Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Devon Energy Corporation

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

          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.     þ Yes     No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

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

          The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2003, was $12,148,090,102.

          On February 29, 2004, 237,953,429 shares of common stock and 1,473,409 exchangeable shares of Devon’s wholly owned subsidiary, Northstar Energy Corporation, were outstanding. Each exchangeable share is exchangeable for one share of Devon common stock.

DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS

2

Table of Contents

DEFINITIONS

      As used in this document:

	“AECO” means the price of gas delivered onto the NOVA Gas Transmission Ltd. System.
	“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.
	“Brent” means pricing point for selling North Sea crude oil.
	“Btu” means British Thermal units, a measure of heating value.
	“Inside FERC” refers to the publication Inside F.E.R.C.’s Gas Market Report.
	“LIBOR” means London Interbank Offered Rate.
	“MBbls” means thousand barrels.
	“MMBbls” means million barrels.
	“MBoe” means thousand Boe.
	“MMBoe” means million Boe.
	“MMBtu” means million Btu.
	“Mcf” means thousand cubic feet.
	“MMcf” means million cubic feet.
	“NGL” or “NGLs” means natural gas liquids.
	“NYMEX” means New York Mercantile Exchange.
	“Oil” includes crude oil and condensate.
	“Domestic” means the properties of Devon in the onshore continental United States and the offshore Gulf of Mexico.
	“Canada” means the division of Devon encompassing oil and gas properties located in Canada.
	“International” means the division of Devon encompassing oil and gas properties that lie outside the United States and Canada.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding Devon’s future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” or “continue” or the negative thereof or variations thereon or similar terminology. Although Devon believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from Devon’s expectations (“Cautionary Statements”) include, but are not limited to, Devon’s assumptions about energy markets, production levels, reserve levels, operating results, competitive conditions, technology, the availability of capital resources,

3

Table of Contents

4

Table of Contents

PART I

General

      Devon Energy Corporation, including its subsidiaries, (“Devon”) is an independent energy company engaged primarily in oil and gas exploration, development and production, the acquisition of producing properties, the transportation of oil, gas, and NGLs and the processing of natural gas. Through its predecessors, Devon began operations in 1971 as a privately held company. In 1988, Devon’s common stock began trading publicly on the American Stock Exchange under the symbol “DVN”. In addition, commencing on December 15, 1998, a new class of Devon exchangeable shares began trading on The Toronto Stock Exchange under the symbol “NSX”. These shares are essentially equivalent to Devon common stock. However, because they are issued by Devon’s wholly owned subsidiary, Northstar Energy Corporation (“Northstar”), they qualify as a domestic Canadian investment for Canadian shareholders. They are exchangeable at any time, on a one-for-one basis, for common shares of Devon.

      The principal and administrative offices of Devon are located at 20 North Broadway, Oklahoma City, OK 73102-8260 (telephone 405/235-3611).

      Devon operates oil and gas properties in the United States, Canada and various regions located outside North America. Devon’s North American properties are concentrated within five geographic areas. Operations in the United States are focused in the Permian Basin, the Mid-Continent, the Rocky Mountains and onshore and offshore Gulf Coast. Canadian operations are focused in the Western Canadian Sedimentary Basin in Alberta and British Columbia. Operations outside North America are located primarily in Azerbaijan, China, Egypt, and areas in West Africa, including Equatorial Guinea, Gabon and Cote d’Ivoire. In addition to its oil and gas operations, Devon has marketing and midstream operations. These include marketing natural gas, crude oil and NGLs, and the construction and operation of pipelines, storage and treating facilities and gas processing plants. (A detailed description of Devon’s significant properties and associated 2003 developments can be found under “Item 2. Properties”).

      At December 31, 2003, Devon’s estimated proved reserves were 2,089 MMBoe, of which 58% were natural gas reserves and 42% were oil and NGLs reserves. The present value of pre-tax future net revenues discounted at 10% per annum assuming essentially constant prices (“10% Present Value”) of such reserves was $22.7 billion. After taxes, the present value was $15.9 billion. Devon is one of the largest public independent oil and gas companies based in the United States, as measured by oil and gas reserves.

Availability of Reports

      Devon makes available free of charge on its internet website, www.dvn.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files or furnishes them to the Securities Exchange Commission.

Strategy

      Devon’s primary objectives are to build reserves, production, cash flow and earnings per share by (a) acquiring oil and gas properties, (b) exploring for new oil and gas reserves and (c) optimizing production and value from existing oil and gas properties. Devon’s management seeks to achieve these objectives by (a) concentrating its properties in core areas to achieve economies of scale, (b) acquiring and developing high profit margin properties, (c) continually disposing of marginal and non-strategic properties, (d) balancing reserves between oil and gas, (e) maintaining a high degree of financial flexibility, and (f) enhancing the value of Devon’s production and reserves through marketing and midstream activities.

5

Table of Contents

Development of Business

      During 1988, Devon expanded its capital base with its first issuance of common stock to the public. This transaction began a substantial expansion program that has continued through the subsequent years. Devon has used a two-pronged strategy of acquiring producing properties and engaging in drilling activities to achieve this expansion. Total proved reserves increased from 8 MMBoe at year-end 1987 (without giving effect to the 1998 and 2000 mergers accounted for as poolings of interests) to 2,089 MMBoe at year-end 2003.

      During the same time period, proved reserves have grown from 1.31 Boe per diluted share at year-end 1987 (without giving effect to the 1998 and 2000 poolings) to 9.65 Boe per diluted share at year-end 2003. This represents a compound annual growth rate of 13%. Another measure of value per share is oil and gas production per share. Production increased from 0.18 Boe per diluted share in 1987 (without giving effect to the 1998 and 2000 poolings) to 1.05 Boe per diluted share in 2003, a compound annual growth rate of 12%.

      On April 25, 2003, Devon completed its merger with Ocean Energy, Inc. (“Ocean”). In the transaction, Devon issued 0.414 shares of its common stock for each outstanding share of Ocean common stock, or a total of approximately 74 million shares. Also, Devon assumed approximately $1.8 billion of debt from Ocean. The Ocean merger added approximately 554 million Boe to Devon’s proved reserves.

      Cash flow from operations was $3.8 billion for 2003. This allowed Devon to fully fund its $2.6 billion of capital expenditures, retire over $500 million in long-term debt and add almost $1 billion to cash on hand. Devon is continuing to accumulate cash with the intent to repay debt as it matures in 2004 and subsequent years.

      Devon drilled almost 300 exploration wells and over 1,900 development wells during 2003. See further discussion of Devon’s 2003 exploration and drilling efforts in “Item 2. Properties.”

      On January 24, 2002, Devon completed its merger with Mitchell Energy & Development Corp. (“Mitchell”). Under the terms of this merger, Devon issued approximately 30 million shares of Devon common stock and paid $1.6 billion in cash to the Mitchell stockholders. The cash portion of the merger was funded from borrowings under a $3.0 billion senior unsecured term loan credit facility. The Mitchell merger added approximately 404 million Boe to Devon’s proved reserves.

      On October 15, 2001, Devon acquired Anderson Exploration Ltd. (“Anderson”) for approximately $3.5 billion in cash. The Anderson acquisition added approximately 534 million Boe to Devon’s proved reserves.

      To fund the cash portions of the Mitchell merger and the Anderson acquisition, as well as to pay related transaction costs and retire certain long-term debt assumed from Mitchell and Anderson, Devon entered into long-term debt agreements in October 2001 that totaled $6 billion. Half of this total consisted of $3 billion of notes and debentures issued on October 3, 2001. Of this total, $1.25 billion bears interest at 7.875% and matures in September 2031. The remaining $1.75 billion bears interest at 6.875% and matures in September 2011.

      The remaining $3 billion of the $6 billion of long-term debt was borrowed under a credit facility that bears interest at floating rates. As of December 31, 2003, $2.4 billion of the original $3 billion balance had been retired. The primary sources of the repayments were the issuance of $1.5 billion of debt securities, of which $1.3 billion was used to pay down the credit facility with the remainder used to pay down other debt, and $1.4 billion from the sale of certain oil and gas properties, of which $1.1 billion was used to pay down the credit facility. As of December 31, 2003, the balance outstanding under the term loan credit facility was $0.6 billion at an average rate of 2.2%. The terms of this facility require repayment of the remaining debt balance at maturity in October 2006.

6

Table of Contents

Financial Information about Segments and Geographical Areas

      Notes 17 and 18 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this report contains information on Devon’s segments and geographical areas.

Drilling Activities

      Devon is engaged in numerous drilling activities on properties presently owned and intends to drill or develop other properties acquired in the future. Devon’s 2004 drilling activities will be focused in the Rocky Mountains, Permian Basin, Mid-Continent, Gulf of Mexico and onshore Gulf Coast areas in the U.S., the Western Sedimentary basin of Canada and in Brazil, China, Egypt, Russia, Syria and West Africa outside North America.

      The following tables set forth the results of Devon’s drilling activity for the past five years.

Total Properties

United States Properties

Canadian Properties

7

Table of Contents

International Properties

(1)	Gross wells are the sum of all wells in which Devon owns an interest.
(2)	Net wells are the sum of Devon’s working interests in gross wells.

      As of December 31, 2003, Devon was participating in the drilling of 97 gross (61.46 net) wells in the U.S., 41 gross (29.36 net) wells in Canada and 39 gross (12.53 net) wells internationally. Of these wells, through February 1, 2004, 43 gross (30.62 net) wells in the U.S., 36 gross (26.14 net) wells in Canada, and 6 gross (2.23 net) wells internationally had been completed as productive. An additional 3 gross (1.20 net) wells in the U.S. and 1 gross (1.00 net) well in Canada were dry holes. The remaining wells were still in process.

Customers

      Devon sells its gas production to a variety of customers including pipelines, utilities, gas marketing firms, industrial users and local distribution companies. Existing gathering systems and interstate and intrastate pipelines are used to consummate gas sales and deliveries.

      The principal customers for Devon’s crude oil production are refiners, remarketers and other companies, some of which have pipeline facilities near the producing properties. In the event pipeline facilities are not conveniently available, crude oil is shipped to storage, refining or pipeline facilities.

      No purchaser accounted for over 10% of Devon’s revenues in 2003.

Oil and Natural Gas Marketing

      The spot market for oil and gas is subject to volatility as supply and demand factors in various regions of North America fluctuate. In addition to fixed price contracts, Devon periodically enters into financial hedging arrangements or firm delivery commitments with a portion of its oil and gas production. These activities are intended to support targeted price levels and to manage Devon’s exposure to price fluctuations. (See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”)

      Oil Marketing. Devon’s oil production is sold under both long-term (one year or more) and short-term (less than one year) agreements at prices negotiated with third parties.

      Natural Gas Marketing. Devon’s gas production is also sold under both long-term and short-term agreements at prices negotiated with third parties. Although exact percentages vary daily, as of February 2004 approximately 78% of Devon’s natural gas production was sold under short-term contracts at variable or market-sensitive prices. These market-sensitive sales are referred to as “spot market” sales. Another 19% were committed under various long-term contracts (one year or more) which dedicate the natural gas to a purchaser for an extended period of time, but still at market sensitive prices. Devon’s remaining gas production was sold under fixed price contracts: 1% under short-term agreements and 2% under long-term contracts.

      Typically either the entire contract (in the case of short-term contracts) or the price provisions of the contract (in the case of long-term contracts) are re-negotiated from daily intervals up to one-year

8

Table of Contents

Competition

      The oil and gas business is highly competitive. Devon encounters competition by major integrated and independent oil and gas companies in acquiring drilling prospects and properties, contracting for drilling equipment and securing trained personnel. Intense competition occurs with respect to marketing, particularly of natural gas. Certain competitors have resources that substantially exceed those of Devon.

Seasonal Nature of Business

      Generally, but not always, the demand for natural gas decreases during the summer months and increases during the winter months. Seasonal anomalies such as mild winters or hot summers sometimes lessen this fluctuation. In addition, pipelines, utilities, local distribution companies and industrial users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer. This can also lessen seasonal demand fluctuations.

Government Regulation

      Devon’s operations are subject to various levels of government controls and regulations in the United States, Canada and international locations in which it operates.

      In the United States, legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Such laws and regulations have a significant impact on oil and gas drilling, pipelines, gas processing plants and production activities, increase the cost of doing business and, consequently, affect profitability. Inasmuch as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, Devon is unable to predict the future cost or impact of complying with such laws and regulations. Devon considers the cost of environmental protection a necessary and manageable part of its business. Devon has been able to plan for and comply with new environmental initiatives without materially altering its operating strategies.

      Exploration and Production. Devon’s United States operations are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells; maintaining bonding requirements in order to drill or operate wells; implementing spill prevention plans; submitting notification and receiving permits relating to the presence, use and release of certain materials incidental to oil and gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface usage and the restoration of properties upon which wells have been drilled, the plugging and abandoning of wells and the transporting of production. Devon’s operations are also subject to various conservation matters, including the regulation of the size of drilling and spacing units or proration units, the number of wells which may be drilled in a unit, and the unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and gas wells, generally limit the venting or flaring of gas, and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas Devon can produce from its wells and to limit the number of wells or the locations at which Devon can drill.

9

Table of Contents

      Certain of Devon’s oil and gas leases, including its offshore Gulf of Mexico leases, most of its leases in the San Juan Basin and many of Devon’s leases in southeast New Mexico, Montana and Wyoming, are granted by the federal government and administered by various federal agencies, including the Minerals Management Service of the Department of the Interior (“MMS”). Such leases require compliance with detailed federal regulations and orders which regulate, among other matters, drilling and operations on lands covered by these leases, and calculation and disbursement of royalty payments to the federal government. The MMS has been particularly active in recent years in evaluating and, in some cases, promulgating new rules and regulations regarding competitive lease bidding and royalty payment obligations for production from federal lands. The Federal Energy Regulatory Commission (“FERC”) also has jurisdiction over certain offshore activities pursuant to the Outer Continental Shelf Lands Act.

      Environmental and Occupational Regulations. Various federal, state and local laws and regulations concerning the discharge of incidental materials into the environment, the generation, storage, transportation and disposal of contaminants or otherwise relating to the protection of public health, natural resources, wildlife and the environment, affect Devon’s exploration, development, processing, and production operations and the costs attendant thereto. These laws and regulations increase Devon’s overall operating expenses. Devon maintains levels of insurance customary in the industry to limit its financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, salt water or other substances. However, 100% coverage is not maintained concerning any environmental claim, and no coverage is maintained with respect to any penalty or fine required to be paid by Devon because of its violation of any federal, state or local law. Devon is committed to meeting its responsibilities to protect the environment wherever it operates and anticipates making increased expenditures of both a capital and expense nature as a result of the increasingly stringent laws relating to the protection of the environment. Devon’s unreimbursed expenditures in 2003 concerning such matters were immaterial, but Devon cannot predict with any reasonable degree of certainty its future exposure concerning such matters.

      Devon is also subject to laws and regulations concerning occupational safety and health. Due to the continued changes in these laws and regulations, and the judicial construction of same, Devon is unable to predict with any reasonable degree of certainty its future costs of complying with these laws and regulations. Devon considers the cost of safety and health compliance a necessary and manageable part of its business. Devon has been able to plan for and comply with new initiatives without materially altering its operating strategies.

      Devon maintains its own internal Environmental, Health and Safety Department. This department is responsible for instituting and maintaining an environmental and safety compliance program for Devon. The program includes field inspections of properties and internal assessments of Devon’s compliance procedures.

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

      Certain of Devon’s subsidiaries 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 December 31, 2003, Devon’s consolidated balance sheet included $9 million of non-current accrued liabilities, reflected in “Other liabilities,” related to these and other environmental remediation liabilities.

10

Table of Contents

      The oil and gas industry in Canada is subject to extensive controls and regulations imposed by various levels of government. It is not expected that any of these controls or regulations will affect Devon’s Canadian operations in a manner materially different than they would affect other oil and gas companies of similar size. The following are the most important areas of control and regulation.

      The North American Free Trade Agreement. The North American Free Trade Agreement (“NAFTA”) which became effective on January 1, 1994 carries forward most of the material energy terms contained in the Canada-U.S. Free Trade Agreement. In the context of energy resources, Canada continues to remain free to determine whether exports to the United States or Mexico will be allowed, provided that any export restrictions do not (i) reduce the proportion of energy exported relative to the supply of the energy resource; (ii) impose an export price higher than the domestic price; or (iii) disrupt normal channels of supply. All parties to NAFTA are also prohibited from imposing minimum export or import price requirements.

      Exploration and Production. Devon’s Canadian operations are subject to federal and provincial governmental regulation. Such regulation include requiring licenses for the drilling of wells, regulating the location of wells and the method and ability to produce wells, surface usage and the restoration of land upon which wells have been drilled, the plugging and abandoning of wells and the transportation of production from wells. Devon’s Canadian operations are also subject to various conservation regulations, including the regulation of the size of spacing units, the number of wells which may be drilled in a unit, the unitization or pooling of oil and gas properties, the rate of production allowable from oil and gas wells, and the ability to produce oil and gas. In Canada, the effect of such regulation is to limit the amounts of oil and gas Devon can produce from its wells and to limit the number of wells or the locations at which Devon can drill.

      Royalties and Incentives. Each province and the federal government of Canada have legislation and regulations governing land tenure, royalties, production rates and taxes, environmental protection and other matters under their respective jurisdictions. The royalty regime is a significant factor in the profitability of oil and natural gas production. Royalties payable on production from lands other than Crown lands are determined by negotiations between the parties. Crown royalties are determined by government regulation and are generally calculated as a percentage of the value of the gross production with the royalty rate dependent in part upon prescribed reference prices, well productivity, geographical location, field discovery date and the type and quality of the petroleum product produced. From time to time, the governments of Canada, Alberta, British Columbia and Saskatchewan have also established incentive programs such as royalty rate reductions, royalty holidays and tax credits for the purpose of encouraging oil and natural gas exploration or enhanced recovery projects. These incentives generally have the effect of increasing the cash flow to the producer.

      Pricing and Marketing. The price of oil, natural gas and NGLs sold is determined by negotiation between buyers and sellers. An order from the National Energy Board (“NEB”) is required for oil exports from Canada. Any oil export to be made pursuant to an export contract of longer than one year, in the case of light crude, and two years, in the case of heavy crude, duration (up to 25 years) requires an exporter to obtain an export license from the NEB. The issue of such a license requires the approval of the Government of Canada. Natural gas exported from Canada is also subject to similar regulation by the NEB. Exporters are free to negotiate prices and other terms with purchasers, provided that the export

11

Table of Contents

      Environmental Regulation. The oil and natural gas industry is subject to environmental regulation pursuant to local, provincial and federal legislation. Environmental legislation provides for restrictions and prohibitions on releases or emissions of various substances produced or utilized in association with certain oil and gas industry operations. In addition, legislation requires that well and facility sites be abandoned and reclaimed to the satisfaction of provincial authorities. A breach of such legislation may result in the imposition of fines and penalties. Devon is committed to meeting its responsibilities to protect the environment wherever it operates and anticipates making increased expenditures of both a capital and expense nature as a result of the increasingly stringent laws relating to the protection of the environment. Devon’s unreimbursed expenditures in 2003 concerning such matters were immaterial, but Devon cannot predict with any reasonable degree of certainty its future exposure concerning such matters.

      Kyoto Protocol. In December 2002 the Government of Canada ratified the Kyoto Protocol. This protocol calls for Canada to reduce its greenhouse gas emissions to 6 percent below 1990 levels during the period between 2008 and 2012. The protocol will only become legally binding when it is ratified by at least 55 countries, covering at least 55 percent of the emissions addressed by the protocol. At this time, it is uncertain if the protocol will in fact be ratified. If the protocol becomes legally binding, it is expected to affect the operation of all industries in Canada, including the oil and gas industry. As details of the implementation of emissions reduction initiatives related to this protocol have yet to be announced, the effect on Devon cannot be determined at this time.

      Investment Canada Act. The Investment Canada Act requires Government of Canada approval, in certain cases, of the acquisition of control of a Canadian business by an entity that is not controlled by Canadians. In certain circumstances, the acquisition of natural resource properties may be considered to be a transaction requiring such approval.

      The oil and gas industry is subject to various types of regulation throughout the world. Legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, government agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Such laws and regulations have a significant impact on oil and gas exploration, drilling and production activities, increase the cost of doing business and, consequently, affect profitability. Inasmuch as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, Devon is unable to predict the future cost or impact of complying with such laws and regulations. The following are significant areas of regulation.

      Exploration and Production. Devon’s oil and gas concessions and operating licenses or permits are granted by host governments and administered by various foreign government agencies. Such foreign governments require compliance with detailed regulations and orders which regulate, among other matters, seismic, drilling and production operations on areas covered by concessions and permits and calculation and disbursement of royalty payments, taxes and minimum investments to the government.

      Regulation includes requiring permits for acquiring seismic data; drilling wells; maintaining bonding requirements in order to drill or operate wells; implementing spill prevention plans; submitting notification and receiving permits relating to the presence, use and release of certain materials incidental to oil and gas operations; and regulating the location of wells, the method of drilling and casing wells, the use, transportation, storage and disposal of fluids and materials used in connection with drilling and production activities, surface usage and the restoration of properties upon which wells have been drilled, the plugging and abandoning of wells and the transporting of production. Devon’s operations are also subject to regulations which may limit the number of wells or the locations at which Devon can drill.

12

Table of Contents

      Production Sharing Contracts. Many of Devon’s international licenses are governed by Production Sharing Contracts (PSC) between the concessionaires and the granting government agency. PSCs are contracts that define and regulate the framework for investments, revenue sharing, and taxation of mineral interests in foreign countries. Unlike most domestic leases, PSCs have defined production terms and time limits of generally 30 years. Many PSCs allow for recovery of investments including carried government percentages. PSCs generally contain sliding scale revenue sharing provisions. For example, at either higher production rates or higher cumulative rates of return, PSCs allow governments to generally retain higher fractions of revenue.

      Environmental Regulations. Various government laws and regulations concerning the discharge of incidental materials into the environment, the generation, storage, transportation and disposal of waste or otherwise relating to the protection of public health, natural resources, wildlife and the environment, affect Devon’s exploration, development, processing and production operations and the costs attendant thereto. In general, this consists of preparing Environmental Impact Assessments in order to receive required environmental permits to conduct seismic acquisition, drilling or construction activities. Such regulations also typically include requirements to develop emergency response plans, waste management plans, environmental protection plans and spill contingency plans. In some countries, the application of worldwide standards, such as ISO 14000 governing Environmental Management Systems, are required to be implemented for international oil and gas operations.

Employees

      As of December 31, 2003, Devon’s staff consisted of 3,924 full-time employees. Devon believes that it has good labor relations with its employees.

      Substantially all of Devon’s properties consist of interests in developed and undeveloped oil and gas leases and mineral acreage located in Devon’s core operating areas. These interests entitle Devon to drill for and produce oil, natural gas and NGLs from specific areas. Devon’s interests are mostly in the form of working interests and, to a lesser extent, overriding royalty, volumetric production payments, foreign government concessions, mineral and net profits interests and other forms of direct and indirect ownership in oil and gas properties.

      Devon also has certain midstream assets, including natural gas and NGL processing plants and pipeline systems. Devon’s most significant midstream assets are its 3,100 mile Bridgeport pipeline system and 650 MMcf per day Bridgeport gas processing plant located in North Texas.

Proved Reserves and Estimated Future Net Revenue

      Set forth below is a summary of the reserves which were evaluated by independent petroleum consultants for each of the years ended 2003, 2002 and 2001.

      “Prepared” reserves are those estimates of quantities of reserves which were prepared by an independent petroleum consultant. “Audited” reserves are those quantities of reserves which were estimated by Devon employees and audited by an independent petroleum consultant.

      The domestic reserves were evaluated by the independent petroleum consultants of LaRoche Petroleum Consultants, Ltd. and Ryder Scott Company, L.P. in each of the years presented. The Canadian reserves were evaluated by the independent petroleum consultants of AJM Petroleum

13

Table of Contents

      Devon follows what it believes to be a rational approach to not only recording oil and gas reserves, but also to subjecting these reserves to reviews by independent petroleum consultants. The reserve estimates for all of our Gulf of Mexico and international properties are prepared by an independent petroleum consulting firm every year (excluding 2% of Devon’s 2003 international reserves that were estimated by in-house engineers). In Canada, another independent petroleum consulting firm prepares a rolling one-third of our properties each year so that the reserve estimates for all the Canadian properties are prepared by outside engineers over a three-year cycle.

      For the U.S. onshore properties, reserve estimates of individually significant properties are either prepared or audited by an independent petroleum consulting firm, while estimates of minor properties are prepared by in-house engineers. This approach results in independent engineers preparing or auditing over 50% of our U.S. onshore reserves each year.

      Over any three-year period, more than 95% of Devon’s company-wide reserve estimates are prepared or audited by an independent petroleum consulting firm. Devon believes this approach provides a high degree of assurance about the validity of our reserve estimates. This is evidenced by the fact that in the past four years, Devon’s annual revisions to its reserve estimates have averaged approximately 2% of the previous year’s estimate.

      The following table sets forth Devon’s estimated proved reserves and the related estimated future net revenues, pre-tax 10% Present Value and after-tax standardized measure of discounted future net cash flows as of December 31, 2003. These estimates correspond with the method used in presenting the “Supplemental Information on Oil and Gas Operations” in Note 18 to Devon’s Consolidated Financial Statements included herein.

14

Table of Contents

(1)	Gas reserves are converted to Boe at the rate of six Mcf per Bbl of oil, based upon the approximate relative energy content of natural gas to oil, which rate is not necessarily indicative of the relationship of gas to oil prices. NGL reserves are converted to Boe on a one-to-one basis with oil. The respective prices of gas and oil are affected by market conditions and other factors in addition to relative energy content.
(2)	Estimated future net revenue represents estimated future gross revenue to be generated from the production of proved reserves, net of estimated production and development costs. The amounts shown do not give effect to non-property related expenses such as debt service and future income tax expense or to depreciation, depletion and amortization.

These amounts were calculated using prices and costs in effect as of December 31, 2003. These prices were not changed except where different prices were fixed and determinable from applicable contracts. These assumptions yield average prices over the life of Devon’s properties of $27.55 per Bbl of oil, $5.18 per Mcf of natural gas and $21.22 per Bbl of NGLs. These prices compare to December 31, 2003, New York Mercantile Exchange prices of $32.52 per Bbl for crude oil and $5.97 per MMBtu for natural gas.

(3)	See Note 18 to the consolidated financial statements included in Item 8 of this report.

      No estimates of Devon’s proved reserves have been filed with or included in reports to any federal or foreign governmental authority or agency since the beginning of the last fiscal year except (i) in filings with the SEC and Canadian Securities Regulators and (ii) in filings with the Department of Energy (“DOE”). Reserve estimates filed by Devon with the SEC and Canadian Securities Regulators correspond with the estimates of Devon reserves contained herein. Reserve estimates filed with the DOE are based upon the same underlying technical and economic assumptions as the estimates of Devon’s reserves included herein. However, the DOE requires reports to include the interests of all owners in wells that Devon operates and to exclude all interests in wells that Devon does not operate.

      The prices used in calculating the estimated future net revenues attributable to proved reserves do not necessarily reflect market prices for oil, gas and NGL production subsequent to December 31, 2003. There

15

Table of Contents

      The process of estimating oil, gas and NGLs reserves is complex, requiring significant subjective decisions in the evaluation of available geological, engineering and economic data for each reservoir. The data for a given reservoir may change substantially over time as a result of, among other things, additional development activity, production history and viability of production under varying economic conditions. Consequently, material revisions to existing reserve estimates may occur in the future.

Production, Revenue and Price History

      Certain information concerning oil and natural gas production, prices, revenues (net of all royalties, overriding royalties and other third party interests) and operating expenses for the three years ended December 31, 2003, is set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Well Statistics

      The following table sets forth Devon’s producing wells as of December 31, 2003:

(1)	Gross wells are the total number of wells in which Devon owns a working interest.
(2)	Net refers to gross wells multiplied by Devon’s fractional working interests therein.

      Devon also held numerous overriding royalty interests in oil and gas wells, a portion of which are convertible to working interests after recovery of certain costs by third parties. After converting to working interests, these overriding royalty interests will be included in Devon’s gross and net well count.

Developed and Undeveloped Acreage

      The following table sets forth Devon’s developed and undeveloped oil and gas lease and mineral acreage as of December 31, 2003.

16

Table of Contents

(1)	Gross acres are the total number of acres in which Devon owns a working interest.
(2)	Net refers to gross acres multiplied by Devon’s fractional working interests therein.