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| DVN > SEC Filings for DVN > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
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, 2009, compared to the three-month and nine-month
periods ended September 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 nine months of 2009. The Henry Hub natural gas
index for the third quarter of 2009 was down 51% from the fourth quarter of 2008
and 67% from the third quarter of 2008. Additionally, although oil index prices
have improved since the end of 2008, the West Texas Intermediate oil index
dropped 42% from the third quarter of 2008 to the third quarter of 2009.
The lower oil and gas prices have significantly impacted our earnings for the
third quarter and first nine months of 2009. During the third quarter of 2009
and first nine months of 2009, we generated net earnings of $499 million, or
$1.12 per diluted share, and a net loss of $3.1 billion, or $7.09 per diluted
share, for the respective periods. These amounts are significantly lower than
the comparative earnings amounts for 2008. The loss in the first nine months 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 drop in natural gas prices since
December 31, 2008.
Key measures of our performance for the third quarter and first nine months
of 2009 compared to 2008 are summarized below:
• Production increased 6% and 8% in the third quarter and first nine months of
2009, respectively.
• The combined realized price without hedges for oil, gas and NGLs decreased 56% and 58% in the third quarter and first nine months of 2009, respectively.
• Marketing and midstream operating profit decreased 41% to $100 million and 33% to $367 in the third quarter and first nine months of 2009, respectively.
• Per unit operating costs decreased 28% to $9.15 per Boe and 25% to $8.94 per Boe in the third quarter and first nine months of 2009, respectively.
• Oil and gas hedges generated net gains of $23 million and $190 million in the third quarter and first nine months of 2009, respectively. Our hedges generated a net gain of $1.6 billion in third quarter of 2008 and a net loss of $411 million in the first nine months of 2008. Included in these amounts were cash receipts of $127 million and $359 million for the third quarter and first nine months of 2009, respectively, and payments of $240 million and $551 million in the third quarter and first nine months of 2008, respectively.
• Operating cash flow decreased approximately 60% to $3.3 billion in the first nine months of 2009.
• Cash spent on capital expenditures was approximately $4.2 billion in the first nine months of 2009. Approximately 80% of this amount was funded with operating cash flow and the remainder was funded with commercial paper borrowings.
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 expect the challenging commodity price environment will likely persist in
the coming months. 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 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 lower 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 November 2, 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. Furthermore, our
available cash resources position us with adequate capital to quickly increase
exploration and development activities once commodity prices show signs of
long-term improvement.
Results of Operations
Revenues
The three-month and nine-month comparison of our oil, gas and NGL production,
prices and revenues for the third quarter and first nine months 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 September 30, Nine Months Ended September 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 14 12 +14 % 43 39 +8 %
Gas (Bcf) 243 239 +2 % 742 692 +7 %
NGLs (MMBbls) 8 7 +14 % 23 21 +10 %
Total (MMBoe)(1) 62 58 +6 % 189 175 +8 %
Realized prices without
hedges
Oil (Per Bbl) $ 61.12 $ 106.95 -43 % $ 49.30 $ 101.42 -51 %
Gas (Per Mcf) $ 2.84 $ 8.82 -68 % $ 3.16 $ 8.60 -63 %
NGLs (Per Bbl) $ 25.67 $ 54.72 -53 % $ 22.21 $ 52.03 -57 %
Combined (Per Boe)(1) $ 27.97 $ 64.29 -56 % $ 26.21 $ 62.84 -58 %
Revenues ($ in millions)
Oil sales $ 845 $ 1,296 -35 % $ 2,107 $ 4,001 -47 %
Gas sales 691 2,107 -67 % 2,344 5,947 -61 %
NGL sales 195 362 -46 % 501 1,069 -53 %
Total $ 1,731 $ 3,765 -54 % $ 4,952 $ 11,017 -55 %
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Domestic
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 4 4 +9 % 12 13 -6 %
Gas (Bcf) 184 185 -0 % 570 532 +7 %
NGLs (MMBbls) 7 6 +19 % 20 18 +12 %
Total (MMBoe)(1) 42 40 +3 % 127 119 +6 %
Realized prices without
hedges
Oil (Per Bbl) $ 65.01 $ 118.70 -45 % $ 52.60 $ 111.94 -53 %
Gas (Per Mcf) $ 2.82 $ 8.66 -67 % $ 3.05 $ 8.50 -64 %
NGLs (Per Bbl) $ 24.56 $ 51.50 -52 % $ 21.04 $ 48.96 -57 %
Combined (Per Boe)(1) $ 23.09 $ 58.38 -60 % $ 22.09 $ 57.43 -62 %
Revenues ($ in millions)
Oil sales $ 279 $ 467 -40 % $ 654 $ 1,476 -56 %
Gas sales 518 1,598 -68 % 1,738 4,522 -62 %
NGL sales 164 288 -43 % 414 859 -52 %
Total $ 961 $ 2,353 -59 % $ 2,806 $ 6,857 -59 %
Canada
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 6 5 +6 % 19 15 +21 %
Gas (Bcf) 58 54 +9 % 171 159 +8 %
NGLs (MMBbls) 1 1 -12 % 3 3 -4 %
Total (MMBoe)(1) 16 15 +6 % 50 45 +12 %
Realized prices without
hedges
Oil (Per Bbl) $ 55.10 $ 92.98 -41 % $ 43.42 $ 87.28 -50 %
Gas (Per Mcf) $ 2.91 $ 9.36 -69 % $ 3.51 $ 8.90 -61 %
NGLs (Per Bbl) $ 33.81 $ 72.19 -53 % $ 30.20 $ 70.00 -57 %
Combined (Per Boe)(1) $ 31.62 $ 70.24 -55 % $ 29.94 $ 66.16 -55 %
Revenues ($ in millions)
Oil sales $ 318 $ 507 -37 % $ 811 $ 1,345 -40 %
Gas sales 171 504 -66 % 602 1,410 -57 %
NGL sales 31 74 -59 % 87 210 -59 %
Total $ 520 $ 1,085 -52 % $ 1,500 $ 2,965 -49 %
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International
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 Change(2) 2009 2008 Change(2)
Production
Oil (MMBbls) 4 3 +38 % 12 11 +7 %
Gas (Bcf) 1 - N/M 1 1 N/M
NGLs (MMBbls) - - N/M - - N/M
Total (MMBoe)(1) 4 3 +36 % 12 11 +6 %
Realized prices without
hedges
Oil (Per Bbl) $ 65.94 $ 117.97 -44 % $ 55.23 $ 108.73 -49 %
Gas (Per Mcf) $ 5.90 $ 10.72 -45 % $ 4.65 $ 9.95 -53 %
NGLs (Per Bbl) $ - $ - N/M $ - $ - N/M
Combined (Per Boe)(1) $ 65.42 $ 116.35 -44 % $ 54.85 $ 107.63 -49 %
Revenues ($ in millions)
Oil sales $ 248 $ 322 -23 % $ 642 $ 1,180 -46 %
Gas sales 2 5 -58 % 4 15 -69 %
NGL sales - - N/M - - N/M
Total $ 250 $ 327 -23 % $ 646 $ 1,195 -46 %
(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 $ 1,296 $ 2,107 $ 362 $ 3,765
Changes due to volumes 184 34 52 270
Changes due to prices (635 ) (1,450 ) (219 ) (2,304 )
2009 sales $ 845 $ 691 $ 195 $ 1,731
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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 nine months ended September 30, 2009 and 2008.
Oil Gas NGLs Total
(In millions)
2008 sales $ 4,001 $ 5,947 $ 1,069 $ 11,017
Changes due to volumes 334 428 104 866
Changes due to prices (2,228 ) (4,031 ) (672 ) (6,931 )
2009 sales $ 2,107 $ 2,344 $ 501 $ 4,952
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Oil Sales
Oil sales decreased $635 million in the third quarter of 2009 as a result of
a 43% decrease in our realized price without hedges. The average NYMEX West
Texas Intermediate index price decreased 42% during the same time period,
accounting for the majority of the decrease.
Oil sales increased $184 million in the third quarter of 2009 due to a two
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 $2.2 billion in the first nine months of 2009 as a result
of a 51% decrease in our realized price without hedges. The average NYMEX West
Texas Intermediate index price decreased 50% during the same time period,
accounting for the majority of the decrease.
Oil sales increased $334 million in the first nine months of 2009 due to a
four 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.
Gas Sales
Gas sales decreased $1.5 billion during the third quarter of 2009 as a result
of a 68% 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 four Bcf increase in production during the third quarter of 2009 caused gas
sales to increase by $34 million. Gas production increased 10 Bcf due to a
decline in Canadian government royalties largely resulting from lower gas
prices. Also, we restored five Bcf of production that was deferred in the third
quarter of 2008 due to hurricanes. These increases were largely offset by lower
production from our North American onshore properties due to the net effect of
natural production declines in excess of new production from drilling and
development. In response to continued declining natural gas prices throughout
2009, we have scaled back our North American onshore natural gas drilling
programs. As a result, we began experiencing production declines in the third
quarter that outpaced new production from development activities performed in
late 2008 and early 2009.
Gas sales decreased $4.0 billion during the first nine months of 2009 as a
result of a 63% 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 50 Bcf increase in production during the first nine months of 2009 caused
gas sales to increase by $428 million. Our North American onshore properties
contributed 40 Bcf to our growth as a result of new production from drilling and
development that exceeded natural production declines. This increase was led by
higher production from the Barnett Shale, which contributed 22 Bcf. Gas
production also increased 22 Bcf due to a decline in Canadian government
royalties largely resulting from lower gas prices. These increases were
partially offset by 12 Bcf of lower production from our United States Offshore
properties, largely resulting from natural production declines.
NGL Sales
NGL sales decreased $219 million during the third quarter of 2009 as a result
of a 53% 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 increased $52 million in the third quarter of 2009 due to a
one million barrel increase in production that was primarily related to our
Barnett Shale and Woodford Shale activity.
NGL sales decreased $672 million during the first nine months of 2009 as a
result of a 57% 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. NGL sales increased $104 million in the first nine months of 2009 due
to a two million barrel increase in production. The higher production resulted
primarily from development in the Barnett Shale and Woodford Shale.
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 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 nine months ended September 30, 2009 and 2008. The prices do not
include the effects of unrealized gains and losses.
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
(In millions)
Cash settlement receipts (payments):
Gas price collars $ 118 $ (125 ) $ 350 $ (275 )
Gas price swaps 9 (115 ) 9 (276 )
Total cash settlements 127 (240 ) 359 (551 )
Unrealized gains (losses):
Gas price collars (104 ) 1,142 (169 ) 114
Gas price swaps (7 ) 645 (7 ) 27
Oil price collars 7 45 7 (1 )
Total unrealized gains (losses) (104 ) 1,832 (169 ) 140
Net gain (loss) on oil and gas derivative
financial instruments $ 23 $ 1,592 $ 190 $ (411 )
Three Months Ended September 30, 2009
Oil Gas NGLs Total
(Per Bbl) (Per Mcf) (Per Bbl) (Per Boe)
Realized price without hedges $ 61.12 $ 2.84 $ 25.67 $ 27.97
Cash settlements of hedges - 0.53 - 2.05
Realized price, including cash settlements $ 61.12 $ 3.37 $ 25.67 $ 30.02
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
Nine Months Ended September 30, 2009
Oil Gas NGLs Total
(Per Bbl) (Per Mcf) (Per Bbl) (Per Boe)
Realized price without hedges $ 49.30 $ 3.16 $ 22.21 $ 26.21
Cash settlements of hedges - 0.48 - 1.90
Realized price, including cash settlements $ 49.30 $ 3.64 $ 22.21 $ 28.11
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
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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
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 third quarter and first nine months of 2009, we received
$127 million, or $0.53 per Mcf, and $359 million, or $0.48 per Mcf, respectively
from counterparties to settle our gas price contracts. 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 collars and swaps.
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
. . .
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