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| DVN > SEC Filings for DVN > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
The following discussion addresses material changes in our results of
operations and capital resources and uses for the three-month and six-month
periods ended June 30, 2009, compared to the three-month and six-month periods
ended June 30, 2008, and in our financial condition and liquidity since
December 31, 2008. For information regarding our critical accounting policies
and estimates, see our 2008 Annual Report on Form 10-K under "Item 7.
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
The downward pressure in natural gas prices that began in the last half of
2008 has continued into the first and second quarters of 2009. The Henry Hub
natural gas index for the second quarter of 2009 was down 49% from the fourth
quarter of 2008 and 68% from the second quarter of 2008. Additionally, although
oil index prices have improved slightly since the end of 2008, the West Texas
Intermediate oil index dropped 52% from the second quarter of 2008 to the second
quarter of 2009.
The lower oil and gas prices have significantly impacted our earnings for the
second quarter and first six months of 2009. During the second quarter of 2009
and first six months of 2009, we generated net earnings of $314 million, or
$0.70 per diluted share, and a net loss of $3.6 billion, or $8.21 per diluted
share, for the respective periods. These amounts are significantly lower than
the comparative earnings amounts for 2008. Additionally, the loss in the first
half of 2009 was the result of noncash impairments of our oil and gas properties
in the first quarter that totaled $4.2 billion, net of income taxes.
Substantially all of this noncash charge was the result of the continuing drop
in natural gas prices since December 31, 2008.
Key measures of our performance for the second quarter and first six months
of 2009 compared to 2008 are summarized below:
• Production increased 12% and 9% in the second quarter and first six months
of 2009, respectively.
• The combined realized price without hedges for oil, gas and NGLs decreased 62% and 59% in the second quarter and first six months of 2009, respectively.
• Marketing and midstream operating profit decreased 39% to $125 million and 29% to $267 in the second quarter and first six months of 2009, respectively.
• Per unit operating costs decreased 30% to $8.51 per Boe and 24% to $8.84 per Boe in the second quarter and first six months of 2009, respectively.
• Oil and gas hedges generated net gains of $13 million and $167 million in the second quarter and first six months of 2009, respectively and net losses of $1.2 billion and $2.0 billion in the second quarter and first six months of 2008. Included in these amounts were cash receipts of $114 million and $232 million for the second quarter of 2009 and first six months of 2009, respectively and payments of $303 million and $311 million in the second quarter of 2008 and first six months of 2008, respectively.
• Operating cash flow decreased approximately 60% to $2.1 billion in the first half of 2009.
• Cash spent on capital expenditures was approximately $3.2 billion in the first six months of 2009. Approximately 65% this amount was funded with operating cash flow and the remainder was funded with commercial paper borrowings.
Additionally, in January 2009, we issued $500 million of 5.625% senior
unsecured notes due January 15, 2014 and $700 million of 6.30% senior unsecured
notes due January 15, 2019. The net proceeds received of $1.187 billion, after
discounts and issuance costs, were used primarily to repay our $1.0 billion of
outstanding commercial paper as of December 31, 2008.
During the second quarter of 2009, we announced the integration of our Gulf
of Mexico and International operations into one offshore unit. This integration
will provide greater focus and efficiency to these areas of our operations,
which have similar scope, technical requirements and strategy. We continue to
view our deepwater strategy as a means to enhance our long-term growth
opportunities.
We expect the challenging commodity price environment will likely persist
throughout the remainder of 2009. As a result, we are continuing to execute the
strategy we outlined at the beginning of the year. That strategy is to decrease
our activity across our near-term development projects in North America and
continue advancing our longer term development projects
like our second Jackfish heavy oil project in Canada and our Lower Tertiary
developments in the Gulf of Mexico. We also continue to drive costs lower and
maintain our strong liquidity position until we see signs of recovery in the
hydrocarbon markets.
As part of this strategy, in the second quarter of 2009, we announced plans
to pursue a partner to participate in our Lower Tertiary projects in the Gulf of
Mexico. The proceeds we may obtain from such a transaction would supplement the
liquidity provided by our operating cash flow and credit lines. Additionally,
such a transaction would give us greater flexibility to adjust capital
expenditures to changes in cash flow, particularly in these times of low
commodity prices.
Although oil and gas prices remain depressed compared to recent highs
achieved in 2008, and our operating cash flow has been negatively impacted, we
expect to have adequate liquidity to execute our near-term operating strategy
and maintain momentum on our longer-term projects. As of July 31, 2009, we had
unused lines of credit totaling $2.0 billion and continue to have access to the
commercial paper market. We anticipate these capital sources combined with our
operating cash flow will be sufficient to fund our planned capital expenditures
and other capital uses over the near-term.
Results of Operations
Revenues
The three-month and six-month comparison of our oil, gas and NGL production,
prices and revenues for the second quarter and first half of 2009 and 2008 are
shown in the following tables. The amounts for all periods presented exclude our
West African operations that are classified as discontinued operations in our
financial statements.
Total
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 16 13 +17 % 29 27 +6 %
Gas (Bcf) 254 230 +11 % 499 453 +10 %
NGLs (MMBbls) 8 7 +9 % 15 14 +8 %
Oil, Gas and NGLs
(MMBoe)(1) 65 59 +12 % 127 117 +9 %
Realized prices
without hedges
Oil (Per Bbl) $ 52.44 $ 110.56 -53 % $ 43.65 $ 98.98 -56 %
Gas (Per Mcf) $ 2.91 $ 9.61 -70 % $ 3.31 $ 8.48 -61 %
NGLs (Per Bbl) $ 22.24 $ 54.08 -59 % $ 20.45 $ 50.76 -60 %
Oil, Gas and NGLs
(Per Boe)(1) $ 26.27 $ 69.14 -62 % $ 25.36 $ 62.12 -59 %
Revenues ($ in
millions)
Oil sales $ 808 $ 1,455 -44 % $ 1,262 $ 2,705 -53 %
Gas sales 740 2,210 -67 % 1,653 3,840 -57 %
NGL sales 170 379 -55 % 306 707 -57 %
Oil, Gas and NGL
sales $ 1,718 $ 4,044 -58 % $ 3,221 $ 7,252 -56 %
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Domestic
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 4 5 -12 % 8 9 -12 %
Gas (Bcf) 194 176 +10 % 386 347 +11 %
NGLs (MMBbls) 7 6 +10 % 13 12 +9 %
Oil, Gas and NGLs
(MMBoe)(1) 42 40 +7 % 85 79 +8 %
Realized prices
without hedges
Oil (Per Bbl) $ 55.18 $ 122.47 -55 % $ 46.07 $ 109.08 -58 %
Gas (Per Mcf) $ 2.81 $ 9.56 -71 % $ 3.16 $ 8.42 -62 %
NGLs (Per Bbl) $ 20.89 $ 50.66 -59 % $ 19.24 $ 47.78 -60 %
Oil, Gas and NGLs
(Per Boe)(1) $ 21.10 $ 63.88 -67 % $ 21.61 $ 56.95 -62 %
Revenues ($ in
millions)
Oil sales $ 225 $ 566 -60 % $ 375 $ 1,009 -63 %
Gas sales 544 1,688 -68 % 1,220 2,924 -58 %
NGL sales 138 305 -55 % 250 571 -56 %
Oil, Gas and NGL
sales $ 907 $ 2,559 -65 % $ 1,845 $ 4,504 -59 %
Canada
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 7 5 +24 % 13 10 +30 %
Gas (Bcf) 60 53 +13 % 113 105 +8 %
NGLs (MMBbls) 1 1 +4 % 2 2 -1 %
Oil, Gas and NGLs
(MMBoe)(1) 18 16 +17 % 34 30 +15 %
Realized prices
without hedges
Oil (Per Bbl) $ 48.14 $ 94.35 -49 % $ 38.19 $ 84.16 -55 %
Gas (Per Mcf) $ 3.25 $ 9.76 -67 % $ 3.82 $ 8.66 -56 %
NGLs (Per Bbl) $ 30.99 $ 75.10 -59 % $ 28.52 $ 68.86 -59 %
Oil, Gas and NGLs
(Per Boe)(1) $ 30.85 $ 72.14 -57 % $ 29.11 $ 64.01 -55 %
Revenues ($ in
millions)
Oil sales $ 316 $ 498 -37 % $ 493 $ 838 -41 %
Gas sales 195 517 -62 % 431 906 -52 %
NGL sales 32 74 -57 % 56 136 -59 %
Oil, Gas and NGL
sales $ 543 $ 1,089 -50 % $ 980 $ 1,880 -48 %
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International
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 5 3 +46 % 8 8 -3 %
Gas (Bcf) - 1 -32 % - 1 -39 %
NGLs (MMBbls) - - N/M - - N/M
Oil, Gas and NGLs
(MMBoe)(1) 5 3 +44 % 8 8 -4 %
Realized prices
without hedges
Oil (Per Bbl) $ 56.03 $ 119.87 -53 % $ 50.10 $ 105.63 -53 %
Gas (Per Mcf) $ 4.24 $ 11.00 -61 % $ 3.85 $ 9.56 -60 %
NGLs (Per Bbl) $ - $ - N/M $ - $ - N/M
Oil, Gas and NGLs
(Per Boe)(1) $ 55.71 $ 118.70 -53 % $ 49.76 $ 104.68 -52 %
Revenues ($ in
millions)
Oil sales $ 267 $ 391 -32 % $ 394 $ 858 -54 %
Gas sales 1 5 -74 % 2 10 -76 %
NGL sales - - N/M - - N/M
Oil, Gas and NGL
sales $ 268 $ 396 -32 % $ 396 $ 868 -54 %
(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
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
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Oil Gas NGLs Total
(In millions)
2008 sales $ 1,455 $ 2,210 $ 379 $ 4,044
Changes due to volumes 248 232 34 514
Changes due to prices. (895 ) (1,702 ) (243 ) (2,840 )
2009 sales $ 808 $ 740 $ 170 $ 1,718
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The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the six months ended June 30, 2009 and 2008.
Oil Gas NGLs Total
(In millions)
2008 sales $ 2,705 $ 3,840 $ 707 $ 7,252
Changes due to volumes 156 389 53 598
Changes due to prices. (1,599 ) (2,576 ) (454 ) (4,629 )
2009 sales $ 1,262 $ 1,653 $ 306 $ 3,221
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Oil Sales
Oil sales decreased $895 million in the second quarter of 2009 as a result of
a 53% decrease in our realized price without hedges. The average NYMEX West
Texas Intermediate index price decreased 52% during the same time period,
accounting for the majority of the decrease.
Oil sales increased $248 million in the second quarter of 2009 due to a three
million barrel increase in production. The increased production resulted
primarily from the continued development activities at our Jackfish operations
in Canada and at our Polvo operations in Brazil.
Oil sales decreased $1.6 billion in the first half of 2009 as a result of a
56% decrease in our realized price without hedges. The average NYMEX West Texas
Intermediate index price decreased 54% during the same time period, accounting
for the majority of the decrease.
Oil sales increased $156 million in the first half of 2009 due to a two
million barrel increase in production. The increased production resulted
primarily from the continued development at our Jackfish operations in Canada
and at our Polvo operations in Brazil. These increases were partially offset by
decreased production in Azerbaijan as a result of reaching certain cost recovery
thresholds. In addition, we deferred approximately 0.7 million barrels of Gulf
of Mexico oil production due to hurricane damage suffered in the third quarter
of 2008.
Gas Sales
Gas sales decreased $1.7 billion during the second quarter of 2009 as a
result of a 70% decrease in our realized price without hedges. This decrease was
largely due to decreases in the North American regional index prices upon which
our gas sales are based.
A 24 Bcf increase in production during the second quarter of 2009 caused gas
sales to increase by $232 million. Our drilling and development program in the
Barnett Shale field in north Texas contributed 10 Bcf to the gas production
increase. A decline in Canadian government royalties resulting from lower gas
prices increased gas production by nine Bcf. These increases and the effect of
new drilling and development in our other North American properties were
partially offset by natural production declines, mainly in the Gulf of Mexico,
and the deferral of approximately two Bcf of production due to hurricane damage
suffered in the third quarter of 2008.
Gas sales decreased $2.6 billion during the first half of 2009 as a result of
a 61% decrease in our realized price without hedges. This decrease is largely
due to decreases in the regional index prices upon which our gas sales are
based.
A 46 Bcf increase in production during the first half of 2009 caused gas
sales to increase by $389 million. Our drilling and development program in the
Barnett Shale field in north Texas contributed 25 Bcf to the gas production
increase. A decline in Canadian government royalties resulting from lower gas
prices increased gas production by 12 Bcf. These increases and the effect of new
drilling and development in our other North American properties were partially
offset by natural production declines, mainly in the Gulf of Mexico, and the
deferral of approximately four Bcf of production due to hurricane damage
suffered in the third quarter of 2008.
NGL Sales
NGL sales decreased $243 million during the second quarter of 2009 as a
result of a 59% decrease in our realized price without hedges. This decrease was
largely due to decreases in the regional index prices upon which our NGL sales
are based.
NGL sales decreased $454 million during the first half of 2009 as a result of
a 60% decrease in our realized price without hedges. This decrease is largely
due to decreases in the regional index prices upon which our NGL 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 second quarter and first half of 2009 and 2008. 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 three and six months ended June 30, 2009 and 2008. The prices do not include the effects of unrealized gains and losses.
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 2009 2008
(In millions)
Cash settlements receipts (payments):
Gas price swaps $ - $ (153 ) $ - $ (161 )
Gas price collars 114 (150 ) 232 (150 )
Total cash settlements 114 (303 ) 232 (311 )
Unrealized losses on fair value changes:
Gas price swaps - (247 ) - (618 )
Gas price collars (101 ) (620 ) (65 ) (1,028 )
Oil price collars - (45 ) - (46 )
Total unrealized losses on fair value
changes (101 ) (912 ) (65 ) (1,692 )
Net gain (loss) on oil and gas
derivative financial instruments $ 13 $ (1,215 ) $ 167 $ (2,003 )
Three Months Ended June 30, 2009
Oil Gas NGLs Total
(Per Bbl) (Per Mcf) (Per Bbl) (Per Boe)
Realized price without hedges $ 52.44 $ 2.91 $ 22.24 $ 26.27
Cash settlements of hedges - 0.45 - 1.75
Realized price, including cash settlements $ 52.44 $ 3.36 $ 22.24 $ 28.02
Three Months Ended June 30, 2008
Oil Gas NGLs Total
(Per Bbl) (Per Mcf) (Per Bbl) (Per Boe)
Realized price without hedges $ 110.56 $ 9.61 $ 54.08 $ 69.14
Cash settlements of hedges (0.01 ) (1.32 ) - (5.18 )
Realized price, including cash settlements $ 110.55 $ 8.29 $ 54.08 $ 63.96
Six Months Ended June 30, 2009
Oil Gas NGLs Total
(Per Bbl) (Per Mcf) (Per Bbl) (Per Boe)
Realized price without hedges $ 43.65 $ 3.31 $ 20.45 $ 25.36
Cash settlements of hedges - 0.47 - 1.83
Realized price, including cash settlements $ 43.65 $ 3.78 $ 20.45 $ 27.19
Six Months Ended June 30, 2008
Oil Gas NGLs Total
(Per Bbl) (Per Mcf) (Per Bbl) (Per Boe)
Realized price without hedges $ 98.98 $ 8.48 $ 50.76 $ 62.12
Cash settlements of hedges - (0.69 ) - (2.67 )
Realized price, including cash settlements $ 98.98 $ 7.79 $ 50.76 $ 59.45
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In the second quarter and first half of 2009, our derivative financial instruments were comprised of gas price collars. In the second quarter and first half of 2008, our derivative financial instruments included gas price swaps and oil and gas price collars. For the price swaps, we receive a fixed price for our production and pay a variable market price to the contract counterparty. The price collars set a floor and ceiling price. 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 gains or losses related to our price swaps and collars.
During the second quarter and first half of 2009, we received $114 million,
or $0.45 per Mcf, and $232 million, or $0.47 per Mcf, respectively from
counterparties to settle our gas price collars. During the second quarter and
first half of 2008, we paid $303 million, or $1.32 per Mcf, and $311 million, or
$0.69 per Mcf, respectively, to 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 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 our gas price collars at
June 30, 2009, a 10% increase in these forward curves would have increased our
2009 unrealized losses for our gas collar derivative financial instruments by
approximately $20 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.
Counterparty credit risk is also a component of commodity derivative
valuations. We have mitigated our exposure to any single counterparty by
. . .
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