Summary of DEVON ENERGY CORP/DE

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion addresses material changes in our results of operations and capital resources and uses for the three-month and nine-month periods ended September 30, 2008, compared to the three-month and nine-month periods ended September 30, 2007, and in our financial condition and liquidity since December 31, 2007. It is presumed that readers have read or have access to our 2007 Annual Report on Form 10-K/A, which includes disclosures regarding critical accounting policies and estimates as part of Management's Discussion and Analysis of Financial Condition and Results of Operations. Unless otherwise stated, all dollar amounts are expressed in U.S. dollars. Business Overview
During the third quarter and first nine months of 2008, we generated net earnings of $2.6 billion and $4.7 billion, respectively, or $5.87 and $10.40 per diluted share, representing increases of 260% and 105% over the same periods of 2007. Additionally, net cash provided by operating activities for the first nine months of 2008 climbed to a record amount of $8.2 billion, representing a 60% increase over 2007. These increases in earnings and cash flow were largely attributable to the following factors:
• Production increased 3% and 6% in the third quarter and first nine months of 2008, respectively.

• The combined realized price without hedges for oil, gas and NGLs increased 57% and 51% in the third quarter and first nine months of 2008, respectively.

• Oil and gas hedges generated a net gain of $1.6 billion in the third quarter of 2008 and a net loss of $411 million in the first nine months of 2008. Included in these amounts were cash payments of $240 million and $551 million, respectively.

• Marketing and midstream operating profit increased 28% and 52% in the third quarter and first nine months of 2008, respectively.

• Per unit operating costs rose 26% and 17% in the third quarter and first nine months of 2008, respectively.

• General and administrative expenses increased 17% and 33% in the third quarter and first nine months of 2008, respectively.

• Cash spent on capital expenditures for oil and gas exploration and development activities was $5.7 billion during the first nine months of 2008.

In the third quarter of 2008, we sold our operations in Cote d'Ivoire, completing another sale under our African divestiture program. The sales price was $205 million ($163 million net of purchase price adjustments). As a result of this sale, we recognized an after-tax gain of $101 million in the third quarter of 2008.
With the completion of the Cote d'Ivoire transaction, we have divested all our oil and gas producing properties in Africa, including Equatorial Guinea-the largest individual transaction in the divestiture program. The Africa divestitures have generated just over $3.0 billion of sales proceeds. After income taxes and purchase price adjustments, such proceeds totaled $2.2 billion and generated after-tax gains of $0.8 billion. Also, in conjunction with these asset sales, we repatriated an additional $2.3 billion of earnings from certain foreign subsidiaries to the United States in the first nine months of 2008. We also expect to repatriate $0.4 billion from certain foreign subsidiaries to the United States in the fourth quarter of 2008.
With the proceeds from asset sales, repatriated funds and growing cash flow from operations, we repaid $2.5 billion of commercial paper and credit facility borrowings. During 2008, we fully redeemed our exchangeable debentures for cash payments totaling $1.0 billion. We also repurchased 6.5 million common shares for $665 million and redeemed $150 million of preferred stock during the first nine months of 2008.
Industry Overview and Outlook
As disclosed in our 2007 Annual Report on Form 10-K/A, our current and future earnings depend largely on our ability to replace and grow oil and gas reserves, increase production and exert cost discipline. We must also manage commodity pricing risks to achieve long-term success. Recently, managing and reacting to the volatility of oil and natural gas prices has been an important part of our strategy.

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Oil and natural gas prices have reached historical high levels in recent years and during the first half of 2008. These high prices have been a key factor in the oil and gas industry experiencing cost increases that have exceeded general inflation trends. We are no different from others in the industry in that we have been impacted by these cost increases. However, we have continued to remain disciplined with regards to our operating costs and capital expenditures. We have utilized the record operating cash flows generated by high commodity prices, along with proceeds from our African divestitures, to, among other uses, repay outstanding debt. During 2007 and the first nine months of 2008, we repaid outstanding debt totaling $3.4 billion. During this same period, we also repurchased $1.0 billion of our common stock and redeemed $150 million of preferred stock.
As we exited the third quarter of 2008, oil and natural gas prices had declined sharply from their recent record levels. In addition, recent problems in the credit markets, steep stock market declines, financial institution failures and government bail-outs provide evidence of a weakening United States and global economy. As a result of the market turmoil and price decreases, oil and gas companies with high debt levels and lack of liquidity have been and will continue to be negatively impacted.
However, we do not expect to be significantly impacted by these recent events. We are in a financially-strong position due to our past strategies. We continue to have access to the commercial paper market, and we had $3.1 billion of available capacity under our credit facilities as of November 5, 2008. We also anticipate our operating cash flow and other capital resources, if needed, will adequately fund our planned capital expenditures and other capital uses over the near-term.
Results of Operations
Revenues
Oil, Gas and NGL Sales
The three-month and nine-month comparison of our oil, gas and NGL production and the related prices realized without the effect of hedges is shown in the following tables. The amounts for all periods presented exclude our Egyptian operations that were sold in the fourth quarter of 2007 and our West African operations, which are classified as discontinued operations in our financial statements.

                                                                                   Total
                                        Three Months Ended September 30,                            Nine Months Ended September 30,
                                  2008                 2007             Change(2)             2008                2007             Change(2)
Production
Oil (MMBbls)                             12                  13                -10 %                39                  41                 -4 %
Gas (Bcf)                               239                 223                 +7 %               692                 637                 +9 %
NGLs (MMBbls)                             7                   7                 +5 %                21                  19                +10 %
Oil, Gas and NGLs
(MMBoe)(1)                               58                  57                 +3 %               175                 166                 +6 %

Realized prices without
hedges
Oil (Per Bbl)                 $      106.95         $     67.41                +59 %      $     101.42         $     59.88                +69 %
Gas (Per Mcf)                 $        8.82         $      5.28                +67 %      $       8.60         $      5.95                +45 %
NGLs (Per Bbl)                $       54.72         $     38.34                +43 %      $      52.03         $     34.31                +52 %
Oil, Gas and NGLs (Per
Boe)(1)                       $       64.29         $     40.86                +57 %      $      62.84         $     41.52                +51 %

Revenues ($ in millions)
Oil sales                     $       1,296         $       905                +43 %      $      4,001         $     2,461                +63 %
Gas sales                             2,107               1,175                +79 %             5,947               3,787                +57 %
NGL sales                               362                 242                +50 %             1,069                 643                +66 %

Oil, Gas and NGL sales        $       3,765         $     2,322                +62 %      $     11,017         $     6,891                +60 %

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                                                                                 Domestic
                                        Three Months Ended September 30,                            Nine Months Ended September 30,
                                  2008                 2007             Change(2)             2008                2007             Change(2)
Production
Oil (MMBbls)                              4                   5                -20 %                13                  14                 -7 %
Gas (Bcf)                               185                 164                +13 %               532                 465                +14 %
NGLs (MMBbls)                             6                   6                 +5 %                18                  16                +13 %
Oil, Gas and NGLs
(MMBoe)(1)                               40                  38                 +7 %               119                 107                +11 %

Realized prices without
hedges
Oil (Per Bbl)                 $      118.70         $     73.19                +62 %      $     111.94         $     63.01                +78 %
Gas (Per Mcf)                 $        8.66         $      5.23                +65 %      $       8.50         $      5.87                +45 %
NGLs (Per Bbl)                $       51.50         $     36.78                +40 %      $      48.96         $     32.68                +50 %
Oil, Gas and NGLs (Per
Boe)(1)                       $       58.38         $     37.62                +55 %      $      57.43         $     38.55                +49 %

Revenues ($ in millions)
Oil sales                     $         467         $       359                +30 %      $      1,476         $       898                +64 %
Gas sales                             1,598                 860                +86 %             4,522               2,732                +66 %
NGL sales                               288                 196                +47 %               859                 509                +69 %

Oil, Gas and NGL sales        $       2,353         $     1,415                +66 %      $      6,857         $     4,139                +66 %




                                                                                 Canada
                                       Three Months Ended September 30,                           Nine Months Ended September 30,
                                 2008                2007              Change(2)            2008                2007             Change(2)
Production
Oil (MMBbls)                            5                   4                 +30 %               15                  12                +32 %
Gas (Bcf)                              54                  59                  -7 %              159                 171                 -7 %
NGLs (MMBbls)                           1                   1                   5 %                3                   3                 -5 %
Oil, Gas and NGLs
(MMBoe)(1)                             15                  15                  +4 %               45                  43                 +4 %

Realized prices without
hedges
Oil (Per Bbl)                 $     92.98         $     53.40                 +74 %      $     87.28         $     48.01                +82 %
Gas (Per Mcf)                 $      9.36         $      5.40                 +73 %      $      8.90         $      6.16                +45 %
NGLs (Per Bbl)                $     72.19         $     46.77                 +54 %      $     70.00         $     42.36                +65 %
Oil, Gas and NGLs (Per
Boe)(1)                       $     70.24         $     39.28                 +79 %      $     66.16         $     40.33                +64 %

Revenues ($ in millions)
Oil sales                     $       507         $       224                +127 %      $     1,345         $       562               +139 %
Gas sales                             504                 312                 +61 %            1,410               1,048                +35 %
NGL sales                              74                  46                 +61 %              210                 134                +57 %

Oil, Gas and NGL sales        $     1,085         $       582                 +86 %      $     2,965         $     1,744                +70 %

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                                                                               International
                                        Three Months Ended September 30,                            Nine Months Ended September 30,
                                  2008                 2007             Change(2)             2008                2007             Change(2)
Production
Oil (MMBbls)                              3                   4                -37 %                11                  15                -28 %
Gas (Bcf)                                 -                   -                  2 %                 1                   1                +17 %
NGLs (MMBbls)                             -                   -                N/M                   -                   -                N/M
Oil, Gas and NGLs
(MMBoe)(1)                                3                   4                -36 %                11                  16                -28 %

Realized prices without
hedges
Oil (Per Bbl)                 $      117.97         $     74.43                +58 %      $     108.73         $     66.10                +64 %
Gas (Per Mcf)                 $       10.72         $      6.61                +62 %      $       9.95         $      5.73                +74 %
NGLs (Per Bbl)                $           -         $         -                N/M        $          -         $         -                N/M
Oil, Gas and NGLs (Per
Boe)(1)                       $      116.35         $     73.77                +58 %      $     107.63         $     65.66                +64 %

Revenues ($ in millions)
Oil sales                     $         322         $       322                 +0 %      $      1,180         $     1,001                +18 %
Gas sales                                 5                   3                +66 %                15                   7               +103 %
NGL sales                                 -                   -                N/M                   -                   -                N/M

Oil, Gas and NGL sales        $         327         $       325                 +0 %      $      1,195         $     1,008                +18 %

(1) Gas volumes are converted to Boe or MMBoe 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. NGL volumes are converted to Boe on a one-to-one basis with oil.

(2) All percentage changes included in this table are based on actual figures and are not calculated using the rounded figures included in this table.

N/M Not meaningful.

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the three months ended September 30, 2008 and 2007.

                                         Oil         Gas       NGLs       Total
                                                     (In millions)
              2007 sales               $   905     $ 1,175     $ 242     $ 2,322
              Changes due to volumes       (88 )        87        12          11
              Changes due to prices        479         845       108       1,432

              2008 sales               $ 1,296     $ 2,107     $ 362     $ 3,765

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the nine months ended September 30, 2008 and 2007.

                                       Oil         Gas        NGLs        Total
                                                    (In millions)
            2007 sales               $ 2,461     $ 3,787     $   643     $  6,891
            Changes due to volumes       (99 )       328          62          291
            Changes due to prices      1,639       1,832         364        3,835

            2008 sales               $ 4,001     $ 5,947     $ 1,069     $ 11,017

Oil Sales
Oil sales decreased $88 million in the third quarter of 2008 due to a one million barrel, or 10%, decrease in production. Our International production decreased approximately one million barrels due to reaching certain cost recovery thresholds of our carried interest in Azerbaijan. We also deferred 0.4 million barrels of oil production during the third quarter of 2008 as the result of the effects of Hurricanes Ike and Gustav. These decreases were partially offset by additional production resulting from increased development activity at our Jackfish and Lloydminster areas in Canada.

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Oil sales increased $479 million in the third quarter of 2008 as a result of a 59% increase in our realized price without hedges. The average NYMEX West Texas Intermediate index price increased 58% during the same time period, accounting for the majority of the increase.
Oil sales decreased $99 million in the first nine months of 2008 due to a two million barrel, or 4%, decrease in production. Our International production decreased approximately four million barrels due to reaching certain cost recovery thresholds of our carried interest in Azerbaijan. We also deferred 0.4 million barrels of oil production due to hurricanes. These decreases were partially offset by additional production resulting from increased development activity at our Jackfish and Lloydminster areas in Canada.
Oil sales increased $1.6 billion in the first nine months of 2008 as a result of a 69% increase in our realized price without hedges. The average NYMEX West Texas Intermediate index price increased 72% during the same time period, accounting for the majority of the increase. Gas Sales
A 16 Bcf, or 7%, increase in production during the third quarter of 2008 caused gas sales to increase by $87 million. Our drilling and development program in the Barnett Shale field in north Texas contributed 23 Bcf to the gas production increase. We also deferred 5 Bcf of gas production in the third quarter of 2008 due to Hurricanes Ike and Gustav. This net increase and the effect of new drilling and development in our other North American properties were partially offset by natural production declines.
Gas sales increased $845 million during the third quarter of 2008 as a result of a 67% increase in our realized price without hedges. This increase was largely due to increases in the regional index prices upon which our gas sales are based.
A 55 Bcf, or 9%, increase in production during the first nine months of 2008 caused gas sales to increase by $328 million. Our drilling and development program in the Barnett Shale field in north Texas contributed 64 Bcf to the gas production increase. We also deferred 5 Bcf of gas production due to hurricanes. This net increase and the effect of new drilling and development in our other North American properties were partially offset by natural production declines.
Gas sales increased $1.8 billion during the first nine months of 2008 as a result of a 45% increase in our realized price without hedges. This increase was largely due to increases in the regional index prices upon which our gas sales are based.
Net Gain (Loss) on Oil and Gas Derivative Financial Instruments The following tables provide financial information associated with our oil and gas hedges for the third quarter and first nine months of 2008 and 2007. The first table presents the cash settlements and unrealized gains and losses recognized as components of our revenues. The subsequent tables present our oil, gas and NGL prices with, and without, the effects of the cash settlements for the third quarter and first nine months of 2008 and 2007. The prices do not include the effects of unrealized gains and losses.

                                                      Three Months                         Nine Months
                                                   Ended September 30,                 Ended September 30,
                                                  2008               2007             2008              2007
                                                                        (In millions)
Cash settlements:
Gas price swaps                               $        (115 )       $    14        $     (276 )       $      29
Gas price collars                                      (125 )             -              (275 )               2

Total cash settlements (paid) received                 (240 )            14              (551 )              31

Unrealized gains (losses) on fair value
changes:
Gas price swaps                                         645              (7 )              27               (26 )
Gas price collars                                     1,142               -               114                (4 )
Oil price collars                                        45               -                (1 )               -

Total unrealized gains (losses) on fair
value changes                                         1,832              (7 )             140               (30 )

Net gain (loss) on oil and gas
derivative financial instruments              $       1,592         $     7        $     (411 )       $       1

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                                                                Three Months Ended September 30, 2008
                                                    Oil                 Gas               NGLs               Total
                                                 (Per Bbl)           (Per Mcf)          (Per Bbl)          (Per Boe)
Realized price without hedges                   $    106.95         $      8.82        $     54.72        $     64.29
Cash settlements of hedges                            (0.01 )             (1.01 )                -              (4.10 )

Realized price, including cash settlements      $    106.94         $      7.81        $     54.72        $     60.19




                                                               Three Months Ended September 30, 2007
                                                   Oil                Gas               NGLs               Total
                                                (Per Bbl)          (Per Mcf)          (Per Bbl)          (Per Boe)
Realized price without hedges                   $    67.41         $     5.28        $     38.34        $     40.86
Cash settlements of hedges                               -               0.06                  -               0.24

Realized price, including cash settlements      $    67.41         $     5.34        $     38.34        $     41.10




                                                                Nine Months Ended September 30, 2008
                                                   Oil                 Gas               NGLs               Total
                                                (Per Bbl)           (Per Mcf)          (Per Bbl)          (Per Boe)
Realized price without hedges                   $   101.42         $      8.60        $     52.03        $     62.84
Cash settlements of hedges                               -               (0.80 )                -              (3.15 )

Realized price, including cash settlements      $   101.42         $      7.80        $     52.03        $     59.69




                                                                Nine Months Ended September 30, 2007
                                                   Oil                 Gas               NGLs               Total
                                                (Per Bbl)           (Per Mcf)          (Per Bbl)          (Per Boe)
Realized price without hedges                   $    59.88         $      5.95        $     34.31        $     41.52
Cash settlements of hedges                               -                0.05                  -               0.19

Realized price, including cash settlements      $    59.88         $      6.00        $     34.31        $     41.71

Our oil and gas derivative financial instruments include price swaps and costless collars. For the price swaps, we receive a fixed price for our production and pay a variable market price to the contract counterparty. The costless price collars 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, we cash-settle the difference with the counterparty to the collars. Cash settlements as presented in the tables above represent realized losses or gains related to our price swaps and collars.
During the third quarter and first nine months of 2008, we paid $240 million, or $1.01 per Mcf, and $551 million, or $0.80 per Mcf, respectively, to counterparties to settle our gas price swaps and collars. During the third quarter and nine months of 2007, we received $14 million, or $0.06 per Mcf, and $31 million, or $0.05 per Mcf, respectively, from counterparties to settle our gas price swaps and collars.
In addition to recognizing these cash settlement effects, we also recognize unrealized changes in the fair values of our oil and gas derivative instruments in each reporting period. We estimate the fair values of our oil and gas derivative financial instruments primarily by using internal discounted cash flow calculations. From time to time, we validate our valuation techniques by comparing our internally generated fair value estimates with those obtained from contract counterparties and/or brokers.
The most significant variable to our cash flow calculations is our estimate of future commodity prices. We base our estimate of future prices upon published forward commodity price curves such as the Inside FERC Henry Hub forward curve for gas instruments and the NYMEX West Texas Intermediate forward curve for oil instruments. Based on the amount of volumes subject to price swaps and collars at September 30, 2008, a 10% increase in these forward curves would have decreased our third quarter 2008 unrealized gain for our oil and gas derivative financial instruments by approximately $130 million. Another key input to our cash flow calculations is our estimate of volatility for these forward curves, which we base primarily upon implied volatility.
In spite of the recent turmoil in the financial markets, counterparty credit risk has not had a significant effect on our cash flow calculations and commodity derivative valuations. This is primarily the result of two factors. . . .