UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission File Number 001-32318

DEVON ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On July 31, 2009, 443.8 million shares of common stock were outstanding.

 

 

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DEFINITIONS			4
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			5
PART I. Financial Information
Item 1. Consolidated Financial Statements			6
Consolidated Balance Sheets			6
Consolidated Statements of Operations			7
Consolidated Statements of Comprehensive Income (Loss)			8
Consolidated Statements of Stockholders’ Equity			9
Consolidated Statements of Cash Flows			10
Notes to Consolidated Financial Statements			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			44
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders			46
Item 6. Exhibits			47
SIGNATURES			48
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

DEFINITIONS

As used in this document:

     “Bbl” or “Bbls” means barrel or barrels.

     “Bcf” means billion cubic feet.

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

     “Btu” means British thermal units, a measure of heating value.

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

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

     “Federal Funds Rate” means the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

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

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

     “LIBOR” means London Interbank Offered Rate.

     “Mcf” means thousand cubic feet.

     “MMBbls” means million barrels.

     “MMBoe” means million Boe.

     “MMBtu” means million Btu.

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

     “NYMEX” means New York Mercantile Exchange.

     “Oil” includes crude oil and condensate.

     “SEC” means United States Securities and Exchange Commission.

     “U.S. Offshore” means the operations of Devon encompassing oil and gas properties in the Gulf of Mexico.

     “U.S. Onshore” means the operations of Devon encompassing oil and gas properties in the continental United States.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare the December 31, 2008 reserve reports and other data in our possession or available from third parties. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “project,” “estimate,” “anticipate,” “believe,” “continue” or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, our assumptions about:

•

energy markets, including the supply and demand for oil, gas, NGLs and other products or services, and the prices of oil, gas, NGLs, including regional pricing differentials, and other products or services;

•

production levels, including Canadian production subject to government royalties, which fluctuate with prices and production, and international production governed by payout agreements, which affect reported production;

•

reserve levels;

•

competitive conditions;

•

technology;

•

the availability of capital resources within the securities or capital markets and related risks such as general credit, liquidity, market and interest-rate risks;

•

capital expenditure and other contractual obligations;

•

currency exchange rates;

•

the weather;

•

inflation;

•

the availability of goods and services;

•

drilling risks;

•

future processing volumes and pipeline throughput;

•

general economic conditions, whether internationally, nationally or in the jurisdictions in which we or our subsidiaries conduct business;

•

legislative or regulatory changes, including retroactive royalty or production tax regimes, changes in environmental regulation, environmental risks and liability under federal, state and foreign environmental laws and regulations;

•

terrorism;

•

occurrence of property acquisitions or divestitures; and

•

other factors disclosed in our 2008 Annual Report on Form 10-K under “Item 2. Properties — Proved Reserves and Estimated Future Net Revenue,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

     All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.

Item 1.		Consolidated Financial Statements

		June 30,				December 31,
		2009				2008
		(Unaudited)
		(In millions, except
		share data)
ASSETS
Current assets:
Cash and cash equivalents		$	648			$	379
Accounts receivable			1,318				1,412
Income taxes receivable			27				334
Derivative financial instruments, at fair value			226				282
Other current assets			358				277
Total current assets			2,577				2,684
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($4,298 and $4,551 excluded from amortization in 2009 and 2008, respectively)			59,086				55,664
Less accumulated depreciation, depletion and amortization			40,999				32,683
Property and equipment, net			18,087				22,981
Goodwill			5,710				5,579
Other long-term assets, including $180 million and $199 million at fair value in 2009 and 2008, respectively			683				664
Total assets		$	27,057			$	31,908
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade		$	1,074			$	1,825
Revenues and royalties due to others			377				496
Short-term debt			1,508				180
Current portion of asset retirement obligations, at fair value			175				138
Accrued expenses and other current liabilities			358				496
Total current liabilities			3,492				3,135
Long-term debt			5,849				5,661
Asset retirement obligations, at fair value			1,411				1,347
Other long-term liabilities			1,036				1,026
Deferred income taxes			1,587				3,679
Stockholders’ equity:
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 443.9 million and 443.7 million shares in 2009 and 2008, respectively			44				44
Additional paid-in capital			6,363				6,257
Retained earnings			6,589				10,376
Accumulated other comprehensive income			686				383
Total stockholders’ equity			13,682				17,060
Commitments and contingencies (Note 11)
Total liabilities and stockholders’ equity		$	27,057			$	31,908

See accompanying notes to consolidated financial statements.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(Unaudited)
		(In millions, except per share amounts)
Revenues:
Oil sales		$	808			$	1,455			$	1,262			$	2,705
Gas sales			740				2,210				1,653				3,840
NGL sales			170				379				306				707
Net gain (loss) on oil and gas derivative financial instruments			13				(1,215	)			167				(2,003	)
Marketing and midstream revenues			359				719				730				1,274
Total revenues			2,090				3,548				4,118				6,523
Expenses and other income, net:
Lease operating expenses			510				537				1,034				1,043
Production taxes			47				176				89				310
Marketing and midstream operating costs and expenses			234				515				463				897
Depreciation, depletion and amortization of oil and gas properties			494				762				1,093				1,499
Depreciation and amortization of non-oil and gas properties			74				62				144				119
Accretion of asset retirement obligations			24				22				48				44
General and administrative expenses			182				180				348				328
Interest expense			90				90				173				192
Change in fair value of other financial instruments			(10	)			(40	)			(15	)			(24	)
Reduction of carrying value of oil and gas properties			—				—				6,516				—
Other expense (income), net			20				(17	)			27				(38	)
Total expenses and other income, net			1,665				2,287				9,920				4,370
Earnings (loss) from continuing operations before income taxes			425				1,261				(5,802	)			2,153
Income tax expense (benefit):
Current			51				414				53				517
Deferred			77				253				(2,194	)			391
Total income tax expense (benefit)			128				667				(2,141	)			908
Earnings (loss) from continuing operations			297				594				(3,661	)			1,245
Discontinued operations:
Earnings from discontinued operations before income taxes			17				851				16				1,040
Income tax expense			—				144				—				235
Earnings from discontinued operations			17				707				16				805
Net earnings (loss)			314				1,301				(3,645	)			2,050
Preferred stock dividends			—				3				—				5
Net earnings (loss) applicable to common stockholders		$	314			$	1,298			$	(3,645	)		$	2,045
Basic net earnings (loss) per share:
Earnings (loss) from continuing operations		$	0.67			$	1.33			$	(8.25	)		$	2.80
Earnings from discontinued operations			0.04				1.58				0.04				1.80
Net earnings (loss)		$	0.71			$	2.91			$	(8.21	)		$	4.60
Diluted net earnings (loss) per share:
Earnings (loss) from continuing operations		$	0.66			$	1.31			$	(8.25	)		$	2.76
Earnings from discontinued operations			0.04				1.57				0.04				1.79
Net earnings (loss)		$	0.70			$	2.88			$	(8.21	)		$	4.55

See accompanying notes to consolidated financial statements.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
						(Unaudited)
						(In millions)
Net earnings (loss)		$	314			$	1,301			$	(3,645	)		$	2,050
Foreign currency translation:
Change in cumulative translation adjustment			467				88				306				(294	)
Income tax (expense) benefit			(30	)			(3	)			(19	)			14
Total			437				85				287				(280	)
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in net earnings (loss)			12				4				24				8
Income tax expense			(4	)			(1	)			(8	)			(2	)
Total			8				3				16				6
Other comprehensive earnings (loss), net of tax			445				88				303				(274	)
Comprehensive income (loss)		$	759			$	1,389			$	(3,342	)		$	1,776

See accompanying notes to consolidated financial statements.

																						Accumulated
														Additional								Other								Total
		Preferred				Common Stock								Paid-In				Retained				Comprehensive				Treasury				Stockholders'
		Stock				Shares				Amount				Capital				Earnings				Income				Stock				Equity
		(Unaudited)
		(In millions)
Six Months Ended June 30, 2009:
Balance as of December 31, 2008							444			$	44			$	6,257			$	10,376			$	383			$	—			$	17,060
Net loss							—				—				—				(3,645	)			—				—				(3,645	)
Other comprehensive income							—				—				—				—				303				—				303
Stock option exercises							—				—				9				—				—				—				9
Common stock repurchased							—				—				—				—				—				(11	)			(11	)
Common stock retired							—				—				(11	)			—				—				11				—
Common stock dividends							—				—				—				(142	)			—				—				(142	)
Share-based compensation							—				—				103				—				—				—				103
Share-based compensation tax benefits							—				—				5				—				—				—				5
Balance as of June 30, 2009							444			$	44			$	6,363			$	6,589			$	686			$	—			$	13,682
Six Months Ended June 30, 2008:
Balance as of December 31, 2007		$	1				444			$	44			$	6,743			$	12,813			$	2,405			$	—			$	22,006
Net earnings			—				—				—				—				2,050				—				—				2,050
Other comprehensive loss			—				—				—				—				—				(274	)			—				(274	)
Stock option exercises			—				4				1				107				—				—				(4	)			104
Common stock repurchased			—				—				—				—				—				—				(316	)			(316	)
Common stock retired			—				(3	)			(1	)			(269	)			—				—				270				—
Redemption of preferred stock			(1	)			—				—				(149	)			—				—				—				(150	)
Common stock dividends			—				—				—				—				(141	)			—				—				(141	)
Preferred stock dividends			—				—				—				—				(5	)			—				—				(5	)
Share-based compensation			—				—				—				104				—				—				—				104
Share-based compensation tax benefits			—				—				—				55				—				—				—				55
Balance as of June 30, 2008		$	—				445			$	44			$	6,591			$	14,717			$	2,131			$	(50	)		$	23,433

See accompanying notes to consolidated financial statements.

		Six Months
		Ended June 30,
		2009				2008
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Net (loss) earnings		$	(3,645	)		$	2,050
Earnings from discontinued operations, net of tax			(16	)			(805	)
Adjustments to reconcile (loss) earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			1,237				1,618
Deferred income tax (benefit) expense			(2,194	)			391
Reduction of carrying value of oil and gas properties			6,516				—
Net unrealized loss on oil and gas derivative financial instruments			65				1,692
Other noncash charges			134				122
Net increase in working capital			(89	)			(132	)
Decrease (increase) in long-term other assets			43				(37	)
Increase in long-term other liabilities			19				181
Cash provided by operating activities — continuing operations			2,070				5,080
Cash provided by operating activities — discontinued operations			7				106
Net cash provided by operating activities			2,077				5,186
Cash flows from investing activities:
Proceeds from sales of property and equipment			2				108
Capital expenditures			(3,201	)			(3,870	)
Purchases of short-term investments			—				(50	)
Sales of long-term and short-term investments			4				295
Cash used in investing activities — continuing operations			(3,195	)			(3,517	)
Cash provided by investing activities — discontinued operations			2				1,712
Net cash used in investing activities			(3,193	)			(1,805	)
Cash flows from financing activities:
Proceeds from borrowings of long-term debt, net of issuance costs			1,187				—
Credit facility repayments			—				(3,070	)
Credit facility borrowings			—				1,620
Net commercial paper borrowings (repayments)			325				(1,004	)
Debt repayments			(1	)			(47	)
Redemption of preferred stock			—				(150	)
Proceeds from stock option exercises			9				104
Repurchases of common stock			—				(252	)
Dividends paid on common and preferred stock			(142	)			(146	)
Excess tax benefits related to share-based compensation			5				55
Net cash provided by (used in) financing activities			1,383				(2,890	)
Effect of exchange rate changes on cash			5				(19	)
Net increase in cash and cash equivalents			272				472
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			384				1,373
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	656			$	1,845

See accompanying notes to consolidated financial statements.

     The accompanying unaudited consolidated financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in Devon’s 2008 Annual Report on Form 10-K.

     The unaudited interim consolidated financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon’s financial position as of June 30, 2009 and Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2009 and 2008. To prepare the accompanying financial statements and notes, Devon’s management evaluated events or transactions that occurred subsequent to June 30, 2009 and before August 5, 2009, which was the date these financial statements were issued.

     In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” Staff Position 132(R)-1 amends FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to require additional disclosures about the types of assets and associated risks in an employer’s defined benefit pension or other postretirement plan. Staff Position 132(R)-1 is effective for fiscal years ending after December 15, 2009. Devon is evaluating the impact the adoption of Staff Position 132(R)-1 will have on its financial statement disclosures. However, Devon’s adoption of Staff Position 132(R)-1 will not affect its current accounting for its pension and postretirement plans.

     In December 2008, the SEC adopted revisions to its required oil and gas reporting disclosures. The revisions are intended to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves. In the three decades that have passed since adoption of these disclosure items, there have been significant changes in the oil and gas industry. The amendments are designed to modernize and update the oil and gas disclosure requirements to align them with current practices and changes in technology. In addition, the amendments concurrently align the SEC’s full cost accounting rules with the revised disclosures. The revised disclosure requirements must be incorporated in registration statements filed on or after January 1, 2010, and annual reports on Form 10-K for fiscal years ending on or after December 31, 2009. A company may not apply the new rules to disclosures in quarterly reports prior to the first annual report in which the revised disclosures are required.

     The following amendments have the greatest likelihood of affecting Devon’s reserve disclosures, including the comparability of its reserves disclosures with those of its peer companies:

	•		Pricing mechanism for oil and gas reserves estimation — The SEC’s current rules require proved reserve estimates to be calculated using prices as of the end of the period and held constant over the life of the reserves. Price changes can be made only to the extent provided by contractual arrangements. The revised rules require reserve estimates to be calculated using a 12-month average price. The 12-month average price will also be used for purposes of calculating the full cost ceiling limitations. Price changes can still be incorporated to the extent defined by contractual arrangements. The use of a 12-month average price rather than a single-day price is expected to reduce the impact on reserve estimates and the full cost ceiling limitations due to short-term volatility and seasonality of prices.
	•		Reasonable certainty — The SEC’s current definition of “proved oil and gas reserves” incorporate certain specific concepts such as “lowest known hydrocarbons,” which limits the ability to claim proved reserves in the absence of information on fluid contacts in a well penetration, notwithstanding the existence of other engineering and geoscientific evidence. The revised rules amend the definition to permit the use of new reliable technologies to establish the reasonable certainty of proved reserves. This revision also includes provisions for establishing levels of lowest known hydrocarbons and highest known oil through reliable technology other than well penetrations.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

			The revised rules also amend the definition of proved oil and gas reserves to include reserves located beyond development spacing areas that are immediately adjacent to developed spacing areas if economic producibility can be established with reasonable certainty. These revisions are designed to permit the use of reliable technologies to establish proved reserves in lieu of requiring companies to use specific tests. In addition, they establish a uniform standard of reasonable certainty that applies to all proved reserves, regardless of location or distance from producing wells.
			Because the revised rules generally expand the definition of proved reserves, Devon expects its proved reserve estimates will increase upon adoption of the revised rules. However, Devon is not able to estimate the magnitude of the potential increase at this time.
	•		Unproved reserves — The SEC’s current rules prohibit disclosure of reserve estimates other than proved in documents filed with the SEC. The revised rules permit disclosure of probable and possible reserves and provide definitions of probable reserves and possible reserves. Disclosure of probable and possible reserves is optional. However, such disclosures must meet specific requirements. Disclosures of probable or possible reserves must provide the same level of geographic detail as proved reserves and must state whether the reserves are developed or undeveloped. Probable and possible reserve disclosures must also provide the relative uncertainty associated with these classifications of reserves estimations. Devon has not yet determined whether it will disclose its probable and possible reserves in documents filed with the SEC.

2. Accounts Receivable

     The components of accounts receivable include the following:

		June 30, 2009				December 31, 2008
		(In millions)
Oil, gas and NGL revenues		$	719			$	789
Joint interest billings			207				263
Marketing and midstream revenues			127				153
Production tax credits			210				170
Other			61				42
Gross accounts receivable			1,324				1,417
Allowance for doubtful accounts			(6	)			(5	)
Net accounts receivable		$	1,318			$	1,412

3. Derivative Financial Instruments

     Devon periodically enters into commodity and interest rate derivative financial instruments. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility and to manage Devon’s exposure to interest rate volatility. Also, during the first eight months of 2008, Devon was subject to an embedded option derivative related to the fair value of its debentures exchangeable into shares of Chevron common stock.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     The following table presents the fair values of derivative assets and liabilities included in the accompanying balance sheets. None of Devon’s derivative instruments included in the table have been designated as hedging instruments.

		Balance Sheet Caption		Asset				Liability
				(In millions)
June 30, 2009:
Gas price collars		Derivative financial instruments, current		$	190			$	—
Interest rate swaps		Derivative financial instruments, current			36				—
Interest rate swaps		Long-term other assets			62				—
Total derivatives				$	288			$	—
December 31, 2008:
Gas price collars		Derivative financial instruments, current		$	255			$	—
Interest rate swaps		Derivative financial instruments, current			27				—
Interest rate swaps		Long-term other assets			77				—
Total derivatives				$	359			$	—

     The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying statements of operations associated with these derivative financial instruments. None of Devon’s derivative instruments included in the table have been designated as hedging instruments.

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
						(In millions)
Cash settlements receipts (payments):
Gas price collars (1)		$	114			$	(150	)		$	232			$	(150	)
Gas price swaps (1)			—				(153	)			—				(161	)
Interest rate swaps (2)			5				—				21				—
Total cash settlements			119				(303	)			253				(311	)
Unrealized (losses) gains:
Gas price collars (1)			(101	)			(620	)			(65	)			(1,028	)
Gas price swaps (1)			—				(247	)			—				(618	)
Oil price collars (1)			—				(45	)			—				(46	)
Interest rate swaps (2)			5				—				(6	)			—
Embedded option (2)			—				(155	)			—				(58	)
Total unrealized losses			(96	)			(1,067	)			(71	)			(1,750	)
Net gain (loss) recognized on statement of operations		$	23			$	(1,370	)		$	182			$	(2,061	)

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

4. Other Current Assets

     The components of other current assets include the following:

		June 30, 2009				December 31, 2008
		(In millions)
Inventories		$	275			$	197
Prepaid assets			43				49
Other			40				31
Other current assets		$	358			$	277

5. Property and Equipment

     In the first quarter of 2009, Devon reduced the carrying values of certain of its oil and gas properties due to full cost ceiling limitations. These reductions are discussed in Note 13.

6. Goodwill

     During the first six months of 2009, Devon’s goodwill increased $131 million. This increase related to Devon’s Canadian goodwill and was entirely due to foreign currency translation.

7. Debt

5.625% Senior Notes Due January 15, 2014 and 6.30% Senior Notes Due January 15, 2019

     In January 2009, Devon issued $500 million of 5.625% senior unsecured notes due January 15, 2014 and $700 million of 6.30% senior unsecured notes due January 15, 2019. The net proceeds received of $1.187 billion, after discounts and issuance costs, were used primarily to repay Devon’s $1.0 billion of outstanding commercial paper as of December 31, 2008.

Credit Lines

     Devon has two syndicated, unsecured revolving lines of credit that can be accessed to provide liquidity as needed. The following schedule summarizes the capacity of Devon’s credit facilities by maturity date, as well as its available capacity as of June 30, 2009.

Description		Amount
		(In millions)
Senior Credit Facility maturities:
April 7, 2012		$	500
April 7, 2013			2,150
Senior Credit Facility total capacity			2,650
Short-Term Facility total capacity — November 3, 2009 maturity			700
Total credit facility capacity			3,350
Less:
Outstanding credit facility borrowings			—
Outstanding commercial paper borrowings			1,330
Outstanding letters of credit			111
Total available capacity		$	1,909

     The credit facilities contain only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization to be less than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the consolidated financial statements. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

impairments. As of June 30, 2009, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at June 30, 2009, as calculated pursuant to the terms of the agreement, was 21.8%.

Commercial Paper

     Subsequent to the $1.0 billion commercial paper repayment in January 2009, Devon utilized additional commercial paper borrowings of $1.3 billion to fund capital expenditure payments in excess of cash generated by operating activities during the first half of 2009. As of June 30, 2009, Devon’s average borrowing rate on its $1.3 billion of commercial paper debt was 0.48%.

8. Asset Retirement Obligations

     The following is a summary of the changes in Devon’s asset retirement obligations (“ARO”) for the first six months of 2009 and 2008.

		Six Months
		Ended June 30,
		2009				2008
		(In millions)
ARO as of beginning of period		$	1,485			$	1,318
Liabilities incurred			43				29
Liabilities settled			(43	)			(40	)
Revision of estimated obligation			23				162
Accretion expense on discounted obligation			48				44
Foreign currency translation adjustment			30				(20	)
ARO as of end of period			1,586				1,493
Less current portion			175				63
ARO, long-term		$	1,411			$	1,430

9. Retirement Plans

Net Periodic Benefit Cost and Other Comprehensive Income

     The following table presents the components of net periodic benefit cost and other comprehensive income for Devon’s pension and other post retirement benefit plans for the three-month and six-month periods ended June 30, 2009 and 2008.

		Pension Benefits																Other Postretirement Benefits
		Three Months Ended								Six Months Ended								Three Months Ended								Six Months Ended
		June 30,								June 30,								June 30,								June 30,
		2009				2008				2009				2008				2009				2008				2009				2008
														(In millions)
Net periodic benefit cost:
Service cost		$	11			$	10			$	22			$	20			$	—			$	—			$	—			$	—
Interest cost			14				14				28				28				1				2				2				4
Expected return on plan assets			(9	)			(13	)			(18	)			(26	)			—				—				—				—
Amortization of prior service cost			1				—				2				—				—				—				—				—
Net actuarial loss			11				4				22				8				—				—				—				—
Net periodic benefit cost			28				15				56				30				1				2				2				4
Other comprehensive income:
Recognition of prior service cost in net periodic benefit cost			(1	)			—				(2	)			—				—				—				—				—
Recognition of net actuarial loss in net periodic benefit cost			(11	)			(4	)			(22	)			(8	)			—				—				—				—
Total recognized		$	16			$	11			$	32			$	22			$	1			$	2			$	2			$	4

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     Devon previously disclosed in its 2008 Annual Report on Form 10-K that it expected to contribute up to approximately $183 million to its defined benefit pension plans in 2009 and $5 million to its defined benefit postretirement plans in 2009. Devon has revised its estimate of 2009 defined benefit pension plan contributions to $55 million. As of June 30, 2009, Devon has contributed $15 million to its defined benefit pension plans and $2 million to its defined benefit postretirement plans.

10. Stockholders’ Equity

Stock Repurchases

     During the first six months of 2008, Devon repurchased 2.8 million common shares for $302 million, or $106.01 per share, under programs approved by its Board of Directors. The 2.8 million common shares include 2.0 million shares that were repurchased under Devon’s 50 million share repurchase program and 0.8 million shares that were repurchased under Devon’s ongoing, annual stock repurchase program. No such repurchases were made during the first six months of 2009.

Dividends

     Devon paid common stock dividends of $142 million and $141 million (quarterly rates of $0.16 per share) in the first six months of 2009 and 2008, respectively. Devon paid preferred stock dividends of $5 million in the first half of 2008. Devon redeemed all 1.5 million outstanding shares of its preferred stock on June 20, 2008.

11. 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 that 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. However, 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 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 are involved in matters in which it has been alleged that such subsidiaries are potentially responsible parties (“PRPs”) under CERCLA or similar state legislation with respect to various waste disposal areas owned or operated by third parties. As of June 30, 2009, Devon’s balance sheet included $1 million of accrued liabilities, reflected in other long-term liabilities, related to these and other environmental remediation liabilities. Devon does not currently believe there is a reasonable possibility of incurring additional material costs in excess of the current accruals recognized for such environmental remediation activities. With respect to the sites in which Devon subsidiaries are PRPs, Devon’s conclusion is based in large part on (i) Devon’s participation in consent decrees with both other PRPs and the Environmental Protection Agency, which provide for performing the scope of work required for remediation and contain covenants not to sue as protection to the PRPs, (ii) participation in groups as a de minimis PRP, and (iii) the availability of other defenses to liability. As a result, Devon’s monetary exposure is not expected to be material.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Royalty Matters

     Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold from federal and Indian owned or controlled lands. The principal suit in which Devon is a defendant is United States ex rel. Wright v. Chevron USA, Inc. et al. (the “Wright case”). The suit was originally filed in August 1996 in the United States District Court for the Eastern District of Texas, but was consolidated in October 2000 with other suits for pre-trial proceedings in the United States District Court for the District of Wyoming. On July 10, 2003, the District of Wyoming remanded the Wright case back to the Eastern District of Texas to resume proceedings. On April 12, 2007, the court entered a trial plan and scheduling order in which the case will proceed in phases. Two phases have been scheduled to date. The first phase was scheduled to begin in August 2008, but the defendant settled prior to trial. The second phase was scheduled to begin in February 2009, but the defendants settled prior to trial. Devon was not included in the groups of defendants selected for these first two phases. Devon believes that it has acted reasonably, has legitimate and strong defenses to all allegations in the suit, and has paid royalties in good faith. Devon does not currently believe that it is subject to material exposure with respect to this lawsuit and, therefore, no liability related to this lawsuit has been recorded.

     In 1995, the United States Congress passed the Deep Water Royalty Relief Act. The intent of this legislation was to encourage deep water exploration in the Gulf of Mexico by providing relief from the obligation to pay royalties on certain federal leases. Deep water leases issued in certain years by the Minerals Management Service (the “MMS”) have contained price thresholds, such that if the market prices for oil or 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 U.S. House of Representatives in January 2007 passed legislation that would have required companies to renegotiate the 1998 and 1999 leases as a condition of securing future federal leases. This legislation was not passed by the U.S. Senate. However, Congress may consider similar legislation in the future. In October 2007, a federal district court ruled in favor of a plaintiff who had challenged the legality of including price thresholds in deep water leases. Additionally, in January 2009 a federal appellate court upheld this district court ruling. This judgment is subject to further appeals.

     As of June 30, 2009, Devon had $82 million accrued for potential royalties on various deep water leases. Due to the uncertainty of this issue caused by the favorable federal court decisions and potential Congressional actions, Devon has ceased accruing additional royalties on its affected leases. Devon will continue to monitor developments and adjust its accruals as necessary.

Other Matters

     Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge as of the date these financial statements were issued, neither Devon nor its property is subject to any material pending legal proceedings.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

12. Fair Value Measurements

     Certain of Devon’s assets and liabilities are reported at fair value in the accompanying balance sheets. Such assets and liabilities include amounts for both financial and nonfinancial instruments. The following tables provide carrying value and fair value measurement information for such assets and liabilities as of June 30, 2009 and December 31, 2008.

		As of June 30, 2009
										Fair Value Measurements Using:
										Quoted				Significant
										Prices in				Other				Significant
										Active				Observable				Unobservable
		Carrying				Total Fair				Markets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Financial Assets (Liabilities):
Long-term investments		$	118			$	118			$	—			$	—			$	118
Gas price collars		$	190			$	190			$	—			$	190			$	—
Interest rate swaps		$	98			$	98			$	—			$	98			$	—
Debt		$	(7,357	)		$	(8,000	)		$	(1,330	)		$	(6,670	)		$	—
Asset retirement obligations		$	(1,586	)		$	(1,586	)		$	—			$	—			$	(1,586	)

		As of December 31, 2008
										Fair Value Measurements Using:
										Quoted				Significant
										Prices in				Other				Significant
										Active				Observable				Unobservable
		Carrying				Total Fair				Markets				Inputs				Inputs
		Amount				Value				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Financial Assets (Liabilities):
Long-term investments		$	122			$	122			$	—			$	—			$	122
Gas price collars		$	255			$	255			$	—			$	255			$	—
Interest rate swaps		$	104			$	104			$	—			$	104			$	—
Debt		$	(5,841	)		$	(6,106	)		$	(1,005	)		$	(5,101	)		$	—
Asset retirement obligations		$	(1,485	)		$	(1,485	)		$	—			$	—			$	(1,485	)

     A summary of the changes in Devon’s asset retirement obligations during the first half of 2009 is included in Note 8. Included below is a summary of the changes in Devon’s other Level 3 fair value measurements during the first half of 2009 (in millions).

Beginning balance		$	122
Redemptions of principal			(4	)
Ending balance		$	118

13. Reduction of Carrying Value of Oil and Gas Properties

     In the first quarter of 2009, Devon reduced the carrying values of certain of its oil and gas properties due to full cost ceiling limitations. A summary of these reductions and additional discussion is provided below.

		March 31, 2009
						Net of
		Gross				Taxes
		(In millions)
United States		$	6,408			$	4,085
Brazil			103				103
Russia			5				2
Total		$	6,516			$	4,190

     The United States reduction resulted primarily from a significant decrease in the full cost ceiling during the first three months of 2009. The lower ceiling value in the United States largely resulted from the continued effects of declining natural gas prices subsequent to December 31, 2008.

     Although oil prices improved subsequent to December 31, 2008, Brazil’s reduction resulted largely from an exploratory well drilled at the BM-BAR-3 block in the offshore Barreirinhas Basin. After drilling this well in the first quarter of 2009, Devon concluded that the well did not have adequate reserves for commercial viability. As a result, the seismic, leasehold and drilling costs associated with this well contributed to the reduction recognized in the first quarter of 2009.

     To demonstrate the changes in the full-cost ceiling for the United States and Brazil, the March 31, 2009 and December 31, 2008 weighted average wellhead prices are presented in the following table.

		March 31, 2009												December 31, 2008
		Oil				Gas				NGLs				Oil				Gas				NGLs
Country		(Per Bbl)				(Per Mcf)				(Per Bbl)				(Per Bbl)				(Per Mcf)				(Per Bbl)
United States		$	47.30			$	2.67			$	17.04			$	42.21			$	4.68			$	16.16
Brazil		$	36.71				N/A				N/A			$	26.61				N/A				N/A

     N/A — Not applicable.

     The March 31, 2009 oil and gas wellhead prices in the table above compare to the NYMEX cash price of $49.66 per Bbl for crude oil and the Henry Hub spot price of $3.63 per MMBtu for gas. The December 31, 2008 oil and gas wellhead prices in the table above compare to the NYMEX cash price of $44.60 per Bbl for crude oil and the Henry Hub spot price of $5.71 per MMBtu for gas.

     At the end of 2008, Devon’s operations in Angola were classified as discontinued as a result of Devon’s plans and ongoing activities to sell its operations in Angola. Due to a commercial discovery in the second quarter of 2009, Devon suspended marketing its Angolan operations for sale. Although Devon intends to resume marketing activities in 2010 once it has drilled its remaining commitment wells, Devon’s operations in Angola do not currently qualify as discontinued. Therefore, Devon has classified all amounts related to its Angolan operations for 2009 and prior years as continuing operations.

     In the second quarter of 2008, Devon sold its assets and terminated its operations in certain West African countries, consisting primarily of Equatorial Guinea and Gabon. As a result of the sales, Devon recognized gains totaling $736 million ($647 million after taxes) in the second quarter of 2008 from proceeds of $2.4 billion ($1.7 billion net of income taxes and purchase price adjustments). During the second quarter of 2009, Devon recognized a $17 million gain in conjunction with post-closing settlements related to these sales, as well as the sale of its assets in Cote D’Ivoire in the third quarter of 2008.

     Operating revenues related to Devon’s discontinued operations totaled $127 million in the three months ended June 30, 2008 and $332 million in the six months ended June 30, 2008. There were no operating revenues related to Devon’s discontinued operations for the three-month and six-month periods ended June 30, 2009.

     The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations as of June 30, 2009 and December 31, 2008.

		Devon's Consolidated		June 30,				December 31,
		Balance Sheet Caption		2009				2008
				(In millions)
Cash and other current assets		Other current assets		$	18			$	14
Property and equipment, net of accumulated depreciation, depletion and amortization		Other long-term assets		$	8			$	9
Accounts payable and other current liabilities		Other current liabilities		$	10			$	6

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

15. Earnings (Loss) Per Share

     The following table reconciles earnings (loss) from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings (loss) per share for the three-month and six-month periods ended June 30, 2009 and 2008. Because a net loss from continuing operations was generated during the six-month period ended June 30, 2009, the dilutive shares produce an antidilutive net loss per share result. Therefore, the diluted loss per share from continuing operations in the six months ended June 30, 2009 reported in the accompanying 2009 statement of operations is the same as the basic loss per share amount.

										Earnings
		Earnings				Common				(Loss)
		(Loss)				Shares				per Share
		(In millions, except per share amounts)
Three Months Ended June 30, 2009:
Earnings from continuing operations		$	297				444
Attributable to participating securities			(5	)			(5	)
Basic earnings per share			292				439			$	0.67
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				2
Diluted earnings per share		$	292				441			$	0.66
Three Months Ended June 30, 2008:
Earnings from continuing operations		$	594				446
Attributable to participating securities			(4	)			(4	)
Less preferred stock dividends			(3	)			—
Basic earnings per share			587				442			$	1.33
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				4
Diluted earnings per share		$	587				446			$	1.31
Six Months Ended June 30, 2009:
Loss from continuing operations		$	(3,661	)			444
Attributable to participating securities			43				(5	)
Basic and diluted loss per share		$	(3,618	)			439			$	(8.25	)
Six Months Ended June 30, 2008:
Earnings from continuing operations		$	1,245				445
Attributable to participating securities			(10	)			(4	)
Less preferred stock dividends			(5	)
Basic earnings per share			1,230				441			$	2.80
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				4
Diluted earnings per share		$	1,230				445			$	2.76