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, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-30176 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, 2000, was 86,595,000. 1 of 28 total pages (Exhibit Index is found at page 27)
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, March 31, 2000 (Unaudited) 4 and December 31, 1999 Consolidated Statements of Operations (Unaudited), 5 For the Three Months Ended March 31, 2000 and 1999 Consolidated Statements of Comprehensive Operations 6 (Unaudited), For the Three Months Ended March 31, 2000 and 1999 Consolidated Statements of Cash Flows (Unaudited), 7 For the Three Months Ended March 31, 2000 and 1999 Notes to Consolidated Financial Statements. 8 Item 2. Management's Discussion and Analysis of Financial 12 Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 22 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
DEVON ENERGY CORPORATION Part I. Financial Information Item 1. Consolidated Financial Statements March 31, 2000 and 1999 (Forming a part of Form 10-Q Quarterly Report to the Securities and Exchange Commission)
DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands, Except Share Data) <TABLE> <CAPTION> March 31, December 31, 2000 1999 (Unaudited) Assets Current assets: <S> <C> <C> Cash and cash equivalents $ 49,788 167,167 Accounts receivable 228,290 209,405 Inventories 14,787 13,441 Deferred income taxes 4,886 4,886 Investments and other current assets 15,812 22,295 Total current assets 313,563 417,194 Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties 5,079,686 4,974,810 Less accumulated depreciation, depletion and amortization 1,917,742 1,818,890 3,161,944 3,155,920 Investment in Chevron Corporation common stock, at fair value 655,606 614,382 Goodwill, net of amortization 314,955 322,800 Other assets 115,089 112,864 Total assets $4,561,157 4,623,160 Liabilities and stockholders' equity Current liabilities: Accounts payable: Trade 78,384 75,625 Revenues and royalties due to others 55,069 58,130 Income taxes payable 31,834 11,287 Accrued interest payable 25,217 26,270 Merger related expenses payable 32,016 32,504 Accrued expenses 22,621 23,628 Total current liabilities 245,141 227,444 Other liabilities 173,680 192,210 Debentures exchangeable into shares of Chevron Corporation common stock 760,313 760,313 Other long-term debt 842,004 1,026,808 Deferred income taxes 424,184 390,865 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 86,520,000 in 2000 and 86,085,000 in 1999 8,652 8,608 Additional paid-in capital 2,257,795 2,246,652 Accumulated deficit (110,362) (164,698) Accumulated other comprehensive loss (41,750) (66,542) Total stockholders' equity 2,115,835 2,025,520 Total liabilities and stockholders' equity $4,561,157 4,623,160 See accompanying notes to consolidated financial statements. </TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In Thousands, Except Per Share Amounts) <TABLE> <CAPTION> Three Months Ended March 31, 2000 1999 (Unaudited) Revenues <S> <C> <C> Oil sales $145,544 27,913 Gas sales 155,532 53,551 Natural gas liquids sales 35,270 3,929 Other 11,365 1,873 Total revenues 347,711 87,266 Costs and expenses Lease operating expenses 65,893 27,420 Production taxes 10,420 2,969 Depreciation, depletion and amortiza- tion of property and equipment 108,552 33,558 Amortization of goodwill 10,332 - General and administrative expenses 16,650 6,223 Interest expense 25,276 6,664 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt 2,408 (3,161) Distributions on preferred securities of subsidiary trust - 2,429 Total costs and expenses 239,531 76,102 Earnings before income tax expense 108,180 11,164 Income tax expense Current 29,847 1,903 Deferred 17,246 3,281 Total income tax expense 47,093 5,184 Net earnings 61,087 5,980 Preferred stock dividends 2,434 - Net earnings applicable to common shareholders $ 58,653 5,980 Net earnings per average common share outstanding: Basic $0.68 0.12 Diluted $0.67 0.12 Weighted average common shares outstanding - basic 86,208 48,470 See accompanying notes to consolidated financial statements. </TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Operations (In Thousands) <TABLE> <CAPTION> Three Months Ended March 31, 2000 1999 (Unaudited) <S> <C> <C> Net earnings $61,087 5,980 Other comprehensive earnings, net of tax: Foreign currency translation adjustments (355) 1,624 Unrealized gains on marketable securities 25,147 - Comprehensive earnings $85,879 7,604 See accompanying notes to consolidated financial statements. </TABLE>
DEVON ENERGY CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands) <TABLE> <CAPTION> Three Months Ended March 31, 2000 1999 (Unaudited) Cash flows from operating activities <S> <C> <C> Net earnings $ 61,087 5,980 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, depletion and amortization of property and equipment 108,552 33,558 Amortization of goodwill 10,332 - Amortization of premiums on debentures (1,023) - Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt 2,408 (3,161) Gain on sale of assets (22) (18) Deferred income taxes 17,246 3,281 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (19,970) 5,562 Inventories (1,347) (32) Prepaid expenses 7,393 (1,121) Other assets (7,151) 76 (Decrease) increase in: Accounts payable (78) 20,287 Income taxes payable 21,641 - Accrued expenses (3,711) (6,608) Long-term other liabilities (13,987) (737) Net cash provided by operating activities 181,370 57,067 Cash flows from investing activities Proceeds from sale of property and equipment 3,048 4,702 Capital expenditures (118,555) (82,798) Decrease in other assets 96 448 Net cash used in investing activities (115,411) (77,648) Cash flows from financing activities Proceeds from borrowings on revolving lines of credit 322,886 297,063 Principal payments on revolving lines of credit (280,670) (281,934) Principal payments on other long-term debt (225,000) - Issuance of common stock, net of issuance costs 11,186 1,654 Dividends paid on common stock (4,317) (2,424) Dividends paid on preferred stock (2,434) - (Decrease) increase in long-term other liabilities (4,522) 525 Net cash (used in) provided by financing activities (182,871) 14,884 Effect of exchange rate changes on cash (467) (17) Net decrease in cash and cash equivalents (117,379) (5,714) Cash and cash equivalents at beginning of period 167,167 19,154 Cash and cash equivalents at end of period $ 49,788 13,440 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 March 31, 2000, and the results of their operations and their cash flows for the three month periods ended March 31, 2000 and 1999. 2. Long-Term Debt 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 March 31, 2000, $35 million was outstanding under this note at an average interest rate of 6.5%. If this short-term note is not extended at its May 22, 2000 maturity, Devon intends to refinance any balance due with borrowings from its long-term credit facilities. Such long-term credit facilities had $429.4 million of availability at the end of March 2000. Accordingly, the $35 million outstanding under the short-term note are classified as long-term debt on the March 31, 2000 consolidated balance sheet. 3. Earnings Per Share The following table reconciles the net earnings and common shares outstanding used in the calculations of basic and diluted earnings per share for the three-month period ended March 31, 2000. The diluted earnings per share calculation for the three months ended March 31, 1999, produced results that are anti- dilutive. <TABLE> <CAPTION> Net Earnings Net Applicable to Common Earnings Common Shares Per Shareholders Outstanding Share (In Thousands) Three Months Ended March 31, 2000: <S> <C> <C> <C> Basic earnings per share $58,653 86,208 $0.68 Dilutive effect of potential common shares issuable upon the exercise of out- standing stock options - 825 Diluted earnings per share $58,653 87,033 $0.67 </TABLE> Options to purchase approximately 1.5 million shares of Devon's common stock, with exercise prices from $39.44 to $92.78 per share (with a weighted average price of $62.45 per share), were excluded from the diluted earnings per share calculation for first quarter 2000. The excluded options expire between April 26, 2000 and March 17, 2010. All options were excluded from the diluted earnings per share calculation for first quarter 1999. 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 2000 and 1999. The revenues reported are all from external customers. <TABLE> <CAPTION> Inter- U.S. Canada national Total (In Thousands) As of March 31, 2000: <S> <C> <C> <C> <C> Current assets $ 225,008 62,625 25,930 313,563 Property and equipment, net of accumulated depreciation, depletion and amortization 2,364,800 481,122 316,022 3,161,944 Investment in Chevron Corporation common stock 655,606 - - 655,606 Goodwill, net of amortization 288,086 - 26,869 314,955 Other assets 113,612 92 1,385 115,089 Total assets $3,647,112 543,839 370,206 4,561,157 Current liabilities 185,587 46,506 13,048 245,141 Debentures exchangeable into shares of Chevron Corporation common stock 760,313 - - 760,313 Other long-term debt 673,444 168,560 - 842,004 Deferred income taxes 382,788 14,638 26,758 424,184 Other liabilities 147,473 2,701 23,506 173,680 Stockholders' equity 1,497,507 311,434 306,894 2,115,835 Total liabilities and stockholders' equity $3,647,112 543,839 370,206 4,561,157 Three Months ended March 31, 2000: Revenues Oil sales $ 114,976 28,518 2,050 145,544 Gas sales 126,010 29,522 - 155,532 Natural gas liquids sales 30,901 4,369 - 35,270 Other 10,450 1,091 (176) 11,365 Total revenues 282,337 63,500 1,874 347,711 Costs and expenses Lease operating expenses 52,704 12,304 885 65,893 Production taxes 10,193 227 - 10,420 Depreciation, depletion and amortization of property equipment 92,376 15,994 182 108,552 Amortization of goodwill 10,326 - 6 10,332 General and administrative expenses 13,127 2,254 1,269 16,650 Interest expense 22,848 2,428 - 25,276 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt - 2,408 - 2,408 Total costs and expenses 201,574 35,615 2,342 239,531 Earnings (loss) before income tax expense 80,763 27,885 (468) 108,180 Income tax expense Current 29,147 700 - 29,847 Deferred 4,296 12,910 40 17,246 Total income tax expense 33,443 13,610 40 47,093 Net earnings (loss) 47,320 14,275 (508) 61,087 Preferred stock dividends 2,434 - - 2,434 Net earnings (loss) applicable to common shareholders $ 44,886 14,275 (508) 58,653 Capital expenditures $ 80,478 36,026 2,051 118,555
4. Segment Information (Continued) <CAPTION> Inter- U.S. Canada national Total (In Thousands) Three Months ended March 31, 1999: Revenues Oil sales $ 14,467 13,446 - 27,913 Gas sales 28,161 25,390 - 53,551 Natural gas liquids sales 2,518 1,411 - 3,929 Other 700 1,173 - 1,873 Total revenues 45,846 41,420 - 87,266 Costs and expenses Lease operating expenses 14,923 12,497 - 27,420 Production taxes 2,592 377 - 2,969 Depreciation, depletion and amortization of property equipment 18,009 15,549 - 33,558 Amortization of goodwill - - - - General and administrative expenses 2,914 3,309 - 6,223 Interest expense 642 6,022 - 6,664 Deferred effect of changes in foreign currency exchange rate on subsidiary's long-term debt - (3,161) - (3,161) Distributions on preferred securities of subsidiary trust 2,429 - - 2,429 Total costs and expenses 41,509 34,593 - 76,102 Earnings before income tax expense 4,337 6,827 - 11,164 Income tax expense Current 820 1,083 - 1,903 Deferred 95 3,186 - 3,281 Total income tax expense 915 4,269 - 5,184 Net earnings $ 3,422 2,558 - 5,980 Capital expenditures $ 42,466 40,332 - 82,798 </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 months ended March 31, 2000, compared to the three months ended March 31, 1999, and in financial condition since December 31, 1999. It is presumed that readers have read or have access to Devon's 1999 Annual Report on Form 10-K. Overview Devon's revenues and net earnings for the quarter ended March 31, 2000, were the highest of any quarter in its history. Net earnings for the first quarter of 2000 were $61.1 million, or 68 cents per share. This compares to net earnings of $6.0 million, or 12 cents per share for the first quarter of 1999. The increase in first quarter earnings was due to sharply higher oil and natural gas production coupled with higher overall oil and natural gas prices. The increase in first quarter production resulted primarily from the August 17, 1999, merger of PennzEnergy Company into Devon. The merger also drove many of the significant changes in assets and liabilities for Devon for the quarter. The transaction more than doubled Devon's total assets and proved oil and gas reserves and significantly expanded the scope of the company's operations. The merger added 396 million Boe of reserves, approximately 13 million net acres of undeveloped leasehold and $3.2 billion of assets to Devon's balance sheet. Results of Operations Total revenues increased $260.4 million, or 298%, in the first quarter of 2000. This was the result of increases in the average prices of oil, gas and NGLs, along with higher production on a combined Boe basis. Oil, gas and NGLs revenues were up $251.0 million, or 294%, for the first quarter of 2000 compared to the first quarter of 1999. 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.) The PennzEnergy merger was accounted for under the purchase method of accounting for business combinations. Therefore, Devon's first quarter 1999 results discussed in this report do not include any effect of PennzEnergy's operations. <TABLE> <CAPTION> Total Three Months Ended March 31, 2000 1999 Change Production <S> <C> <C> <C> Oil (MBbls) 5,695 2,565 +122% Gas (MMcf) 68,814 35,122 +96% NGL (MBbls) 1,776 476 +273% <FN> Oil, Gas and NGLs (MBoe)1 18,940 8,895 +113% Average Prices Oil (Per Bbl) $25.56 10.88 +135% Gas (Per Mcf) 2.26 1.52 +49% NGL (Per Bbl) 19.86 8.25 +141% <FN> Oil, Gas and NGLs (Per Boe)1 17.76 9.60 +85% <CAPTION> (In Thousands) Revenues Oil $145,544 27,913 +421% Gas 155,532 53,551 +190% NGLs 35,270 3,929 +798% Combined $336,346 85,393 +294% <CAPTION> Domestic Three Months Ended March 31, 2000 1999 Change Production Oil (MBbls) 4,195 1,299 +223% Gas (MMcf) 52,436 16,361 +220% NGL (MBbls) 1,602 314 +410% <FN> Oil, Gas and NGLs (MBoe)1 14,536 4,340 +235% Average Prices Oil (Per Bbl) $27.41 11.14 +146% Gas (Per Mcf) 2.40 1.72 +40% NGL (Per Bbl) 19.29 8.02 +141% <FN> Oil, Gas and NGLs (Per Boe)1 18.70 10.40 +80% <CAPTION> (In Thousands) Revenues Oil $114,976 14,467 +695% Gas 126,010 28,161 +347% NGLs 30,901 2,518 +1,127% Combined $271,887 45,146 +502% <CAPTION> Canada Three Months Ended March 31, 2000 1999 Change Production Oil (MBbls) 1,202 1,266 -5% Gas (MMcf) 16,378 18,761 -13% NGL (MBbls) 174 162 +7% <FN> Oil, Gas and NGLs (MBoe)1 4,106 4,555 -10% Average Prices Oil (Per Bbl) $23.73 10.62 +123% Gas (Per Mcf) 1.80 1.35 +33% NGL (Per Bbl) 25.11 8.71 +188% <FN> Oil, Gas and NGLs (Per Boe)1 15.20 8.84 +72% <CAPTION> (In Thousands) Revenues Oil $28,518 13,446 +112% Gas 29,522 25,390 +16% NGLs 4,369 1,411 +210% Combined $62,409 40,247 +55% <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 NGLs 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 first quarter of 2000 Devon also produced 274,000 barrels of oil in Venezuela and 24,000 barrels of oil in Azerbaijan. The oil revenues generated by this production were $2.1 million. This production was added by the PennzEnergy merger. Oil Revenues. Oil revenues increased $117.6 million, or 421%, in the first quarter of 2000. Oil revenues increased $83.6 million due to a $14.68 per barrel increase in the average price of oil in 2000. An increase in 2000's production of 3.1 million barrels caused oil revenues to increase by $34.0 million. The PennzEnergy merger added 3.4 million barrels of oil in the first quarter of 2000. This increase was partially offset by a 0.3 million barrel decline in first quarter 2000 production from Devon's other properties. This reduction was primarily the result of natural decline. Gas Revenues. Gas revenues increased $102.0 million, or 190%, in 2000's first quarter. Production rose 33.7 Bcf in the 2000 period, which added $51.4 million of gas revenues. A $0.74 per Mcf increase in the average gas price in the first quarter of 2000 contributed $50.6 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 34.4 Bcf of production in the first quarter of 2000. Gas production from Devon's historical domestic properties also increased in the 2000 quarter. This was primarily the result of a 0.8 Bcf increase in production from Devon's San Juan Basin coal seam gas properties. These properties produced 6.3 Bcf in the 2000 quarter compared to 5.5 Bcf in the 1999 quarter. This increase was primarily the result of mechanical improvements implemented at the Northeast Blanco Unit coal seam gas property. These domestic increases were partially offset by a decline in Canadian gas production of 2.4 Bcf, or 13% in the 2000 quarter. Approximately half of the decline, or 1.2 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, 0.4 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. NGLs Revenues. NGLs revenues increased $31.3 million, or 798%, in the first quarter of 2000. An increase in the average price in 2000 of $11.61 per barrel, or 141%, caused NGLs revenues to increase $20.6 million in the 2000 period. A production increase of 1.3 million barrels caused revenues to increase $10.7 million. Production from the PennzEnergy merger properties during first quarter 2000 accounted for 1.3 million barrels. Other Revenues. Other revenues increased $9.5 million, or 507%, 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 higher than normal cash on hand in the first quarter of 2000. Production and Operating Expenses. The components of production and operating expenses for the first quarter of 2000 and 1999 are set forth in the following tables. <TABLE> <CAPTION> Total Three Months Ended March 31, 2000 1999 Change Absolute (Thousands) Recurring operations and maintenance <S> <C> <C> <C> expenses $62,835 26,032 +141% Well workover expenses 3,058 1,388 +120% Production taxes 10,420 2,969 +251% Total production and operating expenses $76,313 30,389 +151% Per Boe Recurring operations and maintenance expenses 3.32 2.93 +13% Well workover expenses 0.16 0.16 0% Production taxes 0.55 0.33 +65% Total production and operating expenses $4.03 3.42 +18% <CAPTION> Domestic Three Months Ended March 31, 2000 1999 Change Absolute (Thousands) Recurring operations and maintenance expenses $49,780 13,808 +261% Well workover expenses 2,924 1,115 +162% Production taxes 10,193 2,592 +293% Total production and operating expenses $62,897 17,515 +259% Per Boe Recurring operations and maintenance expenses 3.43 3.18 +8% Well workover expenses 0.20 0.26 -22% Production taxes 0.70 0.60 +17% Total production and operating expenses $4.33 4.04 +7% <CAPTION> Canada Three Months Ended March 31, 2000 1999 Change Absolute (Thousands) Recurring operations and maintenance expenses $12,170 12,224 0% Well workover expenses 134 273 -51% Production taxes 227 377 -40% Total production and operating expenses $12,531 12,874 -3% Per Boe Recurring operations and maintenance expenses 2.96 2.69 +10% Well workover expenses 0.03 0.06 -46% Production taxes 0.06 0.08 -33% Total production and operating expenses $3.05 2.83 +8% </TABLE> In addition to the expenses included in the prior tables for domestic and Canadian operations, the first quarter 2000 also included $0.9 million 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 $36.8 million, or 141%, in the first quarter of 2000. Domestic expenses increased $36.0 million in first quarter 2000 due to $35.8 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 $0.2 million in first quarter 2000. Recurring operations and maintenance expenses were lower than normal in the first 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 first quarter of 2000. Production taxes increased $7.5 million, or 251%, 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 502% increase in domestic oil, gas and NGLs revenues in the first 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. Depreciation, Depletion and Amortization Expenses ("DD&A"). Oil and gas property related DD&A increased $70.8 million, or 217%, from $32.6 million in the first quarter of 1999 to $103.4 million in the first quarter of 2000. Oil and gas property related DD&A expense increased $36.8 million due to the 113% increase in combined oil, gas and NGLs production in 2000. Additionally, an increase in the combined U.S., Canadian and international DD&A rate from $3.66 per Boe in 1999 to $5.46 per Boe in 2000 caused oil and gas property related DD&A to increase by $34.0 million. The $1.80 increase in the 2000 rate over the 1999 rate is primarily the result of the PennzEnergy merger. Non-oil and gas property DD&A expense increased $4.2 million from $5.2 million in the first quarter of 2000 compared to $1.0 million the first quarter of 1999. Depreciation of the non-oil and gas properties acquired in the PennzEnergy merger and depreciation on the new gas pipeline and gathering system in Wyoming accounted for the increase. Amortization of Goodwill. In connection with the PennzEnergy merger, Devon recorded $341.4 million of goodwill. The goodwill was allocated $314.5 million to domestic properties and $26.9 million to international properties. The goodwill is being amortized using the units-of-production method. Substantially all of the $10.3 million of amortization recognized in the first quarter of 2000 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 first quarter of 2000 and 1999. <TABLE> <CAPTION> Three Months Ended March 31, 2000 1999 (In Thousands) <S> <C> <C> Gross G&A $32,669 13,117 Capitalized G&A (8,088) (2,547) Reimbursed G&A (7,931) (4,347) Net G&A $16,650 6,223 </TABLE> Net G&A increased $10.4 million, or 168%, in the first quarter of 2000 compared to the first quarter of 1999. Gross G&A increased $19.5 million, or 149%. The increase in gross expenses in the first quarter of 2000 was primarily related to additional costs incurred as a result of the PennzEnergy merger. G&A was reduced $5.5 million due to an increase in the amount capitalized as part of oil and gas properties. G&A was also reduced by a $3.6 million 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 279%, in 2000's first quarter. An increase in the average debt balance outstanding from $418.0 million in 1999 to $1.65 billion in 2000 caused interest expense to increase by $18.9 million. The increase in the average debt balance in the first quarter of 2000 was attributable to the long-term debt assumed in the PennzEnergy merger. The average rate on the debt outstanding was 6.2% in both quarters and had no effect on the interest expense variance. The remaining decrease of $0.3 million was caused by other factors as shown in the following table. The following schedule includes the components of interest expense for the first quarter of 2000 and 1999. <TABLE> <CAPTION> Three Months Ended March 31, 2000 1999 (In Thousands) <S> <C> <C> Interest on debt outstanding $25,275 6,419 Facility and agency fees 290 147 Amortization of capitalized loan costs 147 69 Capitalized interest (496) - Other 60 29 Total interest expense $25,276 6,664 </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 first quarter 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. As a result, no distributions were recorded in the 2000 quarter. 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 2000 was 44%, compared to 46% estimated in the first quarter of 1999. The lower expected 2000 rate is primarily due to the effect of certain components of 2000'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, these fixed components have less impact on the effective tax rate. 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 March 31, 2000, were approximately $150 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 1, Item 1. Capital Expenditures. Approximately $118.6 million was spent in the first three months of 2000 for capital expenditures. This total includes $94.2 million for the acquisition, drilling or development of oil and gas properties, $16.6 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 $7.8 million for other fixed assets. Approximately $82.8 million was spent for capital expenditures in the first quarter of 1999. This total includes $69.9 million for the acquisition, drilling or development of oil and gas properties, $12.1 million related to the construction of the new gas pipeline and gathering system in Wyoming, and $0.8 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 quarter of 2000. Operating cash flow in the first quarter of 2000 was $181.4 million, compared to $57.1 million in the first quarter of 1999. The increase in operating cash flow in the 2000 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 and excess cash on hand at the beginning of 2000 to fund its capital expenditures and reduce long-term debt by over $180 million during the first quarter. As of May 9, 2000, Devon had approximately $383 million available under its $750 million credit facilities. 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"). SFAS 133 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. A subsequent pronouncement, SFAS 137, was issued in July 1999 which delayed the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. Devon plans to adopt the provision of SFAS 133 in the first quarter of the year ending December 31, 2001, and is currently evaluating the effects of this pronouncement. 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 March 31, 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 None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation S-K are as follows: Exhibit No. 2.1 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). 2.2 Amended and Restated Combination Agreement between the 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 on August 18, 1999). 3.2 Registrant's Bylaws (incorporated by reference to Exhibit 3.3 to Registrant's Registration Statement on Form S-4, File No. 333-82903 as filed on July 15, 1999). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Registrant's Form 8-K filed on August 18, 1999). 4.2 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 on August 18, 1999). 4.3 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 on August 18, 1999). 4.4 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 on August 18, 1999). 4.5 Description of Capital Stock of Registrant (incorporated by reference to Exhibit 4.9 to Registrant's Form 8-K filed on August 18, 1999). 4.6 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 on March 10, 1993 (SEC File No. 1- 5591)). 4.7 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 on March 23, 1999.) 4.8 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(g) to PennzEnergy Company's 1998 Form 10-K filed on March 23, 1999.) 4.9 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 on August 18, 1999). 4.10 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 on July 31, 1986 (SEC File No. 1-5591). 4.11 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 on August 18, 1999). 4.12 Second Supplemental Indenture dated as of August 17, 1999 to Indenture dated as of July 3, 1996 among the Registrant and The Bank of New York, as Trustee and the First Supplemental Indenture dated as of July 3, 1996 between the Registrant (as successor by merger to PennzEnergy) and The Bank of New York, as Trustee, relating to the issuance of 6.5% Trust Convertible Preferred Junior Subordinated Debentures (incorporated by reference to Exhibit 4.6 to Registrant's Form 8-K filed on August 18, 1999). 4.13 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 on August 18, 1999). 4.14 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). 4.15 Registration Rights Agreement, dated December 31, 1996, by and between Registrant and Kerr-McGee Corporation (incorporated by reference to Exhibit 4.4 to Devon Energy Corporation (Oklahoma)'s (predecessor of Registrant) Form 8-K filed on January 14, 1997). 4.16 Exchangeable Share Provisions (incorporated by reference to Exhibit 4.2 to Devon Energy Corporation (Oklahoma)'s (predecessor of Registrant) Form 8-K filed on December 23, 1998). 4.17 Amended Exchangeable Share Provisions dated as of August 17, 1999. 27 Financial Data Schedule (filed electronically only) (b) Reports on Form 8-K - A Current Report on Form 8-K dated January 26, 2000, was filed by the Registrant regarding year-end 1999 oil and gas reserves and 2000 forward-looking information.
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 11, 2000 /s/Danny J. Heatly Danny J. Heatly Vice President - Accounting
INDEX TO EXHIBITS Exhibit Page 2.1 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 * 2.2 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 Bylaws * 4.1 Form of Common Stock Certificate * 4.2 Rights Agreement dated as of August 17, 1999 between Registrant and BankBoston, N.A. * 4.3 Certificate of Designations of Series A Junior Participating Preferred Stock of Registrant. * 4.4 Certificate of Designations of the 6.49% Cumulative Preferred Stock, Series A of Registrant * 4.5 Description of Capital Stock of Registrant * 4.6 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 * 4.7 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 * 4.8 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 * 4.9 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 * 4.10 Indenture dated as of February 15, 1986 among Registrant (as successor by merger to PennzEnergy) and Chase Bank of Texas, National Association * 4.11 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 * 4.12 Second Supplemental Indenture dated as of August 17, 1999 to Indenture dated as of July 3, 1996 among the Registrant and The Bank of New York, as Trustee and the First Supplemental Indenture dated as of July 3, 1996 between the Registrant (as successor by merger to PennzEnergy) and The Bank of New York, as Trustee, relating to the issuance of 6.5% Trust Convertible Preferred Junior Subordinated Debentures * 4.13 Amending Support Agreement dated as of August 17, 1999 between Registrant and Northstar Energy Corporation * 4.14 Support Agreement, dated December 10, 1998, between the Registrant and Northstar Energy Corporation * 4.15 Registration Rights Agreement, dated December 31, 1996, by and between Registrant and Kerr-McGee Corporation * 4.16 Exchangeable Share Provisions * 4.17 Amended Exchangeable Share Provisions dated as of August 17, 1999 . * 27 Financial Data Schedule (filed electronically only) * Incorporated by reference.