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 March 31, 2007

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		73102-8260
(Address of Principal Executive Offices)		(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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer 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

     The number of shares outstanding of Registrant’s common stock, par value $0.10, as of March 31, 2007, was 444,814,000.

 

 

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DEVON ENERGY CORPORATION
Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission

		Page
		No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets, March 31, 2007 (Unaudited) and December 31, 2006			5
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2007 and 2006			6
Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2007 and 2006			7
Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2007 and 2006			8
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2007 and 2006			9
Notes to Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 4. Controls and Procedures			31
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 6. Exhibits			32
SIGNATURES			33
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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.

     “MMBbls” means million barrels.

     “MMBoe” means million Boe.

     “Mcf” means thousand cubic feet.

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

     “Oil” includes crude oil and condensate.

     “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.

     “United States Onshore” means the properties of Devon in the continental United States.

     “United States Offshore” means the properties of Devon in the 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. Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2007				2006
		(Unaudited)
		(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	615				692
Short-term investments, at fair value			275				574
Accounts receivable			1,361				1,324
Deferred income taxes			66				102
Current assets held for sale			252				232
Other current assets			167				288
Total current assets			2,736				3,212
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($3,276 and $3,293 excluded from amortization in 2007 and 2006, respectively)			41,536				39,585
Less accumulated depreciation, depletion and amortization			17,128				16,429
			24,408				23,156
Investment in Chevron Corporation common stock, at fair value			1,049				1,043
Goodwill			5,741				5,706
Assets held for sale			1,680				1,619
Other assets			364				327
Total assets		$	35,978				35,063
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable – trade		$	1,236				1,154
Revenues and royalties due to others			476				522
Income taxes payable			192				82
Short-term debt			1,857				2,205
Accrued interest payable			81				114
Current portion of asset retirement obligation, at fair value			55				53
Current liabilities associated with assets held for sale			222				173
Accrued expenses and other current liabilities			321				342
Total current liabilities			4,440				4,645
Debentures exchangeable into shares of Chevron Corporation common stock			732				727
Other long-term debt			4,839				4,841
Financial instruments, at fair value			309				302
Asset retirement obligation, at fair value			1,152				804
Liabilities associated with assets held for sale			450				429
Other liabilities			630				583
Deferred income taxes			5,270				5,290
Stockholders’ equity:
Preferred stock of $1.00 par value. Authorized 4,500,000 shares; issued 1,500,000 ($150 million aggregate liquidation value)			1				1
Common stock of $0.10 par value. Authorized 800,000,000 shares; issued 444,814,000 in 2007 and 444,040,000 in 2006			44				44
Additional paid-in capital			6,897				6,840
Retained earnings			10,055				9,114
Accumulated other comprehensive income			1,159				1,444
Treasury stock, at cost: 11,000 shares in 2006			—				(1	)
Total stockholders’ equity			18,156				17,442
Commitments and contingencies (Note 6)
Total liabilities and stockholders’ equity		$	35,978				35,063

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended
		March 31,
		2007				2006
		(Unaudited)
		(In millions, except per share
		amounts)
Revenues:
Oil sales		$	691				508
Gas sales			1,226				1,358
NGL sales			177				176
Marketing and midstream revenues			379				458
Total revenues			2,473				2,500
Expenses and other income, net:
Lease operating expenses			430				331
Production taxes			80				83
Marketing and midstream operating costs and expenses			270				338
Depreciation, depletion and amortization of oil and gas properties			587				443
Depreciation and amortization of non-oil and gas properties			46				41
Accretion of asset retirement obligation			18				10
General and administrative expenses			119				90
Interest expense			110				101
Change in fair value of financial instruments			1				12
Other income, net			(26	)			(29	)
Total expenses and other income, net			1,635				1,420
Earnings from continuing operations before income tax expense			838				1,080
Income tax expense:
Current			189				224
Deferred			75				140
Total income tax expense			264				364
Earnings from continuing operations			574				716
Discontinued operations:
Earnings from discontinued operations before income tax expense			137				47
Income tax expense			60				63
Earnings (loss) from discontinued operations			77				(16	)
Net earnings			651				700
Preferred stock dividends			2				2
Net earnings applicable to common stockholders		$	649				698
Basic net earnings per share:
Earnings from continuing operations		$	1.29				1.61
Earnings (loss) from discontinued operations			0.17				(0.03	)
Net earnings		$	1.46				1.58
Diluted net earnings per share:
Earnings from continuing operations		$	1.27				1.59
Earnings (loss) from discontinued operations			0.17				(0.03	)
Net earnings		$	1.44				1.56
Weighted average common shares outstanding:
Basic			444				442
Diluted			450				449

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended
		March 31,
		2007				2006
		(Unaudited)
		(In millions)
Net earnings		$	651				700
Foreign currency translation:
Change in cumulative translation adjustment			83				(9	)
Income taxes			(6	)			1
Total			77				(8	)
Derivative financial instruments — reclassification adjustment for realized gains included in net earnings			(1	)			(1	)
Pension and postretirement benefit plans:
Recognition of net actuarial loss in net earnings			4				—
Income taxes			(1	)			—
Total			3				—
Investment in Chevron Corporation common stock (Note 1):
Unrealized holding gain			—				17
Income taxes			—				(6	)
Total			—				11
Other comprehensive income, net of tax			79				2
Comprehensive income		$	730				702

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)
Three Months Ended March 31, 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 (Note 1)			—				—				—				—				364				(364	)			—				—
Adoption of FASB Interpretation No. 48 (Note 1)			—				—				—				—				(10	)			—				—				(10	)
Net earnings			—				—				—				—				651				—				—				651
Other comprehensive income			—				—				—				—				—				79				—				79
Stock option exercises			—				1				—				23				—				—				—				23
Common stock retired			—				—				—				(1	)			—				—				1				—
Common stock dividends			—				—				—				—				(62	)			—				—				(62	)
Preferred stock dividends			—				—				—				—				(2	)			—				—				(2	)
Share-based compensation			—				—				—				30				—				—				—				30
Excess tax benefits on share-based compensation			—				—				—				5				—				—				—				5
Balance as of March 31, 2007		$	1				445			$	44				6,897				10,055				1,159				—				18,156
Three Months Ended March 31, 2006
Balance as of December 31, 2005		$	1				443			$	44				6,928				6,477				1,414				(2	)			14,862
Net earnings			—				—				—				—				700				—				—				700
Other comprehensive income			—				—				—				—				—				2				—				2
Stock option exercises			—				1				—				19				—				—				—				19
Restricted stock grants, net of cancellations			—				—				—				1				—				—				(1	)			—
Common stock repurchased			—				(4	)			—				—				—				—				(253	)			(253	)
Common stock retired			—				—				—				(238	)			—				—				238				—
Common stock dividends			—				—				—				—				(49	)			—				—				(49	)
Preferred stock dividends			—				—				—				—				(2	)			—				—				(2	)
Share-based compensation			—				—				—				19				—				—				—				19
Excess tax benefits on share-based compensation			—				—				—				4				—				—				—				4
Balance as of March 31, 2006		$	1				440			$	44				6,733				7,126				1,416				(18	)			15,302

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended
		March 31,
		2007				2006
		(Unaudited)
		(In Millions)
Cash flows from operating activities:
Net earnings		$	651				700
(Earnings) loss from discontinued operations, net of tax			(77	)			16
Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			633				484
Deferred income tax expense			75				140
Net gain on sales of non-oil and gas property and equipment			—				(5	)
Other noncash charges			75				39
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(29	)			241
Other current assets			(10	)			(10	)
Long-term other assets			(25	)			4
Increase (decrease) in:
Accounts payable			20				(162	)
Income taxes payable			207				80
Other current liabilities			(118	)			(160	)
Long-term other liabilities			(2	)			(6	)
Cash provided by operating activities — continuing operations			1,400				1,361
Cash provided by operating activities — discontinued operations			117				161
Net cash provided by operating activities			1,517				1,522
Cash flows from investing activities:
Proceeds from sales of property and equipment			25				19
Capital expenditures			(1,484	)			(1,249	)
Purchases of short-term investments			(424	)			(495	)
Sales of short-term investments			723				441
Cash used in investing activities — continuing operations			(1,160	)			(1,284	)
Cash used in investing activities — discontinued operations			(53	)			(68	)
Net cash used in investing activities			(1,213	)			(1,352	)
Cash flows from financing activities:
Net commercial paper repayments, net of issuance costs			(348	)			—
Debt repayments, including current maturities			—				(3	)
Proceeds from stock option exercises			23				20
Repurchases of common stock			—				(253	)
Excess tax benefits related to share-based compensation			5				4
Dividends paid on common stock			(62	)			(49	)
Dividends paid on preferred stock			(2	)			(2	)
Net cash used in financing activities			(384	)			(283	)
Effect of exchange rate changes on cash			2				1
Net decrease in cash and cash equivalents			(78	)			(112	)
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			756				1,606
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	678				1,494
Supplementary cash flow data:
Interest paid		$	162				159
Income taxes (received) paid		$	(24	)			160

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

1. Summary of Significant Accounting Policies

     The accompanying consolidated financial statements and notes thereto of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, 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 thereto should be read in conjunction with the consolidated financial statements and notes thereto included in Devon’s 2006 Annual Report on Form 10-K.

     In the opinion of Devon’s management, all adjustments (all of which are normal and recurring) that have been made are necessary to fairly state the consolidated financial position of Devon and its subsidiaries as of March 31, 2007, and the results of their operations and their cash flows for the three-month periods ended March 31, 2007 and 2006.

     Certain prior period amounts have been reclassified to conform to the current period presentation.

Net Earnings Per Common 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 periods ended March 31, 2007 and 2006.

		Net
		Earnings				Weighted
		Applicable to				Average				Net
		Common				Common Shares				Earnings
		Stockholders				Outstanding				per Share
		(In millions, except per share amounts)
Three Months Ended March 31, 2007:
Earnings from continuing operations		$	574
Less preferred stock dividends			(2	)
Basic earnings per share			572				444			$	1.29
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				6
Diluted earnings per share		$	572				450			$	1.27
Three Months Ended March 31, 2006:
Earnings from continuing operations		$	716
Less preferred stock dividends			(2	)
Basic earnings per share			714				442			$	1.61
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				7
Diluted earnings per share		$	714				449			$	1.59

     Certain options to purchase shares of Devon’s common stock were excluded from the dilution calculations because the options were antidilutive. During the first quarter of 2007 and 2006, 4.2 million shares and 2.6 million shares, respectively, were excluded from the diluted earnings per share calculations.

Short-term Investments and Other Marketable Securities – Change in Accounting Principle

     Devon owns approximately 14.2 million shares of Chevron Corporation (“Chevron”) common stock. These shares are held in connection with debt owed by Devon that contains an exchange option. This exchange option allows the debt holders, prior to the debt’s maturity, to exchange the debt for the shares of Chevron common stock owned by Devon.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     The shares of Chevron common stock and the exchange option embedded in the debt have always been recorded on Devon’s balance sheet at fair value. However, pursuant to accounting rules prior to January 1, 2007, only the change in fair value of the embedded option has historically been included in Devon’s results of operations. Conversely, the change in fair value of the Chevron common stock has not been included in Devon’s results of operations, but instead has been recorded directly to stockholders’ equity as part of “accumulated other comprehensive income.”

     Effective January 1, 2007, Devon adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. Statement No. 159 allows a company the option to value its financial assets and liabilities, on an instrument by instrument basis, at fair value, and include the change in fair value of such assets and liabilities in its results of operations. Devon chose to apply the provisions of Statement No. 159 to its shares of Chevron common stock. Accordingly, beginning with the first quarter of 2007, the change in fair value of the Chevron common stock owned by Devon, along with the change in fair value of the related exchange option, will both be included in Devon’s results of operations.

     In the first quarter of 2007, the change in fair value of financial instruments caption on Devon’s statements of operations includes an unrealized gain of $6 million related to the Chevron common stock, and an unrealized loss of $8 million related to the embedded option. In the first quarter of 2006, prior to adopting Statement No. 159, an unrealized loss of $14 million related to the change in fair value of the embedded option was included in the change in fair value of financial instruments caption on Devon’s statements of operations.

     As of December 31, 2006, $364 million of after-tax unrealized gains related to Devon’s investment in the Chevron common stock was included in accumulated other comprehensive income. This is the amount of unrealized gains that, prior to Devon’s adoption of Statement No. 159, had not been recorded in Devon’s historical results of operations. Upon the adoption of Statement No. 159 as of January 1, 2007, this $364 million of unrealized gains was reclassified on Devon’s balance sheet from accumulated other comprehensive income to retained earnings.

     In conjunction with the adoption of Statement No. 159, Devon also adopted on January 1, 2007 Statement of Financial Accounting Standards No. 157, Fair Value Measurements. Statement No. 157 provides a common definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, but does not require any new fair value measurements. The adoption of Statement No. 157 had no impact on Devon’s financial statements, but it did result in additional required disclosures as set forth in Note 7.

Income Taxes — Change in Accounting Principle

     Devon and its subsidiaries are subject to current income taxes assessed by the federal and various state jurisdictions in the United States and other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

     At March 31, 2007, undistributed earnings of foreign subsidiaries included in continuing operations were determined to be permanently reinvested. Therefore, no U.S. deferred income taxes were provided on such amounts at March 31, 2007. If it becomes apparent that some or all of the undistributed earnings will be distributed, Devon would then record taxes on those earnings.

     In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. Interpretation No. 48 prescribes a

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

threshold for recognizing the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in accrued expenses and other current liabilities. Interest and penalties related to unrecognized tax benefits are included in income tax expense.

     On January 1, 2007, Devon adopted Interpretation No. 48 and recorded a $10 million reduction to the January 1, 2007 balance of retained earnings related to unrecognized tax benefits. The $10 million includes $8 million for related interest and penalties. An additional $2 million of liabilities were recorded with a corresponding increase to goodwill.

     As a result of the adoption of Interpretation No. 48, certain liabilities included in income taxes payable and deferred income taxes were reclassified to other current and long-term liabilities in the accompanying balance sheet. The total $12 million increase in liabilities included a $15 million increase to long-term liabilities, partially offset by a $3 million reduction to current liabilities.

     As of January 1, 2007, Devon’s unrecognized tax benefits were $114 million. This amount included $82 million that, if recognized, would affect Devon’s effective income tax rate.

     Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

Jurisdiction		Tax Years Open
U.S. federal		2002-2006
Various U.S. states		2001-2006
Canada federal		2000-2006
Various Canadian provinces		2000-2006
Various other foreign jurisdictions		1997-2006

     Devon is currently in the final stages of the administrative review process for certain open tax years. In addition, certain statute of limitation expirations are scheduled to occur in the next twelve months. Due to these factors, Devon anticipates it is reasonably possible that liabilities for certain tax positions will decrease between $15 million and $25 million within the next twelve months.

Recently Issued Accounting Standards Not Yet Adopted

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). Statement No. 158 requires the measurement of plan assets and benefit obligations as of the date of the employer’s fiscal year-end, beginning with fiscal years ending after December 15, 2008. The Statement provides two alternatives to transition to a fiscal year-end measurement date. Devon has not yet adopted this requirement, but Devon does not expect such adoption to have a material effect on its results of operations, financial condition, liquidity or compliance with debt covenants.

2. Property and Equipment and Asset Retirement Obligations (“ARO”)

     On November 14, 2006, Devon announced that it intends to divest its operations in Egypt. Also, on January 23, 2007, Devon announced that it intends to divest its operations in West Africa. See Note 10 for more discussion regarding these planned divestitures.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Asset Retirement Obligations

     The following is a summary of the changes in Devon’s ARO for the first three months of 2007 and 2006.

		Three Months Ended
		March 31,
		2007				2006
		(In millions)
Asset retirement obligation as of beginning of period		$	857				636
Liabilities incurred			28				13
Liabilities settled			(12	)			(9	)
Revision of estimated obligation			311				—
Accretion expense on discounted obligation			18				10
Foreign currency translation adjustment			5				—
Asset retirement obligation as of end of period			1,207				650
Less current portion			55				51
Asset retirement obligation, long-term		$	1,152				599

     During the first quarter of 2007, Devon recognized a $311 million increase to its ARO. The primary factors causing the fair value increase were an overall increase in abandonment cost estimates, an overall decrease in estimated reserve lives and an increase in the assumed inflation rate. The effects of these factors were partially offset by the effect of an increase in the discount rate used to present value the obligations.

3. Debt

Credit Facility

     In April 2007, Devon extended the maturity of its existing $2.5 billion five-year, syndicated, unsecured revolving line of credit (the “Senior Credit Facility”) from April 7, 2011 to April 7, 2012.

     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 March 31, 2007, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at March 31, 2007, as calculated pursuant to the terms of the agreement, was 25.6%.

     As of March 31, 2007, there were no borrowings under the Senior Credit Facility. The available capacity under the Senior Credit Facility as of March 31, 2007, net of $1.46 billion of outstanding commercial paper and $285 million of outstanding letters of credit, was approximately $755 million.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. 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 quarters ended March 31, 2007 and 2006.

										Other
		Pension Benefits								Postretirement Benefits
		Three Months								Three Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
		(In millions)
Net periodic benefit cost:
Service cost		$	8				6				—				—
Interest cost			11				10				1				1
Expected return on plan assets			(12	)			(11	)			—				—
Net actuarial loss			4				3				—				—
Net periodic benefit cost			11				8				1				1
Other comprehensive income:
Recognition of net actuarial loss in net periodic benefit cost			(4	)			—				—				—
Total recognized		$	7				8				1				1

5. Stockholders’ Equity

Stock Repurchases

     On August 3, 2005, Devon announced a stock repurchase program to repurchase up to 50 million shares of its common stock. As of May 1, 2007, Devon has repurchased 6.5 million shares under this program for $387 million, or $59.80 per share. This program was suspended in 2006 as a result of the Chief acquisition. In conjunction with the sales of Egypt and West Africa (see Note 9), Devon expects to resume this repurchase program in late 2007 by using a portion of the sale proceeds to repurchase common stock. Although this program expires at the end of 2007, it could be extended if necessary.

Dividends

     Dividends on Devon’s common stock were paid in the first quarters of 2007 and 2006 at per share rates of $0.14 and $0.1125, respectively.

6. 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 (“CERCLA”) and similar state statutes. In response to liabilities associated with these activities, accruals have been

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

established when reasonable estimates are possible. Such accruals primarily include estimated costs associated with remediation. Devon has not used discounting in determining its accrued liabilities for environmental remediation, and no material claims for possible recovery from third party insurers or other parties related to environmental costs have been recognized in Devon’s consolidated financial statements. Devon adjusts the accruals when new remediation responsibilities are discovered and probable costs become estimable, or when current remediation estimates must be adjusted to reflect new information.

     Certain of Devon’s subsidiaries acquired in past mergers 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 March 31, 2007, Devon’s consolidated balance sheet included $5 million of non-current accrued liabilities, reflected in “Other liabilities,” related to these and other environmental remediation liabilities. Devon does not currently believe there is a reasonable possibility of incurring additional material costs in excess of the current accruals recognized for such environmental remediation activities. With respect to the sites in which Devon subsidiaries are PRPs, Devon’s conclusion is based in large part on (i) Devon’s participation in consent decrees with both other PRPs and the Environmental Protection Agency, which provide for performing the scope of work required for remediation and contain covenants not to sue as protection to the PRPs, (ii) participation in groups as a de minimis PRP, and (iii) the availability of other defenses to liability. As a result, Devon’s monetary exposure is not expected to be material.

Royalty Matters

     Numerous 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 natural gas liquids 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 the 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. Trial is set for November 2007. 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 in association with this lawsuit and no liability has been recorded in connection therewith.

     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. The MMS in 2006 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 since had several discussions with MMS representatives on this issue, but has not yet entered into renegotiated leases.

     The U.S. House of Representatives in January 2007 passed legislation that would require companies to renegotiate the 1998 and 1999 leases as a condition of securing future federal leases. If this legislation were to become law, it would require price thresholds to be effective in the renegotiated 1998 and 1999 leases effective October 1, 2006. Although Devon has not yet signed renegotiated leases, it has accrued through March 31, 2007 approximately $11 million for royalties that would be due if price thresholds were added to its 1998 and 1999 leases effective October 1, 2006.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Equatorial Guinea Investigation

     The SEC has been conducting an inquiry into payments made to the government of Equatorial Guinea and to officials and persons affiliated with officials of the government of Equatorial Guinea. On August 9, 2005, Devon received a subpoena issued by the SEC pursuant to a formal order of investigation. Devon has cooperated fully with the SEC’s requests for information in this inquiry. After responding in 2005 to such requests for information, Devon has not been contacted by the SEC. In the event that Devon receives any further inquiries, Devon will work with the SEC in connection with its investigation.

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 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 the third quarter of 2006 as a full settlement of the amount due from Devon’s primary insurers. As of March 31, 2007, $171 million of these proceeds had been utilized as reimbursement of past repair costs and deductible amounts. The remaining proceeds of $296 million will be utilized as reimbursement of Devon’s anticipated future repair costs. Devon has not yet received any settlements related to claims filed with its secondary insurers.

     Should Devon’s total policy recoveries, including the partial settlements already received from Devon’s primary 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. During the third quarter of 2006, Devon was able to re-establish a comprehensive insurance program that includes business interruption and physical damage coverage for its business. However, due to significant changes in the marketplace, Devon was only able to obtain a de minimis amount of coverage for any damage that may be caused by named windstorms in the Gulf of Mexico. Devon has not experienced any losses covered by this new insurance arrangement through March 31, 2007.

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.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Fair Value Measurements

     Certain of Devon’s assets and liabilities are reported at fair value in the accompanying balance sheets. The following table provides fair value measurement information for such assets and liabilities as of March 31, 2007.

						Fair Value Measurements Using:
						Quoted				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
		Total Fair				Markets				Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Assets:
Short-term investments		$	275				275				—				—
Investment in Chevron common stock		$	1,049				1,049				—				—
Financial instruments		$	6				—				6				—
Liabilities:
Financial instruments		$	314				—				314				—
Asset retirement obligation (ARO)		$	1,207				—				—				1,207

     Statement No. 157 (see Note 1) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the table above, this hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 3 inputs have the lowest priority.

     Devon uses appropriate valuation techniques based on the available inputs to measure the fair values of its assets and liabilities. When available, Devon measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. Devon owes debt that has an embedded exchange option. Because the exchange option is not actively traded in an established market, its fair value is measured using Level 2 inputs. Devon also has certain commodity and interest-rate derivative financial instruments which are measured using Level 2 inputs, such as forward commodity price curves or interest-rate yield curves. Devon only uses Level 3 inputs to measure the fair value of its ARO. A reconciliation of the beginning and ending balances of Devon’s ARO, including a revision of the fair value in the first quarter of 2007, is presented in Note 2.

8. Change in Fair Value of Financial Instruments

     The components of change in fair value of financial instruments include the following:

		Three Months Ended
		March 31,
		2007				2006
		(In millions)
Option embedded in exchangeable debentures		$	8				14
Investment in Chevron common stock (Note 1)			(6	)			—
Interest rate swaps			(1	)			(2	)
Total		$	1				12

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

9. Other Income

     The components of other income include the following:

		Three Months Ended
		March 31,
		2007				2006
		(In millions)
Interest and dividend income		$	21				28
Net gain on sales of non-oil and gas property and equipment			—				5
Other			5				(4	)
Total		$	26				29

10. Discontinued Operations

Egypt and West Africa

     On November 14, 2006, Devon announced its plans to divest its operations in Egypt. On January 23, 2007, Devon announced its plans to divest its operations in West Africa. Pursuant to accounting rules for discontinued operations, Devon has classified all 2007 and prior period amounts related to its operations in Egypt and West Africa as discontinued operations. As of March 31, 2007, Devon has not recorded any gain or loss associated with these planned sales.

     On April 18, 2007, Devon announced that it had agreed to sell its Egyptian operations for $375 million effective January 1, 2007. Devon estimates that after-tax proceeds will be approximately $300 million. The transaction is expected to close in the third quarter of 2007. Had the transaction closed on January 1, 2007, Devon would have recognized a gain, after taxes, of approximately $60 million. The gain ultimately recorded when the transaction closes will depend on the carrying values of Devon’s Egyptian assets and liabilities at the closing date, as well as the effect of purchase price adjustments between the effective date of January 1, 2007 and the actual closing date.

     Devon has recently opened data rooms for the West African assets and expects to receive bids on these properties in the third quarter of 2007.

     Revenues related to Devon’s operations in Egypt and West Africa totaled $175 million and $218 million in the first quarters of 2007 and 2006, respectively.

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     The following table presents the main classes of assets and liabilities associated with Devon’s operations in Egypt and West Africa as of March 31, 2007 and December 31, 2006.

		March 31,				December 31,
		2007				2006
		(In millions)
Assets:
Cash		$	63				64
Accounts receivable			117				101
Other current assets			72				67
Current assets		$	252				232
Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization		$	1,680				1,619
Liabilities:
Accounts payable – trade		$	60				48
Income taxes payable			152				115
Current portion of asset retirement obligation			8				8
Accrued expenses and other current liabilities			2				2
Current liabilities		$	222				173
Asset retirement obligation, long-term		$	44				38
Deferred income taxes			390				375
Other liabilities			16				16
Long-term liabilities		$	450				429

Reduction of Carrying Value

     Devon has commitments to drill four wells in Nigeria. The first two wells were unsuccessful. After drilling the second unsuccessful well in the first quarter of 2006, Devon determined that the capitalized costs related to these two wells should be impaired. Devon’s first quarter 2006 earnings from discontinued operations include an $85 million impairment of its investment in Nigeria equal to the costs to drill the two dry holes and a proportionate share of block-related costs. There was no tax benefit related to this impairment.

11. Segment Information

     Following is certain financial information regarding Devon’s reporting segments. The revenues reported are all from external customers.

		U.S.				Canada				International				Total
		(In millions)
As of March 31, 2007:
Current assets		$	1,187				564				985				2,736
Property and equipment, net of accumulated depreciation, depletion and amortization			15,975				7,395				1,038				24,408
Goodwill			3,053				2,620				68				5,741
Other assets			1,311				56				1,726				3,093
Total assets		$	21,526				10,635				3,817				35,978
Current liabilities		$	3,361				608				471				4,440
Long-term debt			2,597				2,974				—				5,571
Asset retirement obligation, long-term			602				480				70				1,152
Other liabilities			908				27				454				1,389
Deferred income taxes			3,361				1,839				70				5,270
Stockholders’ equity			10,697				4,707				2,752				18,156
Total liabilities and stockholders’ equity		$	21,526				10,635				3,817				35,978

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		U.S.				Canada				International				Total
						(In millions)
Three Months Ended March 31, 2007:
Revenues:
Oil sales		$	234				153				304				691
Gas sales			869				356				1				1,226
NGL sales			136				41				—				177
Marketing and midstream revenues			371				8				—				379
Total revenues			1,610				558				305				2,473
Expenses and other income, net:
Lease operating expenses			248				143				39				430
Production taxes			56				1				23				80
Marketing and midstream operating costs and expenses			266				4				—				270
Depreciation, depletion and amortization of oil and gas properties			371				160				56				587
Depreciation and amortization of non-oil and gas properties			41				5				—				46
Accretion of asset retirement obligation			10				7				1				18
General and administrative expenses			92				25				2				119
Interest expense			59				51				—				110
Change in fair value of financial instruments			2				(1	)			—				1
Other income, net			(12	)			(3	)			(11	)			(26	)
Total expenses and other income, net			1,133				392				110				1,635
Earnings from continuing operations before income tax expense			477				166				195				838
Income tax expense (benefit):
Current			67				62				60				189
Deferred			86				(1	)			(10	)			75
Total income tax expense			153				61				50				264
Earnings from continuing operations			324				105				145				574
Discontinued operations:
Earnings from discontinued operations before income tax expense			—				—				137				137
Income tax expense			—				—				60				60
Earnings from discontinued operations			—				—				77				77
Net earnings			324				105				222				651
Preferred stock dividends			2				—				—				2
Net earnings applicable to common stockholders		$	322				105				222				649
Capital expenditures, before revision of future ARO		$	943				469				111				1,523
Revision of future ARO			210				99				2				311
Capital expenditures, continuing operations		$	1,153				568				113				1,834

DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		U.S.				Canada				International				Total
						(In millions)
Three Months Ended March 31, 2006:
Revenues:
Oil sales		$	294				122				92				508
Gas sales			919				435				4				1,358
NGL sales			124				52				—				176
Marketing and midstream revenues			451				7				—				458
Total revenues			1,788				616				96				2,500
Expenses and other income, net:
Lease operating expenses			196				124				11				331
Production taxes			66				2				15				83
Marketing and midstream operating costs and expenses			335				3				—				338
Depreciation, depletion and amortization of oil and gas properties			281				150				12				443
Depreciation and amortization of non-oil and gas properties			37				4				—				41
Accretion of asset retirement obligation			6				4				—				10
General and administrative expenses			70				21				(1	)			90
Interest expense			42				59				—				101
Change in fair value of financial instruments			14				(2	)			—				12
Other income, net			(16	)			(6	)			(7	)			(29	)
Total expenses and other income, net			1,031				359				30				1,420
Earnings from continuing operations before income tax expense			757				257				66				1,080
Income tax expense (benefit):
Current			154				51				19				224
Deferred			101				43				(4	)			140
Total income tax expense			255				94				15				364
Earnings from continuing operations			502				163				51				716
Discontinued operations:
Earnings from discontinued operations before income tax expense			—				—				47				47
Income tax expense			—				—				63				63
Loss from discontinued operations			—				—				(16	)			(16	)
Net earnings			502				163				35				700
Preferred stock dividends			2				—				—				2
Net earnings applicable to common stockholders		$	500				163				35				698
Capital expenditures, continuing operations		$	732				646				99				1,477