SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 26, 1998
DEVON ENERGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
OKLAHOMA 1-10067 73-1474008
(State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer
Incorporation or Organization) Identification Number)
20 NORTH BROADWAY, SUITE 1500, OKLAHOMA CITY, OK 73102
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (405) 235-3611
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Item 5. Other Events
1998 Estimates
The forward-looking statements provided in this discussion
are based on Devon Energy Corporation's ("Devon") management's
examination of historical operating trends, the December 31, 1997
reserve reports of independent petroleum engineers, data in
Devon's files and other data available from third parties. Devon
cautions that its future oil, gas and natural gas liquids ("NGL")
production, revenues and expenses are subject to all of the risks
and uncertainties normally incident to the exploration for and
development and production of oil and gas. These risks include,
but are not limited to, inflation for or lack of availability of
goods and services, environmental risks, drilling risks,
regulatory changes, the uncertainty inherent in estimating future
oil and gas production or reserves, and other risks as outlined
below. Also, the financial results for Devon's Canadian
operations are subject to currency exchange rate risks.
Additional risks are discussed below in the context of line items
most affected by such risks.
Specific Assumptions and Risks Related to Price and
Production Estimates Prices for oil, natural gas and NGLs are
determined primarily by prevailing market conditions. Market
conditions for these products are influenced by regional and
world-wide economic growth, weather and other substantially
variable factors. These factors are beyond Devon s control and
are difficult to predict. Over 90% of Devon s revenues are
attributable to sales of these three commodities. In addition to
lowering revenues, low product prices can result in reductions to
the carrying value of Devon's oil and gas properties in
accordance with the full cost method of accounting.
Consequently, Devon's financial results and resources are highly
influenced by this price volatility.
Estimates for Devon s future production of oil, natural gas
and NGLs are based on the assumption that market demand and
prices for oil and gas will continue at levels that allow for
profitable production of these products. Although Devon's
management believes these assumptions to be reasonable, there can
be no assurance of such stability.
Certain of Devon s individual oil and gas properties are
sufficiently significant as to have a material impact on the
company's overall financial results. With respect to oil
production, these properties include the West Red Lake Field and
the Grayburg-Jackson Unit, both in southeast New Mexico. Devon's
interest in the Northeast Blanco Unit ("NEBU") and the 32-9 Unit
can have a substantive effect on overall gas production.
The production, transportation and marketing of oil, natural
gas and NGLs are complex processes which are subject to
disruption due to transportation and processing availability,
mechanical failure, human error, meteorological events and
numerous other factors. The following forward-looking statements
were prepared assuming demand, curtailment, producibility and
general market conditions for Devon's oil, natural gas and NGLs
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for 1998 will be substantially similar to those of 1997, unless
otherwise noted. Given the general limitations expressed herein,
Devon's forward-looking statements for 1998 are set forth below.
Oil Production and Relative Prices Devon expects its oil
production in 1998 to total between 6.3 million barrels and 7.3
million barrels. Devon expects its net oil prices will average
from between $0.20 to $0.45 above West Texas Intermediate posted
prices in 1998.
Gas Production and Relative Prices Devon expects its total
gas production in 1998 will be between 67.0 billion cubic feet
("Bcf") and 78.5 Bcf. It is expected that coal seam gas
production will be 19.0 Bcf to 22.2 Bcf. Canadian production in
1998 is estimated to be between 6.8 Bcf and 8.0 Bcf. Devon
expects production from the remainder of its gas properties to
total between 41.2 Bcf and 48.3 Bcf.
Devon expects its 1998 coal seam average price will be
between $0.25 and $0.55 less than Texas Gulf Coast spot averages.
This includes an expected $0.40 to $0.45 per thousand cubic feet
("Mcf") from the 1995 transaction covering substantially all of
Devon's San Juan Basin coal seam gas properties ("the San Juan
Basin Transaction"). Devon's Canadian gas production is expected
to average from between $0.80 to $1.05 less than Texas Gulf Coast
spot prices. (These Canadian differentials are expressed in U.S.
dollars, using the year-end 1997 exchange rate of $0.70 U.S.
dollar to $1.00 Canadian dollar.) Devon's remaining gas
production is expected to average $0.05 to $0.25 less than Texas
Gulf Coast spot prices during 1998.
Devon has made firm commitments to sell approximately 12,700
Mcf per day of its coal seam gas production throughout 1998 at a
fixed price of approximately $1.45 per Mcf (excluding the
expected $0.40 to $0.45 per Mcf benefit from the San Juan Basin
Transaction). The effect of these fixed price commitments has
been included in the expected differential for coal seam gas
discussed in the above paragraph. Devon has also made other
commitments to sell certain quantities of its 1998 domestic
conventional and Canadian gas production at fixed prices.
However, such commitments to date are not expected to have a
material effect on Devon's 1998 gas price differentials due to
the limited quantities of gas per day involved.
NGL Production Devon expects its production of NGLs in 1998
to total between 1.3 million barrels and 1.5 million barrels.
Production and Operating Expenses Devon s production and
operating expenses vary in response to several factors. Among the
most significant of these factors are additions or deletions to
the company s property base, changes in production taxes, general
changes in the prices of services and materials that are used in
the operation of the company s properties and the amount of
repair and workover activity required on the company s
properties.
Oil, gas and NGL prices will have a direct effect on
production taxes to be incurred in 1998. Future prices could
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also have an effect on whether proposed workover projects are
economically feasible. These factors coupled with the uncertainty
of future oil, gas and NGL prices, increase the margin of error
inherent in estimating future production and operating costs.
Given these uncertainties, Devon estimates that 1998's total
production and operating costs will be between $78.0 million and
$90.5 million.
Depreciation, Depletion and Amortization ("DD&A") The 1998
DD&A rate will depend on various factors. Most notable among
such factors are the amount of proved reserves that could be
added from drilling or acquisition efforts in 1998 compared to
the costs incurred for such efforts, and the revisions to Devon's
year-end 1997 reserve estimates which will be made during 1998.
The DD&A rate as of the beginning of 1998 was $4.08 per Boe.
Assuming a 1998 rate of between $4.10 per Boe and $4.45 per Boe,
1998's DD&A expense (including approximately $3.2 million of non-
oil and gas property related DD&A) is expected to be $88 million
to $96 million.
General and Administrative Expenses ("G&A") Devon s G&A
includes the costs of many different goods and services used in
support of its business. These goods and services are subject to
general price level increases or decreases. In addition, Devon s
G&A expenses vary with its level of activity and the related
staffing needs as well as with the amount of professional
services required during any given period. Should Devon's
anticipated needs or the prices of the required goods and
services differ significantly from expectations, actual G&A
expenses could vary materially from the estimate. Given these
limitations, G&A expenses are expected to be between $13 million
and $15 million in 1998.
Interest Expense Devon s management expects to fund
substantially all of its anticipated expenditures during 1998
with working capital and internally generated cash flow. Should
Devon s actual capital expenditures or internally generated cash
flow vary significantly from expectations, interest expense could
differ materially from the following estimate. Given this
limitation, interest expense is expected to be less than $1
million in 1998.
Distributions on 6.5% Trust Convertible Preferred Securities
("TCP Securities") TCP Securities are convertible into common
shares of Devon at the option of the holder. Should any of the
holders of the TCP Securities elect to convert during 1998, it
would reduce the amount of required distributions. Assuming all
$149.5 million of TCP Securities are outstanding for the entire
year, Devon will make $9.7 million of distributions in 1998.
Income Taxes Devon expects its financial income tax rate in
1998 to be between 34% and 38%. Regardless of the level of pre-
tax earnings reported for financial purposes, Devon will have a
minimum of approximately $2.0 million of financial income tax
expense due to various aspects of a 1994 acquisition of Alta
Energy Corporation, the San Juan Basin Transaction and the 1996
acquisition of the North American onshore oil and gas exploration
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and production properties and business of Kerr-McGee Corporation.
Therefore, if the actual amount of 1998 pre-tax earnings differs
materially from what Devon currently expects, the actual
financial income tax rate for 1998 could fall outside of the
expected rate of 34% to 38%. Also, based on its current
expectations of 1998 taxable income, Devon anticipates its
current portion of 1998 income taxes will be between $12 million
and $17 million. However, revenue and earnings fluctuations
could easily make these tax estimates obsolete.
Capital Expenditures Devon s capital expenditures budget is
based on an expected range of future oil, natural gas and NGL
prices as well as the expected costs of the capital additions.
Should Devon's price expectations for its future production
change significantly, the company may accelerate or defer some
projects. Thus, Devon would increase or decrease total 1998
capital expenditures. In addition, if the actual cost of the
budgeted items varies significantly from the amount anticipated,
actual capital expenditures could vary materially from Devon s
estimate.
Though Devon has completed several major property
transactions in recent years, these transactions are opportunity
driven. Thus, Devon does not "budget", nor can it reasonably
predict, the timing or size of such possible acquisitions, if
any.
Given these limitations, Devon expects its 1998 capital
expenditures for drilling and development efforts to total
between $140 million and $160 million, including $8 million to
$12 million in Canada. (Canadian amounts are expressed in U.S.
dollars, using the year-end 1996 exchange rate of $0.70 U.S.
dollar to $1.00 Canadian dollar.) Devon expects to spend $45
million to $60 million in 1998 for drilling, facilities and
waterflood costs related to reserves classified as proved as of
year-end 1997. Devon also plans to spend another $60 million to
$70 million on new, higher risk/reward projects.
Other Cash Uses Devon's management expects the policy of
paying a quarterly dividend to continue. With the current $0.05
per share quarterly dividend rate and 32.3 million shares of
common stock outstanding, 1998 dividends are expected to
approximate $6.5 million.
Capital Resources and Liquidity Devon's estimated future
drilling and development activities are expected to be funded
through a combination of working capital and net cash provided by
operations. The amount of net cash to be provided by operating
activities in 1998 is uncertain due to the factors affecting
revenues and expenses cited above. However, Devon considers its
capital resources to be more than adequate to fund its
anticipated capital expenditures.
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Based on the expected level of 1998's capital expenditures
and net cash provided by operations, Devon does not expect to
rely on its credit lines to fund a material portion of its
capital expenditures. However, if significant acquisitions or
other unplanned capital requirements arise during the year, Devon
could utilize its credit lines. The unused portion of these
credit lines at the end of 1997 consisted of $208 million of
long-term credit facilities, and a $12.5 million (Canadian
dollars) demand facility for Devon's Canadian operations. If so
desired, Devon believes that its lenders would increase its
credit lines to at least $450 million to $500 million. However,
Devon does not desire nor anticipate a need to increase its
credit lines above their current levels.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereto duly authorized.
Devon Energy Corporation
By: /s/ Danny J. Heatly
Danny J. Heatly
Controller
Date: January 26, 1998
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