Devon Energy Corporation (DVN)

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Devon Energy Corporation (DVN)

Q4 2012 Earnings Call

February 20, 2013 11:00 a.m. ET

Executives

Vincent White - Senior Vice President of Investor Relations

John Richels - Chief Executive Officer, President and Director

David Hager - Executive Vice President of Exploration & Production

Jeffrey Agosta - Chief Financial Officer and Executive Vice President

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

Analysts

David Kistler - Simmons & Company

Doug Leggate – Bank of America Merrill Lynch

Bob Brackett - Bernstein Research

Brian Singer - Goldman Sachs

David Tameron – Wells Fargo

John Herrlin – Societe Generale

Presentation

Operator

Good morning. Welcome to Devon Energy's Fourth Quarter and Year-End 2012 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 White

Thank you and welcome everybody to today's fourth quarter and year-end 2012 earnings call and webcast. Today's call will follow our usual format. I will cover a few preliminary items and then I'll turn the call over to our President and CEO, John Richels. John will provide an overview of our 2012 results and his thoughts on the year ahead, and then Dave Hager, Head of Exploration and Production, will provide an update on Devon's reserves activity and operations. Following that, our CFO, Jeff Agosta, will finish up with a review of our financial results as well as specific guidance for 2013. After Jeff's discussion we'll of course have a Q&A session. And I want to remind everybody that our Executive Chairman, Larry Nichols, as well as Darryl Smette, the Head of Marketing, Midstream and Supply Chain, they are both with us today. As usual we'll respect your schedule and conclude the call after one hour.

Later today we will file a Form 8-K that will provide specific detailed forecast for all of our operating items as well as our capital budget for 2013. The guidance section of our website will contain a copy of that 8-K and other forward-looking estimates that we mention in the call today To access that guidance, just click on the guidance link found in the Investor Relations section of the Devon website.

Please note that all references today to our plans, forecast, expectations and estimates are forward-looking statements under U.S. securities laws and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. These statements are not guarantees of future performance. You could see a discussion of the risk factors relating to these 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. Those can be found on Devon's website.

Before I turn over the call to John, I want to comment on the $896 million property impairment charge taken during the fourth quarter. This resulted principally from the full-cost accounting ceiling test. It is a non-cash impairment charge and it resulted from the decline in natural gas and NGL’s prices over the past 12 months. Just to be clear, this write-down is simply an accounting exercise and is not reflective of the fair value of our assets. The impairment charge has no impact on cash flow, cash balances or credit agreements and is not indicative of the future cash flows we expect to generate from our assets. It’s worth noting that this charge is not unique to Devon. Several companies in our industry have taken these impairment charges throughout 2012.

When you exclude the impairment charge and the other items that analysts typically don’t put in their estimates, our non-GAAP earnings and cash flow for the fourth quarter was $0.78 and $3.11 respectively per diluted share. Both these results exceeded street expectations by a comfortable margin.

At this point I’ll turn the call over to John Richels.

John Richels

Thank you, Vince. Good morning everyone.  2012 was a year of achievement and challenges for Devon. While weak price realizations definitely hurt our financial results for the year, we continued to make significant progress towards the conversion of our portfolio to higher margin oil production.

We drove 2012 oil production up 20%, more than offsetting declines in natural gas. In fact, production from our North American asset base climbed to an all-time record of 250 million oil equivalent barrels. This production growth was led by year over year Permian Basin oil production growth of 31%.

With the aggressive transition of our product mix, liquids production has now reached nearly 40% of our total volumes at yearend. We have also significantly increased our development inventory in the Permian through our successful Bone Spring and Delaware programs. Over the past year, our risk resource from these two plays has more than doubled.

In 2012 we also successfully entered into two exploration based joint ventures that are delivering nearly $4 billion in value to the company. This included $1.3 billion in upfront cash payments, along with $2.6 billion of future drilling carries that will fund 70% of Devon’s drilling costs in our new venture plays over the next couple of years.

While the upfront cash payments alone more than compensated us for our acreage and early exploration costs, these transactions also significantly improved the capital efficiency of our go-forward programs.

Our exploration work on the joint venture assets is delivering very promising results in the Mississippian play in Oklahoma, the WolfCamp and Cline Shale in the Permian Basin and in various oil plays in the Rockies. In aggregate, Devon has exposure to over 1 million net acres in these plays.

On the liquidity front, our balance sheet remains in terrific shape and continues to be one of the strongest in the peer group. At December 31, we had $7 billion of cash and short term investments and a net debt to cap ratio of only 18%. This position of strength helps us comfortably fund our transition through an oilier production mix.

And finally, with the 2012 capital program weighted towards oil projects, we had strong growth in oil reserves. Our oil reserve additions reached almost 260% of 2012 oil production. Dave will provide more details on the results of our 2012 capital program later on in the call.

Looking now to this year’s activity, given the pricing environment we’re facing in 2013, our capital program is designed to enhance capital efficiency by concentrating spending in core development regions and derisking our joint venture acreage while significantly reducing investments related to acreage capture. We expect our E&P capital expenditures in 2013 to decline by more than 25% to a range of $4.9 billion to $5.3 billion. This includes $200 million for routine leasehold acquisitions, which is roughly $1 billion less than the spend rate in 2012.

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