UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32318

DEVON ENERGY CORPORATION

Delaware		73-1567067
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)
20 North Broadway, Oklahoma City, Oklahoma		73102-8260
(Address of principal executive offices)		(Zip code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On November 2, 2009, 444.1 million shares of common stock were outstanding.

 

 

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DEVON ENERGY CORPORATION

FORM 10-Q
For the Quarterly Period Ended September 30, 2009

INDEX

DEFINITIONS			4
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			5
PART I. Financial Information			6
Item 1. Consolidated Financial Statements			6
Consolidated Balance Sheets			6
Consolidated Statements of Operations			7
Consolidated Statements of Comprehensive Income (Loss)			8
Consolidated Statements of Stockholders’ Equity			9
Consolidated Statements of Cash Flows			10
Notes to Consolidated Financial Statements			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			47
PART II. Other Information			48
Item 6. Exhibits			48
SIGNATURES			49
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

DEFINITIONS

As used in this document:

     “Bbl” or “Bbls” means barrel or barrels.

     “Bcf” means billion cubic feet.

     “Boe” means barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of gas.

     “Btu” means British thermal units, a measure of heating value.

     “Canada” means the operations of Devon encompassing oil and gas properties located in Canada.

     “Domestic” means the operations of Devon encompassing oil and gas properties in the onshore continental United States and the offshore Gulf of Mexico.

     “Federal Funds Rate” means the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

     “Inside FERC” refers to the publication Inside F.E.R.C.’s Gas Market Report.

     “International” means the operations of Devon encompassing oil and gas properties that lie outside the United States and Canada.

     “LIBOR” means London Interbank Offered Rate.

     “Mcf” means thousand cubic feet.

     “MMBbls” means million barrels.

     “MMBoe” means million Boe.

     “MMBtu” means million Btu.

     “NGL” or “NGLs” means natural gas liquids.

     “NYMEX” means New York Mercantile Exchange.

     “Oil” includes crude oil and condensate.

     “SEC” means United States Securities and Exchange Commission.

     “U.S. Offshore” means the operations of Devon encompassing oil and gas properties in the Gulf of Mexico.

     “U.S. Onshore” means the operations of Devon encompassing oil and gas properties in the continental United States.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare the December 31, 2008 reserve reports and other data in our possession or available from third parties. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” “continue” or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, our assumptions about:

	•		energy markets, including the supply and demand for oil, gas, NGLs and other products or services, and the prices of oil, gas, NGLs, including regional pricing differentials, and other products or services;
	•		production levels, including Canadian production subject to government royalties, which fluctuate with prices and production, and international production governed by payout agreements, which affect reported production;
	•		reserve levels;
	•		competitive conditions;
	•		technology;
	•		the availability of capital resources within the securities or capital markets and related risks such as general credit, liquidity, market and interest-rate risks;
	•		capital expenditure and other contractual obligations;
	•		currency exchange rates;
	•		the weather;
	•		inflation;
	•		the availability of goods and services;
	•		drilling risks;
	•		future processing volumes and pipeline throughput;
	•		general economic conditions, whether internationally, nationally or in the jurisdictions in which we or our subsidiaries conduct business;
	•		legislative or regulatory changes, including retroactive royalty or production tax regimes, changes in environmental regulation, environmental risks and liability under federal, state and foreign environmental laws and regulations;
	•		terrorism;
	•		occurrence of property acquisitions or divestitures; and
	•		other factors disclosed in our 2008 Annual Report on Form 10-K under “Item 2. Properties — Proved Reserves and Estimated Future Net Revenue,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

     All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.

PART I. Financial Information

Item 1.		Consolidated Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2009				2008
		(Unaudited)
		(In millions, except
		share data)
ASSETS
Current assets:
Cash and cash equivalents		$	905			$	379
Accounts receivable			1,142				1,412
Income taxes receivable			47				334
Derivative financial instruments, at fair value			131				282
Other current assets			384				277
Total current assets			2,609				2,684
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($4,433 million and $4,551 million excluded from amortization in 2009 and 2008, respectively)			61,375				55,664
Less accumulated depreciation, depletion and amortization			42,503				32,683
Property and equipment, net			18,872				22,981
Goodwill			5,929				5,579
Other long-term assets, including $167 million and $199 million at fair value in 2009 and 2008, respectively			731				664
Total assets		$	28,141			$	31,908
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade		$	1,113			$	1,825
Revenues and royalties due to others			368				496
Short-term debt			1,545				180
Current portion of asset retirement obligations, at fair value			108				138
Other current liabilities, including $7 million at fair value in 2009			309				496
Total current liabilities			3,443				3,135
Long-term debt			5,848				5,661
Asset retirement obligations, at fair value			1,511				1,347
Other long-term liabilities			977				1,026
Deferred income taxes			1,709				3,679
Stockholders’ equity:
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 444.1 million and 443.7 million shares in 2009 and 2008, respectively			44				44
Additional paid-in capital			6,410				6,257
Retained earnings			7,017				10,376
Accumulated other comprehensive income			1,182				383
Total stockholders’ equity			14,653				17,060
Commitments and contingencies (Note 11)
Total liabilities and stockholders’ equity		$	28,141			$	31,908

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Unaudited)
		(In millions, except per share amounts)
Revenues:
Oil sales		$	845			$	1,296			$	2,107			$	4,001
Gas sales			691				2,107				2,344				5,947
NGL sales			195				362				501				1,069
Net gain (loss) on oil and gas derivative financial instruments			23				1,592				190				(411	)
Marketing and midstream revenues			344				621				1,074				1,895
Total revenues			2,098				5,978				6,216				12,501
Expenses and other income, net:
Lease operating expenses			505				591				1,539				1,634
Production taxes			61				152				150				462
Marketing and midstream operating costs and expenses			244				452				707				1,349
Depreciation, depletion and amortization of oil and gas properties			480				781				1,573				2,280
Depreciation and amortization of non-oil and gas properties			65				67				209				186
Accretion of asset retirement obligations			25				22				73				66
General and administrative expenses			137				146				485				474
Interest expense			90				69				263				261
Change in fair value of other financial instruments			(5	)			46				(20	)			22
Reduction of carrying value of oil and gas properties			—				—				6,516				—
Other income, net			(96	)			(83	)			(69	)			(121	)
Total expenses and other income, net			1,506				2,243				11,426				6,613
Earnings (loss) from continuing operations before income taxes			592				3,735				(5,210	)			5,888
Income tax expense (benefit):
Current			102				226				155				743
Deferred			(9	)			1,000				(2,203	)			1,391
Total income tax expense (benefit)			93				1,226				(2,048	)			2,134
Earnings (loss) from continuing operations			499				2,509				(3,162	)			3,754
Discontinued operations:
Earnings from discontinued operations before income taxes			—				93				16				1,133
Discontinued operations income tax expense (benefit)			—				(16	)			—				219
Earnings from discontinued operations			—				109				16				914
Net earnings (loss)			499				2,618				(3,146	)			4,668
Preferred stock dividends			—				—				—				5
Net earnings (loss) applicable to common stockholders		$	499			$	2,618			$	(3,146	)		$	4,663
Basic net earnings (loss) per share:
Basic earnings (loss) from continuing operations per share		$	1.13			$	5.68			$	(7.12	)		$	8.45
Basic earnings (loss) from discontinued operations per share			—				0.25				0.03				2.05
Basic net earnings (loss) per share		$	1.13			$	5.93			$	(7.09	)		$	10.50
Diluted net earnings (loss) per share:
Diluted earnings (loss) from continuing operations per share		$	1.12			$	5.64			$	(7.12	)		$	8.37
Diluted earnings (loss) from discontinued operations per share			—				0.24				0.03				2.03
Diluted net earnings (loss) per share		$	1.12			$	5.88			$	(7.09	)		$	10.40

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(Unaudited)
		(In millions)
Net earnings (loss)		$	499			$	2,618			$	(3,146	)		$	4,668
Foreign currency translation:
Change in cumulative translation adjustment			520				(386	)			826				(679	)
Foreign currency translation income tax benefit (expense)			(31	)			15				(50	)			29
Foreign currency translation total			489				(371	)			776				(650	)
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in net earnings (loss)			12				4				36				12
Pension and postretirement benefit plans income tax benefit (expense)			(5	)			(2	)			(13	)			(5	)
Pension and postretirement benefit plans total			7				2				23				7
Other comprehensive earnings (loss), net of tax			496				(369	)			799				(643	)
Comprehensive income (loss)		$	995			$	2,249			$	(2,347	)		$	4,025

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																						Accumulated
														Additional								Other								Total
		Preferred				Common Stock								Paid-In				Retained				Comprehensive				Treasury				Stockholders’
		Stock				Shares				Amount				Capital				Earnings				Income				Stock				Equity
		(Unaudited)
		(In millions)
Nine Months Ended September 30, 2009:
Balance as of December 31, 2008							444			$	44			$	6,257			$	10,376			$	383			$	—			$	17,060
Net earnings (loss)							—				—				—				(3,146	)			—				—				(3,146	)
Other comprehensive earnings (loss), net of tax							—				—				—				—				799				—				799
Stock option exercises							—				—				19				—				—				—				19
Common stock repurchased							—				—				—				—				—				(12	)			(12	)
Common stock retired							—				—				(12	)			—				—				12				—
Common stock dividends							—				—				—				(213	)			—				—				(213	)
Share-based compensation							—				—				140				—				—				—				140
Share-based compensation tax benefits							—				—				6				—				—				—				6
Balance as of September 30, 2009							444			$	44			$	6,410			$	7,017			$	1,182			$	—			$	14,653
Nine Months Ended September 30, 2008:
Balance as of December 31, 2007		$	1				444			$	44			$	6,743			$	12,813			$	2,405			$	—			$	22,006
Net earnings (loss)			—				—				—				—				4,668				—				—				4,668
Other comprehensive earnings (loss), net of tax			—				—				—				—				—				(643	)			—				(643	)
Stock option exercises			—				4				1				112				—				—				(4	)			109
Common stock repurchased			—				—				—				—				—				—				(681	)			(681	)
Common stock retired			—				(7	)			(1	)			(684	)			—				—				685				—
Redemption of preferred stock			(1	)			—				—				(149	)			—				—				—				(150	)
Common stock dividends			—				—				—				—				(211	)			—				—				(211	)
Preferred stock dividends			—				—				—				—				(5	)			—				—				(5	)
Share-based compensation			—				—				—				139				—				—				—				139
Share-based compensation tax benefits			—				—				—				58				—				—				—				58
Balance as of September 30, 2008		$	—				441			$	44			$	6,219			$	17,265			$	1,762			$	—			$	25,290

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months
		Ended September 30,
		2009				2008
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Net earnings (loss)		$	(3,146	)		$	4,668
Net loss (earnings) from discontinued operations			(16	)			(914	)
Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			1,782				2,466
Deferred income tax expense (benefit)			(2,203	)			1,391
Reduction of carrying value of oil and gas properties			6,516				—
Net unrealized loss (gain) on oil and gas derivative financial instruments			169				(140	)
Other noncash charges			199				217
Net decrease (increase) in working capital			(1	)			339
Decrease (increase) in long-term other assets			20				(61	)
Increase (decrease) in long-term other liabilities			(33	)			94
Cash provided by operating activities — continuing operations			3,287				8,060
Cash provided by operating activities — discontinued operations			5				121
Net cash provided by operating activities			3,292				8,181
Cash flows from investing activities:
Proceeds from sales of property and equipment			23				116
Capital expenditures			(4,184	)			(6,184	)
Purchases of short-term investments			—				(50	)
Sales of long-term and short-term investments			6				297
Cash used in investing activities — continuing operations			(4,155	)			(5,821	)
Cash provided by investing activities — discontinued operations			1				1,859
Net cash used in investing activities			(4,154	)			(3,962	)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt, net of issuance costs			1,187				—
Credit facility repayments			—				(3,191	)
Credit facility borrowings			—				1,741
Net commercial paper borrowings (repayments)			363				(1,004	)
Debt repayments			(1	)			(1,031	)
Redemption of preferred stock			—				(150	)
Proceeds from stock option exercises			19				109
Repurchases of common stock			—				(665	)
Dividends paid on common and preferred stock			(213	)			(216	)
Excess tax benefits related to share-based compensation			6				58
Net cash provided by (used in) financing activities			1,361				(4,349	)
Effect of exchange rate changes on cash			29				(47	)
Net increase (decrease) in cash and cash equivalents			528				(177	)
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			384				1,373
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	912			$	1,196

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

     The accompanying unaudited consolidated financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in Devon’s 2008 Annual Report on Form 10-K.

     The unaudited interim consolidated financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon’s financial position as of September 30, 2009 and Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2009 and 2008. To prepare the accompanying financial statements and notes, Devon’s management evaluated events or transactions that occurred subsequent to September 30, 2009 and before November 5, 2009, which was the date these financial statements were issued.

Recently Issued Accounting Standards Not Yet Adopted

     In December 2008, the Financial Accounting Standards Board (“FASB”) updated Accounting Standards Codification (“ASC”) Topic 715 Compensation — Retirement Benefits, regarding employers’ disclosures about postretirement benefit plan assets. This ASC update requires additional disclosures about the types of assets and associated risks in an employer’s defined benefit pension or other postretirement plan. It is effective for fiscal years ending after December 15, 2009. Devon is evaluating the impact the adoption of this ASC update will have on its financial statement disclosures. However, Devon’s adoption of this ASC update will not affect its current accounting for its pension and postretirement plans.

Modernization of Oil and Gas Reporting

     In December 2008, the SEC adopted revisions to its required oil and gas reporting disclosures. Additionally, on two separate occasions in October 2009, the SEC issued certain compliance and disclosure interpretations of its oil and gas rules. The disclosure revisions are intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves. In the three decades that have passed since adoption of these disclosure items, there have been significant changes in the oil and gas industry. The amendments are designed to modernize and update the oil and gas disclosure requirements to align them with current practices and changes in technology. In addition, the amendments concurrently align the SEC’s full cost accounting rules with the revised disclosures. The revised disclosure requirements must be incorporated in registration statements filed on or after January 1, 2010, and annual reports on Form 10-K for fiscal years ending on or after December 31, 2009. A company may not apply the new rules to disclosures in quarterly reports prior to the first annual report in which the revised disclosures are required.

     The following amendments have the greatest likelihood of affecting Devon’s reserve disclosures, including the comparability of its reserves disclosures with those of its peer companies:

•

Pricing mechanism for oil and gas reserves estimation — The SEC’s current rules require proved reserve estimates to be calculated using prices as of the end of the period and held constant over the life of the reserves. Price changes can be made only to the extent provided by contractual arrangements. The revised rules require reserve estimates to be calculated using a 12-month average price. The 12-month average price will also be used for purposes of calculating the full cost ceiling limitations. Price changes can still be incorporated to the extent defined by contractual arrangements. The use of a 12-month average price rather than a single-day price is expected to reduce the impact on reserve estimates and the full cost ceiling limitations due to short-term volatility and seasonality of prices.

•

Reasonable certainty — The SEC’s current definition of “proved oil and gas reserves” incorporate certain specific concepts such as “lowest known hydrocarbons,” which limits the ability to claim proved reserves in the absence of information on fluid contacts in a well penetration, notwithstanding the existence of other engineering and geoscientific evidence. The revised rules amend the definition to permit the use of new reliable technologies to establish the reasonable certainty of proved reserves. This revision also includes provisions for establishing levels of lowest known hydrocarbons and highest known oil through reliable technology other than well penetrations.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

			The revised rules also amend the definition of proved oil and gas reserves to include reserves located beyond development spacing areas that are immediately adjacent to developed spacing areas if economic producibility can be established with reasonable certainty. These revisions are designed to permit the use of reliable technologies to establish proved reserves in lieu of requiring companies to use specific tests. In addition, they establish a uniform standard of reasonable certainty that applies to all proved reserves, regardless of location or distance from producing wells.
			Because the revised rules generally expand the definition of proved reserves, Devon expects its proved reserve estimates will increase upon adoption of the revised rules. However, Devon is not able to estimate the magnitude of the potential increase at this time.
	•		Unproved reserves — The SEC’s current rules prohibit disclosure of reserve estimates other than proved in documents filed with the SEC. The revised rules permit disclosure of probable and possible reserves and provide definitions of probable reserves and possible reserves. Disclosure of probable and possible reserves is optional. However, such disclosures must meet specific requirements. Disclosures of probable or possible reserves must provide the same level of geographic detail as proved reserves and must state whether the reserves are developed or undeveloped. Probable and possible reserve disclosures must also provide the relative uncertainty associated with these classifications of reserves estimations. Devon has not yet determined whether it will disclose its probable and possible reserves in documents filed with the SEC.

2. Accounts Receivable

     The components of accounts receivable include the following:

		September 30, 2009				December 31, 2008
		(In millions)
Oil, gas and NGL revenues		$	595			$	789
Joint interest billings			222				263
Marketing and midstream revenues			114				153
Production tax credits			197				170
Other			25				42
Gross accounts receivable			1,153				1,417
Allowance for doubtful accounts			(11	)			(5	)
Net accounts receivable		$	1,142			$	1,412

3. Derivative Financial Instruments

     Devon periodically enters into commodity and interest rate derivative financial instruments. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility and to manage Devon’s exposure to interest rate volatility. Also, during the first eight months of 2008, Devon was subject to an embedded option derivative related to the fair value of its debentures exchangeable into shares of Chevron common stock.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     The following table presents the fair values of derivative assets and liabilities included in the accompanying balance sheets. None of Devon’s derivative instruments included in the table have been designated as hedging instruments.

		Balance Sheet Caption		Asset				Liability
				(In millions)
September 30, 2009:
Gas price collars		Derivative financial instruments, current		$	86			$	—
Gas price swaps		Other current liabilities			—				7
Oil price collars		Derivative financial instruments, current			7				—
Interest rate swaps		Derivative financial instruments, current			38				—
Interest rate swaps		Other long-term assets			51				—
Total derivatives				$	182			$	7
December 31, 2008:
Gas price collars		Derivative financial instruments, current		$	255			$	—
Interest rate swaps		Derivative financial instruments, current			27				—
Interest rate swaps		Other long-term assets			77				—
Total derivatives				$	359			$	—

     The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying statements of operations associated with these derivative financial instruments. None of Devon’s derivative instruments included in the table have been designated as hedging instruments.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(In millions)
Cash settlement receipts (payments):
Gas price collars (1)		$	118			$	(125	)		$	350			$	(275	)
Gas price swaps (1)			9				(115	)			9				(276	)
Interest rate swaps (2)			14				—				35				—
Total cash settlements			141				(240	)			394				(551	)
Unrealized gains (losses):
Gas price collars (1)			(104	)			1,142				(169	)			114
Gas price swaps (1)			(7	)			645				(7	)			27
Oil price collars (1)			7				45				7				(1	)
Interest rate swaps (2)			(9	)			23				(15	)			23
Embedded option (2)			—				167				—				109
Total unrealized gains (losses)			(113	)			2,022				(184	)			272
Net gain (loss) recognized on statement of operations		$	28			$	1,782			$	210			$	(279	)

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

4. Other Current Assets

      The components of other current assets include the following:

		September 30, 2009				December 31, 2008
		(In millions)
Inventories		$	278			$	197
Prepaid assets			71				49
Other			35				31
Other current assets		$	384			$	277

5. Property and Equipment

     In the first quarter of 2009, Devon reduced the carrying values of certain of its oil and gas properties due to full cost ceiling limitations. These reductions are discussed in Note 14.

6. Goodwill

     During the first nine months of 2009, Devon’s goodwill increased $350 million. This increase related to Devon’s Canadian goodwill and was entirely due to foreign currency translation.

7. Debt

5.625% Senior Notes Due January 15, 2014 and 6.30% Senior Notes Due January 15, 2019

     In January 2009, Devon issued $500 million of 5.625% senior unsecured notes due January 15, 2014 and $700 million of 6.30% senior unsecured notes due January 15, 2019. The net proceeds received of $1.187 billion, after discounts and issuance costs, were used primarily to repay Devon’s $1.0 billion of outstanding commercial paper as of December 31, 2008.

Credit Lines

     Devon has two syndicated, unsecured revolving lines of credit that can be accessed to provide liquidity as needed. The following schedule summarizes the capacity of Devon’s credit facilities by maturity date, as well as its available capacity as of September 30, 2009.

Description		Amount
		(In millions)
Senior Credit Facility maturities:
April 7, 2012		$	500
April 7, 2013			2,150
Senior Credit Facility total capacity			2,650
Short-Term Facility total capacity — November 2, 2010 maturity			700
Total credit facility capacity			3,350
Less:
Outstanding credit facility borrowings			—
Outstanding commercial paper borrowings			1,368
Outstanding letters of credit			84
Total available capacity		$	1,898

     On November 3, 2009 Devon’s unused $700 million short-term facility matured. On November 3, 2009, Devon established a new $700 million 364-day, syndicated, unsecured revolving senior credit facility (the “Short-Term Facility”). The Short-Term Facility matures on November 2, 2010. On the maturity date, all amounts outstanding will be due and payable at that time. Amounts borrowed under the Short-Term Facility bear interest at various fixed rate options for periods

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

of up to 12 months. Such rates are generally based on LIBOR or the prime rate. The Short-Term Facility provides for an annual facility fee of approximately $1.75 million that is payable quarterly in arrears.

     The credit facilities contain only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization to be less than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of September 30, 2009, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at September 30, 2009, as calculated pursuant to the terms of the agreement, was 21.3%.

Commercial Paper

     Subsequent to the $1.0 billion commercial paper repayment in January 2009, Devon utilized additional net commercial paper borrowings of $1.4 billion to fund capital expenditure payments in excess of cash generated by operating activities during the first nine months of 2009. As of September 30, 2009, Devon’s average borrowing rate on its $1.4 billion of commercial paper debt was 0.32%.

8. Asset Retirement Obligations

     The following is a summary of the changes in Devon’s asset retirement obligations (“ARO”) for the first nine months of 2009 and 2008.

		Nine Months
		Ended September 30,
		2009				2008
		(In millions)
ARO as of beginning of period		$	1,485			$	1,318
Liabilities incurred			32				48
Liabilities settled			(76	)			(59	)
Revisions, net			23				244
Accretion expense on discounted obligation			73				66
Foreign currency translation adjustment			82				(46	)
ARO as of end of period			1,619				1,571
Less current portion			108				115
ARO, long-term		$	1,511			$	1,456

9. Retirement Plans

Net Periodic Benefit Cost and Other Comprehensive Income

     The following table presents the components of net periodic benefit cost and other comprehensive income for Devon’s pension and other post retirement benefit plans for the three-month and nine-month periods ended September 30, 2009 and 2008.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

		Pension Benefits																Other Postretirement Benefits
		Three Months Ended								Nine Months Ended								Three Months Ended								Nine Months Ended
		September 30,								September 30,								September 30,								September 30,
		2009				2008				2009				2008				2009				2008				2009				2008
		(In millions)
Net periodic benefit cost:
Service cost		$	11			$	10			$	33			$	30			$	—			$	—			$	—			$	—
Interest cost			14				14				42				42				1				2				3				6
Expected return on plan assets			(9	)			(13	)			(27	)			(39	)			—				—				—				—
Amortization of prior service cost			1				—				3				—				—				—				—				—
Net actuarial loss			11				4				33				12				—				—				—				—
Net periodic benefit cost			28				15				84				45				1				2				3				6
Other comprehensive income:
Recognition of prior service cost in net periodic benefit cost			(1	)			—				(3	)			—				—				—				—				—
Recognition of net actuarial loss in net periodic benefit cost			(11	)			(4	)			(33	)			(12	)			—				—				—				—
Total recognized		$	16			$	11			$	48			$	33			$	1			$	2			$	3			$	6

     Devon previously disclosed in its 2008 Annual Report on Form 10-K that it expected to contribute up to approximately $183 million to its defined benefit pension plans in 2009 and $5 million to its defined benefit postretirement plans in 2009. Devon has revised its estimate of 2009 defined benefit pension plan contributions to $55 million. As of September 30, 2009, Devon has contributed $42 million to its defined benefit pension plans and $3 million to its defined benefit postretirement plans.

10. Stockholders’ Equity

Stock Repurchases

     During the first nine months of 2008, Devon repurchased 6.5 million common shares for $665 million, or $102.56 per share, under programs approved by its Board of Directors. The 6.5 million common shares include 4.5 million shares that were repurchased under Devon’s 50 million share repurchase program and 2.0 million shares that were repurchased under Devon’s ongoing, annual stock repurchase program. No such repurchases were made during the first nine months of 2009.

Dividends

     Devon paid common stock dividends of $213 million and $211 million (quarterly rates of $0.16 per share) in the first nine months of 2009 and 2008, respectively. Devon paid preferred stock dividends of $5 million in 2008. Devon redeemed all 1.5 million outstanding shares of its preferred stock on June 20, 2008.

11. Commitments and Contingencies

     Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and that can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. However, actual amounts could differ materially from management’s estimate.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Environmental Matters

     Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and similar state statutes. In response to liabilities associated with these activities, accruals have been established when reasonable estimates are possible. Such accruals primarily include estimated costs associated with remediation. Devon has not used discounting in determining its accrued liabilities for environmental remediation, and no material claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in Devon’s consolidated financial statements. Devon adjusts the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.

     Certain of Devon’s subsidiaries are involved in matters in which it has been alleged that such subsidiaries are potentially responsible parties (“PRPs”) under CERCLA or similar state legislation with respect to various waste disposal areas owned or operated by third parties. As of September 30, 2009, Devon’s balance sheet included $1 million of accrued liabilities, reflected in other long-term liabilities, related to these and other environmental remediation liabilities. Devon does not currently believe there is a reasonable possibility of incurring additional material costs in excess of the current accruals recognized for such environmental remediation activities. With respect to the sites in which Devon subsidiaries are PRPs, Devon’s conclusion is based in large part on (i) Devon’s participation in consent decrees with both other PRPs and the Environmental Protection Agency, which provide for performing the scope of work required for remediation and contain covenants not to sue as protection to the PRPs, (ii) participation in groups as a de minimis PRP, and (iii) the availability of other defenses to liability. As a result, Devon’s monetary exposure is not expected to be material.

Royalty Matters

     Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold from federal and Indian owned or controlled lands. The principal suit in which Devon is a defendant is United States ex rel. Wright v. Chevron USA, Inc. et al. (the “Wright case”). The suit was originally filed in August 1996 in the United States District Court for the Eastern District of Texas, but was consolidated in October 2000 with other suits for pre-trial proceedings in the United States District Court for the District of Wyoming. On July 10, 2003, the District of Wyoming remanded the Wright case back to the Eastern District of Texas to resume proceedings. On April 12, 2007, the court entered a trial plan and scheduling order in which the case will proceed in phases. Two phases have been scheduled to date. The first phase was scheduled to begin in August 2008, but the defendant settled prior to trial. The second phase was scheduled to begin in February 2009, but the defendants settled prior to trial. Devon was not included in the groups of defendants selected for these first two phases. Devon believes that it has acted reasonably, has legitimate and strong defenses to all allegations in the suit, and has paid royalties in good faith. Devon does not currently believe that it is subject to material exposure with respect to this lawsuit. Therefore, no liability related to this lawsuit has been recorded.

     In 1995, the United States Congress passed the Deep Water Royalty Relief Act. The intent of this legislation was to encourage deep water exploration in the Gulf of Mexico by providing relief from the obligation to pay royalties on certain federal leases. Deep water leases issued in certain years by the Minerals Management Service (the “MMS”) have contained price thresholds, such that if the market prices for oil or gas exceeded the thresholds for a given year, royalty relief would not be granted for that year.

     In October 2007, a federal district court ruled in favor of a plaintiff who had challenged the legality of including price thresholds in deep water leases. Additionally, in January 2009 a federal appellate court upheld this district court ruling. This judgment was later appealed to the United States Supreme Court, which, in October 2009, declined to review the appellate court’s ruling. The Supreme Court’s decision ended the MMS’s judicial course to enforce the price thresholds.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     Prior to September 30, 2009, Devon had $84 million accrued for potential royalties on various deep water leases. Based upon the Supreme Court’s decision, Devon reduced to zero the $84 million loss contingency accrual in the third quarter of 2009. The $84 million expense reduction is included in other income in the accompanying 2009 statements of operations.

Other Matters

     Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge as of the date these financial statements were issued, neither Devon nor its property is subject to any material pending legal proceedings.

12. Fair Value Measurements

     Certain of Devon’s assets and liabilities are reported at fair value in the accompanying balance sheets. Such assets and liabilities include amounts for both financial and nonfinancial instruments. The following tables provide carrying value and fair value measurement information for such assets and liabilities as of September 30, 2009 and December 31, 2008.

		As of September 30, 2009
										Fair Value Measurements Using:
										Quoted				Significant
										Prices in				Other				Significant
										Active				Observable				Unobservable
		Carrying				Total Fair				Markets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Financial Assets (Liabilities):
Long-term investments		$	116			$	116			$	—			$	—			$	116
Gas price collars		$	86			$	86			$	—			$	86			$	—
Gas price swaps		$	(7	)		$	(7	)		$	—			$	(7	)		$	—
Oil price collars		$	7			$	7			$	—			$	7			$	—
Interest rate swaps		$	89			$	89			$	—			$	89			$	—
Debt		$	(7,393	)		$	(8,269	)		$	(1,368	)		$	(6,901	)		$	—
Asset retirement obligations		$	(1,619	)		$	(1,619	)		$	—			$	—			$	(1,619	)

		As of December 31, 2008
										Fair Value Measurements Using:
										Quoted				Significant
										Prices in				Other				Significant
										Active				Observable				Unobservable
		Carrying				Total Fair				Markets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Financial Assets (Liabilities):
Long-term investments		$	122			$	122			$	—			$	—			$	122
Gas price collars		$	255			$	255			$	—			$	255			$	—
Interest rate swaps		$	104			$	104			$	—			$	104			$	—
Debt		$	(5,841	)		$	(6,106	)		$	(1,005	)		$	(5,101	)		$	—
Asset retirement obligations		$	(1,485	)		$	(1,485	)		$	—			$	—			$	(1,485	)

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     A summary of the changes in Devon’s asset retirement obligations during the first nine months of 2009 is included in Note 8. Included below is a summary of the changes in Devon’s other Level 3 fair value measurements during the first nine months of 2009 (in millions).

Beginning balance		$	122
Redemptions of principal at par			(6	)
Ending balance		$	116

13. Change in Fair Value of Other Financial Instruments

The components of the change in fair value of other financial instruments are presented in the following table.

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(In millions)
(Gains) losses from:
Interest rate swaps — settlements		$	(14	)		$	—			$	(35	)		$	—
Interest rate swaps — fair value changes			9				(23	)			15				(23	)
Chevron common stock			—				236				—				154
Option embedded in exchangeable debentures			—				(167	)			—				(109	)
Total		$	(5	)		$	46			$	(20	)		$	22

14. Reduction of Carrying Value of Oil and Gas Properties

     In the first quarter of 2009, Devon reduced the carrying values of certain of its oil and gas properties due to full cost ceiling limitations. A summary of these reductions and additional discussion is provided below.

		March 31, 2009
						Net of
		Gross				Taxes
		(In millions)
United States		$	6,408			$	4,085
Brazil			103				103
Russia			5				2
Total		$	6,516			$	4,190

     The United States reduction resulted primarily from a significant decrease in the full cost ceiling during the first three months of 2009. The lower ceiling value in the United States largely resulted from the continued effects of declining natural gas prices subsequent to December 31, 2008.

     Although oil prices improved subsequent to December 31, 2008, Brazil’s reduction resulted largely from an exploratory well drilled at the BM-BAR-3 block in the offshore Barreirinhas Basin. After drilling this well in the first quarter of 2009, Devon concluded that the well did not have adequate reserves for commercial viability. As a result, the seismic, leasehold and drilling costs associated with this well contributed to the reduction recognized in the first quarter of 2009.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     To demonstrate the changes in the full-cost ceiling for the United States and Brazil, the March 31, 2009 and December 31, 2008 weighted average wellhead prices are presented in the following table.

		March 31, 2009												December 31, 2008
		Oil				Gas				NGLs				Oil				Gas				NGLs
Country		(Per Bbl)				(Per Mcf)				(Per Bbl)				(Per Bbl)				(Per Mcf)				(Per Bbl)
United States		$	47.30			$	2.67			$	17.04			$	42.21			$	4.68			$	16.16
Brazil		$	36.71				N/A				N/A			$	26.61				N/A				N/A

     The March 31, 2009 oil and gas wellhead prices in the table above compare to the NYMEX cash price of $49.66 per Bbl for crude oil and the Henry Hub spot price of $3.63 per MMBtu for gas. The December 31, 2008 oil and gas wellhead prices in the table above compare to the NYMEX cash price of $44.60 per Bbl for crude oil and the Henry Hub spot price of $5.71 per MMBtu for gas.

15. Other Income

     The components of other income are presented in the following table.

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
		(In millions)
Interest and dividend income		$	3			$	18			$	7			$	65
Deep water royalties (see Note 11)			84				—				84				—
Hurricane insurance proceeds			—				57				—				57
Other			9				8				(22	)			(1	)
Total		$	96			$	83			$	69			$	121

16. Income Taxes

     In the third quarter of 2009, Devon recognized $59 million of income tax benefits in conjunction with the filing of its 2008 and certain amended 2005, 2006 and 2007 income tax returns. These tax benefits consist of deferred tax benefits of $50 million and current tax benefits of $9 million. Of the $59 million, $41 million relates to taxation on foreign operations. The remaining $18 million relates to taxation on U.S. federal and state operations.

     Also in the third quarter of 2009, Devon recognized a $22 million current tax benefit related to certain unsuccessful international drilling results.

17. Discontinued Operations

     At the end of 2008, Devon’s operations in Angola were classified as discontinued as a result of Devon’s plans and ongoing activities to sell its operations in Angola. Due to a commercial discovery in the second quarter of 2009, Devon suspended marketing its Angolan operations for sale. Although Devon intends to resume marketing activities in 2010 once it has drilled its remaining commitment wells, Devon’s operations in Angola do not currently qualify as discontinued. Therefore, Devon has classified all amounts related to its Angolan operations for 2009 and prior years as continuing operations.

     In the second quarter of 2008, Devon sold its assets and terminated its operations in certain West African countries, consisting primarily of Equatorial Guinea and Gabon. As a result of the sales, Devon recognized gains totaling $736 million ($647 million after taxes) in the second quarter of 2008 from proceeds of $2.4 billion ($1.7 billion net of income taxes and purchase price adjustments).

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     In the third quarter of 2008, Devon sold its assets and terminated its operations in Cote d’Ivoire. As a result of this sale, Devon recognized a gain of $83 million ($101 million after tax) in the third quarter of 2008 from proceeds of $205 million ($163 million net of purchase price adjustments).

     In the second quarter of 2009, Devon recognized a $17 million gain in conjunction with post-closing settlements related to the 2008 sales.

     Operating revenues related to Devon’s discontinued operations totaled $17 million and $349 million in the three-month and nine-month periods ended September 30, 2008, respectively. There were no operating revenues related to Devon’s discontinued operations for the three-month and nine-month periods ended September 30, 2009.

     The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations as of September 30, 2009 and December 31, 2008.

		Devon’s Consolidated				September 30,				December 31,
		Balance Sheet Caption				2009				2008
						(In millions)
Cash and other current assets			Other current assets			$	16			$	14
Property and equipment, net of accumulated depreciation, depletion and amortization			Other long-term assets			$	9			$	9
Accounts payable and other current liabilities			Other current liabilities			$	10			$	6

18. Earnings (Loss) Per Share

     The following table reconciles earnings (loss) from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings (loss) per share for the three-month and nine-month periods ended September 30, 2009 and 2008. Because a net loss from continuing operations was generated during the nine-month period ended September 30, 2009, the dilutive shares produce an antidilutive net loss per share result. Therefore, the diluted loss per share from continuing operations in the nine months ended September 30, 2009 reported in the accompanying 2009 statement of operations is the same as the basic loss per share amount.

										Earnings
		Earnings				Common				(Loss)
		(Loss)				Shares				per Share
		(In millions, except per share amounts)
Three Months Ended September 30, 2009:
Earnings from continuing operations		$	499				444
Attributable to participating securities			(5	)			(5	)
Basic earnings per share			494				439			$	1.13
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				2
Diluted earnings per share		$	494				441			$	1.12
Three Months Ended September 30, 2008:
Earnings from continuing operations		$	2,509				442
Attributable to participating securities			(23	)			(4	)
Basic earnings per share			2,486				438			$	5.68
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				3
Diluted earnings per share		$	2,486				441			$	5.64