Devon Energy Corporation (DVN)

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Devon Energy Corporation (DVN)

Q2 2009 Earnings Call

August 5, 2009 11:00 am ET

Executives

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 and Midstream

Analysts

Thomas Gardner - Simmons & Company

David Heikkinen - Tudor Pickering Holt

Doug Leggate - Howard Weil

Mark Gilman - The Benchmark Company

Brian Singer - Goldman Sachs

Rashid Rehan - FBR Capital Markets

Biju Perincheril - Jefferies & Company

Presentation

Operator

Welcome to Devon Energy's second quarter 2009 earnings conference call. At this time all participants are in listen-only mode. After the prepared remarks, we will conduct the question-and-answer session. This call is being recorded. At this time lied like to turn the conference over to Mr. Vince White, Senior Vice President of Investor Relations. Sir, you may begin.

Vince White

Good morning, everybody and welcome to Devon's second quarter call. I've got just a couple of housekeeping items and then I'll turn the call over to our Chairman and CEO, Larry Nichols. He'll give us an overview of the quarter and some thoughts about how Devon is positioned for the future. Following Larry's remarks, our President, John Richels will provide a financial review and then following John's comments, Dave Hager, our Executive Vice President of Exploration and Production will discuss operations.

This will be followed by a Q&A period and as usual we will hold the call to about an hour or so. If we don't get a chance to get to your question today, please feel free to follow up later in the day. As always we will ask the participants on the call to keep their questions in the Q&A session to just one question and one follow up.

A replay of this call will be available later today through a link on Devon's home page. During our call we are going to provide updates to some of our 2009 forecast based on our actual results for the first half of the year and our revised outlook for the second half. In addition to those updates that we are going to give in today's call, we'll file an 8-K later today and that will provide the details of all of our updated 2009 estimates.

These updates will also be posted to the estimates page on www.devonenergy.com. Please note that all references today to our plans, forecast, 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 and we therefore urge you to review the discussion of risk factors and uncertainties that is provided with the form 8-K that we are going to file today.

One other compliance note. We will refer today to various non-GAAP performance measures. When we make reference to these measures, we are required to make certain disclosures under US Securities law. Those disclosures are available on our website and again that is www.devonenergy.com. With those items out of the way, I'll turn the call over to Larry Nichols.

Larry Nichols

Despite a rather challenging environment, Devon had a very positive second quarter. Total production increased 5% over the first quarter this year and 12% over the second quarter last year. It increased to 719,000 Boe per day which sets an all-time record for a combined production of oil, gas and NGLs for Devon.

Our realized crude prices climbed more than 50% over the first quarter, which more than offsets the lower natural gas prices. This of course underscores one of Devon's strengths of having a balance between oil and gas. Cost trends were favorable with most categories coming down in the second quarter with better than expected production, lower cost and stronger oil prices, we generated net earnings of $314 million for the second quarter.

Excluding those items that analysts generally do not forecast, Devon earned $379 million or $0.85 cents per share for the quarter which is $0.26 cents or 44% above the first call mean. We generated cash flow of $1.1 billion in the second quarter which more than funds our CapEx expenditures for the period. We exited June with cash and unused credit lines of about $2.6 billion and a net debt-to-cap ratio of 35%, actually a little below 35%.

With abundant liquidity and a very strong balance sheet, we are well positioned for an upturn in the current cycle. Our second quarter performance reflects the very high quality of our oil and gas property base. In spite of the dramatic decrease in drilling activity in the first half of this year for Devon, our assets significantly outperformed expectations.

Furthermore our oil and liquids components supported sufficient cash flow to fully meet the demands of our capital program and dividends during a period of very low natural gas prices. Based on the very strong performance of our asset base for the first half of the year, we are increasing our full-year production forecast by 7 million Boe which takes it to a range of between 243 million Boe 247 million Boe.

The midpoint represents a 3% increase over 2008 production from continuing operations. This level of production is net of roughly 3 million Boe of voluntary reductions that we were planning for the second half of 2009. John will cover the details and the [antacid] impact on third quarter volumes.

As we discussed in May, we have reduced capital expenditures significantly in 2009 in response to the macro environment. Our 2009 exploration and production budget of $3.5 million to $4.1 billion is less than half the 2008 level. We are now in the very, very early stages of developing our 2010 exploration and production budget, which will ultimately reflect our outlook for commodity prices and cost in the future.

Read the rest of this transcript for free on seekingalpha.com