Devon Energy Corporation (DVN)

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Devon Energy (DVN)

Q2 2011 Earnings Call

August 03, 2011 11:00 am ET

Executives

Vincent White - Senior Vice President of Investor Relations

David Hager - Executive Vice President of Exploration & Production

Jeffrey Agosta - Chief Financial Officer and Executive Vice President

John Richels - Chief Executive Officer, President and Director

Analysts

Brian Singer - Goldman Sachs Group Inc.

Scott Hanold - RBC Capital Markets, LLC

David Tameron - Wells Fargo Securities, LLC

Scott Wilmoth - Simmons & Company International

Mark Gilman - The Benchmark Company, LLC

Douglas Leggate - BofA Merrill Lynch

Rehan Rashid - FBR Capital Markets & Co.

Presentation

Operator

Good morning, and welcome to Devon Energy's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] This call is being recorded. At this time, I'd like to turn the conference over to Mr. Vince White, Senior Vice President of Investor Relations. Sir, you may begin.

Vincent White

Thank you, operator, and good morning, everyone. Welcome to Devon's second quarter 2011 earnings call and webcast. As usual, I'll begin today's call with a few preliminary items and then turn the call over to our President and CEO, John Richels for his perspective. Following John's remarks, Dave Hager, our Executive Vice President of Exploration and Production will provide the operations update and then Jeff Agosta, our Chief Financial Officer will finish up with a review of our financial results. We'll conclude with the Q&A period and we'll hold the call to about an hour. A replay will be available later today through a link on our homepage, that's devonenergy.com.

During the call today, we're going to provide some minor updates to our 2011 forecast based on the actual results for the first half of the year and our outlook for the remainder of the year. In addition to the updates that we're going to give in today's call, we'll file an 8-K later today as is our usual practice that will provide details of our updated 2011 estimates. These updates can be accessed using the Guidance link on the Investor Relations section of Devon's website.

Please note that all references in today's call to our plans, forecast, expectations, estimates and so on are considered forward-looking statements under U.S. securities law. And while we strive to give you the very best estimates possible, many factors could cause our actual results to differ from our estimates. We'd encourage you to review the discussion of risk factors and uncertainties provided in the Form 8-K that we are filing today.

Also on today's call, we will refer to certain non-GAAP performance measures. When we do that, we are required to provide certain related disclosures and those disclosures are also available on the Devon website.

With those items out of the way, I'll turn the call over to President and CEO, John Richels.

John Richels

Thank you, Vince, and good morning, everyone. Let me begin by stating the obvious. Devon's second quarter of 2011 was an excellent one. Our North American onshore production reached an all-time record, averaging 660,000 equivalent barrels per day. That's a 5% increase over the first quarter, continued focus on efficiency and cost control, mitigated industry inflation and the impact of a stronger Canadian dollar. In fact, our pretax cash cost per equivalent barrel were essentially flat compared to the previous quarter and the year-ago quarter.

With production above our guidance, higher realized commodity prices and effective cost management, our second quarter adjusted earnings climbed 10% over the prior year quarter to $1.71 per diluted share and that exceeded the first call mean by $0.17.

Cash flow before balance sheet changes reached $1.6 billion or $3.81 per diluted share surpassing the street mean estimate by $0.48.

Net earnings including the gain on the sale of Brazil totaled a whopping $2.7 billion for the second quarter or $6.48 per diluted share. And during the second quarter, we repurchased 7.1 million shares for $584 million. To date, we have spent $2.6 billion of the $3.5 billion current authorization to repurchase 35.1 million shares. This represents almost 8% of our outstanding shares and those shares were acquired at an average price of roughly $74 per share. We remain on track to complete that repurchase program by the end of the year.

In May, we closed our $3.2 billion sale of our Brazilian assets which essentially completes the strategic repositioning of Devon to a company focused entirely onshore in North America. Our total pretax divestiture proceeds exceeded $10 billion, with after-tax proceeds estimated to $8 billion. Currently, we have more than $6.5 billion of cash and short-term investments outside the U.S. that we have not repatriated. However, it's important to note that our after-tax estimate of proceeds assumes full payment of the taxes triggered by repatriation of most of those funds under current U.S. tax law. If a more favorable tax situation develops for the repatriation of these funds, or if we redeploy the proceeds in Canada, we will have up to $900 million of upside. Until we have better visibility into potential repatriation tax legislation and determine the optimal long-term capital allocation between the U.S. and Canada, our divestiture proceeds will remain outside the U.S.

Devon has emerged from the repositioning in a truly enviable position. We have a deep inventory of low-risk drilling locations, including years of high margin oil and liquids-rich development in our cornerstone project areas. This include the Barnett, the Cana, and our steam-assisted gravity drainage project in Canada. We are drilling our most economic wells ever in the liquid-rich portions of the Barnett. Our first mover position has provided us with the largest and best acreage position. Furthermore, our low entry and royalty cost enhanced the economic returns across our inventory of thousands of undrilled Barnett locations. In the liquids-rich Cana, we're taking advantage of opportunities to increase our working interest and are continuing to delineate our condensate-rich acreage to the northwest. We could continue for years, at our current pace of development, without any additional inventory. However, in order to bring forward the value embedded in our existing acreage positions, we're pursuing a wide range of exploration opportunities across North America.

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