1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 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 April 30, 2001, was 129,420,000. 1 of 83 total pages (Exhibit Index is found at page 29) 1
2 DEVON ENERGY CORPORATION Index to Form 10-Q Quarterly Report to the Securities and Exchange Commission <TABLE> <CAPTION> Page No. -------- <S> <C> Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets, March 31, 2001 (Unaudited) 4 and December 31, 2000 Consolidated Statements of Operations (Unaudited), 5 For the Three Months Ended March 31, 2001 and 2000 Consolidated Statements of Comprehensive Operations 6 (Unaudited), For the Three Months Ended March 31, 2001 and 2000 Consolidated Statements of Cash Flows (Unaudited), 7 For the Three Months Ended March 31, 2001 and 2000 Notes to Consolidated Financial Statements. 8 Item 2. Management's Discussion and Analysis of Financial 17 Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 27 </TABLE> 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 "NGLs" means natural gas liquids 2
3 DEVON ENERGY CORPORATION PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 (FORMING A PART OF FORM 10-Q QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION) 3
4 DEVON ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 609,702 228,050 Accounts receivable 555,967 615,463 Inventories 40,256 47,272 Deferred income taxes 8,979 8,979 Investments and other current assets 35,199 34,373 ----------- ----------- Total current assets 1,250,103 934,137 ----------- ----------- Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties 9,966,413 9,709,352 Less accumulated depreciation, depletion and amortization 4,925,204 4,799,816 ----------- ----------- 5,041,209 4,909,536 Investment in Chevron Corporation common stock, at fair value 622,715 598,867 Goodwill, net of amortization 286,227 289,489 Other assets 126,498 128,449 ----------- ----------- Total assets $ 7,326,752 6,860,478 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade 314,325 305,210 Revenues and royalties due to others 117,306 151,951 Income taxes payable 162,546 65,674 Accrued interest payable 31,690 23,191 Merger related expenses payable 23,799 36,981 Accrued expenses and other current liabilities 47,127 45,980 ----------- ----------- Total current liabilities 696,793 628,987 ----------- ----------- Other liabilities 180,429 164,469 Debentures exchangeable into shares of Chevron Corporation common stock 639,257 760,313 Other long-term debt 1,229,916 1,288,523 Deferred revenue 97,545 113,756 Fair value of derivative instruments 89,711 -- Deferred income taxes 728,552 626,826 Stockholders' equity: Preferred stock of $1.00 par value ($100 liquidation value) Authorized 4,500,000 shares; issued 1,500,000 in 2001 and 2000 1,500 1,500 Common stock of $.10 par value Authorized 400,000,000 shares; issued 129,414,000 in 2001 and 128,638,000 in 2000 12,941 12,864 Additional paid-in capital 3,582,982 3,563,994 Retained earnings (accumulated deficit) 176,654 (214,708) Accumulated other comprehensive loss (108,961) (85,397) Unamortized restricted stock awards (567) (649) ----------- ----------- Total stockholders' equity 3,664,549 3,277,604 ----------- ----------- Total liabilities and stockholders' equity $ 7,326,752 6,860,478 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 4
5 DEVON ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ----------- ----------- (UNAUDITED) <S> <C> <C> REVENUES Oil sales $ 253,982 270,157 Gas sales 725,164 240,817 Natural gas liquids sales 32,337 37,377 Other 12,104 12,065 ----------- ----------- Total revenues 1,023,587 560,416 ----------- ----------- COSTS AND EXPENSES Lease operating expenses 122,648 106,707 Transportation costs 17,404 11,813 Production taxes 44,509 19,398 Depreciation, depletion and amortization of property and equipment 182,892 165,252 Amortization of goodwill 8,462 10,332 General and administrative expenses 22,262 24,850 Interest expense 34,538 40,076 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt -- 2,408 ----------- ----------- Total costs and expenses 432,715 380,836 ----------- ----------- Earnings before change in fair value of derivative instruments, income tax expense, and cumulative effect of change in accounting principle 590,872 179,580 Change in fair value of derivative instruments (14,042) -- ----------- ----------- Earnings before income tax expense and cumulative effect of change in accounting principle 576,830 179,580 INCOME TAX EXPENSE Current 144,096 36,147 Deferred 81,919 38,246 ----------- ----------- Total income tax expense 226,015 74,393 ----------- ----------- Earnings before cumulative effect of change in accounting principle 350,815 105,187 Cumulative effect of change in accounting principle, net of income tax expense of $31,617 49,452 -- ----------- ----------- Net earnings 400,267 105,187 Preferred stock dividends 2,434 2,434 ----------- ----------- Net earnings applicable to common shareholders $ 397,833 102,753 =========== =========== Net earnings before cumulative effect of change in accounting principle per average common share outstanding: Basic $ 2.70 0.81 =========== =========== Diluted $ 2.59 0.80 =========== =========== Net earnings per average common share outstanding: Basic $ 3.08 0.81 =========== =========== Diluted $ 2.96 0.80 =========== =========== Weighted average common shares outstanding - basic 129,030 126,336 =========== =========== Weighted average common shares outstanding - diluted 135,361 127,667 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 5
6 DEVON ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 --------- --------- (UNAUDITED) <S> <C> <C> Net earnings $ 400,267 105,187 Other comprehensive (loss) earnings, net of tax: Foreign currency translation adjustments (19,634) (355) Cumulative effect of change in accounting principle (36,579) -- Reclassification adjustment for derivative losses reclassified into oil and gas sales 4,643 -- Change in fair value of outstanding hedging positions 13,459 -- Unrealized gains on marketable securities 14,547 25,447 --------- --------- Comprehensive earnings $ 376,703 130,279 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 6
7 DEVON ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 --------- ------- (UNAUDITED) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 400,267 105,187 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, depletion and amortization of property and equipment 182,892 165,252 Amortization of goodwill 8,462 10,332 Accretion of interest on zero-coupon convertible senior debentures 3,483 -- Amortization of discounts (premiums) on other long-term debt 1,985 (923) Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt -- 2,408 Gain on sale of assets (49) (22) Change in fair value of derivative instruments 14,042 -- Cumulative effect of change in accounting principle (49,452) -- Deferred income taxes 81,919 38,246 Other 302 1,900 Changes in assets and liabilities: Decrease (increase) in: Accounts receivable 79,130 (29,370) Inventories 7,044 (247) Prepaid expenses (24,416) (9,807) Other assets (12,600) (10,551) Increase (decrease) in: Accounts payable 2,319 (1,678) Income taxes payable 96,977 26,141 Accrued expenses and other current liabilities (20,910) (3,611) Deferred revenue (16,014) 61,700 Long-term other liabilities 1,349 (8,887) --------- --------- Net cash provided by operating activities 756,730 345,970 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property and equipment 22,215 3,448 Capital expenditures (345,926) (436,055) Decrease in other assets -- 96 --------- --------- Net cash used in investing activities (323,711) (432,511) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings of long-term debt, net of issuance costs 62,406 487,386 Principal payments on long-term debt (117,763) (505,670) Issuance of common stock, net of issuance costs 32,403 11,186 Repurchase of common stock (13,337) (8,800) Issuance of treasury stock -- 1,900 Dividends paid on common stock (6,471) (4,317) Dividends paid on preferred stock (2,434) (2,434) Decrease in long-term other liabilities (5,163) (4,522) --------- --------- Net cash used in financing activities (50,359) (25,271) --------- --------- Effect of exchange rate changes on cash (1,008) (467) --------- --------- Net increase (decrease) in cash and cash equivalents 381,652 (112,279) Cash and cash equivalents at beginning of period 228,050 173,167 --------- --------- Cash and cash equivalents at end of period $ 609,702 60,888 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 7
8 DEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation On August 29, 2000, Devon Energy Corporation ("Devon") and Santa Fe Snyder Corporation ("Santa Fe Snyder") completed a merger of the two companies (the "Santa Fe Snyder merger"). At that date, Santa Fe Snyder became a wholly-owned subsidiary of Devon. The Santa Fe Snyder merger was accounted for under the pooling-of-interests method of accounting for business combinations. All operational and financial information contained herein includes the combined amounts of Devon and Santa Fe Snyder for all periods presented. 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 accounting principles generally accepted in the United States of America 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 2000 Annual Report on Form 10-K. In the opinion of Devon's management, all adjustments (all of which are normal and recurring) have been made which are necessary to fairly state the consolidated financial position of Devon and its subsidiaries as of March 31, 2001, and the results of their operations and their cash flows for the three month periods ended March 31, 2001 and 2000. Certain of the 2000 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2001 presentation. 2. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES As of January 1, 2001, Devon adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS No. 133." SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. In accordance with the transition provisions of SFAS No. 133, Devon recorded a net-of-tax cumulative-effect-type adjustment of a $36.6 million loss in accumulated other comprehensive loss to recognize at fair value all derivatives that are designated as cash-flow hedging instruments. Additionally, Devon recorded a net-of-tax cumulative-effect-type adjustment to net earnings for a $49.5 million gain ($0.38 per basic share and $0.37 per diluted share) related to the fair value of derivative instruments that do not qualify as hedges. This gain related principally to the option embedded in Devon's debentures that are exchangeable into shares of Chevron Corporation common stock. 8
9 All derivatives are recognized on the balance sheet at their fair value. All of Devon's derivatives that qualify for hedge accounting treatment are either "cash flow" hedges or "foreign currency cash flow" hedges (collectively, "cash flow hedges"). Devon designates its cash flow hedge derivatives as such on the date the derivative contract is entered into. Devon formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. Devon also assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. During the first quarter of 2001, there were no gains or losses reclassified into earnings as a result of the discontinuance of hedge accounting treatment for any of Devon's derivatives. By using derivative instruments to hedge exposures to changes in commodity prices and exchange rates, Devon exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are usually placed with counterparties that Devon believes are minimal credit risks. Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, commodity prices, or currency exchange rates. The market risk associated with commodity price and foreign exchange contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Devon periodically enters into financial hedging activities with respect to a portion of its projected oil and natural gas production through various financial transactions to manage its exposure to oil and gas price volatility. These transactions include financial price swaps whereby Devon will receive a fixed price for its production and pay a variable market price to the contract counterparty. These transactions also include costless price collars that set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon and the counterparty to the collars will settle the difference. These financial hedging activities are intended to support oil and natural gas prices at targeted levels and to manage Devon's exposure to oil and gas price fluctuations. The oil and gas reference prices upon which these price hedging instruments are based reflect various market indices that have a high degree of historical correlation with actual prices received by Devon. Devon also periodically enters into foreign exchange rate swaps to manage its exposure to oil and gas price volatility. The foreign exchange rate swaps mitigate the effect of volatility in the Canadian-to-U.S. dollar exchange rate on Canadian oil revenues that are predominantly based on U.S. dollar prices. Devon does not hold or issue derivative instruments for trading purposes. All of Devon's commodity price financial swaps and costless price collars and foreign exchange rate swaps in place at January 1, 2001 and March 31, 2001 have been designated as cash flow hedges. Changes in the 9
10 fair value of these derivatives are reported on the balance sheet in "Accumulated other comprehensive loss" ("AOCL"). These amounts are reclassified to oil and gas sales when the forecasted transaction takes place. Devon assesses the effectiveness of its hedges based on changes in the derivative's intrinsic value. The change in the time value of the derivative is excluded from the assessment of hedge effectiveness and, along with any ineffectiveness, is recorded on the statement of operations in "Change in fair value of derivative instruments." For the quarter ended March 31, 2001, Devon recorded a net charge of less than $0.1 million which represented the ineffectiveness of the various cash flow hedges. As of January 1, 2001, $31.9 million of net deferred losses on derivative instruments accumulated in AOCL as a result of the $36.6 million transition adjustment are expected to be reclassified to earnings during the next 12 months. As of March 31, 2001, $16.1 million of net deferred losses on derivative instruments accumulated in AOCL are expected to be reclassified to earnings during the next 12 months. Transactions and events expected to occur over the next 12 months that will necessitate reclassifying these derivatives' losses to earnings are the production and sale of oil and gas which includes the production hedged under the various derivative instruments. The maximum term over which the Company is hedging exposures to the variability of cash flows for commodity price risk is 21 months. Devon recorded an expense of $14.0 million in the first quarter of 2001 for the change in fair value of derivative instruments. Substantially all of this expense related to the fair value change in the option that is embedded in Devon's debentures which are exchangeable into shares of Chevron Corporation common stock. 3. 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 periods ended March 31, 2001 and 2000. Options to purchase approximately 0.8 million shares of Devon's common stock with exercise prices ranging from $58.84 per share to $89.66 per share (with a weighted average price of $66.49 per share) were outstanding at March 31, 2001, but were not included in the computation of diluted earnings per share for the first quarter of 2001 because the options' exercise price exceeded the average market price of Devon's common stock during the first quarter. Similarly, options to purchase approximately 2.6 million shares of Devon's common stock with exercise prices ranging from $39.44 per share to $92.78 per share (with a weighted average price of $59.96 per share) were excluded from the diluted earnings per share calculation for the first quarter of 2000. The excluded options for the 2001 period expire between May 22, 2001 and February 22, 2011. 10
11 3. EARNINGS PER SHARE (CONTINUED) <TABLE> <CAPTION> NET EARNINGS NET APPLICABLE COMMON EARNINGS TO COMMON SHARES PER STOCKHOLDERS OUTSTANDING SHARE ------------ ----------- -------- (IN THOUSANDS) <S> <C> <C> <C> THREE MONTHS ENDED MARCH 31, 2001: Basic earnings per share $397,833 129,030 $3.08 ===== 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 $1,380,000) 2,159 4,377 Potential common shares issuable upon the exercise of outstanding stock options -- 1,954 -------- -------- Diluted earnings per share $399,992 135,361 $2.96 ======== ======== ===== THREE MONTHS ENDED MARCH 31, 2000: Basic earnings per share $102,753 126,336 $0.81 ===== Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options -- 1,331 -------- -------- Diluted earnings per share $102,753 127,667 $0.80 ======== ======== ===== </TABLE> 11
12 4. 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 for the first quarters of 2001 and 2000. The revenues reported are all from external customers. <TABLE> <CAPTION> INTER- U.S. CANADA NATIONAL TOTAL ---------- ---------- ---------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> AS OF MARCH 31, 2001: Current assets $ 928,456 83,797 237,850 1,250,103 Property and equipment, net of accumulated depreciation, depletion and amortization 3,679,823 597,381 764,005 5,041,209 Investment in Chevron Corporation common stock 622,715 -- -- 622,715 Goodwill, net of amortization 238,880 -- 47,347 286,227 Other assets 123,152 82 3,264 126,498 ---------- ---------- ---------- ---------- Total assets $5,593,026 681,260 1,052,466 7,326,752 ========== ========== ========== ========== Current liabilities 460,627 105,336 130,830 696,793 Other liabilities 144,423 796 35,210 180,429 Debentures exchangeable into shares of Chevron Corporation common stock 639,257 -- -- 639,257 Other long-term debt 1,144,326 85,590 -- 1,229,916 Deferred revenue 96,325 729 491 97,545 Fair value of derivative instruments 63,822 25,889 -- 89,711 Deferred income taxes 616,451 83,327 28,774 728,552 Stockholders' equity 2,427,795 379,593 857,161 3,664,549 ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity $5,593,026 681,260 1,052,466 7,326,752 ========== ========== ========== ========== </TABLE> 12
13 4. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> INTER- U.S. CANADA NATIONAL TOTAL ---------- ---------- ---------- ---------- (IN THOUSANDS) <S> <C> <C> <C> <C> THREE MONTHS ENDED MARCH 31, 2001: REVENUES Oil sales $ 166,548 27,787 59,647 253,982 Gas sales 643,181 79,465 2,518 725,164 Natural gas liquids sales 27,163 5,124 50 32,337 Other 13,581 1,053 (2,530) 12,104 ---------- ---------- ---------- ---------- Total revenues 850,473 113,429 59,685 1,023,587 ---------- ---------- ---------- ---------- COSTS AND EXPENSES Lease operating expenses 88,463 15,337 18,848 122,648 Transportation costs 14,636 2,768 -- 17,404 Production taxes 43,916 418 175 44,509 Depreciation, depletion and amortization of property and equipment 149,134 19,285 14,473 182,892 Amortization of goodwill 8,451 -- 11 8,462 General and administrative expenses 20,443 1,910 (91) 22,262 Interest expense 32,168 2,115 255 34,538 ---------- ---------- ---------- ---------- Total costs and expenses 357,211 41,833 33,671 432,715 ---------- ---------- ---------- ---------- Earnings before change in fair value of derivative instruments, income tax expense and cumulative effect of change in accounting principle 493,262 71,596 26,014 590,872 Change in fair value of derivative instruments (14,042) -- -- (14,042) ---------- ---------- ---------- ---------- Earnings before income tax expense and cumulative effect of change in accounting principle 479,220 71,596 26,014 576,830 INCOME TAX EXPENSE Current 139,877 936 3,283 144,096 Deferred 43,634 30,712 7,573 81,919 ---------- ---------- ---------- ---------- Total income tax expense 183,511 31,648 10,856 226,015 ---------- ---------- ---------- ---------- Earnings before cumulative effect of change in accounting principle 295,709 39,948 15,158 350,815 Cumulative effect of change in accounting principle 49,452 -- -- 49,452 ---------- ---------- ---------- ---------- Net earnings 345,161 39,948 15,158 400,267 Preferred stock dividends 2,434 -- -- 2,434 ---------- ---------- ---------- ---------- Net earnings applicable to common shareholders $ 342,727 39,948 15,158 397,833 ========== ========== ========== ========== Capital expenditures $ 230,754 61,364 53,808 345,926 ========== ========== ========== ========== </TABLE> 13
14 4. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> INTER- U.S. CANADA NATIONAL TOTAL -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> THREE MONTHS ENDED MARCH 31, 2000: REVENUES Oil sales $189,834 29,473 50,850 270,157 Gas sales 206,869 31,348 2,600 240,817 Natural gas liquids sales 33,001 4,376 -- 37,377 Other 11,450 1,091 (476) 12,065 -------- -------- -------- -------- Total revenues 441,154 66,288 52,974 560,416 -------- -------- -------- -------- COSTS AND EXPENSES Lease operating expenses 77,418 12,304 16,985 106,707 Transportation costs 9,025 2,788 -- 11,813 Production taxes 19,071 227 100 19,398 Depreciation, depletion and amortization of property and equipment 139,976 15,994 9,282 165,252 Amortization of goodwill 10,326 -- 6 10,332 General and administrative expenses 22,027 2,254 569 24,850 Interest expense 37,348 2,428 300 40,076 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt -- 2,408 -- 2,408 -------- -------- -------- -------- Total costs and expenses 315,191 38,403 27,242 380,836 -------- -------- -------- -------- Earnings before income tax expense 125,963 27,885 25,732 179,580 INCOME TAX EXPENSE Current 31,947 700 3,500 36,147 Deferred 16,496 12,910 8,840 38,246 -------- -------- -------- -------- Total income tax expense 48,443 13,610 12,340 74,393 -------- -------- -------- -------- Net earnings 77,520 14,275 13,392 105,187 Preferred stock dividends 2,434 -- -- 2,434 -------- -------- -------- -------- Net earnings applicable to common shareholders $ 75,086 14,275 13,392 102,753 ======== ======== ======== ======== Capital expenditures $339,727 36,026 60,302 436,055 ======== ======== ======== ======== </TABLE> 14
15 5. COMMITMENTS AND CONTINGENCIES Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon's estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon's financial position or results of operations after consideration of recorded accruals. Environmental Matters Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and similar state statutes. In response to liabilities associated with these activities, accruals have been established when reasonable estimates are possible. Such accruals primarily include estimated costs associated with remediation. Devon has not used discounting in determining its accrued liabilities for environmental remediation, and no claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in Devon's consolidated financial statements. Devon adjusts the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information. Certain of Devon's subsidiaries acquired in the PennzEnergy merger are involved in matters in which it has been alleged that such subsidiaries are potentially responsible parties ("PRPs") under CERCLA or similar state legislation with respect to various waste disposal areas owned or operated by third parties. As of March 31, 2001, Devon's consolidated balance sheet included $7.8 million of accrued liabilities, reflected in "Other liabilities," for environmental remediation. Devon does not currently believe there is a reasonable possibility of incurring additional material costs in excess of the current accruals recognized for such environmental remediation activities. With respect to the sites in which Devon subsidiaries are PRPs, Devon's conclusion is based in large part on (i) the availability of defenses to liability, including the availability of the "petroleum exclusion" under CERCLA and similar state laws, and/or (ii) Devon's current belief that its share of wastes at a particular site is or will be viewed by the Environmental Protection Agency or other PRPs as being de minimis. As a result, Devon's monetary exposure is not expected to be material. Royalty Matters More than 30 oil companies, including Devon, are involved in disputes in which it is alleged that such companies and related parties underpaid royalty, overriding royalty and working interests owners in connection with the production of crude oil. The proceedings include suits in federal court in Texas, Louisiana, Mississippi and Wyoming that have been consolidated into one proceeding in Texas. To avoid expensive and protracted litigation, certain parties, including Devon, have entered into a global settlement agreement which provides for a settlement of all claims of all members of the settlement class. The court held a fairness hearing and issued an Amended Final Judgment approving 15
16 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) the settlement on September 10, 1999. However, certain entities have appealed their objections to the settlement. Also, pending in federal court in Texas is a similar suit alleging underpaid royalties to the United States in connection with natural gas and natural gas liquids produced and sold from United States owned and/or controlled lands. The claims were filed by private litigants against Devon and numerous other producers, under the federal False Claims Act. The United States served notice of its intent to intervene as to certain defendants, but not Devon. Devon and certain other defendants are challenging the constitutionality of whether a claim under the federal False Claims Act can be maintained absent government intervention. Devon believes that it has acted reasonably and paid royalties in good faith. Devon does not currently believe that it is subject to material exposure in association with this litigation. As a result, Devon's monetary exposure in this suit is not expected to be material. Maersk Rig Contract In December 1997, the working interest owner partner of Pennzoil Venezuela Corporation, S.A. ("PVC"), a subsidiary of Devon as a result of the PennzEnergy merger, entered into a contract with Maersk Jupiter Drilling, S.A. ("Maersk") for the provision of a rig for drilling services relative to the anticipated drilling program associated with Devon's Block 70/80 in Lake Maracaibo, Venezuela. The rig was assembled and delivered by Maersk to Lake Maracaibo where it performed an abbreviated drilling program for both Blocks 68/79 and 70/80. It is currently stacked in Lake Maracaibo. The contract, which expires October 1, 2001, provides for early termination, with a charge for such termination which is currently estimated at $42,000 per day with certain escalation factors for the balance of the term. As of March 31, 2001, Devon's consolidated balance sheet included accrued liabilities, reflected in "Other liabilities," for the expected cost to terminate/settle the contract. Devon does not currently believe there is a reasonable possibility of incurring additional material costs in excess of the liability recognized for such termination/settlement of the contract. 16
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion addresses material changes in results of operations for the three months ended March 31, 2001, compared to the three months ended March 31, 2000, and in financial condition since December 31, 2000. It is presumed that readers have read or have access to Devon's 2000 Annual Report on Form 10-K. OVERVIEW Devon's revenues and net earnings for the quarter ended March 31, 2001, were the highest of any quarter in its history. Net earnings for the first quarter of 2001 were $400.3 million, or $3.08 per share. This compares to net earnings of $105.2 million, or $0.81 per share for the first quarter of 2000. The increase in first quarter earnings was due to sharply higher natural gas prices and higher overall production. 17
18 RESULTS OF OPERATIONS Total revenues increased $463.2 million, or 83%, in the first quarter of 2001. This was the result of increases in the average prices of gas and NGL, along with higher production on a combined Boe basis. Oil, gas and NGL revenues were up $463.1 million, or 84%, for the first quarter of 2001 compared to the first quarter of 2000. The quarterly 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.) <TABLE> <CAPTION> TOTAL ------------------------------------ THREE MONTHS ENDED MARCH 31, ------------------------------------ 2001 2000 CHANGE ---------- ------- ------- <S> <C> <C> <C> PRODUCTION Oil (MBbls) 10,439 10,915 -4% Gas (MMcf) 111,769 103,769 +8% NGL (MBbls) 1,317 1,934 -32% Oil, Gas and NGL (MBoe)(1) 30,384 30,144 +1% AVERAGE PRICES Oil (Per Bbl) $ 24.33 24.75 -2% Gas (Per Mcf) 6.49 2.32 +180% NGL (Per Bbl) 24.55 19.33 +27% Oil, Gas and NGL (Per Boe)(1) 33.29 18.19 +83% (IN THOUSANDS) REVENUES Oil $ 253,982 270,157 -6% Gas 725,164 240,817 +201% NGL 32,337 37,377 -13% ---------- ------- Combined $1,011,483 548,351 +84% ========== ======= </TABLE> 18
19 <TABLE> <CAPTION> DOMESTIC -------------------------------- THREE MONTHS ENDED MARCH 31, -------------------------------- 2001 2000 CHANGE -------- ------- ------ <S> <C> <C> <C> PRODUCTION Oil (MBbls) 6,702 7,564 -11% Gas (MMcf) 94,654 85,206 +11% NGL (MBbls) 1,141 1,760 -35% Oil, Gas and NGL (MBoe)(1) 23,619 23,525 +0% AVERAGE PRICES Oil (Per Bbl) $ 24.85 25.10 -1% Gas (Per Mcf) 6.80 2.43 +180% NGL (Per Bbl) 23.81 18.75 +27% Oil, Gas and NGL (Per Boe)(1) 35.43 18.27 +94% (IN THOUSANDS) REVENUES Oil $166,548 189,834 -12% Gas 643,181 206,869 +211% NGL 27,163 33,001 -18% -------- ------- Combined $836,892 429,704 +95% ======== ======= </TABLE> <TABLE> <CAPTION> CANADA -------------------------------- THREE MONTHS ENDED MARCH 31, -------------------------------- 2001 2000 CHANGE -------- ------- ------ <S> <C> <C> <C> PRODUCTION Oil (MBbls) 1,286 1,202 +7% Gas (MMcf) 15,192 16,378 -7% NGL (MBbls) 174 174 +0% Oil, Gas and NGL (MBoe)(1) 3,992 4,106 -3% AVERAGE PRICES Oil (Per Bbl) $ 21.61 24.52 -12% Gas (Per Mcf) 5.23 1.91 +173% NGL (Per Bbl) 29.45 25.15 +17% Oil, Gas and NGL (Per Boe)(1) 28.15 15.88 +77% (IN THOUSANDS) REVENUES Oil $ 27,787 29,473 -6% Gas 79,465 31,348 +153% NGL 5,124 4,376 +17% -------- ------- Combined $112,376 65,197 +72% ======== ======= </TABLE> 19
20 <TABLE> <CAPTION> INTERNATIONAL -------------------------------- THREE MONTHS ENDED MARCH 31, -------------------------------- 2001 2000 CHANGE -------- ------- ------ <S> <C> <C> <C> PRODUCTION Oil (MBbls) 2,451 2,149 +14% Gas (MMcf) 1,923 2,185 -12% NGL (MBbls) 2 -- N/M Oil, Gas and NGL (MBoe)(1) 2,774 2,513 +10% AVERAGE PRICES Oil (Per Bbl) $ 24.34 23.66 +3% Gas (Per Mcf) 1.31 1.19 +10% NGL (Per Bbl) 25.00 N/M N/M Oil, Gas and NGL (Per Boe)(1) 22.43 21.27 +5% (IN THOUSANDS) REVENUES Oil $59,647 50,850 +17% Gas 2,518 2,600 -3% NGL 50 -- N/M ------- ------- Combined $62,215 53,450 +16% ======= ======= </TABLE> - ---------- (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. N/M Not meaningful. OIL REVENUES. Oil revenues decreased $16.2 million, or 6%, in the first quarter of 2001. Oil revenues decreased $4.4 million due to a $0.42 per barrel decrease in the average price of oil in 2001. A decrease in 2001's production of 0.5 million barrels caused oil revenues to decrease by $11.8 million. This reduction was primarily the result of the disposition of certain domestic and international properties whose production was included in the 2000 quarter but which were sold prior to the 2001 quarter. GAS REVENUES. Gas revenues increased $484.4 million, or 201%, in 2001's first quarter. Production rose 8.0 Bcf in the 2001 period, which added $18.6 million of gas revenues. A $4.17 per Mcf increase in the average gas price in the first quarter of 2001 contributed $465.8 million of the increase in gas revenues. The largest contributor to the 2001 production increase was production added as a result of new drilling and development domestically, primarily in Devon's coalbed methane properties. These domestic increases were partially offset by a decline in Canadian gas production of 1.2 Bcf, or 7% in the 2001 quarter. Increased royalty rates and natural declines, partially offset by 20
21 new drilling, development and acquisitions were the primary reasons for the production decline. The increase in gas prices from the 2000 quarter to the 2001 quarter, resulted in an increase in the Canadian government's royalty percentage from 21.2% in the 2000 quarter to 28.8% in the 2001 quarter. Gross Canadian gas production, before royalties, was 21.3 Bcf in the 2001 quarter compared to 20.8 Bcf in the 2000 quarter. NGL REVENUES. NGL revenues decreased $5.0 million, or 13%, in the first quarter of 2001. An increase in the average price in 2001 of $5.22 per barrel, or 27%, caused NGL revenues to increase $6.9 million in the 2001 period. A production decrease of 0.6 million barrels caused revenues to decrease $11.9 million. The production drop was primarily the result of a temporary shutdown of a gas processing plant in the Gulf of Mexico and the sale of certain domestic properties. PRODUCTION AND OPERATING EXPENSES. The components of production and operating expenses for the first quarter of 2001 and 2000 are set forth in the following tables. <TABLE> <CAPTION> TOTAL ------------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------------- 2001 2000 CHANGE ----------- ------- ------ <S> <C> <C> <C> ABSOLUTE (Thousands) Recurring operations and maintenance expenses $ 116,192 103,555 +12% Well workover expenses 6,456 3,152 +105% Transportation costs 17,404 11,813 +47% Production taxes 44,509 19,398 +129% ----------- ------- Total production and operating expenses $ 184,561 137,918 +34% =========== ======= PER BOE Recurring operations and maintenance expenses 3.82 3.44 +11% Well workover expenses 0.21 0.10 +91% Transportation costs 0.57 0.39 +46% Production taxes 1.47 0.64 +130% ----------- ------- Total production and operating expenses $ 6.07 4.58 +33% =========== ======= </TABLE> Recurring operations and maintenance expenses increased $12.6 million, or 12%, in the first quarter of 2001. This increase was primarily the result of increases in fuel and electricity costs as well as increases in many third-party field service costs. Transportation costs increased $5.6 million, primarily due to an increase in coalbed methane gas production and increases in transportation costs. 21
22 Production taxes increased $25.1 million, or 129%, in the 2001 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 95% increase in domestic oil, gas and NGL revenues in the first quarter of 2001 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 fact that most of the increase in domestic revenues occurred in the Rocky Mountain division which has higher production tax rates than the other domestic divisions. DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSES ("DD&A"). Oil and gas property related DD&A increased $15.3 million, or 10%, from $158.9 million in the first quarter of 2000 to $174.2 million in the first quarter of 2001. Oil and gas property related DD&A expense increased $1.3 million due to the 1% increase in combined oil, gas and NGLs production in 2001. Additionally, an increase in the combined U.S., Canadian and international DD&A rate from $5.27 per Boe in 2000 to $5.73 per Boe in 2001 caused oil and gas property related DD&A to increase by $14.0 million. The $0.46 increase in the 2001 rate over the 2000 rate is primarily the result of an increase in future development costs and the disposition of certain properties during 2000, partially offset by an increase in total reserves. Non-oil and gas property DD&A expense increased $2.4 million from $6.3 million in the first quarter of 2000 compared to $8.7 million the first quarter of 2001. Depreciation of new non-oil and gas property and the gas pipeline and gathering system in Wyoming accounted for the increase. AMORTIZATION OF GOODWILL. In connection with Devon's August 1999 merger with PennzEnergy Company, Devon recorded $352.1 million of goodwill. Subsequent to the first quarter of 2000, adjustments to the purchase price resulted in changes to goodwill. These changes caused goodwill amortization to decrease from $10.3 million in the first quarter of 2000 to $8.5 million in the first quarter of 2001. 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 first quarter of 2001 and 2000. 22
23 <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 -------- -------- (IN THOUSANDS) <S> <C> <C> Gross G&A $ 51,399 52,701 Capitalized G&A (15,893) (14,286) Reimbursed G&A (13,244) (13,565) -------- -------- Net G&A $ 22,262 24,850 ======== ======== </TABLE> Net G&A decreased $2.6 million, or 10%, in the first quarter of 2001 compared to the first quarter of 2000. Gross G&A decreased $1.3 million, or 2%. The decrease in gross expenses in the first quarter of 2001 was primarily related to cost savings realized from the Santa Fe Snyder merger. G&A was reduced $1.6 million due to an increase in the amount capitalized as part of oil and gas properties. The increase in capitalized G&A was primarily related to increased drilling activities. G&A, however, rose by $0.3 million due to a decrease in the amount of reimbursements on operated properties in the 2001 quarter. INTEREST EXPENSE. Interest expense decreased $5.5 million, or 14%, in 2001's first quarter. A decrease in the average debt balance outstanding from $2.4 billion in 2000 to $1.9 billion in 2001 caused interest expense to decrease by $8.6 million. The decrease in the average debt balance in the first quarter of 2001 was primarily attributable to the repayment of long-term debt from excess cash flow. Approximately $0.1 billion of the reduction was due to certain debentures being revalued upon the adoption of a new accounting principle as discussed below. The increase in the average rate on the debt outstanding from 6.8% in the 2000 quarter to 6.9% in the 2001 quarter resulted in a $0.3 million increase in interest expense. The increase in the rate is the result of the adoption of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133 ("SFAS No. 133") effective January 1, 2001. Pursuant to SFAS No. 133, the debentures that are exchangeable into shares of Chevron Corporation common stock were revalued as of August 17, 1999. This is the date the debentures were assumed as part of the PennzEnergy merger. Under SFAS No. 133, the total fair value of the debentures was allocated between the interest-bearing debt and the option that is embedded in the debentures. Accordingly, the debt portion of the debentures was reduced by $139.6 million as of August 17, 1999. This discount is being accreted in interest expense, which has raised the effective interest rate on the debentures to 7.76% in the first quarter of 2001 compared to 4.92% recorded prior to 2001. The accretion in the first quarter of 2001 was $3.0 million. 23
24 The following schedule includes the components of interest expense for the first quarter of 2001 and 2000. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------- 2001 2000 -------- -------- (IN THOUSANDS) <S> <C> <C> Interest on debt outstanding $ 32,401 40,698 Amortization of discounts (premiums) 1,985 (923) Facility and agency fees 277 690 Amortization of capitalized loan costs 300 447 Capitalized interest (694) (696) Other 269 (140) -------- -------- Total interest expense $ 34,538 40,076 ======== ======== </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 date 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 2000 prior to the debt retirement. As a result, $2.4 million of expense was recognized in the first quarter of 2000. CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS. As a result of the adoption of SFAS No. 133 effective January 1, 2001, all derivatives are included on the balance sheet at their fair value. The $14.0 million charge included in the first quarter of 2001 principally represents the change in the fair value of derivatives that do not qualify as hedges. The change is primarily the result of changes in the fair value of the option embedded in the debentures exchangeable into shares of Chevron Corporation common stock. 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 estimated effective tax rate in the first quarter of 2001 was 39%, compared to 41% estimated in the first quarter of 2000. The lower expected 2001 rate is primarily due to the effect of certain components of 2001's income tax expense that will not fluctuate in relation to pre-tax earnings. Examples are the amounts of amortization of goodwill and certain Canadian DD&A recorded for financial statement purposes that are not deductible for income tax purposes, and the Canadian large corporation tax that is based on capitalization levels instead of pre-tax earnings. As pre-tax earnings increase as they did in 2001, these fixed components have less impact on the effective tax rate. 24
25 Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 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 No. 109 requires that a valuation allowance be provided to reduce the recorded tax benefits from such assets. Included as deferred tax assets at March 31, 2001, were approximately $208 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 2002 and 2014, Canadian carryforwards which expire primarily between 2001 and 2007 and minimum tax credits which have no expiration. Devon expects the tax benefits from the net operating loss carryforwards to be utilized between 2001 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. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. At the time of adoption of SFAS No. 133, Devon recorded a cumulative-effect-type adjustment to net earnings for a $49.5 million gain related to the fair value of derivatives that do not qualify as hedges. This gain included $46.2 million related to the option embedded in the debentures that are exchangeable into shares of Chevron Corporation common stock. CAPITAL EXPENDITURES, CAPITAL RESOURCES AND LIQUIDITY The following discussion of capital expenditures, capital resources and liquidity should be read in conjunction with the consolidated statements of cash flows included in Part 1, Item 1. CAPITAL EXPENDITURES. Approximately $345.9 million was spent in the first three months of 2001 for capital expenditures. This total includes $332.1 million for the acquisition, drilling or development of oil and gas properties, $4.5 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 $9.3 million for other fixed assets. Approximately $436.1 million was spent for capital expenditures in the first quarter of 2000. This total includes $409.5 million for the acquisition, drilling or development of oil and gas properties, $16.6 million related to the construction of the gas pipeline and gathering system in Wyoming, and $10.0 million for other fixed assets. 25
26 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 quarter of 2001. Operating cash flow in the first quarter of 2001 was $756.7 million, compared to $346.0 million in the first quarter of 2000. The increase in operating cash flow in the 2001 quarter was primarily caused by the rise in revenues, partially offset by increased expenses, as discussed earlier in this section. Devon used its operating cash flow to fund its capital expenditures, reduce long-term debt by over $55 million and increase cash and cash equivalents by almost $382 million during the first quarter. As of April 30, 2001, Devon had approximately $933 million available under its $1 billion credit facilities. 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 2000 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 March 31, 2001, there have been no material changes in Devon's market risk exposure from that disclosed in the 2000 Form 10-K. 26
27 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K are as follows: Exhibit No. 10.1.1 First Amendment to U.S. Credit Agreement dated March 1, 2001, among Devon Energy Corporation, Bank of America N.A., individually and as administrative agent, and the U.S. Lenders party to the Original Agreement. 10.2.1 First Amendment to Canadian Credit Agreement dated March 1, 2001, among Northstar Energy Corporation, Bank of America Canada, individually and as administrative agent and the Canadian Lenders party to the Original Agreement. (b) Reports on Form 8-K - A Current Report on Form 8-K dated January 29, 2001, was filed by the Registrant regarding year-end 2000 oil and gas reserves and various gas hedging instruments entered into in January 2001. 27
28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DEVON ENERGY CORPORATION Date: May 14, 2001 /s/ Danny J. Heatly ----------------------------------------- Danny J. Heatly Vice President - Accounting 28
29 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 10.1.1 First Amendment to U.S. Credit Agreement dated March 1, 2001, among Devon Energy Corporation, Bank of America N.A., individually and as administrative agent, and the U.S. Lenders party to the Original Agreement 10.2.1 First Amendment to Canadian Credit Agreement dated March 1, 2001, among Northstar Energy Corporation, Bank of America Canada, individually and as administrative agent and the Canadian Lenders party to the Original Agreement </TABLE> 29