Bobby AaronJohn AaronMorgan AaronRandall AaronHarry AasmyrShilpa AbbittWyatt AbbittChris AbbottDennis AbbottDouglas AbelSharon AbernathyJohn AbernethyLuis AbilaJerry AblesLauren AbneyGeri AbramsDavid AbshireShannon ActonCarson AdamsDavid AdamsDwayne AdamsLouise AdamsNorvella AdamsRod AdamsSteven AdamsVerna AdamsColby AddingtonPaul AddingtonGordon AddisonJason AddisonRichard AdkinsRuthanne AdolpheJeff AgostaLeonard AguilarDwight AguillardTrevor AitkenSusan AizzierSaleem AkhtarSteve AlbaughAdam AlbrightDerek AlbroMichelle AldermanTrevor AldingerGuy AldrichDavid AlexanderGreg AlexanderJames AlexanderKari-Lynn AlexanderRicky AlexanderTodd AlexanderJoan Allan-KayserJames AllbeeMarty AllemanRobert AllemandCari AllenDan AllenJillian AllenJim AllenRob AllenJeffrey AllisonMike AllisonTerri AllisonJames AlmondJesse AlvaradoArlindo AlvesPedro AmadorKendall AmburnLeo AmiotAhmed AmmarMichael AmmermanPaolo AmorusoArmand AmyotteJuan AnayaKenneth AncarKevin AndereggAndrea AndersonBruce AndersonChad AndersonChris AndersonChris AndersonClayton AndersonDarren AndersonDavid AndersonDewey AndersonJack AndersonJohn AndersonKirk AndersonLaura AndersonLinda AndersonNicole AndersonRobert AndersonRoderick AndersonRonald AndersonRoyce AndersonTerry AndersonAlejandro AndradeJoseph AndrepontKenneth AndresRichard AndrewsRimontas AndriekusRena AndrusDurwood AntleyJames AppeltRyan AquiliniDerek ArberrySouad ArboucheCharles ArcandThomas ArcherJonathan ArdoinRobert ArdoinWade ArkinstallHoda Armanious-TawadrouJesse ArmendarizAnne ArmstrongClinton ArmstrongDavid ArmstrongGinger ArmstrongJan ArmstrongJohn ArmstrongLori ArnasonAyla ArneyJohn ArneyJim ArnoldMichelle ArnoldRebecca ArnoldTom ArnoldDevender AroraMitchell ArringtonHeath Arstingstall
Jeff ArvidsonBlake AryJoseph AshPatrick AshDeborah AshcraftJohn AshleyCarrie AskinsHenry AssenNancy AstonMark AtkersonDeborah AtterburyRick AtwoodRobert AtwoodSandra AtyiaKeith AubinRyan AuclairDarrell AugerJohn AumanLoren AusmusSara AustinScarlett AustinShari AustinCurtis AutenriebJames AvaryClay AxtonD. Brian BabcockPaul BaclawskiOwen BadilloPaul BaezaPete BaggettGlen BagwellKelly BagwellCraig BaierDaryl BaileyDebbie BairdOneta BairdAlana BakerBrandon BakerBrenda BakerCarole BakerDave BakerDavid BakerJoshua BakerLarry BakerMarilyn BakerMicha BakerPaul BakerRosemarie BakerHank BakkerKay BakkerMamadou BaldeChadwick BaldesClaude BaldesDenice BaldwinTeresa BaldwinCyril BalkoJonathan BalkwillRicky BallKen BallardPaul BalmerJason BandyCindy BanksJody BarbareKristen BarberMonica BarberRusty BarberKes BarcasPaula BardwellJames BarhamKeith BarkeDonna BarkerScott BarlundWayland BarmoreJim BarnesJimmy BarnesRaymond BarnesTim BarnesVelta BarnesAngela BarnettJudith BarnettJanet BarnhillDavid BarrOlga BarrRandy BarrLeticia BarreraJennifer BarrerasRandy BarrettBilly BarrickJulie BarryCasandra BarteeAnna BarthelemyMarsha BartlettMary BartlettBob BartusiakKay BarzizaJeff BaschAdam BasicGay BaskinDarryl BaskindRena BassitDouglas BastKent BastianJoni BatchelorDiane BatesRhonda BatesBarry BattaglioGerald BattrickEric BauerRonnie BauerleinJames BaughLynn BaughmanKelvin BaumanLewis BaumgartnerMichael BaxleyKris BaxterRon BaxterLynn BaylessBradley BayleyBrian BaylissLauro BazanDaryl BeanDavid BeanMike BearBarry BeattieJohn BeattieJoyce BeatyJerome BeaudoinPhilip BeaudoinWilliam Beaudoin
Josh BebeeCharles BecanGinger BeckRalph BeckJudy BeckerOlga BedoyKyle BeebeDonald BeekmanJon BeenKenneth BeeneyGary BeesonJeremy BegemanJeannette BeggConnie BegnaudCarla BeierleCeline BelandVivian BelascoMarcel BelcourtJamel BelhadiMouloud BelharcheColby BellDeanna BellDonna BellJulie BellRobert BellJudy BellamyBernard BellangerMatt BellerTom BelshaBetty BenavidesWilliam BenderDale BenedettoArt BenjaminLaurel BenjaminRenea BenjaminBenny BennettBrady Lee BennettCharles BennettMelissa BennettMyra BennettRichard BennettScott BennettDonald BenoitBrett BentleyDuane BentleyBeverly BentsonAnthony BenvegnuGeorge BenwellJonathan BenzerChuck BergDerek BergRyan BergMichelle BergerChad BergeronRobin BergeronRoger BergleyChristopher BergquistAndrea BernardyKelly BernardyDoug BerridgeJoseph BerryLinda BerrymanPhyllis BertholdLou BertoliMichael BerubeKenneth BerzeDettmar BesselAllan BettensonMark BettsJohn Bevill Jr.Jasvir BhangooChris BiagiLee Ann BiancoRhonda BiasucciHermeka BibbinsFlint BickfordHal BiddleBrad BiddyAnthony BieleskiDennis BiendarraBennie BieryAlex Big PlumeMike BigbyKelly BiggsKim BiggsRex BiglerBrian BillCindy BilyeuWally BindaJason BinghamKeith BinghamJerome BiolloScott BirdShane BirdRyan BirkenfeldBrenda BishopDarrell BishopGordon BishopKenneth BissettJason BissonnetteAndrew BittsonAndrae BlackBruce BlackPaige BlackTravis BlackVernon BlackRaymond BlackmoreSteven Blake BlackshearTim BlackwellAnn BlackwoodKingsley BladesGloria BlainCynthia BlaineMargaret BlairDale BlakemanHoss BlakleyJoanne BlakneyDave BlanchardMark BlancheKevin BlanchetteTerri BlancoJames BlandKeith BlanksSteven BleakleyKathy BlickNathan BlighSusan BlighJanet BlissEarl Blois
Karen BlomstedtKathy BloodworthLloyd BloomerGarry BlouinJim BlountKathy BlountAdam BlytheDale BoatwrightKathy BoazGary BockMary-Ellen BodkinAlvin BoehmeEarl BoganeyMary BogleSusanne BogleBetty BohanLenard BohnkeGerald BoisvertEmile BoivinTeresa BoldmanRandy BollesDale BolsterBecky BondThomas BondarukSpencer BondickWade BondsAnthony BoneDan BonertzAmber BonneyJennifer BonoPeter BoogersDiana BooherGarrett BoomgaardenAlan BoothSandy BootheBrian BordelonJana BorenDalton BorleEva BorregoMichael BorstDavid BoschJim BosleyFred BossChad BostickShawna BostickRick BottMike BoucherLarry BoudreauxWayne BoudreauxMelany BoughmanGeorge BouquinBrenda BourdonJerry BourneJohn BowenDru Bower-MooreLance BowersGary BowkerGreg BowlingBrandon BowmanBrent BowmanCampbell BowmanJohn BowmanLaureen BowmanScott BowmanWilliam BownessRobert BoyceAnn BoydCarl BoydPauline BoydAaron BoyerRoger BoykinCaryn BoykoChristopher BoykoKelly BoyleDave BozemanKevin BradburyRobert BraddockMartin BradfordAaron BradleyAngela BradleyDerek BradleyMark BradleyMike BradshawGreg BradyTravis BradyVaughn BraggConnie BranchJohn BrandSheila BranhamJerrid BrannKelley BraseltonCharlie BrasharesBobby BrassellStephanie BrassovanGlendora BraudKeith BrawdyShawn BrayTess BrayBobby BrazierKory BreauxRicky BreauxCynthia BrenemanPaul BreretonDwayne BreshearsJames BrewerDeborah Brewster-LindauerRandy BrezinskiAlex BridgeJaime BridgesBob BridgewaterDoug BridwellDave BriereRichard BrietzkeKathryn BriganceGreg BrigdenBobby BriggsDeborah BrightMichael BrightwellBill BrimmerKenneth BrinsonHector BritoBrian BrittonDavid BroaddusArmand BrochuDonald BrockGerald BrockmanKathy BrodeurMitchell BroganStacy Brogan
Jane BronnenbergMike BrooksDaryl BrostCaren BrouilletteDana BroussardHarold BroussardHarold BroussardKirk BroussardRobert BroussardSaul BroussardKaren BrowerCalvin BrownDavid BrownDean BrownDonna BrownDonnita BrownJeremy BrownKimily BrownLeroy BrownMichael BrownMike BrownMurray BrownPatrick BrownRobert BrownAmber BrowningOwen BroylesJason BruceKenneth BruceMike BruceMonty BrucePat BruceLynda BruckerCaroline BruggencateJean BruleDebbie BrummettDan BrundigeTiffany-Rose BruneauCurtis BrunelleGerald BruntRonald BruntBarbara BryantDoyle BryantAdam BrysonAlvis BrysonGary BucekStephanie BuchananSteve BuchananMike BuchholzJeannie BucklesShirley BucknerDerrick BuddenByron BueChad BulkleyDouglas BullickJack BullionCheryl BumpasGaylan BunasJimmy BunnJohn BuoyClay BurchamGlenn BurchnallShanica BurdexKit BurdickCody BurdineMichelle BurgardGary BurgessJeremy BurkhardtJenna BurkinshawYvonne BurlesonTimothy BurnellJosh BurnettMatt BurnettSteve BurnettValerie BurnopCollin BurnsJane BurnsJulie BurnsStephen BurnsTodd BurnsRobert BurnsideBruce BurrCharlean BurrisMichele BurtchRobert BurtnettCampbell BusbyChris BusbyJay BuschBilly BushBob BushTodd BushKaren BustosJamie ButlerMurray ButlerRobert ButlerTy ButlerLorrie ButtErnie ButtrossJennifer ButtsForrest BuxtonMichael ByersDavid ByrdJustin ByrneJames CabeWarren CadrainSusie CaffreyMarian CaggianoJanelle CahillGraham CainJim CalbeckJanet CalderLaura CalderwoodJosh CaldwellScott CaldwellTom CaldwellLeigh Ann CalesSheldon CallioRalph CalveOrlando CalvinhoJosh CameronMichael CameronRobert CameronDoug CampbellJamaine CampbellPhillips CampbellRandell CampbellSteven CampbellWendell CampbellEnrique CamposMelissa Cangley
Stefanie CannonGonzalo CanoCynthia CantrellRoland CantuBambi CappelleBernie CaracenaTarquin CaraherJoy CaramTimothy CardenasAlex CardinalDuane CardinalLorraine CardinalTania CareyBruce CariensBrian CarlsonDarrel CarlsonMark CarlsonRandy CarlsonTerrance CarlsonTerry CarltonArthur CarmanGerald CarmanJackie CarmoucheAmy CarpenterJohn CarpenterTim CarpenterArnold CarperWesley CarrRonnie CarreDavid CarrilloHector CarrizalesKathy CarrizalesMarla CarrollClayton CarsonTanya CarsonKathy CartenAlex CarterDaniel CarterDoug CarterJonathan CarterLarry CarterMark CarterMarvin CarterTracy CarterGary CartwrightDuane CarverDeborah CasaresJohn CaseyTana CashionPatty CasonTim CasonKevin CasperNanci CassardDolly CastilloFrank CastilloJaime CastilloJoe CastilloMorris CastleIrma CastroMelisa CastroRonald CatchickB.J. CatheyCameron CatlinDan CatlinLiz CatlinAngelia CaughlinPaul CaughlinSuzanne CavalheiroEd CavalierClay CavasosMichael CavazosTeresa CavazosVeronica CavazosJoanne CaveJean CavesTerry CavesWayne CawthornCarrie CazesKim CazesChuck CecilBetty CesnikMark C’HairCarl ChaissonJohn ChakalisJohn ChalmersRoy ChamberlainLinda ChambersRandy ChambersLewis ChampagneCarol ChanCharles ChanDenis ChanDenise ChanVincent ChanTroy ChandlerJerry ChaneyChristy ChapmanKay ChapmanSamantha ChapmanRoger ChaputBruce CharchukElkan CharikarElana ChaschinRay ChatelainDave CheezumJanet ChelfDorothy ChenCraig ChenowethMichael CherewkoBruce CherniakSteven ChesherBeryl ChesterJ.P. ChestermanScott ChevesLily ChewRon CheyneKen ChibaJanice ChildersRonald ChildreMarian ChinJake ChipiukLloyd ChipmanPamela ChiuRichard ChoateJim CholkaLeonard ChowWillie ChowAdam ChrismanKent Chrisman
Joel ChristalBrad ChristensenTim ChristensenWayne ChristianSue ChristiansonBruce ChristieCarol ChristieRobert ChristiePete ChristmasNathan ChristmonJeremy ChristophersonLifu ChuJeanine ChubbsGrace ChungWillie ChungDavid ChurchJames ChyzykWarren CieszeckiRobin ClaneyBruce ClardyDavid ClarkJimmy ClarkLeroy ClarkLindsey ClarkMery ClarkPam ClarkRandy ClarkRichard ClarkRocio ClaybonLeon ClaypoolDarlea ClaytonRobert ClaytonGeorge CleaseBryan ClemPam ClementLloyd ClementsJack ClevengerStephen CliffLuci ClineSandra ClineDon ClouseJoy ClymerMike ClyneAlan CoadThomas CoanAndy CoatesJason CobbKevin CobbLee CobbMarjorie CobbTed CochraneMichael CockrellBill CoffeyRonald CogganLarry CogginsDeborah CoheeMartin CohenDoug CohrsJimmy CokerBarb ColacoFloyd ColbertJean ColbertRon ColbertBarbara ColeBob ColeDale ColeRobby ColeRobert ColeSam ColeRick ColemanJutta ColhounShannon ColleCharlotte CollettDon CollierLeann CollierDustin CollinsMaria CollinsMike CollinsRandy CollinsJolene ColpittsMeggan ColpittsEddie ColvinDavid ComanAllison ComeauGlen CommanderBehtaz Compani-TabriziTammie ComptonBobby CongerAlan ConnellLauren ConnellTerry ConnellAllen ConnerTony ConnerJoseph ConnorsHenry ContrerasFrank Contreras VegaJay ConwayShannon ConwayStephen ConwayScott CoodyDanny CookDavid CookJaron CookLarry CookMike CookNeill CookPhil CookRicky CookWilliam CookLorelee CookeSharen CookeClaire CooleyAndy CoolidgeCraig CoombesLloyd CoonanAshley CooperBeverly CooperLoretta CooperLori CooperMark CooperTeresa CooperDanielle CootsKelly Russell CopeAnne CorbetChantal CorcueraJim CorkenKelly CorkenCarl CormierRoosevelt Cormier
Shane CornelisonBarbara CornellFred CornellIvan CornelssenJustin CornetBob CornwellPierluigi CorradiniJeff CorsonAdrian CortezElizabeth CostelloMichael CottrellDiane CouillardJames CoulterLee CourangeJohn CoveyOlga CovingtonKelly CowanDana CownsBarbara CoxBen CoxFrans CoxGrant CoxLaDonna CoxLinda CoxRonald CoxValerie CoxTimothy CrabtreeCab CraigChristopher CraigJim CraigMark CraigPam CraigStaci CraigCarolyn CrainGail CramerRobert CrappellDarwin CrawfordRichard CreeTimothy CrespyRickie CrewsKim CrillyClarence CrippenTrent CrippenErnest CriswellJohn CrockerLinda CrockerDavid CrockettShelly CrokerJames CromerBrooke CropperHugh CrosbieJonathan CrosbyJudy CrosbyMaurice CrosbyRandy CrossSkip CrossWilliam CrossmanShar CrouchMike CrowleyDon CruickshankRandy CruickshankPaul CullenDon CulpepperJustin CulpepperTom CunninghamWalter CunninghamElena Cupac-CingelDebbie CurleeEarl CurnutteAndrea CurrieJason CurrieRaymond CurrierDavid CurryDean CurryJulie CurtisPatty CutbirthDouglas DahmannDrew DahmannChristine DaigleJennifer DaleRosalind DamerLarry DamervalDoug DamonDwayne DancyAnn DanielJeff DanielMisti DanielBryant DanielsJamie DanielsTim DanielsAngie DannaRandy DarbonneJo-Ann DArcangeloEarnest DarceyKunle DareCourtenay DarrowGillian daSilvaPaul DaSilvaJena DaughheteeTommy DauphineHank DavidChad DavidsonHoward DavidsonJeremy DavidsonRobert DavidsonAlan DaviesMarilynn DaviesCarlos DavilaBarry DavisBrandon DavisChristopher DavisClint DavisDaniel DavisDebbie DavisGretenal DavisHarold DavisJanna DavisJeff DavisJesse DavisKathy DavisKelly DavisL.T. DavisLarry DavisLee DavisLuke DavisMike DavisMitch DavisNicole DavisRickey Davis
Shane DavisTom DavisBrett DawkinsTroy DawsonCarol DayGreg DayJennifer DayMark DayMitch DayRobert DayMeridith De GrootCarlos De Los SantosKevin Deacon-RosamondMichael DeanMichele DeanSheila DeasonKati DeatonParry DeBusschereDon DeCarloColleen DechPhilip DechantBrad DeckerHermis DecoteauEddie DeculusBrian DedmonJudith DeedsClayton DeeringDavid DeeringWade DeesStephen DeetzGeorge DekerlegandTroy DelahoussayeMarianne DelaneyKevin DeLayJesse DelcambreGerard DeLeeuwOscar DeleonJaime DelunaMadonna DemasSteve DemecsTeresa DeMillianoWilbert DemouchetRoy DenisonDevin DennieW.A. DennisDan DensonGlenda DensonTommy DentonMark DerouenRonald DerouenCory DesantisGuy DesaunoyScott DesmaraisIsaac DeVilliersLarry DewettElma DiazCarolyn DibelloJerry DicharryBrian DickKelley DickensCraig DierkerHarry DietrichJay DietrichPaul DiffenderferDennis DildayJohnny DillardRalph DillardJohn DillinderDavid DillonLeslie DimionNguyen-Hoa DinhTish DinsmoreSteve DionneHelen DiserensJohn DistasoJames DixonObie DjordjevicRoger DlugoszJudith DobbinJanice DobbsNelson DobbsGreg DoddHomer DoddLilly DoddRichard DoddsEddie DodsonBev DoigJames DonaghyAlan DonaldsonDanny DonaldsonRaymond DonaleshenJohn DonohoeTodd DonowhoNerry DooleyRobert DooleySusan DorieMatt DornanRad DorrisCatherine DortchRichard DoucetBarbara DoughertyBill DoughertyPatricia DouglasNick DovedanMatthew DowdCliff DowdenDeborah DowdyGeorge DowdyStacy DowningAnne DownsThomas DowsleyGerhard DrakeMelanie DraperRob DresslerDrina DrummondTim DrysdaleTracey DubeJohnny DuboisTed DuboseDerrick DubyNicole DudaErin DuerichenCharles DuffeyLuanne DuffyLynn DugasRoland DuhonDebra DukeChristopher DumanowskiJanette Dumas
Joel DumasMeri DunawayRobert DunawayAlec DuncanDavid DuncanDavid DuncanFredi DuncanBob DunckleyMelanie DunhamMilton DunlapAndrew DunleavyChris DunnElizabeth DunnRaymond DunwaldKevin DuplantisHarold DuplechinStephanie DupuieBarney DupuisRui DuqueErnest DuranPatrick DurandMark DurkeeBecky DurrettJason DutchakSteven DutcherScottie DuvallCary DwyerRandall DyckCecil DyeDarrell EaglesDavid EamonRichard EarlesJanell EasleyKen EasonTodd EasonDarryl EastLes EatonSuzanne Eaves-BunchDana EberhardtTainialynn EbrechtDonald EckfordPriscilla EddyMatthew EdgelowJohn EdigerJanice EdmistonGloria EdmondsEdwin EdwardsKristin EdwardsLauren EdwardsLeah EdwardsMarie EdwardsRex EdwardsRobert EggertMark EhrhardChristy EichholzDennis EisnerRon ElbrechterLoyd ElkinsRonald ElkoMichael ElledgeTim EllerBrent ElliottCarl ElliottClay ElliottDavid ElliottRicky ElliottRobert EllisKevin EllisorFranceaz ElmanGavin ElsleyElizabeth ElsonDarrell ElyAlice EmersonJessie EmersonDale EmeryTim EnderlinDanielle EndsleyBrian EngelNancy Engelhardt-MooreJerry EnglandHope EnglishMark EnglishMyles EnickeSarah EnixTodd EnnengaRonald EnslingerDonnie EppersonJudy EppersonMark ErbDale EresmanBradley EricksonDaniel EricksonTelann EricksonBrian ErwinMiguel EscobedoBrenda EskelsonRhoda EsmilioReed EstesSusan EstesSteven EthridgeJ.R. EubanksMarcus EubanksDonnie EuperAimee EvansBeverly EvansDanny EvansDarlene EvansPaul EvansPeter EvansShellie EvansSteve EvansJay EwingJohn EzekweDean EzellMatthew EzellRaymundo FabelaMartin FabisSheila FahlDoyle FainDebbie FalckKaren FalconerJeremy FallinNicholas FanaiBob FantKeith FardyHamid FaridLance FarkasKaren FastJames Faulkner
Carol FavorsRay FeatherstoneMira FederucciMitch FedricMark FehrmannKevin FeiselDonna FelgerElaine FeltLarry FeluxTyler FenleyLance FentieAngela FentonRandy FentonGrant FergesonCarol FergusonLorraine FergusonPeter FermorClay FernandezMike FeroliMark FessendenBrett FewellAndrea FieldEugene FielderMike FielderKathleen FieldsRon FieldsWarren FieldsWayne FieldsStuart FillerBobby FinchTrinity FincherSteve FineLisa FinleySteve FinnKevin FinnemanDon FippingerJessica FischerRon FischerDavid FishburnDavid FiteMichele FlaigAmy FlanaganLaurie FlanaganArlen FlatenDoug FlatenDuane FlathPenny FlathDiane FlemingPenny FlemingFrank FletcherMichael FletcherSharon FlorezRobert FlowerdayIlene FloydJason FluneyAmy FolsomBridget FontenetteCodi FontenotEugene FontenotJoe FontenotBrenda FonvilleLaura ForbesAlex FordKeith ForeMark ForestTeresa ForgueThomas ForrestSteve ForsterAvery FortenberryDavid FortenberryAllan FortierLouise FortierDavid FortnerBlake FosterBradley FosterBrent FosterRobert FosterWayne FournierCatherine FowellDorothy FowlerLeon FowlerCurtis FoxDonald FoxJay FoxJohn FoxMaryann FoxLeonard FoytG. Robert FraleighBart FraleySam FrancisTaryn FrancisCraig FrankDavid FrankWally FrankKevin FrankenberyHelen FranklinSandra FranklinAlex FranksRay FranksKevin FransonColin FraserDan FraserMargaret FraserMark FraserGeoffrey FrazerBilly FrazierVicki FrederickIan FreelandDustin FreemanShawn FreemanUwe FreibergLarry FreminAndy FreudenrichOliver FriersonGordon FriesenNancy FriesenChristine FrinscoDan FrisbeeDavid FriskeDale FritzStacie FugateTeresa FugittGeorge FulcoDavid FulfordPamela FulkHeather FullerPhyllis FullerBill FultonRobert Fulton
Steven FunderburkChris FurrhCarrie FyfeJay GabbardJohn GabertPhillip GabouryGwen GabrielKathy GabrielsonPolina GaddyRichard GafiukBeverley GageMarcel GagneBrandon GainerMervin GalbraithDanny GallenbeckStarleng GallopeJanet GallowayBlair GambleWaldemar GampKim GannVidya GannessMichelle GanttJose GarateTom GarbsJoe GarciaJoel GarciaJudith GarciaMichael GarciaRuben GarciaNorma Garcia-SlajerAl GardinerGeorge GardinerDoug GarrardHeather GarrettKelly GarrettLynn GarrettBarney GaryDouglas GaryMichael GaryAlberto GarzaErnest GarzaLamar GaspardDewayne GaughtClyde GautreauJudith GavanRaphael Gay-De-MontellaTim GaydosJ. Nick GeibDavid GeisLarry GelbaughOrry GelowitzCarol GennarelliKirk GenoCharles GentryDale GeorgeDavid GeorgeMircea GeorgescuRadu GeorgescuJeff GephartMartha GerdesJohn GerdingJohn Jr GerichKirk GerichJohn GerlitzKen GermanMark GermanTaylor GermanDavid GermscheidMichal GerovStan GerowRod GertsonStan GeurinNick GibbensRosalind GibsonTatiana GibsonTina GibsonHeidi GiesbrechtMark GiesbrechtDarrell GilbertEd GilbertVicky GillespieRussell GillettCarolyn GilleyAngela GingeraDeena GirdnerPaul GirouardRichard GirouxCarola GiudicelliJan GlasgowEd GlassRay GlidewellDavid GloverAndre GodinJeff GoffinKris GoforthPatrick GohlkeSherman GoinesDiana GoldsteinKaren GolonkaFrancis GomesAlma GomezJesse GomezLawrence GomezAlbert GonzalesTerry GonzalesAbraham GonzalezMagdalena GonzalezPilar GonzalezKevin GoodCraig GoodallKrystal GoodmanCraig GoodrichLana GoodrichRickey GoodsonJohn GoodspeedShannon GoodwinAlan GopenEdward GordenShane GordonWendy GordonJason GossMark GossShawn GossJennifer GottschPaul GouldPhilip GouldDarrin GowingKerri GrabowskyCameron Grace
Tim GraffAnthony GrahamCandi GrahamGary GrahamJennifer GrahamJohn GrahamSean GrahamVeronica GrahamJannette GranstaffGreg GrassellDean GravesGalen GrayJason GrayKen GrayLeslie GrayStephanie GreaserVicki GreearAllan GreenBill GreenClayton GreenEarl GreenGregory GreenLarry GreenMonica GreenPaul GreenSuzanne GreenSylvia GreenTim GreenDale GreenfeatherAlan GreenfieldMichael GreenhowBill GreenleesRyan GreerNicholas GreggBetty GregoryJ.R. GregoryMatt GregoryLee GreinerGlenn GreshamMark GreskoMark GressEvelyn GreyVince GribbleMichael GriffinJoel GrillotAaron GrimeauRhonda GrimesJason GrimmMark GrinnellLauren GrissomLetitia GroceKarin GroepperAaron GrossAlbert GrossJonathon GrossMary GrossEric GrossmanJoe GrossmanJohn GroundsRoxanne GrovesSam GrovesJoan GrozellDoug GrubbMichelle Guanzo-ReyesCaroline GuaySonya GuentherJesse GuerreroRaquel GuerreroGary GuerrieriJoel GuichardCathy GuidryChristopher GuidryWendell GuidryFloyd GuilloryMiller GuilloryJeff GuillotJay GuilmetteJanice GunnGeorge GurrEric GuruleEd GusemanElham GushtasbiJeff GussieStacey GustafsonLinda GuthrieMike GutkoskiVeronica GuzmanThu Ba HaDebra HaalandJason HaasZiad HaddadSteve HaddenJim HagerTeresa HagerZack HagerKelly HaggAdina Hagi-MemetApril HagueAllison HahnMelvin HakesRick HaleNancy HaleyAmos HallBrad HallDavid HallJames HallJeff HallKay HallPaula HallRobin HallockTroy HalsallBev HalterJackson HalterJason HamelPercy HamiltonRandy HamiltonSarah HammondDavid HamonBlaine HamptonSteve HamrickWayne HanTim HancsicsakRusty HandTim HandJoe HandleyWes HandleyHerman HandstedeMichael HankinsReagan Hanks
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2 LettertoShareholders ChairmanandCEOLarryNicholslooksbackonthe accomplishmentsof2006andshareshisoutlook forthefuture.
5 Five-YearHighlights Atableofkeyfinancialandpropertydatafromthe pastfiveyears.
10 CommunityOutreach Wediscusskeyinitiativesthatstrengthencommunities andenhanceouroperations.
14 EnvironmentalPartnerships Wereviewconservationprogramsthatbenefitthe environmentandimproveourefficiency.
18 Management’sQ&A Managementrespondstoinvestorquestions.
22 ExplorationandProductionResources Adiscussionofsignificantoilandgasproperties.
27 OperatingStatisticsbyArea27 11-YearPropertyData28 KeyPropertyHighlights33 IndextoFinancials102 Directors&SeniorOfficers104 Glossary105 InvestorInformation andStockPerformance
Devon’semployeesareourmostvaluedresource.Thenamesofeachofour4,692employeesareprintedontheinsidefrontcoverandonpages6and32ofthisannualreport.
Resource Full,thethemeofthisannualreport,wasinspiredbyanentryfromKarenPriceinDevon’sPortland,Texas,fieldoffice.Nearly1,200entriesweresubmittedbyemployeesinourannualcontesttoselectthetheme.
Corporate Profile DevonisoneofNorthAmerica’sleadingindependentoilandgasexplorationandproductioncompanies.Devon’soperationsarefocusedprimarilyintheUnitedStatesandCanada;however,thecompanyalsoexploresforandproducesoilandnaturalgasinselectinternationalareas.Wealsoownnaturalgaspipelinesandtreatmentfacilitiesinmanyofourproducingareas,makingusoneofNorthAmerica’slargerprocessorsofnaturalgasliquids.DevonisincludedintheS&P500IndexandtradesontheNewYorkStockExchangeunderthetickersymbolDVN.
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DearFellowShareholders:2006wasayearofoutstandingachievementsforDevon.Earningspershareandcashflowfromoperationsreachednewhighs.Weincreasedoilandgasreservestothehighestlevelsinourhistory,andwemadeimportantstridesinbothhigh-impactexplorationandlow-riskdevelopmentprojectsthatwillfuelDevon’sfuturegrowth.
Gulf of Mexico Success Brings Worldwide AcclaimTheoperationalhighpointofouryearwasthesuccessfulproductiontestoftheJackNo.2wellintheGulfofMexico’sLowerTertiarytrend.During
testing,theJackNo.2wellflowed6,000barrelsofoilperdayfromjust40%ofthehydrocarbon-bearingcolumn.TheresultsindicatethatLowerTertiaryreservoirswillproduceathighratesprovidingcompellingevidencethatDevon’sdeepwaterLowerTertiaryreservoirscanbeprofitablydeveloped.
WhenDevonandco-ownersChevronandStatoilreleasednewsoftheJacktestonSeptember5,2006,theworldawoketothetremendouspotentialoftheLowerTertiarytrend.PunditsapplaudeditasamajornewenergysourcefortheUnitedStates.SomecalleditthebiggestfindsincePrudhoeBay.Timewilljudgetheaccuracyofsuchpredictions,butwebelieveDevon’sproprietarypositionintheLowerTertiarycould,overtime,doubleoreventripleDevon’scurrentprovedreservebaseof2.4billionoil-equivalentbarrels.
Themedia’sexcitementandtheinvestmentcommunity’sfavorablereactiontotheJackannouncementweregratifyingandvalidatedthemeritsofDevon’slong-termgrowthstrategy.Wehaveinvestedmorethan$2billionoverthepastfiveyearsinhigh-impact,multi-yearexplorationprojects.Bytheirverynature,weknewtheseprojectscouldnotdeliveroilandgasreserves,productionorrevenueinthenearterm.However,webelievedtheshort-termsacrificerequiredtomaketheseinvestmentswouldbewellworththelonger-termrewards.TheseinvestmentswillprovideDevonanditsshareholderswithasteadystreamofdevelopmentprojectsoverthenextdecade.
BrighteningtheglowofsuccessfollowingtheJacktestwastheaddedsatisfactionofourfourthsignificantLowerTertiarydiscovery.Thisdiscovery,knownasKaskida,appearstobeevenlargerthanJackandalsolargerthanourfirsttwoLowerTertiarydiscoveries,CascadeandSt.Malo.Furthermore,KaskidaextendstheLowerTertiaryplayintothedeepwaterKeathleyCanyonfederalleaseareawherewehold12additionalexploratoryprospects.
Withfourdiscoveriesoutofsixattempts,ourearlysuccessratiointheLowerTertiaryisexceptionalbyhistoricalstandards.Whilewecannotcountonthislevelofsuccessgoingforward,itdemonstratesthatourseismicinterpretationapproachanddepositionalmodelfortheLowerTertiaryareworkingwell.Weattributethissuccesstotheskillandpreparationofourhighly-seasoneddeepwaterexplorationteams.
WedoubledourworkinginterestintheCascadediscoveryto50%in2006andreachedadecisiontocommerciallydeveloptheproject.CascadewilllikelybethefirstdevelopmentintheGulfofMexicotoemployanFPSO,orfloatingproduction,storageandoffloadingvessel.FPSOtechnologyallowsfortheproductionoflargeoilreservoirscurrentlybeyondthereachofexistingpipelines.OurcurrentplanscallforCascadetobeginproducingoilinlate2009.
Letter to Shareholders
J. LArry NiChoLSCHAIRMAnAnDCHIEFExECutIvEOFFICER
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OverthenextseveralyearswewillexploreotherLowerTertiaryprospectswiththeaimofextendingourimpressivestringofdiscoveries.Wewillalsodrillappraisalwellstofurtherdefineandquantifytheprizeswehavefoundtodate.Theseactivitieswillprovidetheinformationnecessarytomovetheseprojectsintothedevelopmentandproductionphases.EngineeringandmarketingplansforJackandSt.Malocouldbefinalizedthisyearwithfirstproductioninthe2011to2013timeframe.
OurmountingsuccessintheLowerTertiarytrendandotherareasinNorthAmericacausedustore-examinethehigh-impactexplorationsegmentofourportfolio.In2006,wemadethedecisiontodivestourassetsinEgypt,andearlythisyearweannouncedplanstoexitWestAfrica.Bydoingso,wehavetheopportunitytofurtherrefineourfocus.WebelievewecanredeployourtechnicalandfinancialresourcesfromAfricamoreeffectivelytootherpartsofourbusinessthatcangeneratereservesandproductiongrowthmorequickly.WeexpecttoapplytheproceedsofourAfricanassetsalestoinvestinnewprojects,strengthenourbalancesheetandrepurchasesharestofurtherenhancevaluepershare.
Previous investments Coming on Strong Successfulexplorationprojectsultimatelymoveintothedevelopmentphase.In2007,weexpecttoachievefirstproductionfromthreemulti-year
developmentprojects:Polvo,MerganserandJackfish.TheseprojectsareinadditiontothefullyearofincreasedproductionwewillreceivefromtheACGfieldinAzerbaijan.Devon’soilproductionfromACGincreaseddramaticallyinthefourthquarterof2006,andweexpectittoaveragemorethan30,000barrelsperdayin2007.
OffshoreBrazil,weareontracktodeliverfirstproductioninmid-2007fromour2004Polvooildiscovery.Constructionandfabricationofthe$380millionPolvofacilities,inwhichDevonhasa60%workinginterest,progressedthroughout2006.
Wehavenowcompletedmostoftheworknecessarytobringour50%-owneddeepwaterMergansernaturalgasfieldonproductionin2007.Merganser,a2001discovery,shouldbeginproducingintotheIndependenceHubintheeasternGulfofMexicoaroundmid-year.Mooredin8,000feetofwater,theIndependenceHubhostfacilitywillestablishawater-depthrecordforGulfgasproduction.Together,MerganserandPolvowilladdabout35,000oil-equivalentbarrelstoDevon’snetdailyproductionwhenfullyoperational.
InCanada,the100%Devon-ownedJackfishthermaloilsandsprojectisonscheduletobeginproducinginlate2007.Jackfishusessteam-injectiontechnology,andDevonwillbethefirstU.S.-basedindependentproducertocompletesuchaprojectinCanada.Whenfullyoperational,weexpecttheinitialphaseofJackfishtoproduceabout35,000barrelsofoilperdayfor20yearsormore.Inaddition,weareinthelaterstagesofevaluatingalook-alikeprojectonadjacentacreagethatwoulddoubleJackfishproductionto70,000barrelsperday.
ElsewhereinCanada,wehaveelectedtocutbackoncapitalallocatedtoconventionalnaturalgasprojects.RisingcostsinCanada,accentuatedbythestrengtheningCanadiandollar,havehurtgasdrillingeconomics.Weexpectthissituationtocorrectitselfinthenextyearorso.Untilthen,wewillallocateourcapitaltootherNorthAmericanprojectareaswhereupwardcostpressureshavebeenlessintense.
U.S. onshore Projects Add Stability and GrowthHigh-impactexplorationisonlypartofDevon’slong-termgrowthstrategy.Repeatable,low-riskonshoreoilandgasdrillingisanotherimportant
component.Notablyin2006,wesubstantiallystrengthenedourpositionintheBarnettShale,thelargestgasfieldinTexas.The$2.2billionacquisitionofChiefHoldingsinJuneextendedDevon’sleadasthetopacreageholderandgasproducerinthefield.Weexpecttoincreasenetgasproductionfromour736,000BarnettShaleacrestoaboutonebillioncubicfeetequivalentperdayin2009.Toputthisinperspective,onebillioncubicfeetperdayisenoughnaturalgastoheatmorethanfivemillionhomesandrepresentsabout2%oftotalU.S.naturalgasproduction.
Wedrilledour600thhorizontalwellintheBarnettShalein2006,andthemostrecentofthosewellsweredrilledwithnewgenerationrigsthatcandrillwellsmorequickly,safelyandefficiently.Our2006activitydroveDevon’sBarnettShaleproductionupmorethan25%duringtheyeartoover700millioncubicfeetperdayinDecember.
TheBarnettShaleisourlargestasset,butitisjustoneofmanyintheUnitedStatesandCanada.About89%ofourtotaloilandgasproductionin2006camefromNorthAmerica,wherewedrilled2,427wellswitha98%successrate.DevonisthelargestU.S.-basedindependentproducerinCanadaandaleadingproducerinthestatesofNewMexico,Montana,WyomingandTexas.
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Production Growth Today and TomorrowWhatdoesallthisoperationalsuccessmean?First,itmeanssignificantproductiongrowth.Weforecastproductionfromcontinuingoperationsin2007at
219to221millionoil-equivalentbarrels,excludinganyproductionfromthepropertiesinAfricathatweintendtodivest.Thisisa10%increaseoverthe200millionoil-equivalentbarrelsweproducedin2006,withoutAfrica.Wealsoanticipateabouta10%sequentialproductionincreaseagainin2008.
Operationalsuccessalsomeansgrowthinoilandgasreservesinthegroundtobeproducedinfutureyears.Weadded427millionequivalentbarrelsfromsuccessfuldrillingin2006.ThisdoesnotincludeanycontributionfromthemajordiscoverieswehavemadeintheLowerTertiarytrendoradditionaldevelopmentintheJackfisharea.ThereserveadditionsfortheCascade,Jack,St.MaloandKaskidaprojects,aswellasanyadditionaldiscoveriesintheLowerTertiarytrend,willberecordedinfutureyears.AndDevon’sLowerTertiaryinventoryofuntesteddeepwaterGulfofMexicoprospectsrepresentsbillionsofadditionalbarrelsofpotentialresources.
Focused on PerformanceRisingcostsareachallengethroughouttheoilandgasindustry.Competitionforservices,suppliesandpersonnelarereflectedinhighercostsandtighter
profitmargins.Amidthesechallenges,Devonagaindeliveredanoutstandingfinancialperformancein2006.Netearningstopped$2.8billionandpershareearningsreached$6.34,thehighestlevelinourhistory.Devonalsocontinuestogeneratehealthylevelsofcash.Cashflowfromoperationsreached$6billionin2006,anotherall-timehigh.
Explorationandproductionofoilandnaturalgasrequireshighlevelsofcapitalinvestment.Weinvestedmorethan$5billiononexplorationanddevelopmentprojectsin2006plus$2.2billioninthepurchaseoftheChiefproperties.Weplantoinvestupto$5.3billiononexplorationanddevelopmentprojectsin2007.Oursisacapital-intensivebusiness,andDevoniscommittedtomakingtheinvestmentsnecessarytoremainahealthyandgrowingcompany.
IwanttoofferanoteofspecialthankstoDukeLigon,seniorvicepresidentandgeneralcounsel,whoretiredinJanuary.DukeledDevon’sLegalDepartmentfor10years,andwewillmisshisleadershipandwisecounsel.LyndonTaylorhasjoinedDevon’sExecutiveCommitteeasDuke’sreplacement.LyndonbringstoDevonmorethan20yearsoflegalandmanagementexperienceandisawelcomeadditiontotheDevonexecutiveteam.
Asweenter2007,IcouldnotbemoreexcitedaboutDevon’sfuture.Thestepswetookearlyinthisdecadetobuildarobustpipelineoffuturegrowthprojectsarepayingoff;wehavethedeepestinventoryofinvestmentopportunitiesinourhistory.ThethemeofthisreportisResource Full.Thisreferstohowweviewtheopportunitiesaheadofusandthecapabilitiesofthecompanytoexecutethoseopportunities.ItalsoreflectsthecreativespiritandresourcefulnessofDevon’semployeesandbusinesspartners.Itistheseattributesthathaveputthecompanyintheenviablepositionthatweareintoday.Inthisreport,youwillreadcommentsfromavarietyoftheseemployeesandotherstakeholdersaboutDevonanditscorevalues.Ideeplyappreciatethethoughtsofthesecontributorsandthepositivereflectiontheirwordscastuponourentireorganization.
J. LArry NiChoLS
ChairmanandChiefExecutiveOfficer
March20,2007
Devon’s realized price for oil and gas climbed to $41.51 per equivalent barrel in 2006. This enabled the company to earn a record $6.34 per share and drove cash flow to a record $6 billion.
AverAge Price Per Boe($ per Bbl)
eArnings Per shAre ($ Diluted)
17.61
25.9329.92
39.4841.51
02 03 04 05 06
0.30
4.044.38
6.26 6.34
02 03 04 05 06
net cAsh Provided By oPerAting Activities($ Billions)
1.8
3.8
4.8
5.66.0
02 03 04 05 06
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Five-year highlights
LAST yeAryeAr eNDeD DeCeMBer 31, 2002 2003 2004 2005 2006 ChANGe
FiNANCiAL DATA (1)(Millions,exceptpersharedata) totalrevenues $ 4,316 7,309 9,086 10,622 10,578 — totalexpensesandotherincome,net(2) 4,450 5,020 5,810 6,117 6,566 7% Earnings(loss)beforeincometaxes (134) 2,289 3,276 4,505 4,012 (11%)
totalincometaxexpense(benefit) (193) 527 1,095 1,606 1,189 (26%) Earningsfromcontinuingoperations 59 1,762 2,181 2,899 2,823 (3%) Earnings(loss)fromdiscontinuedoperations 45 (31) 5 31 23 (26%) Cumulativeeffectofchangeinaccountingprinciple — 16 — — — n/M
netearnings 104 1,747 2,186 2,930 2,846 (3%) Preferredstockdividends 10 10 10 10 10 — netearningsapplicabletocommonstockholders $ 94 1,737 2,176 2,920 2,836 (3%)
netearningspershare: Basic $ 0.31 4.16 4.51 6.38 6.42 1% Diluted $ 0.30 4.04 4.38 6.26 6.34 1%
Weightedaveragecommonsharesoutstanding: Basic 309 417 482 458 442 (3%) Diluted 313 433 499 470 448 (5%)
Cashflowfromcontinuingoperatingactivities $ 1,726 3,771 4,789 5,514 5,936 8% Cashflowfromdiscontinuedoperatingactivities 28 (3) 27 98 57 (42%) netcashprovidedbyoperatingactivities $ 1,754 3,768 4,816 5,612 5,993 7%
Cashdividendspercommonshare $ 0.10 0.10 0.20 0.30 0.45 50% Closingcommonshareprice $ 22.95 28.63 39.03 62.54 67.08 7%
LAST yeArDeCeMBer 31, 2002 2003 2004 2005 2006 ChANGe
totalassets $ 16,225 27,162 30,025 30,273 35,063 16% Debenturesexchangeableintosharesof ChevronCorporationcommonstock(3) $ 662 677 692 709 727 3% Otherlong-termdebt $ 6,900 7,903 6,339 5,248 4,841 (8%) Stockholders’equity $ 4,653 11,056 13,674 14,862 17,442 17% Workingcapital(deficit) $ 22 293 772 1,272 (1,433) (213%) ProPerTy DATA (1) Provedreserves(netofroyalties) Oil(MMBbls) 444 646 585 640 708 11% Gas(Bcf) 5,836 7,316 7,493 7,296 8,356 15% nGLs(MMBbls) 192 209 232 246 275 12% Oil,GasandnGLs(MMBoe) 1,609 2,074 2,065 2,102 2,376 13%
LAST yeAryeAr eNDeD DeCeMBer 31, 2002 2003 2004 2005 2006 ChANGe
Production(netofroyalties) Oil(MMBbls) 42 60 74 62 55 (11%) Gas(Bcf) 761 863 891 827 815 (1%) nGLs(MMBbls) 19 22 24 24 23 (2%) Oil,GasandnGLs(MMBoe) 188 226 247 224 214 (4%)
(1) theyear2002excludesresultsfromDevon’soperationsinIndonesia,ArgentinaandEgyptthatwerediscontinuedin2002.DevonacquirednewassetsinEgyptintheApril2003Oceanmerger. theyears2003through2006excluderesultsfromoperationsinEgyptthatwerediscontinuedin2006.Revenues,expensesandproductionin2003includeonlyeightandone-fourthmonthsattributable totheOceanmergerand,in2002,includeonly11andone-fourthmonthsattributabletotheMitchellmerger.Allperiodshavebeenadjustedtoreflectthetwo-for-onestocksplitthatoccurredonnovember15,2004.(2) Includesotherincome,whichisnettedagainstotherexpenses.(3) Debenturesexchangeableinto14.2millionsharesofChevroncommonstockownedbyDevon.n/M notameaningfulnumber.
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Russell HannaSandy HanneldDaniel HansbergerBrad HansenPeter HansenRonald HansenKaren HansonKent HansonLana HansonValerie HansonCrystal HarbertMike HarbinJerry HarborthLance HarderPeggie-Jean HarderDarrel HardesDavid HardesGisele HardockChris HardwickJackie HardwickDarrel HardyJacob HardyJennifer HargisDavid HargraveOlivette HargravesAllan HargreavesChris HargroveDoug HargroveSusan HargroveBrad HarguesAshley HarkinsJD HarkriderAllison HarlingChuck HarlingGordon HarmsenTed HarperWallace HarperLu Ann HarringtonChris HarrisDennis HarrisJoe HarrisJohn HarrisKarla HarrisMichael HarrisRoyce HarrisSeyi HarrisBrian HarrisonCubby HarrisonShelly HarrisonDavid HartRobert HartChris HartleyDonald HartmanDavid HartnagelLynn HartonKara HarveyDarrell HarwellKevin HarwiCharles HarwoodJo HastingsGlenn HatcherDonna HatchettFlorin HateganJason HatfieldKyra HatfieldRoy HathcockBrady HattebergMichel HattermannTravis HaugerJoe HavlikAndy HawkinsHarold HawkinsJeffrey HawkinsTony HawkinsMichael HawleyCheryl HaworthColin HaworthEasten HawthorneDavid HaxtonRobert HaxtonPrentis HayAmina HayatErik HaycockClayton HaydenJoe HaydenBarbara HaymanChris HaynesDan HaynesRobert HaynesDarrell HaysMike HazlettGreg HeadSherry HealdGeorge HeardDanny HeatlyJarrod HeatonBrian HebertBrock HebertClint HebertJohn HebertRod HebertRussell HebertGlenn HedgecokeBrenda HedgelandDebi HedgesJessica HefleyVance HefleyJohn HegDon HeidMike HeiderRuss HeideschTracy HeimClint HeinBrad HeinrichsMary HeinsDonald HeinsenJim HeinzeBryan HelfenbaumTom HellerLarry HelmsBrad HeltonLon HeltonAustin HendersonFred HendersonJames HendersonLaura HendersonRonetta HendersonSylves HendersonDaniel Hengel
Cindy HenleyBrenda HenryBeth HensonGregg HensonMichael HensonDenise Heppler-BalkumCathy HermanTravis HermanVince HermesEllen HerminghausArmando HernandezBobby HernandezCheryl HernandezDorene HernandezLetty HernandezLily HernandezOmar HernandezRobert HernandezRoger HernandezJeanie HerndonBill HeroldBraddy HeroldBrett HeroldZane HerringKyle HerrmannTravis HerrmannKaren HertelVicki HestandJohn HicksLinda HicksSeann HicksDan HigdonHenry HigginsJason HigginsSissy HigginsNeil HightowerKelly HilburnBilly HillFielder HillMichelle HillMindy HillRichard HillPhillip HillianJohn HillierTricia HillmanDavid HillsTrevor HilsendagerKeith HimelFrancois HindletCole HindsMichael HinerKen HinshawLynn HinsleySteve HipplerBart HironGreg HirschmanCarl HiscockNick HiseMargaret HitchcockPaula HixDean HladBryan HnatiukWilliam HobbsCharles HodgePhil HodgeCindi HodgesRodney HodgesMyles HodgsonGary HodneBryan HoefleinCarl HoelscherGary HoeselBill HoffmanBlake HoffmanRobert HoffmanDanny HoganRobert HojnackiMax HoldcraftJoe HoldenChristopher HolderChad HolemanBlaine HolitzkiDavid HollandChristi HolleyJanice HolleyBrandon HollimanMatt HollingsworthDoug HollisterScott HollowayDavid HolmLinda HolmbergMaurie HolmenCharlotte HolmesCoyla HolmesSteve HolmesTamara HolmesThom HolmesTom HolmesGeoff HolmlundJerry HolsworthDebbie HoltGlen HoltTheo HoltDwayne HolubowichDerrick HoningKen HookerSusan HooperTom HooperDavid HopeRick HopkinsonSteve HoppeClay HoppersCandace HopsonRose HornJeff HornerLori HornerTimothy HornerSandra HorningChuck HorsmanGilbert HortonDonna HoskinsAngie HoultAletha HouseTarsha HouseColleen HoustonJay HoustonMark HoustonLes HovenJaren Howard
Kay HowardLinda HowardMike HowardMichael HoweFabian HowerKaren HowlandGarnet HowlettBrandon HoyeDarrin HrycakVern HrycuikXue Fen HuangJoe HubbardJoe HuberMike HuberRyan HuberChristine HuculakAbid HudaSharon HuddlestonAlicia HudgensBrett HudsonMarvin HudsonMichael HudsonRobert HudsonRuthie HudsonSantiago HuertaRay HuestisJames HuggardBonnie HughesJanice HughesJohn HughesKathy HughesPatricia HughesRobert HughesRobert HughesTerence HughesTeo HuismanSteve HulkeJason HullLeon HulonAnita HulseyJeremy HumphersCharanjeet HunjanFreddy HuntRegina HuntTracy HuntValarie HuntAndrew HunterBlake HunterJeff HunterMelissa HunterGary HuntsmanNancy HunzikerElla HurdRobert HurdAvie HutchinsonCarrol HutchisonGeorge HuttonMike HuttonPete HuttonTimothy HuxleyHoa HuynhRick HyattMarcia HydeKeith HymelLaurie HysellChristine IbrahimMariana IftincaEdward ImberyJames InnesJanelle InnocentPaul IottRoxana IrizarryJeremy IrwinMaggie IrwinMonika IsbachDan IsenhowerBrenda IsonJohn IvezicCathy IvinsHiroshi IwabuchiLonnie IzardAlan JacksonBarry JacksonChance JacksonEileen JacksonGarrett JacksonGeorge JacksonJanet JacksonKenneth JacksonRandy JacksonSally JacksonTravis JacksonWilliam JacksonGregg JacobBenson JacobsRick JacobsenDeborah JacobsonKeith JagordRodney JakubowskiKenneth JamesRandall JamesBret JamesonDebra JamesonJoann JamiesonRick JanigoRaquel JanoeJamie JanotaTom JantzMichael JanzLeroy JardieRobert JardineMichelle JarrettDarrell JarvisRoland JasoBrian JeffreyWendy JenishKathryn JenkinsKyle JenkinsRonald JenkinsDonald JenningsKim JensenMargaret JensenRyan JensenNick JensonDee JeromePierre JobinBilly JohnsonBilly JohnsonChristopher Johnson
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Vanetta McCulloughHeather McCutcheonCarol McDanielDerrick McDanielMark McDanielCameron McDonaldCharles McDonaldDavid McDonaldDebra McDonaldJeff McDonaldJenelle McDonaldPam McDougallAlicia McDuffieRobbie McEachnieKelly McElhaneyIrene McEvoyJody McEwenLee McFarlandDean McGarryMaggie McGeheeBrandon McGinleyTodd McGlauchlinHelena McGoughSteve McGoughColin McGovernErnie McGowenGregory McGowenRoy McGowenJames McGregorScott McGregorDwain McGuireLynn McGuireMichelle McGuireLittle McGullionDavid McHargKeith McInroeGary McIntyreLouise McIntyreTerry McIverNeil McKeachnieVerna McKeanDanielle McKeeKyle McKeeVance McKeeDan McKeeverKathryne McKeeverBobo McKenzieNicole McKenzieKenneth McKibbenCurt McKinneyMichael McKinneyScott McKinneyShaleen McKinneySteven McLaughlinMatthew McLeanW. Jeffrey McLeanDonald McLeodTravis McLeodMike McMahanBilly McMillanJeanie McMillanMark McMillanRodney McNabbPhilip McNeilKyle McNeillJim McPheeDanny McPhetridgeCraig McPhieRobbie McPikeKaren McQuigganTim McTaggartJeff McVayRon McWhorterGlen McWilliamsNiles McWilliamsThad MeadorMichael MeansFran MearsSandra MecheTony MedleyBarbara MeekinsJudith MegliBalu MeharwadeJoseph MehringBetty MeixnerArturo MejoradoDave MelanconHarry MellafontAnna MeloJ. Dennis MelocheTeresa MendiazJorge MendozaGulanar MeraliKatie MerchantMonty MereckaPhillip MeredithMaryanne MerlockCharlene MerrillGerald MeshenKathryn MesiFrank MessaGregory MessnerTalbot MestayerRobert MetcalfTina MettingJohn MetzlerCraig MeyerEllen MeyerTravis MeyersMeagen MichaelSean MichalskiMark MichellAndrew MickleboroughMike MiddletonBrenda MilamCliff MilamPhil MilamAndrea MilesBill MileyThorin MileyBetty MillenBrad MillerCasey MillerDonna MillerFred MillerGary MillerJames MillerJanelle MillerKurt Miller
Kyle MillerLarry MillerLinda MillerMelissa MillerMichael MillerPatrick MillerReginald MillerRyan MillerYamoria MillerDon MillettKathy MillettDixon MillicanPeter MillmanDavid MillsDon MillsMichel MillsRandy MillsJason MilnerDane MiltonJose MinasKarlee MinkJohnny MintonChip MintyTravis MironElliott MiskaDewayne MisnerRebecca MissmanGregg MitchellLisa MitchellRandy MitchellRick MitchellStacey MitchellTrudy MitchellJerry MitchumJohnny MixonMichael MlcakClarence MoberlyAndy MobleyTodd MoehlenbrockBobby MogfordCecilia Mo-IrvingBryan MolaisonThomas MolaisonDelia MolinaRobert MollisonGwen MonarchDoug MonkEmma MontgomeryGerald MontgomeryMariLynn MontgomeryFrank MontheyRalph MontoyaIda MoodyMark MoodyMarian MoonDan MooneySteve MooneyBrent MooreBrian MooreDavid MooreDonna MooreDouglas MooreJosh MooreMarc MoorePatrick MooreShelley MooreTravis MooreTom MooresLutie MoraDanny MoralesOscar MoralesRay MoralesRuby MoranCarla MoraschRoy MoreheadVincent MorelandSteven MorencyColleen MorettiJosh MorganRory MorganTodd MorganWarren MorganBrenda MorgensenNicole MorissetteR. Peter MorissetteRod MorozBrian MorrisDavid MorrisGrant MorrisPhyliss MorrisDebbie MorrisonGreg MorrisonRodney MorrisonTracy MorrisonCharity MorrisseauFrederick MorrisseyDick MorrowDarrell MosbyFausto MoscaRobert MoserAnne MosesRobyn MoskMike MossNeil MossRochelle MoteKeith MottFrank MotyckaLorraine MounkesMichael MoutonKelly MowerCharles MowryChristina MoyBenjamin MoyeOscar MuellerMeg MuhlinghauseGeorge MullenSteve MullenTrent MullenMarius MullerJustin MullinaxJeremy MullinsVictor MundingPete MundyAmanda MunizFabian MunosSophia Munoz-GuzmanAurea MunroKim MunroMichael Munsey
George MunzingJeff MurphreeBarbara MurphyBob MurphyEd MurphyKenneth MurphyThomas MurphyTom MurphyJordan MurrayLloyd MurrayPatti MurrayPaul MurrayShawn MurrayTyler MurrayDavid MurrellRichard MyalDavid MyersJames MyersDavid NaasJohn NaborsGary NagorkaRick NagyAmi NaikEthan NallLarry NantzGary NashJeff NationMike NausTom NayShiraz NazeraliFrancis NazzalTraian NeacsuRandy NealRand NedvedKeith NeedhamTom NegenmanJamie NeibauerDebby NelsonDonnie NelsonKelly NelsonLori NelsonMartin NelsonSharlene NelsonTom NelsonRosie Nelson-TaylorCandy NesomScot NesomKristian NesporJimmy NetowastanumPaul NeubauerSidney NeudorfKim NeugebauerDarla NeundorfJack NeunerJon NewellKelley NewkirkNancy NewmanJohn NewtonNick NewtonBenny NgDaniel NgEsther NgMichael NgAlex NguyenDanh NguyenJohn NguyenPhuong NguyenTom NguyenTony NguyenKenneth NibbelinkVickie NicholasGeorge NicholsLarry NicholsNick NicholsPaul NicholsonFrances NickelMike NicolPatric NicolMelanie NicolaidesDarlene NicolsDarcy NiedermaierMarilyn NielsenTim NielsenMike NivensToby NivensJessie NixKen NixonBrian NolandTaylor NolandDanny NolenBlair NolinDavid NollschErnie NonogShannon NordstromBradley NoreJanna NormanMike NorrisCarol NortonGlenn NorwoodTamara NovogrudskyRudy NowakDanielle NusbaumJeff NutterDale NyegaardWilliam NystromJason OakleyMark OatesDon OBeirneEugene O’BrienWilliam O’BrienDave O’BrightKaren OConnellSteve O’ConnellMaureen O’Connor-HorvatDavid OczkowskiClay OdenErnest OdenKarla ODonnellMike O’DonnellHeather OffetDaniel OffuttLana OffuttScott OgierLee OgleTim OgleChristopher OgstonMichael OharaCalvin OldfieldPeter Olesen
Charles OliverCorby OliverDwane OliverJeff OliverTamara OllenbergAllan OllenbergerSean OlmsteadGrant OlsenJames OlsonAdam OlszewskiWanda OlszewskiTunde OluokunJohn OndreyArt OnealPatrick ONeillSandra OniaScott OpdykeMark OrchardRyan OrcuttTrevor OrdDennis OrtegoAndrea OrtizMarcos OrtizJay OrtnerMelissa OsborneRobert OsbournCindy OsinaDale OslanskiBrooke OslerDonald OszustJason OttoBen OuelletJason OuelletJason OvercashBrian OvermanAmanda OwenBen OwenEddie OwenGreg OwenJames OwenDave OwensStephanie OwensSteve OwensTracee OwensWhitney OxleyPaul OzarKenny PaceCynthia PaigeBrad PakkalaMona PalChris PalazzoKatherine PallisterCourtney PalmerDouglas PalmerMichael PalmerShaun PalmerBianca PalosanuNorman PalsChris PanNicole PanielAmy PannellTom PapeJames PappasBob ParadisoSheila PardoGloria Pardo-ContrerasElsa PareceHector ParentKim ParentRobert ParishBecky ParkerCarolynn ParkerDavid ParkerDon ParkerLinda ParkerRandy ParkerCalvin ParksFred ParksJeff ParksMichele ParksWalter ParlangeDennis ParonLori ParrGeorge ParraMariela ParraPaula ParrickTed ParrishSpencer PartridgeThomas PascoSonal PatelPlacido PatrianaDavid PattersonDonald PattersonMartyn PattersonCarol PattesonHardy PattonJeff PattonMark PattonSherri PattonWesley PaughJoe PaulTim PaulMark PaullMeghan PaulsonRegina PauraRob PawlikWesley PawlikJohn PawluskiBen PayneDal PayneFred PayneJohnny PayneJonathan PayneKaren PayneMicheal PayneRay PayneDavid PearceJohn PearceJoyce PearnBrandon PearsonEdward PearsonJanet PearsonKathy PearsonRoss PearsonBrandon PeckBridger PeckHeather PeckFinn PedersenDwayne Pederson
Dave PeetJorge PeinadoAlthemus PellerinJean PelletierNeil PelletierApril PelsCindy PembertonAl PenaAmanda PendegrassTim PendletonBill PenhallBarbara PenmanHolly PennerCathy PenningtonMatthew PenningtonShelby PenningtonDavid PennybakerShelagh PensonKevin PepplerDenise PercivalWagner PeresCarlos PerezElisa PerezJohn PerezChristine PerkinsDeanna PerkinsGuy PerkinsKerry PerkinsRichard PerkinsMichael PerletteDaniel PernaDeborah PerraultDebbie PerrinDusty PerryKathy PerryRobert PessiaAida PetersGerald PetersGord PetersPam PetersCasey PetersenPaula PetersenCharles PetersonChuck PetersonGerald PetersonKyle PetersonTerry PetersonKamberly PeteteAnthony PetkovichRob PetroneShannon PetrusawichAllen PetryClayton PetryPatrick PetryBarbara PettigrewBill PettittDavid PettusMatthew PettyjohnChip PhillipsMarvin PhillipsMatt PhillipsRussell PhillipsSherry PhillipsTyler PhillipsJimmy PhippsLily PhungJudy PickeringTravis PickeringMark PickupMichal PicquetLawrence PidkowaPenny PiekarskiDavid PierceDuane PierceEddie PierceJimmy PierceJoe PierrottieJerry PiersonLeslie PietronCharlie PikeKimberly PikeCharlie PilandNorman PimmCathy PinedaJerri PinelSusan PinkneyOlivia PintoRisa PippinPeter PiszRobert PittJack PittmanVince PittsRyan PivonkaMerle PlamondonGlen PlaskaMary PlattCharlotte PlombinEarl PlumbBrandi PlumleeJohn PodhaiskyRay PodobaAlbert PoetkerDavid PoirierDebbie PoirierDanny PolakPaul PoleyKimberly PolhemusMike PolhemusTerry PollardTommy PollyJeffery PolsfutEva PolyakMarilyn PomeroyMarvinette PonderRichard PontelloDarris PonthieuxKelly PoonLucas PopinskiRon PoppengaAl PoprikCharles PortelanceJustin PorterRobin PorterLenny PostDan PostlerRandi PoteetGreg PotterRory PotterTracy Potter
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Wehavebuiltourcompanyonasolidfoundationofcorebeliefsandvaluesthathaveshapedourpastandmapourfuture.Fromthisfoundation,wedrawuponpreciousresourcessuchasinnovation,teamwork,integrityandperseverance.Morecriticalthantheenergyresourcesweproducearetheconvictionsthatguideusaswework.
Inpreparingthisannualreport,wetalkedwithacrosssectionofDevonemployeesandstakeholdersoutsidethecompanyaboutDevon’scharacterandhowweconductourbusiness.Inthefollowingpages,alongwithcommunity,environmentalandoperationalhighlights,theseindividualssharetheiruniqueperspectives.
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“Theyunderstandthatshareholdervalueandthebottomlineareenhancedbyinvestinginthecommunityandespeciallybyinvestinginthenext generation.”DAviD BoreNPRESIDENT,UNIVERSITYOFOKLAHOMANORMAN,OKLAHOMA
“As president of the University of Oklahoma, my role is to help build an outstanding university, and the leadership at Devon shares my mission.
“It is not a coincidence that strong and productive companies are most often located in strong and flourishing communities. The two go together and Devon understands that. They understand that shareholder value and the bottom line are enhanced by investing in the community and especially by investing in the next generation.
“Devon has invested in new facilities, scholarships, internships and research programs at OU. Their contributions are helping us produce a pool of outstanding graduates that Devon can draw from to maintain its talented workforce.
“Devon has succeeded as a company and is becoming an even greater company because its leaders have the vision to understand that their business interests coincide with the public interest. Devon is not only a corporate partner for OU, its leadership and its values serve as a model and an inspirational guide for our students.”
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“ When my community has a need, we can always count on Devon to get involved. Devon has been in our community for several years, contributing to public education, youth recreation, senior support programs and a variety of other community service efforts.”
Wendy TremblayAboriginAl Committee member of the Conklin métis loCAl #193Conklin, AlbertA
“In the area of community relations, Devon sets an excellent example for others to follow. The company supports public education, its employees are active in the community and it supports public safety programs.”
Roy EatonPublIsher, WIse CounTy MessengerDeCaTur, Texas
“Devon’s like a big family, and that makes it a lot easier for everyone to do their jobs. The friendly environment is why I enjoy coming to work each day, and I think it makes people want to do their best for the company.”
Reah ToRResDevon RecepTIonIsTHousTon, Texas
“Devon’s commitment to innovation means a lot to me as an employee. Our company is always looking at better ways to do our business, which helps me and my staff better monitor our business and accomplish more.”
Mandy WrightDevOn SuperviSOr, AccOunting OperAtiOnSOklAhOmA city, OklAhOmA
“Although our Devon tutors can only spend a short time at our school each week, their faithful dedication has made a significant impact on the lives of our students.”
Trina STanberryCommunities in sChools ProjeCt mAnAgerthomPson elementAry sChoolhouston, texAs
“While Devon provides funding for some of our school activities, the most important gift they give us is their time. Our students light up when their tutors arrive and it’s often the highlight of their day.”
ChuCk TompkinsPrinciPal, Mark TWain ElEMEnTary SchOOlOklahOMa ciTy,OklahOMa
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Ambassadors Strengthen Community Bonds Servingonschoolboards,donatingequipmenttoemergencyrespondersandspeakingtostudentsaboutoilfieldsafetyarefundamentaltoour
business.Devon’semployeesarededicatedtothebusinessofeconomicallyfindingandproducingtheoilandnaturalgasthatmaintainsDevon’spositionasoneoftheindustry’stopenergyproducers.Butthatisonlypartofourroleinthecommunitieswherewedobusiness.Wealsospendtimeasvolunteerteachers,littleleaguecoachesandcitycouncilmembers.
Workingwithinourcommunitiesisessentialtooursuccessasacompany,anditisanintegralpartofourcorporateculture.Bysupportingthecommunitieswhereweliveandwork,weenhancethequalityoflifeforourselvesandourneighbors.Devon’sambassadorprogramisakeycomponentofitscommitmenttocommunityoutreach.
Theambassadorprogramsucceedsbecauseofouremployees.Devonambassadorsareprominentmembersofcommunityorganizations,availabletoanswerquestionsaboutouroperationsandtoopenlinesofcommunicationwithallofourstakeholders.
ForBillSkelton,beingaDevonambassadorinRiverton,Wyoming,requiresowninga“goodpairofboots.”Asanambassador,Billseeksopportunitiestomakeapositiveimpactinhiscommunity.Hevolunteerstohelplocallawenforcementwithsearchandrescueoperations—savingaccidentvictimsandsearchingforlostchildren.
ThousandsofDevonemployeevolunteersbuildrelationshipswithlandowners,civicleadersandregulators.Theserelationshipshelpusworktogether,whetherweareaddressingacommunityneedorrespondingtoanemergencyinthefield.Astheyservetheircommunities,thesevolunteersarestrengtheningbondsandbuildingpartnerships.
Community outreachCommitmentofResources
Tosucceedinthefield,energycompaniesmusthavesupportfromthecommunitiesthatsurroundtheiroperations.Weconsiderourselvespartofthetowns,citiesandruralareaswhereweexploreforandproduceoilandnaturalgas.Welivethere,workthere,playthere,worshipthereandsendourchildrentoschoolthere.
Ourbusinessoperationsdependonasolidfootingthatcanonlycomefromstablecommunities.Thatiswhyweworktobuildrelationshipsanddonatefinancialresourcestocivicorganizations,schools,lawenforcementagencies,firedepartmentsandyouthprograms.
Wearegratefultohaveopportunitiestocontributetoprogramsandservicesthatenhancethequalityoflifeforouremployeesandtheirneighbors.Byinvestinginthefutureofourcommunities,weareinvestinginthefutureofDevon.
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Devon helped re-equip firefighters in vermilion Parish, Louisiana, following the devastating Gulf Coast hurricanes of 2005.
Devon Continues Support for Gulf Coast recoveryMorethanayearafterhurricanesKatrinaandRitapummeledtheGulfCoast,Devonhasnotforgottenthepeoplethatwereimpactedbythe
devastation.Asfamiliesreturntoplacestheyoncecalledhome,manylocalschools,socialserviceorganizationsandemergencyrespondersremainwithoutthesuppliesandequipmenttheyneedtoservetheircommunities.
Immediatelyfollowingthehurricanes,Devonrespondedwithcontributionsandvolunteerstohelpvictimsbeginthehealingprocess.Devon’s$2millioncontributiontoreliefeffortsaidedrestorationinitiativesalongtheLouisianaandTexascoastlines.Butourreliefefforthasnotstoppedthere.Devoncontinuestomakesignificantcontributionstotherestorationprocessbytargetingneedsthatarenotcoveredbygovernmentagenciesandinsuranceprograms.
Forexample,wehaveworkedwithlocalschoolsinLouisianatoidentifywayswecanhelpstudentsandfacultyrecoverfromthelossestheirfacilitiessustainedinthestorms.Asaresult,wehavepurchasedeverythingfromschoolsuppliestofurniture,computerequipmentandevenrainponchostohelpprotectstudentsastheywalkbetweenportableclassrooms.AtErathHighSchoolinLouisiana,wefundedanewfloorforthegymnasium,whichalsoservesasacommunitygatheringplaceandrecreationcenter.
ThestormsalsoconsumedvitalequipmentusedbyfirefightersinVermilionParishLouisiana.Devoncontributed$180,000toensurethatthesefirstrespondersareadequatelyequippedtoservetheircommunities.Devonhasalsocontributedtoorganizationsthatprovidepost-traumacounseling,clothingandtutorsforevacuatedstudents.
Inadditiontocorporatefunding,manyofouremployeescontinuetomakepersonaldonationstoassisthurricanevictims.InDecember2006,DevonemployeesinLouisianamadetheholidaysalittlebrighterbypurchasingclothingandtoysforthechildrenoffamiliesstillstrugglingwiththerecovery.
Whilethehurricaneshavelongbeenover,thedevastationtheycausedcontinuestoaffectthelivesofmanyinthecoastalcommunitieswhereweliveandwork.Asanenergyproducer,wedependonourcommunitiestocreateasolidfoundationforourbusinessandouremployees.BecausewehavebeengracedbythesupportofmanycommunitiesthatsharedinthedisastrouseffectsofKatrinaandRitain2005,wesharetheresponsibilityforpickingupthepiecesthestormsleftbehind.
Mike Naus from Devon’s Gillette office talks with students about wildlife and the environ-ment during the Wyoming hunting and Fishing heritage expo in 2006.
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“There are certain companies that have established themselves as leaders. Through their conduct and their participation they are able to shape the direction of the industry. Devon is one of those companies.”
Marc SMithExEcuTivE DirEcTorinDEpEnDEnT pETrolEum AssociATion of mounTAin sTATEsDEnvEr, colorADo
“The best way to handle a problem is to address it, not back away from it. Devon is the kind of company that works with me. They want to help people and make things work. It’s the mark of an honest company. If there’s a mistake, the honest company will work it out. If they’re dishonest, they’ll never resolve it.”
R.C. MCFallCounTy CommIssIonerJohnson CounTy, Texas
“I see the respect Devon gets from service companies, the Bureau of Land Management and from people who live in the town of Baggs. As a petroleum engineer, working for a company with a good reputation makes my job easier. People are easier to talk to and work with because they trust Devon.”
Megan StarrDevon oPerAtIons engIneerBAggs, WyoMIng
“Credibility is essential to be effective in Washington. Devon exemplifies the new image of an independent producer. It’s big enough to participate in any project, but its roots are solidly in America.“
Lee FuLLerVICe PresIDent, GoVernment relAtIonsInDePenDent Petroleum AssoCIAtIon of AmerICAWAshInGton, D.C.
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“Ourenvironmental,healthandsafetyphilosophystartedwithacommitmentourmanagementwaswillingtomake,andnowitisoneofthethingsthatsetsusapartfromourpeers.”DArreN SMiThDEVONENVIRONMENTALSCIENTISTOKLAHOMACITY,OKLAHOMA
“Devon has adopted an environmental, health and safety philosophy that calls on us to conduct our business ethically and lawfully. It also requires us to seek ways to operate in a manner that is safe and compatible with the environment as well as with the communities that surround our operations.
“The philosophy is more than a priority. It’s part of our system of values, which is important, because priorities can change, but values are concrete.
“Our philosophy is a top-down commitment, and that’s the best part. We are all held accountable for our EHS performance. As a supervisor in our environmental group, that makes my job a lot easier.
“People are welcome to suggest new ideas that could make our operations more efficient, better for the environment and friendlier to our neighbors. Great ideas are coming in from the field because people are encouraged to think that way. As a result, our environmental programs are among the best in the industry.
“Our environmental, health and safety philosophy started with a commitment our management was willing to make, and now it is one of the things that sets us apart from our peers.”
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Technology Drives emissions reduction effortBetween1996and2005,Devonhasaccountedforemissionreductionsofmorethan15milliontonsofcarbondioxideequivalentasreportedthrough
voluntarygovernmentprogramsintheUnitedStatesandCanada.Wehavereducedemissionsthroughtheuseofnewtechnology,andwehavefoundinnovativenewapproachestoourwellcompletionandproductionmethods.Forexample,Devonhasinitiatedaprogramtoreplaceoldpneumaticdeviceswiththelatesttechnologydesignedtosubstantiallyreducemethaneemissions.Devonisreplacinghundredsofthese“oldtechnology”devicesatproductionsitescompanywide.Eachreplacementaccountsforanemissionreductionof100tonsofcarbondioxideequivalenteachyear.Thatisliketaking20carsofftheroad.
Bycapturingnaturalgasnormallylostintheproductionprocess,wehavebeenabletoincreasethevolumeofgasavailableforsale.In2005,wewereabletoretainsixbillioncubicfeetofnaturalgasthatwouldhavebeenlosttotheatmosphereusingtraditionalpractices.Withaneconomicbenefitofmorethan$43million,doingwhatmakessensefortheenvironmentalsoenhancesourprofitability.
Since1999,Devonhasearnedrecognitionbygovernmentagenciesforbeinganindustryleaderinemissionsreductionandreporting.IntheUnitedStates,theEnvironmentalProtectionAgencyhashonoredDevonrepeatedlyforitsperformanceandforitsadvocacy.InCanada,Devon’seffortshaveearnedthecompanyelitestatusfromtheGHGChallengeandRegistryprogramforthepastsixyears.
Whilewearepleasedwithourpastsuccess,wecanachievemuchmore.In2006,wefurtherdefinedourfuturecourseasanindustryleader.Newinitiativesincludeacompanywideinventoryofgreenhousegasemissionsandcontinuedimplementationofnewemissionreductiontechnology.
Agreenhousegasinventory,scheduledforcompletionbytheendof2007,isthebackboneofourfutureemissionsreductionprogram.ThroughtheinventorywewillidentifyreductionopportunitiesatDevonproductionfacilitiesacrossNorthAmerica.Itwillallowustofocusonspecificregions,identifytheirneedsanddevelopreductionstrategies.Thoseeffortswillincludetheapplicationofnewtechnology,improvedproductionmethodsandbetterequipmentconfigurations.
environmental Partnerships AResourcefulApproachtoConservation
Devoniscommittedtothepreservationofournaturalenvironment,especiallyairandwater.OurcommitmenthasresultedinsuccessfulinitiativescompanywidethathaveestablishedDevonasanindustryleaderinenvironmentalresponsibility.
Wearegratifiedbyourprogress,andweareevenmoreexcitedaboutourfutureaswecontinueacourseofinnovationintheareasofemissionsreductionandwaterconservation.WhileDevon’sgreenhousegasemissionsreductionprogramsarealreadyinplace,ouraccomplishmentsin2006createdanewplatformforgreaterreductionsinthefuture.Inadditiontotheseachievements,ourwaterconservationprogramscontinuetoexpandwithnewtechnologythatcouldeventuallybeappliedtoproductionoperationscompanywide.
Conservationisourgoalasagoodneighborandisconsistentwithourobjectivetocontinuetobeatopperformerinthehighlycompetitiveenergyindustry.Bykeepingmorenaturalgasinthepipelineandreducingwaterusage,wecanincreaseproductionandcutoperatingcosts.Thatisnotonlygoodfortheenvironment,itisgoodforourbottomline.
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Supervisor Jay ewing examines a water sample at a Barnett Shale facility. Water recycling is an important element of Devon’s conservation efforts.
OurongoingemissionsreductioneffortsandourinventoryprogramhelppositionDevonforthefuture.Bycontinuallymonitoringourperformanceandlookingforopportunitiestoincreaseefficiency,weenhanceourcompetitivenessaswellasourabilitytorespondtopotentialchangesintheregulatoryenvironment.Wearededicatedtooperatingcompatiblywiththeenvironment,andwebelieveadynamicandrigorousemissionsreductionprogramisvitaltothatcommitment.
Water Conservation initiative expanding in North TexasWaterisanintegralpartofnaturalgasproduction.WhetherweareusingfreshwatertocompletewellsintheBarnettShale,ormanagingbrinefrom
wellsintheRockyMountains,waterconservationisacoreenvironmentalinitiativeforDevon.Forexample,atatimewhensociety’sneedforwaterisatanall-timehigh,Devonhasrespondedbyintroducingrecyclingtechnologythatwillallowustoreduceourdemandandpotentiallyimproveourefficiencycompanywide.Since2005,DevonhaspartneredwithFountainQuailWaterManagementtopioneerrecyclingintheBarnettShalenaturalgasfieldinnorthTexas.
Oureffortshaveresultedinthefirstwaterrecyclingprogramtobepermittedforlong-termusebyindustryregulatorsinthestateofTexas.Devon’suseofthermaldistillationtechnologyhasallowedthecompanytoreclaimwaterrecoveredfromhydraulicfracturestimulationsintheBarnett.Insteadofinjectingwastewaterintodeepdisposalwells,Devonisusingheattoseparatethewaterfromsaltandotherimpurities.Thetreatedwatercanbereusedforfuturecompletionoperations,takingdemandpressureofflocalfreshwatersupplies.
Devon’srecyclingprogramhasmovedbeyondthedevelopmentstage.Today,weareoperatingsevenrecyclingunitswithacombinedtreatmentcapacityof500,000gallonsofwaterperday.Aswebringadditionalunitsintotheregion,weexpectourrecycledvolumestocontinuegrowing.Theimpactofthistechnologycouldbemeaningful.Atfulltreatmentcapacity,upto85percentofthewaterwerecoverfromfracturecompletionsintheBarnettShalecouldbereused,significantlyreducingourdemandforfreshwater.
Whilewearepleasedwithourprogress,wecontinuethepushtodevelopnewideas.InMarch2007,webeganfieldtestingasecondwaterrecyclingtechnologyintheBarnettShale.WehavedevelopedtheEngineeredMembraneSeparationsystemthroughapartnershipwithGeneralElectric.Themembranetechnologyusesaseriesoffilterstotreatwaterwithoutthesubstantialenergyrequirementsofthethermalsystem.Ifsuccessfulinthefield,thenewtechnologymayprovetobemoreeconomical,anditcouldhaveapplicationsinothernaturalgasproducingregions.
Byconservingwater,wereduceourenvironmentalimpactandcreateopportunitiestoimproveouroperationalefficiency.Theprogramallowsustoreducethevolumeofwaterwemustpurchaseforouroperations,andithelpsusavoidcostsassociatedwithsaltwaterdisposal.Overall,waterrecyclingisanexcitinginitiativeforthecompanybecauseofitsbenefitstotheenvironmentandtoourbottomline.
Protecting the natural environment is imperative in our field operations. Devon is the largest independent natural gas producer in New Mexico, where we have been working in harmony with the environment for more than 20 years.
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“IthasbeenmyexperiencethatDevonconductsitsbusinesswithinnovationandprofessionalism, carryingoutitsactivitiesresponsibly,withaneyetowardprotectingtheenvironment.”viCTor CArriLLoTExASRAILROADCOMMISSIONERAUSTIN,TExAS
“As a Texas Railroad Commissioner, I oversee and regulate the oil and gas industry. Devon is incredibly active in Texas and is the top gas producer in the state. It has been my experience that Devon conducts its business with innovation and professionalism, carrying out its activities responsibly, with an eye toward protecting the environment. For example, Devon has responded to freshwater use concerns in north Texas by being the first operator in Texas to test a pilot recycling program to recover water used in natural gas production operations.
“Devon is also pushing the envelope in terms of technological advancements, using innovations in seismic, drilling and production techniques in the Barnett Shale. They are the top producer in the unconventional Barnett Shale gas trend – perhaps the most active natural gas play in the nation. Along with their partners, they are also employing leading edge technology in successfully exploring the ultra-deepwater Lower Tertiary trend in the Gulf of Mexico. Devon is the type of producer we would like to see more of in Texas.”
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“Since joining Devon in 1999, I’ve seen our management tested on repeated occasions. Each time they have demonstrated a commitment to doing what is right, even when it’s not the most convenient or expedient solution.”
Don SanDSDEvon SupErvISor of Gulf of MExIco opEratIonSlafayEttE, louISIana
“Our executives always stop to say hello. When I need to talk to them, their doors are always open, which is very helpful in the work that I do.”
Bill WalterDevOn SupervISOr, InfraStructure anD DatabaSe ServIceSOklahOma cIty, OklahOma
“The rating agencies, banks and companies I work with all have a very high level of trust in us; they know we will follow through on our commitments.”
Jeff RitenouRDevon Manager, CorporaTe FInanCeoklahoMa CITy, oklahoMa
“At Devon, every employee is treated with respect. Our leadership has created an environment of trust and goodwill, and it’s apparent in how our teams work together.”
Jenifer WickDevOn GeOscience TechniciAnOklAhOmA ciTy, OklAhOmA
“Whether we are working with other businesses or with government regulators, integrity is our focus. It’s Devon’s culture. Integrity guides us as professionals and influences us in our personal lives as well.”
Humberto QuintasDevon Attorney AnD LegALCoorDInAtor for expLorAtIon AnD proDuCtIon operAtIons rIo De JAneIro, BrAzIL
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how does Devon compete for qualified employees?Thevitalityandgrowthoftheenergyindustryisstretchingthecapacityofamaturingworkforce.Competingforemployees—fromrecentcollege
graduatestoexperiencedindustryprofessionals—ischallenging.Ourcollegerecruitingeffortsincludecampusvisitsbyyoungeremployeeswhocansharepersonalexperiencesandcanrelatetoastudent’suncertaintyabouttheirfuture.Wealsoprovidefinancialsupportforpetroleumstudiesprogramsandfacilitiesthatraiseouron-campusprofile.Inourcollegeinternshipprogramweinvitemorethan100studentstospendthesummergettingtoknowthecompanyandworkingintheenergyindustry.
ExperiencedpersonnelareattractedbyDevon’sreputationasaleadingindependentoilandgasproduceraswellasbyourcultureoffairnessandopenness.OurobjectiveistohireandretainemployeeswhoarenotonlytechnicallyskilledbutwhoareengagedandenthusiasticaboutDevon’sfuture.Tohelpretainourcurrentstaff,wegaugethepracticesofcompetitorstoensurethatDevonofferscomparablecompensationandbenefitsprograms.However,compensationaloneisnotenoughtoattractandretainthebestpeople.Wealsobelievethatofferingasuperiorworkexperiencethatrewardsintegrity,ingenuityandteamworkpositionsDevonasnotonlyagreatplacetowork,butmoreimportantly,buildsastrongbaseofleadersfocusedoncreatingvalueforourshareholders.Anoverviewofthecompany’sretentionandrecruitingprogramscanbefoundintheCareerssectionofDevon’swebsiteatdevonenergy.com.
Do the Jack production test results apply to your other Lower Tertiary discoveries in the Gulf of Mexico?ThesuccessfulproductiontestoftheJackwellin2006wasasignificantindicatorthatdeepwaterLowerTertiaryreservoirscanproduceoilincommercial
quantities.Althougheachdiscoveryisunique,thetestresultsbuildourconfidenceinthecommercialpotentialofDevon’sLowerTertiaryportfolio.Inaddition,theseresultsmoveusclosertothesanctioninganddevelopmentofeachofourdiscoveriesintheLowerTertiary.
Devon’sfourLowerTertiarydiscoveriestodatearesimilar,butnotidentical.Differencesinwaterdepths,reservoircharacteristics,rockqualities,oilchemistryandotherpropertiesarepresenttovaryingdegreesamongthediscoveries.TheJackwelltestansweredmanyquestions,butthelearningprocesscontinues.AswedevelopourfourLowerTertiaryprojectsandexploreforadditionalLowerTertiarydiscoveries,ourunderstandingofthisimportantnewdomesticenergysourcewillexpandrapidly.
Devon is already the biggest producer in the Barnett Shale. Can you continue to grow this asset?Yes,weareconfidentthatwecancontinuetoincreaseDevon’sprovedreservesandproductionfromtheBarnettShale.Wehavemorethandoubleddaily
productionfromthisoutstandingunconventionalresourcesinceDevonfirstacquireditsBarnettShalepropertiesin2002.WehavealsodoubledprovedreservesintheBarnetttoabout3.6trillioncubicfeetequivalentandhaveproducednearlyonetrillioncubicfeetequivalentduringthesameperiod.Theseincreasesingasproductionandprovedreserveshavebeentheresultofanactivedrillingprogramcomplementedbytechnologicalimprovements,includinghorizontaldrilling,multi-stagecompletionsandextensive3-Dcomputerimaging.Increaseddrillingdensityandenhancedreservoirmanagementtechniqueshavealsoledtoproductionincreases.WehavemorethantripledthenumberofproducingwellsintheBarnettShalesince2002toover2,700today.
In2006,weacquiredthepropertiesofChiefHoldings,whichincreasedDevon’slandpositioninthefieldby169,000netacrestoacurrenttotalof736,000netacres.Devon’sacreagepositionisthelargestintheBarnettShale,andDevonisalsothelargestproducerbyasignificantmargin.FurthergrowthintheBarnettwillbeachievedthroughhighactivitylevelsappliedtothislargerresourcebaseandsupplementedbycontinuedenhancementsindrillingandproductiontechnologies.Weplantodrillatleast385wellsin2007,andwehaveseveralthousandpotentiallocationsininventory.Giventheseabundantdrillingopportunitiesandourtrackrecordofsuccess,webelievewecancontinuetoincreasethesizeandvalueofDevon’sBarnettShaleassetsfarintothefuture.
What does your decision to reduce investment in conventional Canadian natural gas areas say about Devon’s commitment to Canada?CanadaandtheUnitedStatesaretwoofthebestplacesintheworldtoexploreforandproduceoilandgas.Stablegovernmentsandfiscalregimes,access
tomarketsandatalentedandexperiencedworkforceattractustoNorthAmerica.WehavealargeinventoryofhighqualityassetsinCanadaandhavehadgoodperformanceinthepast.However,in2005and2006,theCanadianmarketforland,equipment,servicesandsuppliesbecameoverheated.This,coupledwiththestrongerCanadiandollar,resultedincostescalationthathasseverelysqueezedprofitmargins—especiallyinthemature,conventionalgasdrilling
Management’s Q&A ResourcefulnessSupportsOurStrategy
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areas.Devonrespondedbytemporarilyreducingtheamountofcapitalallocatedtotheseconventionalprojectareas.WewillcontinuetolimitconventionaldrillinginCanadauntilthesituationshowsevidenceofcorrecting.Wewillincreasedrillingintheconventionalgasareasquickly,whenconditionsimprove.
ElsewhereinCanada,suchasatourJackfishoilsandsprojectandintheLloydminsteroilfield,wearemaintainingveryactivedevelopmentprograms.WeexpecttobeginproductionfromtheinitialphaseofJackfishthisyear.CombinedproductionfromanexpandedJackfishprogramandtheLloydminsterareacouldreach100,000barrelsperdayearlyinthenextdecade.
Devon is forecasting 10% production growth from continuing operations in 2007. What projects are driving that growth?Weexpecttoproducefrom219millionto221millionoil-equivalentbarrels,orBoe,in2007.Thisisabout10%morethanweproducedin2006,
excludingproductionfromEgyptandWestAfricafrombothyears.AllofDevon’smajorgeographicproducingareas—theUnitedStates,Canadaandinternational—areexpectedtoparticipateinthegrowth.
IntheUnitedStates,weanticipatecontinuedproductiongainsfromourcoreonshorepropertiessuchastheBarnettShale,GroesbeckandCarthageareasinTexas.Weexpecttoseeathird-quarterboostingasproductionwhenthetwodeepwaterGulfofMexicoMerganserwellsaretiedintotheIndependenceHub.Our50%interestinMerganserisestimatedatabout50millioncubicfeet,orroughly8,000Boe,perday.InCanada,theJackfishoilsandsprojectisexpectedtocommenceproductioninthesecondhalfoftheyear.Jackfishproductionshouldrampupgraduallyuntilreachingitsfullcapacityofabout35,000Boeperdayin2008.
OutsideNorthAmerica,Devon’sinterestintheACGfieldinAzerbaijanisprojectedtocontributemorethan30,000Boeperdayto2007production.OilproductionfromACGincreaseddramaticallyinthefourthquarterof2006,followingthepayoutofourcarriedworkinginterest.InBrazil,thePolvooilprojectisplannedtocomeonstreaminthesummerof2007.OilproductionfromPolvoisexpectedtoquicklyrampuptoabout26,000barrelsperday,nettoDevon’sinterest.Together,theseprojectsgiveusahighlevelofconfidencethatwewillachieveour10%growthtarget.
you invested $2.2 billion to acquire Chief holdings in 2006. Can we expect more acquisitions ahead?
MuchofDevon’shistoricalgrowthcamefromlargecorporatemergersandacquisitionswhereweacquiredentirecompanies.Ourgoalwastobuildacompanywithsuperioroilandgasassetsthatwecouldgroworganicallywiththedrillbit.Atthesametimeweassembledahighlytrainedandmotivatedgroupofprofessionalswhocouldusecuttingedgetechnologytoenhancethatgrowth.Withourlastmajorcorporateacquisitionfouryearsago,weessentiallyaccomplishedthatgoal.
Today,Devon’scompanywideassetbaseisbroadanddiverse.Ourlong-termstrategyisoneoforganicgrowththroughexplorationanddevelopment,supportedbycontinuousimprovementofourassetbase.OuracquisitionofChiefin2006wasatactical,targetedtransaction.Chief’spropertieswerelocatedentirelyintheBarnettShalefieldinnorthTexas.Addingtoourcorepositions,suchastheBarnettShale,anddivestingassetsthatarenotoptimalforachievingourlong-termobjectivesareimportantcontributorstoimprovingDevon’soverallassetquality.Althoughwecannotcompletelyruleoutthepossibilityofanotheraccretivecorporateacquisitioninthefuture,additionaltransactions,ifany,aremorelikelytobefocused,asset-drivenacquisitionssuchasChief.
Led by the Barnett Shale and other significant growth projects, Devon expects overall production to increase by 10% in 2007. Strong growth in the Barnett Shale is expected to continue into 2009.
devon’s cumulAtive BArnett shAle Production (Net, Bcfe)
1,400
1,200
1,000
800
600
400 2004 2005 2006 2007 estimate
Project objective targetNetrate
Barnett Shale 2009 peak production >1.0 BcfdACG Field 2007 average production >30 MBoed Merganser 1st production mid-2007 50 MMcfdPolvo 1st production mid-2007 26 MBoedJackfish 2008 peak production 35 MBoed
significAnt Projects
To date, Devon has produced in excess of one trillion cubic feet of natural gas from the Barnett Shale in north Texas.
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“Whether it’s safety, environmental responsibility, community involvement or our production operations, I know our senior management will support us when honesty and integrity are at the foundation of what we do.”
GeorGe JacksonDevon ProDuctIon SuPervISorBrIDgePort, texaS
“My job as a field engineer is to optimize production from our wells and work alongside others to identify opportunities for improvement. A lot of times, this means finding ways to cut costs and increase production from a single well.”
Kim JohnstonDevon FielD engineergrAnDe PrAirie, AlbertA
“I like the way Devon has followed up on its acquisitions and has taken advantage of its opportunities. Their engineers and geologists have done some very good work, not only with the Barnett Shale assets Devon acquired from Mitchell, but also offshore in the Lower Tertiary trend, where Devon and its partners are working under very difficult conditions.”
GeorGe MitchellInveSTor anD ForMer ChaIrMan anD ChIeF exeCuTIve oFFICer oFMITCheLL energy & DeveLopMenT Corp.houSTon, TexaS
“I am very impressed with the attitude of Devon’s management, particularly their willingness to use local resources, especially people from CNOOC. Devon allowed representatives from CNOOC to make a full technical contribution to the Panyu field development. As a result, the two companies created a very efficient process that allowed us to develop the Panyu field into one of the most successful offshore oil projects in the region.”
Duan Cheng gangVICe PresIDeNt Of fIelD DeVelOPmeNt AND eNgINeerINgChINese NAtIONAl OffshOre OIl COmPANy (CNOOC)sheNzheN, guANgDONg PrOVINCe, ChINA
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“Weareaclosegroupwithagreatteamspirit.Asaresult,wecometoworkeachdaybelievingwecanmakeanimpactonthecompanybygeneratinggoodexplorationprospectswhichlead,hopefully,tomajornewdiscoveriesforourfuture.”
“When I joined Devon through the company’s acquisition of PennzEnergy in 1999, what impressed me was how much emphasis the company placed on its values. Trust, collegiality and goodwill are among those values, and they have special importance to me and the people in my group.
“We are responsible for generating exploration prospects and developing production in the Gulf of Mexico’s deep water, which is one of the most technologically challenging places in the world to operate. We overcome those obstacles by working in an environment that encourages trust, creative thinking and collective effort. If there is no trust, there is no communication or sharing of ideas. Trusting environments allow good ideas to nurture and mature.
“We are a close group with a great team spirit. As a result, we come to work each day believing we can make an impact on the company by generating good exploration prospects which lead, hopefully, to major new discoveries for our future.”
FROMLEFttORIGHt: irMA CASTro, DAtABASESuPERvISOR;DArryL LiNToN, EnGInEER;GreG KeLLeher, DEEPWAtERMAnAGER;roBBie SeNG, GEOLOGISt;ADAM SeiTChiK, GEOPHYSICISt
GreG KeLLeher (CENTER)DEVONDEEPWATERMANAGERGULFDIVISIONHOUSTON,TExAS
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Asoneoftheworld’slargestindependentexplorationandproductioncompanies,Devonisaleaderinthesearchfornewoilandnaturalgasresources.In2006,weincreasedreservesinthegroundandpositionedthecompanyforfuturegrowth.Weincreasedestimatedprovedreservesby13%in2006toarecord2.4billionoil-equivalentbarrels.Weproduced200millionequivalentbarrelsfromcontinuingoperationsin2006andexpecttoproduce219millionto221millionequivalentbarrelsin2007.
Duringthepastyearwedrillednearly2,500wellswithanoverallsuccessrateof98%.Ourrepeatable,low-riskdevelopmentdrillingprojectswereenhancedbyhigh-impactexplorationsuccessesinthedeepwaterGulfofMexico.Alsoduring2006,wemovedseveralmulti-yearoilandgasprojectstowardcompletion.ThefollowingpagesprofilesomeofDevon’smoresignificantexplorationandproductionprojects.
exploration and Production resourcesDevelopingOurFullPotential
Devon drilled a record 2,468 wells in 2006, adding 427 million equivalent barrels of proved reserves with the drill bit. Total proved reserves reached a record 2.376 billion barrels at year-end.
Wells drilled
1,685
2,228 2,1712,362
2,468
02 03 04 05 06
reserve Additions from extensions, discoveries And PerformAnce revisions(MMBoe)
131
172
311
02 03 04 05 06
•
••
437 • •
Proved reserves (net of royalties) (MMBoe)
1,609
2,074 2,0652,102
2,376
02 03 04 05 06
427
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Barnett Shale, a Lasting resourceTheBarnettShaleinnorthTexashasbeencalledthehottestnaturalgasplayintheUnitedStates,andDevonisitslargestproducer.Sinceacquiringour
originalownershipinthefieldin2002,wehavedrilledabout1,600wellsandincreasedournetdailyproductionfrom350millioncubicfeetofnaturalgasequivalenttomorethan710milliontoday.
In2006,weleaptfurtheraheadintheplaybyacquiringtheassetsofanotherBarnettoperator,ChiefHoldings.Devonacquiredmorethan600billioncubicfeetofprovennaturalgasreservesthroughthe$2.2billiontransaction.Importantly,thedealalsogrewourlandpositionto736,000netacres,representingthousandsofpotentialdrillinglocations.
Devon’sdominanceinthelow-riskBarnettShaleisreapinghugerewardsforthecompanyandourshareholders.Wenowhavemorethan2,700producingwellsintheBarnett,representingone-thirdofDevon’stotalgasproductionintheUnitedStates.Devonproducesnearlyhalfthefield’soveralldailyproductionandmorethantwicethatofournearestcompetitor.
ApplicationoftechnologyisanimportantelementofDevon’sleadershippositionintheBarnett.Wefirstintroducedhorizontaldrillingtotheplayin2002anddrilledour600thhorizontalBarnettShalewellin2006.Wehavealsopartneredwithaleadinguniversitytodevelopproprietary,cutting-edgeundergroundimagingtoidentifyoptimaldrillinglocations.
WeareacceleratingproductiongrowthintheBarnettbyincreasingdrillingdensity.The20-acreinfillprogramwestartedin2005isdeliveringimpressiveresults,andwehavenowbegundrilling20-acrewellsoutsidethebordersoftheoriginalcorepilotarea.Thesuccessfulinfillprogram,theadditionofChief’sassetsandexpansionofouroperationsinJohnsonandParkercountiesarecurrentlykeeping30drillingrigsrunning.Weplantodrillatleast385wellsin2007,andbylate2009weexpectourBarnettproductiontoreachonebillioncubicfeetofnaturalgasequivalentperday.
TheBarnettShaleisoneofthecountry’smostimportantnewsourcesofclean-burningnaturalgas,anditrepresented26%ofDevon’scompanywidereservebaseatyear-end2006.Since2002,wehavesignificantlyincreasedtheamountofgaswearerecoveringfromtheBarnettShale,andweexpectadditionaltechnologicaladvancesinthefuturetofurtherincreaserecoveries.TheBarnettShaleisoneofDevon’smostprizedassetsanditwilllikelyremainsoformanyyearstocome.
in addition to being the largest gas producer in the Barnett Shale, Devon also owns and operates an extensive network of natural gas gathering and processing facilities.
As the largest gas producer in Texas, Devon drills day and night to help meet the nation’s energy needs. We drilled our 600th horizontal well in the Barnett Shale in 2006.
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Jack Test Brings Worldwide AttentionSeldomdoesasinglebusinessstorycatchtheattentionofnewsmediaaroundtheworld.Thiswasthecase,however,wheninSeptember2006
Devonanditsco-ownersannouncedthesuccessfultestofthedeepwaterJackNo.2wellintheGulfofMexico.AccordingtoThe Wall Street Journal,theGulf ’sLowerTertiarytrend“couldbecomethenation’sbiggestnewdomesticsourceofoilsincethediscoveryofAlaska’sNorthSlopemorethanagenerationago.”
TheJacktestmadenews,anditwasbignewsforDevonbecausewehavefoursignificantdiscoveriesinthisexcitingnewoilplay.Theproductiontestprovedthatoilfoundinthe2004Jackdiscoverywouldflowtothesurfaceatcommercialrates.Duringthetest,theJackNo.2flowedatarateofmorethan6,000barrelsperdayfromjust40%oftheoil-bearingcolumn.FutureplansforJackincludedrillinganotherappraisalwelltobetterdefinethesizeofthefield.Alsoahead,theco-ownerswilldecideuponthelayoutandengineeringdesignstodevelopthefield.
DevonisfurtheralongwithplanstocommerciallydevelopCascade.This2002discoverywasourfirstintheLowerTertiary.Beginninginlate2009,Cascadeisexpectedtoproduceintothefirstfloatingproduction,storageandoffloadingvessel(FPSO)approvedfortheGulfofMexico.FPSOsenableoffshoreproductioninfrontierareassuchastheLowerTertiarytrendbeforepipelineinfrastructurehasbeenbuilt.
WemadeourfourthdiscoveryintheLowerTertiarytrendin2006.Thediscoverywell,ontheKaskidaprospect,alsoappearstobethelargestofthefour.FutureplansforKaskidaincludeadditionalappraisaldrillingandevaluationofvariousdevelopmentoptions.WiththeadditionofKaskida,Devon’sLowerTertiarydiscoveriestodatemayholdupto900millionbarrelsofresourcepotential.Ontopofthat,wehaveanother18undrilledprospectswithacombinedunriskedresourcepotentialmorethandoubleDevon’scurrentreservesizeof2.4billionoil-equivalentbarrels.
horizontal Drilling Capturing More Gas resourcesAtypicaloilorgaswellisdrilledstraightdown,vertically.Ahorizontalwellstartsoutverticallybutisturnedundergroundtorunparalleltothe
surface.Tovisualizethebenefitsofhorizontaldrilling,imaginetheearth’ssurfaceasthetopofasandwich.Ifyoupushadrinkingstrawbetweentheslicesofbread,youwillencounteralotmorepeanutbutterthanyouwillbystickingthestrawthroughthesandwichlikeatoothpick.Whenpositionedproperly,onehorizontalwellcanrecoverasmuchoilornaturalgasasthreeorfourverticalwells.Thiscanimprovewelleconomicssignificantly,becausethecostofahorizontalwellmaybeonlytwotothreetimesthecostofaverticalwell.
IneastTexas,DevonisapplyingthesamehorizontaldrillingandcompletiontechnologiesthatwehavehonedintheBarnettShalefieldwhiledrillingmorethan600successfulhorizontalwells.DevondrilleditsfirsthorizontalwellineastTexasin2005intheNan-Su-GailfieldwithintheGroesbeckarea.WecontinuedtheNan-Su-Gailprogramin2006,achievinginitialproductionratesof11.5millionand26millioncubicfeetofgasperdayfromthefirsttwowellsand32millioncubicfeetperdayfromathird.Wehave100%workinginterestsinthesewellsandcouldhaveasmanyas200additionaldrillinglocationsthroughouttheGroesbeckarea.
A front page story in The Wall Street Journal captured the significance of the Jack No. 2 well test.
During testing, the Jack No. 2 well in the Gulf of Mexico flowed at a rate of more than 6,000 barrels of oil per day.
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FollowingoursuccessatGroesbeck,webegantryinghorizontaldrillingfurthereastintheCarthagearea.ThefirstwellintheCarthageprogramalsobeganproducingatanimpressiverate—averagingaboutninemillioncubicfeetperdayforthefirst30daysofproduction.WeplantocontinueevaluatinghorizontaldrillingatCarthage,wherewecouldhaveupto70potentialdrillinglocations.
Woodford Shale Shows PromiseWiththetremendoussuccessoftheBarnettShaleinnorthTexas,theoilandgasindustryissearchingforotherlook-alikeshaleplays.Onesuch
candidateistheWoodfordShaleintheArkomabasinofeasternOklahoma.TheWoodfordandBarnettarenotidentical,butsharesomecharacteristics.Bothcontainlargequantitiesofnaturalgas,andbothformationsgiveuptheirgasreluctantly.AsintheBarnettShale,Woodfordwellsmustbehydraulicallyfracturedduringcompletion.Thisaddstothecostandcomplexityofeachwell.Also,asintheBarnettShale,theWoodfordrespondswelltohorizontaldrilling.
DevonhasassembledanacreagepositioninseveraleasternOklahomacountiesthatisprospectivefortheWoodfordShale.Wecurrentlyholdabout70,000netacres,representingseveralhundredpotentialdrillinglocations.WedrilledourfirstWoodfordwellin2005anddrilled40horizontalWoodfordwellsin2006.WeplantokeepfouroperatedrigsrunningonourWoodfordacreagein2007,drilling55wells.
The octopus is ComingPolvo,octopusinPortuguese,isDevon’sfirststart-to-finishoffshoreoilprojectinBrazil.LocatedintheCamposBasin,Polvowillbeoneofthe
quickestoffshoreprojectsbroughttocompletioninBrazil.DiscoveredinJune2004,Polvoisexpectedtoseefirstproductioninmid-2007.Developmentplansanticipate10producingwells.The1.5millionbarrel-capacityFPSOvesselthatwillhandletheproducedoilhasbeencommissionedandisexpectedonlocationinMay.Oilproductionisprojectedtoreachapeakofabout26,000barrelsofoilperday,nettoDevon.WeoperatePolvowitha60%workinginterest.
EncouragedbyoursuccessatPolvo,Devon’sobjectiveistobuildasignificantpresenceinBrazilthroughanongoingexplorationprogram.Brazilwelcomesforeigninvestmenttomakethecountrymoreenergyself-sufficient.DevonhasevenjoinedwithBrazil’sownPetrobrastoacquireleasesinsomeofthecountry’smostpromisingoffshoreexplorationareas.Petrobrasisaworldwideleaderindeepwateroilandgasexplorationandproduction,andweareverypleasedtobepartneredwiththiscompanyinitshomecountry,aswellasintheU.S.GulfofMexico.WecurrentlyholdleasesinnineoffshoreblocksinBrazil.
oil from the Devon-operated Polvo project in Brazil will flow to this 1.5 million barrel vessel.
Polvo is located on block BM-C-8, one of nine Brazilian offshore exploratory blocks held by Devon.
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First Production Slated for Jackfish oil Sands ProjectTheoilsandsofwesternCanadaarebelievedtoholdbillionsofbarrelsofoilintheformofthick,tar-likebitumen.Shallowdepositsofbitumenhave
beensuccessfullyminedformanyyears.Deeperdepositscannotbemined,butcanbeheatedandcoaxedtothesurfacebyinjectingsteamunderground.Devon’s100%-ownedJackfishprojectineasternAlbertautilizesthesteam-assistedgravitydrainage(SAGD)process.
Jackfish,with300millionbarrelsofestimatedrecoverablereserves,hasbeenunderconstructionsince2005.Withconstructionnearingcompletion,weexpecttobegininjectingsteamatJackfishin2007.Asthesteampermeatesandheatsthebitumen,flowswillincrease,reachinganexpected35,000barrelsperdayinlate2008.Jackfishisanimportantcomponentofourproductiongrowthforecastsfor2008and2009.Withoutthedeclinesseeninmostconventionaloilfields,Jackfishisexpectedtoproduceatarelativelysteadyratefor20yearsormore.
WehavealsoaskedtheAlbertagovernmenttoapproveasecondphaseJackfishprojectonouroilsandsleasesadjacenttothefirstphase.Thiswoulddoubletheresourcesizetoapproximately600millionbarrelsanddoubleproductiontoabout70,000barrelsperday.Iftheexpansionprojectisapprovedandsanctionedfordevelopment,firststeamatJackfish2couldcommenceneartheendofthisdecade.
Production Growth from the CaspianAzerbaijanhasarichheritageasanoilproducer.Itwasthebirthplaceoftheoil-refiningindustryandwastheworld’sleadingpetroleumproducerat
thebeginningofthetwentiethcentury.DuringWorldWarII,thecountrysuppliedabout70%oftheformerSovietUnion’stotaloilproduction.TheAzeri-Chirag-Gunashli(ACG)oildevelopmentprojectislocatedintheCaspianSea,nearly75milesoffthecoastofAzerbaijan.ACGisoneofthe
largestoilfieldsunderdevelopmentintheworld,andDevon’ssharerepresentsabout84millionbarrelsoflight,sweetcrudeoil.Devonestablisheditsstakeinthefieldin1999whenweacquiredPennzEnergy.CommercialdevelopmentofACGwasdependentuponconstruction
ofamajorexportpipelinethatwascompletedin2006.Forthepastsevenyears,mostofDevon’sshareofproductionfromACGwenttorepaypartnersforcostsincurredonourbehalfunderthetermsofour5.6%carriedinterestownership.Aramp-upinproductionuponcompletionoftheexportpipelineenabledustorepayourcarriedinterestbalancesinlate2006.
Withtransportationcapacityprovidedbytheexportpipeline,field-wideproductionhasincreasedtomorethan700,000barrelsperday,headingtoamillionbarrelsperdayin2009.Asaresult,Devon’sshareofACGproductionhasalsoincreased,makingACGasignificantcontributortoour10%year-over-yearproductiongrowthforecastfor2007.Devon’sproductionfromACGisexpectedtoaveragemorethan30,000barrelsperdayin2007.
Drilling operations on the ACG field, offshore Azerbaijan, have increased field-wide production to more than 700,000 barrels of oil per day. Devon’s share of production is expected to average more than 30,000 barrels per day in 2007.
Construction nears completion at Devon’s Jackfish thermal oil facility in Alberta, Canada. Commencement of steam injection and first production from Jackfish are planned for 2007.
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operating Statistics by Area(1) mid- rocky gulf u.s. total total Permian continent mountains coast offshore u.s. canada international company
ProducingWellsatYear-End 8,704 6,668 5,785 3,925 687 25,769 7,391 530 33,690
2006Production (Net of royalties) Oil (MMBbls) 7 1 1 2 8 19 13 23 55 Gas (Bcf ) 38 225 95 129 79 566 241 8 815 NGLs (MMBbls) 2 11 1 4 1 19 4 — 23 Oil, Gas and NGLs (MMBoe) 16 49 18 27 22 132 58 24 214
AveragePrices Oil price ($/Bbl) $ 61.20 62.49 55.40 63.11 64.24 62.23 46.94 61.36 58.30 Gas price ($/Mcf) $ 5.80 5.75 5.64 6.39 7.24 6.09 6.05 3.95 6.06 NGLs price ($/Bbl) $ 28.78 28.21 15.63 34.05 35.43 29.42 42.67 — 32.10 Oil, Gas and NGLs ($/Boe) $ 45.40 33.52 35.35 39.27 51.23 39.31 39.21 59.24 41.51
Year-EndReserves (Net of royalties) Oil (MMBbls) 89 6 20 12 43 170 329 209 708 Gas (Bcf ) 265 3,382 1,134 1,198 376 6,355 1,896 105 8,356 NGLs (MMBbls) 22 156 7 45 3 233 42 — 275 Oil, Gas and NGLs (MMBoe) 155 725 216 257 109 1,462 687 227 2,376
Year-EndPresentValueofReserves (In millions) (2)
Before income tax $ 2,178 4,334 1,952 1,890 2,285 12,639 6,714 4,742 24,095 After income tax $ 8,677 4,817 3,079 16,573
Year-EndLeasehold (Net acres in thousands) Developed 308 772 550 552 223 2,385 2,124 299 4,808 Undeveloped 469 603 1,409 545 1,499 4,525 6,304 9,440 20,269
WellsDrilledDuring2006 171 621 515 223 20 1,550 877 41 2,468
CapitalCostsIncurred (In millions) (3)
2006Actual(4) $ 216 3,609 365 666 681 5,537 1,554 631 7,722 2007Forecast $ 220-240 1,515-1,625 350-370 805-875 720-775 3,610-3,885 1,245-1,350 395-440 5,250-5,675
(1) Excludes results from discontinued operations. (2) Estimated future revenue to be generated from the production of proved reserves, net of estimated future production and development costs, discounted at 10% in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities. Devon believes that the pre-tax 10% present value is a useful measure in addition to the after-tax value as it assists in both the determination of future cash flows of the current reserves as well as in making relative value among peer companies. The after-tax present value is dependent on the unique tax situation of each individual company while the pre-tax present value is based on prices and discount factors which are consistent from company to company. We also understand that securities analysts use this pre-tax measure in similar ways.(3) 2006 actual costs incurred and 2007 forecasted capital costs include exploration and production expenditures, capitalized general and administrative costs, capitalized interest costs and asset retirement costs.(4) 2006 costs incurred includes acquisition costs of $2.2 billion in the Mid-Continent region related to the Chief acquisition.
11-year Property Data(1) 5-year 10-year
compound compound 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 growth rate growth rate
Reserves (Net of royalties) Oil (MMBbls) 351 219 166 439 406 527 444 646 585 640 708 6% 7% Gas (Bcf ) 1,131 1,403 1,440 2,785 3,045 5,024 5,836 7,316 7,493 7,296 8,356 11% 22% NGLs (MMBbls) 18 24 21 55 50 108 192 209 232 246 275 21% 31% Oil, Gas and NGLs (MMBoe) 558 477 427 958 963 1,472 1,609 2,074 2,065 2,102 2,376 10% 16% 10% Present Value Before Income Taxes (In millions) (2) $ 3,952 2,100 1,375 5,316 17,075 6,687 15,307 22,438 22,693 34,830 24,095 29% 20%
Production (Net of royalties) Oil (MMBbls) 30 29 20 25 37 36 42 60 74 62 55 9% 6% Gas (Bcf ) 116 180 189 295 417 489 761 863 891 827 815 11% 22% NGLs (MMBbls) 2 3 3 5 7 8 19 22 24 24 23 24% 27% Oil, Gas and NGLs (MMBoe) 52 62 55 79 113 126 188 226 247 224 214 11% 15%
Average Prices Oil (Per Bbl) $ 17.49 17.03 12.28 17.78 24.99 21.41 21.71 25.82 28.22 38.00 58.30 22% 13% Gas (Per Mcf) $ 1.82 2.04 1.78 2.09 3.53 3.84 2.80 4.51 5.32 6.99 6.06 10% 13% NGLs (Per Bbl) $ 13.78 12.61 8.08 13.28 20.87 16.99 14.05 18.65 23.04 28.96 32.10 14% 9% Oil, Gas and NGLs (Per Boe) $ 14.90 14.51 11.09 14.22 22.38 22.19 17.61 25.93 29.92 39.48 41.51 13% 11%
unit Production and operating expense (Per Boe) $ 5.24 4.63 4.29 4.15 4.81 5.29 4.71 5.65 6.13 7.42 8.54 10% 5%
(1) The years 1996 through 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt from the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting.(2) Estimated future revenue to be generated from the production of proved reserves, net of estimated future production and development costs, discounted at 10% in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities. Devon believes that the pre-tax 10% present value is a useful measure in addition to the after-tax value as it assists in both the determination of future cash flows of the current reserves as well as in making relative value among peer companies. The after-tax present value is dependent on the unique tax situation of each individual company while the pre-tax present value is based on prices and discount factors which are consistent from company to company. We also understand that securities analysts use this pre-tax measure in similar ways.
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K a n s a sC o l o r a d o
Key Property Highlights
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PERMIAN
A / Southeast New Mexico
Profile• 75%averageworkinginterestin548,000acres.• KeyfieldsincludeIngleWells,CatclawDraw,PotatoBasin, RedLake,Gaucho,andOutland.• Producesoilandgasfrommultipleformationsat1,500’ to16,500’.• 44.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted33gaswells.• Drilledandcompleted49oilwells.• Recompleted15wells.2007 Plans• Drill28gaswells.• Drill43oilwells.• Recomplete35wells.
B / West Texas
Profile• 40%averageworkinginterestin1.1millionacres.• KeyfieldsincludeWasson,ReevesandAnton-Irishtothenorth; Ozona,Keystone/KermitandWaddelltothesouth.• Producesoilandgasfrommultipleformationsat2,500’ to18,000’.• 111.3millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted12gaswells.• Drilledandcompleted83oilwells.• Recompleted52wells.• Reactivated11wells.2007 Plans• Drill29gaswells.• Drill71oilwells.• Recomplete48wells.• Reactivate20wells.
MID-CONTINENT
A / Woodford Shale
Profile• 70,000netacresintheArkomaBasinineasternOklahoma.• Operatedworkinginterestsrangefrom50%to100%.• Emergingunconventionalnaturalgasplay.• ProducesgasfromtheWoodfordShaleformationat4,000’ to10,000’.• 10.4millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled40horizontalwells(15operated).• Acquiredadditionalacreage.• Acquired3-Dseismic.2007 Plans• Drill55horizontalwells(40operated).• Expandgasgatheringsystemcapacity.• Continueconstructionof200millioncubicfeetperdaygasplant.• Acquireadditional3-Dseismicandacreage.
B / Barnett Shale
Profile• 736,000netacres(127,000withincorearea)intheFortWorth BasinofnorthTexas.• >93%averageworkinginterestincore.• >84%averageworkinginterestoutsidecore.• ProducesgasfromtheBarnettShaleformationat6,500’to9,200’.• 608.1millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled133wellswithincorearea,including: 54verticalinfillwells. 79horizontalwells.• Drilled250wellsoutsidecorearea,including: 7verticalwells. 243horizontalwells.• AcquiredChief’sassets.• Improveddrillingefficiencieswithnewgenerationrigs.• Acquired3-Dseismicandacreage.2007 Plans• Drill157wellswithincorearea,including: 10verticalinfillwells. 147horizontalwells.• Drill228horizontalwellsoutsidecorearea.• Evaluatefarwestacreage.• Acquireadditional3-Dseismicandacreage.
ROCky MOuNTAINs
A / Bear Paw
Profile• 814,000netacresinnorthcentralMontana.• 90%averageworkinginterestinfederalunits.• 75%averageworkinginterestoutsidefederalunits.• ProducesgasfromtheEagleformationat800’to2,000’.• 18.5millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted49wells.• Recompleted23wells.• Installedartificiallifton39wells.• Expandedgasgatheringsystemcapacity.2007 Plans• Drill95wells.• Continueworkoverprogram.• Addcompressionandperformothergasgathering systemimprovements.• Acquire3-Dseismic.
B / Powder River Coalbed Natural Gas
Profile• 75%averageworkinginterestin346,000acresinnorth easternWyoming.• ProducescoalbednaturalgasfromtheFortUnionCoal formationsat300’to2,000’.• 19.3millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled251coalbednaturalgaswells.• Addedcompressionandperformedothergasgathering systemimprovements.• IncreasedoutsideoperatedactivityinJuniperDraw area(BigGeorgecoal).2007 Plans• Drill342coalbednaturalgaswells.• Continuefocusandexpansionofoperatedandoutside operatedactivityatJuniperDraw.• InitiatefullscaledevelopmentplansforWestPineTreeUnit.
C / Washakie
Profile• 76%averageworkinginterestin210,000acresin southernWyoming.• Producesgasfrommultipleformationsat6,800’to10,300’.• 104.4millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted137wells.• Recompleted3wells.• Installed76plungerlifts.• Installedcompressionandperformedothergasgathering systemimprovements.• Continuedimplementationofautomatedproduction controlsystem.2007 Plans• Drill105wells,including23directionalwells.• Install100plungerlifts.• Addcompressionandperformothergasgathering systemimprovements.• Continueimplementationofautomatedproduction controlsystem.
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A / Groesbeck Area
Profile• 72%averageworkinginterestin292,000acresineast centralTexas.• KeyfieldsincludePersonville,Nan-Su-Gail,Dew,Oaks andBaldPrairie.• ProducesprimarilygasfromtheTravisPeak,CottonValleySand, BossierandCottonValleyLimeformationsat6,000’to13,000’.• Includes677producingwells.• 48.0millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted23verticalwells.• Drilledandcompleted8horizontalwells.• Recompleted3wells.• Acquiredadditionalacreagethroughjointventure.2007 Plans• Drill22verticalwells.• Drill12horizontalwells.• Drill1exploratorywellonjoint-ventureacreage.• Recomplete9wells.• Acquire3-Dseismic.
B / Carthage Area
Profile• 85%averageworkinginterestin205,000acresineastTexas.• KeyfieldsincludeCarthage,Bethany,Waskom,Stockman andAppleby.• ProducesprimarilygasfromthePettit,TravisPeakand CottonValleyformationsat5,700’to9,600’.• Includes1,530producingwells.• 160.8millionbarrelsofoilequivalentreservesat12/31/06.
GuLF - shELF
A / Eugene Island South Area
Profile• Includes8blockslocatedinthesouthernportionof EugeneIslandarea.• Workinginterestsrangefrom14%to100%.• LocatedoffshoreLouisianain250’ofwater.• Producesoilandgasfromsandsat1,500’to13,000’.• 14.7millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled2wellsatEugeneIsland315.• Drilled2wellsatEugeneIsland316.• Drilled1wellatEugeneIsland329.• Drilled1wellatEugeneIsland337.• Completed2005Chopindiscoveryandcommencedproduction.• Drilled1dryholeatEugeneIsland334.2007 Plans• Drill2wellsatEugeneIsland337.• Drill1wellatEugeneIsland333.• Drill1wellatEugeneIsland334.• InitiaterecompletionprogramatEugeneIsland330.Shelf Exploration Prospects
ProfileB / Nimitz• BrazosA-24.• LocatedoffshoreTexasin130’ofwater.• Targetformation:Miocenesandsat19,400’to20,700’.• 20%workinginterest.• Netunriskedreservepotential:undisclosed.
C / Buckeye• WestCameron164.• LocatedoffshoreLouisianain50’ofwater.• Targetformation:LowerMiocenesandsat9,000’to13,000’.• 100%workinginterest.• Netunriskedreservepotential:4millionbarrelsof oilequivalent.D / Sleeping Bear• Mobile826.• LocatedoffshoreAlabamain50’ofwater.• Targetformation:Norphletsandsat21,200’to21,800’.• 75%workinginterest.• Netunriskedreservepotential:16millionbarrelsof oilequivalent.2006 Activity• Finalizedgeophysicalanalysesanddrillingcontracts.• SecuredfarminagreementatNimitz.2007 Plans• Securefarmoutagreementswithindustrypartnersat SleepingBearandBuckeye.• Drillexploratorytestwells.
D / NEBU/32-9 Units
Profile• 25%averageworkinginterestin54,000acresintheSanJuan BasinofnorthwesternNewMexico.• Coalbednaturalgasdevelopmentbeganinthelate1980sand early1990s.• Includes299coalbedgaswells,262conventionalwells,gas andwatergatheringsystemsandanautomatedproduction controlsystem.• ProducesprimarilycoalbednaturalgasfromtheFruitlandCoal formationat3,500’.• 18.1millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted32coalbedgaswells.• Completed171-wellworkoverprogram.• Drilledandcompleted20conventionalgaswells.• Recompleted4conventionalwells.2007 Plans• Drill4coalbedgaswells.• Initiate150-wellworkoverprogram.• Drill33conventionalgaswells.• Recomplete6conventionalwells.
2006 Activity• Drilledandcompleted120verticalwells,including36infillwells.• Drilledandcompleted2horizontalwells.• Recompleted88wells.• Acquiredadditionalacreage.2007 Plans• Drill136verticalwells,including18infillwells.• Drill14horizontalwells.• Recomplete48wells.
C / North Louisiana Area
Profile• 65%averageworkinginterestin654,000acresinnorthLouisiana.• Ownmineralinterestsin139,000netacresontrendwithlower CottonValley/Bossierplay.• Emerginggasexplorationplay.• ProducesfromthelowerCottonValleyandBossierformationsat 13,000’to17,000’.• Includes44producingwells.• 2.4millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted5wellsatVernon-Ansley.• Drilled1exploratorydiscoverywellatEastVernon.• Drilled2appraisalwellsatEastVernon.• Drilled1exploratorywellatMt.Moriah.• Drilled1appraisalwellatVixen.• Acquired3-DseismicatVixenandCaneyLake.
2007 Plans• Drill2explorationwellstotestotherprospectareas.
D / South Texas/South Louisiana
Profile• 66%averageworkinginterestin584,000acres.• KeyareasincludeMatagorda,Zapata,AguaDulce/ N.Brayton,Duval/Hagist,Houston,CentralTexas, CoastalFrioandthePattersonfieldinLouisiana.• ProducesoilandgasfromtheFrio/Vicksburg,Yegua, WilcoxandWoodbinetrendsat1,500’to15,000’.• Includes930producingwells.• 30.9millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted44wells.• Drilled4exploratorywellsintheMatagordaarea.• Recompleted62wells.• Acquired3-DseismicintheZapataarea.2007 Plans• Drill49wells.• Drill1exploratorywellintheMatagordaarea.• Drill3exploratorywellsinsouthLouisiana.• Drill2horizontalAustinChalkwells.• Recomplete63wells.• Acquire3-DseismicintheBrazoriaarea.• Acquire3-DseismicinthePattersonfield.
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A / Nansen
Profile• Includes3blocksincentralEastBreaksarea.• 50%workinginterest.• LocatedoffshoreTexasin3,500’ofwater.• Producesoilandgasfromsandsat9,000’to14,000’.• Utilizestheworld’sfirstopen-hulltrussspar.• 36.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Conductedgeophysicalanalysisfor2-welldevelopmentprogram in2007.2007 Plans• Drill2developmentwells.• Recomplete2wells.
B / Magnolia
Profile• 25%workinginterestinGardenBanks783and784.• LocatedoffshoreLouisianain4,700’ofwater.• Developing1999discovery.• Producesoilandgasfromsandsat12,000’to17,000’.• Utilizestheworld’sdeepesttension-legplatform.• 13.9millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Completedfinal2ofinitial8wells.2007 Plans• Drill2additionaldevelopmentwells.• Performrecompletionsandsidetrackdrillingasnecessary.• Evaluatepotentialforadditionaldrilling.
C / Red Hawk
Profile• 50%workinginterestinGardenBanks876,877,920and921.• LocatedoffshoreLouisianain5,300’ofwater.• 2001discovery.• Producesgasfromsandsat16,000’to18,500’.• Utilizestheworld’sfirstcellspar.• 6.1millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Restoredproductionpreviouslyshut-induetohurricanedamage tothird-partydownstreamfacilities.2007 Plans• Installcompression.• Evaluatepotentialforadditionaldrilling.
D / Merganser (Independence Hub)
Profile• 50%workinginterestinAtwaterValley37.• LocatedoffshoreLouisianain8,100’ofwater.• Developing2001discovery.• Toproducegasfromsandsat19,000’to20,000’.• Cooperativedevelopmentof10nearbyindustrydiscoveries utilizingsubseatie-backstoacentralproductionhub.• 7.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Completedandtested2futureproducingwells.• Continuedconstructionandinstallationofsurfaceand subseafacilities.
2007 Plans• Finishinstallationofsurfaceandsubseafacilities.• Commenceproduction.
Lower Tertiary Discoveries
ProfileE / Cascade• 50%workinginterestinWalkerRidge206.• LocatedoffshoreLouisianain8,200’ofwater.• Targetformation:LowerTertiarysandsat25,000’to27,000’.• Discoverywelldrilledin2002encountered>450’ofnetoilpay.F / St. Malo• 22.5%workinginterestinWalkerRidge678.• LocatedoffshoreLouisianain6,900’ofwater.• Targetformation:LowerTertiarysandsat26,000’to29,000’.• Discoverywelldrilledin2003encountered>450’ofnetoilpay.G / Jack• 25%workinginterestinWalkerRidge759.• LocatedoffshoreLouisianain7,000’ofwater.• Targetformation:LowerTertiarysands.• Discoverywelldrilledin2004encountered>350’ofnetoilpay.H / Kaskida• 20%workinginterestinKeathleyCanyon292.• LocatedoffshoreLouisianain5,900’ofwater.• Targetformation:LowerTertiarysands.• Discoverywelldrilledin2006encounteredapproximately800’of nethydrocarbonbearingsands.• FirstLowerTertiarydiscoveryinKeathleyCanyonarea.2006 Activity• IncreasedownershipinCascadeunitfrom25%to50%.• AnnouncedplanstodevelopCascadewithfirstproductionin late2009.• ReceivedapprovalfromMMSforCascadeConceptualPlanusing anFPSO.• CompletedfirstsuccessfulLowerTertiaryproductiontestatJack.• DrilleddiscoverywellatKaskida.• DrilledsidetrackappraisalwellatKaskida.• Evaluateddevelopmentoptionsandfacilitiesdesignsfor Cascade,JackandSt.Malo.• Acquired13additionalLowerTertiaryblocksthroughfederal leasesale.• Secured2long-termdeepwaterrigcontracts.2007 Plans• SanctioninitialdevelopmentatCascade.• ObtainMMSapprovalofDeepwaterOperatingPlanatCascade.• InitiatedrillingsecondappraisalwellatJack.• InitiatedrillingsecondappraisalwellatSt.Malo.• ContinueevaluationofdevelopmentoptionsatJackandSt.Malo.• InitiateevaluationofdevelopmentoptionsatKaskida.• ConductadditionalappraisaloperationsatKaskida
Miocene Discoveries
ProfileI / Mission Deep• 50%workinginterestinGreenCanyon955.• LocatedoffshoreLouisianain7,300’ofwater.• Targetformation:Miocenesands.• Discoverywelldrilledin2006encountered>250’ofnetoilpay.
J / Sturgis• 25%workinginterestinAtwaterValley183.• LocatedoffshoreLouisianain3,700’ofwater.• Targetformation:Miocenesands.• Discoverywelldrilledin2003encountered>100’ofnetoilpay.• Developmentpotentialwouldbeenhancedbysuccessat SturgisNorth.2006 Activity• DrilleddiscoverywellatMissionDeep.• InitiateddrillingofsidetrackappraisalwellatMissionDeep.2007 Plans• CompletedrillingsidetrackappraisalwellatMissionDeep.• Evaluatedevelopmentoptions.
Deepwater Exploration Prospects
ProfileK / Lower Tertiary Prospect #1• LocatedinKeathleyCanyonarea.• LocatedoffshoreLouisianain6,000’ofwater.• Targetformation:LowerTertiarysands.L / Lower Tertiary Prospect #2• LocatedinWalkerRidgearea.• LocatedoffshoreLouisianain6,500’ofwater.• Targetformation:LowerTertiarysands.2006 Activity• Conductedtechnicalevaluationsandinitiateddrillingcontracts.2007 Plans• Finalizetechnicalevaluationsandcontracts.• Drillexploratorytestwells.
CANADA
A / Mackenzie Delta/Beaufort Sea
Profile• 43%averageworkinginterestin2.1millionexploratoryacresin theMackenzieDeltaandshallowwatersoftheBeaufortSea.• Devonisthelargestholderofexplorationacreageinthisarea.• Drillinglimitedtowinteronly.• 2002TukM-18discoveryestimatedat200-300billion cubicfeetgross.2006 Activity• DrilledandtestedPaktoaexploratorywellinBeaufortSea.• Paktoawellencounteredhydrocarbonsbutdidnotmeet expectations.2007 Plans• ApplyforSignificantDiscoveryLicensetoretainPaktoaacreage.• EvaluatepotentialforfuturedrillingintheMackenzieValley corridor.
B / Northeast British Columbia
Profile• 72%averageworkinginterestin1.7millionacresin northwesternAlbertaandnortheasternBritishColumbia.• KeyareasincludeHamburg,Peggo,Monias,RingBorder andWargen.• Primarilywinter-onlydrilling.• Producesoilandgasfrommultipleformationsincluding theHalfwayandBaldonnelat2,600’to5,000’.• 59.4millionbarrelsofoilequivalentreservesat12/31/06.
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2006 Activity• Drilled64wells,including: 20wellsatWargen. 14wellsatRingBorder. 11 wellsatPeggo. 7wellsatHamburg/Chinchaga.• Recompleted12wells.2007 Plans• Drill68totalwells,including: 26 wellsatWargen. 13wellsatRingBorder. 12wellsatMonias. 7wellsatHamburg/Chinchaga.
C / Peace River Arch
Profile• 69%averageworkinginterestin685,000acresin westernAlberta.• KeyareasincludeBelloy,Cecil,Dunvegan,Eaglesham,Knopcik, TangentandValhalla.• Producesliquids-richgasandlightgravityoilfrommultiple formationsat4,500’to8,000’.• 74.8millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled82wells,including: 16wellsatDunvegan. 16wellsatValhalla. 12wellsatCecil. 9wellsatBelloy. 6wellsatKnopcik.• Recompleted34wells.2007 Plans• Drill62totalwells,including: 13wellsatDunvegan. 10wellsatCecil. 9wellsatTangent. 7wellsatBelloy.
D / Deep Basin
Profile• 46%averageworkinginterestin1.4millionacresinwestern AlbertaandeasternBritishColumbia.• KeyareasincludeBilbo/Cutbank,Hiding,Pinto/Lelandand Wapiti/Elmworth.• ProducesliquidsrichgasfromprimarilyCretaceousformations at2,500’to14,000’.• 96.7millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled115wells,including: 57 wellsatWapiti/Elmworth. 23wellsatBilbo/Cutbank. 21wellsatPinto/Leland. 11wellsatHiding.• Recompleted36wells.2007 Plans• Drill57totalwells,including: 18wellsatWapiti/Elmworth. 16wellsatPinto/Leland. 12wellsatHiding. 11wellsatBilbo/Cutbank.
E / Lloydminster
Profile• 97%workinginterestin2.2millionacresineasternAlberta andSaskatchewan.• KeyareasincludeEndLake,IronRiver,Lloydminster andManatokan.• Producesprimarilyconventional,coldflowheavyoilfrom multipleformationsat1,000’to2,300’.• 84.5millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled397wells,including: 198wellsatIronRiver. 72wellsatLloydminster. 70wellsatManatokan. 46wellsatEndLake.• Recompleted126wells.• ReceiveddownspacingapprovalforIronRiver.
INTERNATIONAL
A / Azerbaijan – ACG
Profile• 5.6%interestin107,000acresintheAzeri-Chirag-Gunashli (ACG)oilfieldsoffshoreAzerbaijan.• Initialpositionobtainedin1999merger.• Majoroilexportpipelinecommencedoperationsin2006.• Expect>30,000barrelsperdaynettoDevonin2007.• 83.8millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted3wellsfromtheCentralAzeriplatform.• Completed2pre-drilledwellsanddrilledandcompleted3 additionalwellsfromtheWestAzeriplatform.• CommencedproductionfromtheWestAzeriplatform.• Completed3pre-drilledwellsandcommencedproductionfrom theEastAzeriplatform.• Drilledandcompleted1wellfromtheChiragplatform.• Pre-drilled4wellsforfutureproductioninthedeepwater Gunashliarea.• CompletedfabricationofdeepwaterGunashlijacket andproductionfacilities.2007 Plans• Drill1producingwellfromtheCentralAzeriplatform.• Drill3producingwellsfromtheWestAzeriplatform.• Complete4pre-drilledwellsfromtheEastAzeriplatform.
• Sidetrack1producingwellfromtheChiragplatform.• Pre-drill4wellsandbegincompletionoperationsinthe deepwaterGunashliarea.• Installplatformsandproductionfacilitiesinthedeepwater Gunashliarea.
B / Brazil
Profile• 1.4millionacresin9licensedblocksoffshoreBrazil: BlockBM-C-8;60%interest. BlockBC-2;17.65%interest. BlockBM-BAR-3;100%interest. BlockBM-C-30;25%interest. BlockBM-C-32;40%interest. BlockBM-C-34(C-M-471);50%interest. BlockBM-C-34(C-M-473);50%interest. BlockBM-C-35;35%interest. BlockBM-CAL-13;100%interest.• LocatedintheCampos,BarreirinhasandCamamuBasinsin waterdepthsrangingfrom330’to9,100’.• Targetoilformationsat7,000’to16,000’.• Developing2004discoveryonblockBM-C-8(Polvodevelopment).• 9.0millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Completedfabricationandinstallationofplatformand productionfacilitiesatPolvo.• ContinuedPolvoFPSOconversion.• Initiateddrillinga3-wellexplorationprogramonblockBM-C-8.• Drilled1unsuccessfulexploratorywellonblockBM-C-30.• Drilled1unsuccessfulexploratorywellonblockBM-C-32.• AcquiredoffshoreblocksBM-C-34,BM-C-35andBM-CAL-13.• Acquired3-DseismiconBM-CAL-13.2007 Plans• Completeplatformhook-upandcommissioningoperations atPolvo.• Completeconversion,installationandcommissioningof PolvoFPSO.• Drill9developmentwellsatPolvo.• Commencefirstproductioninmid-2007atPolvo.• CompleteexplorationdrillingonblockBM-C-8.• Reprocess3-DseismiconblocksBM-C-30,BM-C-32, BM-C-34andBM-C-35.• Farmoutpartialintereststoindustrypartnersonblock BM-BAR-3andBM-CAL-13.• ConductelectromagneticsurveyonBM-BAR-3.• Drill1exploratorywellonblockBC-2.
C / China
Profile• 4.4millionacresin3licensedblocksoffshoreChina: Block15/34(Panyu);24.5%interest. Block42/05;100%interest. Block11/34;100%interest.• LocatedintheSouthChinaSeaandYellowSeainwater depthsrangingfrom100’to4,900’.• Panyufieldsproduceoilfrom1998and1999discoveries.• 16.8millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted6developmentwellsatPanyu.• Initiateddrilling1extendedreachdevelopmentwellatPanyu.• Completedinstallationofwaterhandlingfacilitiesonboth platformsatPanyu.• AcquiredYellowSeablock11/34.• Acquired2-Dseismiconblock11/34.• Acquired3-Dseismiconblock42/05.• Signedcontractstoacquire2additionalexplorationblocksin theSouthChinaSea.2007 Plans• Completeextendedreachdevelopmentdrillinginitiatedin 2006atPanyu.• Drill7developmentwellsatPanyu.• Finalizeacquisitionofblocks53/30and64/18.• Acquire3-Dseismiconblocks53/30and64/18.• Preparefor2008drillingonblocks42/05and11/34.
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F / Thermal Heavy Oil
Profile• 97%averageworkinginterestin82,000acresineastern Albertaoilsands.• KeyassetisJackfish(100%interest).• Steam-AssistedGravityDrainage(SAGD)istheprimary recoverymethod.• Expecttoreach35,000barrelsperdayfromJackfishin2008.• 186.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled19horizontalwellpairsatJackfish.• ContinuedconstructiononJackfishfacilities.• SubmittedapplicationforregulatoryapprovalforJackfish2.• Drilled35stratigraphicwellstofurtherevaluateJackfish areapotential.• ContinuedconstructionofAccessPipelinetoand fromEdmonton.2007 Plans• Completefacilitiesconstructionandinitiatesteaminjection atJackfish.• CompleteconstructionofAccessPipeline.• ContinueengineeringanalysisforJackfish2.• Drillupto50stratigraphicwellstofurtherevaluateJackfish areapotential.
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Chad PottruffLinda PottsTed PottsCatherine PowellCherie PowellEd PowellJamye PowellLynn PowellSteve PowellTimothy PowellTimothy PowellShaun PoweshiekTres PoynorVijay PratapTerry PraterJohn PratherScott PratherJim PreglerWiley PreskittElvis PressleyAmy PrestidgeShelley PrestonRon PrewittAllen PriceDwayne PriceIldiko PriceJeff PriceJohn PriceKaren PriceLeigh PriceRachel PriceSherie PriestJarrod PrimeauxKenneth PrimeauxAnn PrinceLaura PrinceBarbara ProctorBlake ProffittAngela PronkMatthew PronkDarren ProstebbyCandace ProwellFloyd Prudhomme Jr.Kathy PryorSue PryorTim PryorRichard PrzybylskiMichael PuetzWayne PurchaBradley PurchaseChristine PurdyDavid PurdyJames PurdyKarolyn PurnellDavid PushieJohn QualiaAnthony QuanLes QuanMauro QuercioliRoland QuintanaJimmy QuintelaMike RaaflaubBrian RabeRuss RadkeHenry RadomskiLaDonna RaganDale RagasHady RahmanRavi RainaAnnette RainesJohn RainesTim RaleySean RalstonSammy RamadanGary RambergAlonzo RamirezGabe RamirezRaymond RamirezDaniel RandallAndrea Randall-ThorpDennis RandlemanDarla RandolphHarriett RandolphPatti RandolphStephen RangenSandy RankinJames RanksConstance RansomDean RasmussenShane RasmussenSheila RatliffDuane RauscherPaul RavalDouglas RayTed RayEddie RayburnRene RaymondBud ReadDuane ReadGerald ReadLinny ReadMarvin ReadRickey ReadRussell ReadRyan ReadMatt RecklingSandra ReddekoppRita ReddyDaniel RedmanCharlie ReedRandy ReedScott ReedSteve ReedCheryl ReeseBrandi ReesorRebecca ReevesRichard ReevesKimberly RegaladoRobert ReganJohn RegnierRegina RehChristina RehkopJennifer ReidJoseph ReidKaren ReidRobert ReidSherri ReidSusan ReidVeronica Reid
Eric ReigleDerrill ReilColleen ReilanderPat ReillyDale ReitzKaren RekietaBrian RellandKirk RellesSteven RemilySteve RenkePete RepkaTheresa RestaMarlene RevellBrenda RevilleBenjamin ReyesRay ReyesRichard ReyesRicky ReyesDean ReynoldsEarl ReynoldsRobert ReynoldsIrma RezanourBrace RhamySteve RhidenourKenny RhoadesBrad RhodesJeneria RhodesGeorge RhyasonBill RiceChase RiceCindy RiceFaye RiceJamie RichChristopher RichardDavid RichardEric RichardGlenn RichardJack RichardsWayne RichardsIan RichardsonPaul RichardsonTroy RichardsonJohn RichelsJimmie RichesonDonnie RicheyRobert RicheyZane RicheyKen RickenbrodeDerek RidgwayPatti RiechersRobert RieckenCraig RieglingWanda RieweVicki RiffleJim RigbyLuke RigginsGayle RiggsEileen RiisbergRichard RileyTony RileyTron RileyBrandy RitenourJeff RitenourKristi RitterPablo RivasRay RiveraRick RiveraChad RoachMike RoachAaron RoarkCathy RoarkStacy RobbinsDavid RobersonDarrell RobertsDarron RobertsDavid RobertsGeoff RobertsJimmy RobertsJudy RobertsKen RobertsMalcolm RobertsRonnie RobertsWayne RobertsDaniel RobertsonDiane RobertsonKelly RobertsonKim RobertsonRenee RobertsonScott RobertsonSusan RobertsonWilliam RobertsonRyan RobichauxDale RobinsCharlotte RobinsonJames RobinsonRick RobinsonRob RobinsonShaun RobinsonShawn RobinsonTerry RobinsonTim RobinsonH.F. Rick RobsonDuane RochonGregg RodenBarbara RodgersJacob RodgersCalvin RodmanAnselmo RodriguezEdward RodriguezJesse RodriguezVivian RodriguezWillard RoeSherry RoebuckMarilyn RoemischGary RoganBrenda RogersMaureen RogersSteven RogersWendy RogersCeleste RohdeKim RoletteMarty RollegPerrin RollerLorne RollheiserDouglas RollingMark RolsethVicki RomeoLuis RomualdezTroy Ronmark
Larry RookerTara RosenbohmSandra RosenthalJosh RosinskiJayme RossSandy RossJessie RothRobert RotherAaron RothfolkSarah RoughfaceRyan RoutleyChad RoweMary RoweRebecca RoweBruce RowleyLynn RowleyErnest RoybalBob RoyceJennifer RozanderNoel RubioDavid RuddTerry RuderStan RuffnerCharles RuleAllen RunyonRicky RupardRandall RushingErnest RussellMary RussellRhonda RussellStephanie RussellMerilee RustagiWayne RutbergTonja RutelonisDouglas RutherfordMarilyn RutherfordMavis RutherfordChad RutledgeKevin RyanWesley RyanPhillip RybackiCookie RycroftGene RylandWesley SaarelaJune SaastadJustine SaganWill SageSusan SaidyMichael SainasMorey SairEdna SalinasEva SallerDonna SalterBrian SalukSarah SalverdaJames SamaripaDavid SambrooksGary SampleCarlos SanchezDaniel SanchezEdwin SanchezGilbert SanchezRaul SanchezVictoria SanchezMarco SandateBrent SandeGeoff SanderGene SanderfordBuck SandersJeff SandersJimmie SandersDiane SandlinDigna Sandoval-FlorDonald SandsKeith SansingGianni SantillieTeresita SantosDavid SartainRobert SartoriusTracie SassauBrian SatterfieldHeath SatterfieldJeffrey SautnerMurray SavageGarth SawatzkyMarianne SawatzkyMark SawatzkyAmit SaxenaBee SchadeckRandy SchaferDaniel ScharflDarren SchellMelinda SchergerDavid ScheyErnst SchierwagenJacob SchillingRandy SchmedtWilhelm SchmidCharles SchmidtDoug SchmidtJohn SchmidtPat SchmidtBrian SchmitHarold SchnaierJeff SchneiderKimberly SchneiderMagdalena SchneiderMarc SchneiderRyan SchneiderSarah SchnellJohn SchoelenMichael SchoenJeff SchonhoferChad SchorreMichael SchottaJohn SchrammChester SchubertJames SchuelkeJohn SchuetteWilliam SchultheissGary SchultzHenry SchultzPamela SchultzRobert SchultzMike SchupbachWendi SchuurPeter SchwansApril SchwartzMisty Schwartz
Duane ScottEileen ScottGlenn ScottKY ScottLinda ScottMarci ScottMichel ScottPatti ScottRobert ScottValerie ScottParalea ScoutenHeath ScrogumRandall SealLorri SealeSusan SealsTony SearsChristopher SeasonsSteven SeatCatherine SeatonTony SeatonSusanna SeawrightJeff SeayJames SebastianMichelle SecrestBennie SeeEric SeegersChad SeelyMelissa SegstroDarell SeibJoseph SeilaPatrick SeilaffRobert SeilaffWes SeilhantAdam SeitchikDarren SeleshankoSummer SelfDavid SelingerBrad SellickRussell SelmanFraser SenciallRobbie SengRoyce SennTodd SennerZenwill SequeiraDean SergentAntonio SernaJoann SeuserJamin SeversonGina SewellCarson SexsmithKenny ShakotkoGary ShanerDennis ShannonLinda ShannonApoorva SharmaTerri SharpCarla SharpeValerie ShaverCraig ShawJerry ShawSheri-lyn ShawTeresa ShawValerie ShawTroy ShelbyHenry ShenHelen ShepherdJudy ShepherdJohn ShererArnold ShereyPete ShermanDavid SherrellJan SherrodMichael SherryLarene SherwoodBrian ShewchukLea Ann ShieldsGerald ShimekGuy ShipleyTami ShipleyCecil ShipmanTruman ShireyChris ShirleyMike ShirleyMyriam ShirleyWanda ShoalsBrent ShounRuth ShyerTerry ShyerDeanna ShymkiwGregory SibleyDru SidersCraig SiebenRhonda SiffordKen SiglBenjamin SigmundJim SigmundJon SikesDerrick SilkPhil SilvanRobert SilverRyan SimardChris SimmonsDavid SimmonsGreg SimmonsKay SimmonsNancy SimmonsChris SimonCameron SimpsonCandace SimpsonCarina SimpsonDale SimpsonElton SimpsonIan SimpsonJulie SimpsonMark SimpsonSharon SimpsonBart SimsCarl SimsDeborah SimsJennifer SimsNicole SimsEdward SinclairNeil SinclairBirdella SinegalChristopher SingletaryLisa SiriaGerald SirkinSam SittonBill Skelton
Carey SkjodtJohn SkollyBob SkoratkoJohn SkoyenRandy SkrepnekLouis SkrobarczykAdam SkulskyDoug SlackLori-Lynn SlackRonnie SlackArita SlateBruce SlaughterBrian SlempTroy SlempEd SlovacekWilliam SluntJohn SlupskyJeff SmailScott SmallingSpencer SmallwoodMickey SmartGlenn SmetheramDarryl SmetteBernard SminkAndy SmithAngela SmithBetty SmithBradley SmithBrent SmithBrittny SmithDarren SmithDavid SmithDickie SmithG. Thomas SmithGary SmithGlenn SmithGlenn SmithGwen SmithHaley SmithJace SmithJD SmithJim SmithJim SmithJimmy SmithJoe SmithJT SmithJulie SmithLarry SmithLynn SmithMelinda SmithMichelle SmithNita SmithPaul SmithRandall SmithRay SmithRosie SmithRoss SmithRoy SmithSandy SmithShanna SmithSteve SmithSuzanne SmithT. Wade SmithTheresa SmithTodd SmithTommy SmithhartAmy SmootDan SnellingKim SniderShaun SnisarenkoSteve SnowbargerDonald SnowdonCristin SnyderH. Brent SnyderShea SnyderRay SolisEugene SolizLuis SolteroDiane SoltnerRashida SomjiGeorge SonnierLinda SoperBonnie SorgeJeff SoudersBoulos SoueidiGregory SouleLynne SouthwardLuther SowellJohn SpaidLeland SpannDeane SparkmanMatthew SparkmanJimmy SparksLinda SpathCharles SpeerGay SpellerBecky SpencerCherrie SpencerClyde SpencerCorey SpencerDonald SpencerSandra SpencerEric SperlingRandy SperlingBarbara SpicerBrian SpiegelmannGreg SpiveyLance SpradlinDebbie SpragueDemaris SpriestersbachEmery SpronkenGeorgina SprouleMichael SpruillTom SpurlockCathy SpurrDana SquiresPatrick StaffordJulie StaggsGuy StagnerRichard StaleyChris StammCindy StampJackie StanfieldTrent StangRonald StangerMary Ann StankoDavid StanleyRix StanleyVance Stanley
Kevin StarkGreg StarleySusan StarnsMegan StarrKevin StashinDarcy StaszewskiKatarzyna StaszkiewiczElizabeth StationMelissa StefosDavid SteinDeb SteinEvan SteinMatt SteingerDaniel StelmaschukDean StenbeckDonna StepanianAlex StepaniukCarl StephensJames StephensKim StephensLisa StephensRudy StephensTamara StephensWayne StephensNancy StephensonBrandon StevensLinda StevensRay StevensRick StevensCorey StevensonGordon StevensonBlayne StewartBrian StewartDarren StewartGregory StewartJadell StewartJosie StewartJustin StewartKevin StewartLinda StewartSandra StewartStephanie StewartJon StigantDeEric StilesRandy StillAmy Renee StinerDebora StinnJerald StinnettAndrew StirlingDavid StizzaDean StobbeTony StockardAlan StocktonDavid StokesSean StollerTonya StoneDavid StoroschukGreg StortsRick StothersDon StoutMark StoutStephen StoutamireHarold StovallRon StrahanPeter StrakaRonald StrandquistJim StrawnFred StrawsonKristina StreckerEdward StrembickiClifford StricklandJason StricklandMichele StricklandCarl StricklerJon StricklerDiana StridDavid Dean StriegelAlan StroichJason StubinskyMichael StuchlyMarlene StuhrConnie StumGuy SturdevantJeff SudduthWendi SudhakarLeanne SuggettRalph SulakBobby SullivanLynn SullivanDan SunigaJeff SuskiSusan SutherlandWayne SutherlandCarol SuttererDebra SuttonAida SuvagauJan SvajianMike SvorenTravis SwallowCole SwanemyrDella SwartzSarah SweeneyElton SweetBonnie SweppenhiserWilliam SwiderskiMichael SwiftKevin SydorkoWilliam SygutekDoug SykesJoni SykesDavid SyringJonathan TaberMarilyn TaberChris TackelMickey TadlockKaren TaggartAbdel TaherMelody TaitWilliam TalleyNancy TammIgo TanNick TangStefanie TangCharles TannerRandall TannerMona TansownyAngela TarrantBryan TarrantAnne Tate
Glenna TateMichael TateTate TatemBeth TaylorBilly TaylorCarroll TaylorDavida TaylorJ. Michael TaylorJack TaylorJack TaylorLyndon TaylorNeil TaylorNel TaylorRick TaylorShad TaylorSherry TaylorSteve TaylorSusan TaylorTom TaylorTracy TaylorValerie TaylorChris TeagueRonald TedderJose TeixeiraDavid TempletJames Ten EyckJulie TenopirJonathan TeppinJames TernesRod TernesAllan TerpRob TerrellRodney TerrellRonnie TerrellKevin TetzSollie ThamesPeter ThannhauserJason TharJoe TharpTim ThatcherDeana ThayerLarry TherriaultKim ThielenPaul ThiemStacy ThiessenAlan ThomasAshley ThomasBarbara ThomasBarbara ThomasCatrina ThomasDavid ThomasGerald ThomasJanice ThomasKrista ThomasMike ThomasScott ThomasTerry ThomasTol ThomasWilliam ThomasWillie ThomasMarkus ThomersonAlberta ThompsonBarry ThompsonChad ThompsonCheryl ThompsonGerri ThompsonGretchen ThompsonJerry ThompsonLindsey ThompsonNancy ThompsonRichard ThompsonSheila ThompsonShelley ThompsonSheryl ThompsonTracey ThompsonWilliam ThompsonGeorge ThomsonKarl ThomsonLynn ThomsonRonald ThomsonMark ThorneMelva ThorntonTodd ThorpeGary ThrasherJill ThrushCecil ThurmondCecil ThurmondShivi ThusooTerry TibbleJason TillerPaula TimmAllen TimmonsSecily TincherArmstrong TingLoyd TinsleyMatt TisdalePat TisdaleSandra TizzardKatalin TodeaRobert TodorJanice ToldanEldon TolleBarbara TomajaRalph TomlinsonGregg TompkinsPamela TongsrinarkRon TonneMike TooleVincent TopacioBonnie ToporowskiErin ToporowskiBill TorgusonReah TorresDavid TouchetMuriel TourangeauNicole TowersJason TownsendRicky TownsendTanya TownsendRobert TracyRoddy TrahanRonald TrahanJake TrainerSeila TranKirk TrascherGary TravisLynn TravisNicole TremblayRhonda Trent
Mark TrestBelinda TrevinoLuis TrianaHoward TrinhSteve TrippTom TrottEd TroutmanRichard TrueheartRon TrueloveHowie TruongMladen TrzokRoy TsukishimaKerry TuffordCory TuffsVance TurmanKevin TurnerKurt TurnerMike TurnerJudi TwiggsNick TwistAndrew TylerBruce TylerKyle TysonChris TytanicJudy UlrichLaura UnderwoodRon UnderwoodDorothy UppermanRichard UptonSherry UptonDarrell UrbanLorraine UrbaniCarrie UtleyLouis UtschSonia UttingSteve VadnaiPaul VagisScott VailBilly VajdakMarydee ValdezMiguel ValdezNick ValentiLarry ValleRussel ValsinJennifer Van CurenAissa Van Der VeenLarry Van HooseBarbara Van HornLonette Van MieghemBill Van WieMike VanbergJeff VanceConnie VandalDarren VandeGraafJohn VandeligtShane VandercruyssenThomas VandeReepDavid VanMeterRenier VanRensburgGerald vantRietHector VanVierssen TripJim VargaGarry VarneyArmando VasquezRamaswami VasudevanCindy VaughanMatthew VaughanPam VaughnTony VaughnChris VeazeyRaymond VegaElaina VenechukValerie VenezialeRick VennDonna VennardDale VenningRaymond VeraartDean VerbickyPatti VerhilleAdrienne VerklerJennifer VezinaReed ViceDebbie VickRichard VidalDexter VidrinePhillip VidrineRobert VigorenStephanie VilarosAlejandra VillaloboJuanita VillalonRick VillarmaJason VillarrealJR VillarrealLarry VillarrealVirginia VillarrealMaggie VillatoroTony VilleneuveMelanie VinbergBarbara VincentBarry VincentNathan VincentBob VineyAndrew VinkConstantin VisanGarry VisserRobert VollmanDiana VolquardsenChuck VorceAlexandre VoronineAmy VriensPam VukovichLam VuongDylan WaddleMichael WadeMurray WadeCheri WagnerDean WagnerEsther WagnerJanie WagnerPat WagnerRick WagnerJanice WagonerKevin WagonerJames WahrenbergerDanielle WalcherKen WaldJoseph WaldnerIra WaldronPatrick Waldron
Aimee WalkerDavid WalkerDebra WalkerGlynn WalkerJohn WalkerJohn WalkerKenneth WalkerKim WalkerLarry WalkerLinda WalkerMelissa WalkerMichelle WalkerPaul WalkerRichard WalkerPeggy WalkingStickKenneth WalkoDon WallDeborah WallaceHollis WallaceScott WallaceMichael WalleJoan WallerFrank WallesBill WalterColette WalterGina WaltersEric WamplerOwen WamplerJack WangPeter WangRock WangTony WangXia Qing WangGeorge WankeNick WarburtonBill WardDoug WardEvelyn WardLloyd WardWade WardlowDouglas WareColleen WarrellowWilliam WarrenWin WarrenKristen WascomBrian WashburnClarence WashingtonFaye Ruffin WashingtonLen WatchornMichelle WaterfieldCaleb WatkinsCalvin WatsonGary WatsonKevin WatsonLynne WatsonRon WatsonTashila WatsonTony WatsonMarg WattShad WattsBobby WatzilMurray WeatherheadEd WeatherlyDon WebbGlyn WebbKris WebbSharon WebbPaul WeberStan WeedAllan WeheJoah WeidemannBret WeigelGreg WeildJonathan WeirRyan WeisbrotJeffrey WeissMyles WeissAlisa WelchBrook WelchDiana WelchGeoff WelchJoe WeldonMiles WelkeCarol WellsMerla WellsWallace WellsYuan Wendy WenSteven WendteBeverly WenzelLacey WenzelRusty WerlineHerbert WernerDaniel WerthBill WescottBlake WestMichelle WestTimothy WestRaymond WestbrookAdam WestlakeMichelle WestonTroy WhartonWendy WhartonAmanda WheatIan WheatleyBill WheatonNatalie WheelerRobert WheelerGaylynn WheelisLinda WhelanPeter WhelanSara WhelenCathy WhickerAlan WhiteBrian WhiteJennifer WhiteJim WhiteJohn WhiteLisa WhiteMarilynn WhiteMike WhiteMike WhiteRichard WhiteRoy WhiteStephanie WhiteVince WhiteJimmy WhiteheadMarcus WhiteheadPaul WhiteheadDouglas Whiteside
Brad WhitleyRobert WhitleyRyan WhitlowLu’ana WhitmarshKelly WhitneyMonte WhittGreg WhyteJenifer WickRebecca WickeBruce WiebePaul WiebeChris WiggersKrista WigginsJim WigleyAlyssa WilburnDenise WildersMike WildersShannon WileyJason WilhelmSena WilkeAnthony WilkersonKim WilkersonCalvin WilkinCraig WilkinsLynne WilkinsScott WilkinsSelwyn WilkinsonSteve WilkinsonRobert WillClark WillardAustin WilliamsBonnie WilliamsBrett WilliamsBrian WilliamsChristopher WilliamsDean WilliamsDeborah WilliamsDon WilliamsFrank WilliamsH. Russell WilliamsJeffrey WilliamsKathy WilliamsLaura WilliamsLonetta WilliamsLynn WilliamsMark WilliamsMichael WilliamsRoger WilliamsSandie WilliamsStephanie WilliamsSteve WilliamsWanda WilliamsHelen WilliamsonJames WilliamsonNorman WilliamsonJeff WillifordLarry WillisBryan WillmonDarlene WilloughbyMatt WillrathMark WillstropKen WilpitzBill WilseyAlister WilsonBen WilsonBrent WilsonCorey WilsonDennis WilsonDon WilsonGwen WilsonJacqueline WilsonJames WilsonKarla WilsonKerri WilsonMeridith WilsonPatti WilsonPaul WilsonRebecca WilsonSherry WilsonStafford WilsonTawny WilsonTom WilsonYakini WilsonNick WiltgenWilliam WimbergWendy WingerterJames WingoJason WiniaJames WinklemanBecky WinklerVirginia WinnScott WinterSandra WinzigCriston Wise-KennedyeKristi WiselyMarsha WisemanVanessa WisnoskiGene WissingerRobert WitherspoonBrandi WithrowKen WolfeMike WolfeShonna WolfeTroy WolfeWayne WolfeJim WolzPhillip WomackRon WomackTanner WomackHenry WongJorge WongJulie WongKenneth WongChristopher WooColin WoodDaniel WoodGeoff WoodGrant WoodGrant WoodJeri WoodJoseph WoodSteven WoodTerianne WoodWendell WoodBrian WoodardCraig WoodardKevin WoodardCharlotte WoodsMark Woods
Ted WoodsNicole WoodsonDee WoolamJan WooldridgeMichael WooldridgeCourtney WootenRalph WootonTim WordChad WorkmanRobert WorkmanTom WorleyCharlie WrightGregory WrightKatherine WrightKelvin WrightMandy WrightMary WrightRobert WrightLayne WroblewskiHody WuXian WuBrandon Wuttunee-CampbellVicky WyalieNorm WyffelsEverett WylieRobert WynessJoseph WyszynskiHongdi XuClinton YaegerCalvin YakelChristy YakelWilliam YakymyshynGerald YamadaJackie YardKen YaremkoLarry YasmanLori YatesJonathan YeeMichael YehDonald YepMichael YesterRobert YotherAngelica YoungBurt YoungCarla YoungDennis YoungEileen YoungLinda YoungTerri YoungTim YoungTony YoungTrevor YoungVern YoungJerry YoungbloodLorre YoungbloodBryan YoungerStephanie YsasagaFrancis YuJenny YuRandy YuristyDoug YuzwenkoJohnny ZacharyBruce ZagoruyGarnet ZarownyLeandra ZarownyKim ZaudererSean ZawadaRobert ZehrMark ZeskoJames ZeuchBrian ZiemmerChris ZimbelmanLarry ZimbelmanHarold ZimmermanClifford ZingerSteve ZinkCamilo ZoletaTatiana ZouenkoJames ZukRudy ZunigaDino ZuzicCliff Zwahlen
33
ToTal asseTs($ Billions)
16.2
27.230.0 30.3
35.1
02 03 04 05 06
resource full
34 Selected11-YearFinancialData36 Management’sDiscussionandAnalysisof FinancialConditionandResultsofOperations57 ReportsofIndependentRegistered PublicAccountingFirm60 ConsolidatedBalanceSheets61 ConsolidatedStatementsofOperations62 ConsolidatedStatementsofComprehensiveIncome63 ConsolidatedStatementsofStockholders’Equity64 ConsolidatedStatementsofCashFlows65 NotestoConsolidatedFinancialStatements101 RiskFactorstoForward-LookingEstimates
Over the past five years Devon has more than doubled total assets to $35.1 billion and more than tripled stockholders’ equity to $17.4 billion. During this same period the company has increased its dividend more than four fold to $0.45 per common share in 2006.
sTockholders’ equiTy($ Billions)
4.7
11.1
13.714.9
17.4
02 03 04 05 06
dividend raTe($ Per Common Share)
.10 .10
.20
.30
.45
02 03 04 05 06
34
5-Year 10-Year Compound Compound 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Growthrate Growthrate
operatingresults (In millions, except per share data) Revenues(Netofroyalties): Oilsales $ 529 497 236 436 906 784 909 1,545 2,099 2,359 3,205 33% 20% Gassales 211 367 335 616 1,474 1,878 2,133 3,896 4,732 5,784 4,932 21% 37% NGLsales 29 36 25 68 154 131 275 407 554 687 749 42% 39% Marketingandmidstreamrevenues — 10 8 20 53 71 999 1,461 1,701 1,792 1,692 89% N/M Otherincome 36 36 6 23 37 58 35 106 126 198 115 15% 12%
Totalrevenues 805 946 610 1,163 2,624 2,922 4,321 7,415 9,212 10,820 10,693 30% 30%
Productionandoperatingexpenses 271 288 231 328 544 666 886 1,274 1,514 1,659 1,829 22% 21% Marketingandmidstreamcostsandexpenses — 4 3 10 28 47 808 1,174 1,339 1,342 1,244 93% N/M Depreciation,depletionandamortizationofproperty andequipment 175 268 212 379 662 831 1,211 1,761 2,225 2,141 2,442 24% 30% Accretionofassetretirementobligation — — — — — — — 36 44 43 49 N/M N/M Amortizationofgoodwill(2) — — — 16 41 34 — — — — — N/M N/M Generalandadministrativeexpenses 57 56 48 83 96 114 219 307 277 291 397 28% 21% Expensesrelatedtomergers — — 13 17 60 1 — 7 — — — N/M N/M Interestexpense 59 51 53 122 155 220 533 502 475 533 421 14% 22% Changeinfairvalueoffinancialinstruments — — — — — 2 (28) (1) 62 94 178 145% N/M Reductionofcarryingvalueofoilandgasproperties — 633 354 476 — 979 651 66 — 212 121 -34% N/M ImpairmentofChevronCorporationcommonstock — — — — — — 205 — — — — N/M N/M Incometaxexpense(benefit) 106 (128) (103) (75) 377 5 (193) 527 1,095 1,606 1,189 199% 27%
Totalexpenses 668 1,172 811 1,356 1,963 2,899 4,292 5,653 7,031 7,921 7,870 22% 28%
Netearnings(loss)beforeminorityinterest,cumulativeeffectof changeinaccountingprincipleanddiscontinuedoperations(3) 137 (226) (201) (193) 661 23 59 1,762 2,181 2,899 2,823 162% 35% Netearnings(loss) 151 (218) (236) (154) 730 103 104 1,747 2,186 2,930 2,846 94% 34% Preferredstockdividends 47 12 — 4 10 10 10 10 10 10 10 0% -14% Netearnings(loss)tocommonstockholders $ 104 (230) (236) (158) 720 93 94 1,737 2,176 2,920 2,836 98% 39% Netearnings(loss)percommonshare: Basic $ 0.98 (1.67) (1.66) (0.84) 2.83 0.37 0.31 4.16 4.51 6.38 6.42 77% 21% Diluted $ 0.96 (1.67) (1.66) (0.84) 2.75 0.36 0.30 4.04 4.38 6.26 6.34 77% 21% Weightedaveragesharesoutstanding: Basic 105 137 142 187 255 255 309 417 482 458 442 12% 15% Diluted 111 151 154 199 263 259 313 433 499 470 448 12% 15% BalanceSheetdata (In millions) Totalassets $ 2,242 1,965 1,931 6,096 6,860 13,184 16,225 27,162 30,025 30,273 35,063 22% 32% DebenturesexchangeableintosharesofChevronCorporationcommonstock(4) $ — — — 760 760 649 662 677 692 709 727 2% N/M Otherlong-termdebt $ 511 576 885 1,656 1,289 5,940 6,900 7,903 6,339 5,248 4,841 -4% 25% Deferredincometaxes $ 136 50 15 313 634 2,149 2,627 4,315 4,764 5,374 5,650 21% 45% Stockholders’equity $ 1,160 1,006 750 2,521 3,277 3,259 4,653 11,056 13,674 14,862 17,442 40% 31% Commonsharesoutstanding 126 142 142 253 257 252 314 472 484 443 444 12% 13%
(1) The years 1996 to 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt in the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting. All periods prior to the November 15, 2004 two-for-one stock split have been adjusted to reflect the split.(2) Amortization of goodwill in 1999, 2000 and 2001 resulted from Devon’s 1999 acquisition of PennzEnergy. As of January 1, 2002, goodwill is no longer amortized.(3) Before minority interest in Monterrey Resources, Inc. of ($1) and ($5) million in 1996 and 1997, respectively, and the cumulative effect of change in accounting principle of $49 and $16 million in 2001 and 2003, respectively, and the results of discontinued operations of $15, $13, ($35) $39, $69, $31, $45, ($31), $5, $31 and $23 million in 1996 through 2006, respectively. (4) Devon beneficially owns 14.2 million shares of Chevron Corporation common stock. These shares have been deposited with an exchange agent for possible exchange for $760 million principal amount of exchangeable debentures. The Chevron shares and debentures were acquired through the 1999 acquisition of PennzEnergy. N/M Not a meaningful number.
Selected Eleven-Year Financial Data (1)
35
5-Year 10-Year Compound Compound 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Growthrate Growthrate
operatingresults (In millions, except per share data) Revenues(Netofroyalties): Oilsales $ 529 497 236 436 906 784 909 1,545 2,099 2,359 3,205 33% 20% Gassales 211 367 335 616 1,474 1,878 2,133 3,896 4,732 5,784 4,932 21% 37% NGLsales 29 36 25 68 154 131 275 407 554 687 749 42% 39% Marketingandmidstreamrevenues — 10 8 20 53 71 999 1,461 1,701 1,792 1,692 89% N/M Otherincome 36 36 6 23 37 58 35 106 126 198 115 15% 12%
Totalrevenues 805 946 610 1,163 2,624 2,922 4,321 7,415 9,212 10,820 10,693 30% 30%
Productionandoperatingexpenses 271 288 231 328 544 666 886 1,274 1,514 1,659 1,829 22% 21% Marketingandmidstreamcostsandexpenses — 4 3 10 28 47 808 1,174 1,339 1,342 1,244 93% N/M Depreciation,depletionandamortizationofproperty andequipment 175 268 212 379 662 831 1,211 1,761 2,225 2,141 2,442 24% 30% Accretionofassetretirementobligation — — — — — — — 36 44 43 49 N/M N/M Amortizationofgoodwill(2) — — — 16 41 34 — — — — — N/M N/M Generalandadministrativeexpenses 57 56 48 83 96 114 219 307 277 291 397 28% 21% Expensesrelatedtomergers — — 13 17 60 1 — 7 — — — N/M N/M Interestexpense 59 51 53 122 155 220 533 502 475 533 421 14% 22% Changeinfairvalueoffinancialinstruments — — — — — 2 (28) (1) 62 94 178 145% N/M Reductionofcarryingvalueofoilandgasproperties — 633 354 476 — 979 651 66 — 212 121 -34% N/M ImpairmentofChevronCorporationcommonstock — — — — — — 205 — — — — N/M N/M Incometaxexpense(benefit) 106 (128) (103) (75) 377 5 (193) 527 1,095 1,606 1,189 199% 27%
Totalexpenses 668 1,172 811 1,356 1,963 2,899 4,292 5,653 7,031 7,921 7,870 22% 28%
Netearnings(loss)beforeminorityinterest,cumulativeeffectof changeinaccountingprincipleanddiscontinuedoperations(3) 137 (226) (201) (193) 661 23 59 1,762 2,181 2,899 2,823 162% 35% Netearnings(loss) 151 (218) (236) (154) 730 103 104 1,747 2,186 2,930 2,846 94% 34% Preferredstockdividends 47 12 — 4 10 10 10 10 10 10 10 0% -14% Netearnings(loss)tocommonstockholders $ 104 (230) (236) (158) 720 93 94 1,737 2,176 2,920 2,836 98% 39% Netearnings(loss)percommonshare: Basic $ 0.98 (1.67) (1.66) (0.84) 2.83 0.37 0.31 4.16 4.51 6.38 6.42 77% 21% Diluted $ 0.96 (1.67) (1.66) (0.84) 2.75 0.36 0.30 4.04 4.38 6.26 6.34 77% 21% Weightedaveragesharesoutstanding: Basic 105 137 142 187 255 255 309 417 482 458 442 12% 15% Diluted 111 151 154 199 263 259 313 433 499 470 448 12% 15% BalanceSheetdata (In millions) Totalassets $ 2,242 1,965 1,931 6,096 6,860 13,184 16,225 27,162 30,025 30,273 35,063 22% 32% DebenturesexchangeableintosharesofChevronCorporationcommonstock(4) $ — — — 760 760 649 662 677 692 709 727 2% N/M Otherlong-termdebt $ 511 576 885 1,656 1,289 5,940 6,900 7,903 6,339 5,248 4,841 -4% 25% Deferredincometaxes $ 136 50 15 313 634 2,149 2,627 4,315 4,764 5,374 5,650 21% 45% Stockholders’equity $ 1,160 1,006 750 2,521 3,277 3,259 4,653 11,056 13,674 14,862 17,442 40% 31% Commonsharesoutstanding 126 142 142 253 257 252 314 472 484 443 444 12% 13%
(1) The years 1996 to 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt in the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting. All periods prior to the November 15, 2004 two-for-one stock split have been adjusted to reflect the split.(2) Amortization of goodwill in 1999, 2000 and 2001 resulted from Devon’s 1999 acquisition of PennzEnergy. As of January 1, 2002, goodwill is no longer amortized.(3) Before minority interest in Monterrey Resources, Inc. of ($1) and ($5) million in 1996 and 1997, respectively, and the cumulative effect of change in accounting principle of $49 and $16 million in 2001 and 2003, respectively, and the results of discontinued operations of $15, $13, ($35) $39, $69, $31, $45, ($31), $5, $31 and $23 million in 1996 through 2006, respectively. (4) Devon beneficially owns 14.2 million shares of Chevron Corporation common stock. These shares have been deposited with an exchange agent for possible exchange for $760 million principal amount of exchangeable debentures. The Chevron shares and debentures were acquired through the 1999 acquisition of PennzEnergy. N/M Not a meaningful number.
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations
overviewof2006reSultSandoutlook
2006wasoneofthebestyearsinDevon’shistory.Weachievedkeyoperationalsuccessesandcontinuedtoexecuteourstrategytoincreasevaluepershare.Asaresult,wedeliveredrecordamountsforearningspershareandoperatingcashflowandgrewprovedreservestoanewall-timehigh.Keymeasuresofourfinancialandoperatingperformancefor2006,aswellascertainoperationaldevelopments,aresummarizedbelow:
• Netearningsdeclined3%from$2.9billionto$2.8billion• Dilutednetearningspershareincreased1%to$6.34perdilutedshare• Netcashprovidedbyoperatingactivitiesreached$6.0billion• EstimatedprovedreservesatDecember31,2006reachedarecordamountof2.4billionBoe• Estimatedprovedreservesincreased533millionBoethroughdrilling,extensions,performancerevisionsandacquisitions• Capitalexpendituresforoilandgasexplorationanddevelopmentactivitieswere$7.7billion,includingthe$2.2billion acquisitionofChief• Combinedrealizedpriceforoil,gasandNGLsperBoeincreased5%to$41.51• Marketingandmidstreamoperatingprofitremainedflatat$448millionfor2006
Weproduced214millionBoein2006,representinga4%decreasecomparedto2005.Excludingtheeffectsofproductionlostduetothesaleofnon-corepropertiesinthefirsthalfof2005,ouryear-over-yearproductionremainedconstant.OperatingcostsincreasedduetoinflationarypressuredrivenbytheeffectsofhighercommoditypricesandduetotheweakenedU.S.dollarcomparedtotheCanadiandollar.Perunitleaseoperatingexpensesincreased17%to$6.95perBoe.
During2006,weutilizedcashonhand,cashflowfromoperations,and$1.8billionofcommercialpaperborrowingstofundourcapitalexpenditures,repay$862millionindebtandrepurchase$253millionofourcommonstock.Weendedtheyearwith$1.3billionofcashandshort-terminvestments.
Fromanoperationalperspective,ourdeepwaterGulfofMexicoexplorationprogramhasreachedseveralimportantmilestonesrelatedtotheLowerTertiarytrend.Todate,wehavedrilledfourdiscoverywellsintheLowerTertiary—Cascadein2002,St.Maloin2003,Jackin2004andKaskidainthethirdquarterof2006.Alsointhethirdquarterof2006,weannouncedthesuccessfulproductiontestoftheJackNo.2wellintheLowerTertiary.Wecurrentlyhold273blocksintheLowerTertiaryandhaveidentified19additionalexploratoryprospectswithintheseblockstodate.TheseachievementssupportourpositiveviewoftheLowerTertiaryanddemonstratethegrowthpotentialofourhigh-impactexplorationstrategyonlong-termproduction,reservesandvalue.
OnJune29,2006,weacquiredChief’soilandgasassetslocatedintheBarnettShaleareaofTexasfor$2.2billion.Thistransactionadded99.7millionBoeofprovedreservesand169,000netacrestoourBarnettShaleassets.ThisacquisitioncombinedwithourorganicgrowthcontinuestoextendourleadershippositionintheBarnettShaleandprovidesyearsofadditionaldrillinginventory.
OnNovember14,2006,weannouncedourplanstodivestouroperationsinEgypt.AtDecember31,2006,EgypthadprovedreservesofeightmillionBoe.Subsequently,onJanuary23,2007,weannouncedourplanstodivestouroperationsinWestAfrica,includingEquatorialGuinea,Coted’Ivoire,andothercountriesintheregion.AtDecember31,2006,ourWestAfricaoperationshadprovedreservesof90millionBoe,or4%oftotalprovedreserves.WeanticipatecompletingthesaleofourEgyptianassetsinthefirsthalfof2007andourWestAfricanassetsinthethirdquarterof2007.DivestingthesepropertieswillallowustoredeployourfinancialandintellectualcapitaltothesignificantgrowthopportunitieswehavedevelopedonshoreinNorthAmericaandinthedeepwaterGulfofMexico.Additionally,wewillsharpenourfocusinNorthAmericaandconcentrateourinternationaloperationsinBrazilandChina,wherewehaveestablishedcompetitiveadvantages.
Lookingto2007,weintendtousetheproceedsfromthesalesofouroperationsinEgyptandWestAfricatorepayouroutstandingcommercialpaperandresumecommonstockrepurchases.Inaddition,ouroperationalaccomplishmentstodatehavelaidthefoundationforcontinuedgrowthinfutureyears,atcompetitiveunitcosts,thatweexpectwillcontinuetocreateadditionalvalueforourinvestors.In2007,weexpecttodeliverreserveadditionsof350to370millionBoewithrelatedcapitalexpendituresintherangeof$5.3to$5.7billion.Weexpectproductionrelatedtoourcontinuingoperationstoincreaseapproximately10%from2006to2007,whichreflectsthesignificantreserveadditionsin2005and2006,andthoseexpectedin2007.
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reSultSofoperationS
revenuesChangesinoil,gasandNGLproduction,pricesandrevenuesfrom2004to2006areshowninthefollowingtables.Theamountsforallperiodspresentedexclude
ourEgyptianoperations.Unlessotherwisestated,alldollaramountsareexpressedinU.S.dollars. total YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004
PRODUCTION Oil (MMBbls) 55 -11% 62 -17% 74 Gas (Bcf) 815 -1% 827 -7% 891 NGLs (MMBbls) 23 -2% 24 -1% 24 Oil, gas and NGLs (MMBoe)(1) 214 -4% 224 -9% 247AveRAgePRICes Oil (per Bbl) $ 58.30 +53% 38.00 +35% 28.22 Gas (per Mcf) $ 6.06 -13% 6.99 +32% 5.32 NGLs (per Bbl) $ 32.10 +11% 28.96 +26% 23.04 Oil, gas and NGLs (per Boe)(1) $ 41.51 +5% 39.48 +32% 29.92ReveNUes (in millions) Oil $ 3,205 +36% 2,359 +12% 2,099 Gas 4,932 -15% 5,784 +22% 4,732 NGLs 749 +9% 687 +24% 554 Oil, gas and NGLs $ 8,886 +1% 8,830 +20% 7,385
domeStiC YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004
PRODUCTION Oil (MMBbls) 19 -23% 25 -19% 31 Gas (Bcf) 566 +2% 555 -8% 602 NGLs (MMBbls) 19 +3% 18 -4% 19 Oil, gas and NGLs (MMBoe)(1) 132 -3% 136 -10% 151AveRAgePRICes Oil (per Bbl) $ 62.23 +49% 41.64 +35% 30.84 Gas (per Mcf) $ 6.09 -14% 7.08 +30% 5.43 NGLs (per Bbl) $ 29.42 +10% 26.68 +24% 21.47 Oil, gas and NGLs (per Boe)(1) $ 39.31 -2% 40.21 +31% 30.80ReveNUes (in millions) Oil $ 1,218 +15% 1,062 +9% 976 Gas 3,445 -12% 3,929 +20% 3,261 NGLs 548 +13% 484 +19% 405 Oil, gas and NGLs $ 5,211 -5% 5,475 +18% 4,642
Canada YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004
PRODUCTION Oil (MMBbls) 13 -2% 13 -5% 14 Gas (Bcf) 241 -8% 261 -6% 279 NGLs (MMBbls) 4 -11% 6 +8% 5 Oil, gas and NGLs (MMBoe)(1) 58 -7% 62 -5% 65AveRAgePRICes Oil (per Bbl) $ 46.94 +75% 26.88 +24% 21.60 Gas (per Mcf) $ 6.05 -13% 6.95 +35% 5.15 NGLs (per Bbl) $ 42.67 +15% 37.19 +27% 29.23 Oil, gas and NGLs (per Boe)(1) $ 39.21 +3% 38.17 +33% 28.80ReveNUes (in millions) Oil $ 603 +71% 353 +18% 299 Gas 1,456 -20% 1,814 +26% 1,437 NGLs 201 +2% 196 +38% 143 Oil, gas and NGLs $ 2,260 -4% 2,363 +26% 1,879
38
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international YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004
PRODUCTION Oil (MMBbls) 23 -4% 24 -19% 29 Gas (Bcf) 8 -25% 11 +6% 10 NGLs (MMBbls) — N/M — N/M — Oil, gas and NGLs (MMBoe)(1) 24 -7% 26 -17% 31AveRAgePRICes Oil (per Bbl) $ 61.36 +52% 40.26 +41% 28.53 Gas (per Mcf) $ 3.95 +5% 3.75 +13% 3.33 NGLs (per Bbl) $ — N/M 22.81 +8% 21.12 Oil, gas and NGLs (per Boe)(1) $ 59.24 +53% 38.80 +39% 27.99ReveNUes (in millions) Oil $ 1,384 +47% 944 +15% 824 Gas 31 -21% 41 +20% 34 NGLs — N/M 7 +12% 6 Oil, gas and NGLs $ 1,415 +43% 992 +15% 864
(1) GasvolumesareconvertedtoBoeorMMBoeattherateofsixMcfofgasperbarrelofoil,basedupontheapproximaterelativeenergycontentofnaturalgasandoil,whichrateisnotnecessarilyindicativeoftherelationshipofoilandgasprices.NGLvolumesareconvertedtoBoeonaone-to-onebasiswithoil.(2) Allpercentagechangesincludedinthistablearebasedonactualfiguresandnottheroundedfiguresincludedinthistable.N/MNotmeaningful.
Theaveragepricesshownintheprecedingtablesincludetheeffectofouroilandgaspricehedgingactivities.Followingisacomparisonofouraveragepriceswithandwithouttheeffectofhedgesforeachofthelastthreeyears.
withhedGeS withouthedGeS 2006 2005 2004 2006 2005 2004
Oil (per Bbl) $ 58.30 38.00 28.22 58.30 48.43 36.02 Gas (per Mcf) $ 6.06 6.99 5.32 6.01 7.04 5.34 NGLs (per Bbl) $ 32.10 28.96 23.04 32.10 28.96 23.04 Oil, gas and NGLs (per Boe) $ 41.51 39.48 29.92 41.34 42.55 32.37
Thefollowingtabledetailstheeffectsofchangesinvolumesandpricesonouroil,gasandNGLrevenuesbetween2004and2006.
oil GaS nGl total
(INMILLIoNs)
2004ReveNUes $ 2,099 4,732 554 7,385 Changes due to volumes (347) (337) (8) (692) Changes due to prices 607 1,389 141 2,1372005ReveNUes 2,359 5,784 687 8,830 Changes due to volumes (270) (86) (11) (367) Changes due to prices 1,116 (766) 73 4232006ReveNUes $ 3,205 4,932 749 8,886
oilrevenues2006 vs. 2005 Oilrevenuesdecreased$270millionduetoasevenmillionbarreldecreaseinproduction.Productionlostfrompropertiesdivestedin2005accounted
forfourmillionbarrelsofthedecrease.Acontractualreductionofourshareofproductionfromoneofourinternationalpropertiesinmid-2005alsolowered2006volumes.ThesedecreaseswerepartiallyoffsetbyathreemillionbarrelincreaseinproductionresultingfromreachingpayoutofcertaincarriedinterestsinAzerbaijan.
Oilrevenuesincreased$1.1billionasaresultofa53%increaseinourrealizedprice.Theexpirationofoilhedgesattheendof2005anda17%increaseintheaverageNYMEXWestTexasIntermediateindexpricecausedtheincreaseinourrealizedoilprice.
39
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2005 vs. 2004Oilrevenuesdecreased$347millionduetoa12millionbarreldecreaseinproduction.Productionlostfromthe2005propertydivestituresaccountedforsevenmillionbarrelsofthedecrease.Wealsosuspendedcertaindomesticproductionin2005and2004duetotheeffectsofHurricanesKatrina,Rita,DennisandIvan.Thevolumessuspendedin2005wereonemillionbarrelsmorethanin2004.Theremainderofthedecreaseisduetocertaininternationalpropertiesinwhichourownershipinterestdecreasedafterwerecoveredourcostsundertheapplicableproductionsharingcontracts.
Higherrealizedpricescausedoilrevenuestoincrease$607millionin2005.Our2005oilpricesroseprimarilyduetoa37%increaseintheaverageNYMEXWestTexasIntermediateindexprice.
Gasrevenues2006 vs. 2005 A12Bcfdecreaseinproductioncausedgasrevenuestodecreaseby$86million.Productionlostfromthe2005propertydivestiturescauseda
decreaseof35Bcf.Asaresultofthepreviouslymentionedhurricanes,gasvolumessuspendedin2006werethreeBcfmorethanthosesuspendedin2005.ThesedecreaseswerepartiallyoffsetbytheJune2006Chiefacquisition,whichcontributed10Bcfofproductionduringthelasthalfof2006,andadditionalproductionfromnewdrillinganddevelopmentinourU.S.onshoreandoffshoreproperties.
A13%declineinaveragepricescausedgasrevenuestodecrease$766millionin2006.2005 vs. 2004A64Bcfdecreaseinproductioncausedgasrevenuestodecreaseby$337million.Productionassociatedwiththe2005propertydivestiturescauseda
decreaseof89Bcf.Wealsosuspendedcertaindomesticgasproductionin2005and2004duetothepreviouslymentionedhurricanes.Thevolumessuspendedin2005were12Bcfmorethanin2004.ThesedecreaseswerepartiallyoffsetbynewdrillinganddevelopmentandincreasedperformanceinU.S.onshoreandoffshoreproperties.
A32%increaseinaveragegaspricescontributed$1.4billionofadditionalrevenuesin2005.
marketingandmidstreamrevenuesandoperatingCostsandexpensesThefollowingtabledetailsthechangesinourmarketingandmidstreamrevenuesandoperatingcostsandexpensesbetween2004and2006.Thechangesdueto
pricesinthetablerepresenttheneteffectonbothrevenuesandexpensesduetochangesinthemarketpricesfornaturalgasandNGLs.
revenueS expenSeS
(INMILLIoNs)
2004mARkeTINg&mIDsTReAm $ 1,701 1,339 Changes due to volumes (351) (303) Changes due to prices 442 3062005mARkeTINg&mIDsTReAm 1,792 1,342 Changes due to volumes 159 117 Changes due to prices (259) (215)2006mARkeTINg&mIDsTReAm $ 1,692 1,244
2006 vs. 2005Volumeincreasesinourgaspipeline,gassalesandNGLmarketingactivitiescausedbothrevenuesandexpensestoincreasein2006.ThisadditionalactivitywasprimarilyduetoourcontinuedgrowthintheBarnettShaleandhighernaturalgasdeliveriesfromthird-partyproducers
2005 vs. 2004Volumedecreasesin2005causedbothrevenuesandexpensestodeclinein2005.Theloweractivitywasprimarilyattributabletothesaleofcertainnon-coreassetsin2004and2005.
oil,GasandnGlproductionandoperatingexpensesThedetailsofthechangesinoil,gasandNGLproductionandoperatingexpensesbetween2004and2006areshowninthetablebelow.
YearendeddeCemBer31, 2006 2006vs2005(1) 2005 2005vs2004(1) 2004
PRODUCTIONANDOPeRATINgexPeNses (in millions): Lease operating expenses $ 1,488 +12% 1,324 + 5% 1,259 Production taxes 341 + 2% 335 +31% 255 Total production and operating expenses $ 1,829 +10% 1,659 +10% 1,514PRODUCTIONANDOPeRATINgexPeNsesPeRBOe: Lease operating expenses $ 6.95 +17% 5.92 +16% 5.10 Production taxes 1.59 + 6% 1.50 +46% 1.03 Total production and operating expenses per Boe $ 8.54 +15% 7.42 +21% 6.13
(1) All percentage changes included in this table are based on actual figures and not the rounded figures included in this table.
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2006 vs. 2005Leaseoperatingexpensesincreased$164millionin2006largelyduetohighercommodityprices.Commoditypriceincreasesin2005andthefirsthalfof2006contributedtoindustry-wideinflationarypressuresonmaterialsandpersonnelcosts.Additionally,considerationofhighercommoditypricescontributedtoourdecisiontoperformmorewellworkoversandmaintenanceprojectstomaintainorimproveproductionvolumes.Commoditypriceincreasesalsocausedoperatingcostssuchasadvaloremtaxes,powerandfuelcoststorise.
AhigherCanadian-to-U.S.dollarexchangeratein2006causeda$34millionincreaseinourcosts.Leaseoperatingexpensesalsoincreased$33millionduetotheJune2006ChiefacquisitionandthepayoutsofourcarriedinterestsinAzerbaijaninthelasthalfof2006.Theincreasesinourleaseoperatingexpenseswerepartiallyoffsetbyadecreaseof$82millionrelatedtopropertiesthatweresoldin2005.
ThefactorsdescribedabovewerealsotheprimaryfactorscausingleaseoperatingexpensesperBoetoincreaseduring2006.Althoughwedivestedpropertiesin2005thathadhigherper-unitoperatingcosts,thecostescalationlargelyrelatedtohighercommoditypricesandtheweakerU.S.dollarhadagreatereffectonourperunitcoststhanthepropertydivestitures.
2005 vs. 2004 Leaseoperatingexpensesincreased$65millionin2005largelyduetohighercommodityprices.Asaddressedabove,commoditypriceincreasesledtooverallindustryinflation.Additionally,ahigherCanadian-to-U.S.dollarexchangeratein2005causeda$30millionincreasein2005.Partiallyoffsettingtheseincreaseswasadecreaseof$144millioninleaseoperatingexpensesrelatedtopropertiesthatweresoldin2005.
TheincreasesdescribedabovewerealsotheprimaryfactorscausingleaseoperatingexpensesperBoetoincrease.Althoughwedivestedpropertiesthathadhigherper-unitoperatingcosts,thecostescalationlargelyrelatedtohighercommoditypricesandtheweakerU.S.dollarhadagreatereffectonourperunitcoststhanthepropertydivestitures.
Thefollowingtabledetailsthechangesinproductiontaxesbetween2004and2006.Themajorityofourproductiontaxesareassessedonouronshoredomesticproperties.IntheU.S.,mostoftheproductiontaxesarebasedonafixedpercentageofrevenues.Therefore,thechangesduetorevenuesinthetableprimarilyrelatetochangesinoil,gasandNGLrevenuesfromourU.S.onshoreproperties.
(inmillionS)
2004PRODUCTIONTAxes $ 255 Change due to revenues 50 Change due to rate 302005PRODUCTIONTAxes 335 Change due to revenues (23) Change due to rate 292006PRODUCTIONTAxes $ 341
2006 vs. 2005 Productiontaxesincreased$29millionduetoanincreaseintheeffectiveproductiontaxratein2006.AnewChinese“SpecialPetroleumGain”taxwastheprimarycontributortothehigherrate.
2005 vs. 2004 Productiontaxesincreased$30millionduetoanincreaseintheeffectiveproductiontaxratein2005.AnincreaseinRussianexporttaxrateswastheprimarycontributortothehigherrate.
depreciation,depletionandamortizationofoilandGasproperties(“dd&a”)DD&Aofoilandgaspropertiesiscalculatedbymultiplyingthepercentageoftotalprovedreservevolumesproducedduringtheyear,bythe“depletablebase.”The
depletablebaserepresentsthenetcapitalizedinvestmentplusfuturedevelopmentcostsinthosereserves.Generally,ifreservevolumesarerevisedupordown,thentheDD&Arateperunitofproductionwillchangeinversely.However,ifthedepletablebasechanges,thentheDD&Aratemovesinthesamedirection.TheperunitDD&Arateisnotaffectedbyproductionvolumes.AbsoluteortotalDD&A,asopposedtotherateperunitofproduction,generallymovesinthesamedirectionasproductionvolumes.OilandgaspropertyDD&Aiscalculatedseparatelyonacountry-by-countrybasis.
ThefollowingtabledetailsthechangesinDD&Aofoilandgaspropertiesbetween2004and2006.ThechangesduetovolumesinthetablerepresenttheeffectonDD&Aduetodecreasesincombinedoil,gasandNGLproduction.
(inmillionS)
2004DD&A $ 2,077 Change due to volumes (195) Change due to rate 992005DD&A 1,981 Change due to volumes (85) Change due to rate 3702006DD&A $ 2,266
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2006 vs. 2005 OilandgaspropertyrelatedDD&Aincreased$370millionin2006duetoanincreaseintheDD&Aratefrom$8.86perBoein2005to$10.59perBoein2006.Thelargestcontributortotherateincreasewasinflationarypressureonboththecostsincurredduring2006aswellastheestimateddevelopmentcoststobespentinfutureperiodsonprovedundevelopedreserves.OtherfactorscontributingtotherateincreaseincludetheJune2006Chiefacquisitionandthetransferofpreviouslyunprovedcoststothedepletablebaseasaresultof2006drillingactivities.Areductioninreserveestimatesduetotheeffectsof2006year-endcommoditypricesalsocontributedtotherateincrease.
2005 vs. 2004 OilandgaspropertyrelatedDD&Aincreased$99millionin2005duetoanincreaseintheDD&Aratefrom$8.41perBoein2004to$8.86perBoein2005.Thelargestcontributortotherateincreasewastheeffectofinflationarypressureonfindinganddevelopmentcostsforreservediscoveriesandextensions.ChangesintheCanadian-to-U.S.dollarexchangeratealsocausedtheratetoincrease.Theseincreaseswerepartiallyoffsetbyadecreaseintherateasaresultofour2005propertydivestitures.
Generalandadministrativeexpenses(“G&a”)OurnetG&Aconsistsofthreeprimarycomponents.Thelargestofthesecomponentsisthegrossamountofexpensesincurredforpersonnelcosts,officeexpenses,
professionalfeesandotherG&Aitems.Thegrossamountoftheseexpensesispartiallyreducedbytwooffsettingcomponents.OneistheamountofG&Acapitalizedpursuanttothefullcostmethodofaccountingrelatedtoexplorationanddevelopmentactivities.TheotheristheamountofG&Areimbursedbyworkinginterestownersofpropertiesforwhichweserveastheoperator.Thesereimbursementsarereceivedduringboththedrillingandoperationalstagesofaproperty’slife.ThegrossamountofG&Aincurred,lesstheamountscapitalizedandreimbursed,isrecordedasnetG&Aintheconsolidatedstatementsofoperations.NetG&Aincludesexpensesrelatedtooil,gasandNGLexplorationandproductionactivities,aswellasmarketingandmidstreamactivities.SeethefollowingtableforasummaryofG&Aexpensesbycomponent.
YearendeddeCemBer31, 2006 2006vs2005 2005 2005vs2004 2004
(INMILLIoNs)
Gross G&A $ 769 +33% 577 +6% 545Capitalized G&A (269) +49% (181) +9% (166)Reimbursed G&A (103) -2% (105) +3% (102) Net G&A $ 397 +36% 291 +5% 277
2006 vs. 2005GrossG&Aincreased$192million.HigheremployeecompensationandbenefitscostscausedgrossG&Atoincrease$149million.Ofthisincrease,$34millionrepresentedstockoptionexpenserecognizedpursuanttoouradoptionin2006ofStatementofFinancialAccountingStandardNo.123(R),Share-Based Payment.Anadditional$28millionoftheincreaserelatedtohigherrestrictedstockcompensation.Inaddition,changesintheCanadian-to-U.S.dollarexchangeratecausedan$11millionincreaseincosts.
2005 vs. 2004 GrossG&Aincreased$32million.HigheremployeecompensationandbenefitscostscausedgrossG&Atoincrease$35million.Ofthisincrease,$17millionrelatedtohigherrestrictedstockcompensation.Inaddition,changesintheCanadian-to-U.S.dollarexchangeratecauseda$9millionincreaseincosts.Theseincreaseswerepartiallyoffsetbyan$8milliondecreaseinrentexpenseresultingprimarilyfromtheabandonmentofcertainCanadianofficespacein2004.
Thefactorsdiscussedabovewerealsotheprimaryfactorsthatcausedthe$88millionand$15millionincreasesincapitalizedG&Ain2006and2005,respectively.
interestexpenseThefollowingscheduleincludesthecomponentsofinterestexpensebetween2004and2006.
YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Interest based on debt outstanding $ 486 507 513Capitalized interest (79) (70) (70)Other interest 14 96 32 Total interest expense $ 421 533 475
Interestbasedondebtoutstandingdecreasedfrom2004to2006primarilyduetotheneteffectofdebtrepaymentsduring2005and2006.Thiswaspartiallyoffsetbytheeffectofincreasedcommercialpaperborrowingsduringthelasthalfof2006relatedtotheacquisitionoftheChiefproperties.
During2005,weredeemedour$400million6.75%notesdueMarch15,2011andourzerocouponconvertibleseniordebenturespriortotheirscheduledmaturitydates.Theotherinterestcategoryinthetableaboveincludes$81millionin2005relatedtotheseearlyretirements.
During2004,werepaidthebalanceunderour$3billiontermloancreditfacilitypriortothescheduledrepaymentdate.Theotherinterestcategoryinthetableaboveincludes$16millionin2004relatedtothisearlyrepayment.
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reductionofCarryingvalueofoilandGaspropertiesDuring2006and2005,wereducedthecarryingvalueofcertainofouroilandgaspropertiesduetofullcostceilinglimitationsandunsuccessfulexploratory
activities.AdetaileddescriptionofhowfullcostceilinglimitationsaredeterminedisincludedintheCriticalAccountingPoliciesandEstimatessectionofthisreport.Asummaryofthesereductionsandadditionaldiscussionisprovidedbelow. YearendeddeCemBer31, 2006 2005 netof netof GroSS taxeS GroSS taxeS
(INMILLIoNs)
Unsuccessful exploratory reductions: Nigeria $ 85 85 — — Brazil 16 16 42 42 Angola — — 170 119Ceiling test reduction – Russia 20 10 — — Total $ 121 111 212 161
2006 ReductionsWehavecommittedtodrillfourwellsinNigeria.Thefirsttwowellswereunsuccessful.Afterdrillingthesecondunsuccessfulwellinthefirstquarterof2006,wedeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthefirstquarterof2006,werecognizedan$85millionimpairmentofourinvestmentinNigeriaequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.
Duringthesecondquarterof2006,wedrilledtwounsuccessfulexploratorywellsinBrazilanddeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthesecondquarterof2006,werecognizeda$16millionimpairmentofourinvestmentinBrazilequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.ThetwowellswereunrelatedtoDevon’sPolvodevelopmentprojectinBrazil.
Asaresultofadeclineinprojectedfuturenetcashflows,thecarryingvalueofourRussianpropertiesexceededthefullcostceilingby$10millionattheendofthethirdquarterof2006.Therefore,werecognizeda$20millionreductionofthecarryingvalueofouroilandgaspropertiesinRussia,offsetbya$10milliondeferredincometaxbenefit.
2005 ReductionsOurinterestsinAngolawereacquiredthroughthe2003OceanEnergymerger.OurAngolandrillingprogramdiscoverednoprovenreserves.Afterdrillingthreeunsuccessfulwellsinthefourthquarterof2005,wedeterminedthatalloftheAngolancapitalizedcostsshouldbeimpaired.
Priortothefourthquarterof2005,wewerecapitalizingthecostsofpreviousunsuccessfuleffortsinBrazilpendingthedeterminationofwhetherprovedreserveswouldberecordedinBrazil.WehavebeensuccessfulinourdrillingeffortsonblockBM-C-8inBrazilandarecurrentlydevelopingthePolvoprojectonthisblock.TheultimatevalueofthePolvoprojectisexpectedtobeinexcessofthesumofitsrelatedcosts,plusthecostsofthepreviousunrelatedunsuccessfuleffortsinBrazilwhichwerecapitalized.However,thePolvoprovedreserveswillberecordedoveraperiodoftime.Attheendof2005,itwasexpectedthatasmallinitialportionoftheprovedreservesultimatelyexpectedatPolvowouldberecordedin2006.Basedonpreliminaryestimatesdevelopedinthefourthquarterof2005,thevalueofthisinitialpartialbookingofprovedreserveswasnotsufficienttooffsetthesumoftherelatedproportionatePolvocostsplusthecostsofthepreviousunrelatedunsuccessfulefforts.Therefore,wedeterminedthatthepriorunsuccessfulcostsunrelatedtothePolvoprojectshouldbeimpaired.Thesecoststotaledapproximately$42million.TherewasnotaxbenefitrelatedtothisBrazilianimpairment.
ChangeinfairvalueofderivativefinancialinstrumentsThedetailsofthechangesinfairvalueofderivativefinancialinstrumentsbetween2004and2006areshowninthetablebelow.
2006 2005 2004
(INMILLIoNs)
Option embedded in exchangeable debentures $ 181 54 58Non-qualifying commodity hedges — 39 —Ineffectiveness of commodity hedges — 5 5Interest rate swaps (3) (4) (1) Total $ 178 94 62
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ThechangeinthefairvalueoftheembeddedoptionrelatestothedebenturesexchangeableintosharesofChevronCorporationcommonstock.TheseexpenseswerecausedprimarilybyincreasesinthepriceofChevronCorporation’scommonstock.
In2005,werecognizeda$39millionlossoncertainoilderivativefinancialinstrumentsthatnolongerqualifiedforhedgeaccountingbecausethehedgedproductionexceededactualandprojectedproductionunderthesecontracts.ThelowerthanexpectedproductionwascausedprimarilybyhurricanesthataffectedoffshoreproductionintheGulfofMexico.
otherincome,netThefollowingscheduleincludesthecomponentsofotherincomebetween2004and2006.
2006 2005 2004
(INMILLIoNs)
Interest and dividend income $ 100 95 45Net gain on sales of non-oil and gas property and equipment 6 150 33Loss on derivative financial instruments — (48) —Gains from changes in foreign exchange rates — 2 23Other 9 (1) 25 Total $ 115 198 126
Interestanddividendincomeincreasedfrom2004to2005primarilyduetoanincreaseincashandshort-terminvestmentbalancesandhigherinterestrates.During2005,wesoldcertainnon-coremidstreamassetsforanetgainof$150million.Alsoduring2005,weincurreda$55millionlossoncertaincommodity
hedgesthatnolongerqualifiedforhedgeaccountingandweresettledpriortotheendoftheiroriginalterm.ThesehedgesrelatedtoU.S.andCanadianoilproductionfrompropertiessoldaspartofour2005propertydivestitureprogram.Thislosswaspartiallyoffsetbya$7milliongainrelatedtointerestrateswapsthatweresettledpriortotheendoftheiroriginalterminconjunctionwiththeearlyredemptionofthe$400million6.75%seniornotesin2005.
Thegainsin2005and2004fromchangesinforeignexchangerateswereprimarilyrelatedto$400millionofCanadiansubsidiarydebtthatwasdenominatedinU.S.dollars.Thedebtwasretiredin2005.
incometaxesThefollowingtablepresentsourtotalincometaxexpenserelatedtocontinuingoperationsandareconciliationofoureffectiveincometaxratetotheU.S.statutory
incometaxrateforeachofthepastthreeyears.Theprimaryfactorscausingoureffectiveratestovaryfrom2004to2006,anddifferfromtheU.S.statutoryrate,arediscussedbelow.
2006 2005 2004
(INMILLIoNs)
Total income tax expense $ 1,189 1,606 1,095 U.S. statutory income tax rate 35% 35% 35%Canadian statutory rate reductions (6%) — (1%)Texas income-based tax 1% — —United States manufacturing deduction — (1%) —Repatriation of Canadian earnings — 1% —Other — 1% (1%) Effective income tax rate 30% 36% 33%
In2006,2005and2004,deferredincometaxeswerereduced$243million,$14millionand$36million,respectively,duetoCanadianstatutoryratereductionsthatwereenactedineachsuchyear.
In2006,deferredincometaxesincreased$39millionduetotheeffectofanewincome-basedtaxenactedbythestateofTexasthatreplacesapreviousfranchisetax.ThenewtaxiseffectiveJanuary1,2007.
In2006and2005,incometaxeswerereduced$12millionand$25million,respectively,duetoanewU.S.taxdeductionforcompanieswithdomesticproductionactivities,includingoilandgasextraction.
In2005,werecognized$28millionoftaxesrelatedtoourrepatriationof$545milliontotheU.S.Thecashwasrepatriatedduetotaxlegislationthatallowedqualifyingcompaniestorepatriatecashfromforeignoperationsatareducedincometaxrate.Substantiallyallofthecashrepatriatedbyusin2005relatedtoearningsofourCanadiansubsidiary.
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earningsfromdiscontinuedoperationsOnNovember14,2006,weannouncedourplanstodivestouroperationsinEgypt.WeanticipatecompletingthesaleofourEgyptianoperationsinthefirsthalfof
2007.Pursuanttoaccountingrulesfordiscontinuedoperations,Egyptisconsideredadiscontinuedoperationattheendof2006.Asaresult,theEgyptfinancialresultsfor2006andallpriorperiodshavebeenreclassifiedandarepresentedasdiscontinuedoperations.
Followingarethecomponentsoftheresultsofdiscontinuedoperationsbetween2004and2006.
2006 2005 2004
(INMILLIoNs)
Earnings from discontinued operations before income taxes $ 22 46 17Income tax (benefit) expense (1) 15 12 Earnings from discontinued operations $ 23 31 5
CapitalreSourCeS,uSeSandliquiditY
Thefollowingdiscussionofcapitalresourcesandliquidityshouldbereadinconjunctionwiththeconsolidatedfinancialstatementsincludedinthisreport.
SourcesandusesofCashThefollowingtablepresentsthesourcesandusesofourcashandcashequivalentsfrom2004to2006.Thetablepresentscapitalexpendituresonacashbasis.
Therefore,theseamountsdifferfromtheamountsofcapitalexpenditures,includingaccruals,thatarereferredtoelsewhereinthisdocument.Additionaldiscussionoftheseitemsfollowsthetable.
2006 2005 2004
(INMILLIoNs)
SOuRCES OF CASh AnD CASh EquivAlEntS: Operating cash flow – continuing operations $ 5,936 5,514 4,789 Sales of property and equipment 40 2,151 95 Net commercial paper borrowings 1,808 — — Stock option exercises 73 124 268 Net decrease in short-term investments 106 287 — Other 36 — — Total sources of cash and cash equivalents 7,999 8,076 5,152
uSES OF CASh AnD CASh EquivAlEntS: Capital expenditures (7,551) (4,026) (3,058) Debt repayments (862) (1,258) (973) Repurchases of common stock (253) (2,263) (189) Dividends (209) (146) (107) Net increase in short-term investments — — (626) Total uses of cash and cash equivalents (8,875) (7,693) (4,953)Increase (decrease) from continuing operations (876) 383 199Increase (decrease) from discontinued operations 13 34 (18)Effect of foreign exchange rates 13 37 39Net increase (decrease) in cash and cash equivalents $ (850) 454 220 Cash and cash equivalents at end of year $ 756 1,606 1,152Short-term investments at end of year $ 574 680 967
Operating Cash Flow – Continuing Operations Netcashprovidedbyoperatingactivities(“operatingcashflow”)isourprimarysourceofcapitalandliquidity.Changesinoperatingcashflowarelargelyduetothesamefactorsthataffectournetearnings,withtheexceptionofthoseearningschangesduetosuchnoncashexpensesasDD&A,propertyimpairments,derivativefairvaluechangesanddeferredincometaxexpense.Asaresult,ouroperatingcashflowincreasedin2006and2005comparedtothepreviousyearslargelyduetoincreasesinnetearnings,asdiscussedinthe“ResultsofOperations”sectionofthisreport.
Sales of Property and Equipment In2005,wegenerated$2.2billioninpre-taxproceedsfromsalesofpropertyandequipment.Theseconsistedof$2.0billionrelatedtothesaleofnon-coreoilandgaspropertiesand$0.2billionrelatedtothesaleofnon-coremidstreamassets.Netofrelatedincometaxes,theseproceedswere$1.8billionforoilandgaspropertiesand$0.1billionformidstreamassets.
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Net Commercial Paper Borrowings OnJune29,2006,weacquiredChieffor$2billionofcashandtheassumptionof$0.2billionofliabilities.Wefundedaportionofthepurchasepricewith$1.4billionofborrowingsissuedunderourcommercialpaperprogram.AsaresultoftheChiefacquisitionandsuccessinotheronshoreU.S.locations,weacceleratedcertainoilandgasdevelopmentactivitiesintothelasthalfof2006.Weborrowedanadditional$0.4billionofcommercialpapertofundthisaccelerateddevelopment.
Capital Expenditures Theincreasesinoperatingcashflowhaveenabledustoinvestlargeramountsincapitalprojects.Asaresult,excludingtheacquisitionoftheChiefproperties,ourcapitalexpendituresincreased38%in2006.Themajorityofthisincreaserelatedtoourexpendituresfortheacquisition,drillingordevelopmentofoilandgasproperties,whichtotaled$5.0billionin2006,excludingtheChiefacquisition.InflationarypressuredrivenbyhighercommoditypricesandincreaseddrillingactivitiesintheBarnettShale,GulfofMexico,CarthageandGroesbeckareasoftheU.S.contributedtotheincrease.Inaddition,thepayoutsofourcarriedinterestsinAzerbaijaninthelasthalfof2006andtheweakerU.S.dollarimpactonourCanadianoperationsalsocontributedtotheincrease.
Capitalexpendituresin2005increased32%comparedto2004primarilyduetoanincreaseinourexpendituresfortheacquisition,drillingordevelopmentofoilandgasproperties,whichtotaled$3.9billionin2005.IncreaseddrillingactivitiesintheBarnettShale,theapproximately$200millionacquisitionofIronRiveracreageinCanadaandthe$74millionpurchaseoftheSerpentinaFPSOinoffshoreEquatorialGuineawerelargecontributorstotheincrease.InflationarypressuredrivenbyhighercommoditypricesandtheweakerU.S.dollaralsocausedourexpenditurestoincreasefrom2004to2005.
Debt Repayments Ournetdebtretirementswere$0.9billion,$1.3billionand$1.0billionin2006,2005and2004,respectively.Theseamountsconsistedofpaymentsatthescheduledmaturitydateswiththeexceptionofthefollowingpayments.The2006amountincludes$0.2billionrelatedtotherepaymentofdebtacquiredintheChiefacquisition.The2005amountincludes$0.8billionrelatedtotheretirementofzerocouponconvertibledebenturesduein2020and6.75%notesduein2011.The2004amountincludes$635millionforthepaymentoftheoutstandingbalanceundera$3billiontermloancreditfacilityduein2006.
Repurchases of Common Stock InAugust2005,wecompletedasharerepurchaseprogramthatbeganinOctober2004.Underthisprogram,werepurchased49.6millionsharesofourcommonstockatatotalcostof$2.3billion,or$46.69pershare.InAugust2005,weannouncedanotherprogramtorepurchaseuptoanadditional50millionsharesofourcommonstock.During2005and2006,werepurchased6.5millionsharesfor$387million,or$59.80pershare,underthisprogram.
Dividends Ourcommonstockdividendswere$199million,$136millionand$97millionin2006,2005and2004,respectively.Wealsopaid$10millionofpreferredstockdividendsin2006,2005and2004.The2006and2005increasesincommonstockdividendswereprimarilyrelatedtoa50%increaseinthedividendrateinthefirstquarterofboth2006and2005,partiallyoffsetbyadecreaseinoutstandingsharesduetosharerepurchases.
Changes in Short-Term Investments Tomaximizeourincomeonavailablecashbalances,weinvestinhighlyliquid,short-terminvestments.Thepurchaseandsaleoftheseshort-terminvestmentswillcausecashandcashequivalentstodecreaseandincrease,respectively.Short-terminvestmentbalancesdecreased$106millionand$287millionin2006and2005,respectively,andincreased$626millionin2004.
liquidityHistorically,ourprimarysourceofcapitalandliquidityhasbeenoperatingcashflow.Additionally,wemaintainarevolvinglineofcreditandacommercialpaper
programwhichcanbeaccessedasneededtosupplementoperatingcashflow.Otheravailablesourcesofcapitalandliquidityincludetheissuanceofequitysecuritiesandlong-termdebt.During2007,anothermajorsourceofliquiditywillbeproceedsfromthesalesofouroperationsinEgyptandWestAfrica.Weexpectthecombinationofthesesourcesofcapitalwillbemorethanadequatetofundfuturecapitalexpenditures,debtrepayments,commonstockrepurchases,andothercontractualcommitmentsasdiscussedlaterinthissection.
Operating Cash Flow Ouroperatingcashflowhasincreasednearly25%since2004,reachingatotalof$5.9billionin2006.Weexpectoperatingcashflowtocontinuetobeourprimarysourceofliquidity.Ouroperatingcashflowissensitivetomanyvariables,themostvolatileofwhichispricingoftheoil,naturalgasandNGLsproduced.Pricesforthesecommoditiesaredeterminedprimarilybyprevailingmarketconditions.Regionalandworldwideeconomicactivity,weatherandothersubstantiallyvariablefactorsinfluencemarketconditionsfortheseproducts.Thesefactorsarebeyondourcontrolandaredifficulttopredict.
Weperiodicallybelieveitappropriatetomitigatesomeoftheriskinherentinoilandnaturalgasprices.Wehaveusedavarietyofavenuestoachievethispartialriskmitigation.Wehaveutilizedpricecollarstosetminimumandmaximumpricesonaportionofourproduction.Wehavealsoutilizedvariouspriceswapcontractsandfixed-pricephysicaldeliverycontractstofixthepricetobereceivedforaportionoffutureoilandnaturalgasproduction.Basedoncontractscurrentlyinplace,approximately5%ofourestimated2007naturalgasproduction(3%ofourtotalBoeproduction)issubjecttoeitherpricecollars,swapsorfixed-pricecontracts.
Commoditypricescanalsoaffectouroperatingcashflowthroughanindirecteffectonoperatingexpenses.Significantcommoditypriceincreases,asexperiencedinrecentyears,canleadtoanincreaseindrillinganddevelopmentactivities.Asaresult,thedemandandcostforpeople,services,equipmentandmaterialsmayalsoincrease,causinganegativeimpactonourcashflow.
Credit Lines Anothersourceofliquidityisour$2.5billionfive-year,syndicated,unsecuredrevolvinglineofcredit(the“SeniorCreditFacility”).TheSeniorCreditFacilityincludesafive-yearrevolvingCanadiansubfacilityinamaximumamountofU.S.$500million.AmountsborrowedundertheSeniorCreditFacilitymay,atourelection,bearinterestatvariousfixedrateoptionsforperiodsofuptotwelvemonths.Suchratesaregenerallylessthantheprimerate.However,wemayelecttoborrowattheprimerate.AsofDecember31,2006,therewerenoborrowingsundertheSeniorCreditFacility.TheavailablecapacityundertheSeniorCreditFacilityasofDecember31,2006,netof$1.8billionofoutstandingcommercialpaperand$284millionofoutstandinglettersofcredit,wasapproximately$408million.
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TheSeniorCreditFacilitymaturesonApril7,2011,andallamountsoutstandingwillbedueandpayableatthattimeunlessthematurityisextended.PriortoeachApril7anniversarydate,wehavetheoptiontoextendthematurityoftheSeniorCreditFacilityforoneyear,subjecttotheapprovalofthelenders.WeareworkingtoobtainlenderapprovaltoextendthecurrentmaturitydateofApril7,2011toApril7,2012.Ifsuccessful,thismaturitydateextensionwillbeeffectiveApril7,2007,providedwehavenotexperienceda“materialadverseeffect,”asdefinedintheSeniorCreditFacilityagreement,atthatdate.
TheSeniorCreditFacilitycontainsonlyonematerialfinancialcovenant.Thiscovenantrequiresourratiooftotalfundeddebttototalcapitalizationtobelessthan65%.Thecreditagreementcontainsdefinitionsoftotalfundeddebtandtotalcapitalizationthatincludeadjustmentstotherespectiveamountsreportedinourconsolidatedfinancialstatements.Asdefinedintheagreement,totalfundeddebtexcludesthedebenturesthatareexchangeableintosharesofChevronCorporationcommonstock.Also,totalcapitalizationisadjustedtoaddbacknoncashfinancialwritedownssuchasfullcostceilingimpairmentsorgoodwillimpairments.AsofDecember31,2006,ourdebttocapitalizationratioascalculatedpursuanttothiscovenantwas27.3%.
OuraccesstofundsfromtheSeniorCreditFacilityisnotrestrictedunderany“materialadverseeffect”clauses.Itisnotuncommonforcreditagreementstoincludesuchclauses.Theseclausescanremovetheobligationofthebankstofundthecreditlineifanyconditionoreventwouldreasonablybeexpectedtohaveamaterialandadverseeffectontheborrower’sfinancialcondition,operations,propertiesorbusinessconsideredasawhole,theborrower’sabilitytomaketimelydebtpayments,ortheenforceabilityofmaterialtermsofthecreditagreement.WhileourSeniorCreditFacilityincludescovenantsthatrequireustoreportaconditionoreventhavingamaterialadverseeffect,theobligationofthebankstofundtheSeniorCreditFacilityisnotconditionedontheabsenceofamaterialadverseeffect.
Wealsohaveaccesstoshort-termcreditunderourcommercialpaperprogram.Totalborrowingsunderthecommercialpaperprogrammaynotexceed$2billion.Also,anyborrowingsunderthecommercialpaperprogramreduceavailablecapacityundertheSeniorCreditFacilityonadollar-for-dollarbasis.Commercialpaperdebtgenerallyhasamaturityofbetweensevenand90days,althoughitcanhaveamaturityofupto365days,andbearsinterestatratesagreedtoatthetimeoftheborrowing.TheinterestrateisbasedonastandardindexsuchastheFederalFundsRate,LIBOR,orthemoneymarketrateasfoundonthecommercialpapermarket.AsofDecember31,2006,wehad$1.8billionofcommercialpaperdebtoutstandingatanaveragerateof5.37%.
Debt RatingsWereceivedebtratingsfromthemajorratingsagenciesintheUnitedStates.Indeterminingourdebtratings,theagenciesconsideranumberofitemsincluding,butnotlimitedto,debtlevels,plannedassetsales,near-termandlong-termproductiongrowthopportunitiesandcapitalallocationchallenges.Liquidity,assetquality,coststructure,reservemix,andcommoditypricinglevelsarealsoconsideredbytheratingagencies.OurcurrentdebtratingsareBBBwithapositiveoutlookbyStandard&Poor’s,Baa2withapositiveoutlookbyMoody’sandBBBwithapositiveoutlookbyFitch.
Thereareno“ratingtriggers”inanyofourcontractualobligationsthatwouldacceleratescheduledmaturitiesshouldourdebtratingfallbelowaspecifiedlevel.OurcostofborrowingunderourSeniorCreditFacilityispredicatedonourcorporatedebtrating.Therefore,eventhougharatingsdowngradewouldnotacceleratescheduledmaturities,itwouldadverselyimpacttheinterestrateonanyborrowingsunderourSeniorCreditFacility.UnderthetermsoftheSeniorCreditFacility,aone-notchdowngradewouldincreasethefully-drawnborrowingcostsfortheSeniorCreditFacilityfromLIBORplus45basispointstoanewrateofLIBORplus65basispoints.Aratingsdowngradecouldalsoadverselyimpactourabilitytoeconomicallyaccessdebtmarketsinthefuture.AsofDecember31,2006,wewerenotawareofanypotentialratingsdowngradesbeingcontemplatedbytheratingagencies.
Capital ExpendituresInFebruary2007,weprovidedguidanceforour2007capitalexpenditureswhichareexpectedtorangefrom$5.7billionto$6.2billion.Thisrepresentsthelargestplanneduseofour2007operatingcashflow,withthehighendoftherangebeing11%higherthanour2006capitalexpenditures,excludingtheChiefacquisition.Toacertaindegree,theultimatetimingofthesecapitalexpendituresiswithinourcontrol.Therefore,ifoilandnaturalgaspricesfluctuatefromcurrentestimates,wecouldchoosetodeferaportionoftheseplanned2007capitalexpendituresuntillaterperiods,oracceleratecapitalexpendituresplannedforperiodsbeyond2007toachievethedesiredbalancebetweensourcesandusesofliquidity.Baseduponcurrentoilandnaturalgaspriceexpectationsfor2007,weanticipatehavingadequatecapitalresourcestofundour2007capitalexpenditures.
Common Stock Repurchase ProgramInAugust2005,weannouncedaprogramtorepurchaseupto50millionsharesofourcommonstock.Wehadrepurchased6.5millionsharesunderthisprogramthroughthemiddleof2006whentheprogramwassuspendedasaresultoftheChiefacquisition.InconjunctionwiththesalesofourEgyptianandWestAfricanoperations,weexpecttoresumethisrepurchaseprograminlate2007byusingaportionofthesalesproceedstorepurchasecommonstock.Althoughthisprogramexpiresattheendof2007,itcouldbeextendedifnecessary.
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Contractual ObligationsAsummaryofourcontractualobligationsasofDecember31,2006,isprovidedinthefollowingtable. paYmentSdueBYperiod leSSthan 1-3 3-5 morethan total 1Year YearS YearS 5YearS
(INMILLIoNs)
Long-term debt (1) $ 7,770 2,208 937 2,100 2,525Interest expense (2) 5,797 492 764 690 3,851Drilling and facility obligations (3) 2,993 886 1,137 844 126Asset retirement obligations (4) 894 61 75 143 615Firm transportation agreements (5) 574 123 173 106 172Lease obligations (6) 595 80 163 123 229Other 37 28 5 4 — Total $ 18,660 3,878 3,254 4,010 7,518
(1) Long-term debt amounts represent scheduled maturities of our debt obligations at December 31, 2006, excluding $5 million of fair value adjustments and $8 million of net premiums included in the carrying value of debt. The “Less than 1 Year” amount includes $1.8 billion of short-term commercial paper borrowings. We intend to use the proceeds from the sales of our Egyptian and West African assets to repay our outstanding commercial paper. The “1-3 Years” amount includes $760 million related to our debentures exchangeable into shares of Chevron Corporation common stock. As of December 31, 2006, we beneficially owned approximately 14.2 million shares of Chevron common stock for possible exchange for the exchangeable debentures. In addition, $284 million of letters of credit that have been issued by commercial banks on our behalf are excluded from the table. The majority of these letters of credit, if funded, would become borrowings under our revolving credit facility. Most of these letters of credit have been granted by financial institutions to support our international and Canadian drilling commitments.(2) Interest expense amounts represent the scheduled fixed-rate and variable-rate cash payments related to our debt. Interest on our variable-rate debt was estimated based upon expected future interest rates as of December 31, 2006.(3) Drilling and facility obligations represent contractual agreements with third party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction. Included in the $3.0 billion total is $1.9 billion which relates to long-term contracts for three deepwater drilling rigs and certain other contracts for onshore drilling and facility obligations in which drilling or facilities construction has not commenced. The $1.9 billion represents the gross commitment under these contracts. Our ultimate payment for these commitments will be reduced by the amounts billed to our working interest partners. Payments for these commitments, net of amounts billed to partners, will be capitalized as a component of oil and gas properties.(4) Asset retirement obligations represent estimated discounted costs for future dismantlement, abandonment and rehabilitation costs. These obligations are recorded as liabilities on our December 31, 2006 balance sheet.(5) Firm transportation agreements represent “ship or pay” arrangements whereby we have committed to ship certain volumes of oil, gas and NGLs for a fixed transportation fee. We have entered into these agreements to aid the movement of our gas production to market. We expect to have sufficient production to utilize the majority of these transportation services.(6) Lease obligations consist of operating leases for office space and equipment, an offshore platform spar and FPSO’s. Office and equipment leases represent non-cancelable leases for office space and equipment used in our daily operations. We have an offshore platform spar that is being used in the development of the Nansen field in the Gulf of Mexico. This spar is subject to a 20-year lease and contains various options whereby we may purchase the lessors’ interests in the spar. We have guaranteed that the spar will have a residual value at the end of the term equal to at least 10% of the fair value of the spar at the inception of the lease. The total guaranteed value is $14 million in 2022. However, such amount may be reduced under the terms of the lease agreement. In 2005, we sold our interests in the Boomvang field in the Gulf of Mexico, which has a spar lease with terms similar to those of the Nansen lease. As a result of the sale, we are subleasing the Boomvang Spar. The table above does not include any amounts related to the Boomvang spar lease. However, if the sublessee were to default on its obligation, we would continue to be obligated to pay the periodic lease payments and any guaranteed value required at the end of the term. We also lease two FPSO’s that are being used in the Panyu project offshore China and the Polvo project offshore Brazil. The Panyu FPSO lease term expires in September 2009. The Polvo FPSO lease term expires in 2014.
Pension Funding and Estimates Funded Status Ascomparedtothe“projectedbenefitobligation,”ourqualifiedandnonqualifieddefinedbenefitplanswereunderfundedby$178millionand$133millionatDecember31,2006and2005,respectively.Adetailedreconciliationofthe2006changestoourunderfundedstatusisincludedinNote6totheaccompanyingconsolidatedfinancialstatements.Ofthe$178millionunderfundedstatusattheendof2006,$156millionisattributabletovariousnonqualifieddefinedbenefitplanswhichhavenoplanassets.However,wehaveestablishedcertaintruststofundthebenefitobligationsofsuchnonqualifiedplans.AsofDecember31,2006,thesetrustshadinvestmentswithafairvalueof$59million.Thevalueofthesetrustsisincludedinnoncurrentotherassetsinouraccompanyingconsolidatedbalancesheets.
Ascomparedtothe“accumulatedbenefitobligation,”ourqualifieddefinedbenefitplanswereoverfundedby$59millionatDecember31,2006.Theaccumulatedbenefitobligationdiffersfromtheprojectedbenefitobligationinthattheformerincludesnoassumptionaboutfuturecompensationlevels.Ourcurrentintentionsaretoprovidesufficientfundinginfutureyearstoensuretheaccumulatedbenefitobligationremainsfullyfunded.Theactualamountofcontributionsrequiredduringthisperiodwilldependoninvestmentreturnsfromtheplanassets.Requiredcontributionsalsodependuponchangesinactuarialassumptionsmadeduringthesameperiod,particularlythediscountrateusedtocalculatethepresentvalueoftheaccumulatedbenefitobligation.For2007,weanticipatetheaccumulatedbenefitobligationwillremainfullyfundedwithoutcontributingtoourdefinedbenefitplans.Therefore,wedon’texpecttocontributetotheplansduring2007.
Pension Estimate Assumptions Ourpensionexpenseisrecognizedonanaccrualbasisoveremployees’approximateserviceperiodsandisgenerallycalculatedindependentoffundingdecisionsorrequirements.Werecognizedexpenseforourdefinedbenefitpensionplansof$31million,$26millionand$26millionin2006,2005and2004,respectively.Weestimatethatourpensionexpensewillapproximate$43millionin2007.
Thecalculationofpensionexpenseandpensionliabilityrequirestheuseofanumberofassumptions.Changesintheseassumptionscanresultindifferentexpenseandliabilityamounts,andfutureactualexperiencecandifferfromtheassumptions.Webelievethatthetwomostcriticalassumptionsaffectingpensionexpenseandliabilitiesaretheexpectedlong-termrateofreturnonplanassetsandtheassumeddiscountrate.
Weassumedthatourplanassetswouldgeneratealong-termweightedaveragerateofreturnof8.40%atbothDecember31,2006and2005.Wedevelopedtheseexpectedlong-termrateofreturnassumptionsbyevaluatinginputfromexternalconsultantsandeconomistsaswellaslong-terminflationassumptions.Theexpectedlong-termrateofreturnonplanassetsisbasedonatargetallocationofinvestmenttypesinsuchassets.Thetargetinvestmentallocationforourplanassetsis50%U.S.largecapequitysecurities;15%U.S.smallcapequitysecurities,equallyallocatedbetweengrowthandvalue;15%internationalequitysecurities,equallyallocated
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betweengrowthandvalue;and20%debtsecurities.Weexpectourlong-termassetallocationonaveragetoapproximatethetargetedallocation.Weregularlyreviewouractualassetallocationandperiodicallyrebalancetheinvestmentstothetargetedallocationwhenconsideredappropriate.
Pensionexpenseincreasesastheexpectedrateofreturnonplanassetsdecreases.Adecreaseinourlong-termrateofreturnassumptionof100basispoints(from8.40%to7.40%)wouldincreasetheexpected2007pensionexpenseby$6million.
Wediscountedourfuturepensionobligationsusingaweightedaveragerateof5.72%atbothDecember31,2006and2005.Thediscountrateisdeterminedattheendofeachyearbasedontherateatwhichobligationscouldbeeffectivelysettled.Thisrateisbasedonhigh-qualitybondyields,afterallowingforcallanddefaultrisk.Weconsiderhighqualitycorporatebondyieldindices,suchasMoody’sAa,whenselectingthediscountrate.
Thepensionliabilityandfuturepensionexpensebothincreaseasthediscountrateisreduced.Loweringthediscountrateby25basispoints(from5.72%to5.47%)wouldincreaseourpensionliabilityatDecember31,2006,by$25million,andincreaseestimated2007pensionexpenseby$3million.
AtDecember31,2006,wehadactuariallossesof$214millionwhichwillberecognizedasacomponentofpensionexpenseinfutureyears.Theselossesareprimarilyduetoreductionsinthediscountratesince2001andincreasesinparticipantwages.Weestimatethatapproximately$15millionand$13millionoftheunrecognizedactuariallosseswillbeincludedinpensionexpensein2007and2008,respectively.The$15millionestimatedtoberecognizedin2007isacomponentofthetotalestimated2007pensionexpenseof$43millionreferredtoearlierinthissection.
Futurechangesinplanassetreturns,assumeddiscountratesandvariousotherfactorsrelatedtotheparticipantsinourdefinedbenefitpensionplanswillimpactfuturepensionexpenseandliabilities.Wecannotpredictwithcertaintywhatthesefactorswillbeinthefuture.
OnAugust17,2006,thePensionProtectionActwassignedintolaw.Beginningin2008,thisactwillcauseextensivechangesinthedeterminationofboththeminimumrequiredcontributionandthemaximumtaxdeductiblelimit.Becausethenewrequiredcontributionwillapproximateourcurrentpolicyoffullyfundingtheaccumulatedbenefitobligation,thechangesarenotexpectedtohaveasignificantimpactonfuturecashflows.
BeginningwithourDecember31,2006balancesheet,StatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)requiresustorecognizeonourconsolidatedbalancesheetthefundedstatusofourdefinedbenefitplans.Thefundedstatusismeasuredasthedifferencebetweentheprojectedbenefitobligationandthefairvalueofplanassets.Asaresult,werecognizedasliabilitiestheactuariallossesandothercoststhatwerepreviouslyunrecognizedunderprioraccountingrules,andtheneteffectwasalsorecordedasareductiontostockholders’equityonDecember31,2006.Thisreductionwas$140million,orlessthan1%ofourstockholders’equity.
ContinGenCieSandleGalmatterS
Foradetaileddiscussionofcontingenciesandlegalmatters,seeNote8oftheaccompanyingconsolidatedfinancialstatements.
CritiCalaCCountinGpoliCieSandeStimateS
ThepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualamountscoulddifferfromtheseestimates,andchangesintheseestimatesarerecordedwhenknown.
Thecriticalaccountingpoliciesusedbymanagementinthepreparationofourconsolidatedfinancialstatementsarethosethatareimportantbothtothepresentationofourfinancialconditionandresultsofoperationsandrequiresignificantjudgmentsbymanagementwithregardtoestimatesused.Ourcriticalaccountingpoliciesandsignificantjudgmentsandestimatesrelatedtothosepoliciesaredescribedbelow.WehavereviewedthesecriticalaccountingpolicieswiththeAuditCommitteeoftheBoardofDirectors.
fullCostCeilingCalculationsPolicy Description Wefollowthefullcostmethodofaccountingforouroilandgasproperties.Thefullcostmethodsubjectscompaniestoquarterlycalculations
ofa“ceiling,”orlimitationontheamountofpropertiesthatcanbecapitalizedonthebalancesheet.Theceilinglimitationisthediscountedestimatedafter-taxfuturenetrevenuesfromprovedoilandgasproperties,excludingfuturecashoutflowsassociatedwithsettlingassetretirementobligationsincludedinthenetbookvalueofoilandgasproperties,plusthecostofpropertiesnotsubjecttoamortization.Ifournetbookvalueofoilandgasproperties,lessrelateddeferredincometaxes,isinexcessofthecalculatedceiling,theexcessmustbewrittenoffasanexpense,exceptasdiscussedinthefollowingparagraph.Theceilinglimitationisimposedseparatelyforeachcountryinwhichwehaveoilandgasproperties.
If,subsequenttotheendofthequarterbutpriortotheapplicablefinancialstatementsbeingpublished,pricesincreasetolevelssuchthattheceilingwouldexceedthecoststoberecovered,awritedownotherwiseindicatedattheendofthequarterisnotrequiredtoberecorded.Awritedownindicatedattheendofaquarterisalsonotrequiredifthevalueofadditionalreservesproveduponpropertiesaftertheendofthequarterbutpriortothepublishingofthefinancialstatementswouldresultin
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theceilingexceedingthecoststoberecovered,aslongasthepropertieswereownedattheendofthequarter.Anexpenserecordedinoneperiodmaynotbereversedinasubsequentperiodeventhoughhigheroilandgaspricesmayhaveincreasedtheceilingapplicabletothesubsequentperiod.
Judgments and Assumptions Thediscountedpresentvalueoffuturenetrevenuesforourprovedoil,naturalgasandNGLreservesisamajorcomponentoftheceilingcalculation,andrepresentsthecomponentthatrequiresthemostsubjectivejudgments.Estimatesofreservesareforecastsbasedonengineeringdata,projectedfutureratesofproductionandthetimingoffutureexpenditures.Theprocessofestimatingoil,naturalgasandNGLreservesrequiressubstantialjudgment,resultinginimprecisedeterminations,particularlyfornewdiscoveries.Differentreserveengineersmaymakedifferentestimatesofreservequantitiesbasedonthesamedata.Certainofourreserveestimatesarepreparedorauditedbyoutsidepetroleumconsultants,whileotherreserveestimatesarepreparedbyourengineers.SeeNote15oftheaccompanyingconsolidatedfinancialstatements.
Thepassageoftimeprovidesmorequalitativeinformationregardingestimatesofreserves,andrevisionsaremadetopriorestimatestoreflectupdatedinformation.Inthepastfiveyears,annualrevisionstoourreserveestimates,whichhavebeenbothincreasesanddecreasesinindividualyears,haveaveragedapproximately1%ofthepreviousyear’sestimate.However,therecanbenoassurancethatmoresignificantrevisionswillnotbenecessaryinthefuture.Iffuturesignificantrevisionsarenecessarythatreducepreviouslyestimatedreservequantities,itcouldresultinafullcostpropertywritedown.Inadditiontotheimpactoftheestimatesofprovedreservesonthecalculationoftheceiling,estimatesofprovedreservesarealsoasignificantcomponentofthecalculationofDD&A.
Whilethequantitiesofprovedreservesrequiresubstantialjudgment,theassociatedpricesofoil,naturalgasandNGLreserves,andtheapplicablediscountrate,thatareusedtocalculatethediscountedpresentvalueofthereservesdonotrequirejudgment.Theceilingcalculationdictatesthata10%discountfactorbeusedandthatpricesandcostsineffectasofthelastdayoftheperiodareheldconstantindefinitely.Therefore,thefuturenetrevenuesassociatedwiththeestimatedprovedreservesarenotbasedonourassessmentoffuturepricesorcosts.Rather,theyarebasedonsuchpricesandcostsineffectasoftheendofeachquarterwhentheceilingcalculationisperformed.Incalculatingtheceiling,weadjusttheend-of-periodpricebytheeffectofcashflowhedgesinplace.Thisadjustmentrequireslittlejudgmentastheend-of-periodpriceisadjustedusingthecontractpricesforourcashflowhedges.WehadnosuchhedgesoutstandingatDecember31,2006.
Becausetheceilingcalculationdictatesthatpricesineffectasofthelastdayoftheapplicablequarterareheldconstantindefinitely,andrequiresa10%discountfactor,theresultingvalueisnotindicativeofthetruefairvalueofthereserves.Oilandnaturalgaspriceshavehistoricallybeenvolatile.Onanyparticulardayattheendofaquarter,pricescanbeeithersubstantiallyhigherorlowerthanourlong-termpriceforecastthatisabarometerfortruefairvalue.Therefore,oilandgaspropertywritedownsthatresultfromapplyingthefullcostceilinglimitation,andthatarecausedbyfluctuationsinpriceasopposedtoreductionstotheunderlyingquantitiesofreserves,shouldnotbeviewedasabsoluteindicatorsofareductionoftheultimatevalueoftherelatedreserves.
derivativefinancialinstrumentsPolicy Description Themajorityofourhistoricalderivativeinstrumentshaveconsistedofcommodityfinancialinstrumentsusedtomanageourcashflow
exposuretooilandgaspricevolatility.Wehavealsoenteredintointerestrateswapstomanageourexposuretointerestratevolatility.Theinterestrateswapsmitigateeitherthecashfloweffectsofinterestratefluctuationsoninterestexpenseforvariable-ratedebtinstruments,orthefairvalueeffectsofinterestratefluctuationsonfixed-ratedebt.WealsohaveanembeddedoptionderivativerelatedtothefairvalueofourdebenturesexchangeableintosharesofChevronCorporationcommonstock.
Allderivativesarerecognizedattheircurrentfairvalueonourbalancesheet.Changesinthefairvalueofderivativefinancialinstrumentsarerecordedinthestatementofoperationsunlessspecifichedgeaccountingcriteriaaremet.Ifsuchcriteriaaremetforcashflowhedges,theeffectiveportionofthechangeinthefairvalueisrecordeddirectlytoaccumulatedothercomprehensiveincome,acomponentofstockholders’equity,untilthehedgedtransactionoccurs.Theineffectiveportionofthechangeinfairvalueisrecordedinthestatementofoperations.Ifhedgeaccountingcriteriaaremetforfairvaluehedges,thechangeinthefairvalueisrecordedinthestatementofoperationswithanoffsettingamountrecordedforthechangeinfairvalueofthehedgeditem.
Aderivativeinstrumentqualifiesforhedgeaccountingtreatmentifwedesignatetheinstrumentassuchonthedatethederivativecontractisenteredintoorthedateofanacquisitionorbusinesscombinationwhichincludesderivativecontracts.Additionally,wemustdocumenttherelationshipbetweenthehedginginstrumentandhedgeditem,aswellastherisk-managementobjectiveandstrategyforundertakingtheinstrument.Wemustalsoassess,bothattheinstrument’sinceptionandonanongoingbasis,whetherthederivativeishighlyeffectiveinoffsettingthechangeincashflowofthehedgeditem.
Judgments and Assumptions Theestimatesofthefairvaluesofourcommodityderivativeinstrumentsrequiresubstantialjudgment.Fortheseinstruments,weobtainforwardpriceandvolatilitydataforallmajoroilandgastradingpointsinNorthAmericafromindependentthirdparties.Theseforwardpricesarecomparedtothepriceparameterscontainedinthehedgeagreements.TheresultingestimatedfuturecashinflowsoroutflowsoverthelivesofthehedgecontractsarediscountedusingLIBORandmoneymarketfuturesratesforthefirstyearandmoneymarketfuturesandswapratesthereafter.Inaddition,weestimatetheoptionvalueofpricefloorsandpricecapsusinganoptionpricingmodel.Thesepricinganddiscountingvariablesaresensitivetotheperiodofthecontractandmarketvolatilityaswellaschangesinforwardprices,regionalpricedifferentialsandinterestrates.Fairvaluesofourotherderivativeinstrumentsrequirelessjudgmenttoestimateandareprimarilybasedonquotesfromindependentthirdpartiessuchascounterpartiesorbrokers.
Quarterlychangesinestimatesoffairvaluehaveonlyaminimalimpactonourliquidity,capitalresourcesorresultsofoperations,aslongasthederivativeinstrumentsqualifyforhedgeaccountingtreatment.Changesinthefairvaluesofderivativesthatdonotqualifyforhedgeaccountingtreatmentcanhaveasignificantimpactonourresultsofoperations,butgenerallywillnotimpactourliquidityorcapitalresources.Settlementsofderivativeinstruments,regardlessofwhethertheyqualifyforhedgeaccounting,dohaveanimpactonourliquidityandresultsofoperations.Generally,ifactualmarketpricesarehigherthanthepriceofthederivativeinstruments,ournetearningsandcashflowfromoperationswillbelowerrelativetotheresultsthatwouldhaveoccurredabsenttheseinstruments.Theoppositeisalso
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true.Additionalinformationregardingtheeffectsthatchangesinmarketpriceswillhaveonourderivativefinancialinstruments,netearningsandcashflowfromoperationsisincludedinthe“QuantitativeandQualitativeDisclosuresaboutMarketRisk”sectionofthisreport.
BusinessCombinationsPolicy Description Wehavegrownsubstantiallyduringrecentyearsthroughacquisitionsofotheroilandnaturalgascompanies.Mostoftheseacquisitionshave
beenaccountedforusingthepurchasemethodofaccounting,andrecentaccountingpronouncementsrequirethatallfutureacquisitionswillbeaccountedforusingthepurchasemethod.
Underthepurchasemethod,theacquiringcompanyaddstoitsbalancesheettheestimatedfairvaluesoftheacquiredcompany’sassetsandliabilities.Anyexcessofthepurchasepriceoverthefairvaluesofthetangibleandintangiblenetassetsacquiredisrecordedasgoodwill.Goodwillisassessedforimpairmentatleastannually.
Judgments and Assumptions Therearevariousassumptionswemakeindeterminingthefairvaluesofanacquiredcompany’sassetsandliabilities.Themostsignificantassumptions,andtheonesrequiringthemostjudgment,involvetheestimatedfairvaluesoftheoilandgaspropertiesacquired.Todeterminethefairvaluesoftheseproperties,weprepareestimatesofoil,naturalgasandNGLreserves.Theseestimatesarebasedonworkperformedbyourengineersandthatofoutsideconsultants.Thejudgmentsassociatedwiththeseestimatedreservesaredescribedearlierinthissectioninconnectionwiththefullcostceilingcalculation.
However,therearefactorsinvolvedinestimatingthefairvaluesofacquiredoil,naturalgasandNGLpropertiesthatrequiremorejudgmentthanthatinvolvedinthefullcostceilingcalculation.Asstatedabove,thefullcostceilingcalculationappliesend-of-periodpriceandcostinformationtothereservestoarriveattheceilingamount.Bycontrast,thefairvalueofreservesacquiredinabusinesscombinationmustbebasedonourestimatesoffutureoil,naturalgasandNGLprices.Ourestimatesoffuturepricesarebasedonourownanalysisofpricingtrends.Theseestimatesarebasedoncurrentdataobtainedwithregardtoregionalandworldwidesupplyanddemanddynamicssuchaseconomicgrowthforecasts.Theyarealsobasedonindustrydataregardingnaturalgasstorageavailability,drillingrigactivity,changesindeliverycapacity,trendsinregionalpricingdifferentialsandotherfundamentalanalysis.Forecastsoffuturepricesfromindependentthirdpartiesarenotedwhenwemakeourpricingestimates.
Weestimatefuturepricestoapplytotheestimatedreservequantitiesacquired,andestimatefutureoperatinganddevelopmentcosts,toarriveatestimatesoffuturenetrevenues.Forestimatedprovedreserves,thefuturenetrevenuesarethendiscountedusingaratedeterminedappropriateatthetimeofthebusinesscombinationbaseduponourcostofcapital.
Wealsoapplythesesamegeneralprinciplestoestimatethefairvalueofunprovedpropertiesacquiredinabusinesscombination.Theseunprovedpropertiesgenerallyrepresentthevalueofprobableandpossiblereserves.Becauseoftheirverynature,probableandpossiblereserveestimatesaremoreimprecisethanthoseofprovedreserves.Tocompensatefortheinherentriskofestimatingandvaluingunprovedreserves,thediscountedfuturenetrevenuesofprobableandpossiblereservesarereducedbywhatweconsidertobeanappropriaterisk-weightingfactorineachparticularinstance.Itiscommonforthediscountedfuturenetrevenuesofprobableandpossiblereservestobereducedbyfactorsrangingfrom30%to80%toarriveatwhatweconsidertobetheappropriatefairvalues.
Generally,inourbusinesscombinations,thedeterminationofthefairvaluesofoilandgaspropertiesrequiresmuchmorejudgmentthanthefairvaluesofotherassetsandliabilities.Theacquiredcompaniescommonlyhavelong-termdebtthatweassumeintheacquisition,andthisdebtmustberecordedattheestimatedfairvalueasifwehadissuedsuchdebt.However,significantjudgmentonourbehalfisusuallynotrequiredinthesesituationsduetotheexistenceofcomparablemarketvaluesofdebtissuedbypeercompanies.
Exceptforthe2002Mitchellmerger,ourmergersandacquisitionshaveinvolvedotherentitieswhoseoperationswerepredominantlyintheareaofexploration,developmentandproductionactivitiesrelatedtooilandgasproperties.However,inadditiontoexploration,developmentandproductionactivities,Mitchell’sbusinessalsoincludedsubstantialmarketingandmidstreamactivities.Therefore,aportionoftheMitchellpurchasepricewasallocatedtothefairvalueofMitchell’smarketingandmidstreamfacilitiesandequipment.Thisconsistedprimarilyofnaturalgasprocessingplantsandnaturalgaspipelinesystems.
TheMitchellmidstreamassetsprimarilyservedgasproducingpropertiesthatwealsoacquiredfromMitchell.Therefore,certainoftheassumptionsregardingfutureoperationsofthegasproducingpropertieswerealsointegraltothevalueofthemidstreamassets.Forexample,futurequantitiesofnaturalgasestimatedtobeprocessedbynaturalgasprocessingplantswerebasedonthesameestimatesusedtovaluetheprovedandunprovedgasproducingproperties.FutureexpectedpricesformarketingandmidstreamproductsaleswerealsobasedonpricecasesconsistentwiththoseusedtovaluetheoilandgasproducingassetsacquiredfromMitchell.Basedonhistoricalcostsandknowntrendsandcommitments,wealsoestimatedfutureoperatingandcapitalcostsofthemarketingandmidstreamassetstoarriveatestimatedfuturecashflows.Thesecashflowswerediscountedatratesconsistentwiththoseusedtodiscountfuturenetcashflowsfromoilandgasproducingassetstoarriveatourestimatedfairvalueofthemarketingandmidstreamfacilitiesandequipment.
Inadditiontothevaluationmethodsdescribedabove,weperformotherquantitativeanalysestosupporttheindicatedvalueinanybusinesscombination.Theseanalysesincludeinformationrelatedtocomparablecompanies,comparabletransactionsandpremiumspaid.
Inacomparablecompaniesanalysis,wereviewthepublicstockmarkettradingmultiplesforselectedpubliclytradedindependentexplorationandproductioncompanieswithcomparablefinancialandoperatingcharacteristics.Suchcharacteristicsaremarketcapitalization,locationofprovedreservesandthecharacterizationofthosereservesthatwedeemtobesimilartothoseofthepartytotheproposedbusinesscombination.Wecomparethesecomparablecompanymultiplestotheproposedbusinesscombinationcompanymultiplesforreasonableness.
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Inacomparabletransactionsanalysis,wereviewcertainacquisitionmultiplesforselectedindependentexplorationandproductioncompanytransactionsandoilandgasassetpackagesannouncedrecently.Wecomparethesecomparabletransactionmultiplestotheproposedbusinesscombinationtransactionmultiplesforreasonableness.
Inapremiumspaidanalysis,weuseasampleofselectedindependentexplorationandproductioncompanytransactionsinadditiontoselectedtransactionsofallpubliclytradedcompaniesannouncedrecently,toreviewthepremiumspaidtothepriceofthetargetoneday,oneweekandonemonthpriortotheannouncementofthetransaction.Weusethisinformationtodeterminethemeanandmedianpremiumspaidandcomparethemtotheproposedbusinesscombinationpremiumforreasonableness.
Whiletheseestimatesoffairvalueforthevariousassetsacquiredandliabilitiesassumedhavenoeffectonourliquidityorcapitalresources,theycanhaveaneffectonthefutureresultsofoperations.Generally,thehigherthefairvalueassignedtoboththeoilandgaspropertiesandnon-oilandgasproperties,thelowerfuturenetearningswillbeasaresultofhigherfuturedepreciation,depletionandamortizationexpense.Also,ahigherfairvalueassignedtotheoilandgasproperties,basedonhigherfutureestimatesofoilandgasprices,willincreasethelikelihoodofafullcostceilingwritedownintheeventthatsubsequentoilandgaspricesdropbelowourpriceforecastthatwasusedtooriginallydeterminefairvalue.Afullcostceilingwritedownwouldhavenoeffectonourliquidityorcapitalresourcesinthatperiodbecauseitisanoncashcharge,butitwouldadverselyaffectresultsofoperations.Asdiscussedin“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations—CapitalResources,UsesandLiquidity,”incalculatingourdebt-to-capitalizationratiounderourcreditagreement,totalcapitalizationisadjustedtoaddbacknoncashfinancialwritedownssuchasfullcostceilingpropertyimpairmentsorgoodwillimpairments.
Ourestimatesofreservequantitiesareoneofthemanyestimatesthatareinvolvedindeterminingtheappropriatefairvalueoftheoilandgaspropertiesacquiredinabusinesscombination.Aspreviouslydisclosedinourdiscussionofthefullcostceilingcalculations,duringthepastfiveyears,ourannualrevisionstoourreserveestimateshaveaveragedapproximately1%.Asdiscussedintheprecedingparagraphs,therearenumerousestimatesinadditiontoreservequantityestimatesthatareinvolvedindeterminingthefairvalueofoilandgaspropertiesacquiredinabusinesscombination.Theinter-relationshipoftheseestimatesmakesitimpracticaltoprovideadditionalquantitativeanalysesoftheeffectsofchangesintheseestimates.
valuationofGoodwillPolicy Description Goodwillistestedforimpairmentatleastannually.Thisrequiresustoestimatethefairvaluesofourownassetsandliabilitiesinamanner
similartotheprocessdescribedaboveforabusinesscombination.Therefore,considerablejudgmentsimilartothatdescribedaboveinconnectionwithestimatingthefairvalueofanacquiredcompanyinabusinesscombinationisalsorequiredtoassessgoodwillforimpairment.
Judgments and Assumptions Generally,thehigherthefairvalueassignedtoboththeoilandgaspropertiesandnon-oilandgasproperties,thelowergoodwillwouldbe.Alowergoodwillvaluedecreasesthelikelihoodofanimpairmentcharge.However,unfavorablechangesinreservesorinourpriceforecastwouldincreasethelikelihoodofagoodwillimpairmentcharge.Agoodwillimpairmentchargewouldhavenoeffectonliquidityorcapitalresources.However,itwouldadverselyaffectourresultsofoperationsinthatperiod.
Duetotheinter-relationshipofthevariousestimatesinvolvedinassessinggoodwillforimpairment,itisimpracticaltoprovidequantitativeanalysesoftheeffectsofpotentialchangesintheseestimates,otherthantonotethehistoricalaveragechangesinourreserveestimatespreviouslysetforth.
reCentlYiSSuedaCCountinGStandardSnotYetadopted
InJune2006,theFinancialAccountingStandardsBoard(“FASB”)issuedFASBInterpretationNo.48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.InterpretationNo.48clarifiestheaccountingforuncertaintyinincometaxesrecognizedinanenterprise’sfinancialstatementsinaccordancewithFASBStatementNo.109,Accounting for Income Taxes.ThisInterpretationiseffectiveforfiscalyearsbeginningafterDecember15,2006,andwewilladoptitinthefirstquarterof2007.WedonotexpecttheadoptionofInterpretationNo.48tohaveamaterialimpactonourfinancialstatementsandrelateddisclosures.
InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.157,Fair Value Measurements.StatementNo.157providesacommondefinitionoffairvalue,establishesaframeworkformeasuringfairvalueandexpandsdisclosuresaboutfairvaluemeasurements.However,thisStatementdoesnotrequireanynewfairvaluemeasurements.StatementNo.157iseffectiveforfiscalyearsbeginningafterNovember15,2007.Wearecurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.157willhaveonourfinancialstatementsandrelateddisclosures.
InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).StatementNo.158requirestherecognitionoftheoverfundedorunderfundedstatusofadefinedbenefitpostretirementplaninthebalancesheet.WeadoptedthisrecognitionrequirementasofDecember31,2006.TheeffectsofthisadoptionaresummarizedinNote6oftheaccompanyingconsolidatedfinancialstatements.StatementNo.158alsorequiresthemeasurementofplanassetsandbenefitobligationsasofthedateoftheemployer’sfiscalyear-end.TheStatementprovidestwoalternativestotransitiontoafiscalyear-endmeasurementdate.ThismeasurementrequirementiseffectiveforfiscalyearsendingafterDecember15,2008.Wehavenotyetadoptedthismeasurementrequirement,butwedonotexpectsuchadoptiontohaveamaterialeffectonourresultsofoperations,financialcondition,liquidityorcompliancewithdebtcovenants.
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InFebruary2007,theFASBissuedStatementofFinancialAccountingStandardsNo.159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.StatementNo.159permitsentitiestochoosetomeasurecertainfinancialinstrumentsandotheritemsatfairvalue.Theobjectiveistoimprovefinancialreportingbyprovidingentitieswiththeopportunitytomitigatevolatilityinreportedearningscausedbymeasuringrelatedassetsandliabilitiesdifferentlywithouthavingtoapplycomplexhedgeaccountingprovisions.Unrealizedgainsandlossesonanyitemsforwhichweelectthefairvaluemeasurementoptionwouldbereportedinearnings.StatementNo.159iseffectiveforfiscalyearsbeginningafterNovember15,2007.However,earlyadoptionispermittedforfiscalyearsbeginningonorbeforeNovember15,2007,providedwealsoelecttoapplytheprovisionsofStatementNo.157,Fair Value Measurements,atthesametime.Wearecurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.159willhaveonourfinancialstatementsandrelateddisclosures.
2007eStimateS
Theforward-lookingstatementsprovidedinthisdiscussionarebasedonourexaminationofhistoricaloperatingtrends,theinformationwhichwasusedtopreparetheDecember31,2006reservereportsandotherdatainourpossessionoravailablefromthirdparties.Theseforward-lookingstatementswerepreparedassumingdemand,curtailment,producibilityandgeneralmarketconditionsforouroil,naturalgasandNGLsduring2007willbesubstantiallysimilartothoseof2006,unlessotherwisenoted.Pleasereferto“RiskFactorstoForward-LookingEstimates”onpage101foradiscussionofrelevantriskfactors.AmountsrelatedtoCanadianoperationshavebeenconvertedtoU.S.dollarsusingaprojectedaverage2007exchangerateof$0.89U.S.dollarto$1.00Canadiandollar.
OnNovember14,2006,weannouncedourintenttodivestourEgyptianoilandgasassetsandterminateouroperationsinEgypt.Weexpecttocompletethisassetsaleduringthefirsthalfof2007.SubsequentlyonJanuary23,2007,weannouncedourintenttodivestourWestAfricanoilandgasassetsandterminateouroperationsinWestAfrica.Weexpecttocompletethisassetsalebytheendofthethirdquarterin2007.AllEgyptianandWestAfricanrelatedrevenues,expensesandcapitalwillbereportedasdiscontinuedoperationsinour2007financialstatements.Accordingly,allforward-lookingestimatesinthefollowingdiscussionexcludeamountsrelatedtoouroperationsinEgyptandWestAfrica,unlessotherwisenoted.Theassetsheldforsalerepresentedlessthanfivepercentofour2006productionandDecember31,2006provedreserves.
oil,GasandnGlproductionSetforthinthefollowingparagraphsareindividualestimatesofoil,gasandNGLproductionfor2007.Weestimate,onacombinedbasis,thatour2007oil,gas,and
NGLproductionwilltotalapproximately219to221MMBoe.Ofthistotal,approximately92%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Thefollowingestimatesforoil,gasandNGLproductionarecalculatedatthemidpointoftheestimatedrangefortotalproduction.
Oil Production Oilproductionin2007isexpectedtototalapproximately55MMBbls.Ofthistotal,approximately99%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Theexpectedproductionbyareaisasfollows: mmBBlS
U.S. Onshore 10 U.S. Offshore 9 Canada 15 International 21
Oil Prices Wehavenotfixedthepricewewillreceiveonanyofour2007oilproduction.Our2007averagepricesforeachofourareasareexpectedtodifferfromtheNYMEXpriceassetforthinthefollowingtable.TheNYMEXpriceisthemonthlyaverageofsettledpricesoneachtradingdayforbenchmarkWestTexasIntermediatecrudeoildeliveredatCushing,Oklahoma. expeCtedranGeofoilpriCeS aSa%ofnYmexpriCe
U.S. Onshore 86% to 96% U.S. Offshore 90% to 100% Canada 60% to 70% International 83% to 93%
Gas Production Gasproductionin2007isexpectedtototalapproximately841Bcf.Ofthistotal,approximately88%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Theexpectedproductionbyareaisasfollows: BCf
U.S. Onshore 557 U.S. Offshore 75 Canada 207 International 2
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Gas Prices Our2007averagepricesforeachofourareasareexpectedtodifferfromtheNYMEXpriceassetforthinthefollowingtable.TheNYMEXpriceisdeterminedtobethefirst-of-monthSouthLouisianaHenryHubpriceindexaspublishedmonthlyin Inside FERC.
Basedoncontractscurrentlyinplace,wewillhaveapproximately116MMcfperdayofgasproductionin2007thatissubjecttoeitherfixed-pricecontracts,swaps,floorsorcollars.Theseamountsrepresentapproximately5%ofourestimatedgasproductionfor2007.Therefore,thesevariouspricingarrangementsarenotexpectedtohaveamaterialimpactontherangesofestimatedgaspricerealizationssetforthinthefollowingtable.
expeCtedranGeofGaSpriCeS aSa%ofnYmexpriCe
U.S. Onshore 80% to 90% U.S. Offshore 96% to 106% Canada 80% to 90% International 100% to 110%
NGL Production Weexpectour2007productionofNGLstototalapproximately25MMBbls.Ofthistotal,approximately95%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Theexpectedproductionbyareaisasfollows: mmBBlS
U.S. Onshore 20 U.S. Offshore 1 Canada 4
marketingandmidstreamrevenuesandexpensesMarketingandmidstreamrevenuesandexpensesarederivedprimarilyfromournaturalgasprocessingplantsandnaturalgastransportpipelines.Theserevenues
andexpensesvaryinresponsetoseveralfactors.Thefactorsinclude,butarenotlimitedto,changesinproductionfromwellsconnectedtothepipelinesandrelatedprocessingplants,changesintheabsoluteandrelativepricesofnaturalgasandNGLs,provisionsofthecontractagreementsandtheamountofrepairandworkoveractivityrequiredtomaintainanticipatedprocessinglevels.
Thesefactors,coupledwithuncertaintyoffuturenaturalgasandNGLprices,increasetheuncertaintyinherentinestimatingfuturemarketingandmidstreamrevenuesandexpenses.Giventheseuncertainties,weestimatethatmarketingandmidstreamrevenueswillbebetween$1.70billionand$2.10billion,andmarketingandmidstreamexpenseswillbebetween$1.31billionand$1.67billion.
productionandoperatingexpensesOurproductionandoperatingexpensesincludeleaseoperatingexpenses,transportationcostsandproductiontaxes.Theseexpensesvaryinresponsetoseveral
factors.Amongthemostsignificantofthesefactorsareadditionstoordeletionsfromthepropertybase,changesinthegeneralpricelevelofservicesandmaterialsthatareusedintheoperationoftheproperties,theamountofrepairandworkoveractivityrequiredandchangesinproductiontaxrates.Oil,naturalgasandNGLpricesalsohaveaneffectonleaseoperatingexpensesandimpacttheeconomicfeasibilityofplannedworkoverprojects.Giventheseuncertainties,weestimatethat2007leaseoperatingexpenses(includingtransportationcosts)willbebetween$1.70billionand$1.77billion.Additionally,weestimateourproductiontaxesfor2007tobebetween3.6%and4.1%ofconsolidatedoil,naturalgasandNGLrevenues.
depreciation,depletionandamortization(“dd&a”)
The2007oilandgaspropertyDD&Aratewilldependonvariousfactors.Mostnotableamongsuchfactorsaretheamountofprovedreservesthatwillbeaddedfromdrillingoracquisitioneffortsin2007comparedtothecostsincurredforsuchefforts,andtherevisionstoouryear-end2006reserveestimatesthat,basedonpriorexperience,arelikelytobemadeduring2007.
Giventheseuncertainties,weexpectouroilandgaspropertyrelatedDD&Aratewillbebetween$11.00perBoeand$11.50perBoe.BasedontheseDD&Aratesandtheproductionestimatessetforthearlier,oilandgaspropertyrelatedDD&Aexpensefor2007isexpectedtobebetween$2.42billionand$2.53billion.
Additionally,weexpectourdepreciationandamortizationexpenserelatedtonon-oilandgaspropertyfixedassetstototalbetween$210millionand$220million.
accretionofassetretirementobligationAccretionofassetretirementobligationin2007isexpectedtobebetween$45millionand$55million.
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Generalandadministrativeexpenses(“G&a”)OurG&Aincludesemployeecompensationandbenefitscostsandthecostsofmanydifferentgoodsandservicesusedinsupportofourbusiness.G&Avarieswith
thelevelofouroperatingactivitiesandtherelatedstaffingandprofessionalservicesrequirements.Inaddition,employeecompensationandbenefitscostsvaryduetovariousmarketfactorsthataffectthelevelandtypeofcompensationandbenefitsofferedtoemployees.Also,goodsandservicesaresubjecttogeneralpricelevelincreasesordecreases.Therefore,significantvariancesinanyofthesefactorsfromcurrentexpectationscouldcauseactualG&Atovarymateriallyfromtheestimate.
Giventheselimitations,G&Ain2007isexpectedtobebetween$460millionand$480million.Thisestimateincludesapproximately$60millionofnoncash,share-basedcompensation,netofrelatedcapitalizationinaccordancewiththefullcostmethodofaccountingforoilandgasproperties.
reductionofCarryingvalueofoilandGaspropertiesWefollowthefullcostmethodofaccountingforouroilandgaspropertiesdescribedin“Management’sDiscussionandAnalysisofFinancialConditionandResults
ofOperations—CriticalAccountingPoliciesandEstimates.”Reductionstothecarryingvalueofouroilandgaspropertiesarelargelydependentonthesuccessofdrillingresultsandoilandnaturalgaspricesattheendofourquarterlyreportingperiods.Duetotheuncertainnatureoffuturedrillingeffortsandoilandnaturalgasprices,wearenotabletopredictwhetherwewillincursuchreductionsin2007.
interestexpenseFutureinterestratesanddebtoutstandinghaveasignificanteffectonourinterestexpense.Wecanonlymarginallyinfluencethepriceswewillreceivein2007
fromsalesofoil,naturalgasandNGLsandtheresultingcashflow.Thesefactorsincreasethemarginoferrorinherentinestimatingfutureoutstandingdebtbalancesandrelatedinterestexpense.Otherfactorswhichaffectoutstandingdebtbalancesandrelatedinterestexpense,suchastheamountandtimingofcapitalexpendituresandproceedsfromthesaleofourassetsinEgyptandWestAfrica,aregenerallywithinourcontrol.
Basedontheinformationrelatedtointerestexpensesetforthbelow,weexpectour2007interestexpensetobebetween$400millionand$410million.Thisestimateassumesnomaterialchangesinprevailinginterestrates.Thisestimatealsoassumesnomaterialchangesinourexpectedlevelofindebtedness,exceptforanassumptionthatourcommercialpaperwillberepaidattheendofthesecondquarterof2007.
Theinterestexpensein2007relatedtoourfixed-ratedebt,includingnetaccretionofrelateddiscounts,willbeapproximately$410million.Thisfixed-ratedebtremovestheuncertaintyoffutureinterestratesfromsome,butnotall,ofourlong-termdebt.
Ourfloatingratedebtiscomprisedofvariable-ratecommercialpaperandonedebtinstrumentwhichhasbeenconvertedtofloatingratedebtthroughtheuseofaninterestrateswap.Ourfloatingratedebtissummarizedinthefollowingtable:
notional deBtinStrument amount floatinGrate
(INMILLIoNs)
Commercial paper $ 1,808 (1) Various (2)
4.375% senior notes due in Oct. 2007 $ 400 LIBOR plus 40 basis points
(1) Represents outstanding balance as of December 31, 2006.(2) The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. As of December 31, 2006, the average rate on the outstanding balance was 5.37%.
BasedonestimatesoffutureLIBORratesasofDecember31,2006,interestexpenseonfloatingratedebt,includingnetamortizationofpremiums,isexpectedtototalbetween$80millionand$90millionin2007.
Ourinterestexpensetotalsincludepaymentsoffacilityandagencyfees,amortizationofdebtissuancecostsandothermiscellaneousitemsnotrelatedtothedebtbalancesoutstanding.Weexpectbetween$5millionand$15millionofsuchitemstobeincludedinour2007interestexpense.Also,weexpecttocapitalizebetween$95millionand$105millionofinterestduring2007.
effectsofChangesinforeignCurrencyratesForeigncurrencygainsorlossesarenotexpectedtobematerialin2007.
otherincomeWeestimatethatourotherincomein2007willbebetween$65millionand$85million.Historically,wemaintainedacomprehensiveinsuranceprogramthatincludedcoverageforphysicaldamagetoouroffshorefacilitiescausedbyhurricanes.Our
historicalinsuranceprogramalsoincludedsubstantialbusinessinterruptioncoveragewhichweareutilizingtorecovercostsassociatedwiththesuspendedproductionrelatedtohurricanesthatstrucktheGulfofMexicointhethirdquarterof2005.
Basedoncurrentestimatesofphysicaldamageandtheanticipatedlengthoftimewewillhaveproductionsuspended,weexpectourpolicyrecoverieswillexceedrepaircostsanddeductibleamounts.Thisexpectationisbaseduponseveralvariables,includingthe$467millionreceivedinthethirdquarterof2006asafull
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settlementoftheamountduefromourprimaryinsurers.AsofDecember31,2006,$154millionoftheseproceedshadbeenutilizedasreimbursementofpastrepaircostsanddeductibleamounts.Theremainingproceedsof$313millionwillbeutilizedasreimbursementofouranticipatedfuturerepaircosts.Wehavenotyetreceivedanysettlementsrelatedtoclaimsfiledwithoursecondaryinsurers.
Shouldourtotalpolicyrecoveries,includingthepartialsettlementsalreadyreceivedfromourprimaryinsurers,exceedallrepaircostsanddeductibleamounts,suchexcesswillberecognizedasotherincomeinthestatementofoperationsintheperiodinwhichsuchdeterminationcanbemade.Basedonthemostrecentestimatesofourcostsforrepairs,webelievethatsomeamountwillultimatelyberecordedasotherincome.However,thetimingandamountthatwouldberecordedasotherincomeareuncertain.Therefore,the2007estimateforotherincomeabovedoesnotincludeanyamountrelatedtohurricaneproceeds.
incometaxesOurfinancialincometaxratein2007willvarymateriallydependingontheactualamountoffinancialpre-taxearnings.Thetaxratefor2007willbesignificantly
affectedbytheproportionalshareofconsolidatedpre-taxearningsgeneratedbyU.S.,CanadianandInternationaloperationsduetothedifferenttaxratesofeachcountry.Therearecertaintaxdeductionsandcreditsthatwillhaveafixedimpacton2007incometaxexpenseregardlessofthelevelofpre-taxearningsthatareproduced.
Giventheuncertaintyofpre-taxearnings,weexpectthatourconsolidatedfinancialincometaxratein2007willbebetween20%and40%.Thecurrentincometaxrateisexpectedtobebetween15%and25%.Thedeferredincometaxrateisexpectedtobebetween5%and15%.Significantchangesinestimatedcapitalexpenditures,productionlevelsofoil,naturalgasandNGLs,thepricesofsuchproducts,marketingandmidstreamrevenues,oranyofthevariousexpenseitemscouldmateriallyaltertheeffectoftheaforementionedtaxdeductionsandcreditson2007financialincometaxrates.
discontinuedoperationsAspreviouslydiscussed,weintendtodivestourEgyptianandWestAfricanoperationsin2007.WeexpecttocompletethesaleofEgyptduringthefirsthalfof2007
andthesaleofWestAfricaduringthethirdquarterof2007.Thefollowingtableshowstheestimatesfor2007oil,gasandNGLproductionaswellastheanticipatedproductionandoperatingexpensesassociatedwiththesediscontinuedoperationsfor2007.TheseestimatesassumethesalesofEgyptandWestAfricawilloccurattheendofthesecondquarterof2007.Pursuanttoaccountingrulesfordiscontinuedoperations,theEgyptianassetswillnotbesubjecttoDD&Aduring2007andtheWestAfricanassetswillonlybesubjecttoDD&Aforthefirstmonthof2007.
eGYpt weStafriCa
Oil production (MMBbls) 1 5Gas production (Bcf) — 3Total production (MMBoe) 1 6 Production and operating expenses (In millions) $ 11 $ 34Capital expenditures (In millions) $ 17 $ 120
Year2007potentialCapitalresources,usesandliquidityCapital Expenditures Thoughwehavecompletedseveralmajorpropertyacquisitionsinrecentyears,thesetransactionsareopportunitydriven.Thus,wedonot
“budget,”norcanwereasonablypredict,thetimingorsizeofsuchpossibleacquisitions.Ourcapitalexpendituresbudgetisbasedonanexpectedrangeoffutureoil,naturalgasandNGLpricesaswellastheexpectedcostsofthecapitaladditions.
Shouldactualpricesreceiveddiffermateriallyfromourpriceexpectationsforourfutureproduction,someprojectsmaybeacceleratedordeferredand,consequently,mayincreaseordecreasetotal2007capitalexpenditures.Inaddition,iftheactualmaterialorlaborcostsofthebudgeteditemsvarysignificantlyfromtheanticipatedamounts,actualcapitalexpenditurescouldvarymateriallyfromourestimates.
Giventhelimitationsdiscussedabove,thefollowingtableshowsexpecteddrilling,developmentandfacilitiesexpendituresbygeographicarea.Productioncapitalrelatedtoprovedreservesrelatestoreservesclassifiedasprovedasofyear-end2006.Otherproductioncapitalincludesdrillingthatdoesnotoffsetcurrentlyproductiveunitsandforwhichthereisnotacertaintyofcontinuedproductionfromaknownproductiveformation.Explorationcapitalincludesexploratorydrillingtofindandproduceoilorgasinpreviouslyuntestedfaultblocksornewreservoirs. u.S. u.S. onShore offShore Canada international total
(INMILLIoNs)
Production capital related to proved reserves $ 1,170- $ 1,270 $ 80- $ 90 $ 410- $ 450 $ 260- $ 280 $ 1,920- $ 2,090Other production capital $ 1,250- $ 1,340 $ 220- $ 230 $ 590- $ 640 $ 15- $ 20 $ 2,075- $ 2,230Exploration capital $ 350- $ 380 $ 290- $ 310 $ 160- $ 170 $ 75- $ 85 $ 875- $ 945 Total $ 2,770- $ 2,990 $ 590- $ 630 $ 1,160- $ 1,260 $ 350- $ 385 $ 4,870- $ 5,265
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Inadditiontotheaboveexpendituresfordrilling,developmentandfacilities,weexpecttospendbetween$330millionto$370milliononourmarketingandmidstreamassets,whichincludeouroilpipelines,gasprocessingplants,CO
2removalfacilitiesandgastransportpipelines.Wealsoexpecttocapitalizebetween$245
millionand$255millionofG&Aexpensesinaccordancewiththefullcostmethodofaccountingandtocapitalizebetween$95millionand$105millionofinterest.Wealsoexpecttopaybetween$40millionand$50millionforpluggingandabandonmentcharges,andtospendbetween$135millionand$145millionforothernon-oilandgaspropertyfixedassets.
Other Cash Uses Ourmanagementexpectsthepolicyofpayingaquarterlycommonstockdividendtocontinue.Withthecurrent$0.14persharequarterlydividendrateand444millionsharesofcommonstockoutstandingasofDecember31,2006,dividendsareexpectedtoapproximate$250million.Also,wehave$150millionof6.49%cumulativepreferredstockuponwhichwewillpay$10millionofdividendsin2007.
Capital Resources and Liquidity Ourestimated2007cashuses,includingourdrillinganddevelopmentactivities,retirementofdebtandrepurchaseofcommonstock,areexpectedtobefundedprimarilythroughacombinationofoperatingcashflowandproceedsfromthesaleofourassetsinEgyptandWestAfrica.Anyremainingcashusescouldbefundedbyincreasingourborrowingsunderourcommercialpaperprogramorwithborrowingsfromtheavailablecapacityunderourcreditfacility,whichwas$408millionatDecember31,2006.Theamountofoperatingcashflowtobegeneratedduring2007isuncertainduetothefactorsaffectingrevenuesandexpensesaspreviouslycited.However,weexpectourcombinedcapitalresourcestobemorethanadequatetofundouranticipatedcapitalexpendituresandothercashusesfor2007.
Ifsignificantotheracquisitionsorotherunplannedcapitalrequirementsariseduringtheyear,wecouldutilizeourexistingcreditfacilityand/orseektoestablishandutilizeothersourcesoffinancing.
quantitativeandqualitativediSCloSureSaBoutmarketriSk
Theprimaryobjectiveofthefollowinginformationistoprovideforward-lookingquantitativeandqualitativeinformationaboutourpotentialexposuretomarketrisks.Theterm“marketrisk”referstotheriskoflossarisingfromadversechangesinoil,gasandNGLprices,interestratesandforeigncurrencyexchangerates.Thedisclosuresarenotmeanttobepreciseindicatorsofexpectedfuturelosses,butratherindicatorsofreasonablypossiblelosses.Thisforward-lookinginformationprovidesindicatorsofhowweviewandmanageourongoingmarketriskexposures.Allofourmarketrisksensitiveinstrumentswereenteredintoforpurposesotherthanspeculativetrading.
CommoditypriceriskOurmajormarketriskexposureisinthepricingapplicabletoouroil,gasandNGLproduction.Realizedpricingisprimarilydrivenbytheprevailingworldwideprice
forcrudeoilandspotmarketpricesapplicabletoourU.S.andCanadiannaturalgasandNGLproduction.Pricingforoil,gasandNGLproductionhasbeenvolatileandunpredictableforseveralyears.
Currently,wearelargelyacceptingthevolatilityriskthatoil,naturalgasandNGLpricespresent.Noneofourfutureoilproductionissubjecttopriceswapsorcollars.Withregardtoourfuturenaturalgasproduction,basedoncontractscurrentlyinplace,wewillhaveapproximately116MMcfperdayofgasproductionin2007thatissubjecttoeitherfixed-pricecontracts,swaps,floorsorcollars.Thisamountrepresentsapproximately5%ofourestimated2007gasproduction(3%ofourtotalBoeproduction).Fortheyears2008through2011,wehavefixed-pricephysicaldeliverycontractscoveringCanadiannaturalgasproductionrangingfromsevenBcfto14Bcfperyear.Thesecontractsarenotexpectedtohaveamaterialeffectonourrealizedgaspricesfrom2007through2011.
interestrateriskAtDecember31,2006,wehaddebtoutstandingof$7.8billion.Ofthisamount,$5.6billion,or72%,bearsinterestatfixedratesaveraging7.3%.Additionally,we
had$1.8billionofoutstandingcommercialpaperbearinginterestatfloatingrateswhichaveraged5.37%atDecember31,2006.Theremainingdebtconsistsof$400million4.375%seniornotesdueinOctoberof2007.Throughtheuseofaninterestrateswap,thisfixed-ratedebthasbeenconvertedtofloating-ratedebtbearinginterestequaltoLIBORplus40basispoints.
Weuseasensitivityanalysistechniquetoevaluatethehypotheticaleffectthatchangesininterestratesmayhaveonthefairvalueofanyoutstandinginterestrateswapinstruments.AtDecember31,2006,a10%increaseintheunderlyinginterestrateswouldhavedecreasedthefairvalueofourinterestrateswapby$2million.
Theabovesensitivityanalysisforinterestrateriskexcludesaccountsreceivable,accountspayableandaccruedliabilitiesbecauseoftheshort-termmaturityofsuchinstruments.
foreignCurrencyriskOurnetassets,netearningsandcashflowsfromourCanadiansubsidiariesarebasedontheU.S.dollarequivalentofsuchamountsmeasuredintheCanadiandollar
functionalcurrency.AssetsandliabilitiesoftheCanadiansubsidiariesaretranslatedtoU.S.dollarsusingtheapplicableexchangerateasoftheendofareportingperiod.Revenues,expensesandcashflowaretranslatedusingtheaverageexchangerateduringthereportingperiod.A10%unfavorablechangeintheCanadian-to-U.S.dollarexchangeratewouldnotmateriallyimpactourDecember31,2006balancesheet.
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Report of independent Registered Public Accounting Firm
TheBoardofDirectorsandStockholdersDevonEnergyCorporation:
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofDevonEnergyCorporationandsubsidiariesasofDecember31,2006and2005,andtherelatedconsolidatedstatementsofoperations,comprehensiveincome,stockholders’equityandcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2006.TheseconsolidatedfinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.
WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.
Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofDevonEnergyCorporationandsubsidiariesasofDecember31,2006and2005,andtheresultsoftheiroperationsandtheircashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2006,inconformitywithU.S.generallyacceptedaccountingprinciples.
AsdescribedinNote1totheconsolidatedfinancialstatements,asofJanuary1,2006,theCompanyadoptedStatementsofFinancialAccountingStandardsNo.123(R),Share-Based Payment,andasofDecember31,2006theCompanyadoptedthebalancesheetrecognitionprovisionsofStatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theeffectivenessofDevonEnergyCorporation’sinternalcontroloverfinancialreportingasofDecember31,2006,basedoncriteriaestablishedinInternal Control – Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),andourreportdatedFebruary26,2007expressedanunqualifiedopiniononmanagement’sassessmentof,andtheeffectiveoperationof,internalcontroloverfinancialreporting.
OklahomaCity,OklahomaFebruary26,2007
58
Devon’smanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingforDevon,assuchtermisdefinedinRules13a-15(f)and15d-15(f)undertheSecuritiesExchangeActof1934.UnderthesupervisionandwiththeparticipationofDevon’smanagement,includingourprincipalexecutiveandprincipalfinancialofficers,DevonconductedanevaluationoftheeffectivenessofitsinternalcontroloverfinancialreportingbasedontheframeworkinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(the“COSOFramework”).BasedonthisevaluationundertheCOSOFrameworkwhichwascompletedonFebruary12,2007,managementconcludedthatitsinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2006.
Management’sassessmentoftheeffectivenessofDevon’sinternalcontroloverfinancialreportingasofDecember31,2006hasbeenauditedbyKPMGLLP,anindependentregisteredpublicaccountingfirmwhoauditedDevon’sconsolidatedfinancialstatementsasofandfortheyearendedDecember31,2006,asstatedintheirreportwhichisincludedherein.
Management’s Annual Report on internal Control Over Financial Reporting
59
Report of independent Registered Public Accounting Firm
TheBoardofDirectorsandStockholdersDevonEnergyCorporation:
Wehaveauditedmanagement’sassessment,includedintheaccompanyingManagement’sAnnualReportonInternalControlOverFinancialReportingthatDevonEnergyCorporationmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2006,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).DevonEnergyCorporation’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting.Ourresponsibilityistoexpressanopiniononmanagement’sassessmentandanopinionontheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.
WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.
Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.
Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.
Inouropinion,management’sassessmentthatDevonEnergyCorporationmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2006,isfairlystated,inallmaterialrespects,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).Also,inouropinion,DevonEnergyCorporationmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2006,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofDevonEnergyCorporationandsubsidiariesasofDecember31,2006and2005,andtherelatedconsolidatedstatementsofoperations,comprehensiveincome,stockholders’equityandcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2006,andourreportdatedFebruary26,2007expressedanunqualifiedopiniononthoseconsolidatedfinancialstatements.Ourreportreferstoachangeinthemethodofaccountingforshare-basedpaymentsandachangeinthebalancesheetrecognitionofdefinedbenefitpensionandotherpostretirementbenefitplans.
OklahomaCity,OklahomaFebruary26,2007
60
deCemBer31,(inmillionS,exCeptSharedata) 2006 2005
ASSEtS:Currentassets: Cashandcashequivalents $ 739 1,593 Short-terminvestments 574 680 Accountsreceivable 1,393 1,565 Deferredincometaxes 102 158 Currentassetsheldforsale 81 66 Othercurrentassets 323 144 Totalcurrentassets 3,212 4,206Propertyandequipment,atcost,basedonthefullcostmethodof accountingforoilandgasproperties($3,674and$2,704excluded fromamortizationin2006and2005,respectively) 41,889 33,824Lessaccumulateddepreciation,depletionandamortization 17,294 14,913 24,595 18,911InvestmentinChevronCorporationcommonstock,atfairvalue 1,043 805Goodwill 5,706 5,705Assetsheldforsale 185 217Otherassets 322 429 Totalassets $ 35,063 30,273
liAbilitiES AnD StOCkhOlDERS’ EquitY: Currentliabilities: Accountspayable–trade $ 1,190 928 Revenuesandroyaltiesduetoothers 529 666 Incometaxespayable 197 293 Short-termdebt 2,205 662 Accruedinterestpayable 114 127 Fairvalueofderivativefinancialinstruments 6 18 Currentportionofassetretirementobligation 61 50 Currentliabilitiesassociatedwithassetsheldforsale 5 19 Accruedexpensesandothercurrentliabilities 338 171 Totalcurrentliabilities 4,645 2,934DebenturesexchangeableintosharesofChevronCorporationcommonstock 727 709Otherlong-termdebt 4,841 5,248Fairvalueofderivativefinancialinstruments 302 125Assetretirementobligation 833 610Liabilitiesassociatedwithassetsheldforsale 25 40Otherliabilities 598 371Deferredincometaxes 5,650 5,374Stockholders’equity: Preferredstockof$1.00parvalue.Authorized4,500,000shares; issued1,500,000($150millionaggregateliquidationvalue) 1 1 Commonstockof$0.10parvalue.Authorized800,000,000shares; issued444,040,000in2006and443,488,000in2005 44 44 Additionalpaid-incapital 6,840 6,928 Retainedearnings 9,114 6,477 Accumulatedothercomprehensiveincome 1,444 1,414 Treasurystock,atcost:11,000sharesin2006and37,000sharesin2005 (1) (2) Totalstockholders’equity 17,442 14,862Commitmentsandcontingencies(Note8) Totalliabilitiesandstockholders’equity $ 35,063 30,273 seeaccompanyingnotestoconsolidatedfinancialstatements.
Consolidated balance SheetsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes
61
Consolidated Statements of OperationsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes
YearendeddeCemBer31,(inmillionS,exCeptperShareamountS) 2006 2005 2004
REvEnuES: Oilsales $ 3,205 2,359 2,099 Gassales 4,932 5,784 4,732 NGLsales 749 687 554 Marketingandmidstreamrevenues 1,692 1,792 1,701 Totalrevenues 10,578 10,622 9,086
ExPEnSES AnD OthER inCOME, nEt: Leaseoperatingexpenses 1,488 1,324 1,259 Productiontaxes 341 335 255 Marketingandmidstreamoperatingcostsandexpenses 1,244 1,342 1,339 Depreciation,depletionandamortizationofoilandgasproperties 2,266 1,981 2,077 Depreciationandamortizationofnon-oilandgasproperties 176 160 148 Accretionofassetretirementobligation 49 43 44 Generalandadministrativeexpenses 397 291 277 Interestexpense 421 533 475 Changeinfairvalueofderivativefinancialinstruments 178 94 62 Reductionofcarryingvalueofoilandgasproperties 121 212 — Otherincome,net (115) (198) (126) Totalexpensesandotherincome,net 6,566 6,117 5,810Earningsfromcontinuingoperationsbeforeincometaxexpense 4,012 4,505 3,276
inCOME tAx ExPEnSE: Current 819 1,218 725 Deferred 370 388 370 Totalincometaxexpense 1,189 1,606 1,095Earningsfromcontinuingoperations 2,823 2,899 2,181
DiSCOntinuED OPERAtiOnS: Earningsfromdiscontinuedoperationsbeforeincometaxes 22 46 17 Incometax(benefit)expense (1) 15 12 Earningsfromdiscontinuedoperations 23 31 5Netearnings 2,846 2,930 2,186Preferredstockdividends 10 10 10Netearningsapplicabletocommonstockholders $ 2,836 2,920 2,176
bASiC nEt EARningS PER ShARE: Earningsfromcontinuingoperations $ 6.37 6.31 4.50 Earningsfromdiscontinuedoperations 0.05 0.07 0.01 Netearnings $ 6.42 6.38 4.51
DilutED nEt EARningS PER ShARE: Earningsfromcontinuingoperations $ 6.29 6.19 4.37 Earningsfromdiscontinuedoperations 0.05 0.07 0.01 Netearnings $ 6.34 6.26 4.38
WEightED AvERAgE COMMOn ShARES OutStAnDing: Basic 442 458 482 Diluted 448 470 499
seeaccompanyingnotestoconsolidatedfinancialstatements.
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Consolidated Statements of Comprehensive incomeDevoNeNerGyCorporAtIoNANDsuBsIDIArIes
YearendeddeCemBer31,(inmillionS) 2006 2005 2004
Netearnings $ 2,846 2,930 2,186
FOREign CuRREnCY tRAnSlAtiOn: Changeincumulativetranslationadjustment (25) 181 426 Incometaxes 28 (19) (38) Total 3 162 388
DERivAtivE FinAnCiAl inStRuMEntS: Unrealizedchangeinfairvalue — (255) (848) Reclassificationadjustmentforrealized(gains)lossesincludedinnetearnings (2) 685 635 Incometaxes — (141) 62 Total (2) 289 (151)
PEnSiOn AnD POStREtiREMEnt bEnEFit PlAnS: Changeinadditionalminimumpensionliability 30 (8) 61 Incometaxes (13) 3 (22) Total 17 (5) 39
invEStMEnt in ChEvROn CORPORAtiOn COMMOn StOCk: Unrealizedholdinggain 238 60 132 Incometaxes (86) (22) (47) Total 152 38 85Othercomprehensiveincome,netoftax 170 484 361Comprehensiveincome $ 3,016 3,414 2,547
seeaccompanyingnotestoconsolidatedfinancialstatements.
63
Consolidated Statements of Stockholders’ Equity DevoNeNerGyCorporAtIoNANDsuBsIDIArIes
aCCumulated additional other total preferredCommonStoCk paid-in retained ComprehenSive treaSurY StoCkholderS’(inmillionS) StoCk ShareS amount Capital earninGS inCome StoCk equitY
bAlAnCE AS OF DECEMbER 31, 2003 $ 1 472 $ 47 9,011 1,614 569 (186) 11,056Netearnings — — — — 2,186 — — 2,186Othercomprehensiveincome — — — — — 361 — 361Stockoptionexercises — 13 1 267 — — (21) 247Restrictedstockgrants,netofcancellations — 2 — — — — — —Commonstockrepurchased — (5) — — — — (190) (190)Commonstockretired — — — (341) — — 341 —Conversionofsubsidiarypreferredstock — 2 — — — — 56 56Commonstockdividends — — — — (97) — — (97)Preferredstockdividends — — — — (10) — — (10)Share-basedcompensation — — — 11 — — — 11Excesstaxbenefitsonshare-basedcompensation — — — 54 — — — 54
bAlAnCE AS OF DECEMbER 31, 2004 1 484 48 9,002 3,693 930 — 13,674Netearnings — — — — 2,930 — — 2,930Othercomprehensiveincome — — — — — 484 — 484Stockoptionexercises — 5 — 124 — — — 124Restrictedstockgrants,netofcancellations — 1 — — — — — —Commonstockrepurchased — (47) — — — — (2,275) (2,275)Commonstockretired — — (4) (2,269) — — 2,273 —Commonstockdividends — — — — (136) — — (136)Preferredstockdividends — — — — (10) — — (10)Share-basedcompensation — — — 27 — — — 27Excesstaxbenefitsonshare-basedcompensation — — — 44 — — — 44
bAlAnCE AS OF DECEMbER 31, 2005 1 443 44 6,928 6,477 1,414 (2) 14,862Netearnings — — — — 2,846 — — 2,846Othercomprehensiveincome — — — — — 170 — 170AdoptionofFASBStatementNo.158(seeNote6) — — — — — (140) — (140)Stockoptionexercises — 3 — 73 — — — 73Restrictedstockgrants,netofcancellations — 2 — (3) — — — (3)Commonstockrepurchased — (4) — — — — (277) (277)Commonstockretired — — — (278) — — 278 —Commonstockdividends — — — — (199) — — (199)Preferredstockdividends — — — — (10) — — (10)Share-basedcompensation — — — 84 — — — 84Excesstaxbenefitsonshare-basedcompensation — — — 36 — — — 36
bAlAnCE AS OF DECEMbER 31, 2006 $ 1 444 $ 44 6,840 9,114 1,444 (1) 17,442
seeaccompanyingnotestoconsolidatedfinancialstatements.
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Consolidated Statements of Cash FlowsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes
YearendeddeCemBer31,(inmillionS) 2006 2005 2004
CASh FlOWS FROM OPERAting ACtivitiES: Netearnings $ 2,846 2,930 2,186 Lessearningsfromdiscontinuedoperations,netoftax (23) (31) (5) Adjustmentstoreconcilenetearningsfromcontinuingoperations tonetcashprovidedbyoperatingactivities: Depreciation,depletionandamortization 2,442 2,141 2,225 Deferredincometaxexpense 370 388 370 Netgainonsalesofnon-oilandgaspropertyandequipment (5) (150) (34) Reductionofcarryingvalueofoilandgasproperties 121 212 — Othernoncashcharges 270 128 110 Changesinassetsandliabilities: (Increase)decreasein: Accountsreceivable 212 (279) (318) Othercurrentassets (37) (17) (18) Long-termotherassets (66) 48 (93) Increase(decrease)in: Accountspayable (183) 255 189 Incometaxespayable (231) 69 208 Debt,includingcurrentmaturities — (67) 16 Othercurrentliabilities 78 (34) (28) Long-termotherliabilities 142 (79) (19) Cashprovidedbyoperatingactivities–continuingoperations 5,936 5,514 4,789 Cashprovidedbyoperatingactivities–discontinuedoperations 57 98 27 Netcashprovidedbyoperatingactivities 5,993 5,612 4,816CASh FlOWS FROM invESting ACtivitiES: Proceedsfromsalesofpropertyandequipment 40 2,151 95 Capitalexpenditures (7,551) (4,026) (3,058) Purchasesofshort-terminvestments (2,395) (4,020) (3,215) Salesofshort-terminvestments 2,501 4,307 2,589 Cashusedininvestingactivities–continuingoperations (7,405) (1,588) (3,589) Cashusedininvestingactivities–discontinuedoperations (44) (64) (45) Netcashusedininvestingactivities (7,449) (1,652) (3,634)CASh FlOWS FROM FinAnCing ACtivitiES: Netcommercialpaperborrowings,netofissuancecosts 1,808 — — Debtrepayments,includingcurrentmaturities (862) (1,258) (973) Proceedsfromstockoptionexercises 73 124 268 Repurchasesofcommonstock (253) (2,263) (189) Excesstaxbenefitsrelatedtoshare-basedcompensation 36 — — Dividendspaidoncommonstock (199) (136) (97) Dividendspaidonpreferredstock (10) (10) (10) Netcashprovidedby(usedin)financingactivities 593 (3,543) (1,001)Effectofexchangeratechangesoncash 13 37 39Net(decrease)increaseincashandcashequivalents (850) 454 220Cashandcashequivalentsatbeginningofyear(includingcash relatedtoassetsheldforsale) 1,606 1,152 932Cashandcashequivalentsatendofyear(includingcashrelated toassetsheldforsale) $ 756 1,606 1,152
SuPPlEMEntARY CASh FlOW DAtA:
Interestpaid $ 464 663 474Incometaxespaid $ 960 1,092 477
seeaccompanyingnotestoconsolidatedfinancialstatements.
65
notes to Consolidated Financial StatementsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes
1.SummarYofSiGnifiCantaCCountinGpoliCieS
AccountingpoliciesusedbyDevonEnergyCorporationandsubsidiaries(“Devon”)reflectindustrypracticesandconformtoaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Themoresignificantofsuchpoliciesarebrieflydiscussedbelow.
natureofBusinessandprinciplesofConsolidationDevonisengagedprimarilyinoilandgasexploration,developmentandproduction,andtheacquisitionofproperties.SuchactivitiesintheUnitedStatesare
concentratedinthefollowinggeographicareas:
•TheMid-ContinentareaofthecentralandsouthernUnitedStates,principallyinnorthandeastTexasandOklahoma;•ThePermianBasinwithinTexasandNewMexico;•TheRockyMountainsareaoftheUnitedStatesstretchingfromtheCanadianborderintonorthernNewMexico;•TheoffshoreareasoftheGulfofMexico;and•TheonshoreareasoftheGulfCoast,principallyinsouthTexasandsouthLouisiana.
Devon’sCanadianactivitiesarelocatedprimarilyintheWesternCanadianSedimentaryBasin.Devon’sinternationalactivities—outsideofNorthAmerica—arelocatedprimarilyinAzerbaijan,Brazil,ChinaandvariouscountriesinWestAfrica.OnJanuary23,2007,DevonannounceditsplanstodivestitsWestAfricanoperations.SeeNote13.
Devonalsohasmarketingandmidstreamoperationswhichareresponsibleformarketingnaturalgas,crudeoilandNGLs,andconstructingandoperatingpipelines,storageandtreatingfacilitiesandgasprocessingplants.TheseservicesareperformedforDevonaswellasforunrelatedthirdparties.
TheaccountsofDevon’scontrolledsubsidiariesareincludedintheaccompanyingconsolidatedfinancialstatements.Allsignificantintercompanyaccountsandtransactionshavebeeneliminatedinconsolidation.
useofestimatesinthepreparationoffinancialStatementsThepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomake
estimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualamountscoulddifferfromtheseestimates,andchangesintheseestimatesarerecordedwhenknown.Significantitemssubjecttosuchestimatesandassumptionsincludeestimatesofprovedreservesandrelatedpresentvalueestimatesoffuturenetrevenue,thecarryingvalueofoilandgasproperties,goodwillimpairmentassessment,assetretirementobligations,incometaxes,valuationofderivativeinstruments,obligationsrelatedtoemployeebenefitsandlegalandenvironmentalrisksandexposures.
propertyandequipmentDevonfollowsthefullcostmethodofaccountingforitsoilandgasproperties.Accordingly,allcostsincidentaltotheacquisition,explorationanddevelopmentof
oilandgasproperties,includingcostsofundevelopedleasehold,dryholesandleaseholdequipment,arecapitalized.Internalcostsincurredthataredirectlyidentifiedwithacquisition,explorationanddevelopmentactivitiesundertakenbyDevonforitsownaccount,andwhicharenotrelatedtoproduction,generalcorporateoverheadorsimilaractivities,arealsocapitalized.Interestcostsincurredandattributabletounprovedoilandgaspropertiesundercurrentevaluationandmajordevelopmentprojectsofoilandgaspropertiesarealsocapitalized.Allcostsrelatedtoproductionactivities,includingworkovercostsincurredsolelytomaintainorincreaselevelsofproductionfromanexistingcompletioninterval,arechargedtoexpenseasincurred.
Underthefullcostmethodofaccounting,thenetbookvalueofoilandgasproperties,lessrelateddeferredincometaxes,maynotexceedacalculated“ceiling.”Theceilinglimitationistheestimatedafter-taxfuturenetrevenues,discountedat10%perannum,fromprovedoil,naturalgasandNGLreservesplusthecostofpropertiesnotsubjecttoamortization.Estimatedfuturenetrevenuesexcludefuturecashoutflowsassociatedwithsettlingassetretirementobligationsincludedinthenetbookvalueofoilandgasproperties.Suchlimitationsareimposedseparatelyonacountry-by-countrybasisandaretestedquarterly.Incalculatingfuturenetrevenues,pricesandcostsusedarethoseasoftheendoftheappropriatequarterlyperiod.Thesepricesarenotchangedexceptwheredifferentpricesarefixedanddeterminablefromapplicablecontractsfortheremainingtermofthosecontracts,includingdesignatedcashflowhedgesinplace.DevonhadnosuchhedgesoutstandingatDecember31,2006orDecember31,2005.
Anyexcessofthenetbookvalue,lessrelateddeferredtaxes,overtheceilingiswrittenoffasanexpense.Anexpenserecordedinoneperiodmaynotbereversedinasubsequentperiodeventhoughhigheroilandgaspricesmayhaveincreasedtheceilingapplicabletothesubsequentperiod.
Capitalizedcostsaredepletedbyanequivalentunit-of-productionmethod,convertinggastooilattheratioofsixthousandcubicfeetofnaturalgastoonebarrelofoil.Depletioniscalculatedusingthecapitalizedcosts,includingestimatedassetretirementcosts,plustheestimatedfutureexpenditures(basedoncurrentcosts)tobeincurredindevelopingprovedreserves,netofestimatedsalvagevalues.
Unprovedpropertiesareexcludedfromamortizedcapitalizedcostsuntilitisdeterminedwhetherornotprovedreservescanbeassignedtosuchproperties.Devonassessesitsunprovedpropertiesforimpairmentquarterly.Significantunprovedpropertiesareassessedindividually.Costsofinsignificantunprovedpropertiesaretransferredtoamortizablecostsoveraverageholdingperiodsrangingfromthreeyearsforonshorepropertiestosevenyearsforoffshoreproperties.
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notes
Nogainorlossisrecognizedupondisposalofoilandgaspropertiesunlesssuchdisposalsignificantlyalterstherelationshipbetweencapitalizedcostsandprovedreservesinaparticularcountry.
Depreciationofmidstreampipelinesareprovidedonaunits-of-productionbasis.Depreciationandamortizationofotherpropertyandequipment,includingcorporateandothermidstreamassetsandleaseholdimprovements,areprovidedusingthestraight-linemethodbasedonestimatedusefullivesrangingfromthreeto39years.
Devonrecognizesliabilitiesforretirementobligationsassociatedwithtangiblelong-livedassets,suchasproducingwellsites,offshoreproductionplatforms,andnaturalgasprocessingplantswhenthereisalegalobligationassociatedwiththeretirementofsuchassetsandtheamountcanbereasonablyestimated.Theinitialmeasurementofanassetretirementobligationisrecordedasaliabilityatitsfairvalue,withanoffsettingassetretirementcostrecordedasanincreasetotheassociatedpropertyandequipmentontheconsolidatedbalancesheet.Ifthefairvalueofarecordedassetretirementobligationchanges,arevisionisrecordedtoboththeassetretirementobligationandtheassetretirementcost.Theassetretirementcostisdepreciatedusingasystematicandrationalmethodsimilartothatusedfortheassociatedpropertyandequipment.
Short-terminvestmentsandothermarketableSecuritiesDevonreportsitsshort-terminvestmentsandothermarketablesecuritiesatfairvalue,exceptfordebtsecuritiesinwhichmanagementhastheabilityandintent
toholduntilmaturity.AtDecember31,2006and2005,Devon’sshort-terminvestmentsconsistedof$574millionand$680million,respectively,ofauctionratesecuritiesclassifiedasavailableforsale.AlthoughDevon’sauctionratesecuritieshavecontractualmaturitiesofmorethan10years,theunderlyinginterestratesonsuchsecuritiesresetatintervalsrangingfromsevento90days.Therefore,theseauctionratesecuritiesarepricedandsubsequentlytradeasshort-terminvestmentsbecauseoftheinterestrateresetfeature.Asaresult,Devonhasclassifieditsauctionratesecuritiesasshort-terminvestmentsintheaccompanyingconsolidatedbalancesheet.
Devon’sonlyothersignificantinvestmentsecurityisitsinvestmentinapproximately14.2millionsharesofChevronCorporationcommonstockwhichisreportedatfairvalue.Exceptforunrealizedlossesthataredeterminedtobe“otherthantemporary”,thetaxeffectedunrealizedgainorlossontheinvestmentinChevronCorporationcommonstockisrecognizedinothercomprehensiveincomeandreportedasaseparatecomponentofstockholders’equity.
GoodwillGoodwillrepresentstheexcessofthepurchasepriceofbusinesscombinationsoverthefairvalueofthenetassetsacquiredandistestedforimpairmentatleast
annually.Theimpairmenttestrequiresallocatinggoodwillandallotherassetsandliabilitiestoassignedreportingunits.Thefairvalueofeachreportingunitisestimatedandcomparedtothenetbookvalueofthereportingunit.Iftheestimatedfairvalueofthereportingunitislessthanthenetbookvalue,includinggoodwill,thenthegoodwilliswrittendowntotheimpliedfairvalueofthegoodwillthroughachargetoexpense.BecausequotedmarketpricesarenotavailableforDevon’sreportingunits,thefairvaluesofthereportingunitsareestimatedbaseduponseveralvaluationanalyses,includingcomparablecompanies,comparabletransactionsandpremiumspaid.Devonperformedannualimpairmenttestsofgoodwillinthefourthquartersof2006,2005and2004.Basedontheseassessments,noimpairmentofgoodwillwasrequired.
ThetablebelowprovidesasummaryofDevon’sgoodwill,byassignedreportingunit,asofDecember31,2006and2005: deCemBer31, 2006 2005
(INMILLIoNs)
United States $ 3,053 3,056 Canada 2,585 2,581 International 68 68 Total $ 5,706 5,705
revenuerecognitionandGasBalancingOil,gasandNGLrevenuesarerecognizedwhenproductionissoldtoapurchaseratafixedordeterminableprice,deliveryhasoccurred,titlehastransferredand
collectibilityoftherevenueisprobable.Deliveryoccursandtitleistransferredwhenproductionhasbeendeliveredtoapipelineortruckoratankerliftinghasoccurred.Cashreceivedrelatingtofutureproductionisdeferredandrecognizedwhenallrevenuerecognitioncriteriaaremet.Taxesassessedbygovernmentalauthoritiesonoil,gasandNGLrevenuesarepresentedseparatelyfromsuchrevenuesasproductiontaxesinthestatementofoperations.
Devonfollowsthesalesmethodofaccountingforgasproductionimbalances.ThevolumesofgassoldmaydifferfromthevolumestowhichDevonisentitledbasedonitsinterestsintheproperties.Thesedifferencescreateimbalancesthatarerecognizedasaliabilityonlywhentheestimatedremainingreserveswillnotbesufficienttoenabletheunderproducedownertorecoupitsentitledsharethroughproduction.Ifanimbalanceexistsatthetimethewells’reservesaredepleted,settlementsaremadeamongthejointinterestownersunderavarietyofarrangements.Theliabilityispricedbasedoncurrentmarketprices.NoreceivablesarerecordedforthosewellswhereDevonhastakenlessthanitsshareofproductionunlessallrevenuerecognitioncriteriaaremet.
Marketingandmidstreamrevenuesarerecordedatthetimeproductsaresoldorservicesareprovidedtothirdpartiesatafixedordeterminableprice,deliveryorperformancehasoccurred,titlehastransferredandcollectibilityoftherevenueisprobable.RevenuesandexpensesattributabletoDevon’sgasandNGLpurchaseandprocessingcontractsarereportedonagrossbasissinceDevontakestitletotheproductsandhasrisksandrewardsofownership.ThegaspurchasedunderthesecontractsisprocessedinDevon-ownedplants.
67
notes
majorpurchasersDuring2006,revenuesreceivedfromExxonMobilanditsaffiliateswere$1.1billion,or10%ofDevon’sconsolidatedrevenues.Nopurchaseraccountedforover10%
ofDevon’srevenuesin2005or2004.
derivativeinstrumentsThemajorityofDevon’sderivativeinstrumentsconsistofcommodityfinancialinstrumentsusedtomanageDevon’scashflowexposuretooilandgasprice
volatility.Devonhasalsoenteredintointerestrateswapstomanageitsexposuretointerestratevolatility.Theinterestrateswapsmitigateeitherthecashfloweffectsofinterestratefluctuationsoninterestexpenseforvariable-ratedebtinstruments,orthefairvalueeffectsofinterestratefluctuationsonfixed-ratedebt.DevonalsohasanembeddedoptionderivativerelatedtothefairvalueofitsdebenturesexchangeableintosharesofChevronCorporationcommonstock.
Allderivativesarerecognizedattheircurrentfairvalueasfairvalueofderivativefinancialinstrumentsonthebalancesheet.Changesinthefairvalueofderivativefinancialinstrumentsarerecordedinthestatementofoperationsunlessspecifichedgeaccountingcriteriaaremet.Ifsuchcriteriaaremetforcashflowhedges,theeffectiveportionofthechangeinthefairvalueisrecordeddirectlytoaccumulatedothercomprehensiveincome,acomponentofstockholders’equity,untilthehedgedtransactionoccurs.Theineffectiveportionofthechangeinfairvalueisrecordedinthestatementofoperations.Ifsuchcriteriaaremetforfairvaluehedges,thechangeinthefairvalueisrecordedinthestatementofoperationswithanoffsettingamountrecordedforthechangeinfairvalueofthehedgeditem.
AderivativeinstrumentqualifiesforhedgeaccountingtreatmentifDevondesignatestheinstrumentassuchonthedatethederivativecontractisenteredintoorthedateofanacquisitionorbusinesscombinationwhichincludesderivativecontracts.Additionally,Devonmustdocumenttherelationshipbetweenthehedginginstrumentandhedgeditem,aswellastherisk-managementobjectiveandstrategyforundertakingtheinstrument.Devonmustalsoassess,bothattheinstrument’sinceptionandonanongoingbasis,whetherthederivativeishighlyeffectiveinoffsettingthechangeincashflowofthehedgeditem.
During2006,Devonenteredintoandacquiredcertaincommodityderivativeinstruments.Forsuchinstruments,Devonchosenottomeetthenecessarycriteriatoqualifythesederivativeinstrumentsforhedgeaccountingtreatment.Therefore,Devonrecordeda$37milliongainingassalesinthestatementofoperationsforthechangeinfairvaluerelatedtotheseinstruments.
Thefollowingtablepresentsthecomponentsofthe2006,2005and2004changeinfairvalueofderivativefinancialinstrumentspresentedintheaccompanyingstatementofoperations.Significantitemsarediscussedinmoredetailfollowingthetable.
2006 2005 2004
(INMILLIoNs)
Option embedded in exchangeable debentures $ 181 54 58Non-qualifying commodity hedges — 39 —Ineffectiveness of commodity hedges — 5 5Interest rate swaps (3) (4) (1) Total change in fair value of derivative financial instruments $ 178 94 62
ThechangeinthefairvalueoftheembeddedoptionrelatestothedebenturesexchangeableintosharesofChevronCorporationcommonstock.TheseexpenseswerecausedprimarilybyincreasesinthepriceofChevronCorporation’scommonstock.
During2005and2004,Devonhadanumberofcommodityderivativeinstrumentsthatqualifiedforhedgeaccountingtreatmentasdescribedabove.During2005,certainofthesederivativesceasedtoqualifyforhedgeaccountingtreatment.Inthethirdquarterof2005,certainoilderivativesceasedtoqualifyforhedgeaccountingprimarilyasaresultofdeferredproductioncausedbyhurricanesintheGulfofMexico.Becausethesecontractsnolongerqualifiedforhedgeaccounting,Devonrecognized$39millioninlossesaschangeinfairvalueofderivativefinancialinstrumentsintheaccompanying2005statementofoperations.
Inadditiontothechangesinfairvalueofnon-qualifyingcommodityhedgespresentedinthetableabove,Devonalsorecognizedin2005a$55millionlossrelatedtocertainoilhedgesthatnolongerqualifiedforhedgeaccountingduetotheeffectofthe2005propertydivestitureprogram.Thesecommodityinstrumentsrelatedto5,000barrelsperdayofU.S.oilproductionand3,000barrelsperdayofCanadianoilproductionfrompropertiesthatweresoldaspartofDevon’sdivestitureprogram.Thislossispresentedinotherincomeintheaccompanying2005statementofoperations.During2004,noderivativesceasedtoqualifyforhedgeaccounting.
InadditiontothechangesinfairvalueofDevon’sinterestrateswapspresentedinthetableabove,settlementsontheseinterestrateswapsincreasedinterestexpenseby$15millionand$12millionin2006and2005,respectively,anddecreasedinterestexpense$18millionin2004.
ThefollowingtablepresentsthebalancesofDevon’saccumulatednetgain(loss)oncashflowhedgesincludedinaccumulatedothercomprehensiveincome.
(inmillionS)
December 31, 2003 $ (135) December 31, 2004 $ (286) December 31, 2005 $ 3 December 31, 2006 $ 1
68
notes
Byusingderivativeinstrumentstohedgeexposurestochangesincommoditypricesandinterestrates,Devonexposesitselftocreditriskandmarketrisk.Creditriskisthefailureofthecounterpartytoperformunderthetermsofthederivativecontract.Tomitigatethisrisk,thehedginginstrumentsareplacedwithcounterpartiesthatDevonbelievesareminimalcreditrisks.ItisDevon’spolicytoenterintoderivativecontractsonlywithinvestmentgraderatedcounterpartiesdeemedbymanagementtobecompetentandcompetitivemarketmakers.
Marketriskisthechangeinthevalueofaderivativeinstrumentthatresultsfromachangeincommodityprices,interestratesorotherrelevantunderlyings.Themarketriskassociatedwithcommoditypriceandinterestratecontractsismanagedbyestablishingandmonitoringparametersthatlimitthetypesanddegreeofmarketriskthatmaybeundertaken.TheoilandgasreferencepricesuponwhichthecommodityhedginginstrumentsarebasedreflectvariousmarketindicesthathaveahighdegreeofhistoricalcorrelationwithactualpricesreceivedbyDevon.Devondoesnotholdorissuederivativeinstrumentsforspeculativetradingpurposes.
StockoptionsEffectiveJanuary1,2006,DevonadoptedStatementofFinancialAccountingStandardNo.123(R),Share-Based Payment,(“SFASNo.123(R)”),usingthemodified
prospectivetransitionmethod.SFASNo.123(R)requiresequity-classified,share-basedpaymentstoemployees,includinggrantsofemployeestockoptions,tobevaluedatfairvalueonthedateofgrantandtobeexpensedovertheapplicablevestingperiod.Underthemodifiedprospectivetransitionmethod,share-basedawardsgrantedormodifiedonorafterJanuary1,2006,arerecognizedincompensationexpenseovertheapplicablevestingperiod.Also,anypreviouslygrantedawardsthatwerenotfullyvestedasofJanuary1,2006arerecognizedascompensationexpenseovertheremainingvestingperiod.NoretroactiveorcumulativeeffectadjustmentswererequireduponDevon’sadoptionofSFASNo.123(R).
PriortoadoptingSFASNo.123(R),Devonaccountedforitsfixed-planemployeestockoptionsusingtheintrinsic-valuebasedmethodprescribedbyAccountingPrinciplesBoardOpinionNo.25,Accounting for Stock Issued to Employees, (“APBNo.25”)andrelatedinterpretations.Thismethodrequiredcompensationexpensetoberecordedonthedateofgrantonlyifthecurrentmarketpriceoftheunderlyingstockexceededtheexerciseprice.
HadthefairvalueprovisionsofSFASNo.123(R)beenappliedin2005and2004,Devon’snetearningsandnetearningspersharewouldhavedifferedfromtheamountsactuallyreportedasshowninthefollowingtable.
YearendeddeCemBer31, 2005 2004
(INMILLIoNs,exCeptpershAreAMouNts)
Net earnings available to common stockholders, as reported $ 2,920 2,176Add share-based employee compensation expense included in reported net earnings, net of related tax expense 18 7Deduct total share-based employee compensation expense determined under fair value based method for all awards (see Note 9), net of related tax expense (44) (31)Net earnings available to common stockholders, pro forma $ 2,894 2,152
Net earnings per share available to common stockholders: As reported: Basic $ 6.38 4.51 Diluted $ 6.26 4.38 Pro forma: Basic $ 6.32 4.46 Diluted $ 6.21 4.33
AsaresultofadoptingSFASNo.123(R),Devon’s2006earningsfromcontinuingoperationsbeforeincometaxexpensewas$26millionlowerthanifDevonhadcontinuedtoaccountforshare-basedcompensationunderAPBNo.25.Additionally,2006earningsfromcontinuingoperationsandnetearningswereboth$17millionlower.Therelated2006basicanddilutedearningspershareamountswerebothapproximately$0.04persharelower.PriortotheadoptionofSFASNo.123(R),Devonpresentedalltaxbenefitsofdeductionsresultingfromtheexerciseofstockoptionsasoperatingcashinflowsinthestatementofcashflows.SFASNo.123(R)requiresthecashinflowsresultingfromtaxdeductionsinexcessofthecompensationexpenserecognizedforthosestockoptions(“excesstaxbenefits”)tobeclassifiedasfinancingcashinflows.AsrequiredbySFASNo.123(R),Devonrecognized$36millionofexcesstaxbenefitsasfinancingcashinflowsfor2006.In2005and2004,excesstaxbenefitsof$44millionand$54million,respectively,wereclassifiedasoperatingcashinflows.
69
notes
incometaxesDevonaccountsforincometaxesusingtheassetandliabilitymethod,wherebydeferredtaxassetsandliabilitiesarerecognizedforthefuturetaxconsequences
attributabletodifferencesbetweenthefinancialstatementcarryingamountsofassetsandliabilitiesandtheirrespectivetaxbases,aswellasthefuturetaxconsequencesattributabletothefutureutilizationofexistingtaxnetoperatinglossandothertypesofcarryforwards.Deferredtaxassetsandliabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesandcarryforwardsareexpectedtoberecoveredorsettled.Theeffectondeferredtaxassetsandliabilitiesofachangeintaxratesisrecognizedinincomeintheperiodthatincludestheenactmentdate.AtDecember31,2006,undistributedearningsofforeignsubsidiariesweredeterminedtobepermanentlyreinvested.Therefore,noU.S.deferredincometaxeswereprovidedonsuchamountsatDecember31,2006.Ifitbecomesapparentthatsomeoralloftheundistributedearningswillbedistributed,Devonwouldthenrecordtaxesonthoseearnings.
GeneralandadministrativeexpensesGeneralandadministrativeexpensesarereportednetofamountsreimbursedbyworkinginterestownersoftheoilandgaspropertiesoperatedbyDevonandnet
ofamountscapitalizedpursuanttothefullcostmethodofaccounting.
netearningsperCommonShareBasicearningspershareiscomputedbydividingincomeavailabletocommonstockholdersbytheweightedaveragenumberofcommonsharesoutstandingfor
theperiod.Dilutedearningspershare,ascalculatedusingthetreasurystockmethod,reflectsthepotentialdilutionthatcouldoccurifDevon’sdilutiveoutstandingstockoptionswereexercised.For2005and2004,thecalculationofdilutedsharesalsoassumedthatDevon’spreviouslyoutstandingzerocouponconvertibleseniordebentureswereconvertedtocommonstock.
Thefollowingtablereconcilesearningsfromcontinuingoperationsandcommonsharesoutstandingusedinthecalculationsofbasicanddilutedearningspersharefor2006,2005and2004.
net earninGS weiGhted appliCaBleto averaGe net Common CommonShareS earninGS StoCkholderS outStandinG perShare
(INMILLIoNs,exCeptpershAreAMouNts)
YEAR EnDED DECEMbER 31, 2006: Earnings from continuing operations $ 2,823 Less preferred stock dividends (10) Basic earnings per share 2,813 442 $ 6.37 Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options — 6 Diluted earnings per share $ 2,813 448 $ 6.29
YEAR EnDED DECEMbER 31, 2005: Earnings from continuing operations $ 2,899 Less preferred stock dividends (10) Basic earnings per share 2,889 458 $ 6.31 Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options — 8 Dilutive effect of potential common shares issuable upon conversion of senior convertible debentures (increase in net earnings is net of income tax expense of $14 million) (1) 24 4 Diluted earnings per share $ 2,913 470 $ 6.19
YEAR EnDED DECEMbER 31, 2004: Earnings from continuing operations $ 2,181 Less preferred stock dividends (10) Basic earnings per share 2,171 482 $ 4.50 Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options — 8 Dilutive effect of potential common shares issuable upon conversion of senior convertible debentures (increase in net earnings is net of income tax expense of $6 million) 10 9 Diluted earnings per share $ 2,181 499 $ 4.37
(1) The senior convertible debentures were retired in June 2005 prior to their stated maturity.
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notes
CertainoptionstopurchasesharesofDevon’scommonstockwereexcludedfromthedilutioncalculationsbecausetheoptionswereantidilutive.Theseexcludedoptionstotaled3million,0.2millionand4millionin2006,2005and2004,respectively.
foreignCurrencytranslationadjustmentsTheU.S.dollaristhefunctionalcurrencyforDevon’sconsolidatedoperationsexceptitsCanadiansubsidiarieswhichusetheCanadiandollarasthefunctional
currency.Therefore,theassetsandliabilitiesofDevon’sCanadiansubsidiariesaretranslatedintoU.S.dollarsbasedonthecurrentexchangerateineffectatthebalancesheetdates.Canadianincomeandexpensesaretranslatedataverageratesfortheperiodspresented.Translationadjustmentshavenoeffectonnetincomeandareincludedinaccumulatedothercomprehensiveincomeinstockholders’equity.ThefollowingtablepresentsthebalancesofDevon’scumulativetranslationadjustmentsincludedinaccumulatedothercomprehensiveincome.
(inmillionS)
December 31, 2003 $ 666 December 31, 2004 $ 1,054 December 31, 2005 $ 1,216 December 31, 2006 $ 1,219
StatementsofCashflowsForpurposesoftheconsolidatedstatementsofcashflows,Devonconsidersallhighlyliquidinvestmentswithoriginalcontractualmaturitiesofthreemonthsor
lesstobecashequivalents.
CommitmentsandContingenciesLiabilitiesforlosscontingenciesarisingfromclaims,assessments,litigationorothersourcesarerecordedwhenitisprobablethataliabilityhasbeenincurredand
theamountcanbereasonablyestimated.EnvironmentalexpendituresareexpensedorcapitalizedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Liabilitiesfortheseexpendituresarerecordedwhenitisprobablethatobligationshavebeenincurredandtheamountscanbereasonablyestimated.ReferenceismadetoNote8foradiscussionofamountsrecordedfortheseliabilities.
recentlyissuedaccountingStandardsnotYetadoptedInJune2006,theFinancialAccountingStandardsBoard(“FASB”)issuedFASBInterpretationNo.48,Accounting for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109.InterpretationNo.48clarifiestheaccountingforuncertaintyinincometaxesrecognizedinanenterprise’sfinancialstatementsinaccordancewithFASBStatementNo.109,Accounting for Income Taxes.ThisInterpretationiseffectiveforfiscalyearsbeginningafterDecember15,2006,andDevonwilladoptitinthefirstquarterof2007.DevondoesnotexpecttheadoptionofInterpretationNo.48tohaveamaterialimpactonitsfinancialstatementsandrelateddisclosures.
InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.157,Fair Value Measurements.StatementNo.157providesacommondefinitionoffairvalue,establishesaframeworkformeasuringfairvalueandexpandsdisclosuresaboutfairvaluemeasurements.However,thisStatementdoesnotrequireanynewfairvaluemeasurements.StatementNo.157iseffectiveforfiscalyearsbeginningafterNovember15,2007.Devoniscurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.157willhaveonitsfinancialstatementsandrelateddisclosures.
InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). StatementNo.158requirestherecognitionoftheoverfundedorunderfundedstatusofadefinedbenefitpostretirementplaninthebalancesheet.DevonadoptedthisrecognitionrequirementasofDecember31,2006.TheeffectsofthisadoptionaresummarizedinNote6.StatementNo.158alsorequiresthemeasurementofplanassetsandbenefitobligationsasofthedateoftheemployer’sfiscalyear-end.TheStatementprovidestwoalternativestotransitiontoafiscalyear-endmeasurementdate.ThismeasurementrequirementiseffectiveforfiscalyearsendingafterDecember15,2008.Devonhasnotyetadoptedthismeasurementrequirement,butDevondoesnotexpectsuchadoptiontohaveamaterialeffectonitsresultsofoperations,financialcondition,liquidityorcompliancewithdebtcovenants.
InFebruary2007,theFASBissuedStatementofFinancialAccountingStandardsNo.159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.StatementNo.159permitsentitiestochoosetomeasurecertainfinancialinstrumentsandotheritemsatfairvalue.Theobjectiveistoimprovefinancialreportingbyprovidingentitieswiththeopportunitytomitigatevolatilityinreportedearningscausedbymeasuringrelatedassetsandliabilitiesdifferentlywithouthavingtoapplycomplexhedgeaccountingprovisions.UnrealizedgainsandlossesonanyitemsforwhichDevonelectsthefairvaluemeasurementoptionwouldbereportedinearnings.StatementNo.159iseffectiveforfiscalyearsbeginningafterNovember15,2007.However,earlyadoptionispermittedforfiscalyearsbeginningonorbeforeNovember15,2007,providedDevonalsoelectstoapplytheprovisionsofStatementNo.157, Fair Value Measurements,atthesametime.Devoniscurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.159willhaveonitsfinancialstatementsandrelateddisclosures.
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notes
2.aCCountSreCeivaBle
Thecomponentsofaccountsreceivableincludethefollowing:
deCemBer31, 2006 2005
(INMILLIoNs)
Oil, gas and NGL revenue $ 1,020 1,113 Joint interest billings 209 206 Marketing and midstream revenue 138 173 Other 31 78 1,398 1,570 Allowance for doubtful accounts (5) (5) Net accounts receivable $ 1,393 1,565
3.propertYandequipmentandaSSetretirementoBliGationS
Propertyandequipmentincludedthefollowing:
deCemBer31, 2006 2005
(INMILLIoNs)
Oil and gas properties: Subject to amortization $ 35,798 29,257 Not subject to amortization 3,674 2,704 Accumulated depreciation, depletion and amortization (16,610) (14,398) Net oil and gas properties 22,862 17,563 Other property and equipment 2,417 1,863 Accumulated depreciation and amortization (684) (515) Net other property and equipment 1,733 1,348 Property and equipment, net of accumulated depreciation, depletion and amortization $ 24,595 18,911
Thecostsnotsubjecttoamortizationrelatetounprovedpropertieswhichareexcludedfromamortizedcapitalcostsuntilitisdeterminedwhetherornotprovedreservescanbeassignedtosuchproperties.Theexcludedpropertiesareassessedforimpairmentquarterly.Subjecttoindustryconditions,evaluationofmostoftheseproperties,andtheinclusionoftheircostsintheamortizedcapitalcostsisexpectedtobecompletedwithinfiveyears.
ThefollowingisasummaryofDevon’soilandgaspropertiesnotsubjecttoamortizationasofDecember31,2006:
CoStSinCurredin priorto 2006 2005 2004 2004 total
(INMILLIoNs)
Acquisition costs $ 1,357 296 119 691 2,463 Exploration costs 423 239 86 62 810 Development costs 130 19 — 39 188 Capitalized interest 70 56 52 35 213 Total oil and gas properties not subject to amortization $ 1,980 610 257 827 3,674
AtDecember31,2006,Devon’sinvestmentincountrieswhereprovedreserveshavenotbeenestablishedwas$61million,consistingof$56millioninNigeriaand$5millioninGhana.
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notes
ChiefacquisitionOnJune29,2006,Devonacquiredtheoilandgasassetsofprivately-ownedChiefHoldingsLLC(“Chief”).Devonpaid$2.0billionincashandassumed
approximately$0.2billionofnetliabilitiesinthetransactionforatotalpurchasepriceof$2.2billion.Devonfundedtheacquisitionprice,andtheimmediateretirementof$180millionofassumeddebt,with$718millionofcashonhandandapproximately$1.4billionofborrowingsissuedunderitscommercialpaperprogram.Theacquiredoilandgaspropertiesconsistof99.7MMBoe(unaudited)ofprovedreservesandleaseholdtotaling169,000netacreslocatedintheBarnettShaleareaofnorthTexas.Devonallocatedapproximately$1.0billionofthepurchasepricetoprovedreservesandapproximately$1.2billiontounprovedproperties.
propertydivestituresDuring2005,Devondivestedcertainnon-coreoilandgaspropertiesintheoffshoreGulfofMexicoandonshoreintheUnitedStatesandCanada.Fromthesesales,
Devonreceived$2.0billionofgrossproceeds.After-tax,theproceedswereapproximately$1.8billion.Certaininformationregardingthesesalesisincludedinthefollowingtable. unitedStateS Canada total
(INMILLIoNs)
Gross proceeds $ 966 1,029 1,995 After-tax proceeds $ 786 1,027 1,813 Asset retirement obligations assumed by purchasers $ 160 39 199 Reserves sold (MMBoe) (unaudited) 89 87 176
Underfullcostaccountingrules,againorlossonthesaleorotherdispositionofoilandgaspropertiesisnotrecognizedunlessthegainorlosswouldsignificantlyaltertherelationshipbetweencapitalizedcostsandprovedreservesofoilandgasattributabletoacostcenter.Becausethe2005divestituresdidnotsignificantlyaltersuchrelationship,Devondidnotrecognizeagainorlossonthesedivestitures.Therefore,theproceedsfromthesetransactionswererecognizedasanadjustmentofcapitalizedcostsintherespectivecostcenters.
OnNovember14,2006,DevonannouncedthatitintendstodivestitsoperationsinEgypt.Also,onJanuary23,2007,DevonannouncedthatitintendstodivestitsoperationsinWestAfrica.SeeNote13formorediscussionregardingtheseplanneddivestitures.
assetretirementobligationsFollowingisareconciliationoftheassetretirementobligationfortheyearsendedDecember31,2006and2005.
YearendeddeCemBer31, 2006 2005
(INMILLIoNs)
Asset retirement obligation as of beginning of year $ 660 731 Liabilities incurred 102 44 Liabilities settled (62) (42) Liabilities assumed by others — (199) Revision of estimated obligation 149 76 Accretion expense on discounted obligation 49 43 Foreign currency translation adjustment (4) 7 Asset retirement obligation as of end of year 894 660 Less current portion 61 50 Asset retirement obligation, long-term $ 833 610
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notes
4.deBtandrelatedexpenSeS
AsummaryofDevon’sshort-termandlong-termdebtisasfollows:
deCemBer31, 2006 2005
(INMILLIoNs)
Commercial paper $ 1,808 — Debentures exchangeable into shares of Chevron Corporation common stock: 4.90% due August 15, 2008 444 444 4.95% due August 15, 2008 316 316 Discount on exchangeable debentures (33) (51) Other debentures and notes: 2.75% due August 1, 2006 — 500 6.55% due August 2, 2006 ($200 million Canadian) — 172 4.375% due October 1, 2007 400 400 10.125% due November 15, 2009 177 177 6.875% due September 30, 2011 1,750 1,750 7.25% due October 1, 2011 350 350 8.25% due July 1, 2018 125 125 7.50% due September 15, 2027 150 150 7.875% due September 30, 2031 1,250 1,250 7.95% due April 15, 2032 1,000 1,000 Other — 3 Fair value adjustment on debt related to interest rate swaps (5) (18) Net premium on other debentures and notes 41 51 7,773 6,619 Less amount classified as short-term debt 2,205 662 Long-term debt $ 5,568 5,957
Maturitiesofshort-termandlong-termdebtasofDecember31,2006,excludingpremiums,discountsandthe$5millionfairvalueadjustment,areasfollows:
(inmillionS)
2007 $ 2,208 2008 760 2009 177 2010 — 2011 2,100 2012 and thereafter 2,525 Total $ 7,770
CreditfacilitieswithBanksDevonhasa$2.5billionfive-year,syndicated,unsecuredrevolvinglineofcredit(the“SeniorCreditFacility”).TheSeniorCreditFacilityincludesafive-year
revolvingCanadiansubfacilityinamaximumamountofU.S.$500million.TheSeniorCreditFacilitymaturesonApril7,2011,andallamountsoutstandingwillbedueandpayableatthattimeunlessthematurityisextended.Priortoeach
April7anniversarydate,DevonhastheoptiontoextendthematurityoftheSeniorCreditFacilityforoneyear,subjecttotheapprovalofthelenders.DevonisworkingtoobtainlenderapprovaltoextendthecurrentmaturitydateofApril7,2011toApril7,2012.Ifsuccessful,thismaturitydateextensionwillbeeffectiveonApril7,2007,providedDevonhasnotexperienceda“materialadverseeffect,”asdefinedintheSeniorCreditFacilityagreement,atthatdate.
AmountsborrowedundertheSeniorCreditFacilitymay,attheelectionofDevon,bearinterestatvariousfixedrateoptionsforperiodsofuptotwelvemonths.Suchratesaregenerallylessthantheprimerate.Devonmayalsoelecttoborrowattheprimerate.TheSeniorCreditFacilitycurrentlyprovidesforanannualfacilityfeeof$2.3millionthatispayablequarterlyinarrears.
TheagreementgoverningtheSeniorCreditFacilitycontainscertaincovenantsandrestrictions,includingamaximumalloweddebt-to-capitalizationratioof65%asdefinedintheagreement.ThecreditagreementcontainsdefinitionsoftotalfundeddebtandtotalcapitalizationthatincludeadjustmentstotherespectiveamountsreportedinDevon’sconsolidatedfinancialstatements.Pertheagreement,totalfundeddebtexcludesthedebenturesthatareexchangeableintosharesofChevronCorporationcommonstock.Also,totalcapitalizationisadjustedtoaddbacknoncashfinancialwritedownssuchasfullcostceilingpropertyimpairmentsorgoodwillimpairments.AtDecember31,2006,Devonwasincompliancewithsuchcovenantsandrestrictions.Devon’sdebt-to-capitalizationratioatDecember31,2006,ascalculatedpursuanttothetermsoftheagreement,was27.3%.
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notes
AsofDecember31,2006,therewerenoborrowingsundertheSeniorCreditFacility.TheavailablecapacityundertheSeniorCreditFacilityasofDecember31,2006,netof$284millionofoutstandinglettersofcreditand$1.8billionofoutstandingcommercialpaper,wasapproximately$408million.
CommercialpaperDevonalsohasacommercialpaperprogramunderwhichitmayborrowupto$2billion.Borrowingsunderthecommercialpaperprogramreduceavailable
capacityundertheSeniorCreditFacilityonadollar-for-dollarbasis.Commercialpaperdebtgenerallyhasamaturityofbetweensevento90days,althoughitcanhaveamaturityofupto365days,andbearsinterestatratesagreedtoatthetimeoftheborrowing.TheinterestrateisbasedonastandardindexsuchastheFederalFundsRate,LIBOR,orthemoneymarketrateasfoundonthecommercialpapermarket.AsofDecember31,2006,Devonhad$1.8billionofcommercialpaperdebtoutstandingatanaveragerateof5.37%.The$1.8billionofcommercialpaperisclassifiedasshort-termdebtintheaccompanyingconsolidatedbalancesheet.
exchangeabledebenturesTheexchangeabledebenturesconsistof$444millionof4.90%debenturesand$316millionof4.95%debentures.Theexchangeabledebentureswereissuedon
August3,1998andmatureAugust15,2008.TheexchangeabledebentureswerecallablebeginningAugust15,2000,initiallyat104.0%ofprincipalandatpricesdecliningto100.5%ofprincipalonorafterAugust15,2007.AtDecember31,2006,thecallpricewas101%ofprincipal.Theexchangeabledebenturesareexchangeableattheoptionoftheholdersatanytimepriortomaturity,unlesspreviouslyredeemed,forsharesofChevroncommonstock.InlieuofdeliveringChevroncommonstocktoanexchangingdebentureholder,Devonmay,atitsoption,paytosuchholderanamountofcashequaltothemarketvalueoftheChevroncommonstock.Atmaturity,holderswhohavenotexercisedtheirexchangerightswillreceiveanamountincashequaltotheprincipalamountofthedebentures.
AsofDecember31,2006,Devonbeneficiallyownedapproximately14.2millionsharesofChevroncommonstock.Theseshareshavebeendepositedwithanexchangeagentforpossibleexchangefortheexchangeabledebentures.Each$1,000principalamountoftheexchangeabledebenturesisexchangeableinto18.6566sharesofChevroncommonstock,anexchangerateequivalentto$53.60pershareofChevronstock.
Theexchangeabledebentureswereassumedaspartofthe1999PennzEnergyacquisition.Asaresult,thefairvaluesoftheexchangeabledebenturesweredeterminedasofAugust17,1999,basedonmarketquotations.Inaccordancewithderivativeaccountingstandards,thetotalfairvalueofthedebentureswasallocatedbetweentheinterest-bearingdebtandtheoptiontoexchangeChevroncommonstockthatisembeddedinthedebentures.Accordingly,adiscountwasrecordedonthedebenturesandisbeingaccretedusingtheeffectiveinterestmethodwhichraisedtheeffectiveinterestrateonthedebenturesto7.76%.
otherdebenturesandnotesFollowingaredescriptionsofthevariousotherdebenturesandnotesoutstandingatDecember31,2006,aslistedinthetablepresentedatthebeginningofthis
note.
Ocean DebtInconnectionwiththe2003Oceanmerger,Devonassumed$1.8billionofdebt.Thetablebelowsummarizesthedebtassumedwhichremainsoutstanding,thefairvalueofthedebtatApril25,2003,andtheeffectiveinterestrateofthedebtassumedafterdeterminingthefairvaluesoftherespectivenotesusingApril25,2003,marketinterestrates.Thepremiumsarebeingamortizedusingtheeffectiveinterestmethod.AllofthenotesaregeneralunsecuredobligationsofDevon.
fairvalueof effeCtiverateof deBtaSSumed deBtaSSumed deBtaSSumed
(INMILLIoNs)
4.375% due October 2007 (principal of $400 million) $ 410 3.8% 7.250% due October 2011 (principal of $350 million) $ 406 4.9% 8.250% due July 2018 (principal of $125 million) $ 147 5.5% 7.500% due September 2027 (principal of $150 million) $ 169 6.5%
The$400million4.375%seniornotesdueinOctoberof2007aresubjecttoafixed-to-floatinginterestrateswap.Throughtheuseofthisswap,thisfixed-ratedebt
hasbeenconvertedtofloating-ratedebtbearinginterestequaltoLIBORplus40basispoints.10.125% Debentures due November 15, 2009 ThesedebentureswereassumedaspartofthePennzEnergyacquisition.Thefairvalueofthedebentureswas
determinedusingAugust17,1999,marketinterestrates.Asaresult,apremiumwasrecordedonthesedebentureswhichloweredtheeffectiveinterestrateto8.9%.Thepremiumisbeingamortizedusingtheeffectiveinterestmethod.
6.875% Notes due September 30, 2011 and 7.875% Debentures due September 30, 2031OnOctober3,2001,Devon,throughDevonFinancingCorporation,U.L.C.(“DevonFinancing”),soldthesenotesanddebentureswhichareunsecuredandunsubordinatedobligationsofDevonFinancing.DevonhasfullyandunconditionallyguaranteedonanunsecuredandunsubordinatedbasistheobligationsofDevonFinancingunderthedebtsecurities.TheproceedsfromtheissuanceofthesedebtsecuritieswereusedtofundaportionoftheAndersonacquisition.
7.95% Notes due April 15, 2032OnMarch25,2002,DevonsoldthesenoteswhichareunsecuredandunsubordinatedobligationsofDevon.Thenetproceedsreceived,afterdiscountsandissuancecosts,were$986millionandwereusedtoretireotherindebtedness.
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notes
interestexpenseThefollowingscheduleincludesthecomponentsofinterestexpensebetween2004and2006.
YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Interest based on debt outstanding $ 486 507 513 Capitalized interest (79) (70) (70) Other interest 14 96 32 Total interest expense $ 421 533 475
Interestbasedondebtoutstandingdecreasedfrom2004to2006primarilyduetotheneteffectofdebtrepaymentsduring2005and2006partiallyoffsetbytheeffectofcommercialpaperborrowingsduringthelasthalfof2006.
During2005,Devonredeemedits$400million6.75%notesdueMarch15,2011anditszerocouponconvertibleseniordebenturespriortotheirscheduledmaturitydates.Theotherinterestcategoryinthetableaboveincludes$81millionin2005relatedtotheseearlyretirements.
During2004,Devonrepaidthebalanceunderits$3billiontermloancreditfacilitypriortothescheduledrepaymentdate.Theotherinterestcategoryinthetableaboveincludes$16millionin2004relatedtothisearlyrepayment.
5.finanCialinStrumentS
ThefollowingtablepresentsthecarryingamountsandestimatedfairvaluesofDevon’sfinancialinstrumentassets(liabilities)atDecember31,2006and2005. 2006 2005 CarrYinG fair CarrYinG fair amount value amount value
(INMILLIoNs)
Investment in Chevron Corporation common stock $ 1,043 1,043 805 805 Oil and gas price hedge agreements $ 39 39 — — Interest rate swap agreements $ (6) (6) (22) (22) Embedded option in exchangeable debentures $ (302) (302) (121) (121) Debt $ (7,773) (8,725) (6,619) (7,642)
Thefollowingmethodsandassumptionswereusedtoestimatethefairvaluesofthefinancialinstrumentsintheabovetable.Thecarryingvaluesofcashandcashequivalents,short-terminvestments,accountsreceivableandaccountspayable(includingincometaxespayableandaccruedexpenses)includedintheaccompanyingconsolidatedbalancesheetsapproximatedfairvalueatDecember31,2006and2005.
Investment in Chevron Corporation common stock Thefairvalueofthisinvestmentisbasedonaquotedmarketprice.Oil and gas price hedge agreements Thefairvaluesoftheoilandgaspricehedgeswerebasedoneither(a)aninternaldiscountedcashflowcalculation,(b)quotes
obtainedfromthecounterpartytothehedgeagreementor(c)quotesprovidedbybrokers.Interest rate swap agreements Thefairvaluesoftheinterestrateswapsarebasedoninternaldiscountedcashflowcalculations,usingmarketquotesoffuture
interestrates,orquotesobtainedfromcounterparties.Embedded option in exchangeable debentures Thefairvalueoftheembeddedoptionisbasedonaquoteobtainedfromabroker.Debt Thefairvaluesoffixed-ratedebtarebasedonquotesobtainedfrombrokersorbydiscountingtheprincipalandinterestpaymentsatratesavailablefordebt
ofsimilartermsandmaturity.Thefairvaluesoffloating-ratedebtareestimatedtoapproximatethecarryingamountsbecausetheinterestratespaidonsuchdebtaregenerallysetforperiodsofthreemonthsorless.
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notes
6.retirementplanS
Devonhasvariousnon-contributorydefinedbenefitpensionplans,includingqualifiedplans(“QualifiedPlans”)andnonqualifiedplans(“SupplementalPlans”).TheQualifiedPlansprovideretirementbenefitsforU.S.andCanadianemployeesmeetingcertainageandservicerequirements.BenefitsfortheQualifiedPlansarebasedontheemployee’syearsofserviceandcompensationandarefundedfromassetsheldintheplans’trusts.
DevonhasafundingpolicyregardingtheQualifiedPlanssuchthatitwillcontributetheamountoffundsnecessarysothattheQualifiedPlans’assetswillbeapproximatelyequaltotherelatedaccumulatedbenefitobligation.AsofDecember31,2006and2005,thefairvalueoftheQualifiedPlans’assetswere$590millionand$533million,respectively,whichwas$59millionand$37millionmore,respectively,thantherelatedaccumulatedbenefitobligation.Theactualamountofcontribu-tionsrequiredduringfutureperiodswilldependoninvestmentreturnsfromtheplanassetsduringthesameperiodaswellaschangesinlong-terminterestrates.
TheSupplementalPlansprovideretirementbenefitsforcertainemployeeswhosebenefitsundertheQualifiedPlansarelimitedbyincometaxregulations.TheSupplementalPlans’benefitsarebasedontheemployee’syearsofserviceandcompensation.ForcertainSupplementalPlans,Devonhasestablishedtruststofundtheseplans’benefitobligations.Thetotalvalueofthesetrustswas$59millionatbothDecember31,2006and2005,andisincludedinnon-currentotherassetsintheconsolidatedbalancesheets.FortheremainingSupplementalPlansforwhichtrustshavenotbeenestablished,benefitsarefundedfromDevon’savailablecashandcashequivalents.
Devonalsohasdefinedbenefitpostretirementplans(“PostretirementPlans”)whichprovidebenefitsforsubstantiallyallU.S.employees.ThePostretirementPlansprovidemedicaland,insomecases,lifeinsurancebenefitsandare,dependingonthetypeofplan,eithercontributoryornon-contributory.BenefitobligationsforthePostretirementPlansareestimatedbasedonfuturecost-sharingchangesthatareconsistentwithDevon’sexpressedintenttoincrease,wherepossible,contributionsfromfutureretirees.Devon’sfundingpolicyforthePostretirementPlansistofundthebenefitsastheybecomepayablewithavailablecashandcashequivalents.
DevonusesaNovember30measurementdatetovalueitspensionandotherpostretirementbenefitsobligations.AsdescribedinNote1,DevonwillberequiredtouseaDecember31measurementdatebeginningwiththefiscalyearendingDecember31,2008.DevondoesnotexpectthechangeinitsmeasurementdatefromNovember30toDecember31willhaveamaterialeffectonthenetperiodicbenefitcostorbenefitobligation.
BenefitobligationsandplanassetsBeginningwithDevon’sDecember31,2006balancesheet,StatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) requiresDevontorecognizeonitsconsolidatedbalancesheetthefundedstatusofitsdefinedbenefitplans.Thefundedstatusismeasuredasthedifferencebetweentheprojectedbenefitobligationandthefairvalueofplanassets.Thefollow-ingtablepresentstheincrementaleffectonDevon’sDecember31,2006balancesheetasaresultofadoptingthisrecognitionrequirementfromStatementNo.158. Before adoption after adjuStment adjuStment adjuStment
(INMILLIoNs)
Other noncurrent assets $ 448 (126) 322 Total assets $ 35,189 (126) 35,063 Other current liabilities $ 326 12 338 Other noncurrent liabilities $ 517 81 598 Deferred income taxes $ 5,729 (79) 5,650 Accumulated other comprehensive income $ 1,584 (140) 1,444 Total stockholders’ equity $ 17,582 (140) 17,442 Total liabilities and stockholders’ equity $ 35,189 (126) 35,063
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notes
ThefollowingtablepresentsthestatusofDevon’spensionandotherpostretirementbenefitplansfor2006and2005.Thebenefitobligationforpensionplansrepresentstheprojectedbenefitobligation,whilethebenefitobligationforthepostretirementbenefitplansrepresentstheaccumulatedbenefitobligation.Theaccumulatedbenefitobligationdiffersfromtheprojectedbenefitobligationinthattheformerincludesnoassumptionaboutfuturecompensationlevels.TheaccumulatedbenefitobligationforpensionplansatDecember31,2006and2005was$652millionand$607million,respectively.
other penSion poStretirement BenefitS BenefitS 2006 2005 2006 2005
(INMILLIoNs)
ChAngE in bEnEFit ObligAtiOn: Benefit obligation at beginning of year $ 666 588 54 50 Service cost 23 18 1 1 Interest cost 39 35 3 3 Participant contributions — — 2 2 Amendments 2 — 1 — Foreign exchange rate changes 1 1 — — Actuarial loss 66 50 — 6 Benefits paid (29) (26) (9) (8) Benefit obligation at end of year 768 666 52 54
ChAngE in PlAn ASSEtS: Fair value of plan assets at beginning of year 533 456 — — Actual return on plan assets 79 37 — — Employer contributions 6 65 6 6 Participant contributions — — 2 2 Benefits paid (29) (26) (8) (8) Foreign exchange rate changes 1 1 — — Fair value of plan assets at end of year 590 533 — —
Funded status at end of year (178) (133) (52) (54)Unrecognized net actuarial loss — 195 — 7Unrecognized prior service cost (benefit) — 6 — (8) Net amount recognized in balance sheet $ (178) 68 (52) (55)
AMOuntS RECOgnizED in bAlAnCE ShEEt: Noncurrent assets $ 2 — — — Current liabilities (7) — (5) — Noncurrent liabilities (173) — (47) — Prepaid cost — 144 — — Accrued benefit cost — (109) — (55) Intangible asset — 3 — — Additional minimum pension liability — 30 — — Net amount $ (178) 68 (52) (55)
AMOuntS RECOgnizED in ACCuMulAtED OthER COMPREhEnSivE inCOME: Net actuarial loss $ 214 — 6 — Prior service cost (benefit) 6 — (7) — Total $ 220 — (1) —
TheplanassetsforpensionbenefitsinthetableaboveexcludetheassetsheldintrustsfortheSupplementalPlans.However,employercontributionsforpensionbenefitsinthetableaboveinclude$6millionand$5millionin2006and2005,respectively,whichweretransferredfromthetrustsestablishedfortheSupplementalPlans.
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notes
CertainofDevon’spensionandpostretirementplanshaveaprojectedbenefitobligationinexcessofplanassetsatDecember31,2006and2005.Theaggregatebenefitobligationandfairvalueofplanassetsfortheseplansisincludedbelow. deCemBer31, 2006 2005
(INMILLIoNs)
Projected benefit obligation $ 755 707 Fair value of plan assets $ 574 518
CertainofDevon’spensionplanshaveanaccumulatedbenefitobligationinexcessofplanassetsatDecember31,2006and2005.Theaggregateaccumulatedbenefitobligationandfairvalueofplanassetsfortheseplansisincludedbelow. deCemBer31, 2006 2005
(INMILLIoNs)
Accumulated benefit obligation $ 121 111 Fair value of plan assets $ — —
TheplanassetsincludedintheabovetwotablesexcludetheSupplementalPlantrustswhichhadatotalvalueof$59millionatbothDecember31,2006and2005.
netperiodicBenefitCostandotherComprehensiveincomeThefollowingtablepresentsthecomponentsofnetperiodicbenefitcostandothercomprehensiveincomeforDevon’spensionandotherpostretirementbenefit
plansfor2006,2005and2004. other penSionBenefitS poStretirementBenefitS 2006 2005 2004 2006 2005 2004
(INMILLIoNs)
nEt PERiODiC bEnEFit COSt: Service cost $ 23 18 15 1 1 1 Interest cost 39 35 32 3 3 4 Expected return on plan assets (44) (36) (30) — — — Termination benefits — — 1 — — — Amortization of prior service cost 1 1 1 — (1) (1) Recognition of net actuarial loss 12 8 7 1 — — Net periodic benefit cost $ 31 26 26 5 3 4
OthER COMPREhEnSivE inCOME: Change in additional minimum pension liability $ 30 (8) 61 — — —
Thefollowingtablepresentstheestimatednetactuariallossandpriorservicecostforthepensionandotherpostretirementplansthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonetperiodicbenefitcostduring2007. other penSion poStretirement BenefitS BenefitS
(INMILLIoNs)
Net actuarial loss $ 15 1 Prior service cost 1 — Total $ 16 1
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notes
assumptionsThefollowingtablepresentstheweightedaverageactuarialassumptionsthatwereusedtodeterminebenefitobligationsandnetperiodicbenefitcostsfor2006,
2005and2004. other penSionBenefitS poStretirementBenefitS 2006 2005 2004 2006 2005 2004
(INMILLIoNs)
ASSuMPtiOnS tO DEtERMinE bEnEFit ObligAtiOnS: Discount rate 5.72% 5.72% 5.74% 5.50% 5.75% 5.75% Rate of compensation increase 7.00% 4.50% 4.50% N/A N/A N/A
ASSuMPtiOnS tO DEtERMinE nEt PERiODiC bEnEFit COSt: Discount rate 5.72% 5.98% 6.23% 5.75% 6.00% 6.25% Expected return on plan assets 8.40% 8.40% 8.34% N/A N/A N/A Rate of compensation increase 4.50% 4.50% 4.88% N/A N/A N/A
Discount rateFuturepensionandpostretirementobligationsarediscountedattheendofeachyearbasedontherateatwhichobligationscouldbeeffectivelysettled,consideringthetimingofestimatedbenefitpayments.Thisrateisbasedonhigh-qualitybondyields,afterallowingforcallanddefaultrisk.Highqualitycorporatebondyieldindices,suchasMoody’sAa,areconsideredwhenselectingthediscountrate.
Rate of compensation increaseFormeasurementofthe2006benefitobligationforthepensionplans,the7%compensationincreaseinthetableaboverepresentstheassumedincreasefor2007and2008.Theratewasassumedtodecreaseonepercentannuallyto5%intheyear2010andremainatthatlevelthereafter.Formeasurementofthe2005and2004benefitobligationsforthepensionplans,thecompensationincreasesinthetableaboverepresenttheassumedincreasesforallfutureyears.
Expected return on plan assetsDevon’soverallinvestmentobjectiveforitsretirementplans’assetsistoachievelong-termgrowthofinvestedcapitaltoensurepaymentsofretirementbenefitsobligationscanbefundedwhenrequired.Toassistinachievingthisobjective,Devonhasestablishedcertaininvestmentstrategies,includingtargetallocationpercentagesandpermittedandprohibitedinvestments,designedtomitigaterisksinherentwithinvesting.AtDecember31,2006,thetargetinvestmentallocationforDevon’splanassetswas50%U.S.largecapequitysecurities;15%U.S.smallcapequitysecurities,equallyallocatedbetweengrowthandvalue;15%internationalequitysecurities,equallyallocatedbetweengrowthandvalue;and20%debtsecurities.Derivativesorotherspeculativeinvestmentsconsideredhigh-riskaregenerallyprohibited.
Theexpectedrateofreturnonplanassetswasdeterminedbyevaluatinginputfromexternalconsultantsandeconomistsaswellaslong-terminflationassumptions.Devonexpectsthelong-termassetallocationtoapproximatethetargetedallocation.Therefore,theexpectedlong-termrateofreturnonplanassetsisbasedonthetargetallocationofinvestmenttypesinsuchassets.
Thefollowingtablepresentstheweighted-averageassetallocationforDevon’spensionplansatDecember31,2006and2005,andthetargetallocationfor2007byassetcategory:
2007 2006 2005
(INMILLIoNs)
ASSEt CAtEgORY: Equity securities 80% 83% 83% Debt securities 20% 17% 16% Other — — 1% Total 100% 100% 100%
Other assumptions Formeasurementofthebenefitobligationfortheotherpostretirementmedicalplans,a10%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitswasassumedfor2007.Theratewasassumedtodecreaseonepercentannuallyto5%intheyear2012andremainatthatlevelthereafter.Assumedhealthcarecost-trendratesaffecttheamountsreportedforretireehealthcarecosts.Aone-percentage-pointchangeintheassumedhealthcarecost-trendrateswouldhavethefollowingeffectsontheDecember31,2006otherpostretirementbenefitsobligationandthe2006serviceandinterestcostcomponentsofnetperiodicbenefitcost. oneperCent oneperCent inCreaSe deCreaSe
(INMILLIoNs)
Effect on benefit obligation $ 1 (1) Effect on service and interest costs $ — —
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notes
expectedCashflowsThefollowingtablepresentsexpectedcashflowinformationforDevon’spensionandotherpostretirementbenefitplans.
other penSion poStretirement BenefitS BenefitS
(INMILLIoNs)
Devon contributions – 2007 $ 7 5
Benefit payments: 2007 $ 30 5 2008 $ 31 5 2009 $ 33 5 2010 $ 35 5 2011 $ 37 5 2012-2016 $ 245 21
ExpectedcontributionsincludedinthetableaboveincludeamountsrelatedtoDevon’sQualifiedPlans,SupplementalPlansandPostretirementPlans.Ofthebenefitsexpectedtobepaidin2007,$7millionofpensionbenefitsisexpectedtobefundedfromthetrustsestablishedfortheSupplementalPlansandall$5millionofotherpostretirementbenefitsisexpectedtobefundedfromDevon’savailablecashandcashequivalents.Expectedemployercontributionsandbenefitpaymentsforotherpostretirementbenefitsarepresentednetofemployeecontributions.
otherBenefitplansDevonhasa401(k)IncentiveSavingsPlanwhichcoversalldomesticemployees.Atitsdiscretion,Devonmaymatchacertainpercentageoftheemployees’
contributionstotheplan.ThematchingpercentageisdeterminedannuallybytheBoardofDirectors.Devon’smatchingcontributionstotheplanwere$15million,$12millionand$11millionfortheyearsendedDecember31,2006,2005and2004,respectively.
DevonhasdefinedcontributionpensionplansforitsCanadianemployees.Devonmakesacontributiontoeachemployeewhichisbasedupontheemployee’sbasecompensationandclassification.SuchcontributionsaresubjecttomaximumamountsallowedundertheIncomeTaxAct(Canada).DevonalsohasasavingsplanforitsCanadianemployees.Underthesavingsplan,Devoncontributesabasepercentageamounttoallemployeesandtheemployeemayelecttocontributeanadditionalpercentageamount(uptoamaximumamount)whichismatchedbyadditionalDevoncontributions.During2006,2005and2004,Devon’scombinedcontributionstotheCanadiandefinedcontributionplanandtheCanadiansavingsplanwere$12million,$10millionand$9million,respectively.
7.StoCkholderS’equitY
TheauthorizedcapitalstockofDevonconsistsof800millionsharesofcommonstock,parvalue$0.10pershare,and4.5millionsharesofpreferredstock,parvalue$1.00pershare.Thepreferredstockmaybeissuedinoneormoreseries,andthetermsandrightsofsuchstockwillbedeterminedbytheBoardofDirectors.
EffectiveAugust17,1999,Devonissued1.5millionsharesof6.49%cumulativepreferredstock,SeriesA,toholdersofPennzEnergy6.49%cumulativepreferredstock,SeriesA.Dividendsonthepreferredstockarecumulativefromthedateoforiginalissueandarepayablequarterly,incash,whendeclaredbytheBoardofDirectors.ThepreferredstockisredeemableattheoptionofDevonatanytimeonorafterJune2,2008,inwholeorinpart,ataredemptionpriceof$100pershare,plusaccruedandunpaiddividendstotheredemptiondate.
Devon’sBoardofDirectorshasdesignatedacertainnumberofsharesofthepreferredstockasSeriesAJuniorParticipatingPreferredStock(the“SeriesAJuniorPreferredStock”)inconnectionwiththeadoptionoftheshareholderrightsplandescribedlaterinthisnote.OnApril25,2003,theBoardincreasedthedesignatedsharesfrom2.0millionto2.9million.AtDecember31,2006,therewerenosharesofSeriesAJuniorPreferredStockissuedoroutstanding.TheSeriesAJuniorPreferredStockisentitledtoreceivecumulativequarterlydividendspershareequaltothegreaterof$1.00or200timestheaggregatepershareamountofalldividends(otherthanstockdividends)declaredoncommonstocksincetheimmediatelyprecedingquarterlydividendpaymentdateor,withrespecttothefirstpaymentdate,sincethefirstissuanceofSeriesAJuniorPreferredStock.HoldersoftheSeriesAJuniorPreferredStockareentitledto200votespershare(subjecttoadjustmenttopreventdilution)onallmatterssubmittedtoavoteofthestockholders.TheSeriesAJuniorPreferredStockisneitherredeemablenorconvertible.TheSeriesAJuniorPreferredStockrankspriortothecommonstockbutjuniortoallotherclassesofPreferredStock.
AtDecember31,2003,asubsidiaryofDevoncreatedintheOceanmergerhad38,000sharesofconvertiblepreferredstockoutstanding.InJanuary2004,thesesharesofconvertiblepreferredstockwerecanceledandconvertedto2,197,160sharesofDevoncommonstockpursuanttoanautomaticconversionfeatureofthepreferredstock.TheautomaticconversionfeaturewastriggeredwhentheclosingpriceofDevoncommonstockequaledorexceededtheforcedconversionpriceof$26.20for20consecutivetradingdays.
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StockrepurchasesOnSeptember27,2004,Devonannouncedastockrepurchaseprogramtorepurchaseupto50millionsharesofitscommonstock.During2004,Devonrepurchased
fivemillionsharesatatotalcostof$189million,or$37.78pershare.Thisprogramwascompletedin2005,duringwhichDevonrepurchased44.6millionsharesatatotalcostof$2.1billion,or$47.69pershare.Thetotalcostofthisprogramwas$2.3billion,or$46.69pershare.
OnAugust3,2005,Devonannouncedanotherprogramtorepurchaseupto50millionsharesofitscommonstock.During2005,Devonrepurchased2.2millionsharesatacostof$134million,or$60.16pershare,underthisprogram.During2006,Devonrepurchased4.3millionsharesatacostof$253million,or$59.61pershare,underthisprogram.AsofFebruary1,2007,Devonhasrepurchased6.5millionsharesunderthisprogramfor$387million,or$59.80pershare.Thisprogramwassus-pendedin2006asaresultoftheChiefacquisition(seeNote3).InconjunctionwiththesalesofEgyptandWestAfrica(seeNote13),Devonexpectstoresumethisrepur-chaseprograminlate2007byusingaportionofthesaleproceedstorepurchasecommonstock.Althoughthisprogramexpiresattheendof2007,itcouldbeextendedifnecessary.
ShareholderrightsplanUnderDevon’sshareholderrightsplan,stockholdershaveonehalfofonerightforeachshareofcommonstockheld.Therightsbecomeexercisableandseparately
transferabletenbusinessdaysafter(a)anannouncementthatapersonhasacquired,orobtainedtherighttoacquire,15%ormoreofthevotingsharesoutstanding,or(b)commencementofatenderorexchangeofferthatcouldresultinapersonowning15%ormoreofthevotingsharesoutstanding.
Eachrightentitlesitsholder(exceptaholderwhoistheacquiringperson)topurchaseeither(a)1/100ofashareofSeriesAPreferredStockfor$185.00,subjecttoadjustmentor,(b)Devoncommonstockwithavalueequaltotwicetheexercisepriceoftheright,subjecttoadjustmenttopreventdilution.Intheeventofcertainmergerorassetsaletransactionswithanotherpartyortransactionswhichwouldincreasetheequityownershipofashareholderwhothenowned15%ormoreofDevon,eachDevonrightwillentitleitsholdertopurchasesecuritiesofthemergingoracquiringpartywithavalueequaltotwicetheexercisepriceoftheright.
Therights,whichhavenovotingpower,expireonAugust17,2009.TherightsmayberedeemedbyDevonfor$0.01perrightuntiltherightsbecomeexercisable.
dividendsDividendsonDevon’scommonstockwerepaidin2006,2005and2004atapersharerateof$0.1125,$0.075and$0.05perquarter,respectively.
8.CommitmentSandContinGenCieS
Devonispartytovariouslegalactionsarisinginthenormalcourseofbusiness.MattersthatareprobableofunfavorableoutcometoDevonandwhichcanbereasonablyestimatedareaccrued.Suchaccrualsarebasedoninformationknownaboutthematters,Devon’sestimatesoftheoutcomesofsuchmattersanditsexperienceincontesting,litigatingandsettlingsimilarmatters.NoneoftheactionsarebelievedbymanagementtoinvolvefutureamountsthatwouldbematerialtoDevon’sfinancialpositionorresultsofoperationsafterconsiderationofrecordedaccrualsalthoughactualamountscoulddiffermateriallyfrommanagement’sestimate.
environmentalmattersDevonissubjecttocertainlawsandregulationsrelatingtoenvironmentalremediationactivitiesassociatedwithpastoperations,suchastheComprehensive
EnvironmentalResponse,Compensation,andLiabilityAct(“CERCLA”)andsimilarstatestatutes.Inresponsetoliabilitiesassociatedwiththeseactivities,accrualshavebeenestablishedwhenreasonableestimatesarepossible.Suchaccrualsprimarilyincludeestimatedcostsassociatedwithremediation.Devonhasnotuseddiscountingindeterminingitsaccruedliabilitiesforenvironmentalremediation,andnomaterialclaimsforpossiblerecoveryfromthirdpartyinsurersorotherpartiesrelatedtoenvironmentalcostshavebeenrecognizedinDevon’sconsolidatedfinancialstatements.Devonadjuststheaccrualswhennewremediationresponsibilitiesarediscoveredandprobablecostsbecomeestimable,orwhencurrentremediationestimatesmustbeadjustedtoreflectnewinformation.
CertainofDevon’ssubsidiariesacquiredinpastmergersareinvolvedinmattersinwhichithasbeenallegedthatsuchsubsidiariesarepotentiallyresponsibleparties(“PRPs”)underCERCLAorsimilarstatelegislationwithrespecttovariouswastedisposalareasownedoroperatedbythirdparties.AsofDecember31,2006,Devon’sconsolidatedbalancesheetincluded$5millionofnon-currentaccruedliabilities,reflectedin“Otherliabilities,”relatedtotheseandotherenvironmentalremediationliabilities.Devondoesnotcurrentlybelievethereisareasonablepossibilityofincurringadditionalmaterialcostsinexcessofthecurrentaccrualsrecognizedforsuchenvironmentalremediationactivities.WithrespecttothesitesinwhichDevonsubsidiariesarePRPs,Devon’sconclusionisbasedinlargeparton(i)Devon’sparticipationinconsentdecreeswithbothotherPRPsandtheEnvironmentalProtectionAgency,whichprovideforperformingthescopeofworkrequiredforremediationandcontaincovenantsnottosueasprotectiontothePRPs,(ii)participationingroupsasade minimisPRP,and(iii)theavailabilityofotherdefensestoliability.Asaresult,Devon’smonetaryexposureisnotexpectedtobematerial.
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royaltymattersNumerousgasproducersandrelatedparties,includingDevon,havebeennamedinvariouslawsuitsallegingviolationofthefederalFalseClaimsAct.Thesuits
allegethattheproducersandrelatedpartiesusedbelow-marketprices,improperdeductions,impropermeasurementtechniquesandtransactionswithaffiliateswhichresultedinunderpaymentofroyaltiesinconnectionwithnaturalgasandnaturalgasliquidsproducedandsoldfromfederalandIndianownedorcontrolledlands.TheprincipalsuitinwhichDevonisadefendantisUnitedStatesexrel.Wrightv.ChevronUSA,Inc.etal.(the“Wrightcase”).ThesuitwasoriginallyfiledinAugust1996intheUnitedStatesDistrictCourtfortheEasternDistrictofTexas,butwasconsolidatedinOctober2000withtheothersuitsforpre-trialproceedingsintheUnitedStatesDistrictCourtfortheDistrictofWyoming.OnJuly10,2003,theDistrictofWyomingremandedtheWrightcasebacktotheEasternDistrictofTexastoresumeproceedings.TrialissetforNovember2007.Devonbelievesthatithasactedreasonably,haslegitimateandstrongdefensestoallallegationsinthesuit,andhaspaidroyaltiesingoodfaith.Devondoesnotcurrentlybelievethatitissubjecttomaterialexposureinassociationwiththislawsuitandnoliabilityhasbeenrecordedinconnectiontherewith.
In1995,theUnitedStatesCongresspassedtheDeepWaterRoyaltyReliefAct.TheintentofthislegislationwastoencouragedeepwaterexplorationintheGulfofMexicobyprovidingrelieffromtheobligationtopayroyaltiesoncertainfederalleases.DeepwaterleasesissuedincertainyearsbytheMineralsManagementService(the“MMS”)havecontainedpricethresholds,suchthatifthemarketpricesforoilornaturalgasexceededthethresholdsforagivenyear,royaltyreliefwouldnotbegrantedforthatyear.Deepwaterleasesissuedin1998and1999didnotincludepricethresholds.TheMMSin2006informedDevonandotheroilandgascompaniesthattheomissionofpricethresholdsfromtheseleaseswasanerroronitspartandwasnotitsintention.Accordingly,theMMSinvitedDevonandtheotheraffectedoilandgasproducerstorenegotiatethetermsandconditionsofthe1998and1999leasestoaddpricethresholdprovisionstotheleaseagreementsforperiodsafterOctober1,2006.DevonhassincehadseveraldiscussionswithMMSrepresentativesonthisissue,buthasnotyetenteredintorenegotiatedleases.
TheU.S.HouseofRepresentativesinJanuary2007passedlegislationthatwouldrequirecompaniestorenegotiatethe1998and1999leasesasaconditionofsecuringfuturefederalleases.Ifthislegislationweretobecomelaw,itwouldrequirepricethresholdstobeeffectiveintherenegotiated1998and1999leaseseffectiveOctober1,2006.AlthoughDevonhasnotyetsignedrenegotiatedleases,ithasaccruedinits2006consolidatedfinancialstatementsapproximately$6millionforroyaltiesthatwouldbedueifpricethresholdswereaddedtoits1998and1999leaseseffectiveOctober1,2006.
equatorialGuineainvestigation
TheSEChasbeenconductinganinquiryintopaymentsmadetothegovernmentofEquatorialGuineaandtoofficialsandpersonsaffiliatedwithofficialsofthegovernmentofEquatorialGuinea.OnAugust9,2005,DevonreceivedasubpoenaissuedbytheSECpursuanttoaformalorderofinvestigation.DevonhascooperatedfullywiththeSEC’srequestsforinformationinthisinquiry.Afterrespondingin2005tosuchrequestsforinformation,DevonhasnotbeencontactedbytheSEC.IntheeventthatDevonreceivesanyfurtherinquiries,DevonwillworkwiththeSECinconnectionwithitsinvestigation.
hurricaneContingenciesHistorically,Devonmaintainedacomprehensiveinsuranceprogramthatincludedcoverageforphysicaldamagetoitsoffshorefacilitiescausedbyhurricanes.
Devon’shistoricalinsuranceprogramalsoincludedsubstantialbusinessinterruptioncoveragewhichDevonisutilizingtorecovercostsassociatedwiththesuspendedproductionrelatedtohurricanesthatstrucktheGulfofMexicointhethirdquarterof2005.Underthetermsofthisinsuranceprogram,Devonwasentitledtobereimbursedfortheportionofproductionsuspendedlongerthanforty-fivedays,subjecttoupperlimitstooilandnaturalgasprices.Also,thetermsoftheinsuranceincludeastandard,per-eventdeductibleof$1millionforoffshorelossesaswellasa$15millionaggregateannualdeductible.
BasedoncurrentestimatesofphysicaldamageandtheanticipatedlengthoftimeDevonwillhaveproductionsuspended,Devonexpectsitspolicyrecoverieswillexceedrepaircostsanddeductibleamounts.Thisexpectationisbaseduponseveralvariables,includingthe$467millionreceivedinthethirdquarterof2006asafullsettlementoftheamountduefromDevon’sprimaryinsurers.AsofDecember31,2006,$154millionoftheseproceedshadbeenutilizedasreimbursementofpastrepaircostsanddeductibleamounts.Theremainingproceedsof$313millionwillbeutilizedasreimbursementofDevon’santicipatedfuturerepaircosts.Devonhasnotyetreceivedanysettlementsrelatedtoclaimsfiledwithitssecondaryinsurers.
ShouldDevon’stotalpolicyrecoveries,includingthepartialsettlementsalreadyreceivedfromDevon’sprimaryinsurers,exceedallrepaircostsanddeductibleamounts,suchexcesswillberecognizedasotherincomeinthestatementofoperationsintheperiodinwhichsuchdeterminationcanbemade.
ThepolicyunderlyingtheinsuranceprogramtermsdescribedaboveexpiredonAugust31,2006.Duringthethirdquarterof2006,Devonwasabletore-establishacomprehensiveinsuranceprogramthatincludesbusinessinterruptionandphysicaldamagecoverageforitsbusiness.However,duetosignificantchangesinthemarketplace,DevonwasonlyabletoobtainademinimisamountofcoverageforanydamagethatmaybecausedbynamedwindstormsintheGulfofMexico.DevonhasnotexperiencedanylossesunderthisnewinsurancearrangementthroughDecember31,2006.
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othermattersDevonisinvolvedinothervariousroutinelegalproceedingsincidentaltoitsbusiness.However,toDevon’sknowledgeasofthedateofthisreport,therewereno
othermaterialpendinglegalproceedingstowhichDevonisapartyortowhichanyofitspropertyissubject.
CommitmentsDevonhascertaindrillingandfacilityobligationsundercontractualagreementswiththirdpartyserviceproviderstoprocuredrillingrigsandotherrelatedservices
fordevelopmentalandexploratorydrillingandfacilitiesconstruction.Includedinthe$3.0billiontotalof“DrillingandFacilityObligations”inthetablebelowis$1.9billionwhichrelatestolong-termcontractsforthreedeepwaterdrillingrigsandcertainothercontractsforonshoredrillingandfacilityobligationsinwhichdrillingorfacilitiesconstructionhasnotcommenced.The$1.9billionrepresentsthegrosscommitmentunderthesecontracts.Devon’sultimatepaymentforthesecommitmentswillbereducedbytheamountsbilledtoitspartnerswhennetworkinginterestsareultimatelydetermined.Paymentsforthesecommitments,netofamountsbilledtopartners,willbecapitalizedasacomponentofoilandgasproperties.
Devonhascertainfirmtransportationagreementswhichrepresent“shiporpay”arrangementswherebyDevonhascommittedtoshipcertainvolumesofoil,gasandNGLsforafixedtransportationfee.Devonhasenteredintotheseagreementstoaidthemovementofitsproductiontomarket.Devonexpectstohavesufficientproductiontoutilizethemajorityofthesetransportationservices.
Devonleasescertainofficespaceandequipmentunderoperatingleasearrangements.Totalrentalexpenseincludedingeneralandadministrativeexpensesunderoperatingleases,netofsub-leaseincome,was$36million,$35millionand$49millionin2006,2005and2004,respectively.
Devonassumedtwooffshoreplatformsparleasesthroughthe2003Oceanmerger.ThesparsarebeingusedinthedevelopmentoftheNansenandBoomvangfieldsintheGulfofMexico.TheBoomvangfieldwasdivestedaspartofthe2005propertydivestitureprogram.TheNansenoperatingleaseisfora20-yeartermandcontainsvariousoptionswherebyDevonmaypurchasethelessors’interestsinthespar.TotalrentalexpenseincludedinleaseoperatingexpensesunderboththeNansenandBoomvangoperatingleaseswas$12million,$14millionand$17millionin2006,2005and2004,respectively.DevonhasguaranteedthattheNansensparwillhavearesidualvalueattheendoftheoperatingleaseequaltoatleast10%ofthefairvalueofthesparattheinceptionofthelease.Thetotalguaranteedvalueis$14millionin2022.However,suchamountmaybereducedunderthetermsoftheleaseagreement.AsaresultofthesaleoftheBoomvangfield,DevonissubleasingtheBoomvangSpar.Ifthesublesseeweretodefaultonitsobligation,Devonwouldcontinuetobeobligatedtopaytheperiodicleasepaymentsandanyguaranteedvaluerequiredattheendoftheterm.
Devonhasafloating,production,storageandoffloadingfacility(“FPSO”)thatisbeingusedinthePanyuprojectoffshoreChinaandisbeingleasedunderoperatingleasearrangements.ThisleaseexpiresinSeptember2009.DevonwasalsoleasinganFPSOthatisbeingusedintheZafirofieldoffshoreEquatorialGuinea.DevonandtheotherworkinginterestownerspurchasedthisFPSOinthefourthquarterof2005.TotalrentalexpenseincludedinleaseoperatingexpensesunderboththeChinaandEquatorialGuineaoperatingleaseswas$9million,$19millionand$20millionin2006,2005and2004,respectively.
Thefollowingisaschedulebyyearoffutureminimumpaymentsfordrillingandfacilityobligations,firmtransportationagreementsandleasesthathaveinitialorremainingnoncancelableleasetermsinexcessofoneyearasofDecember31,2006: drillinG and firm offiCeand faCilitY tranSportation equipment Spar fpSoYearendinGdeCemBer31, oBliGationS aGreementS leaSeS leaSeS leaSeS
(INMILLIoNs)
2007 $ 886 123 48 11 21 2008 524 92 44 11 31 2009 613 81 37 11 29 2010 480 61 29 11 23 2011 364 45 26 11 23 Thereafter 126 172 31 141 57 Total payments $ 2,993 574 215 196 184
9.Share-BaSedCompenSation
OnJune8,2005,Devon’sstockholdersadoptedthe2005Long-TermIncentivePlanwhichexpiresonJune8,2013.Devon’sstockholdersadoptedcertainamendmentstothisplanonJune7,2006.Thisplan,asamended,authorizestheCompensationCommittee,whichconsistsofnon-managementmembersofDevon’sBoardofDirectors,tograntnonqualifiedandincentivestockoptions,restrictedstockawards,Canadianrestrictedstockunits,performanceunits,performancebonuses,stockappreciationrightsandcash-outrightstoeligibleemployees.Theplanalsoauthorizesthegrantofnonqualifiedstockoptions,restrictedstockawardsandstockappreciationrightstodirectors.Atotalof32millionsharesofDevoncommonstockhavebeenreservedforissuancepursuanttotheplan.Tocalculatesharesissued
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undertheplan,optionsgrantedrepresentoneshareandotherawardsrepresent2.2shares.Devonalsohasstockoptionplansthatwereadoptedin2003and1997underwhichstockoptionsandrestrictedstockawardswereissuedtokeymanagementand
professionalemployees.Optionsgrantedundertheseplansremainexercisablebytheemployeesowningsuchoptions,butnonewoptionsorrestrictedstockawardswillbegrantedundertheseplans.DevonalsohasstockoptionsoutstandingthatwereassumedaspartoftheacquisitionsofOcean,MitchellEnergy&DevelopmentCorp.,SantaFeSnyderandPennzEnergy.
AsdiscussedinNote1,onJanuary1,2006,Devonchangeditsmethodofaccountingforshare-basedcompensationfromtheAPBNo.25intrinsicvalueaccountingmethodtothefairvaluerecognitionprovisionsofSFASNo.123(R).Thefollowingtablepresentstheeffectsofshare-basedcompensationincludedinDevon’saccompanyingstatementofoperationsfortheyearsendedDecember31,2006,2005and2004.
2006 2005 2004
(INMILLIoNs)
Gross general and administrative expense $ 91 29 12Share-based compensation expense capitalized pursuant to the full cost method of accounting for oil and gas properties $ 26 — —Related income tax benefit $ 23 11 5
StockoptionsUnderDevon’s2005Long-TermIncentivePlan,theexercisepriceofstockoptionsgrantedmaynotbelessthantheestimatedfairmarketvalueofthestockatthe
dateofgrant.Inaddition,optionsgrantedareexercisableduringaperiodestablishedforeachgrant,whichperiodmaynotexceedeightyearsfromthedateofgrant.Therecipientmustpaytheexercisepriceincashorincommonstock,oracombinationthereof,atthetimethattheoptionisexercised.Optionsgrantedgenerallyhaveavestingperiodthatrangesfromthreetofouryears.
Thefairvalueofstockoptionsonthedateofgrantisexpensedovertheapplicablevestingperiod.DevonestimatesthefairvaluesofstockoptionsgrantedusingaBlack-Scholesoptionvaluationmodel,whichrequiresDevontomakeseveralassumptions.ThevolatilityofDevon’scommonstockisbasedonthehistoricalvolatilityofthemarketpriceofDevon’scommonstockoveraperiodoftimeequaltotheexpectedtermoftheoptionandendingonthegrantdate.ThedividendyieldisbasedonDevon’shistoricalandcurrentyieldineffectatthedateofgrant.Therisk-freeinterestrateisbasedonthezero-couponU.S.Treasuryyieldfortheexpectedtermoftheoptionatthedateofgrant.Theexpectedtermoftheoptionsisbasedonhistoricalexerciseandterminationexperienceforvariousgroupsofemployeesanddirectors.Eachgroupisdeterminedbasedonthesimilarityoftheirhistoricalexerciseandterminationbehavior.
Thefollowingtablepresentsasummaryofthegrant-datefairvaluesofstockoptionsgrantedandtherelatedassumptionsfortheyearsendedDecember31,2006,2005and2004.Allsuchamountsrepresenttheweighted-averageamountsforeachyear.
2006 2005 2004
(INMILLIoNs)
Grant-date fair value $ 22.41 19.65 10.32Volatility factor 32.2% 31.0% 32.2%Dividend yield 0.5% 0.6% 0.5%Risk-free interest rate 5.7% 4.4% 3.2%Expected term (in years) 4.0 4.2 4.0
ThefollowingtablepresentsasummaryofDevon’soutstandingstockoptionsasofDecember31,2006,includingchangesduringtheyearthenended.
weiGhted weiGhted averaGe averaGe remaininG aGGreGate exerCiSe ContraCtual intrinSiC optionS priCe term value
(INthousANDs) (INyeArs) (INMILLIoNs)
Outstanding at December 31, 2005 16,732 $ 32.74 Granted 1,874 $ 70.00 Exercised (2,846) $ 25.41 Forfeited (377) $ 49.16 Outstanding at December 31, 2006 15,383 $ 38.24 4.1 $ 450Vested and expected to vest at December 31, 2006 14,952 $ 37.51 4.1 $ 448Exercisable at December 31, 2006 11,034 $ 29.44 3.8 $ 416
Theaggregateintrinsicvalueofstockoptionsthatwereexercisedduring2006,2005and2004was$119million,$149millionand$168million,respectively.AsofDecember31,2006,Devon’sunrecognizedcompensationcostrelatedtounvestedstockoptionswas$77million.Suchcostisexpectedtoberecognizedoveraweighted-averageperiodof2.4years.
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restrictedStockawardsandunitsUnderDevon’s2005Long-TermIncentivePlan,restrictedstockawardsandunitsaresubjecttotheterms,conditions,restrictionsand/orlimitations,ifany,thatthe
CompensationCommitteedeemsappropriate,includingrestrictionsoncontinuedemployment.Generally,restrictedstockawardsandunitsvestoveraminimumrestrictionperiodofatleastthreeyearsfromthedateofgrant.Duringthevestingperiod,recipientsofrestrictedstockawardsreceivedividendswhicharenotsubjecttorestrictionsorotherlimitations.Thefairvalueofrestrictedstockawardsandunitsonthedateofgrantisexpensedovertheapplicablevestingperiod.DevonestimatesthefairvaluesofrestrictedstockawardsandunitsastheclosingpriceofDevon’scommonstockonthegrantdateoftheawardorunit.
ThefollowingtablepresentsasummaryofDevon’sunvestedrestrictedstockawardsasofDecember31,2006,includingchangesduringtheyearthenended.
weiGhted reStriCted averaGe StoCk Grant-date awardS fairvalue
(INthousANDs)
Unvested at December 31, 2005 3,417 $ 46.80 Granted 3,091 $ 65.68 Vested (1,156) $ 42.58 Forfeited (190) $ 47.54Unvested at December 31, 2006 5,162 $ 58.35
Theaggregatefairvalueofrestrictedstockawardsthatvestedduring2006,2005and2004was$82million,$51millionand$15million,respectively.AsofDecember31,2006,Devon’sunrecognizedcompensationcostrelatedtounvestedrestrictedstockawardsandunitswas$253million.Suchcostisexpectedtoberecognizedoveraweighted-averageperiodof2.9years.
10.reduCtionofCarrYinGvalueofoilandGaSpropertieS
During2006and2005,Devonreducedthecarryingvalueofcertainofitsoilandgaspropertiesduetofullcostceilinglimitationsandunsuccessfulexploratoryactivities.Asummaryofthesereductionsandadditionaldiscussionisprovidedbelow.
YearendeddeCemBer31, 2006 2005 netof netof GroSS taxeS GroSS taxeS
(INMILLIoNs)
Unsuccessful exploratory reductions: Nigeria $ 85 85 — — Brazil 16 16 42 42 Angola — — 170 119Ceiling test reduction - Russia 20 10 — — Total $ 121 111 212 161
2006 ReductionsDevonhascommittedtodrillfourwellsinNigeria.Thefirsttwowellswereunsuccessful.Afterdrillingthesecondunsuccessfulwellinthefirstquarterof2006,Devondeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthefirstquarterof2006,Devonrecognizedan$85millionimpairmentofitsinvestmentinNigeriaequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.
Duringthesecondquarterof2006,DevondrilledtwounsuccessfulexploratorywellsinBrazilanddeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthesecondquarterof2006,Devonrecognizeda$16millionimpairmentofitsinvestmentinBrazilequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.ThetwowellswereunrelatedtoDevon’sPolvodevelopmentprojectinBrazil.
Asaresultofadeclineinprojectedfuturenetcashflows,thecarryingvalueofDevon’sRussianpropertiesexceededthefullcostceilingby$10millionattheendofthethirdquarterof2006.Therefore,Devonrecognizeda$20millionreductionofthecarryingvalueofitsoilandgaspropertiesinRussia,offsetbya$10milliondeferredincometaxbenefit.
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2005 ReductionsDevon’sinterestsinAngolawereacquiredthroughthe2003OceanEnergymerger.Devon’sAngolandrillingprogramdiscoverednoproven
reserves.Afterdrillingthreeunsuccessfulwellsinthefourthquarterof2005,DevondeterminedthatalloftheAngolancapitalizedcostsshouldbeimpaired.Priortothefourthquarterof2005,DevonwascapitalizingthecostsofpreviousunsuccessfuleffortsinBrazilpendingthedeterminationofwhetherproved
reserveswouldberecordedinBrazil.DevonhasbeensuccessfulinitsdrillingeffortsonblockBM-C-8inBrazilandiscurrentlydevelopingthePolvoprojectonthisblock.TheultimatevalueofthePolvoprojectisexpectedtobeinexcessofthesumofitsrelatedcosts,plusthecostsofthepreviousunrelatedunsuccessfuleffortsinBrazilwhichwerecapitalized.However,thePolvoprovedreserveswillberecordedoveraperiodoftime.Attheendof2005,itwasexpectedthatasmallinitialportionoftheprovedreservesultimatelyexpectedatPolvowouldberecordedin2006.Basedonpreliminaryestimatesdevelopedinthefourthquarterof2005,thevalueofthisinitialpartialbookingofprovedreserveswasnotsufficienttooffsetthesumoftherelatedproportionatePolvocostsplusthecostsofthepreviousunrelatedunsuccessfulefforts.Therefore,DevondeterminedthatthepriorunsuccessfulcostsunrelatedtothePolvoprojectshouldbeimpaired.Thesecoststotaledapproximately$42million.TherewasnotaxbenefitrelatedtothisBrazilianimpairment.
11.otherinCome
Thecomponentsofotherincomeincludethefollowing:
YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Interest and dividend income $ 100 95 45Net gain on sales of non-oil and gas property and equipment 6 150 33Loss on derivative financial instruments — (48) —Gains from changes in foreign exchange rates — 2 23Other 9 (1) 25 Total $ 115 198 126
12.inCometaxeS
AtDecember31,2006,Devonhadthefollowingnetoperatinglosscarryforwardswhichareavailabletoreducefuturetaxableincomeinthejurisdictionwherethenetoperatinglosswasincurred.Thesecarryforwardswillresultinafuturetaxreductionbaseduponthefuturetaxrateapplicabletothetaxableincomethatisulti-matelyoffsetbythenetoperatinglosscarryforward.Forfinancialpurposes,thetaxeffectsofthesecarryforwardshavebeenrecognizedasreductionstothenetdeferredtaxliabilityatDecember31,2006. YearSof CarrYforward juriSdiCtion expiration amountS
(INMILLIoNs)
Various U.S. states 2007 – 2022 $ 110Canada 2008 – 2027 $ 143Brazil Indefinite $ 31
87
notes
Theearningsfromcontinuingoperationsbeforeincometaxesandthecomponentsofincometaxexpense(benefit)fortheyears2006,2005and2004wereasfollows: YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
EARningS FROM COntinuing OPERAtiOnS bEFORE inCOME tAxES: U.S. $ 2,435 3,254 2,264 Canada 751 899 598 International 826 352 414 Total $ 4,012 4,505 3,276
CuRREnt inCOME tAx ExPEnSE: U.S. federal $ 292 735 346 Various states 7 26 10 Canada 143 106 49 International 377 351 320 Total current tax expense 819 1,218 725
DEFERRED inCOME tAx ExPEnSE (bEnEFit): U.S. federal 456 271 246 Various states 77 (18) 27 Canada (105) 217 149 International (58) (82) (52) Total deferred tax expense 370 388 370 Total income tax expense $ 1,189 1,606 1,095
Thetaxesontheresultsofdiscontinuedoperationspresentedintheaccompanyingstatementsofoperationswereallrelatedtointernationaloperations.TotalincometaxexpensedifferedfromtheamountscomputedbyapplyingtheU.S.federalincometaxratetoearningsfromcontinuingoperationsbeforeincome
taxesasaresultofthefollowing:
YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Expected income tax expense based on U.S. statutory tax rate of 35% $ 1,404 1,577 1,146 Effect of Canadian tax rate reductions (243) (14) (36) U.S. manufacturing deduction (12) (25) — Repatriation of Canadian earnings — 28 — State income taxes 55 6 20 Taxation on foreign operations (22) 30 (35) Other 7 4 — Total income tax expense $ 1,189 1,606 1,095
In2006,2005and2004,deferredincometaxeswerereduced$243million,$14millionand$36million,respectively,duetoCanadianstatutoryratereductionsthatwereenactedineachsuchyear.
In2006and2005,incometaxeswerereduced$12millionand$25million,respectively,duetoanewU.S.taxdeductionforcompanieswithdomesticproductionactivities,includingoilandgasextraction.
In2006,deferredincometaxesincreased$39millionduetotheeffectofanewincome-basedtaxenactedbythestateofTexasthatreplacesapreviousfranchisetax.ThenewtaxiseffectiveJanuary1,2007.The$39millionincreaseisincludedin2006stateincometaxesintheabovetable.
In2005,Devonrecognized$28millionoftaxesrelatedtoitsrepatriationof$545milliontotheU.S.Thecashwasrepatriatedduetotaxlegislationthatallowedqualifyingcompaniestorepatriatecashfromforeignoperationsatareducedincometaxrate.SubstantiallyallofthecashrepatriatedbyDevonin2005relatedto
88
notes
earningsofitsCanadiansubsidiary.ThetaxeffectsoftemporarydifferencesthatgaverisetosignificantportionsofthedeferredtaxassetsandliabilitiesatDecember31,2006and2005arepresented
below:
deCemBer31, 2006 2005
(INMILLIoNs)
DEFERRED tAx ASSEtS: Net operating loss carryforwards $ 35 148 Minimum tax credit carryforwards — 18 Fair value of derivative financial instruments 97 52 Asset retirement obligations 270 271 Pension benefit obligations 81 49 Insurance proceeds 113 — Other 108 102 Total deferred tax assets 704 640
DEFERRED tAx liAbilitiES: Property and equipment, principally due to nontaxable business combinations, differences in depreciation, and the expensing of intangible drilling costs for tax purposes (5,743) (5,406) Chevron Corporation common stock (326) (247) Long-term debt (148) (168) Other (35) (35) Total deferred tax liabilities (6,252) (5,856) Net deferred tax liability $ (5,548) (5,216)
Asshownintheabovetable,Devonhasrecognized$704millionofdeferredtaxassetsasofDecember31,2006.Suchamountincludes$35millionfromvariouscarryforwardsavailabletooffsetfutureincometaxes.Thecarryforwardsincludestatenetoperatinglosscarryforwardswhichexpireprimarilybetween2007and2022,Canadiannetoperatinglosscarryforwardswhichexpireprimarilybetween2008and2027,andBraziliannetoperatinglosscarryforwardswhichhavenoexpiration.Thetaxbenefitsofcarryforwardsarerecordedasanassettotheextentthatmanagementassessestheutilizationofsuchcarryforwardstobe“morelikelythannot.”Whenthefutureutilizationofsomeportionofthecarryforwardsisdeterminednottobe“morelikelythannot,”avaluationallowanceisprovidedtoreducetherecordedtaxbenefitsfromsuchassets.
Devonexpectsthetaxbenefitsfromthenetoperatinglosscarryforwardstobeutilizedbetween2007and2010.Suchexpectationisbaseduponcurrentestimatesoftaxableincomeduringthisperiod,consideringlimitationsontheannualutilizationofthesebenefitsassetforthbytaxregulations.Significantchangesinsuchestimatescausedbyvariablessuchasfutureoilandgaspricesorcapitalexpenditurescouldalterthetimingoftheeventualutilizationofsuchcarryforwards.TherecanbenoassurancethatDevonwillgenerateanyspecificlevelofcontinuingtaxableearnings.However,managementbelievesthatDevon’sfuturetaxableincomewillmorelikelythannotbesufficienttoutilizesubstantiallyallitstaxcarryforwardspriortotheirexpiration.
89
notes
13.diSContinuedoperationS
egyptOnNovember14,2006,DevonannounceditsplanstodivestitsoperationsinEgypt.Pursuanttoaccountingrulesfordiscontinuedoperations,Devonhasclassified
all2006andpriorperiodamountsrelatedtoitsoperationsinEgyptasdiscontinuedoperations.DevonanticipatescompletingthesaleofitsEgyptianassetsduringthefirsthalfof2007.AsofDecember31,2006,Devonhasnotrecordedanygainorlossassociatedwiththisplannedsale.
RevenuesrelatedtoDevon’soperationsinEgypttotaled$118million,$119millionand$133millionduring2006,2005and2004,respectively.ThefollowingtablepresentsthemainclassesofassetsandliabilitiesassociatedwithDevon’soperationsinEgyptasofDecember31,2006and2005.
aSofdeCemBer31, 2006 2005
(INMILLIoNs)
ASSEtS: Cash $ 17 13 Accounts receivable 32 36 Other current assets 32 17 Current assets $ 81 66 Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization $ 185 217 liAbilitiES: Current liabilities – accounts payable – trade $ 5 19 Asset retirement obligation, long-term $ 9 8 Deferred income taxes 15 31 Other liabilities 1 1 Long-term liabilities $ 25 40
westafrica(Subsequentevent)OnJanuary23,2007DevonannounceditsplanstodivestitsoperationsinWestAfrica.Pursuanttoaccountingrulesfordiscontinuedoperations,Devonhasnot
classifiedtheassets,liabilitiesoroperatingresultsofitsoperationsinWestAfricaasdiscontinuedoperationsasofDecember31,2006.However,suchamountswillbeclassifiedasdiscontinuedoperationsbeginningwiththefirstquarterof2007.DevonanticipatescompletingthesaleofitsWestAfricanassetsduringthethirdquarterof2007.AsofDecember31,2006,Devonhasnotrecordedanygainorlossassociatedwiththisplannedsale.
ThefollowingtablepresentsthemainclassesofassetsandliabilitiesassociatedwithDevon’soperationsinWestAfricaasofDecember31,2006and2005.
aSofdeCemBer31, 2006 2005
(INMILLIoNs)
ASSEtS: Cash $ 47 62 Accounts receivable 69 190 Other current assets 35 31 Current assets $ 151 283 Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization $ 1,434 1,515 liAbilitiES: Accounts payable – trade $ 43 64 Income taxes payable 115 101 Current portion of asset retirement obligation 8 — Accrued expenses and other current liabilities 2 — Current liabilities $ 168 165 Asset retirement obligation, long-term $ 29 24 Deferred income taxes 360 397 Other liabilities 15 15 Long-term liabilities $ 404 436
90
notes
14.SeGmentinformation
Devonmanagesitsbusinessbycountry.Assuch,Devonidentifiesitssegmentsbasedongeographicareas.Devonhasthreereportablesegments:itsoperationsintheU.S.,itsoperationsinCanada,anditsinternationaloperationsoutsideofNorthAmerica.Substantiallyallofthesesegments’operationsinvolveoilandgasproducingactivities.CertaininformationregardingsuchactivitiesforeachsegmentisincludedinNote15.
FollowingiscertainfinancialinformationregardingDevon’ssegmentsfor2006,2005and2004.Therevenuesreportedareallfromexternalcustomers.
u.S. Canada international total
(INMILLIoNs)
AS OF DECEMbER 31, 2006: Current assets $ 1,307 616 1,289 3,212Property and equipment, net of accumulated depreciation, depletion and amortization 15,253 6,929 2,413 24,595Goodwill 3,053 2,585 68 5,706Other assets 1,289 35 226 1,550 Total assets $ 20,902 10,165 3,996 35,063
Current liabilities $ 3,693 569 383 4,645Long-term debt 2,594 2,974 — 5,568Asset retirement obligation, long-term 387 360 86 833Other liabilities 864 16 45 925Deferred income taxes 3,351 1,831 468 5,650Stockholders’ equity 10,013 4,415 3,014 17,442 Total liabilities and stockholders’ equity $ 20,902 10,165 3,996 35,063
YEAR EnDED DECEMbER 31, 2006: Revenues: Oil sales $ 1,218 603 1,384 3,205 Gas sales 3,445 1,456 31 4,932 NGL sales 548 201 — 749 Marketing and midstream revenues 1,641 31 20 1,692 Total revenues 6,852 2,291 1,435 10,578Expenses and other income, net: Lease operating expenses 813 543 132 1,488 Production taxes 235 7 99 341 Marketing and midstream operating costs and expenses 1,226 10 8 1,244 Depreciation, depletion and amortization of oil and gas properties 1,311 644 311 2,266 Depreciation and amortization of non-oil and gas properties 154 18 4 176 Accretion of asset retirement obligation 25 21 3 49 General and administrative expenses 316 92 (11) 397 Interest expense 199 222 — 421 Change in fair value of derivative financial instruments 181 (3) — 178 Reduction of carrying value of oil and gas properties — — 121 121 Other income, net (43) (14) (58) (115) Total expenses and other income, net 4,417 1,540 609 6,566Earnings from continuing operations before income tax expense 2,435 751 826 4,012Income tax expense (benefit): Current 299 143 377 819 Deferred 533 (105) (58) 370 Total income tax expense 832 38 319 1,189Earnings from continuing operations 1,603 713 507 2,823Discontinued operations: Earnings from discontinued operations before income taxes — — 22 22 Income tax benefit — — (1) (1) Earnings from discontinued operations — — 23 23Net earnings 1,603 713 530 2,846Preferred stock dividends 10 — — 10Net earnings applicable to common stockholders $ 1,593 713 530 2,836 Capital expenditures $ 5,814 1,670 609 8,093
91
notes
u.S. Canada international total
(INMILLIoNs)
AS OF DECEMbER 31, 2005:Current assets $ 2,042 1,182 982 4,206Property and equipment, net of accumulated depreciation, depletion and amortization 10,856 5,877 2,178 18,911Goodwill 3,056 2,581 68 5,705Other assets 1,213 17 221 1,451 Total assets $ 17,167 9,657 3,449 30,273
Current liabilities $ 1,736 925 273 2,934Long-term debt 2,986 2,971 — 5,957Asset retirement obligation, long-term 320 261 29 610Other liabilities 467 12 57 536Deferred income taxes 2,864 2,008 502 5,374Stockholders’ equity 8,794 3,480 2,588 14,862 Total liabilities and stockholders’ equity $ 17,167 9,657 3,449 30,273
YEAR EnDED DECEMbER 31, 2005:Revenues: Oil sales $ 1,062 353 944 2,359 Gas sales 3,929 1,814 41 5,784 NGL sales 484 196 7 687 Marketing and midstream revenues 1,780 12 — 1,792 Total revenues 7,255 2,375 992 10,622Expenses and other income, net: Lease operating expenses 710 498 116 1,324 Production taxes 273 6 56 335 Marketing and midstream operating costs and expenses 1,336 6 — 1,342 Depreciation, depletion and amortization of oil and gas properties 1,137 570 274 1,981 Depreciation and amortization of non-oil and gas properties 141 14 5 160 Accretion of asset retirement obligation 25 16 2 43 General and administrative expenses 245 59 (13) 291 Interest expense 224 309 — 533 Change in fair value of derivative financial instruments 86 8 — 94 Reduction of carrying value of oil and gas properties — — 212 212 Other income, net (176) (10) (12) (198) Total expenses and other income, net 4,001 1,476 640 6,117Earnings from continuing operations before income tax expense 3,254 899 352 4,505Income tax expense (benefit): Current 761 106 351 1,218 Deferred 253 217 (82) 388 Total income tax expense 1,014 323 269 1,606Earnings from continuing operations 2,240 576 83 2,899Discontinued operations: Earnings from discontinued operations before income taxes — — 46 46 Income tax expense — — 15 15 Earnings from discontinued operations — — 31 31Net earnings 2,240 576 114 2,930Preferred stock dividends 10 — — 10Net earnings applicable to common stockholders $ 2,230 576 114 2,920 Capital expenditures $ 2,200 1,707 308 4,215
92
notes
u.S. Canada international total
(INMILLIoNs)
YEAR EnDED DECEMbER 31, 2004:Revenues: Oil sales $ 976 299 824 2,099 Gas sales 3,261 1,437 34 4,732 NGL sales 405 143 6 554 Marketing and midstream revenues 1,688 13 — 1,701 Total revenues 6,330 1,892 864 9,086Expenses and other income, net: Lease operating expenses 714 438 107 1,259 Production taxes 220 5 30 255 Marketing and midstream operating costs and expenses 1,333 6 — 1,339 Depreciation, depletion and amortization of oil and gas properties 1,242 522 313 2,077 Depreciation and amortization of non-oil and gas properties 130 14 4 148 Accretion of asset retirement obligation 27 15 2 44 General and administrative expenses 221 56 — 277 Interest expense 197 278 — 475 Change in fair value of derivative financial instruments 63 (1) — 62 Other income, net (81) (39) (6) (126) Total expenses and other income, net 4,066 1,294 450 5,810Earnings before income tax expense 2,264 598 414 3,276Income tax expense (benefit): Current 356 49 320 725 Deferred 273 149 (52) 370 Total income tax expense 629 198 268 1,095Earnings from continuing operations 1,635 400 146 2,181Discontinued operations: Earnings from discontinued operations before income taxes — — 17 17 Income tax expense — — 12 12 Earnings from discontinued operations — — 5 5Net earnings 1,635 400 151 2,186Preferred stock dividends 10 — — 10Net earnings applicable to common stockholders $ 1,625 400 151 2,176 Capital expenditures $ 1,674 979 279 2,932
15.SupplementalinformationonoilandGaSoperationS(unaudited)
ThefollowingsupplementalunauditedinformationregardingtheoilandgasactivitiesofDevonispresentedpursuanttothedisclosurerequirementspromulgatedbytheSecuritiesandExchangeCommissionandSFASNo.69,Disclosures About Oil and Gas Producing Activities.ThissupplementalinformationexcludesamountsforallperiodspresentedrelatedtoDevon’sdiscontinuedoperationsinEgypt.
CostsincurredThefollowingtablesreflectthecostsincurredinoilandgaspropertyacquisition,exploration,anddevelopmentactivities:
total YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Property acquisition costs: Proved properties $ 1,113 54 38 Unproved properties 1,485 347 141Exploration costs 973 890 714Development costs 4,151 2,787 1,917 Costs incurred $ 7,722 4,078 2,810
93
notes
domeStiC YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Property acquisition costs: Proved properties $ 1,066 5 27 Unproved properties 1,366 106 75Exploration costs 547 422 335Development costs 2,558 1,597 1,163 Costs incurred $ 5,537 2,130 1,600
Canada YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Property acquisition costs: Proved properties $ 23 49 11 Unproved properties 70 239 52Exploration costs 217 361 272Development costs 1,244 1,020 625 Costs incurred $ 1,554 1,669 960
international YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Property acquisition costs: Proved properties $ 24 — — Unproved properties 49 2 14Exploration costs 209 107 107Development costs 349 170 129 Costs incurred $ 631 279 250
Pursuanttothefullcostmethodofaccounting,Devoncapitalizescertainofitsgeneralandadministrativeexpenseswhicharerelatedtopropertyacquisition,explorationanddevelopmentactivities.Suchcapitalizedexpenses,whichareincludedinthecostsshownintheprecedingtables,were$269million,$181millionand$166millionintheyears2006,2005and2004,respectively.Also,Devoncapitalizesinterestcostsincurredandattributabletounprovedoilandgaspropertiesandmajordevelopmentprojectsofoilandgasproperties.Capitalizedinterestexpenses,whichareincludedinthecostsshownintheprecedingtables,were$70millionineachoftheyears2006,2005and2004.
resultsofoperationsforoilandGasproducingactivitiesThefollowingtablesincluderevenuesandexpensesassociateddirectlywithDevon’soilandgasproducingactivities,includinggeneralandadministrative
expensesdirectlyrelatedtosuchproducingactivities.TheydonotincludeanyallocationofDevon’sinterestcostsorgeneralcorporateoverheadand,therefore,arenotnecessarilyindicativeofthecontributiontonetearningsofDevon’soilandgasoperations.Incometaxexpensehasbeencalculatedbyapplyingstatutoryincometaxratestooil,gasandNGLsalesafterdeductingcosts,includingdepreciation,depletionandamortizationandaftergivingeffecttopermanentdifferences.
total YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)
Oil, gas and NGL sales $ 8,886 8,830 7,385Production and operating expenses (1,829) (1,659) (1,514)Depreciation, depletion and amortization (2,266) (1,981) (2,077)Accretion of asset retirement obligation (49) (43) (44)General and administrative expenses (162) (107) (104)Reduction of carrying value of oil and gas properties (121) (212) —Income tax expense (1,448) (1,830) (1,342) Results of operations $ 3,011 2,998 2,304Depreciation, depletion and amortization per Boe $ 10.59 8.86 8.41
94
notes
domeStiC YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)
Oil, gas and NGL sales $ 5,211 5,475 4,642Production and operating expenses (1,048) (983) (934)Depreciation, depletion and amortization (1,311) (1,137) (1,242)Accretion of asset retirement obligation (26) (25) (27)General and administrative expenses (115) (84) (75)Income tax expense (996) (1,145) (807) Results of operations $ 1,715 2,101 1,557Depreciation, depletion and amortization per Boe $ 9.89 8.35 8.23
Canada YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)
Oil, gas and NGL sales $ 2,260 2,363 1,879Production and operating expenses (550) (504) (443)Depreciation, depletion and amortization (644) (570) (522)Accretion of asset retirement obligation (21) (16) (15)General and administrative expenses (29) (20) (16)Income tax expense (144) (426) (275) Results of operations $ 872 827 608Depreciation, depletion and amortization per Boe $ 11.17 9.20 8.00
international YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)
Oil, gas and NGL sales $ 1,415 992 864Production and operating expenses (231) (172) (137)Depreciation, depletion and amortization (311) (274) (313)Accretion of asset retirement obligation (2) (2) (2)General and administrative expenses (18) (3) (13)Reduction of carrying value of oil and gas properties (121) (212) —Income tax expense (308) (259) (260) Results of operations $ 424 70 139Depreciation, depletion and amortization per Boe $ 13.03 10.73 10.13
95
notes
In2006,2005and2004,theCanadianincometaxamountsinthetablesabovewerereducedby$243million,$14millionand$36million,respectively,duetostatutoryratereductionsthatwereenactedineachsuchyear.
quantitiesofoilandGasreserves
Setforthbelowisasummaryofthereserveswhichwereevaluated,eitherbypreparationoraudit,byindependentpetroleumconsultantsforeachoftheyearsended2006,2005and2004.
2006 2005 2004 prepared audited prepared audited prepared audited
Domestic 7% 81% 9% 79% 16% 61% Canada 46% 39% 46% 26% 22% — International 99% — 98% — 98% — Total 28% 61% 31% 54% 28% 35%
“Prepared”reservesarethosequantitiesofreserveswhichwerepreparedbyanindependentpetroleumconsultant.“Audited”reservesarethosequantitiesofrevenueswhichwereestimatedbyDevonemployeesandauditedbyanindependentpetroleumconsultant.Anauditisanexaminationofacompany’sprovedoilandgasreservesandnetcashflowbyanindependentpetroleumconsultantthatisconductedforthepurposeofexpressinganopinionastowhethersuchestimates,inaggregate,arereasonableandhavebeenestimatedandpresentedinconformitywithgenerallyacceptedpetroleumengineeringandevaluationprinciples.
ThedomesticreserveswereevaluatedbytheindependentpetroleumconsultantsofLaRochePetroleumConsultants,Ltd.andRyderScottCompany,L.P.ineachoftheyearspresented.TheCanadianreserveswereevaluatedbytheindependentpetroleumconsultantsofAJMPetroleumConsultantsineachoftheyearspresented.TheInternationalreserveswereevaluatedbytheindependentpetroleumconsultantsofRyderScottCompany,L.P.ineachoftheyearspresented.
Setforthbelowisasummaryofthechangesinthenetquantitiesofcrudeoil,naturalgasandnaturalgasliquidsreservesforeachofthethreeyearsendedDecember31,2006.Additionaldiscussionofthesignificantprovedreservechangesfollowsthetablesbelow.
total natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)
Proved reserves as of December 31, 2003 646 7,316 209 2,074 Revisions due to prices (82) 39 1 (75) Revisions other than price 19 29 21 45 Extensions and discoveries 76 988 25 266 Purchase of reserves 1 14 — 3 Production (74) (891) (24) (247) Sale of reserves (1) (2) — (1) Proved reserves as of December 31, 2004 585 7,493 232 2,065 Revisions due to prices (14) 78 4 3 Revisions other than price 21 (2) 16 37 Extensions and discoveries 166 1,220 30 400 Purchase of reserves 2 10 — 4 Production (62) (827) (24) (224) Sale of reserves (58) (676) (12) (183) Proved reserves as of December 31, 2005 640 7,296 246 2,102 Revisions due to prices (21) (89) (7) (44) Revisions other than price 5 (106) 5 (6) Extensions and discoveries 139 1,491 45 433 Purchase of reserves — 584 9 106 Production (55) (815) (23) (214) Sale of reserves — (5) — (1) Proved reserves as of December 31, 2006 708 8,356 275 2,376 Proved developed reserves as of: December 31, 2003 392 5,980 179 1,568 December 31, 2004 400 6,219 204 1,640 December 31, 2005 355 6,111 216 1,589 December 31, 2006 358 6,518 229 1,674
96
notes
domeStiC natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)
Proved reserves as of December 31, 2003 212 4,884 161 1,187 Revisions due to prices 5 8 1 8 Revisions other than price 2 62 23 35 Extensions and discoveries 16 578 16 129 Purchase of reserves — 8 — 1 Production (31) (602) (19) (151) Sale of reserves (1) (2) — (1) Proved reserves as of December 31, 2004 203 4,936 182 1,208 Revisions due to prices 6 58 3 19 Revisions other than price 2 238 19 61 Extensions and discoveries 16 793 20 169 Purchase of reserves — — — — Production (25) (555) (18) (136) Sale of reserves (29) (306) (9) (89) Proved reserves as of December 31, 2005 173 5,164 197 1,232 Revisions due to prices — (110) (3) (22) Revisions other than price — (11) 6 5 Extensions and discoveries 16 1,298 43 274 Purchase of reserves — 580 9 105 Production (19) (566) (19) (132) Sale of reserves — — — — Proved reserves as of December 31, 2006 170 6,355 233 1,462 Proved developed reserves as of: December 31, 2003 171 3,935 136 964 December 31, 2004 168 4,105 161 1,014 December 31, 2005 149 4,343 175 1,049 December 31, 2006 147 4,916 196 1,163
Canada natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)
Proved reserves as of December 31, 2003 148 2,297 48 579 Revisions due to prices (43) 32 — (38) Revisions other than price 5 (46) (2) (5) Extensions and discoveries 50 410 9 127 Purchase of reserves 1 6 — 2 Production (14) (279) (5) (65) Sale of reserves — — — — Proved reserves as of December 31, 2004 147 2,420 50 600 Revisions due to prices — 22 1 4 Revisions other than price 2 (242) (3) (41) Extensions and discoveries 144 427 10 225 Purchase of reserves 2 10 — 4 Production (13) (261) (6) (62) Sale of reserves (29) (370) (3) (94) Proved reserves as of December 31, 2005 253 2,006 49 636 Revisions due to prices (19) 23 (4) (20) Revisions other than price (1) (84) (1) (16) Extensions and discoveries 109 193 2 145 Purchase of reserves — 4 — 1 Production (13) (241) (4) (58) Sale of reserves — (5) — (1) Proved reserves as of December 31, 2006 329 1,896 42 687 Proved developed reserves as of: December 31, 2003 123 1,964 43 493 December 31, 2004 123 2,043 43 507 December 31, 2005 103 1,708 41 429 December 31, 2006 112 1,560 33 405
97
notes
international(1)
natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)
Proved reserves as of December 31, 2003 286 135 — 308 Revisions due to prices (44) (1) — (45) Revisions other than price 12 13 — 15 Extensions and discoveries 10 — — 10 Purchase of reserves — — — — Production (29) (10) — (31) Sale of reserves — — — — Proved reserves as of December 31, 2004 235 137 — 257 Revisions due to prices (20) (2) — (20) Revisions other than price 17 2 — 17 Extensions and discoveries 6 — — 6 Purchase of reserves — — — — Production (24) (11) — (26) Sale of reserves — — — — Proved reserves as of December 31, 2005 214 126 — 234 Revisions due to prices (2) (2) — (2) Revisions other than price 6 (11) — 5 Extensions and discoveries 14 — — 14 Purchase of reserves — — — — Production (23) (8) — (24) Sale of reserves — — — — Proved reserves as of December 31, 2006 209 105 — 227 Proved developed reserves as of: December 31, 2003 98 81 — 111 December 31, 2004 109 71 — 119 December 31, 2005 103 60 — 111 December 31, 2006 99 42 — 106
(1) Except for nine MMBoe of proved reserves as of December 31, 2006, the preceding International quantities of reserves are attributable to production sharing contracts with various foreign governments.
Noteworthyamountsincludedinthecategoriesofprovedreservechangesfortheyears2006,2005and2004intheabovetablesinclude:Extensions and DiscoveriesOfthe433MMBoeof2006extensionsanddiscoveries,143MMBoerelatedtotheBarnettShaleareainTexas,88MMBoerelatedto
theJackfishsteam-assistedgravitydrainageprojectinCanadawhichisexpectedtobeginproductionin2007,30MMBoerelatedtotheCarthageareaineastTexasand20MMBoerelatedtotheWashakieareainsouthernWyoming.
The2006extensionsanddiscoveriesincluded202MMBoerelatedtoadditionsfromDevon’sinfilldrillingactivities,including127MMBoerelatedtotheBarnettShaleareaand20MMBoerelatedtotheLloydminsterareainCanada.
Ofthe400MMBoeof2005extensionsanddiscoveries,118MMBoerelatedtoJackfish,54MMBoerelatedtotheBarnettShale,and40MMBoerelatedtotheDeepBasininCanada.The2005extensionsanddiscoveriesincluded76MMBoerelatedtoadditionsfromDevon’sinfilldrillingactivities,including19MMBoerelatedtotheBarnettShale,16MMBoerelatedtoCarthageandeightMMBoerelatedtothePermianBasininNewMexicoandwestTexas.
Ofthe266MMBoeof2004extensionsanddiscoveries,32MMBoerelatedtotheCanadianDeepBasin,29MMBoerelatedtotheBarnettShale,and28MMBoerelatedtoCarthage.The2004extensionsanddiscoveriesincluded67MMBoerelatedtoadditionsfromDevon’sinfilldrillingactivities,including21MMBoerelatedtoCarthage,12MMBoerelatedtothePermianBasinandnineMMBoerelatedtotheBarnettShale.
Purchase of ReservesThe2006totalincludes100MMBoelocatedintheBarnettShalethatwasacquiredintheChiefacquisition.SeeNote3.Sale of ReservesThe2005totalincludes176MMBoeofreservesrelatedtonon-coreoilandgaspropertiesintheoffshoreGulfofMexicoandonshoreinthe
UnitedStatesandCanada.SeeNote3.
98
notes
StandardizedmeasureofdiscountedfuturenetCashflowsThetablesbelowreflectthestandardizedmeasureofdiscountedfuturenetcashflowsrelatingtoDevon’sinterestinprovedreserves:
total deCemBer31, 2006 2005 2004
(INMILLIoNs)
Future cash inflows $ 82,354 94,132 66,595Future costs: Development (8,518) (5,802) (4,211) Production (29,408) (25,063) (19,513)Future income tax expense (13,856) (21,425) (13,704)Future net cash flows 30,572 41,842 29,16710% discount to reflect timing of cash flows (13,999) (18,784) (13,555)Standardized measure of discounted future net cash flows $ 16,573 23,058 15,612
domeStiC deCemBer31, 2006 2005 2004
(INMILLIoNs)
Future cash inflows $ 47,980 55,954 39,214Future costs: Development (4,919) (2,954) (2,208) Production (18,858) (16,213) (13,181)Future income tax expense (7,588) (12,582) (7,597)Future net cash flows 16,615 24,205 16,22810% discount to reflect timing of cash flows (7,938) (11,258) (7,129)Standardized measure of discounted future net cash flows $ 8,677 12,947 9,099
Canada deCemBer31, 2006 2005 2004
(INMILLIoNs)
Future cash inflows $ 22,575 26,277 18,483Future costs: Development (2,395) (1,984) (1,353) Production (7,431) (6,344) (4,285)Future income tax expense (3,614) (5,986) (4,200)Future net cash flows 9,135 11,963 8,64510% discount to reflect timing of cash flows (4,318) (5,332) (4,764)Standardized measure of discounted future net cash flows $ 4,817 6,631 3,881
international deCemBer31, 2006 2005 2004
(INMILLIoNs)
Future cash inflows $ 11,799 11,901 8,898Future costs: Development (1,204) (864) (650) Production (3,119) (2,506) (2,047)Future income tax expense (2,654) (2,857) (1,907)Future net cash flows 4,822 5,674 4,29410% discount to reflect timing of cash flows (1,743) (2,194) (1,662)Standardized measure of discounted future net cash flows $ 3,079 3,480 2,632
99
notes
Futurecashinflowsarecomputedbyapplyingyear-endprices(averaging$46.11perbarrelofoil,$5.06perMcfofgasand$27.63perbarrelofnaturalgasliquidsatDecember31,2006)totheyear-endquantitiesofprovedreserves,exceptinthoseinstanceswherefixedanddeterminablepricechangesareprovidedbycontractualarrangementsinexistenceatyear-end.
Futuredevelopmentandproductioncostsarecomputedbyestimatingtheexpenditurestobeincurredindevelopingandproducingprovedoilandgasreservesattheendoftheyear,basedonyear-endcostsandassumingcontinuationofexistingeconomicconditions.Ofthe$8.5billionoffuturedevelopmentcosts,$2.2billion,$1.5billionand$0.9billionareestimatedtobespentin2007,2008and2009,respectively.
Futuredevelopmentcostsincludenotonlydevelopmentcosts,butalsofuturedismantlement,abandonmentandrehabilitationcosts.Includedaspartofthe$8.5billionoffuturedevelopmentcostsare$1.7billionoffuturedismantlement,abandonmentandrehabilitationcosts.
Futureproductioncostsincludegeneralandadministrativeexpensesdirectlyrelatedtooilandgasproducingactivities.Futureincometaxexpensesarecomputedbyapplyingtheappropriatestatutorytaxratestothefuturepre-taxnetcashflowsrelatingtoprovedreserves,netofthetaxbasisofthepropertiesinvolved.Thefutureincometaxexpensesgiveeffecttopermanentdifferencesandtaxcredits,butdonotreflecttheimpactoffutureoperations.
ChangesrelatingtotheStandardizedmeasureofdiscountedfuturenetCashflowsPrincipalchangesinthestandardizedmeasureofdiscountedfuturenetcashflowsattributabletoDevon’sprovedreservesareasfollows:
YearendeddeCemBer31, 2006 2005 2004
(INMILLIoNs)
Beginning balance $ 23,058 15,612 15,769Oil, gas and NGL sales, net of production costs (6,895) (7,064) (5,767)Net changes in prices and production costs (10,519) 11,767 2,027Extensions and discoveries, net of future development costs 4,579 6,096 3,022Purchase of reserves, net of future development costs 786 67 31Development costs incurred during the period which reduced future development costs 1,691 778 681Revisions of quantity estimates (2,325) (799) (1,105)Sales of reserves in place (10) (2,897) (13)Accretion of discount 3,482 2,270 2,243Net change in income taxes 4,247 (4,691) (1,580)Other, primarily changes in timing and foreign exchange rates (1,521) 1,919 304Ending balance $ 16,573 23,058 15,612
100
notes
16.SupplementalquarterlYfinanCialinformation(unaudited)
FollowingisasummaryoftheunauditedinterimresultsofoperationsfortheyearsendedDecember31,2006and2005.
2006 firSt SeCond third fourth full quarter quarter quarter quarter Year
(INMILLIoNs,exCeptpershAreAMouNts)
Oil, gas and NGL sales $ 2,222 2,192 2,279 2,193 8,886Total revenues $ 2,684 2,589 2,696 2,609 10,578Net earnings $ 700 859 705 582 2,846Net earnings per common share: Basic $ 1.58 1.94 1.59 1.31 6.42 Diluted $ 1.56 1.92 1.57 1.29 6.34
2005 firSt SeCond third fourth full quarter quarter quarter quarter Year
(INMILLIoNs,exCeptpershAreAMouNts)
Oil, gas and NGL sales $ 1,914 2,048 2,262 2,606 8,830Total revenues $ 2,330 2,437 2,667 3,188 10,622Net earnings $ 563 653 744 970 2,930Net earnings per common share: Basic $ 1.17 1.40 1.66 2.18 6.38 Diluted $ 1.14 1.38 1.63 2.14 6.26
Thefirst,secondandthirdquartersof2006include$85million,$16millionand$20million,respectively,ofreductionsofcarryingvaluesofoilandgasproperties.Theafter-taxeffectsoftheseamountswere$85million(or$0.19pershare),$16million(or$0.04pershare)and$10million(or$0.02pershare),respectively.Also,thesecondquarterof2006includedareductiontoincometaxexpenseof$243million(or$0.55pershare)duetostatutoryratereductionsinCanadaandadditionalincometaxexpenseof$39million(or$0.09pershare)duetoanewincome-basedtaxenactedbythestateofTexas.
TheadoptionofFASBStatementNo.158inthefourthquarterof2006(seeNote6)hadnoeffectonearningsfromcontinuingoperations,netearningsorrelatedpershareamountsduringanyofthequarterlyperiodsin2006.
Thefourthquarterof2005includesa$212millionreductionofcarryingvalueofoilandgaspropertiesanda$14millionincometaxbenefitduetoastatutoryratereductioninCanada.Theafter-taxeffectofthereductionofcarryingvaluewas$161million,or$0.36pershare.Thepershareeffectoftheratereductiontaxbenefitwas$0.03.
Oil,gasandnaturalgasliquidssalesforthefirst,second,thirdandfourthquartersof2006exclude$34million,$27million,$25millionand$32million,respectively,relatedtodiscontinuedoperationsinEgypt.Oil,gasandnaturalgasliquidssalesforthefirst,second,thirdandfourthquartersof2005exclude$21million,$31million,$37millionand$30million,respectively,relatedtodiscontinuedoperationsinEgypt.
101
Theforward-lookingestimatesbeginningonpage52arebasedonmanagement’sexaminationofhistoricaloperatingtrends,theinformationwhichwasusedtopreparetheDecember31,2006,reservereportsandotherdatainDevon’spossessionoravailablefromthirdparties.Devoncautionsthatitsfutureoil,naturalgasandNGLproduction,revenuesandexpensesaresubjecttoalloftherisksanduncertaintiesnormallyincidenttotheexplorationforanddevelopment,productionandsaleofoil,gasandNGLs.Theserisksinclude,butarenotlimitedto,pricevolatility,inflationorlackofavailabilityofgoodsandservices,environmentalrisks,drillingrisks,regulatorychanges,theuncertaintyinherentinestimatingfutureoilandgasproductionorreserves,andotherrisksasoutlinedbelow.Theproduction,transportation,processingandmarketingofoil,naturalgasandNGLsarecomplexprocesseswhicharesubjecttodisruptionduetotransportationandprocessingavailability,mechanicalfailure,humanerror,meteorologicaleventsincluding,butnotlimitedto,hurricanes,andnumerousotherfactors.
pricevolatilityPricesforoil,naturalgasandNGLsaredeterminedprimarilybyprevailingmarketconditions.Marketconditionsfortheseproductsareinfluencedbyregionaland
worldwideeconomicconditions,weatherandotherlocalmarketconditions.ThesefactorsarebeyondDevon’scontrolandaredifficulttopredict.Inadditiontovolatilityingeneral,oil,gasandNGLpricesmayvaryconsiderablyduetodifferencesbetweenregionalmarkets,differingqualityofoilproduced(i.e.,sweetcrudeversusheavyorsourcrude),differingBtucontentsofgasproduced,transportationavailabilityandcostsanddemandforthevariousproductsderivedfromoil,naturalgasandNGLs.SubstantiallyallofDevon’srevenuesareattributabletosales,processingandtransportationofthesethreecommodities.Consequently,Devon’sfinancialresultsandresourcesarehighlyinfluencedbypricevolatility.
oil,Gas,andnGlproductionEstimatesforfutureproductionofoil,naturalgasandNGLsarebasedontheassumptionthatmarketdemandandpricesforoil,gasandNGLswillcontinueatlevels
thatallowforprofitableproductionoftheseproducts.Therecanbenoassuranceofsuchstability.MostofDevon’sCanadianproductionofoil,naturalgasandNGLsissubjecttogovernmentroyaltiesthatfluctuatewithprices.Thus,pricefluctuationscanaffectreportedproduction.Also,Devon’sinternationalproductionofoil,naturalgasandNGLsisgovernedbypayoutagreementswiththegovernmentsofthecountriesinwhichDevonoperates.Ifthepayoutundertheseagreementsisattainedearlierthanprojected,Devon’snetproductionandprovedreservesinsuchareascouldbereduced.
marketingandmidstreamEstimatesforfutureprocessingandtransportofoil,naturalgasandNGLsarebasedontheassumptionthatmarketdemandandpricesforoil,gasandNGLswill
continueatlevelsthatallowforprofitableprocessingandtransportoftheseproducts.Therecanbenoassuranceofsuchstability.Additionally,Devoncautionsthatitsfuturemarketingandmidstreamrevenuesandexpensesaresubjecttoalloftherisksanduncertaintiesnormallyincidenttothemarketingandmidstreambusiness.Theserisksinclude,butarenotlimitedto,pricevolatility,environmentalrisks,regulatorychanges,theuncertaintyinherentinestimatingfutureprocessingvolumesandpipelinethroughput,costofgoodsandservicesandotherrisksasoutlinedherein.
foreignexchangeAlso,thefinancialresultsofDevon’sforeignoperationsaresubjecttocurrencyexchangeraterisks.Unlessotherwisenoted,allofthedollaramountsareexpressed
inU.S.dollars.AmountsrelatedtoCanadianoperationshavebeenconvertedtoU.S.dollarsusingaprojectedaverage2007exchangerateof$0.89U.S.dollarto$1.00Canadiandollar.Theactual2007exchangeratemayvarymateriallyfromthisestimate.Suchvariationscouldhaveamaterialeffectonourforward-lookingestimates.
propertyacquisitionsanddispositionsAlthoughDevonhascompletedseveralmajorpropertyacquisitionsanddispositionsinrecentyears,thesetransactionsareopportunitydriven.Exceptforthe
planneddivestituresofDevon’sassetsinEgyptandWestAfrica,theforward-lookingestimatesdonotincludethefinancialandoperatingeffectsofpotentialpropertyacquisitionsordivestituresduringtheyear2007.
Risk Factors to Forward-looking Estimates
102
John W. Nichols, 92, is a co-founder of Devon. He was named chairman emeritus in 1999. Nichols was chairman of the board of directors from the time Devon began operations in 1971 until 1999. He is a founding partner of Blackwood & Nichols Co., which put together the first public oil and gas drilling fund ever registered with the Securities and Exchange Commission. Nichols is a non-practicing Certified Public Accountant.
J. Larry Nichols, 64, is a co-founder of Devon and has been a director since 1971. He was named chairman of the board of directors in 2000 and serves as chairman of the Dividend Committee. Nichols served as president from 1976 until 2003 and has been chief executive officer since 1980. Nichols serves as a director of Baker Hughes Inc. and Sonic Corp. Nichols has a Bachelor of Arts degree in Geology from Princeton University and a law degree from the University of Michigan.
Thomas F. Ferguson, 70, joined the board of directors in 1982 and serves as chairman of the Audit Committee. Ferguson retired in 2005 from his position as managing director of United Gulf Management Ltd., a wholly-owned subsidiary of Kuwait Investment Projects Co. KSC. He has represented Kuwait Investment Projects Co. on the boards of various companies in which it invests, including Baltic Transit Bank in Latvia and Tunis International Bank in Tunisia. Ferguson is a Canadian qualified Certified General Accountant and was formerly employed by the Economist Intelligence Unit of London as a financial consultant.
Peter J. Fluor, 59, joined the board of directors in 2003. Fluor served as a director of Ocean Energy Inc. from 1980 to 2003 and has been chairman and chief executive officer of Texas Crude Energy Inc., a private oil and gas company, since January 2001. From 1997 through 2000, Fluor was president and chief executive officer of Texas Crude Energy Inc. He also serves as lead independent director of Fluor Corp. and is a director of Cameron Corp.
David M. Gavrin, 72, joined the board of directors in 1979 and is lead director and chairman of the Compensation Committee. Gavrin has been a private investor since 1989 and is a director and chairman of the board of MetBank Holding Corp. He is also president and a director of Arthur J. Gavrin Foundation Inc. From 1978 to 1988, he was a general partner of Windcrest Partners, a private investment partnership in New York City, and, for 14 years prior to that, he was an officer of Drexel Burnham Lambert Inc.
John A. Hill, 65, joined the board of directors in 2000 following Devon’s merger with Santa Fe Snyder Corp. and serves as chairman of the Governance Committee. He has been with First Reserve Corp., an oil and gas investment management company, since 1983 and is currently its vice chairman and managing director. Prior to creating First Reserve Corp., Hill was president and chief executive officer of several investment banking and asset management companies and served as the deputy administrator of the Federal Energy Administration during the Ford Administration. Hill is chairman of the board of trustees of the Putnam Funds in Boston, a trustee of Sarah Lawrence College and director of various companies controlled by First Reserve Corp.
Robert L. Howard, 70, joined the board of directors in 2003 and is chairman of the Reserves Committee. Howard served as a director of Ocean Energy Inc. from 1996 to 2003. He retired in 1995 from his position as vice president of Domestic Operations, Exploration and Production, of Shell Oil Co. Howard is also a director of Southwestern Energy Co. and McDermott International Inc.
William J. Johnson, 72, has been on the board of directors since 1999. Johnson has been a private consultant to the oil and gas industry since 1994. He is president and a director of JonLoc Inc., an oil and gas company of which he and his family are the only stockholders. Johnson has served as a director of Tesoro Corp. since 1996. From 1991 to 1994, Johnson was president, chief operating officer and a director of Apache Corp.
Michael M. Kanovsky, 58, joined the board of directors in 1998. He was a co-founder of Northstar Energy Corp. and served on Northstar’s board of directors from 1982 to 1998. He is president of Sky Energy Corp. and serves as a director of Kinwest Energy Corp. and North American Oil Sands Corp., all privately held energy corporations. Kanovsky also is a director of Accrete Energy Inc., ARC Resources Ltd., Bonavista Petroleum Ltd., Pure Technologies Ltd. and TransAlta Corp.
J. Todd Mitchell, 48, joined the board of directors in 2002. He served as president of GPM Inc., a family-owned investment company, from 1998 to 2006, and currently serves as its vice president for strategic planning. He also has served as president of Dolomite Resources Inc., a privately owned mineral exploration and investments company, since 1987 and as chairman of Rock Solid Images, a privately owned seismic data analysis software company, since 1998. Mitchell was on the board of directors of Mitchell Energy & Development Corp. from 1993 to 2002.
Directors
103
John Richels, 56, was elected president of Devon in 2004. He previously served as a senior vice president of Devon and president and chief executive officer of Devon’s Canadian subsidiary. Richels joined Devon through its 1998 acquisition of Canadian-based Northstar Energy Corp. Prior to joining Northstar, Richels was managing and chief operating partner of the Canadian-based national law firm, Bennett Jones. While employed at Bennett Jones in the 1980s, Richels served as general counsel of the XV Olympic Winter Games Organizing Committee in Calgary. Richels also has served as a director of a number of publicly traded companies. He holds a bachelor’s degree in economics from York University and a law degree from the University of Windsor.
Stephen J. Hadden, 52, was elected to the position of senior vice president, Exploration and Production, in 2004. In 1977, Hadden joined Texaco, now Chevron Corp., as a field engineer, subsequently holding a series of engineering and management positions in the United States. He served as vice president of Texaco Exploration and Production and as vice president of the company’s California business unit. In 2002, he became an independent consultant. Hadden received a Bachelor of Science degree in chemical engineering from Pennsylvania State University.
Marian J. Moon, 56, was elected to the position of senior vice president, Administration, in 1999. Moon is responsible for office administration, information technology, human resources, corporate resources and corporate governance. Moon has been with Devon for 22 years and served in various capacities, including manager of Corporate Finance and corporate secretary. Prior to joining Devon, Moon was employed by Amarex Inc., an Oklahoma City-based oil and natural gas production and exploration firm, where her last position was treasurer. Moon is a member of the Society of Corporate Secretaries & Governance Professionals and a graduate of Valparaiso University.
Darryl G. Smette, 59, was elected to the position of senior vice president, Marketing and Midstream, in 1999. Smette previously held the position of vice president, Marketing and Administrative Planning. His marketing background includes 15 years with Energy Reserves Group Inc./BHP Petroleum (Americas) Inc. He is also an oil and gas industry instructor, approved by the University of Texas Department of Continuing Education. Smette is a member of the Oklahoma Independent Producers Association, Natural Gas Association of Oklahoma and the American Gas Association. He holds an undergraduate degree from Minot State University and a master’s degree from Wichita State University.
Lyndon C. Taylor, 48, was elected to the position of senior vice president and general counsel in February 2007. Taylor had served as Devon’s deputy general counsel since August 2005. Prior to joining Devon, Taylor was with Skadden, Arps, Slate, Meagher & Flom, LLP for 20 years, most recently as managing partner of the Houston office’s energy practice. He is admitted to practice law in Oklahoma and Texas. Taylor holds a Bachelor of Science degree in industrial engineering from Oklahoma State University and a law degree from the University of Oklahoma.
Senior Officers
104
Glossary
Bitumen / A viscous, tar-like oil that requires nonconven-tional production methods such as mining or steam-assisted gravity drainage.
Block / Refers to a contiguous leasehold position. In federal offshore waters, a block is typically 5,000 acres.
British thermal unit (Btu) / A measure of heat value. An Mcf of natural gas is roughly equal to one million Btu.
Coalbed natural gas / An unconventional gas resource that is present in certain coal deposits.
Deep water / In offshore areas, water depths of greater than 600 feet.
Delineation well / A well drilled just outside the proved area of an oil or gas reservoir in an attempt to extend the known boundaries of the reservoir.
Development well / A well drilled within the area of an oil or gas reservoir known to be productive. Development wells are relatively low risk.
Dry hole / A well found to be incapable of producing oil or gas in sufficient quantities to justify completion.
Exploitation / Various methods of optimizing oil and gas production or establishing additional reserves from produc-ing properties through additional drilling or the application of new technology.
Exploratory well / A well drilled in an unproved area, either to find a new oil or gas reservoir or to extend a known reservoir. Sometimes referred to as a wildcat.
Field / A geographical area under which one or more oil or gas reservoirs lie.
Floating production, storage and offloading unit (FPSO) / A moored tanker-type vessel used to develop an offshore oil field. Oil is stored within the FPSO until offloaded to a tanker for transportation to a terminal or refinery.
Formation / An identifiable layer of rocks named after the geographical location of its first discovery and dominant rock type.
Fracture, refracture / The process of applying hydraulic pressure to an oil or gas bearing geological formation to crack the formation and stimulate the release of oil and gas.
Gross acres / The total number of acres in which one owns a working interest.
Hedge / A financial contract entered into to manage com-modity price risk.
Increased density/infill / A well drilled in addition to the number of wells permitted under initial spacing regulations, used to enhance or accelerate recovery, or prevent the loss of proved reserves.
Independent producer / A non-integrated oil and gas producer with no refining or retail marketing operations.
Lease / A legal contract that specifies the terms of the business relationship between an energy company and a landowner or mineral rights holder on a particular tract.
London Inter Bank Offering Rate (LIBOR) / An average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London.
Natural gas liquids (NGLs) / Liquid hydrocarbons that are extracted and separated from the natural gas stream. NGL products include ethane, propane, butane and natural gasoline.
Net acres / Gross acres multiplied by one’s fractional work-ing interest in the property.
New York Mercantile Exchange (NYMEX) / The world’s largest physical commodity futures exchange. The prices quoted for oil, gas and other commodity transactions on the exchange are the basis for prices paid throughout the world.
Oil sands / A complex mixture of sand, water and clay trap-ping very heavy oil known as bitumen.
Pilot program / A small-scale test project used to assess the viability of a concept prior to committing significant capital to a large-scale project.
Production / Natural resources, such as oil or gas, taken out of the ground.
Gross production / Total production before deducting royalties.
Net production / Gross production, minus royalties, multiplied by one’s fractional working interest.
Prospect / An area designated for the potential drilling of development or exploratory wells.
Proved reserves / Estimates of oil, gas and NGL quantities thought to be recoverable from known reservoirs under existing economic and operating conditions.
Recavitate / The process of applying pressure surges on the coal formation at the bottom of a well in order to increase fracturing, enlarge the bottomhole cavity and thereby increase gas production.
Recompletion / The modification of an existing well for the purpose of producing oil or gas from a different produc-ing formation.
Reservoir / A rock formation or trap containing oil and/or natural gas.
Royalty / The owner’s share of the value of minerals (oil and gas) produced on the property.
Seismic / A tool for identifying underground accumula-tions of oil or gas by sending energy waves or sound waves into the earth and recording the wave reflections. Results indicate the type, size, shape and depth of subsurface rock formations. 2-D seismic provides two-dimensional information while 3-D creates three-dimensional pictures. 4-C, or four-component, seismic utilizes measurement and interpretation of shear wave data. 4-C seismic improves the resolution of seismic images below shallow gas deposits.
Steam-assisted gravity drainage (SAGD) / A method of extracting bitumen from oil sands. Steam is injected under ground, softening the bitumen and allowing it to flow to the surface.
Undeveloped acreage / Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or gas.
Unit / A contiguous parcel of land deemed to cover one or more common reservoirs, as determined by state or federal regulations. Unit interest owners generally share proportionately in costs and revenues.
Working interest / The cost-bearing ownership share of an oil or gas lease.
Workover / The process of conducting remedial work, such as cleaning out a well bore, to increase or restore production.
VOLUME ACRONYMS
Bbl / A standard oil measurement that equals one barrel (42 U.S. gallons).
MBbl / One thousand barrels
MMBbls / One million barrels
MBbld / One thousand barrels per day
Mcf / A standard measurement unit for volumes of natural gas that equals one thousand cubic feet.
MMcf / One million cubic feet
Bcf / One billion cubic feet
Tcf / One tillion cubic feet
MMcfd / One million cubic feet per day
Boe / A method of equating oil, gas and natural gas liquids. Gas is converted to oil based on its relative energy content at the rate of six Mcf of gas to one barrel of oil. NGLs are converted based upon volume: one barrel of natural gas liquids equals one barrel of oil.
MBoe / One thousand barrels of oil equivalent
MMBoe / One million barrels of oil equivalent
MBoed / One thousand barrels of oil equivalent per day
Forward-Looking Statements This annual report includes “forward-looking statements” as defined by the Securities and Exchange Commission. Such statements are those concerning Devon’s plans, expectations and objectives for future operations including reserve potential and exploration target size. These statements address future financial position, business strategy, future capital expenditures, projected oil and gas production and future costs. Devon believes that the expectations reflected in such forward-looking statements are reasonable. However, important risk factors could cause actual results to differ materially from the company’s expectations. A discussion of these risk factors can be found on page 101 of this report. Further information is available in the company’s Form 10-K and other publicly available reports, which are available free of charge on the company’s website, www.devonenergy.com, or will be furnished upon request to the company.
Corporate HeadquartersDevon Energy Corporation20 North BroadwayOklahoma City, OK 73102-8260Telephone: (405) 235-3611Fax: (405) 552-4550
Permian, Mid-Continent,Rocky Mountains andMarketing and Midstream OperationsDevon Energy Corporation20 North BroadwayOklahoma City, OK 73102-8260Telephone: (405) 235-3611Fax: (405) 552-4550
Gulf, Gulf Coast and International OperationsDevon Energy CorporationDevon Energy Tower1200 Smith StreetHouston, TX 77002-4313Telephone: (713) 286-5700
Canadian OperationsDevon Canada Corporation2000, 400 - 3rd Avenue S.W.Calgary, Alberta T2P 4H2Telephone: (403) 232-7100
Royalty Owner AssistanceTelephone: (405) 228-4800E-mail: [email protected]
Shareholder AssistanceFor information about transfer or exchange of shares, dividends, address changes, account consolidation, multiple mailings, lost certificates and Form 1099:
UMB Bank, n.a.Securities Transfer Division928 Grand BoulevardKansas City, MO 64106 Toll free: (877) 860-5820www.umb.com
Company ContactsVince White, Vice PresidentCommunications and Investor RelationsTelephone: (405) 552-4505E-mail: [email protected]
Investor relatIons:Zack HagerManager, Investor RelationsTelephone: (405) 552-4526E-mail: [email protected]
Shea SnyderSupervisor, Investor RelationsTelephone: (405) 552-4782E-mail: [email protected]
Scott CoodySenior Investor Relations AnalystTelephone: (405) 552-4735E-mail: [email protected]
MedIa:Brian EngelManager, Public AffairsTelephone: (405) 228-7750E-mail: [email protected]
Chip MintySenior External Communications SpecialistTelephone: (405) 228-8647E-mail: [email protected]
PublicationsA copy of Devon’s annual report to the Securities and Exchange Commission (Form 10-K) and other publications are available at no charge upon request. Direct requests to:
Judy RobertsShareholder Services AdministratorTelephone: (405) 552-4570Fax: (405) 552-7818E-mail: [email protected]
Annual MeetingOur annual shareholders’ meeting will be held at 8 a.m. Central Time on Wednesday, June 6, 2007, on the Third Floor of the Chase Tower, 100 North Broadway, Oklahoma City, OK.
Independent AuditorsKPMG LLPOklahoma City, OK
Stock Trading DataDevon Energy Corporation’s common stock is traded on the New York Stock Exchange (symbol: DVN). There are approximately 16,000 shareholders of record.
Common Stock Trading Data
Investor Information
2005Quarter HigH Low Last totaLVoLume
First $49.42 36.48 47.75 195,070,400Second $52.31 40.60 50.68 222,165,200Third $70.35 50.75 68.64 184,169,700Fourth $69.79 54.01 62.54 246,835,700
2006Quarter HigH Low Last totaLVoLume
First $69.97 55.31 61.17 184,716,100Second $65.25 48.94 60.41 200,005,000Third $74.65 57.19 63.15 214,743,800Fourth $74.48 58.55 67.08 174,048,200
Do
lla
rs
450
400
350
300
250
200
150
100
50
0
2001 2002 2003 2004 2005 2006
450
400
350
300
250
200
150
100
50
0
Certifications The Form 10-K which was filed by the company with the Securities and Exchange Commission (SEC) for the fiscal year ending December 31, 2006 includes as exhibits, the certifications of our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, required to be filed with the SEC pursuant to Section 302 of the Sarbanes Oxley Act of 2002. The company has also filed with the New York Stock Exchange the 2006 annual certification of its Chief Executive Officer confirming that the company has complied with the New York Stock Exchange corporate governance listing standards.
Stock Performance – 5-Year Cumulative Total Return
DevonS&P 500SIC Code(1)
(1) Stock Index for Crude Petroleum and Natural Gas
This annual report was printed on paper containing a minimum of 10% post-consumer fibers.
105