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, 2007

or

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

Commission File No. 001-32318

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer 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

     The number of shares outstanding of Registrant’s common stock, par value $0.10, as of October 31, 2007, was 444,960,000.

 

 

[This page intentionally left blank.]

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, 2007 (Unaudited) and December 31, 2006			6
Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2007 and 2006			7
Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended September 30, 2007 and 2006			8
Consolidated Statements of Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2007 and 2006			9
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2007 and 2006			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			41
Item 4. Controls And Procedures			41
PART II. OTHER INFORMATION			43
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 5. Other Information			43
Item 6. Exhibits			44
SIGNATURES			44
INDEX TO EXHIBITS			45
First Amendment to Amended and Restated Credit Agreement
Second Amendment to Amended and Restated Credit Agreement
Certification of J. Larry Nichols Pursuant to Section 302
Certification of Danny J. Heatly Pursuant to Section 302
Certification of J. Larry Nichols Pursuant to Section 906
Certification of Danny J. Heatly Pursuant to Section 906

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     This quarterly report on Form 10-Q 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 which was used to prepare the December 31, 2006 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 the negatives or variations of such terms 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 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;
	•		the weather;
	•		inflation;
	•		the availability of goods and services;
	•		drilling risks;
	•		future processing volumes and pipeline throughput;
	•		general economic conditions, either internationally or 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
	•		other factors disclosed in Devon’s 2006 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.

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.

     “MMBbls” means million barrels.

     “MMBoe” means million Boe.

     “Mcf” means thousand cubic feet.

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

     “Oil” includes crude oil and condensate.

     “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.

     “United States Onshore” means the properties of Devon in the continental United States.

     “United States Offshore” means the properties of Devon in the 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,
		2007				2006
		(Unaudited)
		(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	1,392				692
Short-term investments, at fair value			341				574
Accounts receivable			1,435				1,324
Current assets held for sale			176				232
Other current assets			340				390
Total current assets			3,684				3,212
Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($3,371 and $3,293 excluded from amortization in 2007 and 2006, respectively)			46,546				39,585
Less accumulated depreciation, depletion and amortization			19,561				16,429
			26,985				23,156
Investment in Chevron Corporation common stock, at fair value			1,327				1,043
Goodwill			6,150				5,706
Assets held for sale			1,707				1,619
Other assets			418				327
Total assets		$	40,271				35,063
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable – trade		$	1,268				1,154
Revenues and royalties due to others			529				522
Income taxes payable			187				82
Short-term debt			2,076				2,205
Accrued interest payable			191				114
Current liabilities associated with assets held for sale			190				173
Accrued expenses and other current liabilities			325				395
Total current liabilities			4,766				4,645
Debentures exchangeable into shares of Chevron Corporation common stock			638				727
Other long-term debt			5,235				4,841
Financial instruments, at fair value			495				302
Asset retirement obligation, at fair value			1,246				804
Liabilities associated with assets held for sale			445				429
Other liabilities			622				583
Deferred income taxes			5,992				5,290
Stockholders’ equity:
Preferred stock of $1.00 par value. Authorized 4,500,000 shares; issued 1,500,000 ($150 million aggregate liquidation value)			1				1
Common stock of $0.10 par value. Authorized 800,000,000 shares; issued 444,699,000 in 2007 and 444,040,000 in 2006			45				44
Additional paid-in capital			6,883				6,840
Retained earnings			11,564				9,114
Accumulated other comprehensive income			2,339				1,444
Treasury stock, at cost: 11,000 shares in 2006			—				(1	)
Total stockholders’ equity			20,832				17,442
Commitments and contingencies (Note 6)
Total liabilities and stockholders’ equity		$	40,271				35,063

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,
		2007				2006				2007				2006
		(Unaudited)
		(In millions, except per share amounts)
Revenues:
Oil sales		$	905				696				2,461				1,806
Gas sales			1,182				1,186				3,788				3,709
NGL sales			242				204				643				573
Marketing and midstream revenues			434				413				1,273				1,261
Total revenues			2,763				2,499				8,165				7,349
Expenses and other income, net:
Lease operating expenses			457				363				1,326				1,036
Production taxes			85				92				255				261
Marketing and midstream operating costs and expenses			301				301				912				924
Depreciation, depletion and amortization of oil and gas properties			705				547				1,937				1,480
Depreciation and amortization of non-oil and gas properties			51				43				146				127
Accretion of asset retirement obligation			19				12				55				35
General and administrative expenses			126				104				358				284
Interest expense			108				112				325				315
Change in fair value of financial instruments			(22	)			22				(31	)			81
Reduction of carrying value of oil and gas properties			—				20				—				36
Other income, net			(28	)			(28	)			(71	)			(86	)
Total expenses and other income, net			1,802				1,588				5,212				4,493
Earnings from continuing operations before income tax expense			961				911				2,953				2,856
Income tax expense:
Current			96				147				459				471
Deferred			221				111				452				253
Total income tax expense			317				258				911				724
Earnings from continuing operations			644				653				2,042				2,132
Discontinued operations:
Earnings from discontinued operations before income tax expense			177				112				442				337
Income tax expense			86				60				194				205
Earnings from discontinued operations			91				52				248				132
Net earnings			735				705				2,290				2,264
Preferred stock dividends			2				2				7				7
Net earnings applicable to common stockholders		$	733				703				2,283				2,257
Basic net earnings per share:
Earnings from continuing operations		$	1.45				1.47				4.57				4.81
Earnings from discontinued operations			0.20				0.12				0.56				0.30
Net earnings		$	1.65				1.59				5.13				5.11
Diluted net earnings per share:
Earnings from continuing operations		$	1.43				1.45				4.52				4.76
Earnings from discontinued operations			0.20				0.12				0.55				0.29
Net earnings		$	1.63				1.57				5.07				5.05
Weighted average common shares outstanding:
Basic			445				441				445				441
Diluted			450				447				450				447

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,
		2007				2006				2007				2006
		(Unaudited)
		(In millions)
Net earnings		$	735				705				2,290				2,264
Foreign currency translation:
Change in cumulative translation adjustment			579				(1	)			1,311				303
Income taxes			(33	)			—				(74	)			7
Total			546				(1	)			1,237				310
Derivative financial instruments – reclassification adjustment for realized gains included in net earnings			—				—				(1	)			(1	)
Pension and postretirement benefit plans:
Recognition of net actuarial loss in net earnings			4				—				12				—
Income taxes			(2	)			—				(5	)			—
Total			2				—				7				—
Investment in Chevron Corporation common stock (Note 1):
Unrealized holding gain			—				39				—				114
Income taxes			—				(14	)			—				(41	)
Total			—				25				—				73
Other comprehensive income, net of tax			548				24				1,243				382
Comprehensive income		$	1,283				729				3,533				2,646

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, 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 (Note 1)			—				—				—				—				364				(364	)			—				—
Adoption of FASB Interpretation No. 48 (Note 1)			—				—				—				—				(10	)			—				—				(10	)
Adoption of FASB Statement No. 158 (Note 4)			—				—				—				—				(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			—				(2	)			—				—				—				—				(138	)			(138	)
Common stock retired			—				—				—				(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
Nine Months Ended September 30, 2006
Balance as of December 31, 2005		$	1				443			$	44				6,928				6,477				1,414				(2	)			14,862
Net earnings			—				—				—				—				2,264				—				—				2,264
Other comprehensive income			—				—				—				—				—				382				—				382
Stock option exercises			—				2				—				53				—				—				—				53
Restricted stock grants, net of cancellations			—				1				—				(3	)			—				—				(2	)			(5	)
Common stock repurchased			—				(4	)			—				—				—				—				(253	)			(253	)
Common stock retired			—				—				—				(256	)			—				—				256				—
Common stock dividends			—				—				—				—				(148	)			—				—				(148	)
Preferred stock dividends			—				—				—				—				(7	)			—				—				(7	)
Share-based compensation			—				—				—				55				—				—				—				55
Excess tax benefits on share-based compensation			—				—				—				14				—				—				—				14
Balance as of September 30, 2006		$	1				442			$	44				6,791				8,586				1,796				(1	)			17,217

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		September 30,
		2007				2006
		(Unaudited)
		(In Millions)
Cash flows from operating activities:
Net earnings		$	2,290				2,264
Earnings from discontinued operations, net of tax			(248	)			(132	)
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation, depletion and amortization			2,083				1,607
Deferred income tax expense			452				253
Net gain on sales of non-oil and gas property and equipment			(1	)			(5	)
Reduction of carrying value of oil and gas properties			—				36
Other noncash charges			125				163
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(12	)			206
Other current assets			(65	)			(45	)
Long-term other assets			(53	)			(37	)
Increase (decrease) in:
Accounts payable			111				(59	)
Income taxes payable			139				(34	)
Other current liabilities			(78	)			197
Long-term other liabilities			(4	)			(1	)
Cash provided by operating activities – continuing operations			4,739				4,413
Cash provided by operating activities – discontinued operations			370				469
Net cash provided by operating activities			5,109				4,882
Cash flows from investing activities:
Proceeds from sales of property and equipment			39				36
Capital expenditures, including acquisitions of businesses			(4,477	)			(5,959	)
Purchases of short-term investments			(659	)			(1,868	)
Sales of short-term investments			892				2,424
Cash used in investing activities – continuing operations			(4,205	)			(5,367	)
Cash used in investing activities – discontinued operations			(153	)			(187	)
Net cash used in investing activities			(4,358	)			(5,554	)
Cash flows from financing activities:
Net senior credit facility borrowings, net of issuance costs			400				—
Net commercial paper (repayments) borrowings, net of issuance costs			(129	)			1,439
Principal payments on debt, including current maturities			(166	)			(860	)
Proceeds from exercise of stock options			71				53
Repurchases of common stock			(133	)			(253	)
Excess tax benefits related to share-based compensation			20				14
Dividends paid on common stock			(186	)			(148	)
Dividends paid on preferred stock			(7	)			(7	)
Net cash (used in) provided by financing activities			(130	)			238
Effect of exchange rate changes on cash			44				24
Net increase (decrease) in cash and cash equivalents			665				(410	)
Cash and cash equivalents at beginning of period (including cash related to assets held for sale)			756				1,606
Cash and cash equivalents at end of period (including cash related to assets held for sale)		$	1,421				1,196
Supplementary cash flow data:
Interest paid (net of capitalized interest)		$	226				349
Income taxes paid		$	293				581

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

1. Summary of Significant Accounting Policies

     The accompanying consolidated financial statements and notes thereto of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, 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 thereto should be read in conjunction with the consolidated financial statements and notes thereto included in Devon’s 2006 Annual Report on Form 10-K.

     In the opinion of Devon’s management, all adjustments (all of which are normal and recurring) that have been made are necessary to fairly state the consolidated financial position of Devon and its subsidiaries as of September 30, 2007, and the results of their operations and their cash flows for the three-month and nine-month periods ended September 30, 2007 and 2006.

Net Earnings Per Common 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, 2007 and 2006.

		Net
		Earnings				Weighted
		Applicable to				Average				Net
		Common				Common Shares				Earnings
		Stockholders				Outstanding				per Share
		(In millions, except per share amounts)
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
Three Months Ended September 30, 2006:
Earnings from continuing operations		$	653
Less preferred stock dividends			(2	)
Basic earnings per share			651				441			$	1.47
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				6
Diluted earnings per share		$	651				447			$	1.45
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
Nine Months Ended September 30, 2006:
Earnings from continuing operations		$	2,132
Less preferred stock dividends			(7	)
Basic earnings per share			2,125				441			$	4.81
Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options			—				6
Diluted earnings per share		$	2,125				447			$	4.76

DEVON ENERGY CORPORATION AND SUBSIDIARIES

     Certain options to purchase shares of Devon’s common stock are excluded from the dilution calculations because the options are antidilutive. During the three-month and nine-month periods ended September 30, 2007, 2.1 million and 4.0 million shares were excluded from the diluted earnings per share calculations, respectively. During both the three-month and nine-month periods ended September 30, 2006, 2.6 million shares were excluded from the diluted earnings per share calculations.

Short-term Investments and Other Marketable Securities – Change in Accounting Principle

     Devon owns approximately 14.2 million shares of Chevron Corporation (“Chevron”) common stock. The majority of these shares are held in connection with debt owed by Devon that contains an exchange option. This exchange option allows the debt holders, prior to the debt’s maturity, to exchange the debt for the shares of Chevron common stock owned by Devon.

     The shares of Chevron common stock and the exchange option embedded in the debt have always been recorded on Devon’s balance sheet at fair value. However, pursuant to accounting rules prior to January 1, 2007, only the change in fair value of the embedded option has historically been included in Devon’s results of operations. Conversely, the change in fair value of the Chevron common stock has not been included in Devon’s results of operations, but instead has been recorded directly to stockholders’ equity as part of “accumulated other comprehensive income.”

     Effective January 1, 2007, Devon adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. Statement No. 159 allows a company the option to value its financial assets and liabilities, on an instrument by instrument basis, at fair value, and include the change in fair value of such assets and liabilities in its results of operations. Devon chose to apply the provisions of Statement No. 159 to its shares of Chevron common stock. Accordingly, beginning with the first quarter of 2007, the change in fair value of the Chevron common stock owned by Devon, along with the change in fair value of the related exchange option, are both included in Devon’s results of operations.

     In the three-month and nine-month periods ended September 30, 2007, the change in fair value of financial instruments caption on Devon’s statements of operations includes unrealized gains of $133 million and $285 million, respectively, related to the Chevron common stock, and unrealized losses of $111 million and $255 million, respectively, related to the embedded option. In the three-month and nine-month periods ended September 30, 2006, prior to adopting Statement No. 159, unrealized losses of $22 million and $83 million, respectively, related to the change in fair value of the embedded option were included in the change in fair value of financial instruments caption on Devon’s statements of operations.

     As of December 31, 2006, $364 million of after-tax unrealized gains related to Devon’s investment in the Chevron common stock was included in accumulated other comprehensive income. This is the amount of unrealized gains that, prior to Devon’s adoption of Statement No. 159, had not been recorded in Devon’s historical results of operations. Upon the adoption of Statement No. 159 as of January 1, 2007, this $364 million of unrealized gains was reclassified on Devon’s balance sheet from accumulated other comprehensive income to retained earnings.

     In conjunction with the adoption of Statement No. 159, Devon also adopted on January 1, 2007 Statement of Financial Accounting Standards No. 157, Fair Value Measurements. Statement No. 157 provides a common definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, but does not require any new fair value measurements. The adoption of Statement No. 157 had no impact on Devon’s financial statements, but it did result in additional required disclosures as set forth in Note 7.

Income Taxes – Change in Accounting Principle

     Devon and its subsidiaries are subject to current income taxes assessed by the federal and various state jurisdictions in the United States and by other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and

DEVON ENERGY CORPORATION AND SUBSIDIARIES

liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

     At September 30, 2007, undistributed earnings of foreign subsidiaries included in continuing operations were determined to be permanently reinvested. Therefore, no U.S. deferred income taxes were provided on such amounts at September 30, 2007. If it becomes apparent that some or all of the undistributed earnings will be distributed, Devon would then record taxes on those earnings.

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. Interpretation No. 48 prescribes a threshold for recognizing the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in accrued expenses and other current liabilities. Interest and penalties related to unrecognized tax benefits are included in income tax expense.

     On January 1, 2007, Devon adopted Interpretation No. 48 and recorded a $10 million reduction to the January 1, 2007 balance of retained earnings related to unrecognized tax benefits. The $10 million includes $8 million for related interest and penalties. An additional $2 million of liabilities were recorded with a corresponding increase to goodwill.

     As a result of the adoption of Interpretation No. 48, certain liabilities included in income taxes payable and deferred income taxes were reclassified to other current and long-term liabilities in the accompanying balance sheet. The total $12 million increase in liabilities included a $15 million increase to long-term liabilities, partially offset by a $3 million reduction to current liabilities.

     As of January 1, 2007, Devon’s unrecognized tax benefits were $114 million. This amount included $82 million that, if recognized, would affect Devon’s effective income tax rate.

     Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

Jurisdiction		Tax Years Open
U.S. federal		2002-2006
Various U.S. states		2001-2006
Canada federal		2000-2006
Various Canadian provinces		2000-2006
Various other foreign jurisdictions		1997-2006

     Devon is currently in the final stages of the administrative review process for certain open tax years. In addition, certain statute of limitation expirations are scheduled to occur in the next twelve months. Due to these factors, Devon anticipates it is reasonably possible that liabilities for certain tax positions will decrease between $15 million and $25 million within the next twelve months.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

2. Property and Equipment and Asset Retirement Obligations (“ARO”)

Divestitures

     On November 14, 2006, Devon announced that it intended to divest its operations in Egypt. Devon closed the sale of its Egyptian properties on October 4, 2007. Also, on January 23, 2007, Devon announced that it intends to divest its operations in West Africa. See Note 11 for more discussion regarding these divestiture activities.

Asset Retirement Obligations

     The following is a summary of the changes in Devon’s ARO for the first nine months of 2007 and 2006.

		Nine Months Ended
		September 30,
		2007				2006
		(In millions)
Asset retirement obligation as of beginning of period		$	857				636
Liabilities incurred			44				92
Liabilities settled			(52	)			(39	)
Revision of estimated obligation			311				135
Accretion expense on discounted obligation			55				35
Foreign currency translation adjustment			85				13
Asset retirement obligation as of end of period			1,300				872
Less current portion			54				45
Asset retirement obligation, long-term		$	1,246				827

     During the nine months ended September 30, 2007 and 2006, Devon recognized a $311 million and $135 million revision to its ARO, respectively. 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. The effect of these factors was partially offset by the effect of an increase in the discount rate used to calculate the present value of the obligations. The primary factor causing the 2006 fair value increase was an overall increase in abandonment cost estimates.

3. Debt

Senior Credit Facility

     In April 2007, Devon extended the maturity of its existing $2.5 billion five-year, syndicated, unsecured revolving line of credit (the “Senior Credit Facility”) from April 7, 2011 to April 7, 2012.

     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, 2007, Devon was in compliance with this covenant. Devon’s debt-to-capitalization ratio at September 30, 2007, as calculated pursuant to the terms of the agreement, was 24.8%.

     As of September 30, 2007, Devon had $400 million of outstanding borrowings under the Senior Credit Facility at an average rate of 5.85%. The available capacity under the Senior Credit Facility as of September 30, 2007, net of these borrowings as well as $1.7 billion of outstanding commercial paper and $280 million of outstanding letters of credit, was approximately $128 million.

Short-Term Credit Facility

     On August 7, 2007, Devon established a new $1.5 billion 364-day, syndicated, unsecured revolving senior credit facility (the “Short-Term Facility”). This new facility provides Devon with provisional interim liquidity until it receives the proceeds from divestitures of assets in Africa (see Note 11). The Short-Term Facility was also used to support an increase in Devon’s commercial paper program from $2 billion to $3.5 billion.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

     The Short-Term Facility matures 364 days from the closing date. On the maturity date, all amounts outstanding will be due and payable at that time unless the maturity is extended. Prior to the maturity date, Devon has the option to convert any outstanding principal amount of loans under the Short-Term Facility to a term loan which will be repayable in a single payment 364 days from the maturity date.

     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 less than the prime rate. Devon may also elect to borrow at the prime rate. The Short-Term Facility currently provides for an annual facility fee of approximately $1.0 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 September 30, 2007, there were no amounts borrowed under the Short-Term Facility, and the available capacity was $1.5 billion.

Commercial Paper

     As of September 30, 2007, Devon had $1.7 billion of outstanding commercial paper at an average rate of 5.66%.

Exchangeable Debentures

     During the third quarter of 2007, certain holders of exchangeable debentures exercised their option to convert their debentures prior to the August 15, 2008 maturity date. Devon has the option to settle conversions of the exchangeable debentures with either shares of Chevron common stock or cash equal to the market value of Chevron common stock at the time of conversion. Devon paid $166 million in cash to settle the conversions in the third quarter of 2007. As a result of the $166 million payment, Devon retired outstanding exchangeable debentures totaling $104 million as well as the related embedded derivative option with a value of $62 million.

     As of September 30, 2007, the Chevron exchangeable debentures are due within one year. However, Devon continues to classify this debt as long-term because it has the intent and ability to refinance these debentures on a long-term basis with the available capacity under its existing credit facilities or other long-term financing arrangements.

4. 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, 2007 and 2006.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

		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,
		2007				2006				2007				2006				2007				2006				2007				2006
														(In millions)
Net periodic benefit cost:
Service cost		$	8				6				23				18				—				—				—				—
Interest cost			11				10				33				30				1				1				3				3
Expected return on plan assets			(12	)			(11	)			(36	)			(33	)			—				—				—				—
Net actuarial loss			3				3				10				9				—				—				—				—
Net periodic benefit cost			10				8				30				24				1				1				3				3
Other comprehensive income:
Recognition of net actuarial loss in net periodic benefit cost			(4	)			—				(12	)			—				—				—				—				—
Total recognized		$	6				8				18				24				1				1				3				3

     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). Statement No. 158 requires the measurement of plan assets and benefit obligations as of the date of the employer’s fiscal year-end, beginning with fiscal years ending after December 15, 2008. Although not required until 2008, Devon adopted this measurement-date requirement in the second quarter of 2007 and is changing its measurement date from November 30 to December 31. As a result, Devon used data as of December 31, 2006 to remeasure its plans assets and benefit obligations previously measured using data as of November 30, 2006. As a result of the remeasurement, Devon recognized the following amounts in the second quarter of 2007.

		Increase (Decrease)
		(In millions)
Other long-term liabilities			(26	)
Deferred income tax liabilities			9
Retained earnings			(1	)
Accumulated other comprehensive income			16
General and administrative expenses			2

Revisions to Retirement Plans

     Devon has various noncontributory defined benefit pension plans, including qualified and nonqualified plans (“Defined Benefit Plans”), that provide defined levels of benefits to its domestic employees. Devon also has a 401(k) Incentive Savings Plan (“401(k) Plan”) that covers its domestic employees. Benefits under the 401(k) Plan consist of a discretionary match of a percentage of employees’ contributions to the 401(k) Plan.

     In the second quarter of 2007, Devon adopted an enhanced defined contribution structure related to the 401(k) Plan to be effective January 1, 2008. Participants in this enhanced defined contribution structure will continue to receive a discretionary match of a percentage of their contributions to the 401(k) Plan. These participants will also receive additional, nondiscretionary contributions by Devon calculated as a percentage of annual compensation. The percentage will vary based on the employee’s years of service.

     On or before November 15, 2007, existing eligible employees will elect to either continue to participate in the Defined Benefit Plan or participate in the enhanced defined contribution structure of the 401(k) Plan. Employees who continue to participate in the Defined Benefit Plans will continue to accrue benefits under the existing provisions of the Defined Benefit Plans. Employees who elect to participate in the enhanced defined contribution structure will receive enhanced contributions to the 401(k) Plan and will retain the benefits which they have accrued under the Defined Benefit Plan as of December 31, 2007. However, such employees will only be entitled to the

DEVON ENERGY CORPORATION AND SUBSIDIARIES

benefits which have accrued in the Defined Benefit Plans as of December 31, 2007, after all applicable vesting requirements have been met. Employees hired on or after October 1, 2007 will not have an election and will only participate in the 401(k) Plan and the enhanced defined contribution structure.

     The effect the employee elections will have on Devon’s benefit obligations and related expenses will not be known until such elections are made with respect to the Defined Benefit Plans. However, based upon the most likely employee election scenarios, Devon expects that the effect, including any accelerated recognition of obligations of the Defined Benefit Plans, will be immaterial to its financial statements.

5. Stockholders’ Equity

Stock Repurchases

     In August 2005, Devon’s Board of Directors approved a stock repurchase program to repurchase up to 50 million shares of Devon’s common stock. This program was suspended in 2006 as a result of the $2.0 billion acquisition of oil and gas properties from Chief Holdings LLC (“Chief”) in June 2006. Prior to the suspension of the program and as of September 30, 2007, Devon had repurchased 6.5 million shares under this program for $387 million, or $59.80 per share. Although this program expires at the end of 2007, it could be extended. Should the Board of Directors elect to extend this repurchase program beyond the end of 2007, management expects to resume repurchases in conjunction with the closings of the planned sales of Devon’s operations in West Africa (see Note 11).

     On June 6, 2007, Devon’s Board of Directors approved an ongoing, annual stock repurchase program to offset dilution resulting from restricted stock issued to, and options exercised by, employees. The new repurchase program authorizes the repurchase of up to 4.5 million shares in 2007 and is in addition to the repurchase program described above. As of September 30, 2007, Devon had repurchased 1.8 million shares under the new program for $136 million, or $77.49 per share.

Dividends

     Dividends on Devon’s common stock were paid in 2007 and 2006 at quarterly per share rates of $0.14 and $0.1125, respectively.

6. 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 although 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.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

     Certain of Devon’s subsidiaries acquired in past mergers are involved in matters in which it has been alleged that such subsidiaries are potentially responsible parties (“PRPs”) under CERCLA or similar state legislation with respect to various waste disposal areas owned or operated by third parties. As of September 30, 2007, Devon’s consolidated balance sheet included $4 million of non-current accrued liabilities, reflected in “Other 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.

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 natural gas liquids 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 the 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. A defendant other than Devon is set for trial in August 2008. The next phase trial is set for February 2009. Defendants, other than Devon, were selected for this trial. 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 in association with this lawsuit and no liability has been recorded in connection therewith.

     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. The MMS in 2006 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 since had several discussions with MMS representatives on this issue, but has not yet entered into renegotiated leases.

     The U.S. House of Representatives in January 2007 and July 2007 passed legislation that would require companies to renegotiate the 1998 and 1999 leases as a condition of securing future federal leases. If this legislation were to become law, it would require price thresholds to be effective in the renegotiated 1998 and 1999 leases effective October 1, 2006. Although Devon has not yet signed renegotiated leases, it has accrued through September 30, 2007 approximately $21 million for royalties that would be due if price thresholds were added to its 1998 and 1999 leases effective October 1, 2006.

Canadian Royalties

     On October 25, 2007, the Alberta government proposed increases to the royalty rates on oil and natural gas production beginning in 2009. Devon believes this proposal would reduce future earnings and cash flows from its oil and gas properties located in Alberta. Additionally, assuming all other factors are equal, higher royalty rates would likely result in lower levels of capital investment in Alberta relative to Devon’s other areas of operation.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

However, the magnitude of the potential impact, which will depend on the final form of enacted legislation and other factors which impact the relative expected economic returns of capital projects, cannot be reasonably estimated at this time.

Equatorial Guinea Investigation

     The SEC has been conducting an inquiry into payments made to the government of Equatorial Guinea and to officials and persons affiliated with officials of the government of Equatorial Guinea. On August 9, 2005, Devon received a subpoena issued by the SEC pursuant to a formal order of investigation. Devon has cooperated fully with the SEC’s requests for information in this inquiry. After responding in 2005 to such requests for information, Devon has not been contacted by the SEC. In the event that Devon receives any further inquiries, Devon will work with the SEC in connection with its investigation.

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 which Devon is utilizing to recover costs associated with the suspended production related to hurricanes that struck the Gulf of Mexico in the third quarter of 2005. 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 include a standard, per-event deductible of $1 million for offshore losses as well as a $15 million aggregate annual deductible.

     Based on current estimates of physical damage and the anticipated length of time Devon will have production suspended, Devon expects its policy recoveries will exceed repair costs and deductible amounts. This expectation is based upon several variables, including the $467 million received in the third quarter of 2006 as a full settlement of the amount due from Devon’s primary insurers and $13 million received in the second quarter of 2007 as a full settlement of the amount due from certain of Devon’s secondary insurers. Devon continues to negotiate with its other secondary insurers and expects to receive additional policy recoveries as a result of such negotiations. As of September 30, 2007, $281 million of these proceeds had been utilized as reimbursement of past repair costs and deductible amounts. The remaining proceeds of $199 million are expected to be utilized as reimbursement of Devon’s anticipated future repair costs.

     Should Devon’s total policy recoveries, including settlements already received from Devon’s primary and secondary insurers, exceed all repair costs and deductible amounts, such excess will be recognized as other income in the statement of operations in the period in which such determination can be made.

     The policy underlying the insurance program terms described above expired on August 31, 2006. During the third quarter of 2006 and again in the third quarter of 2007, Devon was able to re-establish a comprehensive insurance program that includes business interruption and physical damage coverage for its business. However, due to significant changes in the marketplace, Devon was only able to obtain a de minimis amount of coverage for any damage that may be caused by named windstorms in the Gulf of Mexico. Devon has not experienced any windstorm losses covered by the new insurance arrangements through September 30, 2007.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

7. Fair Value Measurements

     Certain of Devon’s assets and liabilities are reported at fair value in the accompanying balance sheets. The following table provides fair value measurement information for such assets and liabilities as of September 30, 2007.

						Fair Value Measurements Using:
						Quoted				Significant
						Prices in				Other				Significant
						Active				Observable				Unobservable
		Total Fair				Markets				Inputs				Inputs
		Value				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Assets:
Short-term investments		$	341				341				—				—
Investment in Chevron common stock		$	1,327				1,327				—				—
Financial instruments		$	8				—				8				—
Liabilities:
Financial instruments		$	497				—				497				—
Asset retirement obligation (ARO)		$	1,300				—				—				1,300

     Statement No. 157 (see Note 1) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the table above, this hierarchy consists of three broad levels. Level 1 inputs on the hierarchy consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. Level 3 inputs have the lowest priority.

     Devon uses appropriate valuation techniques based on the available inputs to measure the fair values of its assets and liabilities. When available, Devon measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. Devon owes debt that has an embedded exchange option. Because the exchange option is not actively traded in an established market, its fair value is measured using Level 2 inputs. Devon also has certain commodity and interest-rate derivative financial instruments which are measured using Level 2 inputs, such as forward commodity price curves or interest-rate yield curves. Devon only uses Level 3 inputs to measure the fair value of its ARO. A reconciliation of the beginning and ending balances of Devon’s ARO, including a revision of the fair value in 2007, is presented in Note 2.

8. Change in Fair Value of Financial Instruments

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(In millions)
Option embedded in exchangeable debentures		$	111				22				255				83
Investment in Chevron common stock (Note 1)			(133	)			—				(285	)			—
Interest rate swaps			—				—				(1	)			(2	)
Total		$	(22	)			22				(31	)			81

DEVON ENERGY CORPORATION AND SUBSIDIARIES

9. Reduction of Carrying Value of Oil and Gas Properties

     The following schedule summarizes the reductions of carrying value of oil and gas properties for the third quarter and first nine months of 2006.

		Three Months Ended								Nine Months Ended
		September 30, 2006								September 30, 2006
						Net of								Net of
		Gross				Taxes				Gross				Taxes
		(In millions)
Brazil		$	—				—				16				16
Russia			20				10				20				10
Total		$	20				10				36				26

     As a result of a decline in projected future net cash flows, the carrying value of Devon’s Russian properties exceeded the ceiling by $10 million in the third quarter of 2006. Therefore, in the third quarter of 2006, Devon recognized a $20 million reduction of the carrying value of its oil and gas properties in Russia, offset by a $10 million deferred income tax benefit.

     During the second quarter of 2006, Devon drilled two unsuccessful exploratory wells in Brazil and determined that the capitalized costs related to these two wells should be impaired. Therefore, in the second quarter of 2006, Devon recognized a $16 million impairment of its investment in Brazil equal to the costs to drill the two dry holes and a proportionate share of block-related costs. There was no tax benefit related to this impairment. The two wells were unrelated to Devon’s Polvo development project in Brazil.

     See Note 11 for information related to reductions of carrying value of oil and gas properties included in discontinued operations.

10. Other Income

     The components of other income include the following:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
		(In millions)
Interest and dividend income		$	24				22				63				78
Net gain on sales of non-oil and gas property and equipment			—				—				1				5
Other			4				6				7				3
Total		$	28				28				71				86

11. Discontinued Operations

Egypt and West Africa

     On November 14, 2006, Devon announced its plans to divest its operations in Egypt. On January 23, 2007, Devon announced its plans to divest its operations in West Africa. Pursuant to accounting rules for discontinued operations, Devon has classified all 2007 and prior period amounts related to its operations in Egypt and West Africa as discontinued operations.

     On October 4, 2007, Devon closed the sale of its Egyptian operations and received proceeds of $341 million. As a result of this sale, Devon will record an after-tax gain related to this transaction of approximately $130 million in the fourth quarter of 2007.

     Devon is finalizing purchase and sales agreements and obtaining the necessary partner and government

DEVON ENERGY CORPORATION AND SUBSIDIARIES

approvals for the properties in the West African divestiture package. Devon expects to complete these sales during the first half of 2008.

     Revenues related to Devon’s operations in Egypt and West Africa totaled $206 million and $223 million in the three months ended September 30, 2007 and September 30, 2006 and $596 million and $707 million in the nine months ended September 30, 2007 and September 30, 2006, respectively.

     The following table presents the main classes of assets and liabilities associated with Devon’s operations in Egypt and West Africa as of September 30, 2007 and December 31, 2006.

		September 30,				December 31,
		2007				2006
		(In millions)
Assets:
Cash		$	29				64
Accounts receivable			87				101
Other current assets			60				67
Current assets		$	176				232
Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization		$	1,707				1,619
Liabilities:
Accounts payable – trade		$	34				48
Income taxes payable			146				115
Current portion of asset retirement obligation			8				8
Accrued expenses and other current liabilities			2				2
Current liabilities		$	190				173
Asset retirement obligation, long-term		$	44				38
Deferred income taxes			385				375
Other liabilities			16				16
Long-term liabilities		$	445				429

Reduction of Carrying Value

     Based on recent drilling activities in Nigeria, Devon reduced the carrying value of its Nigerian assets held for sale in the second quarter of 2007. As a result, earnings from discontinued operations in the nine months ended 2007 include a $13 million after-tax loss ($64 million pre-tax).

     As a result of unsuccessful exploratory activities in Egypt during the third quarter of 2006, the net book value of Devon’s Egyptian oil and gas properties, less related deferred income taxes, exceeded the ceiling by $18 million as of September 30, 2006. Therefore, in the third quarter of 2006, Devon recognized a $13 million after-tax loss Egypt ($31 million pre-tax).

     Due to unsuccessful drilling activities in Nigeria, in the first quarter of 2006, Devon recognized an $85 million impairment of its investment in Nigeria equal to the costs to drill two dry holes and a proportionate share of block-related costs. There was no income tax benefit related to this impairment.

12. Income Taxes

     During the second quarter of 2007, the Canadian Federal government enacted a statutory rate reduction. As a result of this rate reduction, Devon recorded a $30 million deferred tax benefit in such quarter.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

13. Segment Information

     Following is certain financial information regarding Devon’s reporting segments. The revenues reported are all from external customers.

		U.S.				Canada				International				Total
		(In millions)
As of September 30, 2007:
Current assets		$	1,693				837				1,154				3,684
Property and equipment, net of accumulated depreciation, depletion and amortization			17,237				8,652				1,096				26,985
Goodwill			3,053				3,029				68				6,150
Other assets			1,624				53				1,775				3,452
Total assets		$	23,607				12,571				4,093				40,271
Current liabilities		$	3,660				670				436				4,766
Long-term debt			2,898				2,975				—				5,873
Asset retirement obligation, long-term			605				569				72				1,246
Other liabilities			1,070				43				449				1,562
Deferred income taxes			3,734				2,195				63				5,992
Stockholders’ equity			11,640				6,119				3,073				20,832
Total liabilities and stockholders’ equity		$	23,607				12,571				4,093				40,271