Devon Energy Corporation (DVN)

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Devon Energy (DVN)

Q3 2012 Earnings Call

November 07, 2012 11:00 am ET


Vincent W. White - Senior Vice President of Investor Relations

John Richels - Chief Executive Officer, President and Director

David A. Hager - Executive Vice President of Exploration & Production

Jeffrey A. Agosta - Chief Financial Officer and Executive Vice President

Darryl G. Smette - Executive Vice President of Marketing, Midstream and Supply Chain


Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

David W. Kistler - Simmons & Company International, Research Division

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Charles A. Meade - Johnson Rice & Company, L.L.C., Research Division

Robert L. Christensen - The Buckingham Research Group Incorporated



Welcome to Devon Energy Third Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded. At this time, I would like to turn the conference over to Mr. Vince White, Senior Vice President of Communications and Investor Relations. Sir, you may begin.

Vincent W. White

Thank you, operator, and good morning, everybody. Welcome to today's third quarter 2012 earnings call and webcast. Today's call will follow our usual format. After I make a few preliminary comments, I'll turn the call over to our President and CEO, John Richels. He will provide the overview of the third quarter and his thoughts on the upcoming quarter and year ahead; then Dave Hager, the Head of Exploration and Production, will provide the operations update; and following that, our CFO, Jeff Agosta, will finish up with a review of our financial results and an updated outlook. After Jeff's discussion, we'll have a Q&A session. Our Executive Chairman, Larry Nichols; as well as Darryl Smette, the Head of Marketing, Midstream and Supply Chain, are both with us today to help out in the Q&A. And as usual, we'll keep the call to about an hour. A replay of this call will be available later today on our website.

During the call today, we're going to provide an update of some of our forward-looking estimates based on the actual results that we've seen over the first 9 months of the year and our revised outlook for the fourth quarter. In addition to these updates, we will file an 8-K later today containing the details of the updated fourth quarter estimates. To access this guidance, you can just click on the guidance link found in the Investor Relations section of our website.

Please note that all references today to our plans, forecast, expectations and future estimates are forward-looking statements under U.S. securities law. And while we always try to give you the very best information possible, there are many factors that could cause our actual results to differ from those estimates. You can find a discussion of risk factors related to our estimates in our Form 10-K. Also, in today's call, we'll refer to certain non-GAAP performance measures. When we use these measures, we're required to provide related disclosures which are available on Devon's website.

During the third quarter, we recorded a non-cash property impairment charge of $1.1 billion or about $700 million after-tax. This charge resulted primarily from the lower natural gas prices over the last 12 months. And under full cost accounting rules, the carrying cost of our oil and gas properties is subject to a quarterly ceiling test. I just want to clarify that this write-down was simply an accounting exercise and is not reflective of the fair value of our assets. It does not relate to any specific reserves. It also has no impact on our cash flow or cash balances nor our credit agreements. It's worth noting that this charge is not unique to Devon. Beginning last quarter, that is the second quarter of 2012 and extending into the third quarter, several companies in our peer group have taken impairment charges.

With that out of the way, I'll turn the call over to John Richels.

John Richels

Thank you, Vince, and good morning, everyone. Thanks for joining us this morning. First of all, the organic conversion of our asset portfolio to a higher oil waiting remains on track as evidenced by our continued growth in oil production. We continue to invest the majority of our capital in high-margin North American oil projects. Over time, these high rate of return projects, combined with the greater capital efficiency that's provided by our joint venture structures, should result in superior growth of cash flow per share adjusted for debt.

Devon's third quarter performance reflects our continuing progress towards this goal, so let me give you a few highlights of the quarter. Driven by better-than-expected price realizations and low overall unit cost, adjusted earnings per share and cash flow per share for the quarter came in well above the mean Street estimates. Company-wide oil production increased 14% over the third quarter of 2011, and this was achieved in spite of scheduled plant maintenance at our Jackfish 1 Oil Sands project. Jackfish 1 maintenance reduced third quarter oil production by about 10,000 barrels per day. Without the impact of the Jackfish turnaround, oil production would have increased more than 20% over the year ago quarter.

Our U.S. oil production, which is our highest margin product, grew 26% in the third quarter, and that was driven largely by our success in the Permian Basin. With the expansion of our Gulf Coast Fractionators facility now complete, our midstream business resumed full operations in the third quarter, and our marketing midstream operating profit reached $109 million, and that's right at the top end of our guidance range.

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