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

For the Quarterly Period Ended June 30, 2008

or

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

Devon Energy Corporation

Delaware (State or Other Jurisdiction of Incorporation or Organization)		73-1567067 (I.R.S. Employer Identification Number)
20 North Broadway Oklahoma City, Oklahoma (Address of Principal Executive Offices)		73102-8260 (Zip Code)

Registrant’s telephone number, including area code:
(405) 235-3611

Former name, former address and former fiscal year, if changed from last report.
Not applicable

     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 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.

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

     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

     As of July 31, 2008, 441.8 million shares of the registrant’s common stock were outstanding.

 

 

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DEVON ENERGY CORPORATION

INDEX TO FORM 10-Q QUARTERLY REPORT
TO THE SECURITIES AND EXCHANGE COMMISSION

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			4
DEFINITIONS			5
PART I. FINANCIAL INFORMATION			6
Item 1. Consolidated Financial Statements			6
Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007			6
Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2008 and 2007			7
Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 2008 and 2007			8
Consolidated Statements of Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2008 and 2007			9
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2008 and 2007			10
Notes to Consolidated Financial Statements (Unaudited)			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
PART II. OTHER INFORMATION			44
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 3. Defaults Upon Senior Securities			44
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 5. Other Information			45
Item 6. Exhibits			46
SIGNATURES			46
Registrant's Certificate of Amendment of Restated Certificate of Incorporation
Form of Amendment to Nonqualified Stock Option Award Agreements
Form of Amendment to Restricted Stock Award Agreements
Form of Non-Management Director Nonqualified Stock Option Award Agreement
Form of Non-Management Director Restricted Stock Award Agreement
Certification of J. Larry Nichols, Chief Executive Officer Pursuant to Section 302
Certification of Danny J. Heatly, Vice President - Accounting and Chief Accounting Officer Pursuant to Section 302
Certification of J. Larry Nichols, Chief Executive Officer Pursuant to Section 906
Certification of Danny J. Heatly, Vice President - Accounting and Chief Accounting Officer Pursuant to Section 906

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 that was used to prepare the December 31, 2007 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,” or “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;
	•		production levels, including our Canadian production subject to government royalties, which fluctuate with prices and production, and portions of our International production governed by payout agreements which affect reported production;
	•		reserve levels;
	•		competitive conditions;
	•		technology;
	•		the availability of capital resources;
	•		capital expenditure and other contractual obligations;
	•		the supply and demand for oil, natural gas, NGLs and other energy products or services;
	•		the price of oil, natural gas, NGLs and other energy products or services;
	•		currency exchange rates, particularly the Canadian-to-U.S. dollar exchange rate;
	•		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 or the timing of such planned transactions;
	•		the securities or capital markets and related risks such as general credit, liquidity, market and interest-rate risks; and
	•		other factors disclosed in Devon’s 2007 Annual Report on Form 10-K/A 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.

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.

     “Federal Funds Rate” means the interest rate that financial institutions charge each other for the use of United States Treasury funds.

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

     “LIBOR” means London Interbank Offered Rate.

     “Mcf” means thousand cubic feet.

     “MMBbls” means million barrels.

     “MMBoe” means million Boe.

     “MMBtu” means million Btu.

     “Oil” includes crude oil and condensate.

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

     “NYMEX” means New York Mercantile Exchange.

     “SEC” means United States Securities and Exchange Commission.

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

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

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

PART I. Financial Information

Item 1. Consolidated Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2008				2007
		(Unaudited)
		(In millions)
ASSETS
Current assets:
Cash and cash equivalents		$	1,837			$	1,364
Short-term investments, at fair value			1				372
Accounts receivable			2,460				1,779
Deferred income taxes			775				44
Current assets held for sale			105				120
Other current assets			255				235
Total current assets			5,433				3,914
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($3,741 and $3,417 excluded from amortization in 2008 and 2007, respectively)			51,953				48,473
Less accumulated depreciation, depletion and amortization			21,769				20,394
			30,184				28,079
Investment in Chevron Corporation common stock, at fair value			1,406				1,324
Goodwill			6,081				6,172
Long-term assets held for sale			84				1,512
Other long-term assets, including $126 million at fair value in 2008			592				455
Total assets		$	43,780			$	41,456
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable – trade		$	1,525			$	1,360
Revenues and royalties due to others			966				578
Income taxes payable			306				97
Debentures exchangeable into shares of Chevron Corporation common stock			621				—
Other short-term debt			—				1,004
Derivative financial instruments, at fair value			2,125				—
Current portion of asset retirement obligation, at fair value			63				82
Current liabilities associated with assets held for sale			16				145
Accrued expenses and other current liabilities			410				391
Total current liabilities			6,032				3,657
Debentures exchangeable into shares of Chevron Corporation common stock			—				641
Other long-term debt			4,829				6,283
Derivative financial instruments, at fair value			83				488
Asset retirement obligation, at fair value			1,430				1,236
Long-term liabilities associated with assets held for sale			24				404
Other long-term liabilities			905				699
Deferred income taxes			7,044				6,042
Stockholders’ equity:
Preferred stock of $1.00 par value. Authorized 4.5 million shares; issued 1.5 million shares ($150 million aggregate liquidation value) in 2007			—				1
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 444.9 million and 444.2 million shares in 2008 and 2007, respectively			44				44
Additional paid-in capital			6,591				6,743
Retained earnings			14,717				12,813
Accumulated other comprehensive income			2,131				2,405
Treasury stock, at cost. 0.4 million shares in 2008			(50	)			—
Total stockholders’ equity			23,433				22,006
Commitments and contingencies (Note 8)
Total liabilities and stockholders’ equity		$	43,780			$	41,456

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Unaudited)
		(In millions, except per share amounts)
Revenues:
Oil sales		$	1,455			$	865			$	2,705			$	1,556
Gas sales			2,210				1,366				3,840				2,612
NGL sales			379				224				707				401
Net (loss) gain on oil and gas derivative financial instruments			(1,215	)			14				(2,003	)			(6	)
Marketing and midstream revenues			719				460				1,274				839
Total revenues			3,548				2,929				6,523				5,402
Expenses and other income, net:
Lease operating expenses			537				439				1,043				869
Production taxes			176				90				310				170
Marketing and midstream operating costs and expenses			515				341				897				611
Depreciation, depletion and amortization of oil and gas properties			762				645				1,499				1,232
Depreciation and amortization of non-oil and gas properties			62				49				119				95
Accretion of asset retirement obligation			22				18				44				36
General and administrative expenses			180				113				328				232
Interest expense			90				107				192				217
Change in fair value of non-oil and gas derivative financial instruments			(40	)			(10	)			(24	)			(9	)
Other income, net			(17	)			(17	)			(38	)			(43	)
Total expenses and other income, net			2,287				1,775				4,370				3,410
Earnings from continuing operations before income tax expense			1,261				1,154				2,153				1,992
Income tax expense:
Current			414				174				517				363
Deferred			253				156				391				231
Total income tax expense			667				330				908				594
Earnings from continuing operations			594				824				1,245				1,398
Discontinued operations:
Earnings from discontinued operations before income tax expense			851				128				1,040				265
Income tax expense			144				48				235				108
Earnings from discontinued operations			707				80				805				157
Net earnings			1,301				904				2,050				1,555
Preferred stock dividends			3				3				5				5
Net earnings applicable to common stockholders		$	1,298			$	901			$	2,045			$	1,550
Basic net earnings per share:
Earnings from continuing operations		$	1.33			$	1.84			$	2.79			$	3.13
Earnings from discontinued operations			1.58				0.18				1.80				0.35
Net earnings		$	2.91			$	2.02			$	4.59			$	3.48
Diluted net earnings per share:
Earnings from continuing operations		$	1.31			$	1.82			$	2.76			$	3.09
Earnings from discontinued operations			1.57				0.18				1.79				0.35
Net earnings		$	2.88			$	2.00			$	4.55			$	3.44
Weighted average common shares outstanding:
Basic			446				446				445				445
Diluted			450				450				450				450

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(Unaudited)
		(In millions)
Net earnings		$	1,301			$	904			$	2,050			$	1,555
Foreign currency translation:
Change in cumulative translation adjustment			88				649				(294	)			732
Income tax benefit (expense)			(3	)			(35	)			14				(41	)
Total			85				614				(280	)			691
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in net earnings			4				4				9				8
Income tax expense			(1	)			(2	)			(3	)			(3	)
Total			3				2				6				5
Other			—				—				—				(1	)
Other comprehensive income (loss), net of tax			88				616				(274	)			695
Comprehensive income		$	1,389			$	1,520			$	1,776			$	2,250

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)
Six Months Ended June 30, 2008:
Balance as of December 31, 2007		$	1				444			$	44			$	6,743			$	12,813			$	2,405			$	—			$	22,006
Net earnings			—				—				—				—				2,050				—				—				2,050
Other comprehensive loss			—				—				—				—				—				(274	)			—				(274	)
Stock option exercises			—				4				1				107				—				—				(4	)			104
Common stock repurchased			—				—				—				—				—				—				(316	)			(316	)
Common stock retired			—				(3	)			(1	)			(269	)			—				—				270				—
Redemption of preferred stock			(1	)			—				—				(149	)			—				—				—				(150	)
Common stock dividends			—				—				—				—				(141	)			—				—				(141	)
Preferred stock dividends			—				—				—				—				(5	)			—				—				(5	)
Share-based compensation			—				—				—				104				—				—				—				104
Excess tax benefits on share-based compensation			—				—				—				55				—				—				—				55
Balance as of June 30, 2008		$	—				445			$	44			$	6,591			$	14,717			$	2,131			$	(50	)		$	23,433
Six Months Ended June 30, 2007:
Balance as of December 31, 2006		$	1				444			$	44			$	6,840			$	9,114			$	1,444			$	(1	)		$	17,442
Adoption of FASB Statement No. 159			—				—				—				—				364				(364	)			—				—
Adoption of FASB Interpretation No. 48			—				—				—				—				(10	)			—				—				(10	)
Adoption of FASB Statement No. 158			—				—				—				—				(1	)			16				—				15
Net earnings			—				—				—				—				1,555				—				—				1,555
Other comprehensive income			—				—				—				—				—				695				—				695
Stock option exercises			—				2				1				59				—				—				—				60
Common stock repurchased			—				—				—				—				—				—				(16	)			(16	)
Common stock retired			—				—				—				(17	)			—				—				17				—
Common stock dividends			—				—				—				—				(124	)			—				—				(124	)
Preferred stock dividends			—				—				—				—				(5	)			—				—				(5	)
Share-based compensation			—				—				—				57				—				—				—				57
Excess tax benefits on share-based compensation			—				—				—				17				—				—				—				17
Balance as of June 30, 2007		$	1				446			$	45			$	6,956			$	10,893			$	1,791			$	—			$	19,686

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months
		Ended June 30,
		2008				2007
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Net earnings		$	2,050			$	1,555
Earnings from discontinued operations, net of tax			(805	)			(157	)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			1,618				1,327
Deferred income tax expense			391				231
Net unrealized loss on oil and gas derivative financial instruments			1,692				23
Other noncash charges			122				71
(Increase) decrease in assets:
Accounts receivable			(604	)			32
Other current assets			(44	)			(27	)
Other long-term assets			(40	)			(46	)
Increase (decrease) in liabilities:
Accounts payable			120				64
Revenues and royalties due to others			348				(17	)
Income taxes payable			136				178
Other current liabilities			(99	)			(96	)
Other long-term liabilities			181				14
Cash provided by operating activities – continuing operations			5,066				3,152
Cash provided by operating activities – discontinued operations			120				197
Net cash provided by operating activities			5,186				3,349
Cash flows from investing activities:
Proceeds from sales of property and equipment			108				37
Capital expenditures			(3,867	)			(2,990	)
Purchases of short-term investments			(50	)			(589	)
Redemptions of short-term and long-term investments			295				848
Cash used in investing activities – continuing operations			(3,514	)			(2,694	)
Cash provided by (used in) investing activities – discontinued operations			1,709				(115	)
Net cash used in investing activities			(1,805	)			(2,809	)
Cash flows from financing activities:
Credit facility repayments			(3,070	)			—
Credit facility borrowings			1,620				—
Net commercial paper repayments			(1,004	)			(183	)
Principal payments on debt			(47	)			—
Preferred stock redemption			(150	)			—
Proceeds from stock option exercises			104				60
Repurchases of common stock			(252	)			(10	)
Dividends paid on common and preferred stock			(146	)			(129	)
Excess tax benefits related to share-based compensation			55				17
Net cash used in financing activities			(2,890	)			(245	)
Effect of exchange rate changes on cash			(19	)			16
Net increase in cash and cash equivalents			472				311
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			1,373				756
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	1,845			$	1,067
Supplementary cash flow data:
Interest paid (net of capitalized interest)		$	189			$	202
Income taxes paid – continuing and discontinued operations		$	826			$	159

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 2007 Annual Report on Form 10-K/A.

     The unaudited interim consolidated financial statements furnished in this report reflect all adjustments which are, in the opinion of management, necessary to a fair statement of Devon’s financial position as of June 30, 2008 and Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2008 and 2007. Except for the reclassification of auction rate securities discussed below, all such adjustments are of a normal recurring nature.

Reclassification of Auction Rate Securities

     At December 31, 2007, Devon held $372 million of auction rate securities. Such securities are rated AAA—the highest rating—by one or more rating agencies and are collateralized by student loans that are substantially guaranteed by the United States government. Although Devon’s auction rate securities generally have contractual maturities of more than 20 years, the underlying interest rates on such securities are scheduled to reset every seven to 28 days. Therefore, these auction rate securities were generally priced and subsequently traded as short-term investments because of the interest rate reset feature. As a result, Devon classified its auction rate securities as short-term investments in the accompanying December 31, 2007 consolidated balance sheet and in prior periods.

     During the first half of 2008, Devon reduced its auction rate securities holdings to $127 million. However, since February 8, 2008 Devon has experienced difficulty selling its securities due to the failure of the auction mechanism, which provides liquidity to these securities. An auction failure means that the parties wishing to sell securities could not do so. The securities for which auctions have failed will continue to accrue interest and be auctioned every seven to 28 days until the auction succeeds, the issuer calls the securities or the securities mature.

     From February 2008, when auctions began failing, to June 30, 2008, issuers redeemed $26 million of Devon’s auction rate securities holdings at par. Additionally, Devon’s auction rate securities holdings as of June 30, 2008 include approximately $1 million of securities that were called at par value by the issuer and were repaid on July 10, 2008. These called securities are classified as short-term investments in the accompanying June 30, 2008 consolidated balance sheet. However, based on continued auction failures and the current market for Devon’s auction rate securities, Devon has classified the $126 million of securities that have not been called as of June 30, 2008 as long-term investments. These securities are included in other long-term assets in the accompanying June 30, 2008 consolidated balance sheet. Devon has the ability to hold the securities until maturity. At this time, Devon does not believe the values of its long-term securities are impaired.

Recently Issued Accounting Standards Not Yet Adopted

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141(R), Business Combinations, which replaces Statement No. 141. Statement No. 141(R) retains the fundamental requirements of Statement No. 141 that an acquirer be identified and the acquisition method of accounting (previously called the purchase method) be used for all business combinations. Statement No. 141(R)’s scope is broader than that of Statement No. 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, Statement No. 141(R) improves the comparability of the information about business combinations provided in financial reports. Statement No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, as well as any resulting goodwill. Statement No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Devon will evaluate how the new requirements of Statement No. 141(R) would impact any business combinations completed in 2009 or thereafter.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     In December 2007, the FASB also issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51. A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Statement No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Under Statement No. 160, noncontrolling interests in a subsidiary must be reported as a component of consolidated equity separate from the parent’s equity. Additionally, the amounts of consolidated net income attributable to both the parent and the noncontrolling interest must be reported separately on the face of the income statement. Statement No. 160 is effective for fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. Devon does not expect the adoption of Statement No. 160 to have a material impact on its financial statements and related disclosures.

     In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. Statement No. 161 requires additional disclosures about derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. Devon is evaluating the impact the adoption of Statement No. 161 will have on its financial statement disclosures. However, Devon’s adoption of Statement No. 161 will not affect its current accounting for derivative and hedging activities.

2. Property and Equipment and Asset Retirement Obligations

Divestitures

     Near the beginning of 2007, Devon announced plans to sell its assets and terminate its operations located in Africa. This divestiture package consisted primarily of Devon’s operations located in Egypt and the West African countries of Equatorial Guinea, Gabon and Cote D’Ivoire. Additional information regarding Devon’s Egyptian and West African operations, which are presented as discontinued in the accompanying financial statements, is provided in Note 12.

Asset Retirement Obligations (“ARO”)

     The following is a summary of the changes in Devon’s ARO for the first six months of 2008 and 2007.

		Six Months
		Ended June 30,
		2008				2007
		(In millions)
Asset retirement obligation as of beginning of period		$	1,318			$	857
Liabilities incurred			29				32
Liabilities settled			(40	)			(24	)
Revision of estimated obligation			162				311
Accretion expense on discounted obligation			44				36
Foreign currency translation adjustment			(20	)			47
Asset retirement obligation as of end of period			1,493				1,259
Less current portion			63				45
Asset retirement obligation, long-term		$	1,430			$	1,214

     During the first six months of 2008 and 2007, Devon recognized increases of $162 million and $311 million, respectively, to its ARO. The primary factors causing the 2008 fair value increase were an overall increase in abandonment cost estimates and the effect of a decrease in the discount rate used to present value the obligations. The primary factors causing the 2007 fair value increase were an overall increase in abandonment cost estimates and an increase in the assumed inflation rate.

3. Commodity Derivative Financial Instruments

Devon periodically enters into derivative financial instruments with respect to a portion of its oil and gas production that hedge the future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility. Devon’s derivative financial instruments include financial price swaps, whereby Devon will receive a fixed price for its production and pay a variable market price to the contract counterparty, and costless price collars that set a floor and ceiling price for

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty to the collars.

     As discussed more fully in Note 1 to the consolidated financial statements in Devon’s 2007 Annual Report on Form 10-K/A, Devon’s derivative financial instruments are recognized at the current fair value on the balance sheet. Unrealized changes in such fair values are recorded in the statement of operations. Cash settlements with counterparties to Devon’s price swaps and price collars are also recorded in the statement of operations.

     The following tables present the fair values included in the accompanying balance sheet and the cash settlements and net unrealized losses included in the accompanying statement of operations associated with Devon’s commodity derivative financial instruments.

		June 30, 2008				December 31, 2007
		(In millions)
Fair values:
Other current assets – gas price swaps		$	—			$	12
Derivative financial instruments, current liability:
Gas price swaps		$	606			$	—
Gas price collars			945				—
Oil price collars			46				—
Total derivative financial instruments, current liability		$	1,597			$	—
Derivative financial instruments, long-term liability:
Gas price swaps		$	—			$	—
Gas price collars			83				—
Oil price collars			—				—
Total derivative financial instruments, long-term liability		$	83			$	—

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2007				2008				2007
		(In millions)
Cash settlements:
Gas price swaps		$	(153	)		$	5			$	(161	)		$	15
Gas price collars			(150	)			—				(150	)			2
Total cash settlements (paid) received			(303	)			5				(311	)			17
Unrealized (losses) gains on fair value changes:
Gas price swaps			(247	)			9				(618	)			(19	)
Gas price collars			(620	)			—				(1,028	)			(4	)
Oil price collars			(45	)			—				(46	)			—
Total unrealized (losses) gains on fair value changes			(912	)			9				(1,692	)			(23	)
Net (loss) gain on oil and gas derivative financial instruments		$	(1,215	)		$	14			$	(2,003	)		$	(6	)

4. Debt

Credit Facilities

     In April 2008, Devon extended the maturity of $2.0 billion of its existing $2.5 billion five-year, syndicated, unsecured revolving line of credit (the “Senior Credit

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Facility”) from April 7, 2012 to April 7, 2013. Lenders representing $0.5 billion of the Senior Credit Facility did not approve a maturity date extension. Therefore, the maturity date for $0.5 billion of the Senior Credit Facility remains at April 7, 2012.

     During the second quarter of 2008, Devon repaid $2.5 billion of outstanding commercial paper and Senior Credit Facility borrowings primarily with proceeds received from the sales of assets in West Africa and cash generated from operations.

     On August 7, 2007, Devon established a $1.5 billion 364-day, syndicated, unsecured revolving senior credit facility (the “Short-Term Facility”). This facility matured on August 5, 2008 and was not extended. As a result of the Short-Term Facility’s maturity, Devon’s commercial paper program capacity decreased from $3.5 billion to $2.0 billion.

     The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon to maintain a ratio of total funded debt to total capitalization, as defined in the credit agreement, of no more than 65%. As of June 30, 2008, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at June 30, 2008, as calculated pursuant to the terms of the agreement, was 16.3%.

     As of August 5, 2008, Devon’s available capacity under its Senior Credit Facility was approximately $2.4 billion. This available capacity is net of $140 million of outstanding letters of credit. There were no outstanding commercial paper or Senior Credit Facility borrowings as of August 5, 2008.

Exchangeable Debentures

     During the first six months of 2008, certain holders of exchangeable debentures exercised their option to exchange their debentures for shares of Chevron Corporation (“Chevron”) common stock that Devon owns prior to the debentures’ August 15, 2008 maturity date. In lieu of delivering Chevron common stock to an exchanging debenture holder, Devon may, at its option, pay to such holder an amount of cash equal to the market value of Chevron common stock. During the first half of 2008, Devon elected to pay the exchanging debenture holders cash totaling $47 million in lieu of delivering shares of Chevron common stock. As a result of these exchanges, Devon retired outstanding exchangeable debentures with a book value totaling $28 million and reduced the related embedded derivative option’s balance by $19 million.

     As of June 30, 2008, Devon has classified the exchangeable debentures as short-term borrowings in the accompanying consolidated balance sheet. Although the exchangeable debentures have been due within one year since August 15, 2007, Devon previously classified the debt as long-term borrowings. The long-term classification was based on the uncertain timing of the closings of sales of assets in West Africa, particularly the sale of assets in Equatorial Guinea. Based on the sale proceeds received during the second quarter of 2008, Devon now intends to repay the exchangeable debentures with cash on hand or short-term commercial paper borrowings.

5. 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 fair value measurement information for such assets and liabilities as of June 30, 2008 and December 31, 2007. Following the tables, additional information is provided for those assets and liabilities in which Devon uses significant unobservable inputs (Level 3) to measure fair value.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

		As of June 30, 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):
Short-term and long-term investments		$	127			$	127			$	1			$	—			$	126
Investment in Chevron common stock		$	1,406			$	1,406			$	1,406			$	—			$	—
Net oil and gas price swaps and collars		$	(1,680	)		$	(1,680	)		$	—			$	(1,680	)		$	—
Embedded option in exchangeable debentures		$	(528	)		$	(528	)		$	—			$	(528	)		$	—
Asset retirement obligation		$	(1,493	)		$	(1,493	)		$	—			$	—			$	(1,493	)

		As of December 31, 2007
										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):
Short-term investments		$	372			$	372			$	372			$	—			$	—
Investment in Chevron common stock		$	1,324			$	1,324			$	1,324			$	—			$	—
Gas price swaps		$	12			$	12			$	—			$	12			$	—
Embedded option in exchangeable debentures		$	(488	)		$	(488	)		$	—			$	(488	)		$	—
Asset retirement obligation		$	(1,318	)		$	(1,318	)		$	—			$	—			$	(1,318	)

Level 3 Fair Value Measurements

     Short-term and long-term investments — Devon’s short-term and long-term investments presented in the tables above as of June 30, 2008 and December 31, 2007 consisted entirely of auction rate securities, which are discussed in greater detail in Note 1. As of December 31, 2007, Devon estimated the fair values of its short-term investments using quoted market prices. However, due to the auction failures discussed in Note 1 and the lack of an active market for Devon’s long-term auction rate securities, quoted market prices for the vast majority of these securities were not available as of June 30, 2008. Therefore, Devon used valuation techniques that rely on unobservable, or Level 3, inputs to estimate the fair values of its long-term auction rate securities as of June 30, 2008. These inputs were based on the AAA credit rating of the securities, the probability of full repayment of the securities considering the United States government guarantees of substantially all of the underlying student loans and the collection of all accrued interest to date. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of June 30, 2008. At this time, Devon does not believe the values of its long-term securities are impaired. Included below is a summary of the changes in Devon’s Level 3 short-term and long-term investments during the first half of 2008 (in millions).

Beginning balance		$	—
Transfers from Level 1 to Level 3			129
Redemptions of principal			(3	)
Ending balance		$	126

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     Asset retirement obligation — The fair values of the asset retirement obligations are estimated using internal discounted cash flow calculations based upon Devon’s estimates of future retirement costs. A summary of the changes in Devon’s asset retirement obligation, including revisions of the estimated fair value in 2008 and 2007, is presented in Note 2.

6. 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 six-month periods ended June 30, 2008 and 2007.

		Pension Benefits																Other Postretirement Benefits
		Three Months								Six Months								Three Months								Six Months
		Ended June 30,								Ended June 30,								Ended June 30,								Ended June 30,
		2008				2007				2008				2007				2008				2007				2008				2007
		(In millions)
Net periodic benefit cost:
Service cost		$	10			$	7			$	20			$	15			$	—			$	—			$	—			$	—
Interest cost			14				11				28				22				2				1				4				2
Expected return on plan assets			(13	)			(13	)			(26	)			(25	)			—				—				—				—
Net actuarial loss			4				4				8				8				—				—				—				—
Net periodic benefit cost			15				9				30				20				2				1				4				2
Other comprehensive income:
Recognition of net actuarial loss in net periodic benefit cost			(4	)			(4	)			(8	)			(8	)			—				—				—				—
Total recognized		$	11			$	5			$	22			$	12			$	2			$	1			$	4			$	2

     Devon previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to contribute $8 million to the Qualified and Supplemental Plans in 2008 and $6 million to the Postretirement Plans in 2008. Devon presently anticipates contributing an additional $10 million to the Qualified and Supplemental Plans in 2008 for a total of $18 million. As of June 30, 2008, Devon has contributed $13 million to the Qualified and Supplemental Plans and $2 million to the Postretirement Plans.

7. Stockholders’ Equity

Preferred Stock Redemption

     On June 20, 2008, Devon redeemed all 1.5 million outstanding shares of its 6.49% Series A cumulative preferred stock. Each share of preferred stock was redeemed for cash at a redemption price of $100 per share, plus accrued and unpaid dividends up to the redemption date.

Stock Repurchases

     During the first six months of 2008, Devon repurchased 2.8 million shares for $302 million, or $106.01 per share, under programs approved by its Board of Directors. The 2.8 million shares include 2.0 million shares that were repurchased under Devon’s 50 million share program and 0.8 million shares that were repurchased under Devon’s ongoing, annual stock repurchase program.

Dividends

     Devon paid common stock dividends of $141 million (or a quarterly rate of $0.16 per share) and $124 million (or a quarterly rate of $0.14 per share) in the first six months of 2008 and 2007, respectively. During the first half of 2008 and 2007, Devon also paid $5 million in dividends to preferred stockholders.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

8. 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 which 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 although actual amounts could differ materially from management’s estimate.

Royalty Matters

     Numerous 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, with the first scheduled to begin in August 2008 and the second scheduled to begin in February 2009. Devon is 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 and, 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 natural gas exceeded the thresholds for a given year, royalty relief would not be granted for that year. Deep water leases issued in 1998 and 1999 did not include price thresholds. In 2006, the MMS informed Devon and other oil and gas companies that the omission of price thresholds from these leases was an error on its part and was not its intention. Accordingly, the MMS invited Devon and the other affected oil and gas producers to renegotiate the terms and conditions of the 1998 and 1999 leases to add price threshold provisions to the lease agreements for periods after October 1, 2006. Devon has not renegotiated any of its existing leases.

     The U.S. House of Representatives in January 2007 passed legislation that would have required companies to renegotiate the 1998 and 1999 leases as a condition of securing future federal leases. This legislation was not passed by the U.S. Senate. However, Congress may consider similar legislation in the future. Although Devon has not signed renegotiated leases, it has accrued through June 30, 2008, approximately $40 million for royalties that would be due if price thresholds were added to its 1998 and 1999 leases effective October 1, 2006.

     Additionally, Devon has $35 million accrued at June 30, 2008 for royalties related to leases issued under the Deep Water Royalty Relief Act in years other than 1998 or 1999. The leases issued in these other years did include price thresholds, but in October 2007 a federal district court ruled in favor of a plaintiff who had challenged the legality of including price thresholds in these leases. This judgment is subject to appeal, and Devon will continue to accrue for royalties on these leases until the matter is resolved.

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.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     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 June 30, 2008, Devon’s balance sheet included $2 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.

Hurricane Contingencies

     Historically, Devon maintained a comprehensive insurance program that included coverage for physical damage to its offshore facilities caused by hurricanes. Devon’s historical insurance program also included substantial business interruption coverage, which Devon is utilizing to recover costs associated with the suspended production related to hurricanes that struck the Gulf of Mexico in the third quarter of 2005. Under the terms of this insurance program, Devon was entitled to be reimbursed for the portion of production suspended longer than forty-five days, subject to upper limits to oil and natural gas prices. Also, the terms of the insurance include a standard, per-event deductible of $1 million for offshore losses as well as a $15 million aggregate annual deductible.

     Based on current estimates of physical damage and the anticipated length of time Devon will have had production suspended, Devon expects its policy recoveries will exceed repair costs and deductible amounts. This expectation is based upon several variables, including the $467 million received in 2006 as a full settlement of the amount due from Devon’s primary insurers and $13 million received in 2007 as a full settlement of the amount due from certain of Devon’s secondary insurers. As of June 30, 2008, $388 million of these proceeds had been utilized as reimbursement of past repair costs and deductible amounts. The remaining proceeds of $92 million are expected to be utilized as reimbursement of Devon’s anticipated future repair costs. Devon continues to negotiate with its other secondary insurers and expects to receive additional policy recoveries as a result of such negotiations.

     Should Devon’s total policy recoveries, including the partial settlements already received from Devon’s primary and secondary insurers, exceed all repair costs and deductible amounts, such excess will be recognized as other income in the statement of operations in the period in which such determination can be made.

     The policy underlying the insurance program terms described above expired on August 31, 2006. Devon’s current insurance program includes business interruption and physical damage coverage for its business. However, due to significant changes in the insurance marketplace, Devon no longer has coverage for damage that may be caused by named windstorms in the Gulf of Mexico.

Other Matters

     Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge as of the date of this report, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject.

9. Share-Based Compensation

     With the approval of Devon’s Compensation Committee, Devon modified the share-based compensation arrangements for certain members of senior management (“executives”) in the second quarter of 2008. The modified compensation arrangements provide that executives who meet certain years-of-service and age criteria can retire and continue vesting in outstanding share-based grants. As a condition to receiving the benefits of these modifications, the executives must agree not to use or disclose Devon’s confidential information and not to solicit Devon’s employees and customers. The executives are required to agree to these conditions at retirement and again in each subsequent year until all grants have vested.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     This modification results in accelerated expense recognition as executives approach the years-of-service and age criteria. Additionally, when the modification was made in the second quarter of 2008, certain executives had already met the years-of-service and age criteria. As a result, Devon recognized an additional $27 million of share-based compensation expense in the second quarter of 2008 related to this modification. This additional expense would have been recognized in future reporting periods if the modification had not been made and the executives continued their employment at Devon.

10. Change in Fair Value of Non-Oil and Gas Financial Instruments

     The components of the change in fair value of non-oil and gas financial instruments include the following:

		Three Months								Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
		(In millions)
Losses (gains) from:
Chevron common stock		$	(195	)		$	(146	)		$	(82	)		$	(152	)
Option embedded in exchangeable debentures			155				136				58				144
Other			—				—				—				(1	)
Total		$	(40	)		$	(10	)		$	(24	)		$	(9	)

11. Income Taxes

     In the second quarter of 2008, Devon repatriated $1.3 billion in earnings from certain foreign subsidiaries to the United States. Devon also expects to repatriate approximately $1.5 billion in earnings from certain foreign subsidiaries to the United States during the last six months of 2008. Subsequent to these repatriations, Devon does not expect to repatriate similar earnings from its historical operations in the foreseeable future. Also in the second quarter of 2008, Devon made certain tax policy election changes to minimize the taxes Devon otherwise would pay to all relevant tax jurisdictions for the cash repatriations, as well as the taxable gains associated with the sales of assets in West Africa. As a result of the repatriation and tax policy election changes, Devon recognized additional tax expense of $312 million during the second quarter of 2008. Of the $312 million, $295 million was recognized as current income tax expense, and $17 million was recognized as deferred tax expense. Included in the $312 million additional tax expense is $183 million for tax positions in which the resulting tax benefits are not recognized in the accompanying consolidated financial statements. If recognized, all of these unrecognized tax benefits would affect Devon’s effective income tax rate.

12. Discontinued Operations

Divestiture Activity

     In November 2006 and January 2007, Devon announced its plans to divest its operations in Egypt and West Africa, including Equatorial Guinea, Gabon, Cote D’Ivoire and other countries in the region. Pursuant to accounting rules for discontinued operations, Devon has classified all amounts related to its operations in Egypt and West Africa as discontinued 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).

     In the fourth quarter of 2007, Devon sold its assets and terminated its operations in Egypt and recognized a $90 million after-tax gain from proceeds of $341 million.

     Devon has entered into agreements to sell its operations in Cote D’Ivoire and other countries located in West Africa for approximately $250 million. Devon is obtaining the necessary partner and government approvals for these properties and expects to complete the remaining sales during the third quarter of 2008. Had these transactions closed on June 30, 2008, Devon would have recognized after-tax gains of approximately $100 million. The gains ultimately recorded when the transactions close will depend on

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

the carrying values of Devon’s assets and liabilities at the closing dates, as well as the effect of any purchase price adjustments between the effective dates and the actual closing dates of the sales.

Financial Statement Information

     Revenues related to Devon’s discontinued operations totaled $127 million and $215 million in the three months ended June 30, 2008 and June 30, 2007 and $332 million and $390 million in the six months ended June 30, 2008 and 2007, respectively. These amounts do not include the divestiture gains discussed in the previous section.

     The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations as of June 30, 2008 and December 31, 2007.

		June 30, 2008				December 31, 2007
		(In millions)
Assets:
Cash		$	8			$	9
Accounts receivable			5				83
Deferred tax asset			68				—
Other current assets			24				28
Current assets		$	105			$	120
Long-term assets — property and equipment, net of accumulated depreciation, depletion and amortization		$	84			$	1,512
Liabilities:
Accounts payable — trade		$	2			$	23
Revenues and royalties due to others			2				11
Income taxes payable			6				100
Current portion of asset retirement obligation			—				9
Accrued expenses and other current liabilities			6				2
Current liabilities		$	16			$	145
Asset retirement obligation, long-term		$	5			$	35
Deferred income taxes			19				366
Other long-term liabilities			—				3
Long-term liabilities		$	24			$	404

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

13. Earnings Per Share

     The following table reconciles earnings from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2008 and 2007.

		Net
		Earnings				Weighted
		Applicable to				Average				Net
		Common				Common Shares				Earnings
		Stockholders				Outstanding				per Share
		(In millions, except per share amounts)
Three Months Ended June 30, 2008:
Earnings from continuing operations		$	594
Less preferred stock dividends			(3	)
Basic earnings per share			591				446			$	1.33
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				4
Diluted earnings per share		$	591				450			$	1.31
Three Months Ended June 30, 2007:
Earnings from continuing operations		$	824
Less preferred stock dividends			(3	)
Basic earnings per share			821				446			$	1.84
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				4
Diluted earnings per share		$	821				450			$	1.82
Six Months Ended June 30, 2008:
Earnings from continuing operations		$	1,245
Less preferred stock dividends			(5	)
Basic earnings per share			1,240				445			$	2.79
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				5
Diluted earnings per share		$	1,240				450			$	2.76
Six Months Ended June 30, 2007:
Earnings from continuing operations		$	1,398
Less preferred stock dividends			(5	)
Basic earnings per share			1,393				445			$	3.13
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				5
Diluted earnings per share		$	1,393				450			$	3.09