OREANDA-NEWS. February 28, 2013. Devon Energy Corporation (NYSE:DVN) reported a net loss of USD 357 million for the quarter ended December 31, 2012, or USD 0.89 per common share (USD 0.89 per diluted share).

The company’s fourth quarter financial results were impacted by a non-cash asset impairment charge of USD 896 million. Excluding the asset impairment charge and other items securities analysts typically exclude from estimates, Devon earned USD 316 million or USD 0.78 per diluted share in the fourth quarter of 2012.

Asset impairments also led to a loss of USD 206 million for the year ended December 31, 2012, or USD 0.52 per common share (USD 0.52 per diluted share). Excluding adjusting items, the company earned USD 1.3 billion or USD 3.26 per diluted share in 2012.

“In spite of a challenging commodity price environment that impacted our financial results, Devon delivered solid operating results in 2012. During the year, we continued to make significant progress toward the conversion of our asset portfolio to a higher oil weighting,” commented John Richels, Devon’s president and chief executive officer. “This is evident through the strong oil production growth we delivered during the year and the impressive growth in oil reserves.”

Strong Oil Growth Drives Record Production
Total production of oil, natural gas, and natural gas liquids increased to 250 million oil-equivalent barrels (Boe) in 2012. This is the highest annual production total in the company’s history from its North American property base and represents a 10 million Boe increase compared to 2011. The increase in 2012 production was driven almost entirely by growth in oil production. Devon’s oil production increased 20 percent year-over-year, more than offsetting declines in natural gas volumes due to reduced activity levels.

The company also delivered strong oil production growth in the fourth quarter of 2012. Oil production averaged 151,000 barrels per day, a 13 percent increase compared to the fourth quarter of 2011. The most significant growth in oil production came from the U.S., where fourth-quarter year-over-year oil production increased 30 percent.

Permian Basin Results Lead Fourth-Quarter Operating Highlights
Permian Basin oil production increased 31 percent over the fourth quarter of 2011. Oil accounted for 60 percent of the company’s 66,000 Boe per day produced in the Permian Basin during the quarter.

In the Bone Spring play in the Permian Basin, the company brought 10 new wells on production in the fourth quarter of 2012. Initial 30-day production from these wells averaged 790 Boe per day.

Also in the Permian Basin, Devon completed six wells in the Midland-Wolfcamp Shale during the fourth quarter. This activity was highlighted by the Cortes 1H well with initial 30-day production averaging 795 Boe per day.

In the Mississippian Lime play in Oklahoma, the company brought seven wells online within its Sinopec joint venture acreage in the fourth quarter of 2012. Initial 30-day production from these wells averaged approximately 335 Boe per day, including 210 barrels of oil per day. Devon has a 57 percent working interest in these wells.

Net production from Devon’s Jackfish 1 and Jackfish 2 oil sands projects averaged a record 49,000 barrels of oil per day in the fourth quarter of 2012. Compared to the fourth quarter of 2011, this represents a 15 percent increase in production.

Construction of Devon’s third Jackfish oil sands project is now approximately 50 percent complete, with startup expected by year-end 2014.

The company brought seven operated Granite Wash wells online, including three Hogshooter wells, in the fourth quarter of 2012. The average 30-day production rate from these seven wells was 1,625 Boe per day, including 1,010 barrels of oil per day.

In the Cana-Woodford Shale play, Devon established production from 29 operated wells in the fourth quarter. The average 30-day initial production rate was 6.5 million cubic feet of gas equivalent per day, including 135 barrels of oil per day and 420 barrels of natural gas liquids per day.

Fourth quarter production from the company’s Cana-Woodford Shale averaged 326 million cubic feet of natural gas equivalent per day. Fourth-quarter liquids production increased 68 percent compared to the prior-year quarter to 18,000 barrels per day. Liquids now account for 32 percent of Devon’s net production from the play.

Net daily production in the Barnett Shale averaged 1.4 billion cubic feet of natural gas equivalent per day during the fourth quarter of 2012. Liquids production increased 3 percent year-over-year to 48,000 barrels per day.

Proved Oil Reserves Exhibit Robust Growth
At December 31, 2012, Devon’s estimated proved reserves totaled 3.0 billion oil-equivalent barrels. During the year, oil reserves increased 13 percent compared to 2011, mitigating declines in natural gas reserves.

In 2012, the company added 381 million Boe through successful drilling (extensions, discoveries, and revisions other than price). Associated drill-bit capital invested during the year totaled USD 7.5 billion. For reporting purposes, USD 1.3 billion of cash proceeds received from the closing of two joint ventures were not subtracted from the company’s 2012 drill-bit capital total. However, these proceeds effectively reimbursed Devon for leasing and exploration costs incurred.

“Devon’s capital program delivered excellent drill-bit results in 2012. Our oil-focused drilling program replaced nearly 260 percent of our oil produced during the year,” said Dave Hager, executive vice president, exploration and production. “Even before the benefits of our joint venture agreements, these reserve additions were added at very competitive finding costs.”

Reserve revisions related to lower prices resulted in a decrease in Devon’s proved reserves of 171 million Boe at December 31, 2012. These price revisions impacted only natural gas and natural gas liquids reserves. The company’s reserve life index (proved reserves divided by annual production) remained at approximately 12 years, and its proved developed reserves accounted for 72 percent of total proved reserves.

Oil and Gas Sales Total USD 7.2 Billion; Devon Adds Oil and Gas Hedges
Although total production increased, revenue from oil, natural gas, and natural gas liquids sales declined 14 percent to USD 7.2 billion in 2012. However, cash settlements related to the company’s oil and gas hedges increased revenue by USD 870 million or USD 3.48 per Boe in 2012, partially offsetting lower realized prices for all three products.

The strong oil price environment has provided Devon the opportunity to add oil hedges for 2013. The company now has entered into contracts to hedge 115,000 barrels per day of oil production. Of this total, 55,000 barrels per day are swapped at a weighted average price of USD 101 per barrel. The remaining 60,000 barrels per day utilize costless collars with a weighted average ceiling of USD 113 per barrel and a floor of USD 90 per barrel.

The company also recently increased its natural gas hedging position. For the full-year 2013, Devon now has approximately 1.3 billion cubic feet per day protected at a weighted average floor price of USD 3.87. This position covers approximately 60 percent of the company’s expected natural gas production in 2013.

Operating Costs Reflect Increased Oil Activity

In aggregate, the company’s pre-tax, cash costs totaled USD 14.36 per Boe in 2012, a 7 percent increase compared to 2011. Devon’s cost management efforts and efficient operations partially offset the full impact of industry inflation and a shift toward oil projects. In general, oil projects are more expensive to develop and have higher operating costs than gas projects.

In the fourth quarter of 2012, expenses in most categories were generally in line with expectations. However, general and administrative expenses of USD 198 million or USD 3.17 per Boe exceeded estimates. This was primarily due to USD 21 million of costs associated with the early settlement of pension obligations during the fourth quarter.

Depreciation, depletion, and amortization expense (DD&A) increased to USD 11.73 per Boe in the fourth quarter. The DD&A rate was attributable to the impact of price-related reserve revisions and an upward adjustment in future development cost assumptions.

Joint Ventures Strengthen Balance Sheet and Liquidity

In 2012, Devon successfully entered into two exploration-based joint ventures, delivering almost USD 4.0 billion in value to the company. The transactions included USD 1.3 billion in cash payments along with USD 2.6 billion of drilling carries that fund roughly 70 percent of the company’s capital requirements in the joint ventures.

During the year, Devon generated cash flow from operations of USD 5.0 billion. When combined with cash payments from the closing of two joint venture agreements and other minor asset sales, Devon’s cash inflows totaled USD 6.5 billion in 2012.

The company exited 2012 with a very strong balance sheet. At December 31, 2012, the company’s cash and short-term investments totaled USD 7.0 billion, and Devon’s net debt to adjusted capitalization was 18 percent.

Impairment Charge Methodology
On a quarterly basis, the carrying value of Devon’s oil and natural gas assets are subject to a “ceiling test.” Under the full-cost method of accounting, the net book value of the company’s oil and gas properties, less related deferred income taxes, may not exceed a calculated ceiling. The ceiling is the estimated future net cash flow from proved oil and gas properties, discounted at 10 percent per year. Any excess is written off as a non-cash expense and may not be reversed in future periods, even though higher oil and gas prices may subsequently increase the ceiling. Future net cash flows are calculated assuming continuation of prices and costs in effect at the time of the calculation, except for changes that are fixed and determinable by existing contracts. Trailing 12-month average prices at the end of each quarter are used in the future net cash flow calculation. Impairment charges have no impact on cash flow or cash balances and are not reflective of the fair value of oil and gas assets.