UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2008

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

Devon Energy Corporation

Delaware (State or Other Jurisdiction of Incorporation or Organization)		73-1567067 (I.R.S. Employer Identification Number)

20 North Broadway Oklahoma City, Oklahoma (Address of Principal Executive Offices)		73102-8260 (Zip Code)

Registrant’s telephone number, including area code:
(405) 235-3611

Former name, former address and former fiscal year, if changed from last report.
Not applicable

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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.

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

     As of October 31, 2008, 441.5 million shares of the registrant’s common stock were outstanding.

 

 

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DEVON ENERGY CORPORATION

INDEX TO FORM 10-Q QUARTERLY REPORT
TO THE SECURITIES AND EXCHANGE COMMISSION

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			4
DEFINITIONS			5
PART I. FINANCIAL INFORMATION			6
Item 1. Consolidated Financial Statements			6
Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007			6
Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2008 and 2007			7
Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended September 30, 2008 and 2007			8
Consolidated Statements of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2008 and 2007			9
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2008 and 2007			10
Notes to Consolidated Financial Statements (Unaudited)			11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			47
PART II. OTHER INFORMATION			48
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults Upon Senior Securities			48
Item 4. Submission of Matters to a Vote of Security Holders			48
Item 5. Other Information			48
Item 6. Exhibits			49
SIGNATURES			49
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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 that was used to prepare the December 31, 2007 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,” or “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;
	•		production levels, including our Canadian production subject to government royalties, which fluctuate with prices and production, and portions of our International production governed by payout agreements which affect reported production;
	•		reserve levels;
	•		competitive conditions;
	•		technology;
	•		the availability of capital resources;
	•		capital expenditure and other contractual obligations;
	•		the supply and demand for oil, natural gas, NGLs and other energy products or services;
	•		the price of oil, natural gas, NGLs and other energy products or services;
	•		currency exchange rates, particularly the Canadian-to-U.S. dollar exchange rate;
	•		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 or the timing of such planned transactions;
	•		the securities or capital markets and related risks such as general credit, liquidity, market and interest-rate risks; and
	•		other factors disclosed in Devon’s 2007 Annual Report on Form 10-K/A 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.

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.

     “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.

     “LIBOR” means London Interbank Offered Rate.

     “Mcf” means thousand cubic feet.

     “MMBbls” means million barrels.

     “MMBoe” means million Boe.

     “MMBtu” means million Btu.

     “Oil” includes crude oil and condensate.

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

     “NYMEX” means New York Mercantile Exchange.

     “SEC” means United States Securities and Exchange Commission.

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

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

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

PART I. Financial Information

Item 1. Consolidated Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2008				2007
		(Unaudited)
		(In millions)
ASSETS
Current assets:
Cash and cash equivalents		$	1,193			$	1,364
Short-term investments, at fair value			1				372
Accounts receivable			1,710				1,779
Current assets held for sale			88				120
Other current assets, including $142 million at fair value in 2008			427				279
Total current assets			3,419				3,914
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($4,073 and $3,417 excluded from amortization in 2008 and 2007, respectively)			53,750				48,473
Less accumulated depreciation, depletion and amortization			22,300				20,394
			31,450				28,079
Investment in Chevron Corporation common stock, at fair value			1,170				1,324
Goodwill			5,966				6,172
Long-term assets held for sale			19				1,512
Other long-term assets, including $158 million at fair value in 2008			631				455
Total assets		$	42,655			$	41,456
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable — trade		$	1,559			$	1,360
Revenues and royalties due to others			775				578
Income taxes payable			188				97
Short-term debt			—				1,004
Current portion of asset retirement obligation, at fair value			115				82
Current liabilities associated with assets held for sale			12				145
Accrued expenses and other current liabilities			410				391
Total current liabilities			3,059				3,657
Debentures exchangeable into shares of Chevron Corporation common stock			—				641
Other long-term debt			4,837				6,283
Derivative financial instruments, at fair value			—				488
Asset retirement obligation, at fair value			1,456				1,236
Long-term liabilities associated with assets held for sale			1				404
Other long-term liabilities			833				699
Deferred income taxes			7,179				6,042
Stockholders’ equity:
Preferred stock of $1.00 par value. Authorized 4.5 million shares; issued 1.5 million shares ($150 million aggregate liquidation value) in 2007			—				1
Common stock of $0.10 par value. Authorized 1.0 billion shares; issued 441.4 million and 444.2 million shares in 2008 and 2007, respectively			44				44
Additional paid-in capital			6,219				6,743
Retained earnings			17,265				12,813
Accumulated other comprehensive income			1,762				2,405
Total stockholders’ equity			25,290				22,006
Commitments and contingencies (Note 9)
Total liabilities and stockholders’ equity		$	42,655			$	41,456

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)
		(In millions, except per share amounts)
Revenues:
Oil sales		$	1,296			$	905			$	4,001			$	2,461
Gas sales			2,107				1,175				5,947				3,787
NGL sales			362				242				1,069				643
Net gain (loss) on oil and gas derivative financial instruments			1,592				7				(411	)			1
Marketing and midstream revenues			621				434				1,895				1,273
Total revenues			5,978				2,763				12,501				8,165
Expenses and other income, net:
Lease operating expenses			591				457				1,634				1,326
Production taxes			152				85				462				255
Marketing and midstream operating costs and expenses			452				301				1,349				912
Depreciation, depletion and amortization of oil and gas properties			781				705				2,280				1,937
Depreciation and amortization of non-oil and gas properties			67				51				186				146
Accretion of asset retirement obligation			22				19				66				55
General and administrative expenses			146				126				474				358
Interest expense			69				108				261				325
Change in fair value of other financial instruments			46				(22	)			22				(31	)
Other income, net			(83	)			(28	)			(121	)			(71	)
Total expenses and other income, net			2,243				1,802				6,613				5,212
Earnings from continuing operations before income tax expense			3,735				961				5,888				2,953
Income tax expense:
Current			226				96				743				459
Deferred			1,000				221				1,391				452
Total income tax expense			1,226				317				2,134				911
Earnings from continuing operations			2,509				644				3,754				2,042
Discontinued operations:
Earnings from discontinued operations before income tax expense			93				177				1,133				442
Income tax (benefit) expense			(16	)			86				219				194
Earnings from discontinued operations			109				91				914				248
Net earnings			2,618				735				4,668				2,290
Preferred stock dividends			—				2				5				7
Net earnings applicable to common stockholders		$	2,618			$	733			$	4,663			$	2,283
Basic net earnings per share:
Earnings from continuing operations		$	5.67			$	1.45			$	8.44			$	4.57
Earnings from discontinued operations			0.25				0.20				2.06				0.56
Net earnings		$	5.92			$	1.65			$	10.50			$	5.13
Diluted net earnings per share:
Earnings from continuing operations		$	5.63			$	1.43			$	8.36			$	4.52
Earnings from discontinued operations			0.24				0.20				2.04				0.55
Net earnings		$	5.87			$	1.63			$	10.40			$	5.07
Weighted average common shares outstanding:
Basic			442				445				444				445
Diluted			446				450				448				450

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)
		(In millions)
Net earnings		$	2,618			$	735			$	4,668			$	2,290
Foreign currency translation:
Change in cumulative translation adjustment			(386	)			579				(679	)			1,311
Income tax benefit (expense)			15				(33	)			29				(74	)
Total			(371	)			546				(650	)			1,237
Pension and postretirement benefit plans:
Recognition of net actuarial loss and prior service cost in net earnings			4				4				12				12
Income tax expense			(2	)			(2	)			(5	)			(5	)
Total			2				2				7				7
Other			—				—				—				(1	)
Other comprehensive (loss) income, net of tax			(369	)			548				(643	)			1,243
Comprehensive income		$	2,249			$	1,283			$	4,025			$	3,533

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																						Accumulated
														Additional								Other								Total
		Preferred				Common Stock								Paid-In				Retained				Comprehensive				Treasury				Stockholders’
		Stock				Shares				Amount				Capital				Earnings				Income				Stock				Equity
		(Unaudited)
		(In millions)
Nine Months Ended September 30, 2008:
Balance as of December 31, 2007		$	1				444			$	44			$	6,743			$	12,813			$	2,405			$	—			$	22,006
Net earnings			—				—				—				—				4,668				—				—				4,668
Other comprehensive loss			—				—				—				—				—				(643	)			—				(643	)
Stock option exercises			—				4				1				112				—				—				(4	)			109
Common stock repurchased			—				—				—				—				—				—				(681	)			(681	)
Common stock retired			—				(7	)			(1	)			(684	)			—				—				685				—
Redemption of preferred stock			(1	)			—				—				(149	)			—				—				—				(150	)
Common stock dividends			—				—				—				—				(211	)			—				—				(211	)
Preferred stock dividends			—				—				—				—				(5	)			—				—				(5	)
Share-based compensation			—				—				—				139				—				—				—				139
Excess tax benefits on share-based compensation			—				—				—				58				—				—				—				58
Balance as of September 30, 2008		$	—				441			$	44			$	6,219			$	17,265			$	1,762			$	—			$	25,290
Nine Months Ended September 30, 2007:
Balance as of December 31, 2006		$	1				444			$	44			$	6,840			$	9,114			$	1,444			$	(1	)		$	17,442
Adoption of FASB Statement No. 159			—				—				—				—				364				(364	)			—				—
Adoption of FASB Interpretation No. 48			—				—				—				—				(10	)			—				—				(10	)
Adoption of FASB Statement No. 158			—				—				—				—				(1	)			16				—				15
Net earnings			—				—				—				—				2,290				—				—				2,290
Other comprehensive income			—				—				—				—				—				1,243				—				1,243
Stock option exercises			—				3				1				70				—				—				—				71
Common stock repurchased			—				—				—				—				—				—				(138	)			(138	)
Common stock retired			—				(2	)			—				(139	)			—				—				139				—
Common stock dividends			—				—				—				—				(186	)			—				—				(186	)
Preferred stock dividends			—				—				—				—				(7	)			—				—				(7	)
Share-based compensation			—				—				—				92				—				—				—				92
Excess tax benefits on share-based compensation			—				—				—				20				—				—				—				20
Balance as of September 30, 2007		$	1				445			$	45			$	6,883			$	11,564			$	2,339			$	—			$	20,832

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months
		Ended September 30,
		2008				2007
		(Unaudited)
		(In millions)
Cash flows from operating activities:
Net earnings		$	4,668			$	2,290
Earnings from discontinued operations, net of tax			(914	)			(248	)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			2,466				2,083
Deferred income tax expense			1,391				452
Net unrealized (gain) loss on oil and gas derivative financial instruments			(140	)			30
Other noncash charges			217				94
(Increase) decrease in assets:
Accounts receivable			32				(12	)
Other current assets			(85	)			(65	)
Other long-term assets			(63	)			(53	)
Increase (decrease) in liabilities:
Accounts payable			223				113
Revenues and royalties due to others			278				(2	)
Income taxes payable			36				139
Other current liabilities			(124	)			(78	)
Other long-term liabilities			94				(4	)
Cash provided by operating activities — continuing operations			8,079				4,739
Cash provided by operating activities — discontinued operations			102				370
Net cash provided by operating activities			8,181				5,109
Cash flows from investing activities:
Proceeds from sales of property and equipment			116				39
Capital expenditures			(6,179	)			(4,477	)
Purchases of short-term investments			(50	)			(659	)
Redemptions of short-term and long-term investments			297				892
Cash used in investing activities — continuing operations			(5,816	)			(4,205	)
Cash provided by (used in) investing activities — discontinued operations			1,854				(153	)
Net cash used in investing activities			(3,962	)			(4,358	)
Cash flows from financing activities:
Credit facility repayments			(3,191	)			—
Credit facility borrowings			1,741				400
Net commercial paper repayments			(1,004	)			(129	)
Principal payments on debt			(1,031	)			(166	)
Preferred stock redemption			(150	)			—
Proceeds from stock option exercises			109				71
Repurchases of common stock			(665	)			(133	)
Dividends paid on common and preferred stock			(216	)			(193	)
Excess tax benefits related to share-based compensation			58				20
Net cash used in financing activities			(4,349	)			(130	)
Effect of exchange rate changes on cash			(47	)			44
Net (decrease) increase in cash and cash equivalents			(177	)			665
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			1,373				756
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	1,196			$	1,421
Supplementary cash flow data:
Interest paid (net of capitalized interest)		$	298			$	226
Income taxes paid — continuing and discontinued operations		$	1,162			$	293

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

     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 2007 Annual Report on Form 10-K/A.

     The unaudited interim consolidated financial statements furnished in this report reflect all adjustments which are, in the opinion of management, necessary to a fair statement of Devon’s financial position as of September 30, 2008 and Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2008 and 2007. Except for the reclassification of auction rate securities discussed below, all such adjustments are of a normal recurring nature.

Reclassification of Auction Rate Securities

     At December 31, 2007, Devon held $372 million of auction rate securities. Such securities are rated AAA—the highest rating—by one or more rating agencies and are collateralized by student loans that are substantially guaranteed by the United States government. Although Devon’s auction rate securities generally have contractual maturities of more than 20 years, the underlying interest rates on such securities are scheduled to reset every seven to 28 days. Therefore, these auction rate securities were generally priced and subsequently traded as short-term investments because of the interest rate reset feature. As a result, Devon classified its auction rate securities as short-term investments in the accompanying December 31, 2007 consolidated balance sheet and in prior periods.

     During the first nine months of 2008, Devon reduced its auction rate securities holdings to $125 million. However, since February 8, 2008, Devon has experienced difficulty selling its securities due to the failure of the auction mechanism, which provided liquidity to these securities. An auction failure means that the parties wishing to sell securities could not do so. The securities for which auctions have failed will continue to accrue interest and be auctioned every seven to 28 days until the auction succeeds, the issuer calls the securities or the securities mature.

     From February 2008, when auctions began failing, to September 30, 2008, issuers redeemed $27 million of Devon’s auction rate securities holdings at par. Additionally, Devon’s auction rate securities holdings as of September 30, 2008, include approximately $1 million of securities that were called at par value by the issuer and were repaid on October 1, 2008. These called securities are classified as short-term investments in the accompanying September 30, 2008 consolidated balance sheet. However, based on continued auction failures and the current market for Devon’s auction rate securities, Devon has classified the $124 million of securities that have not been called as of September 30, 2008 as long-term investments. These securities are included in other long-term assets in the accompanying September 30, 2008 consolidated balance sheet. Devon has the ability to hold the securities until maturity. At this time, Devon does not believe the values of its long-term securities are impaired.

Recently Issued Accounting Standards Not Yet Adopted

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141(R), Business Combinations, which replaces Statement No. 141. Statement No. 141(R) retains the fundamental requirements of Statement No. 141 that an acquirer be identified and the acquisition method of accounting (previously called the purchase method) be used for all business combinations. Statement No. 141(R)’s scope is broader than that of Statement No. 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, Statement No. 141(R) improves the comparability of the information about business combinations provided in financial reports. Statement No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, as well as any resulting goodwill. Statement No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Devon will evaluate how the new requirements of Statement No. 141(R) would impact any business combinations completed in 2009 or thereafter.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     In December 2007, the FASB also issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51. A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Statement No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Under Statement No. 160, noncontrolling interests in a subsidiary must be reported as a component of consolidated equity separate from the parent’s equity. Additionally, the amounts of consolidated net income attributable to both the parent and the noncontrolling interest must be reported separately on the face of the income statement. Statement No. 160 is effective for fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. Devon does not expect the adoption of Statement No. 160 to have a material impact on its financial statements and related disclosures.

     In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. Statement No. 161 requires additional disclosures about derivative and hedging activities and is effective for fiscal years and interim periods beginning after November 15, 2008. Devon is evaluating the impact the adoption of Statement No. 161 will have on its financial statement disclosures. However, Devon’s adoption of Statement No. 161 will not affect its current accounting for derivative and hedging activities.

2. Other Current Assets

     The components of other current assets include the following:

		September 30, 2008				December 31, 2007
		(In millions)
Inventories		$	217			$	144
Derivative financial instruments, at fair value			142				12
Other current assets			68				123
Total		$	427			$	279

3. Property and Equipment and Asset Retirement Obligations

Divestitures

     Near the beginning of 2007, Devon announced plans to sell its assets and terminate its operations located in Africa. This divestiture package consisted primarily of Devon’s operations located in Egypt and the West African countries of Equatorial Guinea, Gabon and Cote d’Ivoire. All of the assets in these countries were sold prior to September 30, 2008. Additional information regarding Devon’s Egyptian and West African operations, which are presented as discontinued in the accompanying financial statements, is provided in Note 13.

Asset Retirement Obligations (“ARO”)

     The following is a summary of the changes in Devon’s ARO for the first nine months of 2008 and 2007.

		Nine Months
		Ended September 30,
		2008				2007
		(In millions)
Asset retirement obligation as of beginning of period		$	1,318			$	857
Liabilities incurred			48				44
Liabilities settled			(59	)			(52	)
Revision of estimated obligation			244				311
Accretion expense on discounted obligation			66				55
Foreign currency translation adjustment			(46	)			85
Asset retirement obligation as of end of period			1,571				1,300
Less current portion			115				54
Asset retirement obligation, long-term		$	1,456			$	1,246

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     During the first nine months of 2008 and 2007, Devon recognized increases of $244 million and $311 million, respectively, to its ARO. The ARO increased $162 million in 2008 as a result of an overall increase in abandonment cost estimates and the effect of a decrease in the discount rate used to present value the obligations. In the third quarter of 2008, the ARO increased $82 million as a result of higher abandonment cost estimates related to certain offshore platforms that were destroyed by Hurricane Ike. See additional discussion regarding this revision in Note 9 — Hurricane Contingencies. The primary factors causing the 2007 fair value increase were an overall increase in abandonment cost estimates and an increase in the assumed inflation rate.

4. Derivative Financial Instruments

     Devon periodically enters into derivative financial instruments with respect to a portion of its oil and gas production that hedge the future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility. Devon’s derivative financial instruments include financial price swaps, whereby Devon will receive a fixed price for its production and pay a variable market price to the contract counterparty, and costless price collars that set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty to the collars.

     Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. In the third quarter of 2008, Devon entered into interest rate swaps to mitigate a portion of the fair value effects of interest rate fluctuations on its fixed-rate debt. Under the terms of these swaps, Devon receives a fixed rate and pays a variable rate on a total notional amount of $1.05 billion.

     As discussed more fully in Note 1 to the consolidated financial statements in Devon’s 2007 Annual Report on Form 10-K/A, Devon’s derivative financial instruments are recognized at the current fair value on the balance sheet. Unrealized changes in such fair values are recorded in the statement of operations. Cash settlements with counterparties to Devon’s price swaps, price collars and interest rate swaps are also recorded in the statement of operations.

Commodity Derivative Financial Instruments

     The following tables present the fair values included in the accompanying balance sheet and the cash settlements and net unrealized gains and losses included in the accompanying statement of operations associated with Devon’s commodity derivative financial instruments.

		September 30, 2008				December 31, 2007
		(In millions)
Fair values:
Other current assets:
Gas price swaps		$	39			$	12
Gas price collars			98				—
Total commodity derivative financial instruments, other current assets		$	137			$	12
Other long-term assets — gas price collars		$	16			$	—
Accrued expenses and other current liabilities — oil collars		$	1			$	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(In millions)
Cash settlements:
Gas price swaps		$	(115	)		$	14			$	(276	)		$	29
Gas price collars			(125	)			—				(275	)			2
Total cash settlements (paid) received			(240	)			14				(551	)			31
Unrealized gains (losses) on fair value changes:
Gas price swaps			645				(7	)			27				(26	)
Gas price collars			1,142				—				114				(4	)
Oil price collars			45				—				(1	)			—
Total unrealized gains (losses) on fair value changes			1,832				(7	)			140				(30	)
Net gain (loss) on oil and gas derivative financial instruments		$	1,592			$	7			$	(411	)		$	1

Interest Rate Swaps

     As of September 30, 2008, Devon’s interest rate swaps had a positive fair value of $23 million. Based on scheduled settlement dates for these swaps, $5 million of this amount is classified as other current assets in the accompanying balance sheet. The remaining $18 million is classified as other long-term assets. In addition, the $23 million unrealized gain during the third quarter of 2008 is included in change in fair value of other financial instruments in the accompanying statement of operations. There were no cash settlements in the third quarter of 2008.

5. Debt

Senior Credit Facility

     In April 2008, Devon extended the maturity of $2.0 billion of its existing $2.5 billion five-year, syndicated, unsecured revolving line of credit (the “Senior Credit Facility”) from April 7, 2012 to April 7, 2013. Lenders representing $0.5 billion of the Senior Credit Facility did not approve a maturity date extension. Therefore, the maturity date for $0.5 billion of the Senior Credit Facility remains at April 7, 2012. In August 2008, Devon secured an additional $150 million of available credit under its Senior Credit Facility. The additional $150 million will mature on April 7, 2013. This increases Devon’s total line of credit under its Senior Credit Facility to $2.65 billion.

     The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon to maintain a ratio of total funded debt to total capitalization, as defined in the credit agreement, of no more than 65%. As of September 30, 2008, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at September 30, 2008, as calculated pursuant to the terms of the agreement, was 15.4%.

     During the second quarter of 2008, Devon repaid $2.5 billion of outstanding commercial paper and Senior Credit Facility borrowings primarily with proceeds received from the sales of assets in West Africa and cash generated from operations. As of November 5, 2008, Devon’s available capacity under its Senior Credit Facility was approximately $2.4 billion. This available capacity is net of $118 million of outstanding letters of credit and $137 million of outstanding commercial paper borrowings as of November 5, 2008.

Short-Term Credit Facilities

     Devon had a $1.5 billion 364-day, syndicated, unsecured revolving senior credit facility. This facility matured on August 5, 2008 and was not extended.

     On November 5, 2008, Devon established a new $700 million 364-day, syndicated, unsecured revolving senior credit facility (the

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

“Short-Term Facility”). This new facility provides Devon with incremental liquidity to support the retirement of maturing debentures during 2008 and near-term capital expenditures. The Short-Term Facility also supports an increase in Devon’s commercial paper program to $2.85 billion.

     The Short-Term Facility matures on November 3, 2009. On the maturity date, all amounts outstanding will be due and payable at that time. Amounts borrowed under the Short-Term Facility bear interest at various fixed rate options for periods of up to 12 months. Such rates are generally based on LIBOR or the prime rate. The Short-Term Facility currently provides for an annual facility fee of approximately $0.7 million that is payable quarterly in arrears.

     The agreement governing the Short-Term Facility contains substantially the same covenants and restrictions as Devon’s existing Senior Credit Facility, including a maximum allowed debt-to-capitalization ratio of 65% as defined in the agreement.

     As of November 5, 2008, there were no amounts borrowed under the Short-Term Facility, and the available capacity was $700 million.

Exchangeable Debentures

     During 2008, virtually all holders of exchangeable debentures exercised their option to exchange their debentures for shares of Chevron Corporation (“Chevron”) common stock owned by Devon. The debentures matured on August 15, 2008. In lieu of delivering its shares of Chevron common stock, Devon exercised its option to pay the exchanging debenture holders cash totaling $1.0 billion.

6. 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 fair value measurement information for such assets and liabilities as of September 30, 2008 and December 31, 2007. Following the tables, additional information is provided for those assets and liabilities in which Devon uses significant unobservable inputs (Level 3) to measure fair value.

		As of September 30, 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):
Short-term and long-term investments		$	125			$	125			$	1			$	—			$	124
Investment in Chevron common stock		$	1,170			$	1,170			$	1,170			$	—			$	—
Net oil and gas price swaps and collars		$	152			$	152			$	—			$	152			$	—
Interest rate swaps		$	23			$	23			$	—			$	23			$	—
Asset retirement obligation		$	(1,571	)		$	(1,571	)		$	—			$	—			$	(1,571	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

		As of December 31, 2007
										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):
Short-term investments		$	372			$	372			$	372			$	—			$	—
Investment in Chevron common stock		$	1,324			$	1,324			$	1,324			$	—			$	—
Gas price swaps		$	12			$	12			$	—			$	12			$	—
Embedded option in exchangeable debentures		$	(488	)		$	(488	)		$	—			$	(488	)		$	—
Asset retirement obligation		$	(1,318	)		$	(1,318	)		$	—			$	—			$	(1,318	)

Level 3 Fair Value Measurements

     Short-term and long-term investments — Devon’s short-term and long-term investments presented in the tables above as of September 30, 2008 and December 31, 2007 consisted entirely of auction rate securities, which are discussed in greater detail in Note 1. As of December 31, 2007, Devon estimated the fair values of its short-term investments using quoted market prices. However, due to the auction failures discussed in Note 1 and the lack of an active market for Devon’s long-term auction rate securities, quoted market prices for the vast majority of these securities were not available as of September 30, 2008. Therefore, Devon used valuation techniques that rely on unobservable, or Level 3, inputs to estimate the fair values of its long-term auction rate securities as of September 30, 2008. These inputs were based on the AAA credit rating of the securities, the probability of full repayment of the securities considering the United States government guarantees of substantially all of the underlying student loans, the collection of all accrued interest to date and continued receipts of principal at par. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of September 30, 2008. At this time, Devon does not believe the values of its long-term securities are impaired.

     Included below is a summary of the changes in Devon’s Level 3 short-term and long-term investments during the first nine months of 2008 (in millions).

Beginning balance		$	—
Transfers from Level 1 to Level 3			129
Redemptions of principal			(5	)
Ending balance		$	124

     Asset retirement obligation — The fair values of the asset retirement obligations are estimated using internal discounted cash flow calculations based upon Devon’s estimates of future retirement costs. A summary of the changes in Devon’s asset retirement obligation, including revisions of the estimated fair value in 2008 and 2007, is presented in Note 3.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

7. 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 nine-month periods ended September 30, 2008 and 2007.

		Pension Benefits																Other Postretirement Benefits
		Three Months								Nine Months								Three Months								Nine Months
		Ended September 30,								Ended September 30,								Ended September 30,								Ended September 30,
		2008				2007				2008				2007				2008				2007				2008				2007
		(In millions)
Net periodic benefit cost:
Service cost		$	10			$	8			$	30			$	23			$	—			$	—			$	—			$	—
Interest cost			14				11				42				33				2				1				6				3
Expected return on plan assets			(13	)			(12	)			(39	)			(36	)			—				—				—				—
Net actuarial loss and prior service cost			4				3				12				10				—				—				—				—
Net periodic benefit cost			15				10				45				30				2				1				6				3
Other comprehensive income:
Recognition of net actuarial loss and prior service cost in net periodic benefit cost			(4	)			(4	)			(12	)			(12	)			—				—				—				—
Total recognized		$	11			$	6			$	33			$	18			$	2			$	1			$	6			$	3

     Devon previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to contribute $8 million to its defined benefit pension plans and $6 million to its defined benefit postretirement plans in 2008. Subsequent to the end of 2007, Devon raised its estimated 2008 contributions to its pension plans to $24 million. As of September 30, 2008, Devon had contributed $14 million to the pension plans and $5 million to the postretirement plans.

     Devon’s assets related to its pension plans have been adversely impacted by the performance of the equity markets in recent months, especially since September 30, 2008. Losses incurred on these investments will likely cause Devon to contribute more to its pension plans in 2009 than what would otherwise have been expected. Such losses will also likely cause an increase in Devon’s pension expense in 2009. However, the amounts of additional contributions and pension expense are not expected to have a material impact on Devon’s liquidity or results of operations.

8. Stockholders’ Equity

Preferred Stock Redemption

     On June 20, 2008, Devon redeemed all 1.5 million outstanding shares of its 6.49% Series A cumulative preferred stock. Each share of preferred stock was redeemed for cash at a redemption price of $100 per share, plus accrued and unpaid dividends up to the redemption date.

Stock Repurchases

     During the first nine months of 2008, Devon repurchased 6.5 million shares for $665 million, or $102.56 per share, under programs approved by its Board of Directors. The 6.5 million shares include 4.5 million shares that were repurchased under Devon’s 50 million share program and 2.0 million shares that were repurchased under Devon’s ongoing, annual stock repurchase program.

Dividends

     Devon paid common stock dividends of $211 million (or a quarterly rate of $0.16 per share) and $186 million (or a quarterly rate of $0.14 per share) in the first nine months of 2008 and 2007, respectively. Devon paid preferred stock dividends of $5 million and

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

$7 million in the first nine months of 2008 and 2007, respectively. The decrease in the preferred stock dividend is due to the redemption of the preferred stock in the second quarter of 2008.

9. Commitments and Contingencies

     Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. However, actual amounts could differ materially from management’s estimate.

Royalty Matters

     Numerous gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and 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 is scheduled to begin in February 2009. Devon is 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 natural gas exceeded the thresholds for a given year, royalty relief would not be granted for that year. Deep water leases issued in 1998 and 1999 did not include price thresholds. In 2006, the MMS informed Devon and other oil and gas companies that the omission of price thresholds from these leases was an error on its part and was not its intention. Accordingly, the MMS invited Devon and the other affected oil and gas producers to renegotiate the terms and conditions of the 1998 and 1999 leases to add price threshold provisions to the lease agreements for periods after October 1, 2006. Devon has not renegotiated any of its existing leases.

     On several occasions in 2007 and the first nine months of 2008, the U.S. House of Representatives passed or attempted to pass legislation that would have required companies to pay additional fees or renegotiate the 1998 and 1999 leases as a condition of securing future federal leases. The legislation that was passed by the U.S. House of Representatives was not passed by the U.S. Senate. However, Congress may consider similar legislation in the future. Although Devon has not signed renegotiated leases, it has accrued through September 30, 2008, approximately $44 million for royalties that would be due if price thresholds were added to its 1998 and 1999 leases effective October 1, 2006.

     Additionally, Devon has $37 million accrued at September 30, 2008 for royalties related to leases issued under the Deep Water Royalty Relief Act in years other than 1998 or 1999. The leases issued in these other years did include price thresholds, but in October 2007 a federal district court ruled in favor of a plaintiff who had challenged the legality of including price thresholds in these leases. This judgment is subject to appeal, and Devon will continue to accrue for royalties on these leases until the matter is resolved.

Environmental Matters

     Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations,

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 September 30, 2008, Devon’s balance sheet included $2 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.

Hurricane Contingencies

     Historically, Devon maintained a comprehensive insurance program that included coverage for physical damage to its offshore facilities caused by hurricanes. Devon’s historical insurance program also included substantial business interruption coverage. Under the terms of this insurance program, Devon was entitled to be reimbursed for the portion of production suspended longer than forty-five days, subject to upper limits to oil and natural gas prices. Also, the terms of the insurance included a standard, per-event deductible of $1 million for offshore losses as well as a $15 million aggregate annual deductible.

     Devon suffered insured damages in the third quarter of 2005 related to hurricanes that struck the Gulf of Mexico. As of September 30, 2008, Devon had received $467 million in 2006 as a full settlement of the amount due from its primary insurers and an additional $13 million in 2007 as a full settlement of the amount due from certain of its secondary insurers. Devon’s claims under its then existing insurance arrangements included both physical damages and business interruption claims. As of September 30, 2008, $418 million of these proceeds had been utilized as reimbursement of past repair costs and deductible amounts, and only $5 million is expected to be spent on future repairs. The $57 million of excess recoveries to date were recorded as other income in the third quarter of 2008. Devon expects to receive approximately $44 million of additional recoveries in the fourth quarter of 2008. Such amount will be recorded as other income at the time it is received. While Devon continues to negotiate with its secondary insurers, it may be forced to initiate litigation against these insurers to recover the remaining amounts Devon believes it is entitled to under the terms of its insurance coverage in 2005.

     The policy underlying the insurance program terms described above expired on August 31, 2006. Due to significant changes in the insurance marketplace, Devon no longer has coverage for damage that may be caused by named windstorms from the Gulf of Mexico. As a result, Devon’s current insurance program includes coverage for physical damage and business interruption but does not have such coverage for damages or business interruption caused from named windstorms.

     During the third quarter of 2008, Hurricanes Ike and Gustav damaged certain of Devon’s oil and gas facilities and transportation systems in the Gulf of Mexico. These damages relate to both production operations that will be repaired and restored and production operations that will not be restored. These damages are uninsured losses because they resulted from named windstorms.

     For the damaged facilities and transportation systems for which Devon intends to resume operations after repairs have been made, a $14 million loss was recognized in the third quarter of 2008. This loss is included in lease operating expenses in the accompanying statement of operations.

     The facilities for which Devon will not restore production operations consist of certain platforms that were completely destroyed.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Devon has begun performing asset retirement activities associated with the destroyed platforms and related wells. The time and effort required to complete such activities is expected to be significant due to the hazardous conditions created by the hurricanes. As a result, the estimated costs to complete the asset retirement activities are $82 million higher than Devon’s previously estimated asset retirement obligation related to the destroyed platforms and related wells. Therefore, in the third quarter of 2008, Devon increased its asset retirement obligation by $82 million with a corresponding increase to oil and gas property and equipment in the accompanying balance sheet. Based on the projected timing of the retirement activities, half of this asset retirement obligation increase was recorded to the current portion and half was recorded to the long-term portion.

Other Matters

     Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge as of the date of this report, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject.

10. Share-Based Compensation

     With the approval of Devon’s Compensation Committee, Devon modified the share-based compensation arrangements for certain members of senior management (“executives”) in the second quarter of 2008. The modified compensation arrangements provide that executives who meet certain years-of-service and age criteria can retire and continue vesting in outstanding share-based grants. As a condition to receiving the benefits of these modifications, the executives must agree not to use or disclose Devon’s confidential information and not to solicit Devon’s employees and customers. The executives are required to agree to these conditions at retirement and again in each subsequent year until all grants have vested.

     This modification results in accelerated expense recognition as executives approach the years-of-service and age criteria. Additionally, when the modification was made in the second quarter of 2008, certain executives had already met the years-of-service and age criteria. As a result, Devon recognized an additional $27 million of share-based compensation expense in the second quarter of 2008 related to this modification. This additional expense would have been recognized in future reporting periods if the modification had not been made and the executives continued their employment at Devon.

     With the approval of Devon’s Compensation Committee, Devon granted 0.4 million restricted stock awards and units to certain non-executive employees in the third quarter of 2008. The grant date fair value was $39 million based upon a grant price of $87.33 per share.

11. Change in Fair Value of Other Financial Instruments

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

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
		(In millions)
Losses (gains) from:
Chevron common stock		$	236			$	(133	)		$	154			$	(285	)
Option embedded in exchangeable debentures			(167	)			111				(109	)			255
Interest rate swaps			(23	)			—				(23	)			(1	)
Total		$	46			$	(22	)		$	22			$	(31	)

12. Income Taxes

     During the first nine months of 2008, Devon repatriated $2.3 billion in earnings from certain foreign subsidiaries to the United States. Devon also expects to repatriate approximately $0.4 billion in earnings from certain foreign subsidiaries to the United States during the last three months of 2008. Subsequent to these repatriations, Devon does not expect to repatriate similar earnings from its

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

historical operations in the foreseeable future. Also in the second quarter of 2008, Devon made certain tax policy election changes to minimize the taxes Devon otherwise would pay to all relevant tax jurisdictions for the cash repatriations, as well as the taxable gains associated with the sales of assets in West Africa.

     As a result of the completed and planned repatriations, as well as the tax policy election changes, Devon recognized additional tax expense of $312 million during the second quarter of 2008. Of the $312 million, $295 million was recognized as current income tax expense, and $17 million was recognized as deferred tax expense. Included in the $312 million additional tax expense is $183 million for tax positions in which the resulting tax benefits are not recognized in the accompanying consolidated financial statements. If recognized, all of these unrecognized tax benefits would affect Devon’s effective income tax rate.

13. Discontinued Operations

Divestiture Activity

     In November 2006 and January 2007, Devon announced its plans to divest its operations in Egypt and West Africa, including Equatorial Guinea, Gabon, Cote d’Ivoire and other countries in the region. Pursuant to accounting rules for discontinued operations, Devon has classified all amounts related to its operations in Egypt and West Africa as discontinued 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).

     In the third quarter of 2008, Devon sold its assets and terminated its operations in Cote d’Ivoire. As a result of this sale, Devon recognized a gain of $83 million ($101 million after tax) in the third quarter of 2008 from proceeds of $205 million ($163 million net of purchase price adjustments).

     With the completion of the Cote d’Ivoire transaction, Devon has divested all its oil and gas producing properties in Africa. The Africa divestitures have generated just over $3.0 billion of sales proceeds. After income taxes and purchase price adjustments, such proceeds totaled $2.2 billion and generated after-tax gains of $0.8 billion.

Financial Statement Information

     Operating revenues related to Devon’s discontinued operations totaled $17 million and $206 million in the three months ended September 30, 2008 and September 30, 2007 and $349 million and $596 million in the nine months ended September 30, 2008 and 2007, respectively. These amounts do not include the divestiture gains discussed in the previous section.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

     The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations as of September 30, 2008 and December 31, 2007.

		September 30, 2008				December 31, 2007
		(In millions)
Assets:
Cash		$	3			$	9
Accounts receivable			—				83
Other current assets			85				28
Current assets		$	88			$	120
Long-term assets — property and equipment, net of accumulated depreciation, depletion and amortization		$	19			$	1,512
Liabilities:
Accounts payable — trade		$	1			$	23
Revenues and royalties due to others			—				11
Income taxes payable			6				100
Current portion of asset retirement obligation			—				9
Accrued expenses and other current liabilities			5				2
Current liabilities		$	12			$	145
Asset retirement obligation, long-term		$	—			$	35
Deferred income taxes			1				366
Other long-term liabilities			—				3
Long-term liabilities		$	1			$	404

14. Earnings Per Share

     The following table reconciles earnings from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share for the three-month and nine-month periods ended September 30, 2008 and 2007.

		Net				Weighted
		Earnings				Average
		Applicable to				Common				Net
		Common				Shares				Earnings
		Stockholders				Outstanding				per Share
		(In millions, except per share amounts)
Three Months Ended September 30, 2008:
Basic earnings per share		$	2,509				442			$	5.67
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				4
Diluted earnings per share		$	2,509				446			$	5.63
Three Months Ended September 30, 2007:
Earnings from continuing operations		$	644
Less preferred stock dividends			(2	)
Basic earnings per share			642				445			$	1.45
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				5
Diluted earnings per share		$	642				450			$	1.43

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

		Net				Weighted
		Earnings				Average
		Applicable to				Common				Net
		Common				Shares				Earnings
		Stockholders				Outstanding				per Share
		(In millions, except per share amounts)
Nine Months Ended September 30, 2008:
Earnings from continuing operations		$	3,754
Less preferred stock dividends			(5	)
Basic earnings per share			3,749				444			$	8.44
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				4
Diluted earnings per share		$	3,749				448			$	8.36
Nine Months Ended September 30, 2007:
Earnings from continuing operations		$	2,042
Less preferred stock dividends			(7	)
Basic earnings per share			2,035				445			$	4.57
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				5
Diluted earnings per share		$	2,035				450			$	4.52