Devon Energy Corporation (DVN)

DVN 
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Devon Energy Corporation (DVN)

Q3 2009 Earnings Call

November 4, 2009 11 am ET

Executives

Vince White - SVP of IR

Larry Nichols - Chairman and CEO

John Richels - President

Dave Hager - EVP of Exploration and Production

Analysts

Doug Leggate - Merrill Lynch

Brian Singer - Goldman Sachs

Joseph Allman - JPMorgan

Bob Maurice - Citigroup

Joe Magner - Macquarie

Mark Gilman - Benchmark Company

Presentation

Operator

Welcome to the Devon Energy’s Third Quarter 2009 Earnings Call. (Operator Instructions).

At this time, I’d like to turn the call over to Mr. Vince White, Senior Vice President of Investor Relations.

Vince White

Good morning, everyone, and welcome to Devon’s third quarter earnings call. As usual, I will begin with some housekeeping items and then turn the call over to our Chairman and CEO, Larry Nichols, for his overview. Following Larry’s remarks, our President, John Richels will provide a financial review. Finally, after John’s comment, Dave Hager, Executive VP of Exploration and Production, will provide an operations update. We’ll follow that with a Q&A.

We generally try to hold the call to about an hour or so. If we don’t get to your question, we’ll be in later today, give us a call. As always, we ask the Q&A participants to limit their questions to one question and one follow-up. A replay of this call will be available through a link on our homepage later today.

During the call we’re going to provide updates of some of our 2009 forecasts based on actual results for the first nine months of the year and our expectations for fourth quarter. However, we will not be issuing a revised 8-K today. That’s because most of the estimates remain within the updated ranges that we provided in the Form 8-K that we filed on August 5, 2009. That 8-K is posted to the Estimates page of the Investor Relations section of devonenergy.com and the refinements that we provide to those estimates today will also be posted to the Estimates page of our website.

Please note that our references in today’s call to our plans, forecasts, expectations and estimates are all forward-looking statements as described under US securities law. While we always strive to give you the very best information possible, there are many factors beyond our control that could cause our actual results to differ from the estimates we provide. Therefore, we urge you to review the discussion of risk factors and uncertainties provided in the August Form 8-K.

One final compliance item. We will refer today to various non-GAAP performance measures. When we make reference to such measures, we’re required to make certain disclosures under US securities law. Those disclosures are available on the Devon Energy website at devonenergy.com.

Before I turn the call over to Larry, I want to give you a quick update on our Lower Tertiary sell-down. This process has attracted a very broad interest and we’ve had a strong showing in the data room. We’ve said all along that we will not ask for bids until the Kaskida delineation well results are in and we are confident that we will complete those operations on Kaskida this month. That scheduled would put us with bids due by the end of December.

Now, I’ll turn the call over to Devon’s Board Chairman and CEO, Larry Nichols.

Larry Nichols

The third quarter was another outstanding one for Devon. We continued the trend that we’ve had for several quarters now, quite a few of exceeding expectations for oil and gas production, while at the same time, driving cost lower. Third quarter production for oil, gas and NGLs totaled 61.9 million barrels, exceeding our guidance by about 900,000 Boe. This represents a 6% increase over third quarter of 2008, and this is in spite of voluntary curtailments that we had during the third quarter of about 1 million equivalent barrels.

We drove LOE per equivalent barrel down by 19% from a year ago quarter-to-quarter, fueled by higher than expected production, improving costs and strong oil prices. We generated net earnings of $499 million for the third quarter. After excluding those items that we and analysts generally do not forecast, we earned $491 million or $1.10 per share, far exceeding the First Call mean estimate of $0.90 per share.

We had cash flow from operations of $1.2 billion for the quarter, which more than funded our total capital expenditures for the period and generated free cash of $168 million. We exited September with cash and equivalent credit lines of $2.8 billion and a healthy net debt to cap ratio of just under 31%.

While natural gas prices declined from the second quarter this year, prices for oil and natural gas liquid strengthened, which drive our sequential increases in third quarter sales and earnings. Oil and gas liquids accounted for 60% of Devon’s oil and gas revenues in the third quarter, which underscores again the importance of Devon’s balance portfolio and the balance between oil and gas that we talked about so much in the past really paid off this quarter.

While natural gas prices are still weak today, as we look ahead, we do see improving economics in the North American natural gas business. Costs have come down considerably from the peaks of last year. Based on our own internal forecast as well as the future strip, our key development gas projects all deliver attractive rates of return that are well above our cost to capital.

With the improving outlook for natural gas prices with the impact of the sell-down of our Lower Tertiary and with lower overall industry cost structure, this should allow us to step up activity next year. With superior acreage positions in many of the best shale plays, we have no shortage of opportunities.

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