DBRS Updates Report on Devon Energy Corporation and Subsidiaries

DBRS has today updated its report on Devon Energy Corporation (Devon or the Company) and its subsidiary, Devon Finance Corporation (Devon Finance). The Devon Finance debt rating is based on the guarantee of the Company. The ratings are based on the Company’s (1) strong asset base in North America, (2) strong financial profile and (3) significant growth potential, specifically in liquids production. Despite these strengths, the ratings are limited by (1) excess natural gas supply, resulting in depressed North American natural gas pricing, (2) substantial capital expenditure investments and (3) rising production costs.

Devon maintained a solid balance sheet through Q1 2012, despite lower cash flow as a result of significantly depressed North American natural gas pricing. Increased debt (commercial paper and credit facilities) during the quarter negatively pressured leverage (adjusted debt-to-capital of 33.8%); however, it remains within the parameters for its BBB (high) rating.

Capital expenditure (capex) for the quarter is currently tracking to exceed the budgeted range of $6.5 billion to $6.9 billion for 2012. Based on current results, DBRS does not expect operating cash flow to be sufficient to fund capex and dividends should current capex spending levels continue. The majority of the $7.1 billion in cash on hand is held outside of the United States and subject to repatriation taxes. DBRS would expect that should further funding requirements be necessary, Devon will undertake such funding in a prudent manner to maintain metrics within the BBB (high) rating category.

With its continued focus on liquids-rich natural gas project developments, such as the Barnett Shale formation and production at the Jackfish operation in the oil sands, the production mix will gradually become more balanced (37% liquids at Q1 2012). Assuming a continued favourable pricing environment for liquids, Devon’s financial profile should remain strong with a higher proportion of liquids in the production mix.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.