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

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 April 25, 2011, 423.0 million shares of common stock were outstanding.

 

 

DEVON ENERGY CORPORATION

FORM 10-Q
For the Quarterly Period Ended March 31, 2011

INDEX

Definitions			3
Information Regarding Forward-Looking Statements			4
Part I. Financial Information
Item 1. Consolidated Financial Statements			5
Consolidated Balance Sheets			5
Consolidated Statements of Operations			6
Consolidated Statements of Comprehensive Earnings			7
Consolidated Statements of Stockholders’ Equity			8
Consolidated Statements of Cash Flows			9
Notes to Consolidated Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			35
Part II. Other Information
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults Upon Senior Securities			35
Item 5. Other Information			35
Item 6. Exhibits			36
Signatures			37
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

Measurements of Oil, Natural Gas and Natural Gas Liquids

	•		“NGL” or “NGLs” means natural gas liquids.
	•		“Oil” includes crude oil and condensate.
	•		“Bbl” means barrel of oil. One barrel equals 42 U.S. gallons.

			– “MBbls” means thousand barrels.
			– “MMBbls” means million barrels.
			– “MBbls/d” means thousand barrels per day.

•

“Mcf” means thousand cubic feet of natural gas.

			– “MMcf” means million cubic feet.
			– “Bcf” means billion cubic feet.
			– “Bcfe” means billion cubic feet equivalent.
			– “MMcf/d” means million cubic feet per day.

•

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

			– “MBoe” means thousand Boe.
			– “MMBoe” means million Boe.
			– “MBoe/d” means thousand Boe per day.

	•		“Btu” means British thermal units, a measure of heating value.
			– “MMBtu” means million Btu.
			– “MMBtu/d” means million Btu per day.

Geographic Areas

	•		“Canada” means the operations of Devon encompassing oil and gas properties located in Canada.
	•		“International” means the discontinued operations of Devon that encompass oil and gas properties that lie outside the United States and Canada.
	•		“North America Onshore” means the operations of Devon encompassing oil and gas properties in the continental United States and Canada.
	•		“U.S. Offshore” means the divested operations of Devon that encompassed oil and gas properties in the Gulf of Mexico.
	•		“U.S. Onshore” means the properties of Devon encompassing oil and gas properties in the continental United States.

Other

	•		“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.
	•		“LIBOR” means London Interbank Offered Rate.
	•		“NYMEX” means New York Mercantile Exchange.
	•		“SEC” means United States Securities and Exchange Commission.

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, 2010 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, including the supply and demand for oil, gas, NGLs and other products or services, as well as the prices of oil, gas, NGLs and other products or services, including regional pricing differentials;
	•		production levels, including Canadian production subject to government royalties, which fluctuate with prices and 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;
	•		public policy and government regulatory changes, including changes in royalty, production tax and income tax regimes, changes in hydraulic fracturing regulation and changes in environmental laws, regulation and liability;
	•		terrorism;
	•		occurrence of property acquisitions or divestitures; and
	•		other factors disclosed in Devon’s 2010 Annual Report on Form 10-K under “Item 1A. Risk Factors,” “Item 2. Properties,” “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

		March 31,				December 31,
		2011				2010
		(Unaudited)
		(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	1,311			$	2,866
Short-term investments			1,636				145
Accounts receivable			1,269				1,202
Current assets held for sale			533				563
Other current assets			850				779
Total current assets			5,599				5,555
Property and equipment, at cost:
Oil and gas, based on full cost accounting:
Subject to amortization			58,028				56,012
Not subject to amortization			3,508				3,434
Total oil and gas			61,536				59,446
Other			4,609				4,429
Total property and equipment, at cost			66,145				63,875
Less accumulated depreciation, depletion and amortization			(45,064	)			(44,223	)
Property and equipment, net			21,081				19,652
Goodwill			6,151				6,080
Long-term assets held for sale			913				859
Other long-term assets			806				781
Total assets		$	34,550			$	32,927
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade		$	1,353			$	1,411
Revenues and royalties due to others			639				538
Short-term debt			3,003				1,811
Current liabilities associated with assets held for sale			264				305
Other current liabilities			495				518
Total current liabilities			5,754				4,583
Long-term debt			3,800				3,819
Asset retirement obligations			1,468				1,423
Liabilities associated with assets held for sale			34				26
Other long-term liabilities			1,066				1,067
Deferred income taxes			3,199				2,756
Stockholders’ equity:
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 425.2 million and 431.9 million shares in 2011 and 2010, respectively			43				43
Additional paid-in capital			5,028				5,601
Retained earnings			12,230				11,882
Accumulated other comprehensive earnings			1,951				1,760
Treasury stock, at cost. 0.3 million and 0.4 million shares in 2011 and 2010, respectively			(23	)			(33	)
Total stockholders’ equity			19,229				19,253
Commitments and contingencies (Note 10)
Total liabilities and stockholders’ equity		$	34,550			$	32,927

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months
		Ended March 31,
		2011				2010
		(Unaudited)
		(In millions, except
		per share amounts)
Revenues:
Oil, gas and NGL sales		$	1,860			$	2,070
Oil, gas and NGL derivatives			(168	)			620
Marketing and midstream revenues			455				530
Total revenues			2,147				3,220
Expenses and other, net:
Lease operating expenses			424				414
Taxes other than income taxes			108				101
Marketing and midstream operating costs and expenses			333				397
Depreciation, depletion and amortization of oil and gas properties			442				426
Depreciation and amortization of non-oil and gas properties			64				63
Accretion of asset retirement obligations			23				26
General and administrative expenses			130				138
Restructuring costs			(5	)			—
Interest expense			81				86
Interest-rate and other financial instruments			(17	)			(15	)
Other, net			(16	)			(4	)
Total expenses and other, net			1,567				1,632
Earnings from continuing operations before income taxes			580				1,588
Income tax (benefit) expense:
Current			(89	)			299
Deferred			280				215
Total income tax expense			191				514
Earnings from continuing operations			389				1,074
Discontinued operations:
Earnings from discontinued operations before income taxes			30				137
Discontinued operations income tax expense			3				19
Earnings from discontinued operations			27				118
Net earnings		$	416			$	1,192
Basic net earnings per share:
Basic earnings from continuing operations per share		$	0.91			$	2.40
Basic earnings from discontinued operations per share			0.06				0.27
Basic net earnings per share		$	0.97			$	2.67
Diluted net earnings per share:
Diluted earnings from continuing operations per share		$	0.91			$	2.39
Diluted earnings from discontinued operations per share			0.06				0.27
Diluted net earnings per share		$	0.97			$	2.66

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

		Three Months
		Ended March 31,
		2011				2010
		(Unaudited)
		(In millions)
Net earnings		$	416			$	1,192
Foreign currency translation:
Change in cumulative translation adjustment			195				222
Foreign currency translation income tax expense			(10	)			(12	)
Foreign currency translation total			185				210
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in earnings			9				8
Pension and postretirement benefit plans income tax expense			(3	)			(3	)
Pension and postretirement benefit plans total			6				5
Other comprehensive earnings, net of tax			191				215
Comprehensive earnings		$	607			$	1,407

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Retained				Comprehensive				Treasury				Stockholders’
		Shares				Amount				Capital				Earnings				Earnings				Stock				Equity
														(Unaudited)
														(In millions)
Three Months Ended March 31, 2011:
Balance as of December 31, 2010			432			$	43			$	5,601			$	11,882			$	1,760			$	(33	)		$	19,253
Net earnings			—				—				—				416				—				—				416
Other comprehensive earnings, net of tax			—				—				—				—				191				—				191
Stock option exercises			1				—				88				—				—				—				88
Common stock repurchased			—				—				—				—				—				(696	)			(696	)
Common stock retired			(8	)			—				(706	)			—				—				706				—
Common stock dividends			—				—				—				(68	)			—				—				(68	)
Share-based compensation			—				—				36				—				—				—				36
Share-based compensation tax benefits			—				—				9				—				—				—				9
Balance as of March 31, 2011			425			$	43			$	5,028			$	12,230			$	1,951			$	(23	)		$	19,229
Three Months Ended March 31, 2010:
Balance as of December 31, 2009			447			$	45			$	6,527			$	7,613			$	1,385			$	—			$	15,570
Net earnings			—				—				—				1,192				—				—				1,192
Other comprehensive earnings, net of tax			—				—				—				—				215				—				215
Stock option exercises			—				—				8				—				—				—				8
Common stock repurchased			—				—				—				—				—				(2	)			(2	)
Common stock retired			—				—				(2	)			—				—				2				—
Common stock dividends			—				—				—				(72	)			—				—				(72	)
Share-based compensation			—				—				41				—				—				—				41
Share-based compensation tax benefits			—				—				3				—				—				—				3
Balance as of March 31, 2010			447			$	45			$	6,577			$	8,733			$	1,600			$	—			$	16,955

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months
		Ended March 31,
		2011				2010
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Net earnings		$	416			$	1,192
Earnings from discontinued operations, net of tax			(27	)			(118	)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			506				489
Deferred income tax expense			280				215
Unrealized change in fair value of financial instruments			253				(523	)
Other noncash charges			36				56
Net (increase) decrease in working capital			(171	)			50
Increase in long-term other assets			(4	)			(2	)
Decrease in long-term other liabilities			(23	)			(18	)
Cash from operating activities — continuing operations			1,266				1,341
Cash from operating activities — discontinued operations			(6	)			154
Net cash from operating activities			1,260				1,495
Cash flows from investing activities:
Capital expenditures			(1,827	)			(1,247	)
Purchases of short-term investments			(1,636	)			—
Redemptions of short-term investments			145				—
Redemptions of long-term investments			—				8
Proceeds from property and equipment divestitures			5				1,257
Other			(9	)			—
Cash from investing activities — continuing operations			(3,322	)			18
Cash from investing activities — discontinued operations			(52	)			(107	)
Net cash from investing activities			(3,374	)			(89	)
Cash flows from financing activities:
Net commercial paper borrowings (repayments)			1,197				(1,192	)
Proceeds from stock option exercises			88				8
Repurchases of common stock			(706	)			—
Dividends paid on common stock			(68	)			(72	)
Excess tax benefits related to share-based compensation			9				3
Net cash from financing activities			520				(1,253	)
Effect of exchange rate changes on cash			20				18
Net (decrease) increase in cash and cash equivalents			(1,574	)			171
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			3,290				1,011
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	1,716			$	1,182

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

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 2010 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 March 31, 2011 and Devon’s results of operations and cash flows for the three-month periods ended March 31, 2011 and 2010.

2. Accounts Receivable

     The components of accounts receivable include the following:

		March 31, 2011				December 31, 2010
		(In millions)
Oil, gas and NGL sales		$	811			$	786
Marketing and midstream revenues			204				165
Joint interest billings			181				182
Other			83				79
Gross accounts receivable			1,279				1,212
Allowance for doubtful accounts			(10	)			(10	)
Net accounts receivable		$	1,269			$	1,202

3. Derivative Financial Instruments

Objectives and Strategies

     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, gas and NGL price volatility and to manage exposure to interest rate volatility. Devon does not hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

     Devon’s derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional gas index prices and pays a variable differential on the same two index prices to the contract counterparty. The price collars set a floor and ceiling price for 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. Under the terms of the call options, Devon sold to counterparties the right to purchase production at a predetermined price.

     Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon’s interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount. Devon also has forward starting swaps. Under the terms of the forward starting swaps, Devon will net settle these contracts in September 2011 or sooner should Devon elect. The net settlement amount will be based upon Devon paying a fixed rate and receiving a floating rate that is based upon the three-month LIBOR. The difference between the fixed and floating rate will be applied to the notional amount for the 30-year period from September 30, 2011 to September 30, 2041.

Counterparty Risk

     By using derivative financial instruments to manage exposures to changes in commodity prices and interest rates, Devon

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are minimal credit risks. It is Devon’s policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally require cash collateral to be posted if either its or the counterparty’s credit rating falls below investment grade. The mark-to-market exposure threshold, above which collateral must be posted, decreases as the debt rating falls further below investment grade. Such thresholds generally range from zero to $50 million for the majority of Devon’s contracts. As of March 31, 2011, the credit ratings of all Devon’s counterparties were investment grade.

Commodity Derivatives

     As of March 31, 2011, Devon had the following open oil derivative positions:

Production
Period		Price Swaps								Price Collars												Call Options Sold
						Weighted								Weighted				Weighted								Weighted
		Volume				Average Price				Volume				Average Floor Price				Average Ceiling Price				Volume				Average Price
Period		(Bbls/d)				($/Bbl)				(Bbls/d)				($/Bbl)				($/Bbl)				(Bbls/d)				($/Bbl)
Q2-Q4 2011			—				—				45,000			$	75.00			$	108.89				19,500			$	95.00
Q1-Q4 2012			9,000			$	104.20				35,000			$	82.14			$	126.42				19,500			$	95.00

     As of March 31, 2011, Devon had the following open natural gas derivative positions:

Production
Period		Price Swaps								Price Collars												Call Options Sold
						Weighted								Weighted				Weighted								Weighted
		Volume				Average Price				Volume				Average Floor Price				Average Ceiling Price				Volume				Average Price
Period		(MMBtu/d)				($/MMBtu)				(MMBtu/d)				($/MMBtu)				($/MMBtu)				(MMBtu/d)				($/MMBtu)
Q2 2011			912,500			$	5.24				350,000			$	4.18			$	4.68				—				—
Q3 2011			712,500			$	5.51				—				—				—				—				—
Q4 2011			712,500			$	5.51				—				—				—				—				—
Q1-Q4 2012			130,000			$	5.06				—				—				—				487,500			$	6.00

Basis Swaps

Weighted Average

Differential to

Volume

Henry Hub

Production Period

Index

(MMBtu/d)

($/MMBtu)

Q2-Q4 2011

Panhandle Eastern Pipeline

150,000

$

0.33

     As of March 31, 2011, Devon had the following open NGL derivative positions:

Basis Swaps

Weighted Average

Volume

Differential to WTI

Production Period

Pay

(Bbls/d)

($/Bbl)

Q2-Q4 2011

Natural Gasoline

500

$

9.75

Q1-Q4 2012

Natural Gasoline

500

$

10.10

Q1-Q4 2013

Natural Gasoline

500

$

6.80

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Interest Rate Derivatives

     As of March 31, 2011, Devon had the following open interest rate swap derivative positions:

Fixed-to-Floating Swaps
		Fixed Rate				Variable
Notional		Received				Rate Paid				Expiration
(In millions)
$300			4.30	%		Six month LIBOR				July 18, 2011
100			1.90	%		Federal funds rate				August 3, 2012
500			3.90	%		Federal funds rate				July 18, 2013
250			3.85	%		Federal funds rate				July 22, 2013
$1,150			3.82	%

Forward Starting Swaps

Fixed Rate

Variable

Notional

Paid

Rate Received

Expiration

(In millions)

$950

3.92

%

Three month LIBOR

September 30, 2011

Financial Statement Presentation

     The following table presents the derivative fair values included in the accompanying consolidated balance sheets.

		Balance Sheet Caption				March 31, 2011				December 31, 2010
						(In millions)
Asset derivatives:
Commodity derivatives		Other current assets				$	183			$	248
Commodity derivatives		Other long-term assets					2				1
Interest rate derivatives		Other current assets					112				100
Interest rate derivatives		Other long-term assets					29				40
Total asset derivatives						$	326			$	389
Liability derivatives:
Commodity derivatives		Other current liabilities				$	225			$	50
Commodity derivatives		Other long-term liabilities					157				142
Total liability derivatives						$	382			$	192

     The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying consolidated statements of operations associated with these derivative financial instruments.

						Three Months
						Ended March 31,
		Statement of Operations Caption				2011				2010
						(In millions)
Cash settlements:
Commodity derivatives		Oil, gas and NGL derivatives				$	86			$	96
Interest rate derivatives		Interest-rate and other financial instruments					16				16
Total cash settlements							102				112
Unrealized (losses) gains:
Commodity derivatives		Oil, gas and NGL derivatives					(254	)			524
Interest rate derivatives		Interest-rate and other financial instruments					1				(1	)
Total unrealized (losses) gains							(253	)			523
Net (loss) gain recognized on statement of operations						$	(151	)		$	635

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:

		March 31, 2011				December 31, 2010
		(In millions)
Income taxes receivable		$	374			$	270
Derivative financial instruments			295				348
Inventories			116				120
Other			65				41
Other current assets		$	850			$	779

5. Goodwill

     During the first three months of 2011, Devon’s Canadian goodwill increased $71 million entirely due to foreign currency translation.

6. Debt

Credit Lines

     Devon has a $2,650 million syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). As of March 31, 2011, Devon had no borrowings under the Senior Credit Facility.

     The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization to be less than 65 percent. 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 March 31, 2011, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at March 31, 2011, as calculated pursuant to the terms of the agreement, was 17.7 percent.

Commercial Paper

     In March 2011, Devon’s Board of Directors authorized an increase in its commercial paper program from $2.2 billion to $5.0 billion. Commercial paper debt generally has a maturity of between one and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market.

     Although Devon began and ended the first quarter of 2011 with approximately $3.4 billion of cash and short-term investments, the vast majority of this amount consists of proceeds from its 2010 International divestitures. Based on Devon’s evaluation of future cash needs across its operations in the United States and Canada, these proceeds remain outside of the United States.

     Consequently, during the first quarter of 2011, Devon borrowed $1,197 million of commercial paper in the United States primarily to fund capital expenditures, common stock repurchases and dividends in excess of cash flow generated by its United States operating activities. As of March 31, 2011, Devon’s average borrowing rate on its $1,197 million of commercial paper borrowings was 0.30 percent.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

7. Asset Retirement Obligations

     The schedule below summarizes changes in Devon’s asset retirement obligations.

		Three Months
		Ended March 31,
		2011				2010
		(In millions)
Asset retirement obligations as of beginning of period		$	1,497			$	1,513
Liabilities incurred			11				16
Liabilities settled			(18	)			(47	)
Revision of estimated obligation			3				205
Liabilities assumed by others			—				(8	)
Accretion expense on discounted obligation			23				26
Foreign currency translation adjustment			21				22
Asset retirement obligations as of end of period			1,537				1,727
Less current portion			69				90
Asset retirement obligations, long-term		$	1,468			$	1,637

     During the first quarter of 2010, Devon recognized a revision to its asset retirement obligations totaling $205 million. The increase was primarily due to an overall increase in abandonment cost estimates and a decrease in the discount rate used to calculate the present value of the obligations.

8. Retirement Plans

     The following table presents the components of net periodic benefit cost for Devon’s pension and other postretirement benefit plans.

		Pension Benefits								Other Postretirement Benefits
		Three Months								Three Months
		Ended March 31,								Ended March 31,
		2011				2010				2011				2010
						(In millions)
Net periodic benefit cost:
Service cost		$	9			$	8			$	—			$	—
Interest cost			15				14				1				1
Expected return on plan assets			(10	)			(9	)			—				—
Amortization of prior service cost			1				1				—				—
Net actuarial loss			8				7				—				—
Net periodic benefit cost		$	23			$	21			$	1			$	1

     Devon previously disclosed in its financial statements for the year ended December 31, 2010, that it expected to contribute $84 million to its qualified pension plans in 2011. Devon now expects to contribute $346 million to its qualified pension plans in 2011, including $32 million that was contributed in the first quarter. The increase in Devon’s 2011 estimated contribution is due to increased discretionary funding.

9. Stockholders’ Equity

Stock Repurchases

     During the first quarter of 2011, Devon repurchased 8.1 million common shares under its $3.5 billion stock repurchase program announced in 2010 for $696 million, or $85.95 per share. Through the end of the first quarter of 2011, Devon had repurchased 26.4 million common shares for $1.9 billion, or $71.83 per share, under this program, which expires December 31, 2011.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Dividends

     Devon paid common stock dividends of $68 million and $72 million (quarterly rates of $0.16 per share) in the first quarter of 2011 and 2010, respectively. In March 2011, Devon announced an increase of its quarterly cash dividend to $0.17 per share that will begin in the second quarter of 2011.

10. 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.

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 and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured costs associated with remediation. Devon’s monetary exposure for environmental matters 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. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

Other Matters

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

11. Fair Value Measurements

     Certain of Devon’s assets and liabilities are reported at fair value in the accompanying consolidated balance sheets. Such assets and liabilities include amounts for both financial and non-financial instruments. The following tables provide carrying value and fair value measurement information for Devon’s financial assets and liabilities.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     The carrying values of cash and cash equivalents, accounts receivable, other current receivables, accounts payable and other current payables and accrued expenses included in the accompanying consolidated balance sheets approximated fair value at March 31, 2011 and December 31, 2010. These assets and liabilities are not presented in the following table.

										Fair Value Measurements Using:
										Level 1				Level 2				Level 3
		Carrying Amount				Total Fair Value				Inputs				Inputs				Inputs
						(In millions)
March 31, 2011 assets (liabilities):
Short-term investments		$	1,636			$	1,636			$	1,636			$	—			$	—
Long-term investments		$	94			$	94			$	—			$	—			$	94
Commodity derivatives		$	185			$	185			$	—			$	185			$	—
Commodity derivatives		$	(382	)		$	(382	)		$	—			$	(382	)		$	—
Interest rate derivatives		$	141			$	141			$	—			$	141			$	—
Debt		$	(6,803	)		$	(7,726	)		$	(1,197	)		$	(6,410	)		$	(119	)
December 31, 2010 assets (liabilities):
Short-term investments		$	145			$	145			$	145			$	—			$	—
Long-term investments		$	94			$	94			$	—			$	—			$	94
Commodity derivatives		$	249			$	249			$	—			$	249			$	—
Commodity derivatives		$	(192	)		$	(192	)		$	—			$	(192	)		$	—
Interest rate derivatives		$	140			$	140			$	—			$	140			$	—
Debt		$	(5,630	)		$	(6,629	)		$	—			$	(6,485	)		$	(144	)

     Devon’s Level 3 fair value measurements included in the table above relate to certain long-term investments and a non-interest bearing promissory note. Included below is a summary of the changes in Devon’s Level 3 fair value measurements during the first three months of 2011 and 2010.

		Three Months
		Ended March 31,
		2011				2010
		(In millions)
Long-term investments balance at beginning of period		$	94			$	115
Redemptions of principal			—				(8	)
Long-term investments balance at end of period		$	94			$	107

		Three Months
		Ended March 31,
		2011				2010
		(In millions)
Debt balance at beginning of period		$	(144	)		$	—
Foreign exchange translation adjustment			(3	)			—
Accretion of promissory note			(1	)			—
Redemptions of principal			29				—
Debt balance at end of period		$	(119	)		$	—

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

12. Restructuring Costs

     In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of March 31, 2011, Devon had divested all of its U.S. Offshore assets and a significant part of its International assets. Devon has entered into agreements to sell its remaining offshore assets in Brazil and Angola and is waiting for the respective governments to approve the divestitures.

     Through the end of the first quarter of 2011, Devon had incurred $207 million of restructuring costs associated with these divestitures. This amount is comprised of $127 million of employee severance costs, $77 million associated with abandoned office leases and $3 million of other miscellaneous costs.

Financial Statement Presentation

     The schedule below summarizes activity and balances associated with Devon’s restructuring liabilities. There was no activity during the first quarter of 2010.

		Continuing Operations												Discontinued Operations
						Other												Other
		Other Current				Long-Term								Other Current				Long-Term
		Liabilities				Liabilities				Total				Liabilities				Liabilities				Total
														(In millions)
Balance as of December 31, 2010		$	31			$	51			$	82			$	16			$	—			$	16
Cash severance settled			(8	)			—				(8	)			(1	)			—				(1	)
Lease obligations settled			(3	)			(4	)			(7	)			—				—				—
Cash severance revision			—				—				—				6				—				6
Lease obligations revision			(3	)			(1	)			(4	)			—				—				—
Balance as of March 31, 2011		$	17			$	46			$	63			$	21			$	—			$	21
Balance as of March 31, 2010		$	61			$	—			$	61			$	23			$	—			$	23

     The schedule below summarizes the components of restructuring costs in the accompanying 2011 consolidated statement of operations. No restructuring costs were recorded in the three months ended March 31, 2010.

		Three Months Ended March 31, 2011
		Continuing				Discontinued
		Operations				Operations				Total
						(In millions)
Cash severance		$	—			$	6			$	6
Share-based awards			(1	)			—				(1	)
Lease obligations			(4	)			—				(4	)
Restructuring costs		$	(5	)		$	6			$	1

13. Discontinued Operations

     Revenues related to Devon’s discontinued operations totaled $43 million and $212 million in the three months ended March 31, 2011 and March 31, 2010, respectively. Earnings from discontinued operations before income taxes totaled $30 million and $137 million in the three months ended March 31, 2011 and March 31, 2010, respectively.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations.

		March 31,				December 31,
		2011				2010
		(In millions)
Cash and cash equivalents		$	405			$	424
Accounts receivable			18				43
Other current assets			110				96
Current assets		$	533			$	563
Property and equipment, net		$	875			$	848
Other long-term assets			38				11
Total long-term assets		$	913			$	859
Accounts payable		$	229			$	260
Other current liabilities			35				45
Current liabilities		$	264			$	305
Long-term liabilities		$	34			$	26

14. 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.

										Earnings
		Earnings				Common Shares				per Share
		(In millions, except per share amounts)
Three Months Ended March 31, 2011:
Earnings from continuing operations		$	389				428
Attributable to participating securities			(4	)			(5	)
Basic earnings per share			385				423			$	0.91
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				2
Diluted earnings per share		$	385				425			$	0.91
Three Months Ended March 31, 2010:
Earnings from continuing operations		$	1,074				447
Attributable to participating securities			(13	)			(6	)
Basic earnings per share			1,061				441			$	2.40
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				2
Diluted earnings per share		$	1,061				443			$	2.39

     Certain options to purchase shares of Devon’s common stock are excluded from the dilution calculations because the options are antidilutive. These excluded options totaled 3.1 million and 6.4 million during the three-month periods ended March 31, 2011 and 2010, respectively.