UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 000-30176 DEVON ENERGY CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 73-1567067 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 20 North Broadway, Suite 1500 Oklahoma City, Oklahoma 73102-8260 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (405) 235-3611 Not applicable (Former name, former address and former fiscal year, if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . The number of shares outstanding of Registrant's common stock, par value $.10, as of July 31, 2000, was 87,015,045. 1 of 37 total pages (Exhibit Index is found at page 36)
DEVON ENERGY CORPORATION Index to Form 10-Q Quarterly Report to the Securities and Exchange Commission Page No. Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets, June 30, 2000 (Unaudited) 4 and December 31, 1999 Consolidated Statements of Operations (Unaudited) 5 for the Three Months and Six Months Ended June 30, 2000 and 1999 Consolidated Statements of Comprehensive Operations 6 (Unaudited) for the Three Months and Six Months Ended June 30, 2000 and 1999 Consolidated Statements of Cash Flows (Unaudited) 7 for the Six Months Ended June 30, 2000 and 1999 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial 18 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 30 Item 6. Exhibits and Reports on Form 8-K 31 DEFINITIONS As used in this document: "Mcf" means thousand cubic feet "MMcf" means million cubic feet "Bcf" means billion cubic feet "Bbl" means barrel "MBbls" means thousand barrels "MMBbls" means million barrels "Boe" means equivalent barrels of oil "Mboe" means thousand equivalent barrels of oil "Oil" includes crude oil and condensate "NGL" means natural gas liquids
DEVON ENERGY CORPORATION Part I. Financial Information Item 1. Consolidated Financial Statements June 30, 2000 and 1999 (Forming a part of Form 10-Q Quarterly Report to the Securities and Exchange Commission)
<TABLE> DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands, Except Share Data) <CAPTION> June 30, December 31, 2000 1999 (Unaudited) Assets Current assets: <S> <C> <C> Cash and cash equivalents $ 298,971 167,167 Accounts receivable 296,605 209,405 Inventories 14,462 13,441 Deferred income taxes 4,886 4,886 Investments and other current assets 13,718 22,295 Total current assets 628,642 417,194 Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties 5,189,889 4,974,810 Less accumulated depreciation, depletion and amortization 2,010,128 1,818,890 3,179,761 3,155,920 Investment in Chevron Corporation common stock, at fair value 601,527 614,382 Goodwill, net of amortization 299,481 322,800 Other assets 118,525 112,864 Total assets $4,827,936 4,623,160 Liabilities and stockholders' equity Current liabilities: Accounts payable: Trade 95,420 75,625 Revenues and royalties due to others 57,000 58,130 Income taxes payable 57,401 11,287 Accrued interest payable 22,359 26,270 PennzEnergy Company merger related expenses payable 23,780 32,504 Accrued expenses 16,585 23,628 Total current liabilities 272,545 227,444 Other liabilities 160,062 192,210 Debentures exchangeable into shares of Chevron Corporation common stock 760,313 760,313 Other long-term debt 1,025,514 1,026,808 Deferred income taxes 431,882 390,865 Stockholders' equity: Preferred stock of $1.00 par value ($100 liquidation value). Authorized 4,500,000 shares; issued 1,500,000 in 2000 and 1999 1,500 1,500 Common stock of $.10 par value. Authorized 400,000,000 shares; issued 86,982,000 in 2000 and 86,085,000 in 1999 8,698 8,608 Additional paid-in capital 2,273,989 2,246,652 Accumulated deficit (26,408) (164,698) Accumulated other comprehensive loss (80,159) (66,542) Total stockholders' equity 2,177,620 2,025,520 Total liabilities and stockholders' equity $4,827,936 4,623,160 See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In Thousands, Except Per Share Amounts) <CAPTION> Three Months Ended Six MonthsEnded June 30, June 30, 2000 1999 2000 1999 (Unaudited) Revenues <S> <C> <C> <C> <C> Oil sales $148,249 36,871 293,793 64,784 Gas sales 210,754 59,387 366,286 112,938 Natural gas liquids sales 30,433 5,835 65,703 9,764 Other 11,407 2,219 22,772 4,092 Total revenues 400,843 104,312 748,554 191,578 Costs and expenses Lease operating expenses 70,794 27,100 136,687 54,520 Production taxes 11,370 3,446 21,790 6,415 Depreciation, depletion and amortization of property and equipment 113,151 35,763 221,703 69,321 Amortization of goodwill 10,361 -- 20,693 -- General and administrative expenses 16,123 6,952 32,773 13,175 Interest expense 25,675 7,115 50,951 13,779 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt -- (5,585) 2,408 (8,746) Distributions on preferred securities of subsidiary trust -- 2,430 -- 4,859 Total costs and expenses 247,474 77,221 487,005 153,323 Earnings before income tax expense 153,369 27,091 261,549 38,255 Income tax expense Current 33,658 2,399 63,505 4,302 Deferred 28,977 8,483 46,223 11,764 Total income tax expense 62,635 10,882 109,728 16,066 Net earnings 90,734 16,209 151,821 22,189 Preferred stock dividends 2,434 -- 4,868 -- Net earnings applicable to common shareholders $ 88,300 16,209 146,953 22,189 Net earnings per average common share outstanding: Basic $1.02 0.33 1.70 0.46 Diluted $1.00 0.33 1.67 0.46 Weighted average common shares outstanding: Basic 86,756 48,679 86,481 48,575 Diluted 88,381 54,086 87,827 53,773 See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Operations (In Thousands) <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 (Unaudited) <S> <C> <C> <C> <C> Net earnings $90,734 16,209 151,821 22,189 Other comprehensive earnings (loss), net of tax: Foreign currency translation adjustments (5,420) 3,008 (5,775) 4,632 Unrealized gains (losses) on marketable securities (32,989) -- (7,842) -- Comprehensive earnings $52,325 19,217 138,204 26,821 See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands) <CAPTION> Six Months Ended June 30, 2000 1999 (Unaudited) Cash flows from operating activities <S> <C> <C> Net earnings $ 151,821 22,189 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, depletion and amortization of property and equipment 221,703 69,321 Amortization of goodwill 20,693 -- Amortization of premiums on debentures (1,932) -- Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt 2,408 (8,746) Loss (gain) on sale of assets 44 (33) Deferred income taxes 46,223 11,764 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (88,384) 1,306 Inventories (1,008) 154 Investments and other current assets 8,636 87 Other assets 673 (38) Increase (decrease) in: Accounts payable 19,684 (7,897) Income taxes payable 46,970 -- Accrued expenses (20,513) (802) Long-term other liabilities (25,476) (1,394) Net cash provided by operating activities 381,542 85,911 Cash flows from investing activities Proceeds from sale of property and equipment 42,664 4,906 Capital expenditures (303,827) (139,895) Decrease in other assets 186 570 Net cash used in investing activities (260,977) (134,419) Cash flows from financing activities Proceeds from borrowings on revolving lines of credit 610,696 538,014 Principal payments on revolving lines of credit (727,112) (501,072) Principal payments on other long-term debt (225,000) -- Proceeds from issuance of convertible senior debentures, net of issuance costs 346,125 -- Issuance of common stock, net of issuance costs 27,426 10,152 Dividends paid on common stock (8,663) (4,862) Dividends paid on preferred stock (4,868) -- (Decrease) increase in long-term other liabilities (6,601) 1,049 Net cash provided by financing activities 12,003 43,281 Effect of exchange rate changes on cash (764) 67 Net increase (decrease) in cash and cash equivalents 131,804 (5,160) Cash and cash equivalents at beginning of period 167,167 19,154 Cash and cash equivalents at end of period $298,971 13,994 See accompanying notes to consolidated financial statements. </TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements and notes thereto have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in Devon's 1999 Annual Report on Form 10-K. In the opinion of Devon's management, all adjustments (all of which are normal and recurring) have been made which are necessary to fairly state the consolidated financial position of Devon and its subsidiaries as of June 30, 2000, and the results of their operations and their cash flows for the three-month and six-month periods ended June 30, 2000 and 1999. 2. Pending Merger On May 26, 2000, Devon and Santa Fe Snyder Corporation ("Santa Fe Snyder") announced their intention to merge the two companies. In the merger, Santa Fe Snyder stockholders will receive 0.22 shares of Devon common stock for each share of Santa Fe Snyder common stock owned. The merger is subject to approval by the stockholders of both companies at separate meetings on August 29, 2000, as well as certain regulatory approvals. If approved, the merger is expected to be consummated shortly after the stockholder meetings. The merger will be accounted for under the pooling-of-interests method of accounting for business combinations as an acquisition of Santa Fe Snyder by Devon. Therefore, Devon's operating results for all prior and future periods will include the combined amounts of Devon and Santa Fe Snyder as if the two companies had always been combined. Santa Fe Snyder's year-end 1999 proved oil and gas reserves totaled 386 million Boe, including 257 million Boe in the United States and 129 million Boe in other countries. Santa Fe Snyder's year-end 1999 undeveloped leasehold included 15.9 million net acres, including 1.2 million net acres in the United States and 14.7 million net acres internationally. On July 21, 2000, Devon and Santa Fe Snyder filed definitive proxy materials concerning this pending merger. The proxy materials contain further disclosures regarding the merger and certain financial and operational data concerning both companies. Pro Forma Information Set forth below is certain unaudited pro forma financial information for the three-month and six-month periods ended June 30, 2000 and 1999. This information has been prepared under the pooling-of-interests method of accounting for business combinations, and as such, includes the results of both companies as if the two companies had always been combined. Santa Fe Snyder's historical financial data has been restated to conform to Devon's accounting policies. The pro forma information is presented for illustrative purposes only. If the merger had occurred in the past, the combined company's operating results might have been different from those presented in the following table. The pro forma information should not be relied upon as an indication of the operating results that the combined company would have achieved if the merger had occurred earlier. The pro forma information also should not be used as an indication of the future results that the combined company will achieve after the merger. The following should be considered in connection with the pro forma financial information presented: Devon merged with PennzEnergy Company ("PennzEnergy") on August 17, 1999. This merger was accounted for as a purchase. Accordingly, Devon's results for the second quarter and first six months of 1999 do not include any effects from the PennzEnergy merger. Santa Fe Snyder was formed on May 5, 1999, as a result of the merger of Santa Fe Energy Resources, Inc. and Snyder Oil Corporation. This merger was accounted for as a purchase by Santa Fe of Snyder. Accordingly, Santa Fe Snyder's results for the second quarter and first six months of 1999 include the results of the Snyder merger for only two months. Santa Fe Snyder's results for the second quarter of 1999 include $16.8 million of costs related to the Snyder merger. In the second quarter of 1999, Santa Fe Snyder reduced the carrying value of its oil and gas properties by $463.8 million ($301.5 million after-tax), due to the full cost ceiling limitation.
<TABLE> <CAPTION> Pro Forma Information Three Months Ended Six MonthsEnded June 30, June 30, 2000 1999 2000 1999 (Unaudited) Revenues <S> <C> <C> <C> <C> Oil sales $272,649 98,171 540,593 164,484 Gas sales 319,054 107,887 552,086 186,238 Natural gas liquids sales 33,533 7,935 70,903 13,564 Other 12,707 2,919 24,772 5,492 Total revenues 637,943 216,912 1,188,354 372,778 Costs and expenses Lease operating expenses 114,494 59,600 223,887 115,820 Production taxes 21,470 6,246 39,990 12,215 Depreciation, depletion and amortization of property and equipment 172,251 60,063 337,503 119,821 Amortization of goodwill 10,361 -- 20,693 -- General and administrative expenses 24,023 15,452 48,873 26,775 Expenses related to prior merger -- 16,800 -- 16,800 Interest expense 40,875 17,415 80,951 30,579 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt -- (5,585) 2,408 (8,746) Distributions on preferred securities of subsidiary trust -- 2,430 -- 4,859 Reduction of carrying value of oil and gas properties -- 463,800 -- 463,800 Total costs and expenses 383,474 636,221 754,305 781,923 Earnings (loss) before income tax expense (benefit) and extraordinary item 254,469 (419,309) 434,049 (409,145) Income tax expense (benefit) Current 36,358 1,799 72,505 4,402 Deferred 64,777 (138,817) 103,023 (137,836) Total income tax expense (benefit) 101,135 (137,018) 175,528 (133,434) Earnings (loss) before extraordinary item 153,334 (282,291) 258,521 (275,711) Extraordinary item -- (4,200) -- (4,200) Net earnings (loss) 153,334 (286,491) 258,521 (279,911) Preferred stock dividends 2,434 -- 4,868 -- Net earnings (loss) applicable to common shareholders $150,900 (286,491) 253,653 (279,911) Net earnings per average common share outstanding: Basic before extraordinary item $1.19 (3.50) 2.00 (3.64) Basic after extraordinary item $1.19 (3.55) 2.00 (3.69) Diluted before extraordinary item $1.17 (3.50) 1.97 (3.64) Diluted after extraordinary item $1.17 (3.55) 1.97 (3.69) Weighted average common shares outstanding - basic 126,994 80,645 126,675 75,833 Weighted average common shares outstanding - diluted 129,455 86,448 128,681 81,339 Production Data Oil (MBbls) 11,179 6,522 22,094 12,877 Gas (MMcf) 106,201 61,852 209,970 113,264 NGL (MBbls) 1,762 775 3,696 1,523 Mboe 30,641 17,605 60,785 33,277 </TABLE>
3. Long-Term Debt In June 2000, Devon privately sold zero-coupon convertible senior debentures ("convertible debentures"). The convertible debentures were sold at a price of $464.13 per debenture with a yield to maturity of 3.875% per annum. Each debenture is convertible into 5.7593 shares of Devon common stock. Devon may call the bonds at any time after five years, and a shareholder has the right to require Devon to repurchase the bonds after five, 10 and 15 years, at the issue price plus accrued original issue discount and interest. The proceeds to the company were approximately $346.1 million, net of debt issuance costs of approximately $6.6 million. Devon used the proceeds from the sale of these convertible debentures to pay off its domestic credit facility and money market note borrowings. The remaining proceeds from the convertible debentures have been invested in short-term money market investments. In March 2000, Devon entered into a new unsecured, fixed- rate money market note with The Chase Manhattan Bank. This note is short-term and permits multiple borrowings. Devon currently has the ability to borrow up to a $200 million limit. As of June 30, 2000, $25 million was outstanding under this note at an average interest rate of 6.92%. The balance was paid off at its maturity on July 7, 2000, with proceeds from the convertible debentures. Because Devon had the intent and ability to refinance the balance due with proceeds from its convertible debentures, the $25 million outstanding under the short-term note was classified as long-term debt on the June 30, 2000 consolidated balance sheet. 4. Earnings Per Share The following tables reconcile the net earnings and common shares outstanding used in the calculations of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2000 and the three-month period ended June 30, 1999. The diluted earnings per share calculation for the six months ended June 30, 1999, produced results that are anti- dilutive. This calculation increased net earnings by $3.0 million and increased the common shares outstanding 5.2 million shares. <TABLE> <CAPTION> Net Earnings Net Applicable to Common Earnings Common Shares Per Shareholders Outstanding Share (In Thousands) Three Months Ended June 30, 2000: <S> <C> <C> <C> Basic earnings per share $88,300 86,756 $1.02 Dilutive effect of: Potential common shares issuable upon conversion of senior convertible debentures (the increase in net earnings is net of income tax expense of $46,000) 71 192 Potential common shares issuable upon the exercise of outstanding stock options - 1,433 Diluted earnings per share $88,371 88,381 $1.00 Three Months Ended June 30, 1999: Basic earnings per share $16,209 48,679 $0.33 Dilutive effect of: Potential common shares issuable upon conversion of Trust Convertible Preferred securities (the increase in net earnings is net of income tax expense of $963,000) 1,506 4,902 Potential common shares issuable upon the exercise of outstanding stock options - 505 Diluted earnings per share $17,715 54,086 $0.33 </TABLE> Options to purchase approximately 1.1 million shares of Devon's common stock, with exercise prices from $55.54 to $92.78 per share (with a weighted average price of $68.30 per share), were excluded from the diluted earnings per share calculation for second quarter 2000. The excluded options expire between July 24, 2000 and May 18, 2010. Options to purchase approximately 0.7 million shares of Devon's common stock, with exercise prices from $34.75 to $42.90 per share (with a weighted average price of $37.11 per share), were excluded from the diluted earnings per share calculation for second quarter 1999. The excluded options expire between January 31, 2000 and May 20, 2008.
4. Earnings Per Share (Continued) <TABLE> <CAPTION> Net Earnings Net Applicable to Common Earnings Common Shares Per Shareholders Outstanding Share (In Thousands) Six Months Ended June 30, 2000: <S> <C> <C> <C> Basic earnings per share $146,953 86,481 $1.70 Dilutive effect of: Potential common shares issuable upon conversion of senior convertible debentures (the increase in net earnings is net of income tax expense of $46,000) 71 96 Potential common shares issuable upon the exercise of outstanding stock options - 1,250 Diluted earnings per share $147,024 87,827 $1.67 </TABLE> Options to purchase approximately 1.2 million shares of Devon's common stock, with exercise prices from $49.94 to $92.78 per share (with a weighted average price of $66.39 per share), were excluded from the diluted earnings per share calculation for the six months ended June 30, 2000. The excluded options expire between July 24, 2000 and May 18, 2010. All options were excluded from the diluted earnings per share calculation for the six months ended June 30, 1999.
5. Segment Information Devon manages its business by country. As such, Devon identifies its segments based on geographic areas. Devon has three segments: its operations in the U.S., its operations in Canada and its international operations outside of North America. Substantially all of these segments' operations involve oil and gas producing activities. Following is certain financial information regarding Devon's segments. The revenues reported are all from external customers. <TABLE> <CAPTION> Inter- U.S. Canada national Total (In Thousands) As of June 30, 2000: <S> <C> <C> <C> <C> Current assets $ 538,123 63,016 27,503 628,642 Property and equipment, net of accumulated depreciation, depletion and amortization 2,360,109 498,363 321,289 3,179,761 Investment in Chevron Corporation common stock 601,527 - - 601,527 Goodwill, net of amortization 270,060 - 29,421 299,481 Other assets 119,481 86 (1,042) 118,525 Total assets $3,889,300 561,465 377,171 4,827,936 Current liabilities 208,682 44,905 18,958 272,545 Debentures exchangeable into shares of Chevron Corporation common stock 760,313 - - 760,313 Other long-term debt 863,274 162,240 - 1,025,514 Deferred income taxes 376,207 28,744 26,931 31,882 Other liabilities 145,480 2,354 12,228 160,062 Stockholders' equity 1,535,344 323,222 319,054 2,177,620 Total liabilities and stockholders' equity $3,889,300 561,465 377,171 4,827,936 Three Months ended June 30, 2000: Revenues Oil sales $ 117,862 26,746 3,641 148,249 Gas sales 176,243 34,511 - 210,754 Natural gas liquids sales 26,270 4,163 - 30,433 Other 9,866 1,231 310 11,407 Total revenues 330,241 66,651 3,951 400,843 Costs and expenses Lease operating expenses 56,796 12,921 1,077 70,794 Production taxes 11,073 297 - 11,370 Depreciation, depletion and amortization of property and equipment 96,336 16,359 456 113,151 Amortization of goodwill 10,355 - 6 10,361 General and administrative expenses 11,925 2,541 1,657 16,123 Interest expense 23,107 2,568 - 25,675 Total costs and expenses 209,592 34,686 3,196 247,474 Earnings (loss) before income tax expense 120,649 31,965 755 153,369 Income tax expense Current 33,379 279 - 33,658 Deferred 14,451 14,353 173 28,977 Total income tax expense 47,830 14,632 173 62,635 Net earnings 72,819 17,333 582 90,734 Preferred stock dividends 2,434 - - 2,434 Net earnings applicable to common shareholders $ 70,385 17,333 582 88,300 Capital expenditures $ 137,393 42,131 5,748 185,272 </TABLE>
5. Segment Information (Continued) <TABLE> <CAPTION> Inter- U.S. Canada national Total (In Thousands) Three Months ended June 30, 1999: Revenues <S> <C> <C> <C> <C> Oil sales $ 19,930 16,941 - 36,871 Gas sales 32,448 26,939 - 59,387 Natural gas liquids sales 3,685 2,150 - 5,835 Other 678 1,541 - 2,219 Total revenues 56,741 47,571 - 104,312 Costs and expenses Lease operating expenses 14,343 12,757 - 27,100 Production taxes 3,165 281 - 3,446 Depreciation, depletion and amortization of property and equipment 18,762 17,001 - 35,763 Amortization of goodwill - - - - General and administrative expenses 4,044 2,908 - 6,952 Interest expense 846 6,269 - 7,115 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt - (5,585) - (5,585) Distributions on preferred securities of subsidiary trust 2,430 - - 2,430 Total costs and expenses 43,590 33,631 - 77,221 Earnings before income tax expense 13,151 13,940 - 27,091 Income tax expense Current 1,890 509 - 2,399 Deferred 2,231 6,252 - 8,483 Total income tax expense 4,121 6,761 - 10,882 Net earnings $ 9,030 7,179 - 16,209 Capital expenditures $ 39,138 17,959 - 57,097 </TABLE>
5. Segment Information (Continued) <TABLE> <CAPTION> Inter- U.S. Canada national Total (In Thousands) Six Months ended June 30, 2000: Revenues <S> <C> <C> <C> <C> Oil sales $232,838 55,264 5,691 293,793 Gas sales 302,253 64,033 - 366,286 Natural gas liquids sales 57,171 8,532 - 65,703 Other 20,316 2,322 134 22,772 Total revenues 612,578 130,151 5,825 748,554 Costs and expenses Lease operating expenses 109,500 25,225 1,962 136,687 Production taxes 21,266 524 - 21,790 Depreciation, depletion and amortization of property and equipment 188,712 32,353 638 221,703 Amortization of goodwill 20,681 - 12 20,693 General and administrative expenses 25,052 4,795 2,926 32,773 Interest expense 45,955 4,996 - 50,951 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt - 2,408 - 2,408 Total costs and expenses 411,166 70,301 5,538 487,005 Earnings before income tax expense 201,412 59,850 287 261,549 Income tax expense Current 62,526 979 - 63,505 Deferred 18,747 27,263 213 46,223 Total income tax expense 81,273 28,242 213 109,728 Net earnings $120,139 31,608 74 151,821 Preferred stock dividends 4,868 - - 4,868 Net earnings applicable to common shareholders $115,271 31,608 74 146,953 Capital expenditures $217,871 78,157 7,799 303,827 </TABLE>
5. Segment Information (Continued) <TABLE> <CAPTION> Inter- U.S. Canada national Total (In Thousands) Six Months ended June 30, 1999: Revenues <S> <C> <C> <C> <C> Oil sales $ 34,397 30,387 - 64,784 Gas sales 60,609 52,329 - 112,938 Natural gas liquids sales 6,203 3,561 - 9,764 Other 1,378 2,714 - 4,092 Total revenues 102,587 88,991 - 191,578 Costs and expenses Lease operating expenses 29,266 25,254 - 54,520 Production taxes 5,757 658 - 6,415 Depreciation, depletion and amortization of property and equipment 36,771 32,550 - 69,321 Amortization of goodwill - - - - General and administrative expenses 6,958 6,217 - 13,175 Interest expense 1,488 12,291 - 13,779 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt - (8,746) - (8,746) Distributions on preferred securities of subsidiary trust 4,859 - - 4,859 Total costs and expenses 85,099 68,224 - 153,323 Earnings before income tax expense 17,488 20,767 - 38,255 Income tax expense Current 2,710 1,592 - 4,302 Deferred 2,326 9,438 - 11,764 Total income tax expense 5,036 11,030 - 16,066 Net earnings $ 12,452 9,737 - 22,189 Capital expenditures $ 81,604 58,291 - 139,895 </TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion addresses material changes in results of operations for the three- month and six-month periods ended June 30, 2000, compared to the three-month and six-month periods ended June 30, 1999, and in financial condition since December 31, 1999. The discussion should be read in conjunction with Devon's 1999 annual report on Form 10-K. Overview Devon's revenues and net earnings for the quarter ended June 30, 2000, were the highest of any quarter in its history. Net earnings for the second quarter of 2000 were $90.7 million, or $1.02 per share. This compares to net earnings of $16.2 million, or $0.33 per share for the second quarter of 1999. Net earnings for the first half of 2000 were $151.8 million, or $1.70 per share. These compare to net earnings for the first half of 1999 of $22.2 million, or $0.46 per share. The increase in second quarter and first half earnings was due to sharply higher oil and natural gas production coupled with higher overall oil and natural gas prices. The increase in second quarter and first half production resulted primarily from the August 17, 1999, merger of PennzEnergy into Devon. Results of Operations Total revenues increased $296.5 million, or 284%, in the second quarter of 2000, and $557.0 million, or 291%, in the first half of 2000. This was the result of increases in the average prices of oil, gas and NGL, along with higher production on a combined Boe basis. Oil, gas and NGL revenues were up $287.3 million, or 281%, for the second quarter of 2000 compared to the second quarter of 1999, and $538.3 million, or 287% for the first half of 2000 compared to the first half of 1999. The three-month and six-month period comparisons of production and price changes are shown in the following tables. (Note: Unless otherwise stated, all dollar amounts are expressed in U.S. dollars.) The PennzEnergy merger was accounted for under the purchase method of accounting for business combinations. Therefore, Devon's second quarter 1999 and first half 1999 results discussed in this report do not include any effect of PennzEnergy's operations. <TABLE> <CAPTION> Total Three Months Ended Six Months Ended June 30, June 30, 2000 1999 Change 2000 1999 Change Production <S> <C> <C> <C> <C> <C> <C> Oil (MBbls) 5,821 2,506 +132% 11,516 5,071 +127% Gas (MMcf) 70,212 36,280 +94% 139,026 71,402 +95% NGL (MBbls) 1,613 515 +213% 3,389 991 +242% <FN> Oil, Gas and NGL (MBoe)1 19,136 9,067 +111% 38,076 17,962 +112% Average Prices Oil (Per Bbl) $25.47 14.71 +73% 25.51 12.78 +100% Gas (Per Mcf) 3.00 1.64 +83% 2.63 1.58 +67% NGL (Per Bbl) 18.87 11.33 +67% 19.39 9.85 +97% <FN> Oil, Gas and NGL (Per Boe)1 20.35 11.26 +81% 19.06 10.44 +83% <CAPTION> (In Thousands) Revenues Oil $148,249 36,871 +302% 293,793 64,784 +353% Gas 210,754 59,387 +255% 366,286 112,938 +224% NGL 30,433 5,835 +422% 65,703 9,764 +573% Combined $389,436 102,093 +281% 725,782 187,486 +287% <CAPTION> Domestic Three Months Ended Six Months Ended June 30, June 30, 2000 1999 Change 2000 1999 Change Production Oil (MBbls) 4,302 1,231 +249% 8,497 2,530 +236% Gas (MMcf) 53,804 16,933 +218% 106,240 33,294 +219% NGL (MBbls) 1,445 351 +312% 3,047 665 +358% <FN> Oil, Gas and NGL (MBoe)1 14,714 4,404 +234% 29,251 8,744 +235% Average Prices Oil (Per Bbl) $27.40 16.19 +69% 27.40 13.60 +102% Gas (Per Mcf) 3.28 1.92 +71% 2.85 1.82 +56% NGL (Per Bbl) 18.18 10.50 +73% 18.76 9.33 +101% <FN> Oil, Gas and NGL (Per Boe)1 21.77 12.73 +71% 20.25 11.57 +75% <CAPTION> (In Thousands) Revenues Oil $117,862 19,930 +491% 232,838 34,397 +577% Gas 176,243 32,448 +443% 302,253 60,609 +399% NGL 26,270 3,685 +613% 57,171 6,203 +822% Combined $320,375 56,063 +471% 592,262 101,209 +485% <CAPTION> Canada Three Months Ended Six Months Ended June 30, June 30, 2000 1999 Change 2000 1999 Change Production Oil (MBbls) 1,162 1,275 -9% 2,364 2,541 -7% Gas (MMcf) 16,408 19,347 -15% 32,786 38,108 -14% NGL (MBbls) 168 164 +2% 342 326 +5% <FN> Oil, Gas and NGL (MBoe)1 4,065 4,663 -13% 8,170 9,218 -11% Average Prices Oil (Per Bbl) $23.02 13.29 +73% 23.38 11.96 +95% Gas (Per Mcf) 2.10 1.39 +51% 1.95 1.37 +42% NGL (Per Bbl) 24.78 13.11 +89% 24.95 10.92 +128% <FN> Oil, Gas and NGL (Per Boe)1 16.09 9.87 +63% 15.65 9.36 +67% <CAPTION> (In Thousands) Revenues Oil $26,746 16,941 +58% 55,264 30,387 +82% Gas 34,511 26,939 +28% 64,033 52,329 +22% NGL 4,163 2,150 +94% 8,532 3,561 +140% Combined $65,420 46,030 +42% 127,829 86,277 +48% _______________ <FN> 1 Gas volumes are converted to Boe or MBoe at the rate of six Mcf of gas per barrel of oil, based upon the approximate relative energy content of natural gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices. The respective prices of oil, gas and NGL are affected by market and other factors in addition to relative energy content. </TABLE> In addition to the volumes included in the prior tables for domestic and Canadian production, in the second quarter and first half of 2000 Devon also produced 265,000 barrels and 539,000 barrels of oil in Venezuela, respectively, and 92,000 barrels and 116,000 barrels of oil in Azerbaijan, respectively. The oil revenues generated by this production were $3.6 million and $5.7 million for the second quarter and first half of 2000, respectively. This production was added by the PennzEnergy merger. Oil Revenues. Oil revenues increased $111.4 million, or 302%, in the second quarter of 2000. Oil revenues increased $62.6 million due to a $10.76 per barrel increase in the average price of oil in 2000. An increase in 2000's production of 3.3 million barrels caused oil revenues to increase by $48.8 million. The PennzEnergy merger added 3.5 million barrels of oil in the second quarter of 2000. This increase was partially offset by a 0.2 million barrel decline in second quarter 2000 production from Devon's other properties. This reduction was primarily the result of natural decline. Oil revenues increased $229.0 million, or 353%, in the first half of 2000. An increase in production of 6.4 million barrels, or 127%, caused oil revenues to increase by $82.3 million. Oil revenues increased $146.7 million due to a $12.73 per barrel increase in the average price of oil in 2000. The PennzEnergy merger added 6.9 million barrels of oil in the first half of 2000. This increase was partially offset by a 0.5 million barrel decline in first half 2000 production from Devon's other properties. This reduction was primarily the result of natural decline. Gas Revenues. Gas revenues increased $151.4 million, or 255%, in the second quarter of 2000. Production rose 33.9 Bcf in the 2000 period, which added $55.6 million of gas revenues. A $1.36 per Mcf increase in the average gas price in the second quarter of 2000 contributed $95.8 million of the increase in gas revenues. The largest contributor to the 2000 production increase was production added by the PennzEnergy merger. The PennzEnergy properties added 36.5 Bcf of production in the second quarter of 2000. Gas production from Devon's historical domestic properties also increased 0.4 Bcf in the 2000 quarter. These domestic increases were partially offset by a decline in Canadian gas production of 2.9 Bcf, or 15% in the 2000 quarter. Approximately half of the decline, or 1.5 Bcf, was related to production from certain Canadian properties that were included in the 1999 quarter but were sold prior to the 2000 quarter. Additionally, 0.8 Bcf of the decline was the result of increased Canadian government royalties which fluctuate based on pricing. The remainder of the reduction was related to natural decline and the shut-in of some wells partially offset by new development during the 2000 quarter Gas revenues increased $253.4 million, or 224%, in the first half of 2000. Production rose 67.6 Bcf in the 2000 period, which added $107.0 million of gas revenues. A $1.05 per Mcf increase in the average gas price in the first half of 2000 contributed $146.4 million of the increase in gas revenues. Again, the largest contributor to the 2000 production increase was production added by the PennzEnergy merger. The PennzEnergy properties added 70.4 Bcf of production in the first half of 2000. Gas production from Devon's historical domestic properties also increased by 2.5 Bcf in the first half of 2000. This was primarily the result of a 2.9 Bcf increase in production from Devon's San Juan Basin and Powder River Basin coal seam gas properties. These properties produced 15.4 Bcf in the first half of 2000 compared to 12.5 Bcf in the first half of 1999. This increase was primarily the result of mechanical improvements implemented at the Northeast Blanco Unit coal seam gas property and additional wells drilled in the Powder River Basin. These domestic increases were partially offset by a decline in Canadian gas production of 5.3 Bcf, or 14% in the first half of 2000. Approximately half of the decline, or 2.5 Bcf, was related to production from certain Canadian properties that were included in the first half of 1999 but were sold prior to the first half of 2000. Additionally, 1.2 Bcf of the decline was the result of increased Canadian government royalties which fluctuate based on pricing. The remainder of the reduction was primarily the result of natural decline partially offset by new development. NGL Revenues. NGL revenues increased $24.6 million, or 422%, in the second quarter of 2000. An increase in the average price of $7.54 per barrel, or 67%, caused NGL revenues to increase $12.2 million in the 2000 quarter. A production increase of 1.1 million barrels caused revenues to increase $12.4 million. Production from the PennzEnergy merger properties during first quarter 2000 accounted for 1.1 million barrels. NGL revenues increased $55.9 million, or 573%, in the first half of 2000. An increase in the average price of $9.54 per barrel, or 97%, caused NGL revenues to increase $32.3 million in the first half of 2000. A production increase of 2.4 million barrels caused revenues to increase $23.6 million. Production from the PennzEnergy merger properties during first half of 2000 accounted for 2.3 million barrels. Other Revenues. Other revenues increased $9.2 million, or 414%, in the 2000 quarter. The 2000 period included $4.6 million of dividend income from the 7.1 million shares of Chevron Corporation common stock acquired in the PennzEnergy merger. This dividend income, along with increases in third-party gas processing revenues and interest income were the primary reasons for the substantial increase in other revenues. The increase in interest income was primarily related to an increased amount of cash on hand in the second quarter of 2000. Other revenues increased $18.7 million, or 457%, in the first half of 2000. The 2000 period included $9.2 million of dividend income from the 7.1 million shares of Chevron Corporation common stock acquired in the PennzEnergy merger. This dividend income, along with increases in third-party gas processing revenues and interest income were the primary reasons for the substantial increase in other revenues. Production and Operating Expenses. The components of production and operating expenses are set forth in the following tables. <TABLE> <CAPTION> Total Three Months Ended Six Months Ended June 30, June 30, 2000 1999 Change 2000 1999 Change Absolute (Thousands) Recurring operations and maintenance <S> <C> <C> <C> <C> <C> <C> expenses $68,127 25,776 +164% 130,962 51,808 +153% Well workover expenses 2,667 1,324 +101% 5,725 2,712 +111% Production taxes 11,370 3,446 +230% 21,790 6,415 +240% Total production and operating expenses $82,164 30,546 +169% 158,477 60,935 +160% Per Boe Recurring operations and maintenance expenses 3.56 2.84 +25% 3.44 2.88 +19% Well workover expenses 0.14 0.15 -6% 0.15 0.15 0% Production taxes 0.59 0.38 +56% 0.57 0.36 +60% Total production and operating expenses $4.29 3.37 +27% 4.16 3.39 +23% <CAPTION> Domestic Three Months Ended Six Months Ended June 30, June 30, 2000 1999 Change 2000 1999 Change Absolute (Thousands) Recurring operations and maintenance expenses $54,246 13,490 +302% 104,026 27,298 +281% Well workover expenses 2,550 853 +199% 5,474 1,968 +178% Production taxes 11,073 3,165 +250% 21,266 5,757 +269% Total production and operating expenses $67,869 17,508 +288% 130,766 35,023 +273% Per Boe Recurring operations and maintenance expenses 3.69 3.06 +20% 3.56 3.12 +14% Well workover expenses 0.17 0.20 -11% 0.19 0.23 -17% Production taxes 0.75 0.72 +5% 0.73 0.66 +10% Total production and operating expenses $4.61 3.98 +16% 4.47 4.01 +12% <CAPTION> Canada Three Months Ended Six Months Ended June 30, June 30, 2000 1999 Change 2000 1999 Change Absolute (Thousands) Recurring operations and maintenance expenses $12,804 12,286 +4% 24,974 24,510 +2% Well workover expenses 117 471 -75% 251 744 -66% Production taxes 297 281 +6% 524 658 -20% Total production and operating expenses $13,218 13,038 +1% 25,749 25,912 -1% Per Boe Recurring operations and maintenance expenses 3.15 2.64 +19% 3.06 2.66 +15% Well workover expenses 0.03 0.10 -71% 0.03 0.08 -62% Production taxes 0.07 0.06 +21% 0.06 0.07 -10% Total production and operating expenses $3.25 2.80 +16% 3.15 2.81 +12% </TABLE> In addition to the expenses included in the prior tables for domestic and Canadian operations, the second quarter and first half of 2000 also included $1.1 million and $2.0 million, respectively, of recurring lease operating expenses on properties outside of North America. These expenses were related to properties added by the PennzEnergy merger. Recurring operations and maintenance expenses increased $42.3 million, or 164%, in the second quarter of 2000. Domestic expenses increased $40.8 million in second quarter 2000 due to $39.9 million of expenses from the PennzEnergy properties. Other than the added costs from the PennzEnergy properties, recurring expenses in Devon's other domestic properties increased $0.9 million in second quarter 2000. Recurring operations and maintenance expenses were lower than normal in the second quarter of 1999 as certain non-essential services in Devon's primary oil producing properties were delayed due to the 1999 quarter's low oil prices. However, with the subsequent increase in oil prices, these delays did not continue in the second quarter of 2000. Canada's recurring expenses were $0.5 million higher in the 2000 quarter due primarily to higher fuel costs related to increased heavy oil production. Production taxes increased $7.9 million, or 230%, in the 2000 quarter. The majority of Devon's production taxes are assessed on its onshore domestic properties. In the U.S., most of the production taxes are based on a fixed percentage of revenues. Therefore, the 471% increase in domestic oil, gas and NGL revenues in the second quarter of 2000 was the primary cause of the production tax increase. Production taxes did not increase proportionately to the increase in revenues. This was primarily due to the addition in 1999 of gas revenues from offshore Gulf of Mexico properties acquired in the PennzEnergy merger. Revenues generated from such offshore properties do not incur state production taxes. Recurring operations and maintenance expenses increased $79.2 million, or 153%, in the first half of 2000. Domestic expenses increased $76.7 million in first half of 2000 due to $74.7 million of expenses from the PennzEnergy properties. Other than the added costs from the PennzEnergy properties, recurring expenses in Devon's other domestic properties increased $2.0 million in first half of 2000. Recurring operations and maintenance expenses were lower than normal in the first half of 1999 as certain non-essential services in Devon's primary oil producing properties were delayed due to the 1999 period's low oil prices. However, with the subsequent increase in oil prices, these delays did not continue in the first half of 2000. Canada's recurring expenses were $0.5 million higher in the first half of 2000 due primarily to higher fuel costs related to increased heavy oil production. Production taxes increased $15.4 million, or 240%, in the first half of 2000. The majority of Devon's production taxes are assessed on its onshore domestic properties. In the U.S., most of the production taxes are based on a fixed percentage of revenues. Therefore, the 485% increase in domestic oil, gas and NGL revenues in the first half of 2000 was the primary cause of the production tax increase. Production taxes did not increase proportionately to the increase in revenues. This was primarily due to the addition in 1999 of gas revenues from offshore Gulf of Mexico properties acquired in the PennzEnergy merger. Revenues generated from such offshore properties do not incur state production taxes. Depreciation, Depletion and Amortization Expenses ("DD&A"). Oil and gas property related DD&A increased $72.8 million, or 209%, from $34.8 million in the second quarter of 1999 to $107.6 million in the second quarter of 2000. Oil and gas property related DD&A expense increased $38.7 million due to the 111% increase in combined oil, gas and NGL production in 2000. Additionally, an increase in the combined U.S., Canadian and international DD&A rate from $3.84 per Boe in the 1999 quarter to $5.62 per Boe in the 2000 quarter caused oil and gas property related DD&A to increase $34.1 million. The $1.78 increase in the 2000 rate over the 1999 rate was primarily the result of the PennzEnergy merger. Oil and gas property related DD&A increased $143.6 million, or 213%, from $67.4 million in the first half of 1999 to $211.0 million in the first half of 2000. Oil and gas property related DD&A expense increased $75.5 million due to the 112% increase in combined oil, gas and NGL production in 2000. Additionally, an increase in the combined U.S., Canadian and international DD&A rate from $3.75 per Boe in the first half of 1999 to $5.54 per Boe in the first half of 2000 caused oil and gas property related DD&A to increase $68.1 million. The $1.79 increase in the 2000 rate over the 1999 rate was primarily the result of the PennzEnergy merger. Non-oil and gas property DD&A expense increased $4.6 million to $5.5 million in the second quarter of 2000 compared to $0.9 million the second quarter of 1999. Non-oil and gas property DD&A expense increased $8.8 million to $10.7 million in the first half of 2000 compared to $1.9 million in the first half of 1999. Depreciation of the non-oil and gas properties acquired in the PennzEnergy merger and depreciation on Devon's newly constructed gas pipeline and gathering system in Wyoming accounted for the increase. Amortization of Goodwill. In connection with the PennzEnergy merger, Devon recorded $336.3 million of goodwill. The goodwill was allocated $306.9 million to domestic properties and $29.4 million to international properties. The goodwill is being amortized using the units-of-production method. Substantially all of the $10.4 million and $20.7 million of amortization recognized in the second quarter and first half of 2000, respectively, was related to the domestic balance. General and Administrative Expenses ("G&A"). Devon's net G&A consists of three primary components. The largest of these components is the gross amount of expenses incurred for personnel costs, office expenses, professional fees and other G&A items. The gross amount of these expenses is partially reduced by two offsetting components. One is the amount of G&A capitalized pursuant to the full-cost method of accounting. The other is the amount of G&A reimbursed by working interest owners of properties for which Devon serves as the operator. These reimbursements are received during both the drilling and operational stages of a property's life. The gross amount of G&A incurred, less the amounts capitalized and reimbursed, is recorded as net G&A in the consolidated statements of operations. The following table is a summary of G&A expenses by component for the second quarter and first half of 2000 and 1999. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 (In Thousands) <S> <C> <C> <C> <C> Gross G&A $31,904 13,866 64,573 26,983 Capitalized G&A (8,015) (3,066) (16,103) (5,613) Reimbursed G&A (7,766) (3,848) (15,697) (8,195) Net G&A $16,123 6,952 32,773 13,175 </TABLE> Net G&A increased $9.2 million and $19.6 million, or 132% and 149%, in the second quarter and first half of 2000 compared to the same periods of 1999, respectively. Gross G&A increased $18.0 million and $37.6 million, or 130% and 139%, in the second quarter and first half of 2000 compared to the same periods of 1999, respectively. The increase in gross expenses in the second quarter and first half of 2000 was primarily related to additional costs incurred as a result of the PennzEnergy merger. Net G&A was reduced $4.9 million and $10.5 million in the second quarter and first half of 2000, respectively, due to an increase in the amount capitalized as part of oil and gas properties. G&A was also reduced $3.9 million and $7.5 million in the second quarter and first half of 2000, respectively, by an increase in the amount of reimbursements on operated properties in the 2000 quarter. The increase in capitalized and reimbursed G&A was primarily related to the PennzEnergy merger. Interest Expense. Interest expense increased $18.6 million, or 261%, in the second quarter of 2000. An increase in the average debt balance outstanding from $454.1 million in the second quarter of 1999 to $1.6 billion in the second quarter of 2000 caused interest expense to increase by $18.4 million. The increase in the average debt balance in the second quarter of 2000 was attributable to the long-term debt assumed in the PennzEnergy merger. An increase in the annualized interest rate on outstanding debt from 6.0% in the second quarter of 1999 to 6.4% in the second quarter of 2000 caused interest expense to increase by $0.5 million. The remaining decrease of $0.3 million was caused by other factors as shown in the following table. Interest expense increased $37.2 million, or 270%, in the first half of 2000. An increase in the average debt balance outstanding from $426.3 million in the first half of 1999 to $1.6 billion in the first half of 2000 caused interest expense to increase by $37.6 million. The increase in the average debt balance in the first half of 2000 was attributable to the long- term debt assumed in the PennzEnergy merger. An increase in the annualized interest rate on outstanding debt from 6.2% in the first half of 1999 to 6.3% in the first half of 2000 caused interest expense to increase by $0.2 million. The remaining decrease of $0.6 million was caused by other factors as shown in the following table. The following schedule includes the components of interest expense for the second quarter and first half of 2000 and 1999. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 (In Thousands) <S> <C> <C> <C> <C> Interest based on debt outstanding $25,723 6,765 50,998 13,185 Facility and agency fees 332 152 622 298 Amortization of capitalized loan costs 147 96 294 165 Capitalized interest (546) -- (1,042) -- Other 19 102 79 131 Total interest expense $25,675 7,115 50,951 13,779 </TABLE> Deferred Effect of Changes in Foreign Currency Exchange Rate on Subsidiary's Long-term Debt. Until mid-January 2000, Devon's Canadian subsidiary Northstar Energy Corporation had certain fixed-rate senior notes which were denominated in U.S. dollars. Changes in the exchange rate between the U.S. dollar and the Canadian dollar from the dates the notes were issued to the dates of repayment increased or decreased the expected amount of Canadian dollars eventually required to repay the notes. Such changes in the Canadian dollar equivalent balance of the debt were required to be included in determining net earnings for the period in which the exchange rate changed. In mid-January 2000, the U.S. dollar denominated notes were retired prior to maturity with cash on hand and borrowings under Devon's long-term credit facilities. The Canadian-to-U.S. dollar exchange rate dropped slightly in January prior to the debt retirement. As a result, $2.4 million of expense was recognized in the first quarter of 2000. Distributions on Preferred Securities of Subsidiary Trust. During the second quarter and first half of 1999, Devon had $149.5 million of 6.5% Trust Convertible Preferred Securities outstanding. Distributions on these securities accrued and were paid at the rate of 1.625% per quarter. On November 30, 1999, Devon exercised its right to redeem such securities, and substantially all of the securities were exchanged for shares of Devon common stock. As a result, no distributions were recorded in the 2000 periods. Income Taxes. During interim periods, income tax expense is based on the estimated effective income tax rate that is expected for the entire fiscal year. The effective tax rates estimated for the three-month and six-month periods ended June 30, 2000 and 1999 were not materially different. The estimated effective tax rate in the second quarter of 2000 was 41% compared to 40% in the second quarter of 1999. The estimated effective tax rate was 42% in both the first half of 2000 and the first half of 1999. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), requires that the tax benefit of available tax carryforwards be recorded as an asset to the extent that management assesses the utilization of such carryforwards to be "more likely than not". When the future utilization of some portion of the carryforwards is determined not to be "more likely than not", SFAS 109 requires that a valuation allowance be provided to reduce the recorded tax benefits from such assets. Included as deferred tax assets at June 30, 2000, were approximately $226 million of net operating loss carryforwards. The carryforwards include U.S. federal net operating loss carryforwards, the majority of which do not begin to expire until 2008, U.S. state net operating loss carryforwards which expire primarily between 2000 and 2013, Canadian carryforwards which expire primarily between 2000 and 2005 and minimum tax credits which have no expiration. Devon expects the tax benefits from the net operating loss carryforwards to be utilized between 2000 and 2006. Such expectation is based upon current estimates of taxable income during this period, considering limitations on the annual utilization of these benefits as set forth by federal tax regulations. Significant changes in such estimates caused by variables such as future oil and gas prices or capital expenditures could alter the timing of the eventual utilization of such carryforwards. There can be no assurance that Devon will generate any specific level of continuing taxable earnings. However, Devon's management believes that future taxable income will more likely than not be sufficient to utilize substantially all its tax carryforwards prior to their expirations. Capital Expenditures, Capital Resources and Liquidity The following discussion of capital expenditures, capital resources and liquidity should be read in conjunction with the consolidated statements of cash flows included in Part I, Item 1 included elsewhere herein. Capital Expenditures. Approximately $303.8 million was spent in the first six months of 2000 for capital expenditures. This total includes $257.6 million for the acquisition, drilling or development of oil and gas properties, $24.5 million related to the construction of an extensive gas gathering system, related CO2 removal facilities and gas processing project all located in the Powder River Basin of Wyoming, and $21.7 million for other fixed assets. Approximately $139.9 million was spent for capital expenditures in the first half of 1999. This total includes $101.7 million for the acquisition, drilling or development of oil and gas properties, $36.9 million related to the construction of the new gas pipeline and gathering system in Wyoming, and $1.3 million for other fixed assets. Capital Resources and Liquidity. Net cash provided by operating activities ("operating cash flow") continued to be the primary source of capital and liquidity in the first half of 2000. Operating cash flow in the first half of 2000 was $381.5 million, compared to $85.9 million in the first half of 1999. The increase in operating cash flow in the first half of 2000 was primarily caused by the rise in revenues, partially offset by increased expenses, as discussed earlier in this section. Devon's cash flow for the first six months of 2000 was more than adequate to fund its capital expenditures. Excess available cash flow, along with cash on hand at the beginning of the year and a portion of the proceeds from the late-June issue of convertible debentures, were used to retire long-term debt. At June 30, 2000, Devon's availability under its $750 million long- term credit facilities totaled $563 million. Devon also had approximately $186 million of unused proceeds from its convertible debenture issue temporarily invested in cash equivalents at June 30, 2000. Impact of Recently Issued Accounting Standards Not Yet Adopted. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and in June 2000 issued SFAS 138, which amended certain provisions of SFAS 133. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative (that is gains and losses) depends on the intended use of the derivative and whether it qualifies as a hedge. Devon plans to adopt the provisions of SFAS 133, as amended, in the first quarter of the year ending December 31, 2001, and is currently evaluating the effects of this pronouncement. Pending Merger. On May 26, 2000, Devon and Santa Fe Snyder announced their intention to merge the two companies. In the merger, Santa Fe Snyder stockholders will receive 0.22 shares of Devon common stock for each share of Santa Fe Snyder common stock owned. The merger is subject to approval by the stockholders of both companies at separate meetings on August 29, 2000, as well as certain regulatory approvals. If approved, the merger is expected to be consummated shortly after the stockholder meetings. The merger will be accounted for under the pooling-of- interests method of accounting for business combinations as an acquisition of Santa Fe Snyder by Devon. Therefore, Devon's operating results for all prior and future periods will include the combined amounts of Devon and Santa Fe Snyder as if the companies had always been combined. Santa Fe Snyder's year-end 1999 proved oil and gas reserves totaled 386 million Boe, including 257 million Boe in the United States and 129 million Boe in other countries. Santa Fe Snyder's year-end 1999 undeveloped leasehold included 15.9 million net acres, including 1.2 million net acres in the United States and 14.7 million net acres internationally. On July 21, 2000, Devon and Santa Fe Snyder filed definitive proxy materials concerning this pending merger. The proxy materials contain further disclosures regarding the merger and certain financial and operational data concerning both companies. Item 3. Quantitative and Qualitative Disclosures About Market Risk The information included in "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Devon's 1999 Annual Report on Form 10-K is incorporated herein by reference. Such information includes a description of Devon's potential exposure to market risks, including commodity price risk, interest rate risk and foreign currency risk. As of June 30, 2000, there have been no material changes in Devon's market risk exposure from that disclosed in the 1999 Form 10-K. Part II. Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's annual meeting of shareholders was held in Oklahoma City, Oklahoma at 10:00 a.m. local time, on Thursday May 18, 2000. (b) Proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the nominees for election as directors as listed in the proxy statement and all nominees were elected. (c) Out of a total of 86,490,732 shares of the Company's common stock outstanding and entitled to vote, 76,755,006 shares were present at the meeting in person or by proxy, representing approximately 89 percent of the total outstanding. The only matter voted upon at the meeting was the election of four directors to serve on the Company's board of directors until the 2003 annual meeting of shareholders. The vote tabulation with respect to each nominee was as follows: <TABLE> <CAPTION> Authority Nominee For Withheld <S> <C> <C> John A. Hagg 76,592,852 167,105 Henry R. Hamman 76,578,542 181,415 J. Larry Nichols 76,196,810 181,415 Robert B. Weaver 76,169,768 181,415 </TABLE> Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K are as follows: Exhibit No. 2.1 Amendment No. One to Agreement and Plan of Merger by and among Registrant, Devon Merger Co. and Santa Fe Snyder Corporation dated as of May 25, 2000 (incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K filed July 12, 2000). 2.2 Agreement and Plan of Merger, dated as of May 25, 2000, by and among Registrant, Devon Merger Co. and Santa Fe Snyder Corporation (incorporated by reference to Annex A to Registrant's definitive proxy statement for a special meeting of shareholders filed July 21, 2000). 2.3 Amended and Restated Agreement and Plan of Merger among Registrant, Devon Energy Corporation (Oklahoma) (formerly Devon Energy Corporation, an Oklahoma corporation), Devon Oklahoma Corporation and PennzEnergy Company dated as of May 19, 1999 (incorporated by reference to Exhibit 2.1 to Registrant's Form S- 4, File No. 333-82903). 2.4 Amended and Restated Combination Agreement between Registrant and Northstar Energy Corporation dated as of June 29, 1998 (incorporated by reference to Annex B to Registrant's definitive proxy statement for a special meeting of shareholders, filed November 6, 1998). 3.1 Registrant's Restated Certificate of Incorporation (incorporated by reference to Exhibit 3 to Registrant's Form 8-K filed August 18, 1999). 3.2 Registrant's Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Registrant's definitive proxy statement for a special meeting of shareholders filed July 21, 2000). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K filed August 18, 1999). 4.2 Registration Rights Agreement dated as of June 22, 2000 by and among Registrant and Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. (incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K filed July 12, 2000). 4.3 Amendment to Rights Agreement dated as of May 25, 2000 between Registrant and Fleet National Bank (f/k/a BankBoston, N.A.) (incorporated by reference to Exhibit 4.2 to Registrant's definitive proxy statement for a special meeting of shareholders filed July 21, 2000). 4.4 Rights Agreement dated as of August 17, 1999 between Registrant and BankBoston, N.A. (incorporated by reference to Exhibit 4.2 to Registrant's Form 8-K filed August 18, 1999). 4.5 Certificate of Designations of Series A Junior Participating Preferred Stock of Registrant (incorporated by reference to Exhibit 4.3 to Registrant's Form 8-K filed August 18, 1999). 4.6 Certificate of Designations of the 6.49% Cumulative Preferred Stock, Series A of Registrant (incorporated by reference to Exhibit 4.4 to Registrant's Form 8-K filed August 18, 1999). 4.7 Description of Capital Stock of Registrant (incorporated by reference to Exhibit 4.9 to Registrant's Form 8-K filed August 18, 1999). 4.8 Indenture dated as of June 27, 2000 between Registrant and The Bank of New York, setting forth the terms of the Zero Coupon Convertible Senior Debentures due 2020 (incorporated by reference to Exhibit 4.2 to Registrant's Form 8-K filed July 12, 2000). 4.9 Indenture dated as of December 15, 1992 between Registrant (as successor by merger to PennzEnergy, as successor by merger to Pennzoil Company) and Texas Commerce Bank National Association, Trustee (incorporated by reference to Exhibit 4(o) to Pennzoil Company's Form 10-K filed March 10, 1993 (SEC File No. 1-5591)). 4.10 Third Supplemental Indenture dated as of August 3, 1998 to Indenture dated as of December 15, 1992 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association, setting forth the terms of the 4.90% Exchangeable Senior Debentures due August 15, 2008 (incorporated by reference to Exhibit 4(g) to PennzEnergy Company's 1998 Form 10-K filed March 23, 1999.) 4.11 Fourth Supplemental Indenture dated as of August 3, 1998 to Indenture dated as of December 15, 1992 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association, setting forth the terms of the 4.95% Exchangeable Senior Debentures due August 15, 2008 (incorporated by reference to Exhibit 4(h) to PennzEnergy Company's 1998 Form 10-K filed March 23, 1999.) 4.12 Fifth Supplemental Indenture dated as of August 17, 1999 to Indenture dated as of December 15, 1992 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association (incorporated by reference to Exhibit 4.7 to Registrant's Form 8-K filed August 18, 1999). 4.13 Indenture dated as of February 15, 1986 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association (incorporated by reference to Exhibit 4(a) to Pennzoil Company's Form 10-Q filed July 31, 1986 (SEC File No. 1-5591). 4.14 First Supplemental Indenture dated as of August 17, 1999 to Indenture dated as of February 15, 1986 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association (incorporated by reference to Exhibit 4.8 to Registrant's Form 8-K filed August 18, 1999). 4.15 Amending Support Agreement dated as of August 17, 1999 between Registrant and Northstar Energy Corporation (incorporated by reference to Exhibit 4.5 to Registrant's Form 8-K filed August 18, 1999). 4.16 Support Agreement, dated December 10, 1998, between the Registrant and Northstar Energy Corporation (incorporated by reference to Exhibit 4.1 to Devon Energy Corporation (Oklahoma)'s (predecessor of Registrant) Form 8-K dated as of December 11, 1998). 4.17 Exchangeable Share Provisions (incorporated by reference to Exhibit 4.2 to Devon Energy Corporation (Oklahoma)'s (predecessor of Registrant) Form 8-K filed December 23, 1998). 4.18 Amended Exchangeable Share Provisions dated as of August 17, 1999 (incorporated by reference to Exhibit 4.17 to Registrant's Form 10-K for the fiscal year ended December 31, 1999). 27 Financial Data Schedule (filed electronically only) (b) Reports on Form 8-K - Reports on Form 8-K filed since April 1, 2000, are described below: <TABLE> <CAPTION> Filing Date Contents <S> <C> May 26, 2000 Announcement on the planned merger with Santa Fe Snyder June 5, 2000 Announcement of sale of the SACROC unit June 21, 2000 Preliminary unaudited pro forma financial data concerning the Santa Fe Snyder merger June 22, 2000 Announcement of the private placement of zero-coupon convertible debentures July 12, 2000 Amendment to the Santa Fe Snyder merger agreement; indenture and registration rights agreement regarding the zero-coupon con- vertible debentures; and certain consents July 27, 2000 Press release concerning the second quarter 2000 earnings announcement (a Form 8-K/A was filed August 1, 2000, revising certain data in the July 27, 2000, Form 8-K) </TABLE>
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DEVON ENERGY CORPORATION Date: August 11, 2000 /s/Danny J. Heatly Danny J. Heatly Vice President - Accounting
INDEX TO EXHIBITS Exhibit Page 2.1 Amendment No. One to Agreement and Plan of Merger by and among Registrant, Devon Merger Co. and Santa Fe Snyder Corporation dated as of May 25, 2000 * 2.2 Agreement and Plan of Merger, dated as of May 25, 2000, by and among Registrant, Devon Merger Co. and Santa Fe Snyder Corporation * 2.3 Amended and Restated Agreement and Plan of Merger among Registrant, Devon Energy Corporation (Oklahoma) (formerly Devon Energy Corporation, an Oklahoma corporation), Devon Oklahoma Corporation and PennzEnergy Company dated as of May 19, 1999 * 2.4 Amended and Restated Combination Agreement between the Registrant and Northstar Energy Corporation dated as of June 29, 1998 * 3.1 Registrant's Restated Certificate of Incorporation * 3.2 Registrant's Amended and Restated Bylaws * 4.1 Form of Common Stock Certificate * 4.2 Registration Rights Agreement dated as of June 22, 2000 by and among Registrant and Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. * 4.3 Amendment to Rights Agreement dated as of May 25, 2000 between Registrant and Fleet National Bank (f/k/a BankBoston, N.A.) * 4.4 Rights Agreement dated as of August 17, 1999 between Registrant and BankBoston, N.A. * 4.5 Certificate of Designations of Series A Junior Participating Preferred Stock of Registrant. * 4.6 Certificate of Designations of the 6.49% Cumulative Preferred Stock, Series A of Registrant * 4.7 Description of Capital Stock of Registrant * 4.8 Indenture dated as of June 27, 2000 between Registrant and The Bank of New York, setting forth the terms of the Zero Coupon Convertible Senior Debentures due 2020 * 4.9 Indenture dated as of December 15, 1992 between Registrant (as successor by merger to PennzEnergy, successor by merger to Pennzoil Company) and Texas Commerce Bank National Association, Trustee * 4.10 Third Supplemental Indenture dated as of August 3, 1998 to Indenture dated as of December 15, 1992 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association, setting forth the terms of the 4.90% Exchangeable Senior Debentures due August 15, 2008 * 4.11 Fourth Supplemental Indenture dated as of August 3, 1998 to Indenture dated as of December 15, 1992 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association, setting forth the terms of the 4.95% Exchangeable Senior Debentures due August 15, 2008 * 4.12 Fifth Supplemental Indenture dated as of August 17, 1999 to Indenture dated as of December 15, 1992 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association * 4.13 Indenture dated as of February 15, 1986 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association * 4.14 First Supplemental Indenture dated as of August 17, 1999 to Indenture dated as of February 15, 1986 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association * 4.15 Amending Support Agreement dated as of August 17, 1999 between Registrant and Northstar Energy Corporation * 4.16 Support Agreement, dated December 10, 1998, between the Registrant and Northstar Energy Corporation * 4.17 Exchangeable Share Provisions * 4.18 Amended Exchangeable Share Provisions dated as of August 17, 1999 . * 27 Financial Data Schedule (filed electronically only) _________________________________ * Incorporated by reference.