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Securities and Exchange Commission
Washington, D.C. 20549

Form 10–Q

(Mark One)

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

For the Quarter Ended March 31, 2003

OR

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

Commission file number: 1–8094

Devon OEI Operating, Inc.
(Exact name of registrant as specified in its charter)

               Delaware                       74–1764876
(State or other jurisdiction of                (I.R.S. Employer
incorporation or organization)             Identification No.)

1001 Fannin, Suite 1600, Houston, Texas 77002-6794
(Address of principal executive offices)                        (Zip code)

(713) 265–6000
(Registrant’s telephone number, including area code)

        Ocean Energy, Inc.
(Former name, former address and former fiscal year, if changed since last report)

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 X . No .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b–2 of the Act). Yes X . No .

As of May 13, 2003, 1,000 shares of Common Stock, par value $0.10 per share, were outstanding.

Devon OEI Operating, Inc.

Index

(i)

   Item 1.  Unaudited Consolidated Financial Statements

Devon OEI Operating, Inc.
Consolidated Statements of Operations
(Amounts in Thousands Except Per Share Data)
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

1

Devon OEI Operating, Inc.
Consolidated Balance Sheets
(Amounts in Thousands Except Share Data)
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

2

Devon OEI Operating, Inc.
Consolidated Statements of Cash Flows
(Amounts in Thousands)
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

3

Devon OEI Operating, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in Thousands)
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

4

Devon OEI Operating, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Presentation of Financial Information

     The consolidated financial statements of Devon OEI Operating, Inc., formerly Ocean Energy, Inc. (“Ocean” or “the Company”), a Delaware corporation, included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and, accordingly, certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The financial statements reflect all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation. Certain reclassifications of amounts previously reported have been made to conform to current year presentations.

     On February 23, 2003, Ocean entered into an Agreement and Plan of Merger with Devon Energy Corporation (“Devon”) providing for the merger of Ocean with a subsidiary of Devon with Ocean being the surviving corporation and becoming a wholly–owned subsidiary of Devon. On April 25, 2003, the stockholders of Ocean approved the merger and the stockholders of Devon approved the issuance of the shares of Devon common stock in the merger. The merger was thereafter consummated and Ocean was renamed Devon OEI Operating, Inc. In connection with the merger, each Ocean stockholder received 0.414 shares of common stock of Devon for each share of Ocean common stock they owned as of the date of the merger. The merger is expected to qualify as a tax–free transaction with no gain or loss recognized for U.S. Federal income tax purposes by the Ocean stockholders upon receipt of Devon common stock in exchange for shares of Ocean common stock except for cash received in exchange for fractional shares. The amounts reported in the Company’s accompanying consolidated financial statements do not give effect to the merger.

     The accompanying consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2002.

     Oil and Gas Properties – The Company uses the full cost method to account for its oil and gas exploration and production activities. Proved oil and gas properties include costs accumulated on a country–by–country basis. Oil and gas properties excluded from amortization include costs for exploration activities occurring in areas where the existence of proved reserves has not yet been determined, and portions of costs associated with major development projects where quantities of proved reserves attributable to these projects have not been ascertained. At March 31, 2003, oil and gas properties excluded from amortization include: United States ($548 million), Equatorial Guinea ($67 million), Egypt ($31 million), Angola ($100 million), Nigeria ($93 million), Brazil ($41 million) and other international locations ($7 million).

     The Company capitalizes interest and certain employee–related costs that are directly attributable to capital expenditures for exploration and development activities. For the three months ended March 31, 2003 and 2002, the Company capitalized interest in the amount of $10 million and $13 million, respectively, and certain employee–related costs in the amount of $17 million for both periods.

     The Company has changed its method for estimating proved reserves effective first quarter 2003 to conform to the SEC’s interpretation of its guidelines regarding the recording of proved reserve estimates of oil and gas deposits located below the lowest known hydrocarbon identified by way of well penetration where such reserves are not supported by production data. Although the Company believes that its method of estimating and recording such reserves has been technically sound and consistent with industry standards, the Company has decided to make this change to its method, after SEC review, to be consistent with the SEC’s interpretation of its applicable regulations and guidelines. This change of method does not apply to any of the Company’s fiscal periods ending before January 1, 2003.

5

Devon OEI Operating, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

     Revenue Recognition – The Company records revenues from the sales of crude oil and natural gas when delivery to the customer has occurred and title has transferred. This occurs when production has been delivered to a pipeline or a tanker lifting has occurred. The Company may have an interest with other producers in certain properties. The Company uses the entitlements method to account for sales of production in these instances. The Company may receive more or less than its entitled share of production. Under the entitlements method, if the Company receives more than its entitled share of production, the imbalance is treated as a liability. If the Company receives less than its entitled share, the imbalance is recorded as an asset.

     Reclassification of General and Administrative Expense – The Company expenses employee costs associated with production and other operating activities and general corporate activities. In prior years, a portion of costs related to certain administrative functions that support the Company’s ongoing operating activities were included in operating expense. During 2002, the Company began classifying the costs of these administrative functions as general and administrative expense. As a result, previous years have been reclassified to conform to current year presentation. While this reclassification had no effect on net income, it did decrease operating expense, and increase general and administrative expense, by $6 million for first quarter 2002.

     Stock–Based Compensation – The Company currently has stock option plans and an employee stock purchase plan. The Company accounts for stock–based compensation plans for employees and directors using the intrinsic value method. Under this method, the Company records no compensation expense for stock options granted when the exercise price of options granted is equal to or greater than the fair market value of the Company’s common stock on the date of grant. The Company also records no compensation expense for employee purchases of stock under its employee stock purchase plan because the plan is considered noncompensatory under APB No. 25. The following table presents the effect on net income and earnings per share if the Company had applied a fair value recognition method, using the Black–Scholes options–pricing model to determine the fair value of each option grant on the date of grant:

6

Devon OEI Operating, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

     Earnings Per Share – The following table provides a reconciliation between basic and diluted earnings per share (stated in thousands except per share data):

     Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined on the assumption that outstanding stock options have been converted using the average common stock price for the period and that convertible preferred stock has been converted at its stated conversion price.

     Options to purchase shares of common stock are excluded from the computation of diluted earnings per share when their exercise prices are greater than the average market price of the common shares during the period. The following options were excluded from the computation of diluted earnings per share (options in thousands):

These options expire at various dates through 2013.

     As of April 16, 2003, a preferred stockholder elected to convert 6,000 shares of Series B preferred stock to 409,836 shares of Company common stock.

     Treasury Stock – The Company follows the average cost method of accounting for treasury stock transactions.

     Derivative Instruments and Hedging Activities – From time to time, the Company has utilized and expects to continue to utilize derivative financial instruments to hedge cash flow from operations or to hedge the fair value of financial instruments. The Company accounts for its derivative instruments and hedging activities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.

7

Devon OEI Operating, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

     The Company uses derivative financial instruments with respect to a portion of its oil and gas production to achieve a more predictable cash flow by reducing its exposure to price fluctuations. These transactions generally are swaps, collars or options, and are entered into with major financial institutions or commodities trading institutions. These derivative financial instruments are intended to reduce the Company’s exposure to declines in the market prices of natural gas and crude oil that the Company produces and sells, and to manage cash flow in support of the Company’s annual capital expenditure budget.

     Derivative instruments designated as cash flow hedges are reflected at fair value in the Company’s Consolidated Balance Sheets. Changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the forecasted transaction occurs. Hedge effectiveness is assessed at least quarterly based on total changes in the derivative’s fair value. Any ineffective portion of the derivative instrument’s change in fair value is recognized immediately in revenues.

     The Company may utilize derivative financial instruments that have not been designated as hedges under SFAS No. 133 even though they protect the Company from changes in commodity prices. These instruments are marked to market with the resulting changes in fair value recorded in oil and gas revenues.

     The Company may also utilize derivative financial instruments to hedge exposure to interest rates. Instruments may include contracts to convert the interest rate on fixed-rate debt to floating, or contracts to convert the interest rate on floating–rate debt to fixed. Both types of contracts are reflected at fair value in the Company’s Consolidated Balance Sheets. The Company currently only has contracts that convert the interest rates on its fixed–rate debt to floating. These transactions qualify as fair value hedges. Therefore, the related portion of fixed–rate debt being hedged is reflected at an amount equal to the sum of its carrying value plus an adjustment representing the change in its fair value attributable to the interest rate risk being hedged. The gains or losses on the derivative financial instrument and the hedged item, as well as the settlements on the derivative financial instrument, are recognized currently in interest expense. The net effect of this accounting on the Company’s operating results is that interest expense on the portion of fixed–rate debt being hedged is generally recorded based on variable interest rates.

     Accounting Pronouncements – Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”) requires entities to record the liability for asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of the related long–lived asset. This statement is required to be adopted for periods after December 31, 2002 using a cumulative effect approach to recognize transition amounts for asset retirement obligations, asset retirement costs and accumulated depreciation. The Company adopted SFAS No. 143 as of January 1, 2003. The adoption of this statement resulted in the recognition of a liability for asset retirement obligations of $94 million, $1 million of which was included in accrued liabilities and $93 million of which was included in other noncurrent liabilities, a corresponding increase in property, plant and equipment of $116 million in the Company’s Consolidated Balance Sheets, and a cumulative accounting adjustment of $13 million, net of $9 million deferred tax expense, included in the Company’s Consolidated Statements of Operations as the effect of the change in accounting principle. As of January 1, 2003, the capitalized costs related to asset retirement obligations are being included in the full cost pool.

8

Devon OEI Operating, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

     A reconciliation of the Company’s liability for the three months ended March 31, 2003, is as follows (in thousands):

     Pro forma effects for the three months ended March 31, 2002, assuming the adoption of SFAS No. 143 as of January 1, 2002, were not material to the Company’s results of operations. The associated pro forma asset retirement obligation on that date would have been approximately $82 million.

Note 2. Supplemental Disclosures of Cash Flow Information

     Supplemental disclosures of cash flow information (stated in thousands) are as follows:

Note 3. Financial Instruments

     The Company has the following volumes under derivative contracts related to its oil and gas producing activities:

9

Devon OEI Operating, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

     The change in fair value of derivative financial instruments included in oil and gas revenues comprises the following (amounts in thousands):

      If commodity prices were to stay the same as they were at March 31, 2003, approximately $38 million of net deferred losses related to these fair values included in accumulated other comprehensive loss at March 31, 2003 would be reversed during the next 12 months as the forecasted transactions actually occur, and settlements would be recorded as a reduction in revenues. All forecasted transactions currently being hedged are expected to occur by December 2005.

10

Devon OEI Operating, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

     The Company has also entered into interest rate swap agreements relating to its 7 5/8% senior notes due July 2005 and its 7 7/8% senior notes due August 2003. Under the terms of the agreements, the counterparties pay the Company a weighted average fixed annual rate of 7.74% on total notional amounts of $225 million, and the Company pays the counterparties a variable annual rate equal to the six–month LIBOR rate on the respective settlement dates plus a weighted average rate of 2.73%. At March 31, 2003, the six–month LIBOR rate was 1.26%. The swap agreements remain in effect through the maturity dates of the respective notes. The swap agreements have been designated as fair value hedges pursuant to SFAS No. 133. Interest expense for the three–month period ended March 31, 2003 and 2002 was reduced by $2 million and $1 million, respectively, as a result of the interest rate swaps.

Note 4. Debt

     The Company’s 7 7/8% senior notes, in the amount of $100 million, are due in August 2003. These notes are classified as a current liability in the Consolidated Balance Sheets.

     The Company’s 8 3/8% senior subordinated notes due July 2008, in the amount of $200 million, are redeemable at a premium beginning in July 2003.

     The Company’s credit facility was amended on April 17, 2003 to waive the change of control provision, to reduce the aggregate commitments of the lenders, pro rata among the lenders, from $1 billion to $300 million, and to provide that the full amount of the $300 million commitment could be utilized for letters of credit.

Note 5. Contingencies

     The Company is a party to ongoing litigation in the normal course of business. Management regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that the effect on its financial condition, results of operations and cash flows, if any, will not be material.

     A lawsuit captioned Breakwater Partners, LP v. James T. Hackett, et. al. (Case No. 2003–10161) was filed on February 27, 2003 in the District Court of Harris County, Texas, naming as defendants Ocean and all of the members of Ocean’s board of directors. The complaint generally alleged that the 0.414 exchange ratio in the merger was inadequate and unfair to Ocean common stockholders; and that the defendants breached their fiduciary duties to Ocean stockholders, including the duty of care and the duty of loyalty, or aided and abetted in the breach of those fiduciary duties. The District Court granted the Special Exceptions filed by the defendants and the lawsuit was dismissed without prejudice on April 1, 2003.

11

Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion is intended to assist in understanding the financial position, results of operations and cash flows for the quarters ended March 31, 2003 and 2002 of Devon OEI Operating, Inc., formerly Ocean Energy, Inc. (“Ocean” or “the Company”).

     On February 23, 2003, Ocean entered into an Agreement and Plan of Merger with Devon Energy Corporation (“Devon”) providing for the merger of Ocean with a subsidiary of Devon with Ocean being the surviving corporation and becoming a wholly–owned subsidiary of Devon. On April 25, 2003, the stockholders of Ocean approved the merger and the stockholders of Devon approved the issuance of the shares of Devon common stock in the merger. The merger was thereafter consummated and Ocean was renamed Devon OEI Operating, Inc. In connection with the merger, Ocean stockholders received 0.414 shares of common stock of Devon for each share of Ocean common stock they owned as of the date of the merger. The merger is expected to qualify as a tax–free transaction with no gain or loss recognized for U.S. Federal income tax purposes by the Ocean stockholders upon receipt of Devon common stock in exchange for shares of Ocean common stock except for cash received in exchange for fractional shares. The discussion included in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 3. Quantitative and Qualitative Disclosures About Market Risks do not give effect to the merger.

     The Company’s accompanying unaudited consolidated financial statements and the notes thereto and the consolidated financial statements and notes thereto included in the Annual Report on Form 10–K for the year ended December 31, 2002 contain detailed information that should be referred to in conjunction with the following discussion. The Annual Report on Form 10–K for the year ended December 31, 2002 also includes a discussion of the Company’s critical accounting policies and contractual obligations.

Results of Operations

     During first quarter 2003, the Company continued to experience the effects of higher commodity prices. Average realized prices, excluding the impact of financial derivatives, have increased approximately 19% for crude oil and 52% for natural gas from fourth quarter 2002.

Oil and Gas Operations
(Amounts in Thousands)

     Oil Revenues – Revenues from sales of crude oil increased $84 million, or 66%, to $212 million for first quarter 2003 compared to $128 million for first quarter 2002. The change in revenues included:

12

Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

• An increase in revenues of $86 million due to the increase in crude oil prices. The average realized price for oil, excluding the impact of financial derivatives, increased 56% to $28.58 for first quarter 2003 compared to $18.32 for first quarter 2002.
• An increase in revenues of $26 million due to increases in production. Average daily oil production increased 21% to 93 MBbl for first quarter 2003 compared to 77 MBbl for first quarter 2002. Higher production volumes were primarily attributable to new deepwater production in the Gulf of Mexico and continued success of Zafiro field exploitation initiatives in Equatorial Guinea.
• A negative net quarter–over–prior–year quarter change of $28 million relating to the Company’s use of crude oil derivative financial instruments. The effect of derivative financial instruments on oil revenues was a decrease of $27 million for first quarter 2003 as compared to an increase of $1 million for first quarter 2002.

     Gas Revenues – Revenues from sales of natural gas have increased $117 million, or 127%, to $209 million for first quarter 2003 compared to $92 million for first quarter 2002. The change in revenues included:

• An increase in revenues of $145 million due to the increase in gas prices. The average realized price for natural gas, excluding the impact of financial derivatives, increased 152% to $6.05 per Mcf for first quarter 2003 as compared to $2.40 for first quarter 2002.
• An increase in revenues of $10 million due to increases in production. Average daily production for first quarter 2003 increased 12% to 441 MMcf, as compared to first quarter 2002 volumes of 393 MMcf. Higher production volumes were primarily attributable to new deepwater production in the Gulf of Mexico.
• A negative net quarter–over–prior–year quarter change of $38 million relating to the Company’s use of natural gas derivative financial instruments. The effect of derivative financial instruments on natural gas revenues was a decrease of $31 million for first quarter 2003 as compared to an increase of $7 million for first quarter 2002.

     Commodity prices fluctuate significantly in response to numerous factors such as supply and demand. Since most of the Company’s gas reserves and production are in the United States, future natural gas prices will be dependent primarily on the U. S. economic environment, North American weather patterns, other factors affecting demand such as substitute fuels, the impact of drilling levels on natural gas supply and environmental and access issues that limit future drilling activities for the industry. The Company expects that oil prices will fluctuate significantly in the future as a result of ongoing tensions in the Middle East, including the aftermath of the conflict in Iraq, actions of OPEC and its maintenance of production constraints, as well as other economic, political and environmental factors.

13

Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating Data

     All price information excludes the impact of financial derivatives, unless otherwise stated.

     For first quarter 2003, average daily production was 166 MBOE per day, an increase of 16% over first quarter 2002 average daily production of 143 MBOE per day. The Company expects its production to continue to increase during 2003 as a result of increased production from the deepwater Gulf of Mexico, Equatorial Guinea and Egypt, net of anticipated declines in onshore and Gulf of Mexico shelf areas including the impact of asset sales that occurred in late 2002.

     Operating Expenses – Total operating expenses increased $19 million, or 28%, to $88 million for first quarter 2003 as compared to $69 million for first quarter 2002 primarily due to the 16% increase in production. Increasing deepwater production has resulted in higher transportation and lease operating expenses (including lease expense related to the Nansen and Boomvang spars). In addition, higher commodity prices resulted in an increase in production taxes. Operating expenses were $5.85 per BOE and $5.40 per BOE for first quarter 2003 and 2002, respectively.

14

Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Depreciation, Depletion and Amortization Expense – Total depreciation, depletion and amortization (DD&A) expense for oil and gas operations increased 27%, or $22 million, to $103 million for first quarter 2003 as compared to $81 million for first quarter 2002. This increase was primarily due to an increase in production. DD&A expense per BOE related to oil and gas operations increased 10% to $6.89 per BOE for first quarter 2003 as compared to $6.26 per BOE for first quarter 2002 due to higher estimated future development costs and 2002 finding and development cost of $12.11 per BOE.

Corporate

     Corporate expenditures are comprised of general and administrative expenses and the DD&A expense for non–oil and gas assets.

     General and Administrative Expenses – General and administrative expenses increased $3 million, or 19%, to $19 million for first quarter 2003 compared to $16 million for first quarter 2002. The difference was due primarily to the increase in employee related costs and transportation expenses.

     Merger Expense – Merger expense of $327,000 associated with the merger of Ocean and Devon was recorded in first quarter 2003 and consisted primarily of professional fees and transportation expenses.

     DD&A – DD&A expense for non–oil and gas assets was approximately $4 million and $2 million for first quarter 2003 and 2002, respectively.

Other

     Interest Expense – Interest expense for first quarter 2003 increased $2 million, or 14%, to $16 million from $14 million for first quarter 2002. This increase was due to an increase in fixed–rate debt. Settlements on interest rate swaps reduced interest expense by $2 million for first quarter 2003 and $1 million for first quarter 2002.

     Income Tax Expense – Income tax expense of $82 million was recognized for first quarter 2003 compared to $17 million for first quarter 2002. The effective income tax rate was 43% for first quarter 2003 and 45% for first quarter 2002.

Liquidity and Capital Resources

     Liquidity – The Company’s primary sources of liquidity are its cash on hand, cash flows from operations and available borrowing capacity under its credit facility. The Company’s credit facility provides borrowing capacity and has a maturity date of May 2006. The Company’s obligations under the credit facility are unsecured and guaranteed by Ocean Energy, Inc., a Louisiana corporation. The credit facility bears interest, at the Company’s option, at LIBOR or prime rates plus applicable margins ranging from zero to 1.7% or at a competitive bid. As of March 31, 2003, the Company’s outstanding borrowings under the credit facility totaled $90 million, and letters of credit totaled $129 million. The Company’s long–term debt totaled $1.4 billion and its debt to capitalization ratio was 46% at March 31, 2003 compared to long–term debt of $1.4 billion and debt to capitalization ratio of 48% at December 31, 2002.

15

Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The credit facility was amended on April 17, 2003 to waive the change of control provision, to reduce the aggregate commitments of the lenders, pro rata among the lenders, from $1 billion to $300 million, and to provide that the full amount of the $300 million commitment could be utilized for letters of credit.

     Senior Notes – The Company’s 7 7/8% senior notes, in the amount of $100 million, are due in August 2003. The Company’s 8 3/8% senior subordinated notes, in the amount of $200 million, due July 2008 are redeemable at a premium beginning in July 2003. These notes may be called if market conditions warrant.

     Prepaid Commodity Transactions – In 1999 and 2000, the Company entered into two standard prepaid commodity transactions, one for crude oil in 1999 and one for natural gas in 2000. The prepaid crude oil sales contract provides that the Company deliver approximately 5.6 MBbl per day of crude oil for the period February 2000 through May 2003. In exchange for the crude oil to be provided, the Company received an advance payment of approximately $100 million. The prepaid natural gas sales contract is a market–sensitive contract which, as amended, provides that the Company deliver 53,500 MMBtu per day of natural gas for 2003 and 55,600 MMBtu per day for 2004. In exchange for the natural gas to be provided, the Company received an advance payment of approximately $75 million.

     The obligations associated with the future delivery of the crude oil and natural gas have been recorded as deferred revenue in the Company’s Consolidated Balance Sheets, and the remaining unamortized balance was approximately $70 million as of March 31, 2003. The prepaid proceeds were shown as a component of cash flows from financing activities in the Company’s Consolidated Statements of Cash Flows in the years in which they were received. The prepaid proceeds are being amortized into revenue as scheduled deliveries of crude oil and natural gas are made. This amortization is deducted from net income when computing Net Cash Provided by Operating Activities in the Company’s Consolidated Statements of Cash Flows as scheduled delivery occurs.

     These transactions are described in Note 11 to the Company’s Consolidated Financial Statements, as well as in Management’s Discussion and Analysis, included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2002.

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Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Capital Expenditures
(Amounts in Thousands)

     The Company makes, and will continue to make, substantial capital expenditures for the acquisition, exploration, development, production and abandonment of its crude oil and natural gas reserves and continues to look for opportunities to strengthen and diversify its domestic and international position. The Company has historically funded its expenditures through cash flows from operating activities, bank borrowings, sales of equity and debt securities, sales of non–strategic crude oil and natural gas properties, sales of partial interests in exploration concessions and project finance borrowings.

     The Company’s capital expenditure budget for the year 2003 is approximately $1 billion, a 30% increase over 2002. A significant portion of the 2003 capital program is dedicated to development of the Company’s exploration successes in West Africa and the deepwater Gulf of Mexico. The Company expects to fund its expenditures from cash flows from operations based on anticipated commodity prices subject to change if market conditions shift or new opportunities are identified. The 2003 capital expenditure budget was developed using certain assumed price levels for the sales of crude oil and natural gas and forecasted production growth. Changes in commodity prices or variances from forecasted production growth could impact the Company’s cash flows from operations and funds available for reinvestment. For example, shortfalls in budgeted cash flows from operations could result in the reduction of the Company’s capital spending program, increases in borrowing under the credit facility, issuance of additional equity or debt securities or divestments of properties. The Company will evaluate its level of capital spending throughout the year based upon drilling results, commodity prices, cash flows from operations and property acquisitions. In addition, the capital expenditure budget may be adjusted as a result of the Company’s merger with Devon.

     Dividends – On March 17, 2003, the Company’s Board of Directors declared a quarterly common stock dividend of four cents per share payable on April 24, 2003, to stockholders of record at the close of business on April 10, 2003.

Accounting Pronouncement

     During April 2003, the Financial Accounting Standards Board (FASB) issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The Company will follow the guidance of SFAS No. 149 and expects that it will have no impact on its financial statements.

17

Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Environmental

     Compliance with applicable environmental and safety regulations by the Company has not required any significant capital expenditures or materially affected its business or earnings. The Company believes it is in substantial compliance with environmental and safety regulations and foresees no material expenditures in the future; however, the Company is unable to predict the impact that compliance with future regulations may have on capital expenditures, earnings and competitive position.

Defined Terms

     Oil, condensate and natural gas liquids (“NGL”) are stated herein in barrels (“Bbl”) or thousand barrels (“MBbl”). Natural gas is stated herein in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). MMBOE, MBOE and BOE represent one million barrels, one thousand barrels and one barrel of oil equivalent, respectively, with six Mcf of gas converted to one barrel of liquid. “MMBtu” represents one million British Thermal Units.

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Devon OEI Operating, Inc.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward–Looking Statements May Prove Inaccurate

     This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and information that is based on management’s belief and assumptions based on currently available information. All statements other than statements of historical fact included in this document are forward–looking statements. When used in this document, words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “project” and similar expressions serve to identify forward–looking statements. Although we believe that the expectations reflected in our forward–looking statements are reasonable, we can give no assurance that these expectations will prove correct. Our forward–looking statements are subject to risks, uncertainties and assumptions. Should one of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results may vary materially from those expected. Among the key factors that may have a direct bearing on our results of operations and financial condition are:

• competitive practices in the oil and gas industry;
• geological, mechanical and economic risk inherent in the drilling and operation of exploratory and development wells;
• risk of impairment of unproved property costs in countries where proved reserves have not yet been established;
• risk of impairment of proved property costs due to declines in prices, downward revisions in reserves or significant increases in finding and development costs;
• volatility of energy commodity prices, generally, and fluctuations in the commodity prices for crude oil and natural gas that have not been properly hedged;
• general economic and capital markets conditions, including fluctuations in interest rates;
• the impact of current and future laws and governmental regulations, particularly environmental regulations, affecting the energy industry in general, and our oil and gas operations, in particular;
• environmental liabilities that are not covered by insurance or indemnity;
• the political and economic climate in the foreign or domestic jurisdictions in which we conduct oil and gas operations, including risk of war or potential adverse results of military or terrorist actions in those areas; and
• the effect on our results of operations and financial condition associated with implementing various accounting rules and regulations.

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Devon OEI Operating, Inc.

Item 3.  Quantitative and Qualitative Disclosures About Market Risks

     The Company experiences market risk primarily in the area of commodity prices. To mitigate a portion of its exposure to fluctuations in commodity prices, the Company has entered into various oil and gas derivative financial instruments for its oil and gas production. See Notes 1 and 3 to the Company’s Consolidated Financial Statements for a discussion of activities involving derivative financial instruments during first quarter 2003. To calculate the potential effect of the derivative contracts on future revenues, the Company applied the average New York Mercantile Exchange (“NYMEX”) or Brent, as applicable, oil and gas strip prices as of March 31, 2003 to the quantity of the Company’s oil and gas production covered by those derivative contracts as of that date. The following table shows the estimated potential effects of the derivative financial instruments on future revenues (in millions):

Item 4.  Controls and Procedures

     Within 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a–14(c) and 15d–14(c) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

     There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Part II.  Other Information

Item 1.   Legal Proceedings

     For a discussion of the legal proceedings to which the Company is a party see Note 5 to the Consolidated Financial Statements on page 11.

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Devon OEI Operating, Inc.

Item 4.   Submission of Matters to a Vote of Security Holders

     On April 25, 2003 at a special meeting, the stockholders approved a merger of Ocean Energy, Inc. with and into a subsidiary of Devon Energy Corporation. Votes were cast as follows:

Item 6. Exhibits and Reports on Form 8–K

(a) Exhibits:

*  Filed herewith.

#  Identifies management contracts and compensatory plans or arrangements.

(b) Reports on Form 8–K:

     On February 25, 2003, the Company filed a Current Report on Form 8–K containing the Agreement and Plan of Merger, dated as of February 23, 2003, among Ocean, Devon Energy Corporation (“Devon”) and Devon Newco Corporation, a wholly owned subsidiary of Devon. The item reported in such Current Report was Item 5 (Other Events).

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Devon OEI Operating, Inc.

     On April 2, 2003, the Company filed a Current Report on Form 8–K concerning the letter agreement (the “Letter Agreement”) entered into by Devon Energy Corporation, Devon NewCo Corporation and Ocean on April 1, 2003 to amend the Agreement and Plan of Merger, dated February 23, 2003, by and among the parties, as amended March 19, 2003 (the “Merger Agreement”). The Letter Agreement amends the Merger Agreement concerning the voting rights of Ocean preferred stock that will remain outstanding following the merger. The items reported in such Current Report were Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits).

     On April 14, 2003, the Company filed a Current Report on Form 8–K concerning the issuance by Devon and Ocean of a supplement to the proxy statement/prospectus, dated March 20, 2003, relating to the special meetings of the stockholders of both Devon and Ocean on April 25, 2003 to vote on the merger. The supplement states that Ocean has determined to change its method for estimating proved reserves for periods ending after December 31, 2002 to conform to the Securities and Exchange Commission’s interpretation of its guidelines regarding the recording of proved reserve estimates of oil and gas deposits. The items reported in such Current Report were Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits).

     On April 25, 2003, the Company filed a Current Report on Form 8–K concerning a change in control of the registrant due to the merger of Devon NewCo Corporation with and into the Company. The items reported in such Current Report were Item 1 (Changes in Control of Registrant) and Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits).

Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Devon OEI Operating, Inc.

Certifications

I, James T. Hackett, certify that:

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Devon OEI Operating, Inc.

Certifications

I, William L. Transier, certify that:

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Devon OEI Operating, Inc.

Index To Exhibits

* Filed herewith.

# Identifies management contracts and compensatory plans or arrangements.

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