 126 1,341
Thousand Boe 15,387 11,962 27,349 15,111 9,360 24,471
Average prices:
Oil (per barrel) $12.98 11.47 12.31 19.33 15.77 17.93
Gas (per Mcf) 1.87 1.20 1.56 2.06 1.26 1.74
NGLs (per barrel) 9.43 6.71 8.78 13.61 10.95 13.36
Per Boe 11.66 8.60 10.32 14.88 10.56 13.23
Costs per Boe:
Operating costs 4.23 2.64 3.53 3.93 2.73 3.47
Depreciation, depletion and
amortization of oil and gas
properties 4.29 1.99 3.28 3.86 5.86 4.62
General and administrative expenses 0.64 0.65 0.65 0.61 1.02 0.77
</TABLE>
14
<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 nine month periods
ended September 30, 1998, compared to the three month and nine
month periods ended September 30, 1997, and in financial
condition since December 31, 1997. It is presumed that readers
have read or have access to Devon's 1997 annual report on Form 10-
K.
Overview
Production for the third quarter of 1998 totaled 5.1 million
barrels of oil equivalent ("Boe") of oil, natural gas and natural
gas liquids ("NGL"). This was level with the 5.1 million Boe
produced in 1997's third quarter. However, due to significantly
lower oil, gas and NGL prices, 1998's third quarter revenues of
$57.1 million were down 22% compared to the comparable 1997 total
revenues of $72.9 million. Low prices in existence at the end of
the 1998 quarter also led to an $88 million non-cash net charge
from a full cost ceiling reduction of oil and gas properties.
This charge resulted in an $83.1 million net loss, or $2.57 per
share, in the third quarter. Excluding the $88 million charge,
1998's third quarter would have produced net earnings of $4.9
million, or $0.15 per share. Net earnings and net earnings per
share in the third quarter of 1997 were $16.3 million and $0.51,
respectively.
Production for the first nine months of 1998 totaled 15.4
million Boe. This was an increase of 2% above the production in
1997's comparable period. However, average oil, gas and NGL
prices in the 1998 period were significantly lower than in the
1997 period. These lower prices led to a 20% reduction in
revenues, from $230.4 million in the first nine months of 1997 to
$184.5 million in the first nine months of 1998. The previously
mentioned $88 million non-cash full cost charge resulted in a net
loss of $65.3 million, or $2.02 per share, in the first nine
months of 1998. Excluding the full cost writedown, the 1998
period would have yielded net earnings of $22.7 million, or $0.70
per share, compared to net earnings of $56.4 million, or $1.75
per share, in the first nine months of 1997.
15
<PAGE>
Results of Operations
Total revenues decreased $15.8 million, or 22%, in the third
quarter of 1998, and $45.9 million, or 20%, in the first nine
months of 1998. These decreases were caused by reductions in the
average prices of oil, gas and NGL. Combined oil, gas and NGL
revenues decreased $15.0 million, or 21%, in the third quarter of
1998, and $45.5 million, or 20%, in the year-to-date period of
1998. The relative contributions of production and price changes
to the quarterly and year-to-date comparisons of revenues are
shown in the tables below. (Note: Unless otherwise stated, all
references in this report to dollar amounts regarding Devon's
Canadian operations are expressed in U.S. dollars.)
<TABLE>
<CAPTION>
Total
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
Production
<S> <C> <C> <C> <C> <C> <C>
Oil (Bbls) 1,646,874 1,725,020 -5% 5,043,918 5,218,472 -3%
Gas (Mcf) 18,365,321 17,730,418 +4% 54,983,272 52,062,741 +6%
NGL (Bbls) 377,193 414,446 -9% 1,179,691 1,214,944 -3%
Oil, Gas and
<FN>
NGL (Boe)1 5,084,954 5,094,536 - % 15,387,488 15,110,540 +2%
Revenues
Oil $19,905,958 31,267,250 -36% 65,470,104 100,857,256 -35%
Gas 32,491,082 34,044,149 -5% 102,769,643 107,458,126 -4%
NGL 3,132,210 5,206,135 -40% 11,120,619 16,534,020 -33%
Combined $ 55,529,250 70,517,534 -21% 179,360,366 224,849,402 -20%
Average Prices
Oil (Per Bbl) $12.09 18.13 -33% 12.98 19.33 -33%
Gas (Per Mcf) $ 1.77 1.92 -8% 1.87 2.06 -9%
NGL (Per Bbl) $ 8.30 12.56 -34% 9.43 13.61 -31%
Oil, Gas and NGL
<FN>
(Per Boe)1 $10.92 13.84 -21% 11.66 14.88 -22%
<CAPTION>
Domestic
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
Production
Oil (Bbls) 1,387,458 1,503,734 -8% 4,293,940 4,520,756 -5%
Gas (Mcf) 16,751,561 15,662,465 +7% 49,352,426 45,761,290 +8%
NGL (Bbls) 342,138 372,322 -8% 1,073,617 1,091,316 -2%
Oil, Gas and
<FN>
NGL (Boe)1 4,521,522 4,486,467 +1% 13,592,962 13,238,954 +3%
Revenues
Oil $16,652,491 27,297,108 -39% 55,719,056 87,513,250 -36%
Gas 30,350,695 31,524,367 -4% 95,428,163 98,843,718 -3%
NGL 2,808,125 4,617,201 -39% 9,807,798 14,598,360 -33%
Combined $49,811,311 63,438,676 -21% 160,955,017 200,955,328 -20%
Average Prices
Oil (Per Bbl) $12.00 18.15 -34% 12.98 19.36 -33%
Gas (Per Mcf) $ 1.81 2.01 -10% 1.93 2.16 -11%
NGL (Per Bbl) $ 8.21 12.40 -34% 9.14 13.38 -32%
Oil, Gas and NGL
<FN>
(Per Boe)1 $11.02 14.14 -22% 11.84 15.18 -22%
16
<PAGE>
<CAPTION>
Canada
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
Production
Oil (Bbls) 259,416 221,286 +17% 749,978 697,716 +7%
Gas (Mcf) 1,613,760 2,067,953 -22% 5,630,846 6,301,451 -11%
NGL (Bbls) 35,055 42,124 -17% 106,074 123,628 -14%
Oil, Gas and
<FN>
NGL (Boe)1 563,432 608,069 -7% 1,794,526 1,871,586 -4%
Revenues
Oil $3,253,467 3,970,142 -18% 9,751,048 13,344,006 -27%
Gas 2,140,387 2,519,782 -15% 7,341,480 8,614,408 -15%
NGL 324,085 588,934 -45% 1,312,821 1,935,660 -32%
Combined $5,717,939 7,078,858 -19% 18,405,349 23,894,074 -23%
Average Prices
Oil (Per Bbl) $12.54 17.94 -30% 13.00 19.13 -32%
Gas (Per Mcf) $ 1.33 1.22 +9% 1.30 1.37 -5%
NGL (Per Bbl) $ 9.25 13.98 -34% 12.38 15.66 -21%
Oil, Gas and NGL
<FN>
(Per Boe)1 $10.15 11.64 -13% 10.26 12.77 -20%
<FN>
1 Gas is converted to barrels of oil equivalent ("Boe") at the
rate of six Mcf 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, gas and NGL
prices. The respective prices of these products are affected by
market and other factors in addition to relative energy content.
</TABLE>
Oil Revenues. Oil revenues decreased $11.4 million, or 36%,
in the third quarter of 1998. A decrease in the average price of
$6.04 per barrel, or 33%, reduced oil revenues by $10.0 million.
The remaining $1.4 million reduction in oil revenues was caused
by a 78,000 barrel, or 5%, decrease in production.
Oil revenues decreased $35.4 million, or 35%, in the first
nine months of 1998. A decrease in the average price of $6.35
per barrel, or 33%, reduced oil revenues by $32.0 million. The
remaining $3.4 million reduction in oil revenues was caused by a
175,000 barrel, or 3%, decrease in production.
Gas Revenues. Gas revenues decreased $1.6 million, or 5%,
in the third quarter of 1998. A decrease in the average price of
$0.15 per Mcf, or 8%, decreased gas revenues by $2.8 million.
The effect of lower prices was partially offset by $1.2 million
of increased gas sales caused by a 0.6 Bcf, or 4%, increase in
gas production.
Devon's coal seam gas properties produced 4.9 Bcf of gas in
the third quarter of 1998 compared to 4.2 Bcf in the third
quarter of 1997. During the last two years, Devon has conducted
a program of mechanical improvements at the Northeast Blanco Unit
coal seam gas property. Such program has caused the majority of
the quarterly and year-to-date gains in coal seam gas production
during 1998. Devon's other domestic properties produced 11.9 Bcf
in 1998's third quarter compared to 11.5 Bcf in 1997's third
quarter. This increase was primarily due to new wells drilled
since the middle of 1997.
17
<PAGE>
The coal seam gas properties averaged $1.64 per Mcf in
1998's third quarter compared to the average of $1.88 per Mcf in
1997's third quarter. Devon's other domestic gas properties
averaged $1.88 per Mcf in the 1998 quarter compared to $2.06 per
Mcf in the 1997 quarter.
Gas revenues decreased $4.7 million, or 4%, in the first
nine months of 1998. A decrease in the average price of $0.19
per Mcf, or 9%, reduced gas revenues by $10.7 million. A 2.9
Bcf, or 6%, increase in gas production offset $6.0 million of the
reduction caused by lower prices.
Devon's coal seam gas properties produced 15.0 Bcf of gas in
the first nine months of 1998 compared to 12.8 Bcf in the first
nine months of 1997. Devon's other domestic properties produced
34.4 Bcf in the first nine months of 1998 compared to 33.0 Bcf in
the first nine months of 1997.
The coal seam gas properties averaged $1.74 per Mcf in the
1998 year-to-date period compared to the average of $2.00 per Mcf
in the 1997 year-to-date period. Devon's other domestic gas
properties averaged $2.02 per Mcf in the first nine months of
1998 compared to $2.22 in the comparable 1997 period.
NGL Revenues. NGL revenues decreased $2.1 million, or 40%,
in the third quarter of 1998. A decrease in the average price of
$4.26 per barrel, or 34%, reduced NGL revenues by $1.6 million.
A 37,000 barrel, or 9%, decline in production caused the
remaining $0.5 million of decrease in NGL revenues.
NGL revenues decreased $5.4 million, or 33%, in the first
nine months of 1998. A decrease in the average price of $4.18
per barrel, or 31%, reduced NGL revenues by $4.9 million. A
35,000 barrel, or 3% decline in production caused the remaining
$0.5 million of decrease in NGL revenues.
Other Revenues. Other revenues decreased $0.8 million, or
34%, in the third quarter of 1998. This was primarily caused by a
$0.3 million drop in interest income, a $0.1 million reduction to
the market value of natural gas purchased for secondary recovery
projects, and the fact that the third quarter of 1997's other
income total included several nonrecurring items that
individually were each less than $0.1 million, but in total
aggregated approximately $0.4 million. Other revenues decreased
$0.4 million, or 7%, in the first nine months of 1998. A $0.3
million increase in interest income in the 1998 year-to-date
period was more than offset by $0.7 million of reductions to the
remaining sources of other revenues, including those previously
mentioned with regard to the change in the third quarter other
revenue totals.
18
<PAGE>
Production and Operating Expenses. Components of production
and operating expenses in the third quarter and first nine months
of 1998 increased or decreased compared to 1997 as shown in the
tables below.
<TABLE>
<CAPTION>
Total
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
Expenses
Recurring operations and
<S> <C> <C> <C> <C> <C> <C>
maintenance expenses $17,122,615 14,513,305 +18% 51,618,397 43,088,111 +20%
Well workover expenses 1,1071,039 1,301,385 -18% 3,687,326 3,067,500 +20%
Production taxes 3,247,024 4,109,654 -21% 9,786,223 13,165,045 -26%
Total production and
operating expenses $21,440,678 19,924,344 +8% 65,091,946 59,320,656 +10%
Expenses Per Boe
Recurring operations and
maintenance expenses $3.37 2.85 +18% 3.35 2.85 +18%
Well workover expenses 0.21 0.25 -16% 0.24 0.21 +14%
Production taxes 0.64 0.81 -21% 0.64 0.87 -26%
Total production and
operating expenses $4.22 3.91 +8% 4.23 3.93 +8%
<CAPTION>
Domestic
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
Expenses
Recurring operations and
maintenance expenses $15,344,888 12,782,991 +20% 46,223,383 38,447,151 +20%
Well workover expenses 1,015,035 849,830 +19% 3,500,292 2,410,520 +45%
Production taxes 3,183,644 4,043,208 -21% 9,589,337 12,961,285 -26%
Total production and
operating expenses $19,543,567 17,676,029 +11% 59,313,0125 3,818,956 +10%
Expenses Per Boe
Recurring operations and
maintenance expenses $3.39 2.85 +19% 3.40 2.91 +17%
Well workover expenses 0.23 0.19 +21% 0.26 0.18 +44%
Production taxes 0.70 0.90 -22% 0.70 0.98 -29%
Total production and
operating expenses $4.32 3.94 +10% 4.36 4.07 +7%
<CAPTION>
Canada
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
Expenses
Recurring operations and
maintenance expenses $1,777,727 1,730,314 +3% 5,395,014 4,640,960 +16%
Well workover expenses 56,004 451,555 -88% 187,034 656,980 -72%
Production taxes 63,380 66,446 -5% 196,886 203,760 -3%
Total production and
operating expenses $1,897,111 2,248,315 -16% 5,778,934 5,501,700 +5%
Expenses Per Boe
Recurring operations and
maintenance expenses $3.16 2.85 +11% 3.01 2.48 +21%
Well workover expenses 0.10 0.74 -86% 0.10 0.35 -71%
Production taxes 0.11 0.11 - % 0.11 0.11 - %
Total production and
operating expenses $3.37 3.70 -9% 3.22 2.94 +10%
NM - Not a meaningful figure.
</TABLE>
19
<PAGE>
Recurring operations and maintenance expenses increased $2.6
million, or 18%, in the third quarter of 1998. Expenses incurred
on new wells and property acquisitions added since the third
quarter of 1997 accounted for $1.1 million of the increase.
Also, the quarterly portion of estimated annual ad valorem taxes
increased $0.5 million in the 1998 quarter. However,
approximately $0.4 million of this increase is due to timing
differences between the periods, as 1997's annual ad valorem
taxes were underestimated during the first three quarters of
1997.
Production taxes decreased $0.9 million, or 21%, in the
third quarter of 1998. The majority of this decrease was related
to the 21% decrease in total oil, gas and NGL revenues in the
1998 quarter.
Recurring operations and maintenance expenses increased $8.5
million, or 20%, in the first nine months of 1998. Expenses
incurred on new wells and property acquisitions added since mid-
1997 accounted for $4.7 million of the increase. Also, the
interim estimates of annual ad valorem taxes increased $2.0
million in the first nine months of 1998. However, approximately
$1.5 million of this increase is due to timing differences
between the periods, as 1997's annual ad valorem taxes were
underestimated during the first nine months of 1997.
Production taxes decreased $3.4 million, or 26%, in the
first nine months of 1998. The majority of this decrease was
related to the 20% decrease in total oil, gas and NGL revenues in
the 1998 period. Additionally, production taxes dropped in the
1998 period due to the benefit of lower rates on certain Texas
and Wyoming properties that qualified for either lower production
tax rates or as tax-exempt properties.
Depreciation, Depletion and Amortization Expense ("DD&A").
Oil and gas property related DD&A increased $2.9 million, or 15%,
from $19.5 million in the third quarter of 1997 to $22.4 million
in the third quarter of 1998. An increase in the DD&A rate from
$3.83 per Boe in 1997's third quarter to $4.41 per Boe in 1998's
third quarter accounted for all $2.9 million of the increase in
DD&A expense.
Oil and gas property related DD&A increased $7.7 million, or
13%, from $58.3 million in the first nine months of 1997 to $66.0
million in the first nine months of 1998. An increase in the
DD&A rate from $3.86 per Boe in the first nine months of 1997 to
$4.29 per Boe in the first nine months of 1998 accounted for $6.6
million of the increase in DD&A expense. The remaining $1.1
million of increase was caused by the 277,000 Boe, or 2%,
increase in total oil, gas and NGL production in the 1998 period.
General and Administrative Expenses ("G&A"). G&A
increased $0.2 million, or 6%, in the third quarter of 1998.
Employee salaries and related overhead costs, including insurance
and pension expense, increased $0.9 million in the 1998 quarter.
This increase was due to a combination of compensation increases
and an increase in the number of personnel in Devon's Oklahoma
City and Calgary offices. Other G&A items that incurred
significant increases in the 1998 quarter were costs of leasing
various office equipment and data related to exploration
activities, costs of abandoned acquisitions and legal expenses.
Each of these three areas increased approximately $0.1 million in
the 1998 quarter.
20
<PAGE>
The gross increases in G&A were partially offset by an
increase in the amount of such costs that were capitalized
pursuant to the full cost method of accounting. Approximately
$1.5 million of costs were capitalized in the third quarter of
1998 compared to $0.9 million capitalized in the third quarter of
1997.
G&A was also reduced by an increase in Devon's overhead
reimbursements. As the operator of a property, Devon receives
these reimbursements from the property's working interest owners.
Devon records the reimbursements as reductions to G&A. In the
third quarter of 1998, these reimbursements increased $0.6
million compared to the third quarter of 1997.
G&A increased $0.7 million, or 7%, in the first nine months
of 1998. Employee salaries and related overhead costs, including
insurance and pension expense, increased $2.8 million in the 1998
period. This increase was due to a combination of compensation
increases and an increase in the number of personnel in Devon's
Oklahoma City and Calgary offices. Other G&A items that incurred
significant increases in the first nine months of 1998 were costs
of leasing various office equipment and data related to
exploration activities (up $0.3 million), costs of abandoned
acquisitions (up $0.3 million) and legal expenses (up $0.2
million).
The gross increases in G&A were partially offset by an
increase in the amount of such costs that were capitalized
pursuant to the full cost method of accounting. Approximately
$4.4 million of costs were capitalized in the first nine months
of 1998 compared to $2.7 million capitalized in the same period
of 1997.
G&A was also reduced by a $1.4 million increase in Devon's
overhead reimbursements received in the first nine months of
1998.
Interest Expense. Interest expense incurred in the third
quarters of 1998 and 1997 were comparable and were immaterial to
the overall financial results of each period. Interest expense
decreased $0.1 million, or 26%, in the first nine months of 1998.
The average debt balance decreased from $1.0 million in the first
nine months of 1997 to zero in the first nine months of 1998.
Interest expense recorded in the 1998 period consisted primarily
of facility and agency fees paid under the terms of Devon's long-
term credit facilities, offset by $0.2 million of gain recognized
from a 1996 termination of an interest rate swap. All of such
gain was recognized in the first six months of 1998.
See "Capital Expenditures, Capital Resources and Liquidity -
Capital Resources and Liquidity" elsewhere herein for a
discussion of changes in Devon's long-term credit facilities
during 1998's second quarter.
Distributions on Preferred Securities of Subsidiary Trust.
Devon issued $149.5 million of 6.5% Trust Convertible Preferred
Securities ("TCP Securities") in July, 1996. The proceeds from
this issuance were used to substantially retire Devon's long-term
bank debt. Distributions on the TCP Securities accrue and are
paid at the rate of 1.625% per quarter.
Reduction of Carrying Value of Oil and Gas Properties.
Under the full cost method of accounting, the net book value of
oil and gas properties, less related deferred income taxes, may
not exceed a calculated "ceiling." The ceiling limitation is the
discounted estimated after-tax future net revenues from proved
oil and gas properties. The ceiling is imposed separately by
country. In calculating future net revenues, current prices and
costs are generally held constant indefinitely. The net book
value, less deferred tax liabilities, is compared to the ceiling
on a quarterly and annual basis. Any excess of the net book
value, less deferred taxes, is written off as an expense.
21
<PAGE>
At December 31, 1997, Devon's net book value of oil and gas
properties less deferred taxes was well below the calculated
ceiling. This excess "cushion" was $146 million for Devon's U.S.
properties and $18 million for its Canadian properties. From
December 31, 1997, to September 30, 1998, the Texas Gulf Coast
gas price decreased approximately 35% and the price of West Texas
Intermediate crude oil decreased approximately 13%. As a result,
as of September 30, 1998, the book value of Devon's U.S.
properties, less deferred taxes, exceeded the full cost ceiling
by approximately $88 million. (Devon's Canadian properties had a
full cost cushion of approximately $8 million at September 30,
1998.) Accordingly, the carrying value of Devon's domestic oil
and gas properties were reduced by $126.9 million in the third
quarter of 1998. This reduction was partially offset by a
deferred income tax benefit of $38.9 million, resulting in a net
effect of $88 million.
Income Taxes. The estimated effective tax (benefit) rates
in the third quarter and first nine months of 1998 were (31)% and
(30)%, respectively, compared to 40% estimated in the third
quarter and first nine months of 1997. (However, the eventual
actual tax rate for the year 1997 was reduced to 38%.) As
discussed above, Devon recorded a $126.9 million reduction of
carrying value of its oil and gas properties in the third quarter
of 1998. Approximately $27.2 million of the reduction related to
costs which are not deductible for income tax purposes. These
non-deductible costs lowered the benefit rates for the 1998
periods from the normally expected rate of 35%.
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.
Included as deferred tax assets as of September 30, 1998,
were approximately $2.9 million of net operating loss
carryforwards. The carryforwards include federal net operating
loss carryforwards, the majority of which do not begin to expire
until 2007, and state net operating loss carryforwards that
expire primarily between 1999 and 2011. Devon expects the tax
benefits from the net operating loss carryforwards to be utilized
between 1998 and 2001. 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, management believes that Devon's future
taxable income will more likely than not be sufficient to utilize
substantially all of its tax carryforwards prior to their
expiration.
22
<PAGE>
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
elsewhere herein.
Capital Expenditures. Cash used for capital expenditures
increased 55% from $91.4 million in the first nine months of 1997
to $141.9 million in the first nine months of 1998.
Approximately $138.9 million was spent in the 1998 period on
acquisitions, exploration and development efforts, compared to
$87.7 million spent in the first nine months of 1997.
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 nine months
of 1998. Operating cash flow in the first nine months of 1998
was $98.4 million, compared to $129.0 million in the first nine
months of 1997. Lower revenues caused by average price declines,
as discussed earlier, were the primary cause for the reduction in
operating cash flow in 1998.
Devon's operating and financing cash flow in the first nine
months of 1998, combined with cash on hand, were more than
sufficient to fund the period's net capital expenditures and
dividend requirements. Therefore, Devon did not utilize its
credit lines during the period. On May 15, 1998, Devon entered
into a new long-term credit facility with its lenders. The new
facility is an unsecured "balance sheet" facility that replaced
the previous unsecured "borrowing base" facility. The amount of
credit available under the new facility as of September 30, 1998,
was $208 million, which was unchanged from the previous facility.
If so desired, Devon believes its lenders would increase its
credit lines by a substantial margin above the existing $208
million. Also, Devon has a demand facility for its Canadian
operations which totals $12.5 million in Canadian dollars. No
borrowings were made against either facility during the
first nine months of 1998. As of November 9, 1998, $10 million
was outstanding against the primary facility, and $6 million
Canadian was outstanding against the Canadian facility.
Pending Merger. On June 29, 1998, Devon announced its
intention to issue approximately 15.5 million common shares in a
merger with Northstar Energy Corporation ("Northstar"), a
Canadian independent oil and gas producer. The merger is subject
to approval by the shareholders of both companies as well as
certain regulatory and court approvals. If approved, the merger
is expected to be consummated in the fourth quarter of 1998. The
merger is anticipated to be accounted for under the pooling-of-
interests method of accounting for business combinations.
Therefore, upon consummation of the merger, Devon's previously
reported financial results would be adjusted to combine its results
with those of Northstar and its predecessors.
Northstar's proved oil and gas reserves, all of which are
located in Canada, totaled 128 million barrels of oil equivalent
at December 31, 1997. These barrels included 6 million barrels
of oil equivalent owned through Northstar's share of an entity
accounted for under the equity method of accounting.
Devon filed a definitive proxy statement regarding this pending
merger on November 6, 1998. Such proxy includes a description of the
terms of the merger and other information about both companies. The
proxy can be accessed through the Securities and Exchange Commission's
EDGAR system, or at Devon's web site at http://devonenergy.com.
23
<PAGE>
Year 2000 Status. Devon's company-wide Year 2000 Project
("the Project") is proceeding on schedule. The Project is
addressing the Year 2000 issue caused by computer programs being
written utilizing two digits rather than four to define an
applicable year. As a result, Devon's computer equipment,
software (all of which is externally developed), and devices with
embedded technology that are time sensitive may misinterpret the
actual date beginning on January 1, 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, but not limited to, a temporary inability
to process transactions.
Devon has undertaken various initiatives intended to ensure
that its computer equipment and software will function properly
with respect to dates in the Year 2000 and thereafter. In
planning and developing the Project, Devon has considered both
its information technology ("IT") and its non-IT systems. The
term "computer equipment and software" includes systems that are
commonly thought of as IT systems, including accounting, data
processing, telephone systems, scanning equipment, and other
miscellaneous systems. Those items not to be considered as IT
technology include alarm systems, fax machines, monitors for
field operations, or other miscellaneous systems. Both IT and
non-IT systems may contain embedded technology, which complicates
Devon's Year 2000 identification, assessment, remediation, and
testing efforts. Based upon its identification and assessment
efforts to date, Devon is in the process of replacing the
computer equipment and software it currently uses to become Year
2000 compliant. In addition, in the ordinary course of replacing
computer equipment and software, Devon plans to obtain
replacements that are in compliance with Year 2000.
Devon has also mailed letters to its significant vendors and
service providers and has verbally communicated with many
strategic customers to determine the extent to which interfaces
with such entities are vulnerable to Year 2000 issues and whether
the products and services purchased from or by such entities are
Year 2000 compliant. Devon has received a favorable response
from such third parties and it is anticipated that their
significant Year 2000 issues will be addressed on a timely basis.
With regard to IT, non-IT systems and communications with
third parties, Devon anticipates that the Project will be
completed by June 30, 1999.
As noted above, Devon is in the process of replacing certain
computer equipment and software because of the Year 2000 issue.
Devon estimates that the total cost of such replacements will
approximate $0.3 million. Substantially all of the personnel
being used on the Project are existing Devon employees.
Therefore, the labor costs of its Year 2000 identification,
assessment, remediation and testing efforts, as well as currently
anticipated labor costs to be incurred by Devon with respect to
Year 2000 issues of third parties, are expected to be less than
$0.1 million.
Devon has not yet begun a comprehensive analysis of the
operational problems and costs that would be reasonably likely to
result from the failure by Devon and significant third parties to
complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for
dealing with the most reasonably likely worst case scenario, and
such scenario has not yet been clearly identified. Devon plans
to complete such analysis and contingency planning by December
31, 1999.
24
<PAGE>
Devon presently does not expect to incur significant
operational problems due to the Year 2000 issue. However, if all
Year 2000 issues are not properly and timely identified,
assessed, remediated and tested there can be no assurance that
the Year 2000 issue will not materially impact Devon's results of
operations or adversely affect its relationships with customers,
vendors, or others. Additionally, there can be no assurance that
the Year 2000 issues of other entities will not have a material
impact on Devon's systems or results of operations.
Acquisition and Sale of Units in Burlington Resources Coal
Seam Gas Royalty Trust. In Devon's 1997 Annual Report on Form 10-
K, it was disclosed that on February 13, 1998, Devon commenced a
tender offer for any and all of the units of beneficial interest
("Units") of Burlington Resources Coal Seam Gas Royalty Trust
(the "Trust") for $8.75 per Unit. Ultimately, in the first
quarter of 1998, Devon acquired 356,228 Units , which represented
only approximately 4% of the total Units outstanding. In the
third quarter of 1998, Devon sold all 356,228 Units to a third
party for $9.00 per unit. Also, as a condition of the sale, the
third party provided Devon the right to acquire 6.7% of the
Trust's underlying working interest of approximately 19.6% in the
Northeast Blanco Unit coal seam gas properties. Such right will
only be available if the third party is successful in acquiring
the Trust's working interest and subsequently terminating the
Trust. In such event, and if Devon chooses to exercise its
right, the price to be paid by Devon to the third party for the
working interest would be equal to the third party's cost of
acquiring the working interest, including financing costs.
Impact of Recently Issued Accounting Standards Not Yet
Adopted. In February, 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer
as useful as they previously were. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. Devon will adopt
the new disclosure requirements in its annual financial
statements for the year ending December 31, 1998.
In June, 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure
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 the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
It is expected that Devon will adopt the provisions of SFAS No.
133 as of January 1, 2000. If the provisions of SFAS No. 133
were to be applied as of September 30, 1998, it would not have a
material effect on Devon's financial position as of such date, or
the results of operations for the nine month period then ended.
25
<PAGE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
None
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 Agreement and Plan of Merger among Registrant,
Devon Energy Corporation (Nevada), Kerr-McGee
Corporation, Kerr-McGee North American Onshore
Corporation and Kerr-McGee Canada Onshore Ltd.,
dated October 17, 1996 (incorporated by reference
to Addendum A to Registrant's definitive proxy
statement for a special meeting of shareholders,
filed on November 6, 1996).
2.2 Amended and Restated Combination Agreement between
the Registrant and Northstar Energy Corporation
dated June 29, 1998 (incorporated by reference to
Annex B to Registrant's difinitive proxy statement
for a special meeting of stockholders, filed November
6, 1998).
3.1 Registrant's Certificate of Incorporation, as
amended (incorporated by reference to Exhibit B to
Registrant's definitive Proxy Statement for its
1995 Annual Meeting of Shareholders filed on April
21, 1995).
26
<PAGE>
3.2 Registrant's Certificate of Amendment of
Certificate of Incorporation (incorporated by
reference to Exhibit 2 to Registrant's Current
Report on Form 8-K dated December 31, 1996).
3.3 Registrant's Bylaws (incorporated by reference to
Exhibit 3.2 to Registrant's Registration Statement
on Form 8-B filed on June 7, 1995).
4.1 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to Registrant's
Registration Statement on Form 8-B filed on June
7, 1995).
4.2 Rights Agreement between Registrant and The First
National Bank of Boston (incorporated by reference
to Exhibit 4.2 to Registrant's Registration
Statement on Form 8-B filed on June 7, 1995).
4.3 First Amendment to Rights Agreement between
Registrant and The First National Bank of Boston
dated October 16, 1996 (incorporated by reference
to Exhibit H-1 to Addendum A to Registrant's
definitive proxy statement for a special meeting
of shareholders, filed on November 6, 1996).
4.4 Second Amendment to Rights Agreement between
Registrant and the First National Bank of Boston,
dated December 31, 1996 (incorporated by reference
to Exhibit 4.2 to Registrant's Current Report on
Form 8-K dated December 31, 1996).
4.5 Certificate of Designations of Series A Junior
Participating Preferred Stock of Registrant
(incorporated by reference to Exhibit 3.3 to
Registrant's Registration Statement on Form 8-B
filed on June 7, 1995).
4.6 Certificate of Trust of Devon Financing Trust
[incorporated by reference to Exhibit 4.5 to
Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-00815)].
4.7 Amended and Restated Declaration of Trust of Devon
Financing Trust dated as of July 3, 1996, by J.
Larry Nichols, H. Allen Turner, William T. Vaughn,
The Bank of New York (Delaware) and The Bank of
New York as Trustees and the Registrant as Sponsor
[incorporated by reference to Exhibit 4.6 to
Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-00815)].
4.8 Indenture dated as of July 3, 1996, between the
Registrant and The Bank of New York [incorporated
by reference to Exhibit 4.7 to Amendment No. 1 to
Registrant's Registration Statement on Form S-3
(No. 333-00815)].
4.9 First Supplemental Indenture dated as of July 3,
1996, between the Registrant and The Bank of New
York [incorporated by reference to Exhibit 4.8 to
Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-00815)].
27
<PAGE>
4.10 Form of 6 1/2% Preferred Convertible Securities
(included as Exhibit A-1 to Exhibit 4.7 above).
4.11 Form of 6 1/2% Convertible Junior Subordinated
Debentures (included in Exhibit 4.7 above).
4.12 Preferred Securities Guarantee Agreement dated
July 3, 1996, between Registrant, as Guarantor,
and The Bank of New York, as Preferred Guarantee
Trustee [incorporated by reference to Exhibit 4.11
to Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-00815)].
4.13 Stock Rights and Restrictions Agreement dated as
of December 31, 1996, between Registrant and Kerr-
McGee Corporation (incorporated by reference to
Exhibit 4.3 to Registrant's Current Report on Form
8-K dated December 31, 1996).
4.14 Registration Rights Agreement, dated December 31,
1996, by and between Registrant and Kerr-McGee
Corporation (incorporated by reference to Exhibit
4.4 to Registrant's Current Report on Form 8-K
dated December 31, 1996).
10.1 Credit Agreement, dated May 15, 1998, among the
Registrant and Devon Energy Corporation (Nevada),
as Borrowers, NationsBank, N.A., as Agent, and
NationsBank, N.A., Bank One, Texas, N.A., Bank of
Montreal and First Union National Bank, as Lenders
(incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.2 Devon Energy Corporation 1988 Stock Option Plan
[incorporated by reference to Exhibit 10.4 to
Registrant's Registration Statement on Form S-4
(No. 33-23564)].*
10.3 Devon Energy Corporation 1993 Stock Option Plan
(incorporated by reference to Exhibit A to
Registrant's Proxy Statement for the 1993 Annual
Meeting of Shareholders filed on May 6, 1993).*
10.4 Devon Energy Corporation 1997 Stock
Option Plan (incorporated by reference to Exhibit
A to Registrant's Proxy Statement for the 1997
Annual Meeting of Shareholders filed on April 3,
1997).*
10.5 Severance Agreement among Devon Energy Corporation
(Nevada), Registrant and Mr. J. Larry Nichols,
dated December 3, 1992 (incorporated 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).*
28
<PAGE>
10.6 Severance Agreement among Devon Energy Corporation
(Nevada), Registrant and Mr. J. Michael Lacey,
dated December 3, 1992 (incorporated 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).*
10.7 Severance Agreement among Devon Energy Corporation
(Nevada), Registrant and Mr. H. Allen Turner,
dated December 3, 1992 (incorporated 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).*
10.8 Severance Agreement among Devon Energy Corporation
(Nevada), Registrant and Mr. Darryl G. Smette,
dated December 3, 1992 (incorporated 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).*
10.9 Severance Agreement among Devon Energy Corporation
(Nevada), Registrant and Mr. William T. Vaughn,
dated December 3, 1992 (incorporated 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).*
10.10 Severance Agreement among Devon Energy
Corporation (Nevada), Registrant and Duke R. Ligon
dated March 26, 1997 (incorporated by reference to
Exhibit 10.11 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997).*
10.11 Employment Agreement between Devon
Energy Corporation (Nevada), Registrant and Duke
R. Ligon, dated February 7, 1997 (incorporated by
reference to Exhibit 10.12 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).*
10.12 Supplemental Retirement Income Agreement
among Devon Energy Corporation (Nevada),
Registrant and John W. Nichols, dated March 26,
1997 (incorporated by reference to Exhibit 10.13
to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997).*
10.13 Sale and Purchase Agreement relating to
Registrant's San Juan Basin gas properties
(incorporated by reference to Exhibit 10.15 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
10.14 Second Restatement of and Amendment to Sale
and Purchase Agreement relating to Registrant's
San Juan Basin gas properties (incorporated by
reference to Exhibit 10.16 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).
29
<PAGE>
10.15 Registration Rights Agreement dated July 3,
1996, by and among the Registrant, Devon Financing
Trust and Morgan Stanley & Co. Incorporated
[incorporated by reference to Exhibit 10.1 to
Amendment No. 1 to Registrant's Registration
Statement on Form S-3 (No. 333-00815)].
* Compensatory plans or arrangements.
(b) Reports on Form 8-K - A report on Form 8-K was
filed on July 8, 1998, regarding Devon's pending merger
with Northstar Energy Corporation.
30
<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: November 9, 1998 /s/Danny J. Heatly
Danny J. Heatly
Controller
31
<PAGE>
INDEX TO EXHIBITS
Page
2.1 Agreement and Plan of Merger among Registrant, Devon #
Energy Corporation (Nevada), Kerr-McGee Corporation,
Kerr-McGee North American Onshore Corporation and Kerr-
McGee Canada Onshore Ltd., dated October 17, 1996
2.2 Amended and Restated Combination Agreement between the #
Registrant and Northstar Energy Corporation dated June 29,
1998
3.1 Registrant's Certificate of Incorporation, as amended #
3.2 Registrant's Certificate of Amendment of Certificate of #
Incorporation
3.3 Registrant's Bylaws #
4.1 Form of Common Stock Certificate #
4.2 Rights Agreement between Registrant and The First #
National Bank of Boston
4.3 First Amendment to Rights Agreement between Registrant #
and The First National Bank of Boston dated October 16,
1996
4.4 Second Amendment to Rights Agreement between Registrant #
and the First National Bank of Boston, dated December
31, 1996
4.5 Certificate of Designations of Series A Junior #
Participating Preferred Stock of Registrant
4.6 Certificate of Trust of Devon Financing Trust #
4.7 Amended and Restated Declaration of Trust of Devon #
Financing Trust dated as of July 3, 1996, by J. Larry
Nichols, H. Allen Turner, William T. Vaughn, The Bank
of New York (Delaware) and The Bank of New York as
Trustees and the Registrant as Sponsor
4.8 Indenture dated as of July 3, 1996, between the #
Registrant and The Bank of New York
32
<PAGE>
4.9 First Supplemental Indenture dated as of July 3, 1996, #
between the Registrant and The Bank of New York
4.10 Form of 6 1/2% Preferred Convertible Securities #
(included as Exhibit A-1 to Exhibit 4.5 above)
4.11 Form of 6 1/2% Convertible Junior Subordinated #
Debentures (included in Exhibit 4.7 above)
4.12 Preferred Securities Guarantee Agreement dated July 3, #
1996, between Registrant, as Guarantor, and The Bank of
New York, as Preferred Guarantee Trustee
4.13 Stock Rights and Restrictions Agreement dated as of #
December 31, 1996, between Registrant and Kerr-McGee
Corporation
4.14 Registration Rights Agreement, dated December 31, 1996, #
by and between Registrant and Kerr-McGee Corporation
10.1 Credit Agreement, dated May 15, 1998, among the #
Registrant and Devon Energy Corporation (Nevada), as
Borrowers, NationsBank, N.A., as Agent, and
NationsBank, N.A., Bank One, Texas, N.A., Bank of
Montreal and First Union National Bank, as Lenders.
10.2 Devon Energy Corporation 1988 Stock Option Plan #
10.3 Devon Energy Corporation 1993 Stock Option Plan #
10.4 Devon Energy Corporation 1997 Stock Option Plan #
10.5 Severance Agreement among Devon Energy Corporation #
(Nevada), Registrant and Mr. J. Larry Nichols, dated
December 3, 1992
10.6 Severance Agreement among Devon Energy Corporation #
(Nevada), Registrant and Mr. J. Michael Lacey, dated
December 3, 1992
10.7 Severance Agreement among Devon Energy Corporation #
(Nevada), Registrant and Mr. H. Allen Turner, dated
December 3, 1992
10.8 Severance Agreement among Devon Energy Corporation #
(Nevada), Registrant and Mr. Darryl G. Smette, dated
December 3, 1992
33
<PAGE>
10.9 Severance Agreement among Devon Energy Corporation #
(Nevada), Registrant and Mr. William T. Vaughn, dated
December 3, 1992
10.10 Severance Agreement among Devon Energy Corporation #
(Nevada), Registrant and Duke R. Ligon, dated March 26,
1997
10.11 Employment Agreement between Registrant and Duke R. #
Ligon, dated February 7, 1997
10.12 Supplemental Retirement Income Agreement among Devon #
Energy Corporation (Nevada), Registrant and John W.
Nichols, dated March 26, 1997
10.13 Sale and Purchase Agreement relating to Registrant's #
San Juan Basin gas properties
10.14 Second Restatement of and Amendment to Sale and #
Purchase Agreement relating to Registrant's San Juan
Basin gas properties
10.15 Registration Rights Agreement dated July 3, 1996, by #
and among the Registrant, Devon Financing Trust and
Morgan Stanley & Co. Incorporated
____________________________________
# Incorporated by reference.
34
<PAGE>
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