Devon Energy Corporation (DVN)

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Devon Energy Corporation (DVN)

Q1 2009 Earnings Call

May 6, 2009 11:00 am ET


Vince White - SVP of IR

Larry Nichols - Chairman and CEO

John Richels - President

Dave Hager - EVP of Exploration and Production

Darryl Smette - EVP of Marketing & Midstream


Brian Singer - Goldman Sachs

Ellen Hannan - Weeden & Co.

Ben Dell - Bernstein

Joe Allman - JPMorgan

Rehan Rashid - FBR Capital Markets

Doug Leggate - Howard Weil

Mark Gilman - The Benchmark Company

David Heikkinen - Tudor Pickering Holt

Tom Gardner - Simmons & Company



Welcome to Devon Energy's First Quarter 2009 Earnings Call. At this time, all participants are in a listen-only mode. After the prepared remarks, we will conduct a question-and-answer session. This call is being recorded.

At this time, I would like to turn the conference over to Mr. Vince White, Senior Vice President of Investor Relations. You may begin, sir.

Vince White

Good morning, everyone, and welcome to our call. I'm going to begin with some preliminary comments about our first quarter results, and then I will turn the call over to our Chairman and CEO, Larry Nichols for his thoughts on the quarter and the outlook for the future.

Following Larry's remarks, our President, John Richels will provide a financial overview of the quarter.

Then Devon's new Executive Vice President of Exploration and Production, Dave Hager will review operations.

We'll conclude the call in about an hour. So if we don't get to your question during the Q&A period, please feel free to follow up with us after the call. As always, we'll ask everyone to that ask a question to limit it to one question and one follow-up.

A replay of this call will be available later today through a link on our homepage. During the call today, we're going to update some of our 2009 forecast and estimates based on actual results for the first quarter.

Since the revisions are pretty minor we are not issuing a new 8-K, but we will post those changes to our guidance on our website. If you want to find those, just click on the estimates link found in the Investor Relations section of the Devon website.

Please note that all references in today's call to our plans, forecasts, expectations, and estimates, are forward-looking statements under US securities law and while we always attempt to be as accurate as possible, there are many factors that could cause our actual results to differ from our estimates. So, we urge you to review the discussion of risk factors and uncertainties that we provide in the Form 8-K with the forecast, the last one was issued on February 4.

One other compliance note, we will refer today to several non-GAAP performance measures. When we make reference to these measures we're required to make certain disclosures under securities law. Those disclosures are available on our website at

Before I turn over the call to Larry, I want to comment on the non-cash impairment charge that led to the quarterly loss that we reported today. We went through this in detail in the February call, because deteriorating natural gas prices in the first quarter triggered another ceiling test write-down, it probably merits repetition of that discussion.

The SEC requires companies that utilize the full-cost method of accounting and that's the one that Devon follows to implement a stringent impairment test at the end of each quarter.

The test consists of comparing the net book value of our oil and gas properties less the related deferred income taxes to a calculated maximum carrying value or ceiling.

The ceiling is the estimated present value of the after-tax future net cash flows from proved oil and gas properties, plus the book value of any unevaluated properties.

The ceiling is calculated using oil and gas prices and costs, in effect, on the last day of the quarter, but held flat and discounted at 10% per annum.

We then compare the net book value of our oil and gas properties less deferred income tax to the ceiling. Any excess is written off as expense.

Based on the first quarter 2009 ceiling test calculation, we took an after-tax charge of $4.2 billion in the first quarter. This charge is almost entirely attributable to lower US natural gas prices. While oil prices improved slightly during the first quarter, natural gas prices slid significantly and our US production is roughly 75% natural gas.

I'll remind you that this charge has no impact upon cash flow or cash balances and is unrelated to the intrinsic value of Devon's oil and natural gas reserves.

A misconception about the full-cost ceiling test adjustment is that it results in writing off oil and gas reserves, this is not the case. The reserves estimate is independent of the ceiling test.

The ceiling test adjustment is purely a financial statement event and has no impact on oil and gas reserves in the ground. The main criticism of the full-cost ceiling test has always been that it's based on oil and gas prices, in effect, at a single point in time.

Because of that, price volatility can result in anomalies at the end of an accounting period that lead to an impairment charge that is not indicative of fair value.

These issues have been recognized by the SEC with the recent change in the rules. Under the new rules, full-cost companies will use a 12-month trailing average oil and natural gas price rather than the prices on a single day at the end of the accounting period.

Unfortunately, those rules don't take effect until the end of 2009. Had we had the new rules at the end of the first quarter, we would not have taken this non-cash charge.

Unlike the test for companies using successful efforts, the full-cost ceiling test uses discounted future net cash flows based on the end of the quarter prices. This makes the test for full-cost companies more severe than the test for successful effort companies that can use undiscounted cash flows based on expected oil and gas prices.

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