Devon Energy
Annual Report 2006

Plain-text annual report

Devon Energy 2006 Annual Report resource full Bobby AaronJohn AaronMorgan AaronRandall AaronHarry AasmyrShilpa AbbittWyatt AbbittChris AbbottDennis AbbottDouglas AbelSharon AbernathyJohn AbernethyLuis AbilaJerry AblesLauren AbneyGeri AbramsDavid AbshireShannon ActonCarson AdamsDavid AdamsDwayne AdamsLouise AdamsNorvella AdamsRod AdamsSteven AdamsVerna AdamsColby AddingtonPaul AddingtonGordon AddisonJason AddisonRichard AdkinsRuthanne AdolpheJeff AgostaLeonard AguilarDwight AguillardTrevor AitkenSusan AizzierSaleem AkhtarSteve AlbaughAdam AlbrightDerek AlbroMichelle AldermanTrevor AldingerGuy AldrichDavid AlexanderGreg AlexanderJames AlexanderKari-Lynn AlexanderRicky AlexanderTodd AlexanderJoan Allan-KayserJames AllbeeMarty AllemanRobert AllemandCari AllenDan AllenJillian AllenJim AllenRob AllenJeffrey AllisonMike AllisonTerri AllisonJames AlmondJesse AlvaradoArlindo AlvesPedro AmadorKendall AmburnLeo AmiotAhmed AmmarMichael AmmermanPaolo AmorusoArmand AmyotteJuan AnayaKenneth AncarKevin AndereggAndrea AndersonBruce AndersonChad AndersonChris AndersonChris AndersonClayton AndersonDarren AndersonDavid AndersonDewey AndersonJack AndersonJohn AndersonKirk AndersonLaura AndersonLinda AndersonNicole AndersonRobert AndersonRoderick AndersonRonald AndersonRoyce AndersonTerry AndersonAlejandro AndradeJoseph AndrepontKenneth AndresRichard AndrewsRimontas AndriekusRena AndrusDurwood AntleyJames AppeltRyan AquiliniDerek ArberrySouad ArboucheCharles ArcandThomas ArcherJonathan ArdoinRobert ArdoinWade ArkinstallHoda Armanious-TawadrouJesse ArmendarizAnne ArmstrongClinton ArmstrongDavid ArmstrongGinger ArmstrongJan ArmstrongJohn ArmstrongLori ArnasonAyla ArneyJohn ArneyJim ArnoldMichelle ArnoldRebecca ArnoldTom ArnoldDevender AroraMitchell ArringtonHeath ArstingstallJeff ArvidsonBlake AryJoseph AshPatrick AshDeborah AshcraftJohn AshleyCarrie AskinsHenry AssenNancy AstonMark AtkersonDeborah AtterburyRick AtwoodRobert AtwoodSandra AtyiaKeith AubinRyan AuclairDarrell AugerJohn AumanLoren AusmusSara AustinScarlett AustinShari AustinCurtis AutenriebJames AvaryClay AxtonD. Brian BabcockPaul BaclawskiOwen BadilloPaul BaezaPete BaggettGlen BagwellKelly BagwellCraig BaierDaryl BaileyDebbie BairdOneta BairdAlana BakerBrandon BakerBrenda BakerCarole BakerDave BakerDavid BakerJoshua BakerLarry BakerMarilyn BakerMicha BakerPaul BakerRosemarie BakerHank BakkerKay BakkerMamadou BaldeChadwick BaldesClaude BaldesDenice BaldwinTeresa BaldwinCyril BalkoJonathan BalkwillRicky BallKen BallardPaul BalmerJason BandyCindy BanksJody BarbareKristen BarberMonica BarberRusty BarberKes BarcasPaula BardwellJames BarhamKeith BarkeDonna BarkerScott BarlundWayland BarmoreJim BarnesJimmy BarnesRaymond BarnesTim BarnesVelta BarnesAngela BarnettJudith BarnettJanet BarnhillDavid BarrOlga BarrRandy BarrLeticia BarreraJennifer BarrerasRandy BarrettBilly BarrickJulie BarryCasandra BarteeAnna BarthelemyMarsha BartlettMary BartlettBob BartusiakKay BarzizaJeff BaschAdam BasicGay BaskinDarryl BaskindRena BassitDouglas BastKent BastianJoni BatchelorDiane BatesRhonda BatesBarry BattaglioGerald BattrickEric BauerRonnie BauerleinJames BaughLynn BaughmanKelvin BaumanLewis BaumgartnerMichael BaxleyKris BaxterRon BaxterLynn BaylessBradley BayleyBrian BaylissLauro BazanDaryl BeanDavid BeanMike BearBarry BeattieJohn BeattieJoyce BeatyJerome BeaudoinPhilip BeaudoinWilliam BeaudoinJosh BebeeCharles BecanGinger BeckRalph BeckJudy BeckerOlga BedoyKyle BeebeDonald BeekmanJon BeenKenneth BeeneyGary BeesonJeremy BegemanJeannette BeggConnie BegnaudCarla BeierleCeline BelandVivian BelascoMarcel BelcourtJamel BelhadiMouloud BelharcheColby BellDeanna BellDonna BellJulie BellRobert BellJudy BellamyBernard BellangerMatt BellerTom BelshaBetty BenavidesWilliam BenderDale BenedettoArt BenjaminLaurel BenjaminRenea BenjaminBenny BennettBrady Lee BennettCharles BennettMelissa BennettMyra BennettRichard BennettScott BennettDonald BenoitBrett BentleyDuane BentleyBeverly BentsonAnthony BenvegnuGeorge BenwellJonathan BenzerChuck BergDerek BergRyan BergMichelle BergerChad BergeronRobin BergeronRoger BergleyChristopher BergquistAndrea BernardyKelly BernardyDoug BerridgeJoseph BerryLinda BerrymanPhyllis BertholdLou BertoliMichael BerubeKenneth BerzeDettmar BesselAllan BettensonMark BettsJohn Bevill Jr.Jasvir BhangooChris BiagiLee Ann BiancoRhonda BiasucciHermeka BibbinsFlint BickfordHal BiddleBrad BiddyAnthony BieleskiDennis BiendarraBennie BieryAlex Big PlumeMike BigbyKelly BiggsKim BiggsRex BiglerBrian BillCindy BilyeuWally BindaJason BinghamKeith BinghamJerome BiolloScott BirdShane BirdRyan BirkenfeldBrenda BishopDarrell BishopGordon BishopKenneth BissettJason BissonnetteAndrew BittsonAndrae BlackBruce BlackPaige BlackTravis BlackVernon BlackRaymond BlackmoreSteven Blake BlackshearTim BlackwellAnn BlackwoodKingsley BladesGloria BlainCynthia BlaineMargaret BlairDale BlakemanHoss BlakleyJoanne BlakneyDave BlanchardMark BlancheKevin BlanchetteTerri BlancoJames BlandKeith BlanksSteven BleakleyKathy BlickNathan BlighSusan BlighJanet BlissEarl BloisKaren BlomstedtKathy BloodworthLloyd BloomerGarry BlouinJim BlountKathy BlountAdam BlytheDale BoatwrightKathy BoazGary BockMary-Ellen BodkinAlvin BoehmeEarl BoganeyMary BogleSusanne BogleBetty BohanLenard BohnkeGerald BoisvertEmile BoivinTeresa BoldmanRandy BollesDale BolsterBecky BondThomas BondarukSpencer BondickWade BondsAnthony BoneDan BonertzAmber BonneyJennifer BonoPeter BoogersDiana BooherGarrett BoomgaardenAlan BoothSandy BootheBrian BordelonJana BorenDalton BorleEva BorregoMichael BorstDavid BoschJim BosleyFred BossChad BostickShawna BostickRick BottMike BoucherLarry BoudreauxWayne BoudreauxMelany BoughmanGeorge BouquinBrenda BourdonJerry BourneJohn BowenDru Bower-MooreLance BowersGary BowkerGreg BowlingBrandon BowmanBrent BowmanCampbell BowmanJohn BowmanLaureen BowmanScott BowmanWilliam BownessRobert BoyceAnn BoydCarl BoydPauline BoydAaron BoyerRoger BoykinCaryn BoykoChristopher BoykoKelly BoyleDave BozemanKevin BradburyRobert BraddockMartin BradfordAaron BradleyAngela BradleyDerek BradleyMark BradleyMike BradshawGreg BradyTravis BradyVaughn BraggConnie BranchJohn BrandSheila BranhamJerrid BrannKelley BraseltonCharlie BrasharesBobby BrassellStephanie BrassovanGlendora BraudKeith BrawdyShawn BrayTess BrayBobby BrazierKory BreauxRicky BreauxCynthia BrenemanPaul BreretonDwayne BreshearsJames BrewerDeborah Brewster-LindauerRandy BrezinskiAlex BridgeJaime BridgesBob BridgewaterDoug BridwellDave BriereRichard BrietzkeKathryn BriganceGreg BrigdenBobby BriggsDeborah BrightMichael BrightwellBill BrimmerKenneth BrinsonHector BritoBrian BrittonDavid BroaddusArmand BrochuDonald BrockGerald BrockmanKathy BrodeurMitchell BroganStacy BroganJane BronnenbergMike BrooksDaryl BrostCaren BrouilletteDana BroussardHarold BroussardHarold BroussardKirk BroussardRobert BroussardSaul BroussardKaren BrowerCalvin BrownDavid BrownDean BrownDonna BrownDonnita BrownJeremy BrownKimily BrownLeroy BrownMichael BrownMike BrownMurray BrownPatrick BrownRobert BrownAmber BrowningOwen BroylesJason BruceKenneth BruceMike BruceMonty BrucePat BruceLynda BruckerCaroline BruggencateJean BruleDebbie BrummettDan BrundigeTiffany-Rose BruneauCurtis BrunelleGerald BruntRonald BruntBarbara BryantDoyle BryantAdam BrysonAlvis BrysonGary BucekStephanie BuchananSteve BuchananMike BuchholzJeannie BucklesShirley BucknerDerrick BuddenByron BueChad BulkleyDouglas BullickJack BullionCheryl BumpasGaylan BunasJimmy BunnJohn BuoyClay BurchamGlenn BurchnallShanica BurdexKit BurdickCody BurdineMichelle BurgardGary BurgessJeremy BurkhardtJenna BurkinshawYvonne BurlesonTimothy BurnellJosh BurnettMatt BurnettSteve BurnettValerie BurnopCollin BurnsJane BurnsJulie BurnsStephen BurnsTodd BurnsRobert BurnsideBruce BurrCharlean BurrisMichele BurtchRobert BurtnettCampbell BusbyChris BusbyJay BuschBilly BushBob BushTodd BushKaren BustosJamie ButlerMurray ButlerRobert ButlerTy ButlerLorrie ButtErnie ButtrossJennifer ButtsForrest BuxtonMichael ByersDavid ByrdJustin ByrneJames CabeWarren CadrainSusie CaffreyMarian CaggianoJanelle CahillGraham CainJim CalbeckJanet CalderLaura CalderwoodJosh CaldwellScott CaldwellTom CaldwellLeigh Ann CalesSheldon CallioRalph CalveOrlando CalvinhoJosh CameronMichael CameronRobert CameronDoug CampbellJamaine CampbellPhillips CampbellRandell CampbellSteven CampbellWendell CampbellEnrique CamposMelissa CangleyStefanie CannonGonzalo CanoCynthia CantrellRoland CantuBambi CappelleBernie CaracenaTarquin CaraherJoy CaramTimothy CardenasAlex CardinalDuane CardinalLorraine CardinalTania CareyBruce CariensBrian CarlsonDarrel CarlsonMark CarlsonRandy CarlsonTerrance CarlsonTerry CarltonArthur CarmanGerald CarmanJackie CarmoucheAmy CarpenterJohn CarpenterTim CarpenterArnold CarperWesley CarrRonnie CarreDavid CarrilloHector CarrizalesKathy CarrizalesMarla CarrollClayton CarsonTanya CarsonKathy CartenAlex CarterDaniel CarterDoug CarterJonathan CarterLarry CarterMark CarterMarvin CarterTracy CarterGary CartwrightDuane CarverDeborah CasaresJohn CaseyTana CashionPatty CasonTim CasonKevin CasperNanci CassardDolly CastilloFrank CastilloJaime CastilloJoe CastilloMorris CastleIrma CastroMelisa CastroRonald CatchickB.J. CatheyCameron CatlinDan CatlinLiz CatlinAngelia CaughlinPaul CaughlinSuzanne CavalheiroEd CavalierClay CavasosMichael CavazosTeresa CavazosVeronica CavazosJoanne CaveJean CavesTerry CavesWayne CawthornCarrie CazesKim CazesChuck CecilBetty CesnikMark C’HairCarl ChaissonJohn ChakalisJohn ChalmersRoy ChamberlainLinda ChambersRandy ChambersLewis ChampagneCarol ChanCharles ChanDenis ChanDenise ChanVincent ChanTroy ChandlerJerry ChaneyChristy ChapmanKay ChapmanSamantha ChapmanRoger ChaputBruce CharchukElkan CharikarElana ChaschinRay ChatelainDave CheezumJanet ChelfDorothy ChenCraig ChenowethMichael CherewkoBruce CherniakSteven ChesherBeryl ChesterJ.P. ChestermanScott ChevesLily ChewRon CheyneKen ChibaJanice ChildersRonald ChildreMarian ChinJake ChipiukLloyd ChipmanPamela ChiuRichard ChoateJim CholkaLeonard ChowWillie ChowAdam ChrismanKent ChrismanJoel ChristalBrad ChristensenTim ChristensenWayne ChristianSue ChristiansonBruce ChristieCarol ChristieRobert ChristiePete ChristmasNathan ChristmonJeremy ChristophersonLifu ChuJeanine ChubbsGrace ChungWillie ChungDavid ChurchJames ChyzykWarren CieszeckiRobin ClaneyBruce ClardyDavid ClarkJimmy ClarkLeroy ClarkLindsey ClarkMery ClarkPam ClarkRandy ClarkRichard ClarkRocio ClaybonLeon ClaypoolDarlea ClaytonRobert ClaytonGeorge CleaseBryan ClemPam ClementLloyd ClementsJack ClevengerStephen CliffLuci ClineSandra ClineDon ClouseJoy ClymerMike ClyneAlan CoadThomas CoanAndy CoatesJason CobbKevin CobbLee CobbMarjorie CobbTed CochraneMichael CockrellBill CoffeyRonald CogganLarry CogginsDeborah CoheeMartin CohenDoug CohrsJimmy CokerBarb ColacoFloyd ColbertJean ColbertRon ColbertBarbara ColeBob ColeDale ColeRobby ColeRobert ColeSam ColeRick ColemanJutta ColhounShannon ColleCharlotte CollettDon CollierLeann CollierDustin CollinsMaria CollinsMike CollinsRandy CollinsJolene ColpittsMeggan ColpittsEddie ColvinDavid ComanAllison ComeauGlen CommanderBehtaz Compani-TabriziTammie ComptonBobby CongerAlan ConnellLauren ConnellTerry ConnellAllen ConnerTony ConnerJoseph ConnorsHenry ContrerasFrank Contreras VegaJay ConwayShannon ConwayStephen ConwayScott CoodyDanny CookDavid CookJaron CookLarry CookMike CookNeill CookPhil CookRicky CookWilliam CookLorelee CookeSharen CookeClaire CooleyAndy CoolidgeCraig CoombesLloyd CoonanAshley CooperBeverly CooperLoretta CooperLori CooperMark CooperTeresa CooperDanielle CootsKelly Russell CopeAnne CorbetChantal CorcueraJim CorkenKelly CorkenCarl CormierRoosevelt CormierShane CornelisonBarbara CornellFred CornellIvan CornelssenJustin CornetBob CornwellPierluigi CorradiniJeff CorsonAdrian CortezElizabeth CostelloMichael CottrellDiane CouillardJames CoulterLee CourangeJohn CoveyOlga CovingtonKelly CowanDana CownsBarbara CoxBen CoxFrans CoxGrant CoxLaDonna CoxLinda CoxRonald CoxValerie CoxTimothy CrabtreeCab CraigChristopher CraigJim CraigMark CraigPam CraigStaci CraigCarolyn CrainGail CramerRobert CrappellDarwin CrawfordRichard CreeTimothy CrespyRickie CrewsKim CrillyClarence CrippenTrent CrippenErnest CriswellJohn CrockerLinda CrockerDavid CrockettShelly CrokerJames CromerBrooke CropperHugh CrosbieJonathan CrosbyJudy CrosbyMaurice CrosbyRandy CrossSkip CrossWilliam CrossmanShar CrouchMike CrowleyDon CruickshankRandy CruickshankPaul CullenDon CulpepperJustin CulpepperTom CunninghamWalter CunninghamElena Cupac-CingelDebbie CurleeEarl CurnutteAndrea CurrieJason CurrieRaymond CurrierDavid CurryDean CurryJulie CurtisPatty CutbirthDouglas DahmannDrew DahmannChristine DaigleJennifer DaleRosalind DamerLarry DamervalDoug DamonDwayne DancyAnn DanielJeff DanielMisti DanielBryant DanielsJamie DanielsTim DanielsAngie DannaRandy DarbonneJo-Ann DArcangeloEarnest DarceyKunle DareCourtenay DarrowGillian daSilvaPaul DaSilvaJena DaughheteeTommy DauphineHank DavidChad DavidsonHoward DavidsonJeremy DavidsonRobert DavidsonAlan DaviesMarilynn DaviesCarlos DavilaBarry DavisBrandon DavisChristopher DavisClint DavisDaniel DavisDebbie DavisGretenal DavisHarold DavisJanna DavisJeff DavisJesse DavisKathy DavisKelly DavisL.T. DavisLarry DavisLee DavisLuke DavisMike DavisMitch DavisNicole DavisRickey DavisShane DavisTom DavisBrett DawkinsTroy DawsonCarol DayGreg DayJennifer DayMark DayMitch DayRobert DayMeridith De GrootCarlos De Los SantosKevin Deacon-RosamondMichael DeanMichele DeanSheila DeasonKati DeatonParry DeBusschereDon DeCarloColleen DechPhilip DechantBrad DeckerHermis DecoteauEddie DeculusBrian DedmonJudith DeedsClayton DeeringDavid DeeringWade DeesStephen DeetzGeorge DekerlegandTroy DelahoussayeMarianne DelaneyKevin DeLayJesse DelcambreGerard DeLeeuwOscar DeleonJaime DelunaMadonna DemasSteve DemecsTeresa DeMillianoWilbert DemouchetRoy DenisonDevin DennieW.A. DennisDan DensonGlenda DensonTommy DentonMark DerouenRonald DerouenCory DesantisGuy DesaunoyScott DesmaraisIsaac DeVilliersLarry DewettElma DiazCarolyn DibelloJerry DicharryBrian DickKelley DickensCraig DierkerHarry DietrichJay DietrichPaul DiffenderferDennis DildayJohnny DillardRalph DillardJohn DillinderDavid DillonLeslie DimionNguyen-Hoa DinhTish DinsmoreSteve DionneHelen DiserensJohn DistasoJames DixonObie DjordjevicRoger DlugoszJudith DobbinJanice DobbsNelson DobbsGreg DoddHomer DoddLilly DoddRichard DoddsEddie DodsonBev DoigJames DonaghyAlan DonaldsonDanny DonaldsonRaymond DonaleshenJohn DonohoeTodd DonowhoNerry DooleyRobert DooleySusan DorieMatt DornanRad DorrisCatherine DortchRichard DoucetBarbara DoughertyBill DoughertyPatricia DouglasNick DovedanMatthew DowdCliff DowdenDeborah DowdyGeorge DowdyStacy DowningAnne DownsThomas DowsleyGerhard DrakeMelanie DraperRob DresslerDrina DrummondTim DrysdaleTracey DubeJohnny DuboisTed DuboseDerrick DubyNicole DudaErin DuerichenCharles DuffeyLuanne DuffyLynn DugasRoland DuhonDebra DukeChristopher DumanowskiJanette DumasJoel DumasMeri DunawayRobert DunawayAlec DuncanDavid DuncanDavid DuncanFredi DuncanBob DunckleyMelanie DunhamMilton DunlapAndrew DunleavyChris DunnElizabeth DunnRaymond DunwaldKevin DuplantisHarold DuplechinStephanie DupuieBarney DupuisRui DuqueErnest DuranPatrick DurandMark DurkeeBecky DurrettJason DutchakSteven DutcherScottie DuvallCary DwyerRandall DyckCecil DyeDarrell EaglesDavid EamonRichard EarlesJanell EasleyKen EasonTodd EasonDarryl EastLes EatonSuzanne Eaves-BunchDana EberhardtTainialynn EbrechtDonald EckfordPriscilla EddyMatthew EdgelowJohn EdigerJanice EdmistonGloria EdmondsEdwin EdwardsKristin EdwardsLauren EdwardsLeah EdwardsMarie EdwardsRex EdwardsRobert EggertMark EhrhardChristy EichholzDennis EisnerRon ElbrechterLoyd ElkinsRonald ElkoMichael ElledgeTim EllerBrent ElliottCarl ElliottClay ElliottDavid ElliottRicky ElliottRobert EllisKevin EllisorFranceaz ElmanGavin ElsleyElizabeth ElsonDarrell ElyAlice EmersonJessie EmersonDale EmeryTim EnderlinDanielle EndsleyBrian EngelNancy Engelhardt-MooreJerry EnglandHope EnglishMark EnglishMyles EnickeSarah EnixTodd EnnengaRonald EnslingerDonnie EppersonJudy EppersonMark ErbDale EresmanBradley EricksonDaniel EricksonTelann EricksonBrian ErwinMiguel EscobedoBrenda EskelsonRhoda EsmilioReed EstesSusan EstesSteven EthridgeJ.R. EubanksMarcus EubanksDonnie EuperAimee EvansBeverly EvansDanny EvansDarlene EvansPaul EvansPeter EvansShellie EvansSteve EvansJay EwingJohn EzekweDean EzellMatthew EzellRaymundo FabelaMartin FabisSheila FahlDoyle FainDebbie FalckKaren FalconerJeremy FallinNicholas FanaiBob FantKeith FardyHamid FaridLance FarkasKaren FastJames FaulknerCarol FavorsRay FeatherstoneMira FederucciMitch FedricMark FehrmannKevin FeiselDonna FelgerElaine FeltLarry FeluxTyler FenleyLance FentieAngela FentonRandy FentonGrant FergesonCarol FergusonLorraine FergusonPeter FermorClay FernandezMike FeroliMark FessendenBrett FewellAndrea FieldEugene FielderMike FielderKathleen FieldsRon FieldsWarren FieldsWayne FieldsStuart FillerBobby FinchTrinity FincherSteve FineLisa FinleySteve FinnKevin FinnemanDon FippingerJessica FischerRon FischerDavid FishburnDavid FiteMichele FlaigAmy FlanaganLaurie FlanaganArlen FlatenDoug FlatenDuane FlathPenny FlathDiane FlemingPenny FlemingFrank FletcherMichael FletcherSharon FlorezRobert FlowerdayIlene FloydJason FluneyAmy FolsomBridget FontenetteCodi FontenotEugene FontenotJoe FontenotBrenda FonvilleLaura ForbesAlex FordKeith ForeMark ForestTeresa ForgueThomas ForrestSteve ForsterAvery FortenberryDavid FortenberryAllan FortierLouise FortierDavid FortnerBlake FosterBradley FosterBrent FosterRobert FosterWayne FournierCatherine FowellDorothy FowlerLeon FowlerCurtis FoxDonald FoxJay FoxJohn FoxMaryann FoxLeonard FoytG. Robert FraleighBart FraleySam FrancisTaryn FrancisCraig FrankDavid FrankWally FrankKevin FrankenberyHelen FranklinSandra FranklinAlex FranksRay FranksKevin FransonColin FraserDan FraserMargaret FraserMark FraserGeoffrey FrazerBilly FrazierVicki FrederickIan FreelandDustin FreemanShawn FreemanUwe FreibergLarry FreminAndy FreudenrichOliver FriersonGordon FriesenNancy FriesenChristine FrinscoDan FrisbeeDavid FriskeDale FritzStacie FugateTeresa FugittGeorge FulcoDavid FulfordPamela FulkHeather FullerPhyllis FullerBill FultonRobert FultonSteven FunderburkChris FurrhCarrie FyfeJay GabbardJohn GabertPhillip GabouryGwen GabrielKathy GabrielsonPolina GaddyRichard GafiukBeverley GageMarcel GagneBrandon GainerMervin GalbraithDanny GallenbeckStarleng GallopeJanet GallowayBlair GambleWaldemar GampKim GannVidya GannessMichelle GanttJose GarateTom GarbsJoe GarciaJoel GarciaJudith GarciaMichael GarciaRuben GarciaNorma Garcia-SlajerAl GardinerGeorge GardinerDoug GarrardHeather GarrettKelly GarrettLynn GarrettBarney GaryDouglas GaryMichael GaryAlberto GarzaErnest GarzaLamar GaspardDewayne GaughtClyde GautreauJudith GavanRaphael Gay-De-MontellaTim GaydosJ. Nick GeibDavid GeisLarry GelbaughOrry GelowitzCarol GennarelliKirk GenoCharles GentryDale GeorgeDavid GeorgeMircea GeorgescuRadu GeorgescuJeff GephartMartha GerdesJohn GerdingJohn Jr GerichKirk GerichJohn GerlitzKen GermanMark GermanTaylor GermanDavid GermscheidMichal GerovStan GerowRod GertsonStan GeurinNick GibbensRosalind GibsonTatiana GibsonTina GibsonHeidi GiesbrechtMark GiesbrechtDarrell GilbertEd GilbertVicky GillespieRussell GillettCarolyn GilleyAngela GingeraDeena GirdnerPaul GirouardRichard GirouxCarola GiudicelliJan GlasgowEd GlassRay GlidewellDavid GloverAndre GodinJeff GoffinKris GoforthPatrick GohlkeSherman GoinesDiana GoldsteinKaren GolonkaFrancis GomesAlma GomezJesse GomezLawrence GomezAlbert GonzalesTerry GonzalesAbraham GonzalezMagdalena GonzalezPilar GonzalezKevin GoodCraig GoodallKrystal GoodmanCraig GoodrichLana GoodrichRickey GoodsonJohn GoodspeedShannon GoodwinAlan GopenEdward GordenShane GordonWendy GordonJason GossMark GossShawn GossJennifer GottschPaul GouldPhilip GouldDarrin GowingKerri GrabowskyCameron GraceTim GraffAnthony GrahamCandi GrahamGary GrahamJennifer GrahamJohn GrahamSean GrahamVeronica GrahamJannette GranstaffGreg GrassellDean GravesGalen GrayJason GrayKen GrayLeslie GrayStephanie GreaserVicki GreearAllan GreenBill GreenClayton GreenEarl GreenGregory GreenLarry GreenMonica GreenPaul GreenSuzanne GreenSylvia GreenTim GreenDale GreenfeatherAlan GreenfieldMichael GreenhowBill GreenleesRyan GreerNicholas GreggBetty GregoryJ.R. GregoryMatt GregoryLee GreinerGlenn GreshamMark GreskoMark GressEvelyn GreyVince GribbleMichael GriffinJoel GrillotAaron GrimeauRhonda GrimesJason GrimmMark GrinnellLauren GrissomLetitia GroceKarin GroepperAaron GrossAlbert GrossJonathon GrossMary GrossEric GrossmanJoe GrossmanJohn GroundsRoxanne GrovesSam GrovesJoan GrozellDoug GrubbMichelle Guanzo-ReyesCaroline GuaySonya GuentherJesse GuerreroRaquel GuerreroGary GuerrieriJoel GuichardCathy GuidryChristopher GuidryWendell GuidryFloyd GuilloryMiller GuilloryJeff GuillotJay GuilmetteJanice GunnGeorge GurrEric GuruleEd GusemanElham GushtasbiJeff GussieStacey GustafsonLinda GuthrieMike GutkoskiVeronica GuzmanThu Ba HaDebra HaalandJason HaasZiad HaddadSteve HaddenJim HagerTeresa HagerZack HagerKelly HaggAdina Hagi-MemetApril HagueAllison HahnMelvin HakesRick HaleNancy HaleyAmos HallBrad HallDavid HallJames HallJeff HallKay HallPaula HallRobin HallockTroy HalsallBev HalterJackson HalterJason HamelPercy HamiltonRandy HamiltonSarah HammondDavid HamonBlaine HamptonSteve HamrickWayne HanTim HancsicsakRusty HandTim HandJoe HandleyWes HandleyHerman HandstedeMichael HankinsReagan Hanksresource full 2 5 10 14 Letter to Shareholders Chairman and CEO Larry Nichols looks back on the accomplishments of 2006 and shares his outlook for the future. Five-Year Highlights A table of key financial and property data from the past five years. Community Outreach We discuss key initiatives that strengthen communities and enhance our operations. Environmental Partnerships We review conservation programs that benefit the environment and improve our efficiency. 18 Management’s Q&A 22 Management responds to investor questions. Exploration and Production Resources A discussion of significant oil and gas properties. 27 Operating Statistics by Area 11-Year Property Data 27 Key Property Highlights 28 33 Index to Financials 102 Directors & Senior Officers 104 Glossary 105 Investor Information and Stock Performance Devon’s employees are our most valued resource. The names of each of our 4,692 employees are printed on the inside front cover and on pages 6 and 32 of this annual report. Resource Full, the theme of this annual report, was inspired by an entry from Karen Price in Devon’s Portland, Texas, field office. Nearly 1,200 entries were submitted by employees in our annual contest to select the theme. Corporate Profile Devon is one of North America’s leading independent oil and gas exploration and production companies. Devon’s operations are focused primarily in the United States and Canada; however, the company also explores for and produces oil and natural gas in select international areas. We also own natural gas pipelines and treatment facilities in many of our producing areas, making us one of North America’s larger processors of natural gas liquids. Devon is included in the S&P 500 Index and trades on the New York Stock Exchange under the ticker symbol DVN.  Letter to Shareholders J. LArry NiChoLS CHAIRMAn AnD CHIEF ExECutIvE OFFICER Dear Fellow Shareholders: 2006 was a year of outstanding achievements for Devon. Earnings per share and cash flow from operations reached new highs. We increased oil and gas reserves to the highest levels in our history, and we made important strides in both high-impact exploration and low-risk development projects that will fuel Devon’s future growth. Gulf of Mexico Success Brings Worldwide Acclaim The operational high point of our year was the successful production test of the Jack No. 2 well in the Gulf of Mexico’s Lower Tertiary trend. During testing, the Jack No. 2 well flowed 6,000 barrels of oil per day from just 40% of the hydrocarbon-bearing column. The results indicate that Lower Tertiary reservoirs will produce at high rates providing compelling evidence that Devon’s deepwater Lower Tertiary reservoirs can be profitably developed. When Devon and co-owners Chevron and Statoil released news of the Jack test on September 5, 2006, the world awoke to the tremendous potential of the Lower Tertiary trend. Pundits applauded it as a major new energy source for the United States. Some called it the biggest find since Prudhoe Bay. Time will judge the accuracy of such predictions, but we believe Devon’s proprietary position in the Lower Tertiary could, over time, double or even triple Devon’s current proved reserve base of 2.4 billion oil-equivalent barrels. The media’s excitement and the investment community’s favorable reaction to the Jack announcement were gratifying and validated the merits of Devon’s long-term growth strategy. We have invested more than $2 billion over the past five years in high-impact, multi-year exploration projects. By their very nature, we knew these projects could not deliver oil and gas reserves, production or revenue in the near term. However, we believed the short-term sacrifice required to make these investments would be well worth the longer-term rewards. These investments will provide Devon and its shareholders with a steady stream of development projects over the next decade. Brightening the glow of success following the Jack test was the added satisfaction of our fourth significant Lower Tertiary discovery. This discovery, known as Kaskida, appears to be even larger than Jack and also larger than our first two Lower Tertiary discoveries, Cascade and St. Malo. Furthermore, Kaskida extends the Lower Tertiary play into the deepwater Keathley Canyon federal lease area where we hold 12 additional exploratory prospects. With four discoveries out of six attempts, our early success ratio in the Lower Tertiary is exceptional by historical standards. While we cannot count on this level of success going forward, it demonstrates that our seismic interpretation approach and depositional model for the Lower Tertiary are working well. We attribute this success to the skill and preparation of our highly-seasoned deepwater exploration teams. We doubled our working interest in the Cascade discovery to 50% in 2006 and reached a decision to commercially develop the project. Cascade will likely be the first development in the Gulf of Mexico to employ an FPSO, or floating production, storage and offloading vessel. FPSO technology allows for the production of large oil reservoirs currently beyond the reach of existing pipelines. Our current plans call for Cascade to begin producing oil in late 2009.  Over the next several years we will explore other Lower Tertiary prospects with the aim of extending our impressive string of discoveries. We will also drill appraisal wells to further define and quantify the prizes we have found to date. These activities will provide the information necessary to move these projects into the development and production phases. Engineering and marketing plans for Jack and St. Malo could be finalized this year with first production in the 2011 to 2013 time frame. Our mounting success in the Lower Tertiary trend and other areas in North America caused us to re-examine the high-impact exploration segment of our portfolio. In 2006, we made the decision to divest our assets in Egypt, and early this year we announced plans to exit West Africa. By doing so, we have the opportunity to further refine our focus. We believe we can redeploy our technical and financial resources from Africa more effectively to other parts of our business that can generate reserves and production growth more quickly. We expect to apply the proceeds of our African asset sales to invest in new projects, strengthen our balance sheet and repurchase shares to further enhance value per share. Previous investments Coming on Strong Successful exploration projects ultimately move into the development phase. In 2007, we expect to achieve first production from three multi-year development projects: Polvo, Merganser and Jackfish. These projects are in addition to the full year of increased production we will receive from the ACG field in Azerbaijan. Devon’s oil production from ACG increased dramatically in the fourth quarter of 2006, and we expect it to average more than 30,000 barrels per day in 2007. Offshore Brazil, we are on track to deliver first production in mid-2007 from our 2004 Polvo oil discovery. Construction and fabrication of the $380 million Polvo facilities, in which Devon has a 60% working interest, progressed throughout 2006. We have now completed most of the work necessary to bring our 50%-owned deepwater Merganser natural gas field on production in 2007. Merganser, a 2001 discovery, should begin producing into the Independence Hub in the eastern Gulf of Mexico around mid-year. Moored in 8,000 feet of water, the Independence Hub host facility will establish a water-depth record for Gulf gas production. Together, Merganser and Polvo will add about 35,000 oil-equivalent barrels to Devon’s net daily production when fully operational. In Canada, the 100% Devon-owned Jackfish thermal oil sands project is on schedule to begin producing in late 2007. Jackfish uses steam-injection technology, and Devon will be the first U.S.-based independent producer to complete such a project in Canada. When fully operational, we expect the initial phase of Jackfish to produce about 35,000 barrels of oil per day for 20 years or more. In addition, we are in the later stages of evaluating a look-alike project on adjacent acreage that would double Jackfish production to 70,000 barrels per day. Elsewhere in Canada, we have elected to cut back on capital allocated to conventional natural gas projects. Rising costs in Canada, accentuated by the strengthening Canadian dollar, have hurt gas drilling economics. We expect this situation to correct itself in the next year or so. Until then, we will allocate our capital to other North American project areas where upward cost pressures have been less intense. U.S. onshore Projects Add Stability and Growth High-impact exploration is only part of Devon’s long-term growth strategy. Repeatable, low-risk onshore oil and gas drilling is another important component. Notably in 2006, we substantially strengthened our position in the Barnett Shale, the largest gas field in Texas. The $2.2 billion acquisition of Chief Holdings in June extended Devon’s lead as the top acreage holder and gas producer in the field. We expect to increase net gas production from our 736,000 Barnett Shale acres to about one billion cubic feet equivalent per day in 2009. To put this in perspective, one billion cubic feet per day is enough natural gas to heat more than five million homes and represents about 2% of total U.S. natural gas production. We drilled our 600th horizontal well in the Barnett Shale in 2006, and the most recent of those wells were drilled with new generation rigs that can drill wells more quickly, safely and efficiently. Our 2006 activity drove Devon’s Barnett Shale production up more than 25% during the year to over 700 million cubic feet per day in December. The Barnett Shale is our largest asset, but it is just one of many in the United States and Canada. About 89% of our total oil and gas production in 2006 came from North America, where we drilled 2,427 wells with a 98% success rate. Devon is the largest U. S.-based independent producer in Canada and a leading producer in the states of New Mexico, Montana, Wyoming and Texas.  AverAge Price Per Boe ($ per Bbl) eArnings Per shAre ($ Diluted) 41.51 39.48 6.34 6.26 29.92 25.93 17.61 4.38 4.04 0.30 net cAsh Provided By oPerAting Activities ($ Billions) 6.0 5.6 4.8 3.8 1.8 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 Devon’s realized price for oil and gas climbed to $41.51 per equivalent barrel in 2006. This enabled the company to earn a record $6.34 per share and drove cash flow to a record $6 billion. Production Growth Today and Tomorrow What does all this operational success mean? First, it means significant production growth. We forecast production from continuing operations in 2007 at 219 to 221 million oil-equivalent barrels, excluding any production from the properties in Africa that we intend to divest. This is a 10% increase over the 200 million oil-equivalent barrels we produced in 2006, without Africa. We also anticipate about a 10% sequential production increase again in 2008. Operational success also means growth in oil and gas reserves in the ground to be produced in future years. We added 427 million equivalent barrels from successful drilling in 2006. This does not include any contribution from the major discoveries we have made in the Lower Tertiary trend or additional development in the Jackfish area. The reserve additions for the Cascade, Jack, St. Malo and Kaskida projects, as well as any additional discoveries in the Lower Tertiary trend, will be recorded in future years. And Devon’s Lower Tertiary inventory of untested deepwater Gulf of Mexico prospects represents billions of additional barrels of potential resources. Focused on Performance Rising costs are a challenge throughout the oil and gas industry. Competition for services, supplies and personnel are reflected in higher costs and tighter profit margins. Amid these challenges, Devon again delivered an outstanding financial performance in 2006. Net earnings topped $2.8 billion and per share earnings reached $6.34, the highest level in our history. Devon also continues to generate healthy levels of cash. Cash flow from operations reached $6 billion in 2006, another all-time high. Exploration and production of oil and natural gas requires high levels of capital investment. We invested more than $5 billion on exploration and development projects in 2006 plus $2.2 billion in the purchase of the Chief properties. We plan to invest up to $5.3 billion on exploration and development projects in 2007. Ours is a capital-intensive business, and Devon is committed to making the investments necessary to remain a healthy and growing company. I want to offer a note of special thanks to Duke Ligon, senior vice president and general counsel, who retired in January. Duke led Devon’s Legal Department for 10 years, and we will miss his leadership and wise counsel. Lyndon Taylor has joined Devon’s Executive Committee as Duke’s replacement. Lyndon brings to Devon more than 20 years of legal and management experience and is a welcome addition to the Devon executive team. As we enter 2007, I could not be more excited about Devon’s future. The steps we took early in this decade to build a robust pipeline of future growth projects are paying off; we have the deepest inventory of investment opportunities in our history. The theme of this report is Resource Full. This refers to how we view the opportunities ahead of us and the capabilities of the company to execute those opportunities. It also reflects the creative spirit and resourcefulness of Devon’s employees and business partners. It is these attributes that have put the company in the enviable position that we are in today. In this report, you will read comments from a variety of these employees and other stakeholders about Devon and its core values. I deeply appreciate the thoughts of these contributors and the positive reflection their words cast upon our entire organization. J. LArry NiChoLS Chairman and Chief Executive Officer March 20, 2007  Five-year highlights yeAr eNDeD DeCeMBer 31, 2002 2003 2004 2005 2006 FiNANCiAL DATA (1) (Millions, except per share data) total revenues total expenses and other income, net (2) Earnings (loss) before income taxes total income tax expense (benefit) Earnings from continuing operations Earnings (loss) from discontinued operations Cumulative effect of change in accounting principle net earnings Preferred stock dividends net earnings applicable to common stockholders net earnings per share: Basic Diluted Weighted average common shares outstanding: Basic Diluted Cash flow from continuing operating activities Cash flow from discontinued operating activities net cash provided by operating activities Cash dividends per common share Closing common share price DeCeMBer 31, total assets Debentures exchangeable into shares of Chevron Corporation common stock (3) Other long-term debt Stockholders’ equity Working capital (deficit) ProPerTy DATA (1) Proved reserves (net of royalties) Oil (MMBbls) Gas (Bcf) nGLs (MMBbls) Oil, Gas and nGLs (MMBoe) $ $ $ $ $ $ $ $ $ $ $ $ $ 4,316 4,450 (134) (193) 59 45 — 104 10 94 0.31 0.30 309 313 1,726 28 1,754 0.10 22.95 7,309 5,020 2,289 527 1,762 (31) 16 1,747 10 1,737 4.16 4.04 417 433 3,771 (3) 3,768 0.10 28.63 9,086 5,810 3,276 1,095 2,181 5 — 2,186 10 2,176 4.51 4.38 482 499 4,789 27 4,816 0.20 39.03 10,622 6,117 4,505 1,606 2,899 31 — 2,930 10 2,920 6.38 6.26 458 470 5,514 98 5,612 0.30 62.54 10,578 6,566 4,012 1,189 2,823 23 — 2,846 10 2,836 6.42 6.34 442 448 5,936 57 5,993 0.45 67.08 2002 2003 2004 2005 2006 662 6,900 4,653 22 444 5,836 192 1,609 677 7,903 11,056 293 646 7,316 209 2,074 692 6,339 13,674 772 585 7,493 232 2,065 709 5,248 14,862 1,272 640 7,296 246 2,102 727 4,841 17,442 (1,433) 708 8,356 275 2,376 yeAr eNDeD DeCeMBer 31, 2002 2003 2004 2005 2006 Production (net of royalties) Oil (MMBbls) Gas (Bcf) nGLs (MMBbls) Oil, Gas and nGLs (MMBoe) 42 761 19 188 60 863 22 226 74 891 24 247 62 827 24 224 55 815 23 214 (1) (2) (3) n/M the year 2002 excludes results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt in the April 2003 Ocean merger. the years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Revenues, expenses and production in 2003 include only eight and one-fourth months attributable to the Ocean merger and, in 2002, include only 11 and one-fourth months attributable to the Mitchell merger. All periods have been adjusted to reflect the two-for-one stock split that occurred on november 15, 2004. Includes other income, which is netted against other expenses. Debentures exchangeable into 14.2 million shares of Chevron common stock owned by Devon. not a meaningful number. 16,225 27,162 30,025 30,273 35,063 16% LAST yeAr ChANGe — 7% (11%) (26%) (3%) (26%) n/M (3%) — (3%) 1% 1% (3%) (5%) 8% (42%) 7% 50% 7% LAST yeAr ChANGe 3% (8%) 17% (213%) 11% 15% 12% 13% LAST yeAr ChANGe (11%) (1%) (2%) (4%)  resource  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Judy Lynn JohnsonMarcel JohnsonMike JohnsonMonica JohnsonPatti JohnsonPatty JohnsonRobert JohnsonTip JohnsonTommy JohnsonVivian JohnsonDennis JohnstonDuane JohnstonEverette JohnstonJoe JohnstonKimberly JohnstonHaywood JoinerBrad JolleyCassey JonesCole JonesCraig JonesCynthia JonesDan JonesDavid JonesDesmond JonesDonna JonesFreddie JonesFredrick JonesJ. Phil JonesJeremiah JonesJervis JonesJohn JonesKatie JonesKeri JonesKevin JonesMike JonesMike JonesNorman JonesPaul JonesRandy JonesSamantha JonesScott JonesSteven JonesTim JonesTraci JonesDuskin JordanGregory JordanRobert JordanJustin JornsGreg JossFlorence JosueCarolyn JoyWilliam JoyChelsea JozwiakJose JuarezSteven JuddRosemary JunellDana JurickJohn JuskaJohn KachelmeyerKevin KajorinneMarilyn KalancheyMurray KalitaChristine KalivodaJustin KallenbergerRay KallenbergerPatrick KamannZahir KanjiJohn KanouffCurtis KantenbergerRikki KanuitMelanie KappIbrahim KaraibrahimovicMurray KarbonikDavid KargMisty KasdorfJames KassionesRuss KassnerRoger KearnesFikre KebedeKossila KechemirDon KeeferMary KeeleAlice KeelinJudith KeenJon KeenzeGarry KeepingHarold KeessarPeter KellarGreg KelleherFay KellerKimberly KellerJeff KelleyLacy KelleyLisa KelleyFred KellowDebbie KellyPaul KempAmanda Kendall-SeelMalinda KendrickMichael KendrickRobert KennardBreanne KennedyDan KennedyGary KennedyKristin KennedyTerry KennedyLinda KenneyGregory KentDarren KeoughKelly KerbyPhilip KerigJack KerkhofMichelle KermanShannon KernBill KerrDaniel KerrDebbie KerrJo Ann KerranSherrill KerstensDheal KetchumKim KetchumAaron KetterYasin KhanSandeep KhuranaMonica KiblerAaron KiddTracy KiddRobert KiesewetterJeff KiesterRobert KilleleaghPatty KillmanKlaholt KimkerBev KinchElizabeth KindleCarolyn KingReginald KingKelly KingsmithMike KinmanBobbie-Jo KirbyScharine KirchoffPat KirkendollJoyce KirtleyHal KissnerSteven KistlerJennifer KitchellSusannah KitchensMark KitsmillerBarbra KizmannDavid KlaassenCheryl KleinRoger KleinRusty KleinSteve KleinAdam KlineEd KlingbellMelissa KlingerStephen KnappDale KnepperCynthia KnightDavid KnightEarl KnightJoanne KnightKimberly KnightRandy KnightRoy KnightSkipper KnightBruce KnopfDale KnoxJames KnoxClem KobelskyBradley KodamaJanna KoehnDavid KoelschBurton KoenigKyle KoernerGary KofoedMichael KohlCarla KolodyJennifer KoloenKevin KoonJohn KoopChris KorczewskiJohn KorzenoskiJason KosanovichRon KosheiffLisa KossDiane KossmanJames KotheL.J. KotlarichRichard KovachRaymond KowalNorman KowalchukJana KowalsMichael KozakErin KozakiewiczBeverley KozdrowskiTony KozyraKathleen KrahulicMark KramerKatie KreggerDarryl KreutzigerJason KrobotAna KruegerSteve KruegerGary KrukKevin KrynowskyJon KrystinikAlischa KrystyniakJoe KuehlerSteve KuhnNathan KuhnertPam KuhrGary KumpGregory KuranSusan KurczabaMelanie KushnerykErik KvaleConnie KwanVirgil KwiatkowskiEvelyn KyesJohn KyesWilliam La FleurMarc LaBergeAugust LaboucanDenis LabrecqueMonte LackeyRandy LackeyMike LacroixTom LafferySteve LafolletteCaroline LafondAleksander LajzerCelia LamChuck LamarHolly LambClinton LambertJenni LambertKenneth LamersTodd LaminskiWalter LamleCory LancasterBrian LanctotTammy LandisDean LandryPatrick LandryStacey LandryBryan LaneEmily LaneFrank LaneDarryl LangCasey LangeKerry LangeTim LangenbergMike LangfieldCraig LangfordLynne LangstonDusty LantzMike LantzDebra LanzPete LapeyrouseAnn LaPradeChristopher LaquaJoe LaraJerry LaranceAlisha LargoTerry LarkoLisa LarsenRhonda LarsenDoug LarsonElizabeth LarsonGlenn LarsonGregg LarsonRobert LarsonCindy LasherDarren LasleyCody LathamAsif LatifGlenn LatimerLynn LatiolaisChris LatkiewiczBrian LaughlinRobert LauzeCheryl LavarnwayJoe LawlisClint LawrencePerry LawrenceNancy LawshaeWhitney LawsonNicole LawtonSheila LazzariVu LeCorey LeaPamela LeaRachel LeaLou LeakeJim LeathersHeath LebeoufAaron LeBlancRaymond LeblancCathy LebsackBarbara LeClaireAl LedbetterAngelo LeddaCharles LeeChris LeeDanny LeeDidra LeeJason LeeJill LeeJoseph LeeKevin LeeLicia LeeMary LeeShonda LeeRonnye LeechAlesha LeemasterKristi LeeperBeatrice LeerIan LeesLynda LeethStephen LefebvreKaren LefevreMargaret LeggeBrad LeggettPhil LeibelAllen LejeuneDarell LejeuneTommy LejeuneDavid LelandTeresa LemieuxRonald LemoineAmber LeMondJohn LenhartKaren LennoxLouis LentzCeci LeonardHarry LeonardKyle LeonardChris LeongCathy LerigerCody LerouxDan LeslieRobert LeslieAlarice LetarteAbby LetasyAndre LetourneauJulie LeungThomson LeungWarren LeungCheryl LevesqueMichael LevesqueTodd LevesqueBob LewisCasey LewisDavid LewisDonnell LewisDwayne LewisGlenn LewisLarry LewisMerle LewisRebecca LewisBrian LewitskiTerry LeyenbergerDavid LeylandShanshan LiYing LiNathan LiegmanCharles LillyTed LillyDavid LinJia-Wen LinThomas LinWesley LincolnBenny LindleyDavid LindsayTom LinehanKelsey LinnellDon LinscombTraci LinscombDarryl LintonJim LinvilleLeslie LinvilleMark LisbethA. Gregory LittleDebbie LittleGary LittleGordon LittleSara Little JimPeter LiuRobert LivelyW. Andrew LivingstonHenry LivingstoneWilliam LivingstoneJaimelyn LiwagTony LochBrian LockWoody LockhartJanell LodgeKent LoefflerDerek LofstromDiane LofstromDebbie LogelinRich LohnerDave LondonSteve LondonDavid LoneyDianna LongKaren LongYvonne Long-StarlingSandy LookabaughMichael LoParcoPamela LopasTy LopesNicole LopezDon LorsonGrant LosCharles LottErik LottermoserAmy LouWilliam LouderAlbert LouieRandy LouviereRussell LouviereJulia LoveRenee LoveNichole LoveyPeter LovieLanny LowDan LoweRyan LoweStephen LoweTrey LoweVance LowesLeonard LoyekBernie LucasBrenda LucyRichard LuedeckeTerry LuedkeJohn LuffStanley LuiAna LuistroPaul LukerAndy LumTerri LumanHelge LundChuck LundeenChristina LundgrenCorrine LungDick LunsfordTony LuomaDevin LuperBrad LuskCarol LustigPerry LutzRobert LuxGeorgia LykidisJustin LynchFrancis LyneMarianne LynnDiane LynnesLeeanne LyonMark LyonMike LyonVictor LyonsBrenda LytleDominic MaTracy MaCorey MacDonaldElaine MacDonaldJames MacDonaldMay-Lee MacDonaldPenny MacDonaldDuane MacgowanScott MacGregorDavid MachukTracy MacijukDeanne MackJonah MackayJerry MackeyPaxton MackeyAnne MacLeanElizabeth MacLeanGrace MacLeanMichael MacLeanRobyn MacLeanTodd MacLeanHugh MacLennanWarren MacPhailW. Reigh MacPhersonLee MadsenLee MaesOlga MagasLindsay MagdalenoBrenda MageeJan MaggardRaymond MaggioreHerb MagleyCatherine MagnanKevin MaguireMichael MaguireKyla MahLilac MahMimi MahVirgil MaierMagella MaillouxMichael MakinJay MalanowichLinda MalaskeZack MaleyKristen MalloryNick MalloryJillayne 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have built our company on a solid foundation of core beliefs and values that have shaped our past and map our future. From this foundation, we draw upon precious resources such as innovation, teamwork, integrity and perseverance. More critical than the energy resources we produce are the convictions that guide us as we work. In preparing this annual report, we talked with a cross section of Devon employees and stakeholders outside the company about Devon’s character and how we conduct our business. In the following pages, along with community, environmental and operational highlights, these individuals share their unique perspectives.  “They understand that shareholder value and the bottom line are enhanced by investing in the community and especially by investing in the next generation.” DAviD BoreN PRESIDENT, UNIVERSITY OF OKLAHOMA NORMAN, OKLAHOMA  “As president of the University of Oklahoma, my role is to help build an outstanding university, and the leadership at Devon shares my mission.“It is not a coincidence that strong and productive companies are most often located in strong and flourishing communities. The two go together and Devon understands that. They understand that shareholder value and the bottom line are enhanced by investing in the community and especially by investing in the next generation.“Devon has invested in new facilities, scholarships, internships and research programs at OU. Their contributions are helping us produce a pool of outstanding graduates that Devon can draw from to maintain its talented workforce. “Devon has succeeded as a company and is becoming an even greater company because its leaders have the vision to understand that their business interests coincide with the public interest. Devon is not only a corporate partner for OU, its leadership and its values serve as a model and an inspirational guide for our students.”  “ When my community has a need, we can always count on Devon to get involved. Devon has been in our community for several years, contributing to public education, youth recreation, senior support programs and a variety of other community service efforts.”Wendy TremblayAboriginAl Committee member of the Conklin métis loCAl #193Conklin, AlbertA “In the area of community relations, Devon sets an excellent example for others to follow. The company supports public education, its employees are active in the community and it supports public safety programs.”Roy EatonPublIsher, WIse CounTy MessengerDeCaTur, Texas“Devon’s like a big family, and that makes it a lot easier for everyone to do their jobs. The friendly environment is why I enjoy coming to work each day, and I think it makes people want to do their best for the company.” Reah ToRResDevon RecepTIonIsTHousTon, Texas“Devon’s commitment to innovation means a lot to me as an employee. Our company is always looking at better ways to do our business, which helps me and my staff better monitor our business and accomplish more.”Mandy WrightDevOn SuperviSOr, AccOunting OperAtiOnSOklAhOmA city, OklAhOmA“Although our Devon tutors can only spend a short time at our school each week, their faithful dedication has made a significant impact on the lives of our students.”Trina STanberryCommunities in sChools ProjeCt mAnAgerthomPson elementAry sChoolhouston, texAs“While Devon provides funding for some of our school activities, the most important gift they give us is their time. Our students light up when their tutors arrive and it’s often the highlight of their day.”ChuCk TompkinsPrinciPal, Mark TWain ElEMEnTary SchOOlOklahOMa ciTy,OklahOMaCommunity outreach Commitment of Resources To succeed in the field, energy companies must have support from the communities that surround their operations. We consider ourselves part of the towns, cities and rural areas where we explore for and produce oil and natural gas. We live there, work there, play there, worship there and send our children to school there. Our business operations depend on a solid footing that can only come from stable communities. That is why we work to build relationships and donate financial resources to civic organizations, schools, law enforcement agencies, fire departments and youth programs. We are grateful to have opportunities to contribute to programs and services that enhance the quality of life for our employees and their neighbors. By investing in the future of our communities, we are investing in the future of Devon. Ambassadors Strengthen Community Bonds Serving on school boards, donating equipment to emergency responders and speaking to students about oilfield safety are fundamental to our business. Devon’s employees are dedicated to the business of economically finding and producing the oil and natural gas that maintains Devon’s position as one of the industry’s top energy producers. But that is only part of our role in the communities where we do business. We also spend time as volunteer teachers, little league coaches and city council members. Working within our communities is essential to our success as a company, and it is an integral part of our corporate culture. By supporting the communities where we live and work, we enhance the quality of life for ourselves and our neighbors. Devon’s ambassador program is a key component of its commitment to community outreach. The ambassador program succeeds because of our employees. Devon ambassadors are prominent members of community organizations, available to answer questions about our operations and to open lines of communication with all of our stakeholders. For Bill Skelton, being a Devon ambassador in Riverton, Wyoming, requires owning a “good pair of boots.” As an ambassador, Bill seeks opportunities to make a positive impact in his community. He volunteers to help local law enforcement with search and rescue operations—saving accident victims and searching for lost children. Thousands of Devon employee volunteers build relationships with landowners, civic leaders and regulators. These relationships help us work together, whether we are addressing a community need or responding to an emergency in the field. As they serve their communities, these volunteers are strengthening bonds and building partnerships. 0 Mike Naus from Devon’s Gillette office talks with students about wildlife and the environ- ment during the Wyoming hunting and Fishing heritage expo in 2006. Devon helped re-equip firefighters in vermilion Parish, Louisiana, following the devastating Gulf Coast hurricanes of 2005. Devon Continues Support for Gulf Coast recovery More than a year after hurricanes Katrina and Rita pummeled the Gulf Coast, Devon has not forgotten the people that were impacted by the devastation. As families return to places they once called home, many local schools, social service organizations and emergency responders remain without the supplies and equipment they need to serve their communities. Immediately following the hurricanes, Devon responded with contributions and volunteers to help victims begin the healing process. Devon’s $2 million contribution to relief efforts aided restoration initiatives along the Louisiana and Texas coastlines. But our relief effort has not stopped there. Devon continues to make significant contributions to the restoration process by targeting needs that are not covered by government agencies and insurance programs. For example, we have worked with local schools in Louisiana to identify ways we can help students and faculty recover from the losses their facilities sustained in the storms. As a result, we have purchased everything from school supplies to furniture, computer equipment and even rain ponchos to help protect students as they walk between portable classrooms. At Erath High School in Louisiana, we funded a new floor for the gymnasium, which also serves as a community gathering place and recreation center. The storms also consumed vital equipment used by firefighters in Vermilion Parish Louisiana. Devon contributed $180,000 to ensure that these first responders are adequately equipped to serve their communities. Devon has also contributed to organizations that provide post-trauma counseling, clothing and tutors for evacuated students. In addition to corporate funding, many of our employees continue to make personal donations to assist hurricane victims. In December 2006, Devon employees in Louisiana made the holidays a little brighter by purchasing clothing and toys for the children of families still struggling with the recovery. While the hurricanes have long been over, the devastation they caused continues to affect the lives of many in the coastal communities where we live and work. As an energy producer, we depend on our communities to create a solid foundation for our business and our employees. Because we have been graced by the support of many communities that shared in the disastrous effects of Katrina and Rita in 2005, we share the responsibility for picking up the pieces the storms left behind.   “There are certain companies that have established themselves as leaders. Through their conduct and their participation they are able to shape the direction of the industry. Devon is one of those companies.” Marc SMithExEcuTivE DirEcTorinDEpEnDEnT pETrolEum AssociATion of mounTAin sTATEsDEnvEr, colorADo“The best way to handle a problem is to address it, not back away from it. Devon is the kind of company that works with me. They want to help people and make things work. It’s the mark of an honest company. If there’s a mistake, the honest company will work it out. If they’re dishonest, they’ll never resolve it.” R.C. MCFallCounTy CommIssIonerJohnson CounTy, Texas“I see the respect Devon gets from service companies, the Bureau of Land Management and from people who live in the town of Baggs. As a petroleum engineer, working for a company with a good reputation makes my job easier. People are easier to talk to and work with because they trust Devon.” Megan StarrDevon oPerAtIons engIneerBAggs, WyoMIng“Credibility is essential to be effective in Washington. Devon exemplifies the new image of an independent producer. It’s big enough to participate in any project, but its roots are solidly in America.“Lee FuLLerVICe PresIDent, GoVernment relAtIonsInDePenDent Petroleum AssoCIAtIon of AmerICAWAshInGton, D.C.“Our environmental, health and safety philosophy started with a commitment our management was willing to make, and now it is one of the things that sets us apart from our peers.” DArreN SMiTh DEVON ENVIRONMENTAL SCIENTIST OKLAHOMA CITY, OKLAHOMA  “Devon has adopted an environmental, health and safety philosophy that calls on us to conduct our business ethically and lawfully. It also requires us to seek ways to operate in a manner that is safe and compatible with the environment as well as with the communities that surround our operations.“The philosophy is more than a priority. It’s part of our system of values, which is important, because priorities can change, but values are concrete. “Our philosophy is a top-down commitment, and that’s the best part. We are all held accountable for our EHS performance. As a supervisor in our environmental group, that makes my job a lot easier.“People are welcome to suggest new ideas that could make our operations more efficient, better for the environment and friendlier to our neighbors. Great ideas are coming in from the field because people are encouraged to think that way. As a result, our environmental programs are among the best in the industry.“Our environmental, health and safety philosophy started with a commitment our management was willing to make, and now it is one of the things that sets us apart from our peers.” environmental Partnerships A Resourceful Approach to Conservation Devon is committed to the preservation of our natural environment, especially air and water. Our commitment has resulted in successful initiatives companywide that have established Devon as an industry leader in environmental responsibility. We are gratified by our progress, and we are even more excited about our future as we continue a course of innovation in the areas of emissions reduction and water conservation. While Devon’s greenhouse gas emissions reduction programs are already in place, our accomplishments in 2006 created a new platform for greater reductions in the future. In addition to these achievements, our water conservation programs continue to expand with new technology that could eventually be applied to production operations companywide. Conservation is our goal as a good neighbor and is consistent with our objective to continue to be a top performer in the highly competitive energy industry. By keeping more natural gas in the pipeline and reducing water usage, we can increase production and cut operating costs. That is not only good for the environment, it is good for our bottom line. Technology Drives emissions reduction effort Between 1996 and 2005, Devon has accounted for emission reductions of more than 15 million tons of carbon dioxide equivalent as reported through voluntary government programs in the United States and Canada. We have reduced emissions through the use of new technology, and we have found innovative new approaches to our well completion and production methods. For example, Devon has initiated a program to replace old pneumatic devices with the latest technology designed to substantially reduce methane emissions. Devon is replacing hundreds of these “old technology” devices at production sites companywide. Each replacement accounts for an emission reduction of 100 tons of carbon dioxide equivalent each year. That is like taking 20 cars off the road. By capturing natural gas normally lost in the production process, we have been able to increase the volume of gas available for sale. In 2005, we were able to retain six billion cubic feet of natural gas that would have been lost to the atmosphere using traditional practices. With an economic benefit of more than $43 million, doing what makes sense for the environment also enhances our profitability. Since 1999, Devon has earned recognition by government agencies for being an industry leader in emissions reduction and reporting. In the United States, the Environmental Protection Agency has honored Devon repeatedly for its performance and for its advocacy. In Canada, Devon’s efforts have earned the company elite status from the GHG Challenge and Registry program for the past six years. While we are pleased with our past success, we can achieve much more. In 2006, we further defined our future course as an industry leader. New initiatives include a companywide inventory of greenhouse gas emissions and continued implementation of new emission reduction technology. A greenhouse gas inventory, scheduled for completion by the end of 2007, is the backbone of our future emissions reduction program. Through the inventory we will identify reduction opportunities at Devon production facilities across North America. It will allow us to focus on specific regions, identify their needs and develop reduction strategies. Those efforts will include the application of new technology, improved production methods and better equipment configurations.  Protecting the natural environment is imperative in our field operations. Devon is the largest independent natural gas producer in New Mexico, where we have been working in harmony with the environment for more than 20 years. Supervisor Jay ewing examines a water sample at a Barnett Shale facility. Water recycling is an important element of Devon’s conservation efforts. Our ongoing emissions reduction efforts and our inventory program help position Devon for the future. By continually monitoring our performance and looking for opportunities to increase efficiency, we enhance our competitiveness as well as our ability to respond to potential changes in the regulatory environment. We are dedicated to operating compatibly with the environment, and we believe a dynamic and rigorous emissions reduction program is vital to that commitment. Water Conservation initiative expanding in North Texas Water is an integral part of natural gas production. Whether we are using fresh water to complete wells in the Barnett Shale, or managing brine from wells in the Rocky Mountains, water conservation is a core environmental initiative for Devon. For example, at a time when society’s need for water is at an all-time high, Devon has responded by introducing recycling technology that will allow us to reduce our demand and potentially improve our efficiency companywide. Since 2005, Devon has partnered with Fountain Quail Water Management to pioneer recycling in the Barnett Shale natural gas field in north Texas. Our efforts have resulted in the first water recycling program to be permitted for long-term use by industry regulators in the state of Texas. Devon’s use of thermal distillation technology has allowed the company to reclaim water recovered from hydraulic fracture stimulations in the Barnett. Instead of injecting wastewater into deep disposal wells, Devon is using heat to separate the water from salt and other impurities. The treated water can be reused for future completion operations, taking demand pressure off local freshwater supplies. Devon’s recycling program has moved beyond the development stage. Today, we are operating seven recycling units with a combined treatment capacity of 500,000 gallons of water per day. As we bring additional units into the region, we expect our recycled volumes to continue growing. The impact of this technology could be meaningful. At full treatment capacity, up to 85 percent of the water we recover from fracture completions in the Barnett Shale could be reused, significantly reducing our demand for fresh water. While we are pleased with our progress, we continue the push to develop new ideas. In March 2007, we began field testing a second water recycling technology in the Barnett Shale. We have developed the Engineered Membrane Separation system through a partnership with General Electric. The membrane technology uses a series of filters to treat water without the substantial energy requirements of the thermal system. If successful in the field, the new technology may prove to be more economical, and it could have applications in other natural gas producing regions. By conserving water, we reduce our environmental impact and create opportunities to improve our operational efficiency. The program allows us to reduce the volume of water we must purchase for our operations, and it helps us avoid costs associated with saltwater disposal. Overall, water recycling is an exciting initiative for the company because of its benefits to the environment and to our bottom line.  “It has been my experience that Devon conducts its business with innovation and professionalism, carrying out its activities responsibly, with an eye toward protecting the environment.” viCTor CArriLLo TExAS RAILROAD COMMISSIONER AUSTIN, TExAS  “As a Texas Railroad Commissioner, I oversee and regulate the oil and gas industry. Devon is incredibly active in Texas and is the top gas producer in the state. It has been my experience that Devon conducts its business with innovation and professionalism, carrying out its activities responsibly, with an eye toward protecting the environment. For example, Devon has responded to freshwater use concerns in north Texas by being the first operator in Texas to test a pilot recycling program to recover water used in natural gas production operations. “Devon is also pushing the envelope in terms of technological advancements, using innovations in seismic, drilling and production techniques in the Barnett Shale. They are the top producer in the unconventional Barnett Shale gas trend – perhaps the most active natural gas play in the nation. Along with their partners, they are also employing leading edge technology in successfully exploring the ultra-deepwater Lower Tertiary trend in the Gulf of Mexico. Devon is the type of producer we would like to see more of in Texas.”  “Since joining Devon in 1999, I’ve seen our management tested on repeated occasions. Each time they have demonstrated a commitment to doing what is right, even when it’s not the most convenient or expedient solution.” Don SanDSDEvon SupErvISor of Gulf of MExIco opEratIonSlafayEttE, louISIana“Our executives always stop to say hello. When I need to talk to them, their doors are always open, which is very helpful in the work that I do.”Bill WalterDevOn SupervISOr, InfraStructure anD DatabaSe ServIceSOklahOma cIty, OklahOma“The rating agencies, banks and companies I work with all have a very high level of trust in us; they know we will follow through on our commitments.”Jeff RitenouRDevon Manager, CorporaTe FInanCeoklahoMa CITy, oklahoMa“At Devon, every employee is treated with respect. Our leadership has created an environment of trust and goodwill, and it’s apparent in how our teams work together.”Jenifer WickDevOn GeOscience TechniciAnOklAhOmA ciTy, OklAhOmA“Whether we are working with other businesses or with government regulators, integrity is our focus. It’s Devon’s culture. Integrity guides us as professionals and influences us in our personal lives as well.”Humberto QuintasDevon Attorney AnD LegALCoorDInAtor for expLorAtIon AnD proDuCtIon operAtIons rIo De JAneIro, BrAzILManagement’s Q&A Resourcefulness Supports Our Strategy how does Devon compete for qualified employees? The vitality and growth of the energy industry is stretching the capacity of a maturing workforce. Competing for employees — from recent college graduates to experienced industry professionals — is challenging. Our college recruiting efforts include campus visits by younger employees who can share personal experiences and can relate to a student’s uncertainty about their future. We also provide financial support for petroleum studies programs and facilities that raise our on-campus profile. In our college internship program we invite more than 100 students to spend the summer getting to know the company and working in the energy industry. Experienced personnel are attracted by Devon’s reputation as a leading independent oil and gas producer as well as by our culture of fairness and openness. Our objective is to hire and retain employees who are not only technically skilled but who are engaged and enthusiastic about Devon’s future. To help retain our current staff, we gauge the practices of competitors to ensure that Devon offers comparable compensation and benefits programs. However, compensation alone is not enough to attract and retain the best people. We also believe that offering a superior work experience that rewards integrity, ingenuity and teamwork positions Devon as not only a great place to work, but more importantly, builds a strong base of leaders focused on creating value for our shareholders. An overview of the company’s retention and recruiting programs can be found in the Careers section of Devon’s website at devonenergy.com. Do the Jack production test results apply to your other Lower Tertiary discoveries in the Gulf of Mexico? The successful production test of the Jack well in 2006 was a significant indicator that deepwater Lower Tertiary reservoirs can produce oil in commercial quantities. Although each discovery is unique, the test results build our confidence in the commercial potential of Devon’s Lower Tertiary portfolio. In addition, these results move us closer to the sanctioning and development of each of our discoveries in the Lower Tertiary. Devon’s four Lower Tertiary discoveries to date are similar, but not identical. Differences in water depths, reservoir characteristics, rock qualities, oil chemistry and other properties are present to varying degrees among the discoveries. The Jack well test answered many questions, but the learning process continues. As we develop our four Lower Tertiary projects and explore for additional Lower Tertiary discoveries, our understanding of this important new domestic energy source will expand rapidly. Devon is already the biggest producer in the Barnett Shale. Can you continue to grow this asset? Yes, we are confident that we can continue to increase Devon’s proved reserves and production from the Barnett Shale. We have more than doubled daily production from this outstanding unconventional resource since Devon first acquired its Barnett Shale properties in 2002. We have also doubled proved reserves in the Barnett to about 3.6 trillion cubic feet equivalent and have produced nearly one trillion cubic feet equivalent during the same period. These increases in gas production and proved reserves have been the result of an active drilling program complemented by technological improvements, including horizontal drilling, multi-stage completions and extensive 3-D computer imaging. Increased drilling density and enhanced reservoir management techniques have also led to production increases. We have more than tripled the number of producing wells in the Barnett Shale since 2002 to over 2,700 today. In 2006, we acquired the properties of Chief Holdings, which increased Devon’s land position in the field by 169,000 net acres to a current total of 736,000 net acres. Devon’s acreage position is the largest in the Barnett Shale, and Devon is also the largest producer by a significant margin. Further growth in the Barnett will be achieved through high activity levels applied to this larger resource base and supplemented by continued enhancements in drilling and production technologies. We plan to drill at least 385 wells in 2007, and we have several thousand potential locations in inventory. Given these abundant drilling opportunities and our track record of success, we believe we can continue to increase the size and value of Devon’s Barnett Shale assets far into the future. What does your decision to reduce investment in conventional Canadian natural gas areas say about Devon’s commitment to Canada? Canada and the United States are two of the best places in the world to explore for and produce oil and gas. Stable governments and fiscal regimes, access to markets and a talented and experienced workforce attract us to North America. We have a large inventory of high quality assets in Canada and have had good performance in the past. However, in 2005 and 2006, the Canadian market for land, equipment, services and supplies became overheated. This, coupled with the stronger Canadian dollar, resulted in cost escalation that has severely squeezed profit margins — especially in the mature, conventional gas drilling  devon’s cumulAtive BArnett shAle Production (Net, Bcfe) significAnt Projects 1,400 1,200 1,000 800 600 400 2004 2005 2006 2007 estimate To date, Devon has produced in excess of one trillion cubic feet of natural gas from the Barnett Shale in north Texas. Led by the Barnett Shale and other significant growth projects, Devon expects overall production to increase by 10% in 2007. Strong growth in the Barnett Shale is expected to continue into 2009. areas. Devon responded by temporarily reducing the amount of capital allocated to these conventional project areas. We will continue to limit conventional drilling in Canada until the situation shows evidence of correcting. We will increase drilling in the conventional gas areas quickly, when conditions improve. Elsewhere in Canada, such as at our Jackfish oil sands project and in the Lloydminster oil field, we are maintaining very active development programs. We expect to begin production from the initial phase of Jackfish this year. Combined production from an expanded Jackfish program and the Lloydminster area could reach 100,000 barrels per day early in the next decade. Devon is forecasting 10% production growth from continuing operations in 2007. What projects are driving that growth? We expect to produce from 219 million to 221 million oil-equivalent barrels, or Boe, in 2007. This is about 10% more than we produced in 2006, excluding production from Egypt and West Africa from both years. All of Devon’s major geographic producing areas — the United States, Canada and international — are expected to participate in the growth. In the United States, we anticipate continued production gains from our core onshore properties such as the Barnett Shale, Groesbeck and Carthage areas in Texas. We expect to see a third-quarter boost in gas production when the two deepwater Gulf of Mexico Merganser wells are tied into the Independence Hub. Our 50% interest in Merganser is estimated at about 50 million cubic feet, or roughly 8,000 Boe, per day. In Canada, the Jackfish oil sands project is expected to commence production in the second half of the year. Jackfish production should ramp up gradually until reaching its full capacity of about 35,000 Boe per day in 2008. Outside North America, Devon’s interest in the ACG field in Azerbaijan is projected to contribute more than 30,000 Boe per day to 2007 production. Oil production from ACG increased dramatically in the fourth quarter of 2006, following the payout of our carried working interest. In Brazil, the Polvo oil project is planned to come on stream in the summer of 2007. Oil production from Polvo is expected to quickly ramp up to about 26,000 barrels per day, net to Devon’s interest. Together, these projects give us a high level of confidence that we will achieve our 10% growth target. you invested $2.2 billion to acquire Chief holdings in 2006. Can we expect more acquisitions ahead? Much of Devon’s historical growth came from large corporate mergers and acquisitions where we acquired entire companies. Our goal was to build a company with superior oil and gas assets that we could grow organically with the drill bit. At the same time we assembled a highly trained and motivated group of professionals who could use cutting edge technology to enhance that growth. With our last major corporate acquisition four years ago, we essentially accomplished that goal. Today, Devon’s companywide asset base is broad and diverse. Our long-term strategy is one of organic growth through exploration and development, supported by continuous improvement of our asset base. Our acquisition of Chief in 2006 was a tactical, targeted transaction. Chief’s properties were located entirely in the Barnett Shale field in north Texas. Adding to our core positions, such as the Barnett Shale, and divesting assets that are not optimal for achieving our long-term objectives are important contributors to improving Devon’s overall asset quality. Although we cannot completely rule out the possibility of another accretive corporate acquisition in the future, additional transactions, if any, are more likely to be focused, asset-driven acquisitions such as Chief.  Project objective target Net rateBarnett Shale 2009 peak production >1.0 BcfdACG Field 2007 average production >30 MBoed Merganser 1st production mid-2007 50 MMcfdPolvo 1st production mid-2007 26 MBoedJackfish 2008 peak production 35 MBoed 0 “Whether it’s safety, environmental responsibility, community involvement or our production operations, I know our senior management will support us when honesty and integrity are at the foundation of what we do.”GeorGe JacksonDevon ProDuctIon SuPervISorBrIDgePort, texaS“My job as a field engineer is to optimize production from our wells and work alongside others to identify opportunities for improvement. A lot of times, this means finding ways to cut costs and increase production from a single well.”Kim JohnstonDevon FielD engineergrAnDe PrAirie, AlbertA“I like the way Devon has followed up on its acquisitions and has taken advantage of its opportunities. Their engineers and geologists have done some very good work, not only with the Barnett Shale assets Devon acquired from Mitchell, but also offshore in the Lower Tertiary trend, where Devon and its partners are working under very difficult conditions.”GeorGe MitchellInveSTor anD ForMer ChaIrMan anD ChIeF exeCuTIve oFFICer oFMITCheLL energy & DeveLopMenT Corp.houSTon, TexaS“I am very impressed with the attitude of Devon’s management, particularly their willingness to use local resources, especially people from CNOOC. Devon allowed representatives from CNOOC to make a full technical contribution to the Panyu field development. As a result, the two companies created a very efficient process that allowed us to develop the Panyu field into one of the most successful offshore oil projects in the region.”Duan Cheng gangVICe PresIDeNt Of fIelD DeVelOPmeNt AND eNgINeerINgChINese NAtIONAl OffshOre OIl COmPANy (CNOOC)sheNzheN, guANgDONg PrOVINCe, ChINA“We are a close group with a great team spirit. As a result, we come to work each day believing we can make an impact on the company by generating good exploration prospects which lead, hopefully, to major new discoveries for our future.” GreG KeLLeher (CENTER) DEVON DEEPWATER MANAGER GULF DIVISION HOUSTON, TExAS FROM LEFt tO RIGHt: irMA CASTro, DAtABASE SuPERvISOR; DArryL LiNToN, EnGInEER; GreG KeLLeher, DEEPWAtER MAnAGER; roBBie SeNG, GEOLOGISt; ADAM SeiTChiK, GEOPHYSICISt  “When I joined Devon through the company’s acquisition of PennzEnergy in 1999, what impressed me was how much emphasis the company placed on its values. Trust, collegiality and goodwill are among those values, and they have special importance to me and the people in my group.“We are responsible for generating exploration prospects and developing production in the Gulf of Mexico’s deep water, which is one of the most technologically challenging places in the world to operate. We overcome those obstacles by working in an environment that encourages trust, creative thinking and collective effort. If there is no trust, there is no communication or sharing of ideas. Trusting environments allow good ideas to nurture and mature. “We are a close group with a great team spirit. As a result, we come to work each day believing we can make an impact on the company by generating good exploration prospects which lead, hopefully, to major new discoveries for our future.”exploration and Production resources Developing Our Full Potential As one of the world’s largest independent exploration and production companies, Devon is a leader in the search for new oil and natural gas resources. In 2006, we increased reserves in the ground and positioned the company for future growth. We increased estimated proved reserves by 13% in 2006 to a record 2.4 billion oil-equivalent barrels. We produced 200 million equivalent barrels from continuing operations in 2006 and expect to produce 219 million to 221 million equivalent barrels in 2007. During the past year we drilled nearly 2,500 wells with an overall success rate of 98%. Our repeatable, low-risk development drilling projects were enhanced by high-impact exploration successes in the deepwater Gulf of Mexico. Also during 2006, we moved several multi-year oil and gas projects toward completion. The following pages profile some of Devon’s more significant exploration and production projects. Wells drilled reserve Additions from extensions, discoveries And PerformAnce revisions (MMBoe) Proved reserves (net of royalties) (MMBoe) 2,468 2,362 2,171 2,228 427 437 • • 2,376 1,685 311 • 2,074 2,065 2,102 • 172 • 131 1,609 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06  Devon drilled a record 2,468 wells in 2006, adding 427 million equivalent barrels of proved reserves with the drill bit. Total proved reserves reached a record 2.376 billion barrels at year-end. As the largest gas producer in Texas, Devon drills day and night to help meet the nation’s energy needs. We drilled our 600th horizontal well in the Barnett Shale in 2006. in addition to being the largest gas producer in the Barnett Shale, Devon also owns and operates an extensive network of natural gas gathering and processing facilities. Barnett Shale, a Lasting resource The Barnett Shale in north Texas has been called the hottest natural gas play in the United States, and Devon is its largest producer. Since acquiring our original ownership in the field in 2002, we have drilled about 1,600 wells and increased our net daily production from 350 million cubic feet of natural gas equivalent to more than 710 million today. In 2006, we leapt further ahead in the play by acquiring the assets of another Barnett operator, Chief Holdings. Devon acquired more than 600 billion cubic feet of proven natural gas reserves through the $2.2 billion transaction. Importantly, the deal also grew our land position to 736,000 net acres, representing thousands of potential drilling locations. Devon’s dominance in the low-risk Barnett Shale is reaping huge rewards for the company and our shareholders. We now have more than 2,700 producing wells in the Barnett, representing one-third of Devon’s total gas production in the United States. Devon produces nearly half the field’s overall daily production and more than twice that of our nearest competitor. Application of technology is an important element of Devon’s leadership position in the Barnett. We first introduced horizontal drilling to the play in 2002 and drilled our 600th horizontal Barnett Shale well in 2006. We have also partnered with a leading university to develop proprietary, cutting-edge underground imaging to identify optimal drilling locations. We are accelerating production growth in the Barnett by increasing drilling density. The 20-acre infill program we started in 2005 is delivering impressive results, and we have now begun drilling 20-acre wells outside the borders of the original core pilot area. The successful infill program, the addition of Chief’s assets and expansion of our operations in Johnson and Parker counties are currently keeping 30 drilling rigs running. We plan to drill at least 385 wells in 2007, and by late 2009 we expect our Barnett production to reach one billion cubic feet of natural gas equivalent per day. The Barnett Shale is one of the country’s most important new sources of clean-burning natural gas, and it represented 26% of Devon’s companywide reserve base at year-end 2006. Since 2002, we have significantly increased the amount of gas we are recovering from the Barnett Shale, and we expect additional technological advances in the future to further increase recoveries. The Barnett Shale is one of Devon’s most prized assets and it will likely remain so for many years to come.  A front page story in The Wall Street Journal captured the significance of the Jack No. 2 well test. During testing, the Jack No. 2 well in the Gulf of Mexico flowed at a rate of more than 6,000 barrels of oil per day. Jack Test Brings Worldwide Attention Seldom does a single business story catch the attention of news media around the world. This was the case, however, when in September 2006 Devon and its co-owners announced the successful test of the deepwater Jack No. 2 well in the Gulf of Mexico. According to The Wall Street Journal, the Gulf’s Lower Tertiary trend “could become the nation’s biggest new domestic source of oil since the discovery of Alaska’s North Slope more than a generation ago.” The Jack test made news, and it was big news for Devon because we have four significant discoveries in this exciting new oil play. The production test proved that oil found in the 2004 Jack discovery would flow to the surface at commercial rates. During the test, the Jack No. 2 flowed at a rate of more than 6,000 barrels per day from just 40% of the oil-bearing column. Future plans for Jack include drilling another appraisal well to better define the size of the field. Also ahead, the co-owners will decide upon the layout and engineering designs to develop the field. Devon is further along with plans to commercially develop Cascade. This 2002 discovery was our first in the Lower Tertiary. Beginning in late 2009, Cascade is expected to produce into the first floating production, storage and offloading vessel (FPSO) approved for the Gulf of Mexico. FPSOs enable offshore production in frontier areas such as the Lower Tertiary trend before pipeline infrastructure has been built. We made our fourth discovery in the Lower Tertiary trend in 2006. The discovery well, on the Kaskida prospect, also appears to be the largest of the four. Future plans for Kaskida include additional appraisal drilling and evaluation of various development options. With the addition of Kaskida, Devon’s Lower Tertiary discoveries to date may hold up to 900 million barrels of resource potential. On top of that, we have another 18 undrilled prospects with a combined unrisked resource potential more than double Devon’s current reserve size of 2.4 billion oil-equivalent barrels. horizontal Drilling Capturing More Gas resources A typical oil or gas well is drilled straight down, vertically. A horizontal well starts out vertically but is turned underground to run parallel to the surface. To visualize the benefits of horizontal drilling, imagine the earth’s surface as the top of a sandwich. If you push a drinking straw between the slices of bread, you will encounter a lot more peanut butter than you will by sticking the straw through the sandwich like a tooth pick. When positioned properly, one horizontal well can recover as much oil or natural gas as three or four vertical wells. This can improve well economics significantly, because the cost of a horizontal well may be only two to three times the cost of a vertical well. In east Texas, Devon is applying the same horizontal drilling and completion technologies that we have honed in the Barnett Shale field while drilling more than 600 successful horizontal wells. Devon drilled its first horizontal well in east Texas in 2005 in the Nan-Su-Gail field within the Groesbeck area. We continued the Nan-Su-Gail program in 2006, achieving initial production rates of 11.5 million and 26 million cubic feet of gas per day from the first two wells and 32 million cubic feet per day from a third. We have 100% working interests in these wells and could have as many as 200 additional drilling locations throughout the Groesbeck area.  Polvo is located on block BM-C-8, one of nine Brazilian offshore exploratory blocks held by Devon. oil from the Devon-operated Polvo project in Brazil will flow to this 1.5 million barrel vessel. Following our success at Groesbeck, we began trying horizontal drilling further east in the Carthage area. The first well in the Carthage program also began producing at an impressive rate — averaging about nine million cubic feet per day for the first 30 days of production. We plan to continue evaluating horizontal drilling at Carthage, where we could have up to 70 potential drilling locations. Woodford Shale Shows Promise With the tremendous success of the Barnett Shale in north Texas, the oil and gas industry is searching for other look-alike shale plays. One such candidate is the Woodford Shale in the Arkoma basin of eastern Oklahoma. The Woodford and Barnett are not identical, but share some characteristics. Both contain large quantities of natural gas, and both formations give up their gas reluctantly. As in the Barnett Shale, Woodford wells must be hydraulically fractured during completion. This adds to the cost and complexity of each well. Also, as in the Barnett Shale, the Woodford responds well to horizontal drilling. Devon has assembled an acreage position in several eastern Oklahoma counties that is prospective for the Woodford Shale. We currently hold about 70,000 net acres, representing several hundred potential drilling locations. We drilled our first Woodford well in 2005 and drilled 40 horizontal Woodford wells in 2006. We plan to keep four operated rigs running on our Woodford acreage in 2007, drilling 55 wells. The octopus is Coming Polvo, octopus in Portuguese, is Devon’s first start-to-finish offshore oil project in Brazil. Located in the Campos Basin, Polvo will be one of the quickest offshore projects brought to completion in Brazil. Discovered in June 2004, Polvo is expected to see first production in mid-2007. Development plans anticipate 10 producing wells. The 1.5 million barrel-capacity FPSO vessel that will handle the produced oil has been commissioned and is expected on location in May. Oil production is projected to reach a peak of about 26,000 barrels of oil per day, net to Devon. We operate Polvo with a 60% working interest. Encouraged by our success at Polvo, Devon’s objective is to build a significant presence in Brazil through an ongoing exploration program. Brazil welcomes foreign investment to make the country more energy self-sufficient. Devon has even joined with Brazil’s own Petrobras to acquire leases in some of the country’s most promising offshore exploration areas. Petrobras is a worldwide leader in deepwater oil and gas exploration and production, and we are very pleased to be partnered with this company in its home country, as well as in the U.S. Gulf of Mexico. We currently hold leases in nine offshore blocks in Brazil.  Construction nears completion at Devon’s Jackfish thermal oil facility in Alberta, Canada. Commencement of steam injection and first production from Jackfish are planned for 2007. Drilling operations on the ACG field, offshore Azerbaijan, have increased field-wide production to more than 700,000 barrels of oil per day. Devon’s share of production is expected to average more than 30,000 barrels per day in 2007. First Production Slated for Jackfish oil Sands Project The oil sands of western Canada are believed to hold billions of barrels of oil in the form of thick, tar-like bitumen. Shallow deposits of bitumen have been successfully mined for many years. Deeper deposits cannot be mined, but can be heated and coaxed to the surface by injecting steam underground. Devon’s 100%-owned Jackfish project in eastern Alberta utilizes the steam-assisted gravity drainage (SAGD) process. Jackfish, with 300 million barrels of estimated recoverable reserves, has been under construction since 2005. With construction nearing completion, we expect to begin injecting steam at Jackfish in 2007. As the steam permeates and heats the bitumen, flows will increase, reaching an expected 35,000 barrels per day in late 2008. Jackfish is an important component of our production growth forecasts for 2008 and 2009. Without the declines seen in most conventional oil fields, Jackfish is expected to produce at a relatively steady rate for 20 years or more. We have also asked the Alberta government to approve a second phase Jackfish project on our oil sands leases adjacent to the first phase. This would double the resource size to approximately 600 million barrels and double production to about 70,000 barrels per day. If the expansion project is approved and sanctioned for development, first steam at Jackfish 2 could commence near the end of this decade. Production Growth from the Caspian Azerbaijan has a rich heritage as an oil producer. It was the birthplace of the oil-refining industry and was the world’s leading petroleum producer at the beginning of the twentieth century. During World War II, the country supplied about 70% of the former Soviet Union’s total oil production. The Azeri-Chirag-Gunashli (ACG) oil development project is located in the Caspian Sea, nearly 75 miles off the coast of Azerbaijan. ACG is one of the largest oil fields under development in the world, and Devon’s share represents about 84 million barrels of light, sweet crude oil. Devon established its stake in the field in 1999 when we acquired PennzEnergy. Commercial development of ACG was dependent upon construction of a major export pipeline that was completed in 2006. For the past seven years, most of Devon’s share of production from ACG went to repay partners for costs incurred on our behalf under the terms of our 5.6% carried interest ownership. A ramp-up in production upon completion of the export pipeline enabled us to repay our carried interest balances in late 2006. With transportation capacity provided by the export pipeline, field-wide production has increased to more than 700,000 barrels per day, heading to a million barrels per day in 2009. As a result, Devon’s share of ACG production has also increased, making ACG a significant contributor to our 10% year-over- year production growth forecast for 2007. Devon’s production from ACG is expected to average more than 30,000 barrels per day in 2007.  operating Statistics by Area (1) Producing Wells at Year-End 8,704 6,668 5,785 3,925 687 25,769 7,391 530 33,690 Permian mid- continent rocky mountains gulf coast u.s. offshore total u.s. canada international total company 2006 Production (Net of royalties) Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, Gas and NGLs (MMBoe) Average Prices Oil price ($/Bbl) Gas price ($/Mcf) NGLs price ($/Bbl) Oil, Gas and NGLs ($/Boe) Year-End Reserves (Net of royalties) Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, Gas and NGLs (MMBoe) Year-End Present Value of Reserves (In millions) (2) Before income tax After income tax Year-End Leasehold (Net acres in thousands) Developed Undeveloped Wells Drilled During 2006 Capital Costs Incurred (In millions) (3) 2006 Actual (4) 2007 Forecast 7 38 2 16 61.20 5.80 28.78 45.40 89 265 22 155 1 225 11 49 62.49 5.75 28.21 33.52 6 3,382 156 725 1 95 1 18 55.40 5.64 15.63 35.35 20 1,134 7 216 2 129 4 27 63.11 6.39 34.05 39.27 12 1,198 45 257 8 79 1 22 64.24 7.24 35.43 51.23 43 376 3 109 19 566 19 132 62.23 6.09 29.42 39.31 170 6,355 233 1,462 13 241 4 58 46.94 6.05 42.67 39.21 329 1,896 42 687 23 8 — 24 61.36 3.95 — 59.24 209 105 — 227 55 815 23 214 58.30 6.06 32.10 41.51 708 8,356 275 2,376 2,178 4,334 1,952 1,890 2,285 12,639 8,677 6,714 4,817 4,742 3,079 24,095 16,573 $ $ $ $ $ $ 308 469 171 772 603 621 550 1,409 515 552 545 223 223 1,499 2,385 4,525 2,124 6,304 299 9,440 4,808 20,269 20 1,550 877 41 2,468 $ 216 $ 220-240 3,609 1,515-1,625 365 350-370 666 805-875 681 720-775 5,537 1,554 3,610-3,885 1,245-1,350 631 7,722 395-440 5,250-5,675 (1) Excludes results from discontinued operations. (2) Estimated future revenue to be generated from the production of proved reserves, net of estimated future production and development costs, discounted at 10% in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities. Devon believes that the pre-tax 10% present value is a useful measure in addition to the after-tax value as it assists in both the determination of future cash flows of the current reserves as well as in making relative value among peer companies. The after-tax present value is dependent on the unique tax situation of each individual company while the pre-tax present value is based on prices and discount factors which are consistent from company to company. We also understand that securities analysts use this pre-tax measure in similar ways. (3) 2006 actual costs incurred and 2007 forecasted capital costs include exploration and production expenditures, capitalized general and administrative costs, capitalized interest costs and asset retirement costs. (4) 2006 costs incurred includes acquisition costs of $2.2 billion in the Mid-Continent region related to the Chief acquisition. 11-year Property Data (1) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 10-year compound 2006 growth rate growth rate 5-year compound Reserves (Net of royalties) Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, Gas and NGLs (MMBoe) 10% Present Value Before Income Taxes (In millions) (2) $ 351 1,131 18 558 3,952 219 1,403 24 477 2,100 166 1,440 21 427 1,375 439 2,785 55 958 406 3,045 50 963 5,316 17,075 646 444 527 7,316 5,836 5,024 209 192 108 1,472 2,074 1,609 6,687 15,307 22,438 585 7,493 232 2,065 22,693 640 7,296 246 2,102 34,830 708 8,356 275 2,376 24,095 Production (Net of royalties) Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, Gas and NGLs (MMBoe) Average Prices Oil (Per Bbl) Gas (Per Mcf) NGLs (Per Bbl) Oil, Gas and NGLs (Per Boe) unit Production and operating expense (Per Boe) $ $ $ $ $ 30 116 2 52 29 180 3 62 20 189 3 55 25 295 5 79 37 417 7 113 36 489 8 126 42 761 19 188 60 863 22 226 74 891 24 247 62 827 24 224 55 815 23 214 17.49 1.82 13.78 14.90 17.03 2.04 12.61 14.51 12.28 1.78 8.08 11.09 17.78 2.09 13.28 14.22 24.99 3.53 20.87 22.38 21.41 3.84 16.99 22.19 21.71 2.80 14.05 17.61 25.82 4.51 18.65 25.93 28.22 5.32 23.04 29.92 38.00 6.99 28.96 39.48 58.30 6.06 32.10 41.51 5.24 4.63 4.29 4.15 4.81 5.29 4.71 5.65 6.13 7.42 8.54 10% 6% 11% 21% 10% 29% 9% 11% 24% 11% 22% 10% 14% 13% 7% 22% 31% 16% 20% 6% 22% 27% 15% 13% 13% 9% 11% 5% (1) The years 1996 through 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt from the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting. (2) Estimated future revenue to be generated from the production of proved reserves, net of estimated future production and development costs, discounted at 10% in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities. Devon believes that the pre-tax 10% present value is a useful measure in addition to the after-tax value as it assists in both the determination of future cash flows of the current reserves as well as in making relative value among peer companies. The after-tax present value is dependent on the unique tax situation of each individual company while the pre-tax present value is based on prices and discount factors which are consistent from company to company. We also understand that securities analysts use this pre-tax measure in similar ways.  Key Property Highlights A B B A B B A C D PERMIAN MID-CONTINENT ROCky MOuNTAINs A / Southeast New Mexico A / Woodford Shale A / Bear Paw Profile • 75% average working interest in 548,000 acres. • Key fields include Ingle Wells, Catclaw Draw, Potato Basin, Red Lake, Gaucho, and Outland. • Produces oil and gas from multiple formations at 1,500’ Profile • 70,000 net acres in the Arkoma Basin in eastern Oklahoma. • Operated working interests range from 50% to 100%. • • Produces gas from the Woodford Shale formation at 4,000’ Emerging unconventional natural gas play. to 16,500’. • 44.2 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 33 gas wells. • Drilled and completed 49 oil wells. • Recompleted 15 wells. 2007 Plans • Drill 28 gas wells. • Drill 43 oil wells. • Recomplete 35 wells. B / West Texas Profile • 40% average working interest in 1.1 million acres. • Key fields include Wasson, Reeves and Anton-Irish to the north; Ozona, Keystone/Kermit and Waddell to the south. • Produces oil and gas from multiple formations at 2,500’ to 18,000’. • 111.3 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 12 gas wells. • Drilled and completed 83 oil wells. • Recompleted 52 wells. • Reactivated 11 wells. 2007 Plans • Drill 29 gas wells. • Drill 71 oil wells. • Recomplete 48 wells. • Reactivate 20 wells. to 10,000’. • 10.4 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 40 horizontal wells (15 operated). • Acquired additional acreage. • Acquired 3-D seismic. 2007 Plans • Drill 55 horizontal wells (40 operated). • Expand gas gathering system capacity. • Continue construction of 200 million cubic feet per day gas plant. • Acquire additional 3-D seismic and acreage. B / Barnett Shale Profile • 736,000 net acres (127,000 within core area) in the Fort Worth Basin of north Texas. • >93% average working interest in core. • >84% average working interest outside core. • Produces gas from the Barnett Shale formation at 6,500’ to 9,200’. • 608.1 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 133 wells within core area, including: 54 vertical infill wells. 79 horizontal wells. • Drilled 250 wells outside core area, including: 7 vertical wells. 243 horizontal wells. Improved drilling efficiencies with new generation rigs. • Acquired Chief’s assets. • • Acquired 3-D seismic and acreage. 2007 Plans • Drill 157 wells within core area, including: 10 vertical infill wells. 147 horizontal wells. • Drill 228 horizontal wells outside core area. • • Acquire additional 3-D seismic and acreage. Evaluate far west acreage. Profile • 814,000 net acres in north central Montana. • 90% average working interest in federal units. • 75% average working interest outside federal units. • Produces gas from the Eagle formation at 800’ to 2,000’. • 18.5 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 49 wells. • Recompleted 23 wells. • • 2007 Plans • Drill 95 wells. • Continue workover program. • Add compression and perform other gas gathering Installed artificial lift on 39 wells. Expanded gas gathering system capacity. system improvements. • Acquire 3-D seismic. B / Powder River Coalbed Natural Gas Profile • 75% average working interest in 346,000 acres in north eastern Wyoming. • Produces coalbed natural gas from the Fort Union Coal formations at 300’ to 2,000’. • 19.3 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 251 coalbed natural gas wells. • Added compression and performed other gas gathering • system improvements. Increased outside operated activity in Juniper Draw area (Big George coal). 2007 Plans • Drill 342 coalbed natural gas wells. • Continue focus and expansion of operated and outside operated activity at Juniper Draw. Initiate full scale development plans for West Pine Tree Unit. • C / Washakie Profile • 76% average working interest in 210,000 acres in southern Wyoming. • Produces gas from multiple formations at 6,800’ to 10,300’. • 104.4 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 137 wells. • Recompleted 3 wells. • • Installed 76 plunger lifts. Installed compression and performed other gas gathering system improvements. • Continued implementation of automated production control system. 2007 Plans • Drill 105 wells, including 23 directional wells. • • Add compression and perform other gas gathering Install 100 plunger lifts. system improvements. • Continue implementation of automated production control system. 28 texasOklahOmanew mexicoKansasColoradonew mexicoKansasColoradoArizonANebraskaUTAHIDAHOWyomingMontanaSouthDakotaNorthDakotatexasArkAnsAsOklahOmaGulf of MexicoLouisiana D / NEBU/32-9 Units Profile • 25% average working interest in 54,000 acres in the San Juan Basin of northwestern New Mexico. • Coalbed natural gas development began in the late 1980s and • early 1990s. Includes 299 coalbed gas wells, 262 conventional wells, gas and water gathering systems and an automated production control system. • Produces primarily coalbed natural gas from the Fruitland Coal formation at 3,500’. • 18.1 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 32 coalbed gas wells. • Completed 171-well workover program. • Drilled and completed 20 conventional gas wells. • Recompleted 4 conventional wells. 2007 Plans • Drill 4 coalbed gas wells. • • Drill 33 conventional gas wells. • Recomplete 6 conventional wells. Initiate 150-well workover program. B C A D D D GuLF COAsT A / Groesbeck Area 2006 Activity • Drilled and completed 120 vertical wells, including 36 infill wells. • Drilled and completed 2 horizontal wells. • Recompleted 88 wells. • Acquired additional acreage. 2007 Plans • Drill 136 vertical wells, including 18 infill wells. • Drill 14 horizontal wells. • Recomplete 48 wells. C / North Louisiana Area Profile • 65% average working interest in 654,000 acres in north Louisiana. • Own mineral interests in 139,000 net acres on trend with lower Cotton Valley/Bossier play. Emerging gas exploration play. • • Produces from the lower Cotton Valley and Bossier formations at 13,000’ to 17,000’. Includes 44 producing wells. • • 2.4 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 5 wells at Vernon-Ansley. • Drilled 1 exploratory discovery well at East Vernon. • Drilled 2 appraisal wells at East Vernon. • Drilled 1 exploratory well at Mt. Moriah. • Drilled 1 appraisal well at Vixen. • Acquired 3-D seismic at Vixen and Caney Lake. 2007 Plans • Drill 2 exploration wells to test other prospect areas. D / South Texas/South Louisiana Includes 930 producing wells. Profile • 66% average working interest in 584,000 acres. • Key areas include Matagorda, Zapata, Agua Dulce/ N. Brayton, Duval/Hagist, Houston, Central Texas, Coastal Frio and the Patterson field in Louisiana. • Produces oil and gas from the Frio/Vicksburg, Yegua, Wilcox and Woodbine trends at 1,500’ to 15,000’. • • 30.9 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 44 wells. • Drilled 4 exploratory wells in the Matagorda area. • Recompleted 62 wells. • Acquired 3-D seismic in the Zapata area. 2007 Plans • Drill 49 wells. • Drill 1 exploratory well in the Matagorda area. • Drill 3 exploratory wells in south Louisiana. • Drill 2 horizontal Austin Chalk wells. • Recomplete 63 wells. • Acquire 3-D seismic in the Brazoria area. • Acquire 3-D seismic in the Patterson field. D C B A Profile • 72% average working interest in 292,000 acres in east central Texas. GuLF - shELF • Key fields include Personville, Nan-Su-Gail, Dew, Oaks A / Eugene Island South Area and Bald Prairie. • Produces primarily gas from the Travis Peak, Cotton Valley Sand, Bossier and Cotton Valley Lime formations at 6,000’ to 13,000’. Includes 677 producing wells. • • 48.0 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 23 vertical wells. • Drilled and completed 8 horizontal wells. • Recompleted 3 wells. • Acquired additional acreage through joint venture. 2007 Plans • Drill 22 vertical wells. • Drill 12 horizontal wells. • Drill 1 exploratory well on joint-venture acreage. • Recomplete 9 wells. • Acquire 3-D seismic. B / Carthage Area Profile • 85% average working interest in 205,000 acres in east Texas. • Key fields include Carthage, Bethany, Waskom, Stockman and Appleby. • Produces primarily gas from the Pettit, Travis Peak and Cotton Valley formations at 5,700’ to 9,600’. Includes 1,530 producing wells. • • 160.8 million barrels of oil equivalent reserves at 12/31/06. Profile • Includes 8 blocks located in the southern portion of Eugene Island area. • Working interests range from 14% to 100%. Located offshore Louisiana in 250’ of water. • • Produces oil and gas from sands at 1,500’ to 13,000’. • 14.7 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 2 wells at Eugene Island 315. • Drilled 2 wells at Eugene Island 316. • Drilled 1 well at Eugene Island 329. • Drilled 1 well at Eugene Island 337. • Completed 2005 Chopin discovery and commenced production. • Drilled 1 dry hole at Eugene Island 334. 2007 Plans • Drill 2 wells at Eugene Island 337. • Drill 1 well at Eugene Island 333. • Drill 1 well at Eugene Island 334. • Initiate recompletion program at Eugene Island 330. Shelf Exploration Prospects Profile B / Nimitz • Brazos A-24. • • • 20% working interest. • Net unrisked reserve potential: undisclosed. Located offshore Texas in 130’ of water. Target formation: Miocene sands at 19,400’ to 20,700’. C / Buckeye • West Cameron 164. • • • 100% working interest. • Net unrisked reserve potential: 4 million barrels of Located offshore Louisiana in 50’ of water. Target formation: Lower Miocene sands at 9,000’ to 13,000’. oil equivalent. D / Sleeping Bear • Mobile 826. • • • 75% working interest. • Net unrisked reserve potential: 16 million barrels of Located offshore Alabama in 50’ of water. Target formation: Norphlet sands at 21,200’ to 21,800’. Finalized geophysical analyses and drilling contracts. oil equivalent. 2006 Activity • • Secured farmin agreement at Nimitz. 2007 Plans • Secure farmout agreements with industry partners at Sleeping Bear and Buckeye. • Drill exploratory test wells. 29 MSALGulf of MexicotexasLouisianatexasGulf of MexicoLouisiana J D A BC H K I E L G F GuLF - DEEPwATER A / Nansen Located offshore Texas in 3,500’ of water. Includes 3 blocks in central East Breaks area. Profile • • 50% working interest. • • Produces oil and gas from sands at 9,000’ to 14,000’. • Utilizes the world’s first open-hull truss spar. • 36.2 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Conducted geophysical analysis for 2-well development program in 2007. 2007 Plans • Drill 2 development wells. • Recomplete 2 wells. B / Magnolia Located offshore Louisiana in 4,700’ of water. Profile • 25% working interest in Garden Banks 783 and 784. • • Developing 1999 discovery. • Produces oil and gas from sands at 12,000’ to 17,000’. • Utilizes the world’s deepest tension-leg platform. • 13.9 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Completed final 2 of initial 8 wells. 2007 Plans • Drill 2 additional development wells. • Perform recompletions and sidetrack drilling as necessary. • Evaluate potential for additional drilling. C / Red Hawk Located offshore Louisiana in 5,300’ of water. Profile • 50% working interest in Garden Banks 876, 877, 920 and 921. • • 2001 discovery. • Produces gas from sands at 16,000’ to 18,500’. • Utilizes the world’s first cell spar. • 6.1 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Restored production previously shut-in due to hurricane damage to third-party downstream facilities. 2007 Plans • • Install compression. Evaluate potential for additional drilling. D / Merganser (Independence Hub) Located offshore Louisiana in 8,100’ of water. To produce gas from sands at 19,000’ to 20,000’. Profile • 50% working interest in Atwater Valley 37. • • Developing 2001 discovery. • • Cooperative development of 10 nearby industry discoveries utilizing subsea tie-backs to a central production hub. • 7.2 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Completed and tested 2 future producing wells. • Continued construction and installation of surface and subsea facilities. 2007 Plans • • Commence production. Finish installation of surface and subsea facilities. Lower Tertiary Discoveries Profile E / Cascade • 50% working interest in Walker Ridge 206. Located offshore Louisiana in 8,200’ of water. • • Target formation: Lower Tertiary sands at 25,000’ to 27,000’. • Discovery well drilled in 2002 encountered > 450’ of net oil pay. F / St. Malo • 22.5% working interest in Walker Ridge 678. Located offshore Louisiana in 6,900’ of water. • • Target formation: Lower Tertiary sands at 26,000’ to 29,000’. • Discovery well drilled in 2003 encountered > 450’ of net oil pay. G / Jack • 25% working interest in Walker Ridge 759. • • • Discovery well drilled in 2004 encountered > 350’ of net oil pay. H / Kaskida • 20% working interest in Keathley Canyon 292. Located offshore Louisiana in 5,900’ of water. • • Target formation: Lower Tertiary sands. • Discovery well drilled in 2006 encountered approximately 800’ of Located offshore Louisiana in 7,000’ of water. Target formation: Lower Tertiary sands. net hydrocarbon bearing sands. First Lower Tertiary discovery in Keathley Canyon area. • 2006 Activity Increased ownership in Cascade unit from 25% to 50%. • • Announced plans to develop Cascade with first production in late 2009. • Received approval from MMS for Cascade Conceptual Plan using an FPSO. • Completed first successful Lower Tertiary production test at Jack. • Drilled discovery well at Kaskida. • Drilled sidetrack appraisal well at Kaskida. • Evaluated development options and facilities designs for Cascade, Jack and St. Malo. • Acquired 13 additional Lower Tertiary blocks through federal lease sale. • Secured 2 long-term deepwater rig contracts. 2007 Plans • Sanction initial development at Cascade. • Obtain MMS approval of Deepwater Operating Plan at Cascade. • • • Continue evaluation of development options at Jack and St. Malo. • • Conduct additional appraisal operations at Kaskida Initiate drilling second appraisal well at Jack. Initiate drilling second appraisal well at St. Malo. Initiate evaluation of development options at Kaskida. Miocene Discoveries Profile I / Mission Deep • 50% working interest in Green Canyon 955. Located offshore Louisiana in 7,300’ of water. • Target formation: Miocene sands. • • Discovery well drilled in 2006 encountered > 250’ of net oil pay. J / Sturgis • 25% working interest in Atwater Valley 183. Located offshore Louisiana in 3,700’ of water. • • Target formation: Miocene sands. • Discovery well drilled in 2003 encountered > 100’ of net oil pay. • Development potential would be enhanced by success at Sturgis North. 2006 Activity • Drilled discovery well at Mission Deep. • 2007 Plans • Complete drilling sidetrack appraisal well at Mission Deep. • Initiated drilling of sidetrack appraisal well at Mission Deep. Evaluate development options. Deepwater Exploration Prospects Profile K / Lower Tertiary Prospect #1 Located in Keathley Canyon area. • Located offshore Louisiana in 6,000’ of water. • • Target formation: Lower Tertiary sands. L / Lower Tertiary Prospect #2 • Located in Walker Ridge area. • • 2006 Activity • Conducted technical evaluations and initiated drilling contracts. 2007 Plans • • Drill exploratory test wells. Located offshore Louisiana in 6,500’ of water. Target formation: Lower Tertiary sands. Finalize technical evaluations and contracts. A B C D F E CANADA A / Mackenzie Delta/Beaufort Sea Profile • 43% average working interest in 2.1 million exploratory acres in the Mackenzie Delta and shallow waters of the Beaufort Sea. • Devon is the largest holder of exploration acreage in this area. • Drilling limited to winter only. • 2002 Tuk M-18 discovery estimated at 200-300 billion cubic feet gross. 2006 Activity • Drilled and tested Paktoa exploratory well in Beaufort Sea. • Paktoa well encountered hydrocarbons but did not meet expectations. 2007 Plans • Apply for Significant Discovery License to retain Paktoa acreage. Evaluate potential for future drilling in the Mackenzie Valley • corridor. B / Northeast British Columbia Profile • 72% average working interest in 1.7 million acres in northwestern Alberta and northeastern British Columbia. • Key areas include Hamburg, Peggo, Monias, Ring Border and Wargen. • Primarily winter-only drilling. • Produces oil and gas from multiple formations including the Halfway and Baldonnel at 2,600’ to 5,000’. • 59.4 million barrels of oil equivalent reserves at 12/31/06. 30 NorthwestterritoriesSaSkatchewanManitobaYukonTerriTorYAlbertABritish ColumBiaNuNavutGulf of MexicotexasLouisiana 2007 Plans • Drill 395 total wells, including: 185 wells at Iron River. 82 wells at Manatokan. 53 wells at End Lake. 51 wells at Lloydminster. • Sidetrack 1 producing well from the Chirag platform. • Pre-drill 4 wells and begin completion operations in the • deepwater Gunashli area. Install platforms and production facilities in the deepwater Gunashli area. • Add additional processing capacity at Manatokan plant. B / Brazil 2006 Activity • Drilled 64 wells, including: 20 wells at Wargen. 14 wells at Ring Border. 11 wells at Peggo. 7 wells at Hamburg/Chinchaga. • Recompleted 12 wells. 2007 Plans • Drill 68 total wells, including: 26 wells at Wargen. 13 wells at Ring Border. 12 wells at Monias. 7 wells at Hamburg/Chinchaga. C / Peace River Arch Profile • 69% average working interest in 685,000 acres in western Alberta. • Key areas include Belloy, Cecil, Dunvegan, Eaglesham, Knopcik, Tangent and Valhalla. • Produces liquids-rich gas and light gravity oil from multiple formations at 4,500’ to 8,000’. • 74.8 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 82 wells, including: 16 wells at Dunvegan. 16 wells at Valhalla. 12 wells at Cecil. 9 wells at Belloy. 6 wells at Knopcik. • Recompleted 34 wells. 2007 Plans • Drill 62 total wells, including: 13 wells at Dunvegan. 10 wells at Cecil. 9 wells at Tangent. 7 wells at Belloy. D / Deep Basin F / Thermal Heavy Oil Profile • 97% average working interest in 82,000 acres in eastern Alberta oil sands. • Key asset is Jackfish (100% interest). • Steam-Assisted Gravity Drainage (SAGD) is the primary recovery method. • Expect to reach 35,000 barrels per day from Jackfish in 2008. • 186.2 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 19 horizontal well pairs at Jackfish. • Continued construction on Jackfish facilities. • Submitted application for regulatory approval for Jackfish 2. • Drilled 35 stratigraphic wells to further evaluate Jackfish area potential. • Continued construction of Access Pipeline to and from Edmonton. 2007 Plans • Complete facilities construction and initiate steam injection at Jackfish. • Complete construction of Access Pipeline. • Continue engineering analysis for Jackfish 2. • Drill up to 50 stratigraphic wells to further evaluate Jackfish area potential. Profile • 46% average working interest in 1.4 million acres in western Alberta and eastern British Columbia. • Key areas include Bilbo/Cutbank, Hiding, Pinto/Leland and Wapiti/Elmworth. • Produces liquids rich gas from primarily Cretaceous formations at 2,500’ to 14,000’. • 96.7 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 115 wells, including: 57 wells at Wapiti/Elmworth. 23 wells at Bilbo/Cutbank. 21 wells at Pinto/Leland. 11 wells at Hiding. • Recompleted 36 wells. 2007 Plans • Drill 57 total wells, including: 18 wells at Wapiti/Elmworth. 16 wells at Pinto/Leland. 12 wells at Hiding. 11 wells at Bilbo/Cutbank. E / Lloydminster Profile • 97% working interest in 2.2 million acres in eastern Alberta and Saskatchewan. • Key areas include End Lake, Iron River, Lloydminster and Manatokan. • Produces primarily conventional, cold flow heavy oil from multiple formations at 1,000’ to 2,300’. • 84.5 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled 397 wells, including: 198 wells at Iron River. 72 wells at Lloydminster. 70 wells at Manatokan. 46 wells at End Lake. • Recompleted 126 wells. • Received downspacing approval for Iron River. A C B INTERNATIONAL A / Azerbaijan – ACG Profile • 5.6% interest in 107,000 acres in the Azeri-Chirag-Gunashli (ACG) oil fields offshore Azerbaijan. Initial position obtained in 1999 merger. • • Major oil export pipeline commenced operations in 2006. • Expect >30,000 barrels per day net to Devon in 2007. • 83.8 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 3 wells from the Central Azeri platform. • Completed 2 pre-drilled wells and drilled and completed 3 additional wells from the West Azeri platform. • Commenced production from the West Azeri platform. • Completed 3 pre-drilled wells and commenced production from the East Azeri platform. • Drilled and completed 1 well from the Chirag platform. • Pre-drilled 4 wells for future production in the deepwater Gunashli area. • Completed fabrication of deepwater Gunashli jacket and production facilities. 2007 Plans • Drill 1 producing well from the Central Azeri platform. • Drill 3 producing wells from the West Azeri platform. • Complete 4 pre-drilled wells from the East Azeri platform. Profile • 1.4 million acres in 9 licensed blocks offshore Brazil: Block BM-C-8; 60% interest. Block BC-2; 17.65% interest. Block BM-BAR-3; 100% interest. Block BM-C-30; 25% interest. Block BM-C-32; 40% interest. Block BM-C-34 (C-M-471); 50% interest. Block BM-C-34 (C-M-473); 50% interest. Block BM-C-35; 35% interest. Block BM-CAL-13; 100% interest. Located in the Campos, Barreirinhas and Camamu Basins in • water depths ranging from 330’ to 9,100’. Target oil formations at 7,000’ to 16,000’. • • Developing 2004 discovery on block BM-C-8 (Polvo development). • 9.0 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Completed fabrication and installation of platform and Initiated drilling a 3-well exploration program on block BM-C-8. production facilities at Polvo. • Continued Polvo FPSO conversion. • • Drilled 1 unsuccessful exploratory well on block BM-C-30. • Drilled 1 unsuccessful exploratory well on block BM-C-32. • Acquired offshore blocks BM-C-34, BM-C-35 and BM-CAL-13. • Acquired 3-D seismic on BM-CAL-13. 2007 Plans • Complete platform hook-up and commissioning operations at Polvo. • Complete conversion, installation and commissioning of Polvo FPSO. • Drill 9 development wells at Polvo. • Commence first production in mid-2007 at Polvo. • Complete exploration drilling on block BM-C-8. • Reprocess 3-D seismic on blocks BM-C-30, BM-C-32, • BM-C-34 and BM-C-35. Farmout partial interests to industry partners on block BM-BAR-3 and BM-CAL-13. • Conduct electromagnetic survey on BM-BAR-3. • Drill 1 exploratory well on block BC-2. C / China Profile • 4.4 million acres in 3 licensed blocks offshore China: Block 15/34 (Panyu); 24.5% interest. Block 42/05; 100% interest. Block 11/34; 100% interest. • Located in the South China Sea and Yellow Sea in water depths ranging from 100’ to 4,900’. • Panyu fields produce oil from 1998 and 1999 discoveries. • 16.8 million barrels of oil equivalent reserves at 12/31/06. 2006 Activity • Drilled and completed 6 development wells at Panyu. • • Completed installation of water handling facilities on both Initiated drilling 1 extended reach development well at Panyu. platforms at Panyu. • Acquired Yellow Sea block 11/34. • Acquired 2-D seismic on block 11/34. • Acquired 3-D seismic on block 42/05. • Signed contracts to acquire 2 additional exploration blocks in the South China Sea. 2007 Plans • Complete extended reach development drilling initiated in 2006 at Panyu. • Drill 7 development wells at Panyu. Finalize acquisition of blocks 53/30 and 64/18. • • Acquire 3-D seismic on blocks 53/30 and 64/18. • Prepare for 2008 drilling on blocks 42/05 and 11/34. 3 IndIan OceanAtlAntic OceAn full 32 Chad PottruffLinda PottsTed PottsCatherine PowellCherie PowellEd PowellJamye PowellLynn PowellSteve PowellTimothy PowellTimothy PowellShaun PoweshiekTres PoynorVijay PratapTerry PraterJohn PratherScott PratherJim PreglerWiley PreskittElvis PressleyAmy PrestidgeShelley PrestonRon PrewittAllen PriceDwayne PriceIldiko PriceJeff PriceJohn PriceKaren PriceLeigh PriceRachel PriceSherie PriestJarrod PrimeauxKenneth PrimeauxAnn PrinceLaura PrinceBarbara ProctorBlake ProffittAngela PronkMatthew PronkDarren ProstebbyCandace ProwellFloyd Prudhomme Jr.Kathy PryorSue PryorTim PryorRichard PrzybylskiMichael PuetzWayne PurchaBradley PurchaseChristine PurdyDavid PurdyJames PurdyKarolyn PurnellDavid PushieJohn QualiaAnthony QuanLes QuanMauro QuercioliRoland QuintanaJimmy QuintelaMike RaaflaubBrian RabeRuss RadkeHenry RadomskiLaDonna RaganDale RagasHady RahmanRavi RainaAnnette RainesJohn RainesTim RaleySean RalstonSammy RamadanGary RambergAlonzo RamirezGabe RamirezRaymond RamirezDaniel RandallAndrea Randall-ThorpDennis RandlemanDarla RandolphHarriett RandolphPatti RandolphStephen RangenSandy RankinJames RanksConstance RansomDean RasmussenShane RasmussenSheila RatliffDuane RauscherPaul RavalDouglas RayTed RayEddie RayburnRene RaymondBud ReadDuane ReadGerald ReadLinny ReadMarvin ReadRickey ReadRussell ReadRyan ReadMatt RecklingSandra ReddekoppRita ReddyDaniel RedmanCharlie ReedRandy ReedScott ReedSteve ReedCheryl ReeseBrandi ReesorRebecca ReevesRichard ReevesKimberly RegaladoRobert ReganJohn RegnierRegina RehChristina RehkopJennifer ReidJoseph ReidKaren ReidRobert ReidSherri ReidSusan ReidVeronica ReidEric ReigleDerrill ReilColleen ReilanderPat ReillyDale ReitzKaren RekietaBrian RellandKirk RellesSteven RemilySteve RenkePete RepkaTheresa RestaMarlene RevellBrenda RevilleBenjamin ReyesRay ReyesRichard ReyesRicky ReyesDean ReynoldsEarl ReynoldsRobert ReynoldsIrma RezanourBrace RhamySteve RhidenourKenny RhoadesBrad RhodesJeneria RhodesGeorge RhyasonBill RiceChase RiceCindy RiceFaye RiceJamie RichChristopher RichardDavid RichardEric RichardGlenn RichardJack RichardsWayne RichardsIan RichardsonPaul RichardsonTroy RichardsonJohn RichelsJimmie RichesonDonnie RicheyRobert RicheyZane RicheyKen RickenbrodeDerek RidgwayPatti RiechersRobert RieckenCraig RieglingWanda RieweVicki RiffleJim RigbyLuke RigginsGayle RiggsEileen RiisbergRichard RileyTony RileyTron RileyBrandy RitenourJeff RitenourKristi RitterPablo RivasRay RiveraRick RiveraChad RoachMike RoachAaron RoarkCathy RoarkStacy RobbinsDavid RobersonDarrell RobertsDarron RobertsDavid RobertsGeoff RobertsJimmy RobertsJudy RobertsKen RobertsMalcolm RobertsRonnie RobertsWayne RobertsDaniel RobertsonDiane RobertsonKelly RobertsonKim RobertsonRenee RobertsonScott RobertsonSusan RobertsonWilliam RobertsonRyan RobichauxDale RobinsCharlotte RobinsonJames RobinsonRick RobinsonRob RobinsonShaun RobinsonShawn RobinsonTerry RobinsonTim RobinsonH.F. Rick RobsonDuane RochonGregg RodenBarbara RodgersJacob RodgersCalvin RodmanAnselmo RodriguezEdward RodriguezJesse RodriguezVivian RodriguezWillard RoeSherry RoebuckMarilyn RoemischGary RoganBrenda RogersMaureen RogersSteven RogersWendy RogersCeleste RohdeKim RoletteMarty RollegPerrin RollerLorne RollheiserDouglas RollingMark RolsethVicki RomeoLuis RomualdezTroy RonmarkLarry RookerTara RosenbohmSandra RosenthalJosh RosinskiJayme RossSandy RossJessie RothRobert RotherAaron RothfolkSarah RoughfaceRyan RoutleyChad RoweMary RoweRebecca RoweBruce RowleyLynn RowleyErnest RoybalBob RoyceJennifer RozanderNoel RubioDavid RuddTerry RuderStan RuffnerCharles RuleAllen RunyonRicky RupardRandall RushingErnest RussellMary RussellRhonda RussellStephanie RussellMerilee RustagiWayne RutbergTonja RutelonisDouglas RutherfordMarilyn RutherfordMavis RutherfordChad RutledgeKevin RyanWesley RyanPhillip RybackiCookie RycroftGene RylandWesley SaarelaJune SaastadJustine SaganWill SageSusan SaidyMichael SainasMorey SairEdna SalinasEva SallerDonna SalterBrian SalukSarah SalverdaJames SamaripaDavid SambrooksGary SampleCarlos SanchezDaniel SanchezEdwin SanchezGilbert SanchezRaul SanchezVictoria SanchezMarco SandateBrent SandeGeoff SanderGene SanderfordBuck SandersJeff SandersJimmie SandersDiane SandlinDigna Sandoval-FlorDonald SandsKeith SansingGianni SantillieTeresita SantosDavid SartainRobert SartoriusTracie SassauBrian SatterfieldHeath SatterfieldJeffrey SautnerMurray SavageGarth SawatzkyMarianne SawatzkyMark SawatzkyAmit SaxenaBee SchadeckRandy SchaferDaniel ScharflDarren SchellMelinda SchergerDavid ScheyErnst SchierwagenJacob SchillingRandy SchmedtWilhelm SchmidCharles SchmidtDoug SchmidtJohn SchmidtPat SchmidtBrian SchmitHarold SchnaierJeff SchneiderKimberly SchneiderMagdalena SchneiderMarc SchneiderRyan SchneiderSarah SchnellJohn SchoelenMichael SchoenJeff SchonhoferChad SchorreMichael SchottaJohn SchrammChester SchubertJames SchuelkeJohn SchuetteWilliam SchultheissGary SchultzHenry SchultzPamela SchultzRobert SchultzMike SchupbachWendi SchuurPeter SchwansApril SchwartzMisty SchwartzDuane ScottEileen ScottGlenn ScottKY ScottLinda ScottMarci ScottMichel ScottPatti ScottRobert ScottValerie ScottParalea ScoutenHeath ScrogumRandall SealLorri SealeSusan SealsTony SearsChristopher SeasonsSteven SeatCatherine SeatonTony SeatonSusanna SeawrightJeff SeayJames SebastianMichelle SecrestBennie SeeEric SeegersChad SeelyMelissa SegstroDarell SeibJoseph SeilaPatrick SeilaffRobert SeilaffWes SeilhantAdam SeitchikDarren SeleshankoSummer SelfDavid SelingerBrad SellickRussell SelmanFraser SenciallRobbie SengRoyce SennTodd SennerZenwill SequeiraDean SergentAntonio SernaJoann SeuserJamin SeversonGina SewellCarson SexsmithKenny ShakotkoGary ShanerDennis ShannonLinda ShannonApoorva SharmaTerri SharpCarla SharpeValerie ShaverCraig ShawJerry ShawSheri-lyn ShawTeresa ShawValerie ShawTroy ShelbyHenry ShenHelen ShepherdJudy ShepherdJohn ShererArnold ShereyPete ShermanDavid SherrellJan SherrodMichael SherryLarene SherwoodBrian ShewchukLea Ann ShieldsGerald ShimekGuy ShipleyTami ShipleyCecil ShipmanTruman ShireyChris ShirleyMike ShirleyMyriam ShirleyWanda ShoalsBrent ShounRuth ShyerTerry ShyerDeanna ShymkiwGregory SibleyDru SidersCraig SiebenRhonda SiffordKen SiglBenjamin SigmundJim SigmundJon SikesDerrick SilkPhil SilvanRobert SilverRyan SimardChris SimmonsDavid SimmonsGreg SimmonsKay SimmonsNancy SimmonsChris SimonCameron SimpsonCandace SimpsonCarina SimpsonDale SimpsonElton SimpsonIan SimpsonJulie SimpsonMark SimpsonSharon SimpsonBart SimsCarl SimsDeborah SimsJennifer SimsNicole SimsEdward SinclairNeil SinclairBirdella SinegalChristopher SingletaryLisa SiriaGerald SirkinSam SittonBill SkeltonCarey SkjodtJohn SkollyBob SkoratkoJohn SkoyenRandy SkrepnekLouis SkrobarczykAdam SkulskyDoug SlackLori-Lynn SlackRonnie SlackArita SlateBruce SlaughterBrian SlempTroy SlempEd SlovacekWilliam SluntJohn SlupskyJeff SmailScott SmallingSpencer SmallwoodMickey SmartGlenn SmetheramDarryl SmetteBernard SminkAndy SmithAngela SmithBetty SmithBradley SmithBrent SmithBrittny SmithDarren SmithDavid SmithDickie SmithG. Thomas SmithGary SmithGlenn SmithGlenn SmithGwen SmithHaley SmithJace SmithJD SmithJim SmithJim SmithJimmy SmithJoe SmithJT SmithJulie SmithLarry SmithLynn SmithMelinda SmithMichelle SmithNita SmithPaul SmithRandall SmithRay SmithRosie SmithRoss SmithRoy SmithSandy SmithShanna SmithSteve SmithSuzanne SmithT. Wade SmithTheresa SmithTodd SmithTommy SmithhartAmy SmootDan SnellingKim SniderShaun SnisarenkoSteve SnowbargerDonald SnowdonCristin SnyderH. Brent SnyderShea SnyderRay SolisEugene SolizLuis SolteroDiane SoltnerRashida SomjiGeorge SonnierLinda SoperBonnie SorgeJeff SoudersBoulos SoueidiGregory SouleLynne SouthwardLuther SowellJohn SpaidLeland SpannDeane SparkmanMatthew SparkmanJimmy SparksLinda SpathCharles SpeerGay SpellerBecky SpencerCherrie SpencerClyde SpencerCorey SpencerDonald SpencerSandra SpencerEric SperlingRandy SperlingBarbara SpicerBrian SpiegelmannGreg SpiveyLance SpradlinDebbie SpragueDemaris SpriestersbachEmery SpronkenGeorgina SprouleMichael SpruillTom SpurlockCathy SpurrDana SquiresPatrick StaffordJulie StaggsGuy StagnerRichard StaleyChris StammCindy StampJackie StanfieldTrent StangRonald StangerMary Ann StankoDavid StanleyRix StanleyVance StanleyKevin StarkGreg StarleySusan StarnsMegan StarrKevin StashinDarcy StaszewskiKatarzyna StaszkiewiczElizabeth StationMelissa StefosDavid SteinDeb SteinEvan SteinMatt SteingerDaniel StelmaschukDean StenbeckDonna StepanianAlex StepaniukCarl StephensJames StephensKim StephensLisa StephensRudy StephensTamara StephensWayne StephensNancy StephensonBrandon StevensLinda StevensRay StevensRick StevensCorey StevensonGordon StevensonBlayne StewartBrian StewartDarren StewartGregory StewartJadell StewartJosie StewartJustin StewartKevin StewartLinda StewartSandra StewartStephanie StewartJon StigantDeEric StilesRandy StillAmy Renee StinerDebora StinnJerald StinnettAndrew StirlingDavid StizzaDean StobbeTony StockardAlan StocktonDavid StokesSean StollerTonya StoneDavid StoroschukGreg StortsRick StothersDon StoutMark StoutStephen StoutamireHarold StovallRon StrahanPeter StrakaRonald StrandquistJim StrawnFred StrawsonKristina StreckerEdward StrembickiClifford StricklandJason StricklandMichele StricklandCarl StricklerJon StricklerDiana StridDavid Dean StriegelAlan StroichJason StubinskyMichael StuchlyMarlene StuhrConnie StumGuy SturdevantJeff SudduthWendi SudhakarLeanne SuggettRalph SulakBobby SullivanLynn SullivanDan SunigaJeff SuskiSusan SutherlandWayne SutherlandCarol SuttererDebra SuttonAida SuvagauJan SvajianMike SvorenTravis SwallowCole SwanemyrDella SwartzSarah SweeneyElton SweetBonnie SweppenhiserWilliam SwiderskiMichael SwiftKevin SydorkoWilliam SygutekDoug SykesJoni SykesDavid SyringJonathan TaberMarilyn TaberChris TackelMickey TadlockKaren TaggartAbdel TaherMelody TaitWilliam TalleyNancy TammIgo TanNick TangStefanie TangCharles TannerRandall TannerMona TansownyAngela TarrantBryan TarrantAnne TateGlenna TateMichael TateTate TatemBeth TaylorBilly TaylorCarroll TaylorDavida TaylorJ. Michael TaylorJack TaylorJack TaylorLyndon TaylorNeil TaylorNel TaylorRick TaylorShad TaylorSherry TaylorSteve TaylorSusan TaylorTom TaylorTracy TaylorValerie TaylorChris TeagueRonald TedderJose TeixeiraDavid TempletJames Ten EyckJulie TenopirJonathan TeppinJames TernesRod TernesAllan TerpRob TerrellRodney TerrellRonnie TerrellKevin TetzSollie ThamesPeter ThannhauserJason TharJoe TharpTim ThatcherDeana ThayerLarry TherriaultKim ThielenPaul ThiemStacy ThiessenAlan ThomasAshley ThomasBarbara ThomasBarbara ThomasCatrina ThomasDavid ThomasGerald ThomasJanice ThomasKrista ThomasMike ThomasScott ThomasTerry ThomasTol ThomasWilliam ThomasWillie ThomasMarkus ThomersonAlberta ThompsonBarry ThompsonChad ThompsonCheryl ThompsonGerri ThompsonGretchen ThompsonJerry ThompsonLindsey ThompsonNancy ThompsonRichard ThompsonSheila ThompsonShelley ThompsonSheryl ThompsonTracey ThompsonWilliam ThompsonGeorge ThomsonKarl ThomsonLynn ThomsonRonald ThomsonMark ThorneMelva ThorntonTodd ThorpeGary ThrasherJill ThrushCecil ThurmondCecil ThurmondShivi ThusooTerry TibbleJason TillerPaula TimmAllen TimmonsSecily TincherArmstrong TingLoyd TinsleyMatt TisdalePat TisdaleSandra TizzardKatalin TodeaRobert TodorJanice ToldanEldon TolleBarbara TomajaRalph TomlinsonGregg TompkinsPamela TongsrinarkRon TonneMike TooleVincent TopacioBonnie ToporowskiErin ToporowskiBill TorgusonReah TorresDavid TouchetMuriel TourangeauNicole TowersJason TownsendRicky TownsendTanya TownsendRobert TracyRoddy TrahanRonald TrahanJake TrainerSeila TranKirk TrascherGary TravisLynn TravisNicole TremblayRhonda TrentMark TrestBelinda TrevinoLuis TrianaHoward TrinhSteve TrippTom TrottEd TroutmanRichard TrueheartRon TrueloveHowie TruongMladen TrzokRoy TsukishimaKerry TuffordCory TuffsVance TurmanKevin TurnerKurt TurnerMike TurnerJudi TwiggsNick TwistAndrew TylerBruce TylerKyle TysonChris TytanicJudy UlrichLaura UnderwoodRon UnderwoodDorothy UppermanRichard UptonSherry UptonDarrell UrbanLorraine UrbaniCarrie UtleyLouis UtschSonia UttingSteve VadnaiPaul VagisScott VailBilly VajdakMarydee ValdezMiguel ValdezNick ValentiLarry ValleRussel ValsinJennifer Van CurenAissa Van Der VeenLarry Van HooseBarbara Van HornLonette Van MieghemBill Van WieMike VanbergJeff VanceConnie VandalDarren VandeGraafJohn VandeligtShane VandercruyssenThomas VandeReepDavid VanMeterRenier VanRensburgGerald vantRietHector VanVierssen TripJim VargaGarry VarneyArmando VasquezRamaswami VasudevanCindy VaughanMatthew VaughanPam VaughnTony VaughnChris VeazeyRaymond VegaElaina VenechukValerie VenezialeRick VennDonna VennardDale VenningRaymond VeraartDean VerbickyPatti VerhilleAdrienne VerklerJennifer VezinaReed ViceDebbie VickRichard VidalDexter VidrinePhillip VidrineRobert VigorenStephanie VilarosAlejandra VillaloboJuanita VillalonRick VillarmaJason VillarrealJR VillarrealLarry VillarrealVirginia VillarrealMaggie VillatoroTony VilleneuveMelanie VinbergBarbara VincentBarry VincentNathan VincentBob VineyAndrew VinkConstantin VisanGarry VisserRobert VollmanDiana VolquardsenChuck VorceAlexandre VoronineAmy VriensPam VukovichLam VuongDylan WaddleMichael WadeMurray WadeCheri WagnerDean WagnerEsther WagnerJanie WagnerPat WagnerRick WagnerJanice WagonerKevin WagonerJames WahrenbergerDanielle WalcherKen WaldJoseph WaldnerIra WaldronPatrick WaldronAimee WalkerDavid WalkerDebra WalkerGlynn WalkerJohn WalkerJohn WalkerKenneth WalkerKim WalkerLarry WalkerLinda WalkerMelissa WalkerMichelle WalkerPaul WalkerRichard WalkerPeggy WalkingStickKenneth WalkoDon WallDeborah WallaceHollis WallaceScott WallaceMichael WalleJoan WallerFrank WallesBill WalterColette WalterGina WaltersEric WamplerOwen WamplerJack WangPeter WangRock WangTony WangXia Qing WangGeorge WankeNick WarburtonBill WardDoug WardEvelyn WardLloyd WardWade WardlowDouglas WareColleen WarrellowWilliam WarrenWin WarrenKristen WascomBrian WashburnClarence WashingtonFaye Ruffin WashingtonLen WatchornMichelle WaterfieldCaleb WatkinsCalvin WatsonGary WatsonKevin WatsonLynne WatsonRon WatsonTashila WatsonTony WatsonMarg WattShad WattsBobby WatzilMurray WeatherheadEd WeatherlyDon WebbGlyn WebbKris WebbSharon WebbPaul WeberStan WeedAllan WeheJoah WeidemannBret WeigelGreg WeildJonathan WeirRyan WeisbrotJeffrey WeissMyles WeissAlisa WelchBrook WelchDiana WelchGeoff WelchJoe WeldonMiles WelkeCarol WellsMerla WellsWallace WellsYuan Wendy WenSteven WendteBeverly WenzelLacey WenzelRusty WerlineHerbert WernerDaniel WerthBill WescottBlake WestMichelle WestTimothy WestRaymond WestbrookAdam WestlakeMichelle WestonTroy WhartonWendy WhartonAmanda WheatIan WheatleyBill WheatonNatalie WheelerRobert WheelerGaylynn WheelisLinda WhelanPeter WhelanSara WhelenCathy WhickerAlan WhiteBrian WhiteJennifer WhiteJim WhiteJohn WhiteLisa WhiteMarilynn WhiteMike WhiteMike WhiteRichard WhiteRoy WhiteStephanie WhiteVince WhiteJimmy WhiteheadMarcus WhiteheadPaul WhiteheadDouglas WhitesideBrad WhitleyRobert WhitleyRyan WhitlowLu’ana WhitmarshKelly WhitneyMonte WhittGreg WhyteJenifer WickRebecca WickeBruce WiebePaul WiebeChris WiggersKrista WigginsJim WigleyAlyssa WilburnDenise WildersMike WildersShannon WileyJason WilhelmSena WilkeAnthony WilkersonKim WilkersonCalvin WilkinCraig WilkinsLynne WilkinsScott WilkinsSelwyn WilkinsonSteve WilkinsonRobert WillClark WillardAustin WilliamsBonnie WilliamsBrett WilliamsBrian WilliamsChristopher WilliamsDean WilliamsDeborah WilliamsDon WilliamsFrank WilliamsH. Russell WilliamsJeffrey WilliamsKathy WilliamsLaura WilliamsLonetta WilliamsLynn WilliamsMark WilliamsMichael WilliamsRoger WilliamsSandie WilliamsStephanie WilliamsSteve WilliamsWanda WilliamsHelen WilliamsonJames WilliamsonNorman WilliamsonJeff WillifordLarry WillisBryan WillmonDarlene WilloughbyMatt WillrathMark WillstropKen WilpitzBill WilseyAlister WilsonBen WilsonBrent WilsonCorey WilsonDennis WilsonDon WilsonGwen WilsonJacqueline WilsonJames WilsonKarla WilsonKerri WilsonMeridith WilsonPatti WilsonPaul WilsonRebecca WilsonSherry WilsonStafford WilsonTawny WilsonTom WilsonYakini WilsonNick WiltgenWilliam WimbergWendy WingerterJames WingoJason WiniaJames WinklemanBecky WinklerVirginia WinnScott WinterSandra WinzigCriston Wise-KennedyeKristi WiselyMarsha WisemanVanessa WisnoskiGene WissingerRobert WitherspoonBrandi WithrowKen WolfeMike WolfeShonna WolfeTroy WolfeWayne WolfeJim WolzPhillip WomackRon WomackTanner WomackHenry WongJorge WongJulie WongKenneth WongChristopher WooColin WoodDaniel WoodGeoff WoodGrant WoodGrant WoodJeri WoodJoseph WoodSteven WoodTerianne WoodWendell WoodBrian WoodardCraig WoodardKevin WoodardCharlotte WoodsMark WoodsTed WoodsNicole WoodsonDee WoolamJan WooldridgeMichael WooldridgeCourtney WootenRalph WootonTim WordChad WorkmanRobert WorkmanTom WorleyCharlie WrightGregory WrightKatherine WrightKelvin WrightMandy WrightMary WrightRobert WrightLayne WroblewskiHody WuXian WuBrandon Wuttunee-CampbellVicky WyalieNorm WyffelsEverett WylieRobert WynessJoseph WyszynskiHongdi XuClinton YaegerCalvin YakelChristy YakelWilliam YakymyshynGerald YamadaJackie YardKen YaremkoLarry YasmanLori YatesJonathan YeeMichael YehDonald YepMichael YesterRobert YotherAngelica YoungBurt YoungCarla YoungDennis YoungEileen YoungLinda YoungTerri YoungTim YoungTony YoungTrevor YoungVern YoungJerry YoungbloodLorre YoungbloodBryan YoungerStephanie YsasagaFrancis YuJenny YuRandy YuristyDoug YuzwenkoJohnny ZacharyBruce ZagoruyGarnet ZarownyLeandra ZarownyKim ZaudererSean ZawadaRobert ZehrMark ZeskoJames ZeuchBrian ZiemmerChris ZimbelmanLarry ZimbelmanHarold ZimmermanClifford ZingerSteve ZinkCamilo ZoletaTatiana ZouenkoJames ZukRudy ZunigaDino ZuzicCliff Zwahlenresource full 34 Selected 11-Year Financial Data 36 Management’s Discussion and Analysis of Financial Condition and Results of Operations 57 Reports of Independent Registered Public Accounting Firm 60 Consolidated Balance Sheets 61 Consolidated Statements of Operations 62 Consolidated Statements of Comprehensive Income 63 Consolidated Statements of Stockholders’ Equity 64 Consolidated Statements of Cash Flows 65 Notes to Consolidated Financial Statements 101 Risk Factors to Forward-Looking Estimates ToTal asseTs ($ Billions) sTockholders’ equiTy ($ Billions) dividend raTe ($ Per Common Share) 35.1 17.4 .45 30.0 30.3 27.2 16.2 14.9 13.7 11.1 .30 .20 4.7 .10 .10 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 Over the past five years Devon has more than doubled total assets to $35.1 billion and more than tripled stockholders’ equity to $17.4 billion. During this same period the company has increased its dividend more than four fold to $0.45 per common share in 2006. 33 Selected Eleven-Year Financial Data (1) operating results (In millions, except per share data) Revenues (Net of royalties): Oil sales Gas sales NGL sales Marketing and midstream revenues Other income Total revenues Production and operating expenses Marketing and midstream costs and expenses Depreciation, depletion and amortization of property and equipment Accretion of asset retirement obligation Amortization of goodwill (2) General and administrative expenses Expenses related to mergers Interest expense Change in fair value of financial instruments Reduction of carrying value of oil and gas properties Impairment of Chevron Corporation common stock Income tax expense (benefit) Total expenses Net earnings (loss) before minority interest, cumulative effect of change in accounting principle and discontinued operations (3) Net earnings (loss) Preferred stock dividends Net earnings (loss) to common stockholders Net earnings (loss) per common share: Basic Diluted Weighted average shares outstanding: Basic Diluted Balance Sheet data (In millions) Total assets Debentures exchangeable into shares of Chevron Corporation common stock (4) Other long-term debt Deferred income taxes Stockholders’ equity Common shares outstanding 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 5-Year Compound Growth rate 10-Year Compound Growth rate $ $ $ $ $ $ $ $ $ 529 211 29 — 36 805 271 — 175 — — 57 — 59 — — — 106 668 137 151 47 104 0.98 0.96 105 111 2,242 — 511 136 1,160 126 497 367 36 10 36 946 288 4 268 — — 56 — 51 — 633 — (128) 1,172 (226) (218) 12 (230) (1.67) (1.67) 137 151 1,965 — 576 50 1,006 142 236 335 25 8 6 610 231 3 212 — — 48 13 53 — 354 — (103) 811 (201) (236) — (236) (1.66) (1.66) 142 154 1,931 — 885 15 750 142 436 616 68 20 23 1,163 328 10 379 — 16 83 17 122 — 476 — (75) 1,356 (193) (154) 4 (158) (0.84) (0.84) 187 199 6,096 760 1,656 313 2,521 253 906 1,474 154 53 37 2,624 544 28 662 — 41 96 60 155 — — — 377 661 730 10 720 2.83 2.75 255 263 6,860 760 1,289 634 3,277 257 784 1,878 131 71 58 2,922 666 47 831 — 34 114 220 1 2 979 — 5 23 103 10 93 0.37 0.36 255 259 13,184 649 5,940 2,149 3,259 252 909 2,133 275 999 35 4,321 886 808 1,211 — — 219 — 533 (28) 651 205 (193) 59 104 10 94 0.31 0.30 309 313 16,225 662 6,900 2,627 4,653 314 1,545 3,896 407 1,461 106 7,415 1,274 1,174 1,761 36 — 307 7 502 (1) 66 — 527 1,762 1,747 10 1,737 4.16 4.04 417 433 27,162 677 7,903 4,315 11,056 472 10,820 10,693 2,099 4,732 554 1,701 126 9,212 1,514 1,339 2,225 44 — 277 — 475 62 — — 1,095 7,031 2,181 2,186 10 2,176 4.51 4.38 482 499 2,359 5,784 687 1,792 198 1,659 1,342 2,141 43 — 291 — 533 94 212 — 1,606 7,921 2,899 2,930 10 2,920 6.38 6.26 458 470 3,205 4,932 749 1,692 115 1,829 1,244 2,442 49 — 397 — 421 178 121 — 1,189 7,870 2,823 2,846 10 2,836 6.42 6.34 442 448 30,025 692 6,339 4,764 13,674 484 30,273 709 5,248 5,374 14,862 443 35,063 727 4,841 5,650 17,442 444 1,963 2,899 4,292 5,653 33% 21% 42% 89% 15% 30% 22% 93% 24% N/M N/M 28% N/M 14% 145% -34% N/M 199% 22% 162% 94% 0% 98% 77% 77% 12% 12% 22% 2% -4% 21% 40% 12% 20% 37% 39% N/M 12% 30% 21% N/M 30% N/M N/M 21% N/M 22% N/M N/M N/M 27% 28% 35% 34% -14% 39% 21% 21% 15% 15% 32% N/M 25% 45% 31% 13% (1) The years 1996 to 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt in the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting. All periods prior to the November 15, 2004 two-for-one stock split have been adjusted to reflect the split. (2) Amortization of goodwill in 1999, 2000 and 2001 resulted from Devon’s 1999 acquisition of PennzEnergy. As of January 1, 2002, goodwill is no longer amortized. (3) Before minority interest in Monterrey Resources, Inc. of ($1) and ($5) million in 1996 and 1997, respectively, and the cumulative effect of change in accounting principle of $49 and $16 million in 2001 and 2003, respectively, and the results of discontinued operations of $15, $13, ($35) $39, $69, $31, $45, ($31), $5, $31 and $23 million in 1996 through 2006, respectively. (4) Devon beneficially owns 14.2 million shares of Chevron Corporation common stock. These shares have been deposited with an exchange agent for possible exchange for $760 million principal amount of exchangeable debentures. The Chevron shares and debentures were acquired through the 1999 acquisition of PennzEnergy. N/M Not a meaningful number. 34 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 5-Year Compound Growth rate 10-Year Compound Growth rate operating results (In millions, except per share data) Revenues (Net of royalties): Oil sales Gas sales NGL sales Marketing and midstream revenues Other income Total revenues Production and operating expenses Marketing and midstream costs and expenses Depreciation, depletion and amortization of property and equipment Accretion of asset retirement obligation Amortization of goodwill (2) General and administrative expenses Expenses related to mergers Interest expense Change in fair value of financial instruments Reduction of carrying value of oil and gas properties Impairment of Chevron Corporation common stock Income tax expense (benefit) Total expenses Net earnings (loss) before minority interest, cumulative effect of change in accounting principle and discontinued operations (3) Net earnings (loss) Preferred stock dividends Net earnings (loss) to common stockholders Net earnings (loss) per common share: Weighted average shares outstanding: Basic Diluted Basic Diluted Balance Sheet data (In millions) Total assets Other long-term debt Deferred income taxes Stockholders’ equity Common shares outstanding Debentures exchangeable into shares of Chevron Corporation common stock (4) $ $ $ $ $ $ $ $ $ 529 211 29 — 36 805 271 — 175 — — 57 — 59 — — — 106 668 137 151 47 104 0.98 0.96 105 111 2,242 — 511 136 1,160 126 497 367 36 10 36 946 288 4 268 — — 56 — 51 — 633 — (128) 1,172 (226) (218) 12 (230) (1.67) (1.67) 137 151 1,965 — 576 50 1,006 142 236 335 25 8 6 610 231 3 212 — — 48 13 53 — 354 — (103) 811 (201) (236) — (236) (1.66) (1.66) 142 154 1,931 — 885 15 750 142 1,163 436 616 68 20 23 328 10 379 — 16 83 17 122 — 476 — (75) 1,356 (193) (154) 4 (158) (0.84) (0.84) 187 199 6,096 760 1,656 313 2,521 253 (1) The years 1996 to 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt in the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting. All periods prior to the November 15, 2004 two-for-one stock split have been adjusted to reflect the split. (2) Amortization of goodwill in 1999, 2000 and 2001 resulted from Devon’s 1999 acquisition of PennzEnergy. As of January 1, 2002, goodwill is no longer amortized. (3) Before minority interest in Monterrey Resources, Inc. of ($1) and ($5) million in 1996 and 1997, respectively, and the cumulative effect of change in accounting principle of $49 and $16 million in 2001 and 2003, respectively, and the results of discontinued operations of $15, $13, ($35) $39, $69, $31, $45, ($31), $5, $31 and $23 million in 1996 through 2006, respectively. (4) Devon beneficially owns 14.2 million shares of Chevron Corporation common stock. These shares have been deposited with an exchange agent for possible exchange for $760 million principal amount of exchangeable debentures. The Chevron shares and debentures were acquired through the 1999 acquisition of PennzEnergy. N/M Not a meaningful number. 906 1,474 154 53 37 2,624 544 28 662 — 41 96 60 155 — — — 377 784 1,878 131 71 58 2,922 666 47 831 — 34 114 1 220 2 979 — 5 1,963 2,899 661 730 10 720 2.83 2.75 255 263 6,860 760 1,289 634 3,277 257 23 103 10 93 0.37 0.36 255 259 13,184 649 5,940 2,149 3,259 252 909 2,133 275 999 35 4,321 886 808 1,211 — — 219 — 533 (28) 651 205 (193) 4,292 59 104 10 94 0.31 0.30 309 313 1,545 3,896 407 1,461 106 7,415 1,274 1,174 1,761 36 — 307 7 502 (1) 66 — 527 5,653 1,762 1,747 10 1,737 4.16 4.04 417 433 2,099 4,732 554 1,701 126 9,212 1,514 1,339 2,225 44 — 277 — 475 62 — — 1,095 7,031 2,181 2,186 10 2,176 4.51 4.38 482 499 16,225 662 6,900 2,627 4,653 314 27,162 677 7,903 4,315 11,056 472 30,025 692 6,339 4,764 13,674 484 2,359 5,784 687 1,792 198 3,205 4,932 749 1,692 115 10,820 10,693 1,659 1,342 2,141 43 — 291 — 533 94 212 — 1,606 7,921 2,899 2,930 10 2,920 6.38 6.26 458 470 30,273 709 5,248 5,374 14,862 443 1,829 1,244 2,442 49 — 397 — 421 178 121 — 1,189 7,870 2,823 2,846 10 2,836 6.42 6.34 442 448 35,063 727 4,841 5,650 17,442 444 33% 21% 42% 89% 15% 30% 22% 93% 24% N/M N/M 28% N/M 14% 145% -34% N/M 199% 22% 162% 94% 0% 98% 77% 77% 12% 12% 22% 2% -4% 21% 40% 12% 20% 37% 39% N/M 12% 30% 21% N/M 30% N/M N/M 21% N/M 22% N/M N/M N/M 27% 28% 35% 34% -14% 39% 21% 21% 15% 15% 32% N/M 25% 45% 31% 13% 35 Management’s Discussion and Analysis of Financial Condition and Results of Operations overview of 2006 reSultS and outlook 2006 was one of the best years in Devon’s history. We achieved key operational successes and continued to execute our strategy to increase value per share. As a result, we delivered record amounts for earnings per share and operating cash flow and grew proved reserves to a new all-time high. Key measures of our financial and operating performance for 2006, as well as certain operational developments, are summarized below: • • • • • • • • Net earnings declined 3% from $2.9 billion to $2.8 billion Diluted net earnings per share increased 1% to $6.34 per diluted share Net cash provided by operating activities reached $6.0 billion Estimated proved reserves at December 31, 2006 reached a record amount of 2.4 billion Boe Estimated proved reserves increased 533 million Boe through drilling, extensions, performance revisions and acquisitions Capital expenditures for oil and gas exploration and development activities were $7.7 billion, including the $2.2 billion acquisition of Chief Combined realized price for oil, gas and NGLs per Boe increased 5% to $41.51 Marketing and midstream operating profit remained flat at $448 million for 2006 We produced 214 million Boe in 2006, representing a 4% decrease compared to 2005. Excluding the effects of production lost due to the sale of non-core properties in the first half of 2005, our year-over-year production remained constant. Operating costs increased due to inflationary pressure driven by the effects of higher commodity prices and due to the weakened U.S. dollar compared to the Canadian dollar. Per unit lease operating expenses increased 17% to $6.95 per Boe. During 2006, we utilized cash on hand, cash flow from operations, and $1.8 billion of commercial paper borrowings to fund our capital expenditures, repay $862 million in debt and repurchase $253 million of our common stock. We ended the year with $1.3 billion of cash and short-term investments. From an operational perspective, our deepwater Gulf of Mexico exploration program has reached several important milestones related to the Lower Tertiary trend. To date, we have drilled four discovery wells in the Lower Tertiary—Cascade in 2002, St. Malo in 2003, Jack in 2004 and Kaskida in the third quarter of 2006. Also in the third quarter of 2006, we announced the successful production test of the Jack No. 2 well in the Lower Tertiary. We currently hold 273 blocks in the Lower Tertiary and have identified 19 additional exploratory prospects within these blocks to date. These achievements support our positive view of the Lower Tertiary and demonstrate the growth potential of our high-impact exploration strategy on long-term production, reserves and value. On June 29, 2006, we acquired Chief’s oil and gas assets located in the Barnett Shale area of Texas for $2.2 billion. This transaction added 99.7 million Boe of proved reserves and 169,000 net acres to our Barnett Shale assets. This acquisition combined with our organic growth continues to extend our leadership position in the Barnett Shale and provides years of additional drilling inventory. On November 14, 2006, we announced our plans to divest our operations in Egypt. At December 31, 2006, Egypt had proved reserves of eight million Boe. Subsequently, on January 23, 2007, we announced our plans to divest our operations in West Africa, including Equatorial Guinea, Cote d’Ivoire, and other countries in the region. At December 31, 2006, our West Africa operations had proved reserves of 90 million Boe, or 4% of total proved reserves. We anticipate completing the sale of our Egyptian assets in the first half of 2007 and our West African assets in the third quarter of 2007. Divesting these properties will allow us to redeploy our financial and intellectual capital to the significant growth opportunities we have developed onshore in North America and in the deepwater Gulf of Mexico. Additionally, we will sharpen our focus in North America and concentrate our international operations in Brazil and China, where we have established competitive advantages. Looking to 2007, we intend to use the proceeds from the sales of our operations in Egypt and West Africa to repay our outstanding commercial paper and resume common stock repurchases. In addition, our operational accomplishments to date have laid the foundation for continued growth in future years, at competitive unit costs, that we expect will continue to create additional value for our investors. In 2007, we expect to deliver reserve additions of 350 to 370 million Boe with related capital expenditures in the range of $5.3 to $5.7 billion. We expect production related to our continuing operations to increase approximately 10% from 2006 to 2007, which reflects the significant reserve additions in 2005 and 2006, and those expected in 2007. 36 md&amd&a reSultS of operationS revenues Changes in oil, gas and NGL production, prices and revenues from 2004 to 2006 are shown in the following tables. The amounts for all periods presented exclude our Egyptian operations. Unless otherwise stated, all dollar amounts are expressed in U.S. dollars. PRODUCTION Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, gas and NGLs (MMBoe)(1) AveRAge PRICes Oil (per Bbl) Gas (per Mcf) NGLs (per Bbl) Oil, gas and NGLs (per Boe)(1) ReveNUes (in millions) Oil Gas NGLs Oil, gas and NGLs PRODUCTION Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, gas and NGLs (MMBoe)(1) AveRAge PRICes Oil (per Bbl) Gas (per Mcf) NGLs (per Bbl) Oil, gas and NGLs (per Boe)(1) ReveNUes (in millions) Oil Gas NGLs Oil, gas and NGLs PRODUCTION Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, gas and NGLs (MMBoe)(1) AveRAge PRICes Oil (per Bbl) Gas (per Mcf) NGLs (per Bbl) Oil, gas and NGLs (per Boe)(1) ReveNUes (in millions) Oil Gas NGLs Oil, gas and NGLs 2006 2006 vs 2005 (2) total Year ended deCemBer 31, 2005 2005 vs 2004 (2) 2004 55 815 23 214 58.30 6.06 32.10 41.51 3,205 4,932 749 8,886 -11% -1% -2% -4% +53% -13% +11% +5% +36% -15% +9% +1% 62 827 24 224 38.00 6.99 28.96 39.48 2,359 5,784 687 8,830 -17% -7% -1% -9% +35% +32% +26% +32% +12% +22% +24% +20% 74 891 24 247 28.22 5.32 23.04 29.92 2,099 4,732 554 7,385 2006 2006 vs 2005 (2) domeStiC Year ended deCemBer 31, 2005 2005 vs 2004 (2) 2004 19 566 19 132 62.23 6.09 29.42 39.31 1,218 3,445 548 5,211 -23% +2% +3% -3% +49% -14% +10% -2% +15% -12% +13% -5% 25 555 18 136 41.64 7.08 26.68 40.21 1,062 3,929 484 5,475 -19% -8% -4% -10% +35% +30% +24% +31% +9% +20% +19% +18% 31 602 19 151 30.84 5.43 21.47 30.80 976 3,261 405 4,642 2006 2006 vs 2005 (2) Canada Year ended deCemBer 31, 2005 2005 vs 2004 (2) 2004 13 241 4 58 46.94 6.05 42.67 39.21 603 1,456 201 2,260 -2% -8% -11% -7% +75% -13% +15% +3% +71% -20% +2% -4% 13 261 6 62 26.88 6.95 37.19 38.17 353 1,814 196 2,363 -5% -6% +8% -5% +24% +35% +27% +33% +18% +26% +38% +26% 14 279 5 65 21.60 5.15 29.23 28.80 299 1,437 143 1,879 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 37 md&a PRODUCTION Oil (MMBbls) Gas (Bcf) NGLs (MMBbls) Oil, gas and NGLs (MMBoe)(1) AveRAge PRICes Oil (per Bbl) Gas (per Mcf) NGLs (per Bbl) Oil, gas and NGLs (per Boe)(1) ReveNUes (in millions) Oil Gas NGLs Oil, gas and NGLs 2006 2006 vs 2005 (2) international Year ended deCemBer 31, 2005 2005 vs 2004 (2) 2004 23 8 — 24 61.36 3.95 — 59.24 1,384 31 — 1,415 $ $ $ $ $ $ -4% -25% N/M -7% +52% +5% N/M +53% +47% -21% N/M +43% 24 11 — 26 40.26 3.75 22.81 38.80 944 41 7 992 -19% +6% N/M -17% +41% +13% +8% +39% +15% +20% +12% +15% 29 10 — 31 28.53 3.33 21.12 27.99 824 34 6 864 (1) Gas volumes are converted to Boe or MMBoe at the rate of six Mcf of gas per barrel of oil, based upon the approximate relative energy content of natural gas and oil, which rate is not necessarily indicative of the relationship of oil and gas prices. NGL volumes are converted to Boe on a one-to-one basis with oil. (2) All percentage changes included in this table are based on actual figures and not the rounded figures included in this table. N/M Not meaningful. The average prices shown in the preceding tables include the effect of our oil and gas price hedging activities. Following is a comparison of our average prices with and without the effect of hedges for each of the last three years. Oil (per Bbl) Gas (per Mcf) NGLs (per Bbl) Oil, gas and NGLs (per Boe) 2006 58.30 6.06 32.10 41.51 $ $ $ $ with hedGeS 2005 38.00 6.99 28.96 39.48 2004 28.22 5.32 23.04 29.92 2006 58.30 6.01 32.10 41.34 without hedGeS 2005 48.43 7.04 28.96 42.55 2004 36.02 5.34 23.04 32.37 The following table details the effects of changes in volumes and prices on our oil, gas and NGL revenues between 2004 and 2006. 2004 ReveNUes Changes due to volumes Changes due to prices 2005 ReveNUes Changes due to volumes Changes due to prices 2006 ReveNUes oil revenues oil GaS nGl total (IN MILLIoNs) $ $ 2,099 (347) 607 2,359 (270) 1,116 3,205 4,732 (337) 1,389 5,784 (86) (766) 4,932 554 (8) 141 687 (11) 73 749 7,385 (692) 2,137 8,830 (367) 423 8,886 2006 vs. 2005 Oil revenues decreased $270 million due to a seven million barrel decrease in production. Production lost from properties divested in 2005 accounted for four million barrels of the decrease. A contractual reduction of our share of production from one of our international properties in mid-2005 also lowered 2006 volumes. These decreases were partially offset by a three million barrel increase in production resulting from reaching payout of certain carried interests in Azerbaijan. Oil revenues increased $1.1 billion as a result of a 53% increase in our realized price. The expiration of oil hedges at the end of 2005 and a 17% increase in the average NYMEX West Texas Intermediate index price caused the increase in our realized oil price. 38 md&a 2005 vs. 2004 Oil revenues decreased $347 million due to a 12 million barrel decrease in production. Production lost from the 2005 property divestitures accounted for seven million barrels of the decrease. We also suspended certain domestic production in 2005 and 2004 due to the effects of Hurricanes Katrina, Rita, Dennis and Ivan. The volumes suspended in 2005 were one million barrels more than in 2004. The remainder of the decrease is due to certain international properties in which our ownership interest decreased after we recovered our costs under the applicable production sharing contracts. Higher realized prices caused oil revenues to increase $607 million in 2005. Our 2005 oil prices rose primarily due to a 37% increase in the average NYMEX West Texas Intermediate index price. Gas revenues 2006 vs. 2005 A 12 Bcf decrease in production caused gas revenues to decrease by $86 million. Production lost from the 2005 property divestitures caused a decrease of 35 Bcf. As a result of the previously mentioned hurricanes, gas volumes suspended in 2006 were three Bcf more than those suspended in 2005. These decreases were partially offset by the June 2006 Chief acquisition, which contributed 10 Bcf of production during the last half of 2006, and additional production from new drilling and development in our U.S. onshore and offshore properties. A 13% decline in average prices caused gas revenues to decrease $766 million in 2006. 2005 vs. 2004 A 64 Bcf decrease in production caused gas revenues to decrease by $337 million. Production associated with the 2005 property divestitures caused a decrease of 89 Bcf. We also suspended certain domestic gas production in 2005 and 2004 due to the previously mentioned hurricanes. The volumes suspended in 2005 were 12 Bcf more than in 2004. These decreases were partially offset by new drilling and development and increased performance in U.S. onshore and offshore properties. A 32% increase in average gas prices contributed $1.4 billion of additional revenues in 2005. marketing and midstream revenues and operating Costs and expenses The following table details the changes in our marketing and midstream revenues and operating costs and expenses between 2004 and 2006. The changes due to prices in the table represent the net effect on both revenues and expenses due to changes in the market prices for natural gas and NGLs. 2004 mARkeTINg & mIDsTReAm Changes due to volumes Changes due to prices 2005 mARkeTINg & mIDsTReAm Changes due to volumes Changes due to prices 2006 mARkeTINg & mIDsTReAm revenueS expenSeS (IN MILLIoNs) $ $ 1,701 (351) 442 1,792 159 (259) 1,692 1,339 (303) 306 1,342 117 (215) 1,244 2006 vs. 2005 Volume increases in our gas pipeline, gas sales and NGL marketing activities caused both revenues and expenses to increase in 2006. This additional activity was primarily due to our continued growth in the Barnett Shale and higher natural gas deliveries from third-party producers 2005 vs. 2004 Volume decreases in 2005 caused both revenues and expenses to decline in 2005. The lower activity was primarily attributable to the sale of certain non-core assets in 2004 and 2005. oil, Gas and nGl production and operating expenses The details of the changes in oil, gas and NGL production and operating expenses between 2004 and 2006 are shown in the table below. PRODUCTION AND OPeRATINg exPeNses (in millions): Lease operating expenses Production taxes Total production and operating expenses PRODUCTION AND OPeRATINg exPeNses PeR BOe: Lease operating expenses Production taxes Total production and operating expenses per Boe 2006 2006 vs 2005 (1) Year ended deCemBer 31, 2005 2005 vs 2004 (1) 2004 $ $ $ $ 1,488 341 1,829 6.95 1.59 8.54 +12% + 2% +10% +17% + 6% +15% 1,324 335 1,659 5.92 1.50 7.42 + 5% +31% +10% +16% +46% +21% 1,259 255 1,514 5.10 1.03 6.13 (1) All percentage changes included in this table are based on actual figures and not the rounded figures included in this table. 39 md&a 2006 vs. 2005 Lease operating expenses increased $164 million in 2006 largely due to higher commodity prices. Commodity price increases in 2005 and the first half of 2006 contributed to industry-wide inflationary pressures on materials and personnel costs. Additionally, consideration of higher commodity prices contributed to our decision to perform more well workovers and maintenance projects to maintain or improve production volumes. Commodity price increases also caused operating costs such as ad valorem taxes, power and fuel costs to rise. A higher Canadian-to-U.S. dollar exchange rate in 2006 caused a $34 million increase in our costs. Lease operating expenses also increased $33 million due to the June 2006 Chief acquisition and the payouts of our carried interests in Azerbaijan in the last half of 2006. The increases in our lease operating expenses were partially offset by a decrease of $82 million related to properties that were sold in 2005. The factors described above were also the primary factors causing lease operating expenses per Boe to increase during 2006. Although we divested properties in 2005 that had higher per-unit operating costs, the cost escalation largely related to higher commodity prices and the weaker U.S. dollar had a greater effect on our per unit costs than the property divestitures. 2005 vs. 2004 Lease operating expenses increased $65 million in 2005 largely due to higher commodity prices. As addressed above, commodity price increases led to overall industry inflation. Additionally, a higher Canadian-to-U.S. dollar exchange rate in 2005 caused a $30 million increase in 2005. Partially offsetting these increases was a decrease of $144 million in lease operating expenses related to properties that were sold in 2005. The increases described above were also the primary factors causing lease operating expenses per Boe to increase. Although we divested properties that had higher per-unit operating costs, the cost escalation largely related to higher commodity prices and the weaker U.S. dollar had a greater effect on our per unit costs than the property divestitures. The following table details the changes in production taxes between 2004 and 2006. The majority of our production taxes are assessed on our onshore domestic properties. In the U.S., most of the production taxes are based on a fixed percentage of revenues. Therefore, the changes due to revenues in the table primarily relate to changes in oil, gas and NGL revenues from our U.S. onshore properties. 2004 PRODUCTION TAxes Change due to revenues Change due to rate 2005 PRODUCTION TAxes Change due to revenues Change due to rate 2006 PRODUCTION TAxes (in millionS) $ $ 255 50 30 335 (23) 29 341 2006 vs. 2005 Production taxes increased $29 million due to an increase in the effective production tax rate in 2006. A new Chinese “Special Petroleum Gain” tax was the primary contributor to the higher rate. 2005 vs. 2004 Production taxes increased $30 million due to an increase in the effective production tax rate in 2005. An increase in Russian export tax rates was the primary contributor to the higher rate. depreciation, depletion and amortization of oil and Gas properties (“dd&a”) DD&A of oil and gas properties is calculated by multiplying the percentage of total proved reserve volumes produced during the year, by the “depletable base.” The depletable base represents the net capitalized investment plus future development costs in those reserves. Generally, if reserve volumes are revised up or down, then the DD&A rate per unit of production will change inversely. However, if the depletable base changes, then the DD&A rate moves in the same direction. The per unit DD&A rate is not affected by production volumes. Absolute or total DD&A, as opposed to the rate per unit of production, generally moves in the same direction as production volumes. Oil and gas property DD&A is calculated separately on a country-by-country basis. The following table details the changes in DD&A of oil and gas properties between 2004 and 2006. The changes due to volumes in the table represent the effect on DD&A due to decreases in combined oil, gas and NGL production. 2004 DD&A Change due to volumes Change due to rate 2005 DD&A Change due to volumes Change due to rate 2006 DD&A 40 (in millionS) $ $ 2,077 (195) 99 1,981 (85) 370 2,266 md&a 2006 vs. 2005 Oil and gas property related DD&A increased $370 million in 2006 due to an increase in the DD&A rate from $8.86 per Boe in 2005 to $10.59 per Boe in 2006. The largest contributor to the rate increase was inflationary pressure on both the costs incurred during 2006 as well as the estimated development costs to be spent in future periods on proved undeveloped reserves. Other factors contributing to the rate increase include the June 2006 Chief acquisition and the transfer of previously unproved costs to the depletable base as a result of 2006 drilling activities. A reduction in reserve estimates due to the effects of 2006 year-end commodity prices also contributed to the rate increase. 2005 vs. 2004 Oil and gas property related DD&A increased $99 million in 2005 due to an increase in the DD&A rate from $8.41 per Boe in 2004 to $8.86 per Boe in 2005. The largest contributor to the rate increase was the effect of inflationary pressure on finding and development costs for reserve discoveries and extensions. Changes in the Canadian-to-U.S. dollar exchange rate also caused the rate to increase. These increases were partially offset by a decrease in the rate as a result of our 2005 property divestitures. General and administrative expenses (“G&a”) Our net G&A consists of three primary components. The largest of these components is the gross amount of expenses incurred for personnel costs, office expenses, professional fees and other G&A items. The gross amount of these expenses is partially reduced by two offsetting components. One is the amount of G&A capitalized pursuant to the full cost method of accounting related to exploration and development activities. The other is the amount of G&A reimbursed by working interest owners of properties for which we serve as the operator. These reimbursements are received during both the drilling and operational stages of a property’s life. The gross amount of G&A incurred, less the amounts capitalized and reimbursed, is recorded as net G&A in the consolidated statements of operations. Net G&A includes expenses related to oil, gas and NGL exploration and production activities, as well as marketing and midstream activities. See the following table for a summary of G&A expenses by component. Gross G&A Capitalized G&A Reimbursed G&A Net G&A 2006 2006 vs 2005 Year ended deCemBer 31, 2005 (IN MILLIoNs) 2005 vs 2004 2004 $ $ 769 (269) (103) 397 +33% +49% -2% +36% 577 (181) (105) 291 +6% +9% +3% +5% 545 (166) (102) 277 2006 vs. 2005 Gross G&A increased $192 million. Higher employee compensation and benefits costs caused gross G&A to increase $149 million. Of this increase, $34 million represented stock option expense recognized pursuant to our adoption in 2006 of Statement of Financial Accounting Standard No. 123(R), Share-Based Payment. An additional $28 million of the increase related to higher restricted stock compensation. In addition, changes in the Canadian-to-U.S. dollar exchange rate caused an $11 million increase in costs. 2005 vs. 2004 Gross G&A increased $32 million. Higher employee compensation and benefits costs caused gross G&A to increase $35 million. Of this increase, $17 million related to higher restricted stock compensation. In addition, changes in the Canadian-to-U.S. dollar exchange rate caused a $9 million increase in costs. These increases were partially offset by an $8 million decrease in rent expense resulting primarily from the abandonment of certain Canadian office space in 2004. The factors discussed above were also the primary factors that caused the $88 million and $15 million increases in capitalized G&A in 2006 and 2005, respectively. interest expense The following schedule includes the components of interest expense between 2004 and 2006. Interest based on debt outstanding Capitalized interest Other interest Total interest expense 2006 486 (79) 14 421 $ $ Year ended deCemBer 31, 2005 (IN MILLIoNs) 507 (70) 96 533 2004 513 (70) 32 475 Interest based on debt outstanding decreased from 2004 to 2006 primarily due to the net effect of debt repayments during 2005 and 2006. This was partially offset by the effect of increased commercial paper borrowings during the last half of 2006 related to the acquisition of the Chief properties. During 2005, we redeemed our $400 million 6.75% notes due March 15, 2011 and our zero coupon convertible senior debentures prior to their scheduled maturity dates. The other interest category in the table above includes $81 million in 2005 related to these early retirements. During 2004, we repaid the balance under our $3 billion term loan credit facility prior to the scheduled repayment date. The other interest category in the table above includes $16 million in 2004 related to this early repayment. 41 md&a reduction of Carrying value of oil and Gas properties During 2006 and 2005, we reduced the carrying value of certain of our oil and gas properties due to full cost ceiling limitations and unsuccessful exploratory activities. A detailed description of how full cost ceiling limitations are determined is included in the Critical Accounting Policies and Estimates section of this report. A summary of these reductions and additional discussion is provided below. Unsuccessful exploratory reductions: Nigeria Brazil Angola Ceiling test reduction – Russia Total 2006 Year ended deCemBer 31, net of taxeS GroSS (IN MILLIoNs) 2005 net of taxeS 85 16 — 10 111 — 42 170 — 212 — 42 119 — 161 GroSS 85 16 — 20 121 $ $ 2006 Reductions We have committed to drill four wells in Nigeria. The first two wells were unsuccessful. After drilling the second unsuccessful well in the first quarter of 2006, we determined that the capitalized costs related to these two wells should be impaired. Therefore, in the first quarter of 2006, we recognized an $85 million impairment of our investment in Nigeria 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. During the second quarter of 2006, we 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, we recognized a $16 million impairment of our 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. As a result of a decline in projected future net cash flows, the carrying value of our Russian properties exceeded the full cost ceiling by $10 million at the end of the third quarter of 2006. Therefore, we recognized a $20 million reduction of the carrying value of our oil and gas properties in Russia, offset by a $10 million deferred income tax benefit. 2005 Reductions Our interests in Angola were acquired through the 2003 Ocean Energy merger. Our Angolan drilling program discovered no proven reserves. After drilling three unsuccessful wells in the fourth quarter of 2005, we determined that all of the Angolan capitalized costs should be impaired. Prior to the fourth quarter of 2005, we were capitalizing the costs of previous unsuccessful efforts in Brazil pending the determination of whether proved reserves would be recorded in Brazil. We have been successful in our drilling efforts on block BM-C-8 in Brazil and are currently developing the Polvo project on this block. The ultimate value of the Polvo project is expected to be in excess of the sum of its related costs, plus the costs of the previous unrelated unsuccessful efforts in Brazil which were capitalized. However, the Polvo proved reserves will be recorded over a period of time. At the end of 2005, it was expected that a small initial portion of the proved reserves ultimately expected at Polvo would be recorded in 2006. Based on preliminary estimates developed in the fourth quarter of 2005, the value of this initial partial booking of proved reserves was not sufficient to offset the sum of the related proportionate Polvo costs plus the costs of the previous unrelated unsuccessful efforts. Therefore, we determined that the prior unsuccessful costs unrelated to the Polvo project should be impaired. These costs totaled approximately $42 million. There was no tax benefit related to this Brazilian impairment. Change in fair value of derivative financial instruments The details of the changes in fair value of derivative financial instruments between 2004 and 2006 are shown in the table below. Option embedded in exchangeable debentures Non-qualifying commodity hedges Ineffectiveness of commodity hedges Interest rate swaps Total 2006 181 — — (3) 178 $ $ 2005 (IN MILLIoNs) 54 39 5 (4) 94 2004 58 — 5 (1) 62 42 md&a The change in the fair value of the embedded option relates to the debentures exchangeable into shares of Chevron Corporation common stock. These expenses were caused primarily by increases in the price of Chevron Corporation’s common stock. In 2005, we recognized a $39 million loss on certain oil derivative financial instruments that no longer qualified for hedge accounting because the hedged production exceeded actual and projected production under these contracts. The lower than expected production was caused primarily by hurricanes that affected offshore production in the Gulf of Mexico. other income, net The following schedule includes the components of other income between 2004 and 2006. Interest and dividend income Net gain on sales of non-oil and gas property and equipment Loss on derivative financial instruments Gains from changes in foreign exchange rates Other Total 2006 100 6 — — 9 115 $ $ 2005 (IN MILLIoNs) 95 150 (48) 2 (1) 198 2004 45 33 — 23 25 126 Interest and dividend income increased from 2004 to 2005 primarily due to an increase in cash and short-term investment balances and higher interest rates. During 2005, we sold certain non-core midstream assets for a net gain of $150 million. Also during 2005, we incurred a $55 million loss on certain commodity hedges that no longer qualified for hedge accounting and were settled prior to the end of their original term. These hedges related to U.S. and Canadian oil production from properties sold as part of our 2005 property divestiture program. This loss was partially offset by a $7 million gain related to interest rate swaps that were settled prior to the end of their original term in conjunction with the early redemption of the $400 million 6.75% senior notes in 2005. The gains in 2005 and 2004 from changes in foreign exchange rates were primarily related to $400 million of Canadian subsidiary debt that was denominated in U.S. dollars. The debt was retired in 2005. income taxes The following table presents our total income tax expense related to continuing operations and a reconciliation of our effective income tax rate to the U.S. statutory income tax rate for each of the past three years. The primary factors causing our effective rates to vary from 2004 to 2006, and differ from the U.S. statutory rate, are discussed below. Total income tax expense $ 1,189 1,606 2006 2005 (IN MILLIoNs) U.S. statutory income tax rate Canadian statutory rate reductions Texas income-based tax United States manufacturing deduction Repatriation of Canadian earnings Other Effective income tax rate 35% (6%) 1% — — — 30% 35% — — (1%) 1% 1% 36% 2004 1,095 35% (1%) — — — (1%) 33% In 2006, 2005 and 2004, deferred income taxes were reduced $243 million, $14 million and $36 million, respectively, due to Canadian statutory rate reductions that were enacted in each such year. In 2006, deferred income taxes increased $39 million due to the effect of a new income-based tax enacted by the state of Texas that replaces a previous franchise tax. The new tax is effective January 1, 2007. In 2006 and 2005, income taxes were reduced $12 million and $25 million, respectively, due to a new U.S. tax deduction for companies with domestic production activities, including oil and gas extraction. In 2005, we recognized $28 million of taxes related to our repatriation of $545 million to the U.S. The cash was repatriated due to tax legislation that allowed qualifying companies to repatriate cash from foreign operations at a reduced income tax rate. Substantially all of the cash repatriated by us in 2005 related to earnings of our Canadian subsidiary. 43 md&a earnings from discontinued operations On November 14, 2006, we announced our plans to divest our operations in Egypt. We anticipate completing the sale of our Egyptian operations in the first half of 2007. Pursuant to accounting rules for discontinued operations, Egypt is considered a discontinued operation at the end of 2006. As a result, the Egypt financial results for 2006 and all prior periods have been reclassified and are presented as discontinued operations. Following are the components of the results of discontinued operations between 2004 and 2006. Earnings from discontinued operations before income taxes Income tax (benefit) expense Earnings from discontinued operations Capital reSourCeS, uSeS and liquiditY 2006 22 (1) 23 $ $ 2005 (IN MILLIoNs) 46 15 31 2004 17 12 5 The following discussion of capital resources and liquidity should be read in conjunction with the consolidated financial statements included in this report. Sources and uses of Cash The following table presents the sources and uses of our cash and cash equivalents from 2004 to 2006. The table presents capital expenditures on a cash basis. Therefore, these amounts differ from the amounts of capital expenditures, including accruals, that are referred to elsewhere in this document. Additional discussion of these items follows the table. SOuRCES OF CASh AnD CASh EquivAlEntS: Operating cash flow – continuing operations Sales of property and equipment Net commercial paper borrowings Stock option exercises Net decrease in short-term investments Other Total sources of cash and cash equivalents uSES OF CASh AnD CASh EquivAlEntS: Capital expenditures Debt repayments Repurchases of common stock Dividends Net increase in short-term investments Total uses of cash and cash equivalents Increase (decrease) from continuing operations Increase (decrease) from discontinued operations Effect of foreign exchange rates Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at end of year Short-term investments at end of year 2006 5,936 40 1,808 73 106 36 7,999 (7,551) (862) (253) (209) — (8,875) (876) 13 13 (850) 756 574 $ $ $ $ 2005 (IN MILLIoNs) 5,514 2,151 — 124 287 — 8,076 (4,026) (1,258) (2,263) (146) — (7,693) 383 34 37 454 1,606 680 2004 4,789 95 — 268 — — 5,152 (3,058) (973) (189) (107) (626) (4,953) 199 (18) 39 220 1,152 967 Operating Cash Flow – Continuing Operations Net cash provided by operating activities (“operating cash flow”) is our primary source of capital and liquidity. Changes in operating cash flow are largely due to the same factors that affect our net earnings, with the exception of those earnings changes due to such noncash expenses as DD&A, property impairments, derivative fair value changes and deferred income tax expense. As a result, our operating cash flow increased in 2006 and 2005 compared to the previous years largely due to increases in net earnings, as discussed in the “Results of Operations” section of this report. Sales of Property and Equipment In 2005, we generated $2.2 billion in pre-tax proceeds from sales of property and equipment. These consisted of $2.0 billion related to the sale of non-core oil and gas properties and $0.2 billion related to the sale of non-core midstream assets. Net of related income taxes, these proceeds were $1.8 billion for oil and gas properties and $0.1 billion for midstream assets. 44 md&a Net Commercial Paper Borrowings On June 29, 2006, we acquired Chief for $2 billion of cash and the assumption of $0.2 billion of liabilities. We funded a portion of the purchase price with $1.4 billion of borrowings issued under our commercial paper program. As a result of the Chief acquisition and success in other onshore U.S. locations, we accelerated certain oil and gas development activities into the last half of 2006. We borrowed an additional $0.4 billion of commercial paper to fund this accelerated development. Capital Expenditures The increases in operating cash flow have enabled us to invest larger amounts in capital projects. As a result, excluding the acquisition of the Chief properties, our capital expenditures increased 38% in 2006. The majority of this increase related to our expenditures for the acquisition, drilling or development of oil and gas properties, which totaled $5.0 billion in 2006, excluding the Chief acquisition. Inflationary pressure driven by higher commodity prices and increased drilling activities in the Barnett Shale, Gulf of Mexico, Carthage and Groesbeck areas of the U.S. contributed to the increase. In addition, the payouts of our carried interests in Azerbaijan in the last half of 2006 and the weaker U.S. dollar impact on our Canadian operations also contributed to the increase. Capital expenditures in 2005 increased 32% compared to 2004 primarily due to an increase in our expenditures for the acquisition, drilling or development of oil and gas properties, which totaled $3.9 billion in 2005. Increased drilling activities in the Barnett Shale, the approximately $200 million acquisition of Iron River acreage in Canada and the $74 million purchase of the Serpentina FPSO in offshore Equatorial Guinea were large contributors to the increase. Inflationary pressure driven by higher commodity prices and the weaker U.S. dollar also caused our expenditures to increase from 2004 to 2005. Debt Repayments Our net debt retirements were $0.9 billion, $1.3 billion and $1.0 billion in 2006, 2005 and 2004, respectively. These amounts consisted of payments at the scheduled maturity dates with the exception of the following payments. The 2006 amount includes $0.2 billion related to the repayment of debt acquired in the Chief acquisition. The 2005 amount includes $0.8 billion related to the retirement of zero coupon convertible debentures due in 2020 and 6.75% notes due in 2011. The 2004 amount includes $635 million for the payment of the outstanding balance under a $3 billion term loan credit facility due in 2006. Repurchases of Common Stock In August 2005, we completed a share repurchase program that began in October 2004. Under this program, we repurchased 49.6 million shares of our common stock at a total cost of $2.3 billion, or $46.69 per share. In August 2005, we announced another program to repurchase up to an additional 50 million shares of our common stock. During 2005 and 2006, we repurchased 6.5 million shares for $387 million, or $59.80 per share, under this program. Dividends Our common stock dividends were $199 million, $136 million and $97 million in 2006, 2005 and 2004, respectively. We also paid $10 million of preferred stock dividends in 2006, 2005 and 2004. The 2006 and 2005 increases in common stock dividends were primarily related to a 50% increase in the dividend rate in the first quarter of both 2006 and 2005, partially offset by a decrease in outstanding shares due to share repurchases. Changes in Short-Term Investments To maximize our income on available cash balances, we invest in highly liquid, short-term investments. The purchase and sale of these short-term investments will cause cash and cash equivalents to decrease and increase, respectively. Short-term investment balances decreased $106 million and $287 million in 2006 and 2005, respectively, and increased $626 million in 2004. liquidity Historically, our primary source of capital and liquidity has been operating cash flow. Additionally, we maintain a revolving line of credit and a commercial paper program which can be accessed as needed to supplement operating cash flow. Other available sources of capital and liquidity include the issuance of equity securities and long-term debt. During 2007, another major source of liquidity will be proceeds from the sales of our operations in Egypt and West Africa. We expect the combination of these sources of capital will be more than adequate to fund future capital expenditures, debt repayments, common stock repurchases, and other contractual commitments as discussed later in this section. Operating Cash Flow Our operating cash flow has increased nearly 25% since 2004, reaching a total of $5.9 billion in 2006. We expect operating cash flow to continue to be our primary source of liquidity. Our operating cash flow is sensitive to many variables, the most volatile of which is pricing of the oil, natural gas and NGLs produced. Prices for these commodities are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors are beyond our control and are difficult to predict. We periodically believe it appropriate to mitigate some of the risk inherent in oil and natural gas prices. We have used a variety of avenues to achieve this partial risk mitigation. We have utilized price collars to set minimum and maximum prices on a portion of our production. We have also utilized various price swap contracts and fixed-price physical delivery contracts to fix the price to be received for a portion of future oil and natural gas production. Based on contracts currently in place, approximately 5% of our estimated 2007 natural gas production (3% of our total Boe production) is subject to either price collars, swaps or fixed-price contracts. Commodity prices can also affect our operating cash flow through an indirect effect on operating expenses. Significant commodity price increases, as experienced in recent years, can lead to an increase in drilling and development activities. As a result, the demand and cost for people, services, equipment and materials may also increase, causing a negative impact on our cash flow. Credit Lines Another source of liquidity is our $2.5 billion five-year, syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). The Senior Credit Facility includes a five-year revolving Canadian subfacility in a maximum amount of U.S. $500 million. Amounts borrowed under the Senior Credit Facility may, at our election, bear interest at various fixed rate options for periods of up to twelve months. Such rates are generally less than the prime rate. However, we may elect to borrow at the prime rate. As of December 31, 2006, there were no borrowings under the Senior Credit Facility. The available capacity under the Senior Credit Facility as of December 31, 2006, net of $1.8 billion of outstanding commercial paper and $284 million of outstanding letters of credit, was approximately $408 million. 45 md&a The Senior Credit Facility matures on April 7, 2011, and all amounts outstanding will be due and payable at that time unless the maturity is extended. Prior to each April 7 anniversary date, we have the option to extend the maturity of the Senior Credit Facility for one year, subject to the approval of the lenders. We are working to obtain lender approval to extend the current maturity date of April 7, 2011 to April 7, 2012. If successful, this maturity date extension will be effective April 7, 2007, provided we have not experienced a “material adverse effect,” as defined in the Senior Credit Facility agreement, at that date. The Senior Credit Facility contains only one material financial covenant. This covenant requires our ratio of total funded debt to total capitalization to be less than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in our consolidated financial statements. As defined in the agreement, total funded debt excludes the debentures that are exchangeable into shares of Chevron Corporation common stock. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling impairments or goodwill impairments. As of December 31, 2006, our debt to capitalization ratio as calculated pursuant to this covenant was 27.3%. Our access to funds from the Senior Credit Facility is not restricted under any “material adverse effect” clauses. It is not uncommon for credit agreements to include such clauses. These clauses can remove the obligation of the banks to fund the credit line if any condition or event would reasonably be expected to have a material and adverse effect on the borrower’s financial condition, operations, properties or business considered as a whole, the borrower’s ability to make timely debt payments, or the enforceability of material terms of the credit agreement. While our Senior Credit Facility includes covenants that require us to report a condition or event having a material adverse effect, the obligation of the banks to fund the Senior Credit Facility is not conditioned on the absence of a material adverse effect. We also have access to short-term credit under our commercial paper program. Total borrowings under the commercial paper program may not exceed $2 billion. Also, any borrowings under the commercial paper program reduce available capacity under the Senior Credit Facility on a dollar-for-dollar basis. Commercial paper debt generally has a maturity of between seven and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. As of December 31, 2006, we had $1.8 billion of commercial paper debt outstanding at an average rate of 5.37%. Debt Ratings We receive debt ratings from the major ratings agencies in the United States. In determining our debt ratings, the agencies consider a number of items including, but not limited to, debt levels, planned asset sales, near-term and long-term production growth opportunities and capital allocation challenges. Liquidity, asset quality, cost structure, reserve mix, and commodity pricing levels are also considered by the rating agencies. Our current debt ratings are BBB with a positive outlook by Standard & Poor’s, Baa2 with a positive outlook by Moody’s and BBB with a positive outlook by Fitch. There are no “rating triggers” in any of our contractual obligations that would accelerate scheduled maturities should our debt rating fall below a specified level. Our cost of borrowing under our Senior Credit Facility is predicated on our corporate debt rating. Therefore, even though a ratings downgrade would not accelerate scheduled maturities, it would adversely impact the interest rate on any borrowings under our Senior Credit Facility. Under the terms of the Senior Credit Facility, a one- notch downgrade would increase the fully-drawn borrowing costs for the Senior Credit Facility from LIBOR plus 45 basis points to a new rate of LIBOR plus 65 basis points. A ratings downgrade could also adversely impact our ability to economically access debt markets in the future. As of December 31, 2006, we were not aware of any potential ratings downgrades being contemplated by the rating agencies. Capital Expenditures In February 2007, we provided guidance for our 2007 capital expenditures which are expected to range from $5.7 billion to $6.2 billion. This represents the largest planned use of our 2007 operating cash flow, with the high end of the range being 11% higher than our 2006 capital expenditures, excluding the Chief acquisition. To a certain degree, the ultimate timing of these capital expenditures is within our control. Therefore, if oil and natural gas prices fluctuate from current estimates, we could choose to defer a portion of these planned 2007 capital expenditures until later periods, or accelerate capital expenditures planned for periods beyond 2007 to achieve the desired balance between sources and uses of liquidity. Based upon current oil and natural gas price expectations for 2007, we anticipate having adequate capital resources to fund our 2007 capital expenditures. Common Stock Repurchase Program In August 2005, we announced a program to repurchase up to 50 million shares of our common stock. We had repurchased 6.5 million shares under this program through the middle of 2006 when the program was suspended as a result of the Chief acquisition. In conjunction with the sales of our Egyptian and West African operations, we expect to resume this repurchase program in late 2007 by using a portion of the sales proceeds to repurchase common stock. Although this program expires at the end of 2007, it could be extended if necessary. 46 md&a Contractual Obligations A summary of our contractual obligations as of December 31, 2006, is provided in the following table. Long-term debt (1) Interest expense (2) Drilling and facility obligations (3) Asset retirement obligations (4) Firm transportation agreements (5) Lease obligations (6) Other Total total 7,770 5,797 2,993 894 574 595 37 18,660 $ $ leSS than 1 Year paYmentS due BY period 1-3 YearS 3-5 YearS more than 5 YearS (IN MILLIoNs) 2,208 492 886 61 123 80 28 3,878 937 764 1,137 75 173 163 5 3,254 2,100 690 844 143 106 123 4 4,010 2,525 3,851 126 615 172 229 — 7,518 (1) Long-term debt amounts represent scheduled maturities of our debt obligations at December 31, 2006, excluding $5 million of fair value adjustments and $8 million of net premiums included in the carrying value of debt. The “Less than 1 Year” amount includes $1.8 billion of short-term commercial paper borrowings. We intend to use the proceeds from the sales of our Egyptian and West African assets to repay our outstanding commercial paper. The “1-3 Years” amount includes $760 million related to our debentures exchangeable into shares of Chevron Corporation common stock. As of December 31, 2006, we beneficially owned approximately 14.2 million shares of Chevron common stock for possible exchange for the exchangeable debentures. In addition, $284 million of letters of credit that have been issued by commercial banks on our behalf are excluded from the table. The majority of these letters of credit, if funded, would become borrowings under our revolving credit facility. Most of these letters of credit have been granted by financial institutions to support our international and Canadian drilling commitments. (2) Interest expense amounts represent the scheduled fixed-rate and variable-rate cash payments related to our debt. Interest on our variable-rate debt was estimated based upon expected future interest rates as of December 31, 2006. (3) Drilling and facility obligations represent contractual agreements with third party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction. Included in the $3.0 billion total is $1.9 billion which relates to long-term contracts for three deepwater drilling rigs and certain other contracts for onshore drilling and facility obligations in which drilling or facilities construction has not commenced. The $1.9 billion represents the gross commitment under these contracts. Our ultimate payment for these commitments will be reduced by the amounts billed to our working interest partners. Payments for these commitments, net of amounts billed to partners, will be capitalized as a component of oil and gas properties. (4) Asset retirement obligations represent estimated discounted costs for future dismantlement, abandonment and rehabilitation costs. These obligations are recorded as liabilities on our December 31, 2006 balance sheet. (5) Firm transportation agreements represent “ship or pay” arrangements whereby we have committed to ship certain volumes of oil, gas and NGLs for a fixed transportation fee. We have entered into these agreements to aid the movement of our gas production to market. We expect to have sufficient production to utilize the majority of these transportation services. (6) Lease obligations consist of operating leases for office space and equipment, an offshore platform spar and FPSO’s. Office and equipment leases represent non-cancelable leases for office space and equipment used in our daily operations. We have an offshore platform spar that is being used in the development of the Nansen field in the Gulf of Mexico. This spar is subject to a 20-year lease and contains various options whereby we may purchase the lessors’ interests in the spar. We have guaranteed that the spar will have a residual value at the end of the term equal to at least 10% of the fair value of the spar at the inception of the lease. The total guaranteed value is $14 million in 2022. However, such amount may be reduced under the terms of the lease agreement. In 2005, we sold our interests in the Boomvang field in the Gulf of Mexico, which has a spar lease with terms similar to those of the Nansen lease. As a result of the sale, we are subleasing the Boomvang Spar. The table above does not include any amounts related to the Boomvang spar lease. However, if the sublessee were to default on its obligation, we would continue to be obligated to pay the periodic lease payments and any guaranteed value required at the end of the term. We also lease two FPSO’s that are being used in the Panyu project offshore China and the Polvo project offshore Brazil. The Panyu FPSO lease term expires in September 2009. The Polvo FPSO lease term expires in 2014. Pension Funding and Estimates Funded Status As compared to the “projected benefit obligation,” our qualified and nonqualified defined benefit plans were underfunded by $178 million and $133 million at December 31, 2006 and 2005, respectively. A detailed reconciliation of the 2006 changes to our underfunded status is included in Note 6 to the accompanying consolidated financial statements. Of the $178 million underfunded status at the end of 2006, $156 million is attributable to various nonqualified defined benefit plans which have no plan assets. However, we have established certain trusts to fund the benefit obligations of such nonqualified plans. As of December 31, 2006, these trusts had investments with a fair value of $59 million. The value of these trusts is included in noncurrent other assets in our accompanying consolidated balance sheets. As compared to the “accumulated benefit obligation,” our qualified defined benefit plans were overfunded by $59 million at December 31, 2006. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels. Our current intentions are to provide sufficient funding in future years to ensure the accumulated benefit obligation remains fully funded. The actual amount of contributions required during this period will depend on investment returns from the plan assets. Required contributions also depend upon changes in actuarial assumptions made during the same period, particularly the discount rate used to calculate the present value of the accumulated benefit obligation. For 2007, we anticipate the accumulated benefit obligation will remain fully funded without contributing to our defined benefit plans. Therefore, we don’t expect to contribute to the plans during 2007. Pension Estimate Assumptions Our pension expense is recognized on an accrual basis over employees’ approximate service periods and is generally calculated independent of funding decisions or requirements. We recognized expense for our defined benefit pension plans of $31 million, $26 million and $26 million in 2006, 2005 and 2004, respectively. We estimate that our pension expense will approximate $43 million in 2007. The calculation of pension expense and pension liability requires the use of a number of assumptions. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from the assumptions. We believe that the two most critical assumptions affecting pension expense and liabilities are the expected long-term rate of return on plan assets and the assumed discount rate. We assumed that our plan assets would generate a long-term weighted average rate of return of 8.40% at both December 31, 2006 and 2005. We developed these expected long-term rate of return assumptions by evaluating input from external consultants and economists as well as long-term inflation assumptions. The expected long-term rate of return on plan assets is based on a target allocation of investment types in such assets. The target investment allocation for our plan assets is 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated 47 md&a between growth and value; and 20% debt securities. We expect our long-term asset allocation on average to approximate the targeted allocation. We regularly review our actual asset allocation and periodically rebalance the investments to the targeted allocation when considered appropriate. Pension expense increases as the expected rate of return on plan assets decreases. A decrease in our long-term rate of return assumption of 100 basis points (from 8.40% to 7.40%) would increase the expected 2007 pension expense by $6 million. We discounted our future pension obligations using a weighted average rate of 5.72% at both December 31, 2006 and 2005. The discount rate is determined at the end of each year based on the rate at which obligations could be effectively settled. This rate is based on high-quality bond yields, after allowing for call and default risk. We consider high quality corporate bond yield indices, such as Moody’s Aa, when selecting the discount rate. The pension liability and future pension expense both increase as the discount rate is reduced. Lowering the discount rate by 25 basis points (from 5.72% to 5.47%) would increase our pension liability at December 31, 2006, by $25 million, and increase estimated 2007 pension expense by $3 million. At December 31, 2006, we had actuarial losses of $214 million which will be recognized as a component of pension expense in future years. These losses are primarily due to reductions in the discount rate since 2001 and increases in participant wages. We estimate that approximately $15 million and $13 million of the unrecognized actuarial losses will be included in pension expense in 2007 and 2008, respectively. The $15 million estimated to be recognized in 2007 is a component of the total estimated 2007 pension expense of $43 million referred to earlier in this section. Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our defined benefit pension plans will impact future pension expense and liabilities. We cannot predict with certainty what these factors will be in the future. On August 17, 2006, the Pension Protection Act was signed into law. Beginning in 2008, this act will cause extensive changes in the determination of both the minimum required contribution and the maximum tax deductible limit. Because the new required contribution will approximate our current policy of fully funding the accumulated benefit obligation, the changes are not expected to have a significant impact on future cash flows. Beginning with our December 31, 2006 balance sheet, 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) requires us to recognize on our consolidated balance sheet the funded status of our defined benefit plans. The funded status is measured as the difference between the projected benefit obligation and the fair value of plan assets. As a result, we recognized as liabilities the actuarial losses and other costs that were previously unrecognized under prior accounting rules, and the net effect was also recorded as a reduction to stockholders’ equity on December 31, 2006. This reduction was $140 million, or less than 1% of our stockholders’ equity. ContinGenCieS and leGal matterS For a detailed discussion of contingencies and legal matters, see Note 8 of the accompanying consolidated financial statements. CritiCal aCCountinG poliCieS and eStimateS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates, and changes in these estimates are recorded when known. The critical accounting policies used by management in the preparation of our consolidated financial statements are those that are important both to the presentation of our financial condition and results of operations and require significant judgments by management with regard to estimates used. Our critical accounting policies and significant judgments and estimates related to those policies are described below. We have reviewed these critical accounting policies with the Audit Committee of the Board of Directors. full Cost Ceiling Calculations Policy Description We follow the full cost method of accounting for our oil and gas properties. The full cost method subjects companies to quarterly calculations of a “ceiling,” or limitation on the amount of properties that can be capitalized on the balance sheet. The ceiling limitation is the discounted estimated after-tax future net revenues from proved oil and gas properties, excluding future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties, plus the cost of properties not subject to amortization. If our net book value of oil and gas properties, less related deferred income taxes, is in excess of the calculated ceiling, the excess must be written off as an expense, except as discussed in the following paragraph. The ceiling limitation is imposed separately for each country in which we have oil and gas properties. If, subsequent to the end of the quarter but prior to the applicable financial statements being published, prices increase to levels such that the ceiling would exceed the costs to be recovered, a writedown otherwise indicated at the end of the quarter is not required to be recorded. A writedown indicated at the end of a quarter is also not required if the value of additional reserves proved up on properties after the end of the quarter but prior to the publishing of the financial statements would result in 48 md&a the ceiling exceeding the costs to be recovered, as long as the properties were owned at the end of the quarter. An expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period. Judgments and Assumptions The discounted present value of future net revenues for our proved oil, natural gas and NGL reserves is a major component of the ceiling calculation, and represents the component that requires the most subjective judgments. Estimates of reserves are forecasts based on engineering data, projected future rates of production and the timing of future expenditures. The process of estimating oil, natural gas and NGL reserves requires substantial judgment, resulting in imprecise determinations, particularly for new discoveries. Different reserve engineers may make different estimates of reserve quantities based on the same data. Certain of our reserve estimates are prepared or audited by outside petroleum consultants, while other reserve estimates are prepared by our engineers. See Note 15 of the accompanying consolidated financial statements. The passage of time provides more qualitative information regarding estimates of reserves, and revisions are made to prior estimates to reflect updated information. In the past five years, annual revisions to our reserve estimates, which have been both increases and decreases in individual years, have averaged approximately 1% of the previous year’s estimate. However, there can be no assurance that more significant revisions will not be necessary in the future. If future significant revisions are necessary that reduce previously estimated reserve quantities, it could result in a full cost property writedown. In addition to the impact of the estimates of proved reserves on the calculation of the ceiling, estimates of proved reserves are also a significant component of the calculation of DD&A. While the quantities of proved reserves require substantial judgment, the associated prices of oil, natural gas and NGL reserves, and the applicable discount rate, that are used to calculate the discounted present value of the reserves do not require judgment. The ceiling calculation dictates that a 10% discount factor be used and that prices and costs in effect as of the last day of the period are held constant indefinitely. Therefore, the future net revenues associated with the estimated proved reserves are not based on our assessment of future prices or costs. Rather, they are based on such prices and costs in effect as of the end of each quarter when the ceiling calculation is performed. In calculating the ceiling, we adjust the end-of-period price by the effect of cash flow hedges in place. This adjustment requires little judgment as the end-of-period price is adjusted using the contract prices for our cash flow hedges. We had no such hedges outstanding at December 31, 2006. Because the ceiling calculation dictates that prices in effect as of the last day of the applicable quarter are held constant indefinitely, and requires a 10% discount factor, the resulting value is not indicative of the true fair value of the reserves. Oil and natural gas prices have historically been volatile. On any particular day at the end of a quarter, prices can be either substantially higher or lower than our long-term price forecast that is a barometer for true fair value. Therefore, oil and gas property writedowns that result from applying the full cost ceiling limitation, and that are caused by fluctuations in price as opposed to reductions to the underlying quantities of reserves, should not be viewed as absolute indicators of a reduction of the ultimate value of the related reserves. derivative financial instruments Policy Description The majority of our historical derivative instruments have consisted of commodity financial instruments used to manage our cash flow exposure to oil and gas price volatility. We have also entered into interest rate swaps to manage our exposure to interest rate volatility. The interest rate swaps mitigate either the cash flow effects of interest rate fluctuations on interest expense for variable-rate debt instruments, or the fair value effects of interest rate fluctuations on fixed-rate debt. We also have an embedded option derivative related to the fair value of our debentures exchangeable into shares of Chevron Corporation common stock. All derivatives are recognized at their current fair value on our balance sheet. Changes in the fair value of derivative financial instruments are recorded in the statement of operations unless specific hedge accounting criteria are met. If such criteria are met for cash flow hedges, the effective portion of the change in the fair value is recorded directly to accumulated other comprehensive income, a component of stockholders’ equity, until the hedged transaction occurs. The ineffective portion of the change in fair value is recorded in the statement of operations. If hedge accounting criteria are met for fair value hedges, the change in the fair value is recorded in the statement of operations with an offsetting amount recorded for the change in fair value of the hedged item. A derivative instrument qualifies for hedge accounting treatment if we designate the instrument as such on the date the derivative contract is entered into or the date of an acquisition or business combination which includes derivative contracts. Additionally, we must document the relationship between the hedging instrument and hedged item, as well as the risk-management objective and strategy for undertaking the instrument. We must also assess, both at the instrument’s inception and on an ongoing basis, whether the derivative is highly effective in offsetting the change in cash flow of the hedged item. Judgments and Assumptions The estimates of the fair values of our commodity derivative instruments require substantial judgment. For these instruments, we obtain forward price and volatility data for all major oil and gas trading points in North America from independent third parties. These forward prices are compared to the price parameters contained in the hedge agreements. The resulting estimated future cash inflows or outflows over the lives of the hedge contracts are discounted using LIBOR and money market futures rates for the first year and money market futures and swap rates thereafter. In addition, we estimate the option value of price floors and price caps using an option pricing model. These pricing and discounting variables are sensitive to the period of the contract and market volatility as well as changes in forward prices, regional price differentials and interest rates. Fair values of our other derivative instruments require less judgment to estimate and are primarily based on quotes from independent third parties such as counterparties or brokers. Quarterly changes in estimates of fair value have only a minimal impact on our liquidity, capital resources or results of operations, as long as the derivative instruments qualify for hedge accounting treatment. Changes in the fair values of derivatives that do not qualify for hedge accounting treatment can have a significant impact on our results of operations, but generally will not impact our liquidity or capital resources. Settlements of derivative instruments, regardless of whether they qualify for hedge accounting, do have an impact on our liquidity and results of operations. Generally, if actual market prices are higher than the price of the derivative instruments, our net earnings and cash flow from operations will be lower relative to the results that would have occurred absent these instruments. The opposite is also 49 md&a true. Additional information regarding the effects that changes in market prices will have on our derivative financial instruments, net earnings and cash flow from operations is included in the “Quantitative and Qualitative Disclosures about Market Risk” section of this report. Business Combinations Policy Description We have grown substantially during recent years through acquisitions of other oil and natural gas companies. Most of these acquisitions have been accounted for using the purchase method of accounting, and recent accounting pronouncements require that all future acquisitions will be accounted for using the purchase method. Under the purchase method, the acquiring company adds to its balance sheet the estimated fair values of the acquired company’s assets and liabilities. Any excess of the purchase price over the fair values of the tangible and intangible net assets acquired is recorded as goodwill. Goodwill is assessed for impairment at least annually. Judgments and Assumptions There are various assumptions we make in determining the fair values of an acquired company’s assets and liabilities. The most significant assumptions, and the ones requiring the most judgment, involve the estimated fair values of the oil and gas properties acquired. To determine the fair values of these properties, we prepare estimates of oil, natural gas and NGL reserves. These estimates are based on work performed by our engineers and that of outside consultants. The judgments associated with these estimated reserves are described earlier in this section in connection with the full cost ceiling calculation. However, there are factors involved in estimating the fair values of acquired oil, natural gas and NGL properties that require more judgment than that involved in the full cost ceiling calculation. As stated above, the full cost ceiling calculation applies end-of-period price and cost information to the reserves to arrive at the ceiling amount. By contrast, the fair value of reserves acquired in a business combination must be based on our estimates of future oil, natural gas and NGL prices. Our estimates of future prices are based on our own analysis of pricing trends. These estimates are based on current data obtained with regard to regional and worldwide supply and demand dynamics such as economic growth forecasts. They are also based on industry data regarding natural gas storage availability, drilling rig activity, changes in delivery capacity, trends in regional pricing differentials and other fundamental analysis. Forecasts of future prices from independent third parties are noted when we make our pricing estimates. We estimate future prices to apply to the estimated reserve quantities acquired, and estimate future operating and development costs, to arrive at estimates of future net revenues. For estimated proved reserves, the future net revenues are then discounted using a rate determined appropriate at the time of the business combination based upon our cost of capital. We also apply these same general principles to estimate the fair value of unproved properties acquired in a business combination. These unproved properties generally represent the value of probable and possible reserves. Because of their very nature, probable and possible reserve estimates are more imprecise than those of proved reserves. To compensate for the inherent risk of estimating and valuing unproved reserves, the discounted future net revenues of probable and possible reserves are reduced by what we consider to be an appropriate risk-weighting factor in each particular instance. It is common for the discounted future net revenues of probable and possible reserves to be reduced by factors ranging from 30% to 80% to arrive at what we consider to be the appropriate fair values. Generally, in our business combinations, the determination of the fair values of oil and gas properties requires much more judgment than the fair values of other assets and liabilities. The acquired companies commonly have long-term debt that we assume in the acquisition, and this debt must be recorded at the estimated fair value as if we had issued such debt. However, significant judgment on our behalf is usually not required in these situations due to the existence of comparable market values of debt issued by peer companies. Except for the 2002 Mitchell merger, our mergers and acquisitions have involved other entities whose operations were predominantly in the area of exploration, development and production activities related to oil and gas properties. However, in addition to exploration, development and production activities, Mitchell’s business also included substantial marketing and midstream activities. Therefore, a portion of the Mitchell purchase price was allocated to the fair value of Mitchell’s marketing and midstream facilities and equipment. This consisted primarily of natural gas processing plants and natural gas pipeline systems. The Mitchell midstream assets primarily served gas producing properties that we also acquired from Mitchell. Therefore, certain of the assumptions regarding future operations of the gas producing properties were also integral to the value of the midstream assets. For example, future quantities of natural gas estimated to be processed by natural gas processing plants were based on the same estimates used to value the proved and unproved gas producing properties. Future expected prices for marketing and midstream product sales were also based on price cases consistent with those used to value the oil and gas producing assets acquired from Mitchell. Based on historical costs and known trends and commitments, we also estimated future operating and capital costs of the marketing and midstream assets to arrive at estimated future cash flows. These cash flows were discounted at rates consistent with those used to discount future net cash flows from oil and gas producing assets to arrive at our estimated fair value of the marketing and midstream facilities and equipment. In addition to the valuation methods described above, we perform other quantitative analyses to support the indicated value in any business combination. These analyses include information related to comparable companies, comparable transactions and premiums paid. In a comparable companies analysis, we review the public stock market trading multiples for selected publicly traded independent exploration and production companies with comparable financial and operating characteristics. Such characteristics are market capitalization, location of proved reserves and the characterization of those reserves that we deem to be similar to those of the party to the proposed business combination. We compare these comparable company multiples to the proposed business combination company multiples for reasonableness. 50 md&a In a comparable transactions analysis, we review certain acquisition multiples for selected independent exploration and production company transactions and oil and gas asset packages announced recently. We compare these comparable transaction multiples to the proposed business combination transaction multiples for reasonableness. In a premiums paid analysis, we use a sample of selected independent exploration and production company transactions in addition to selected transactions of all publicly traded companies announced recently, to review the premiums paid to the price of the target one day, one week and one month prior to the announcement of the transaction. We use this information to determine the mean and median premiums paid and compare them to the proposed business combination premium for reasonableness. While these estimates of fair value for the various assets acquired and liabilities assumed have no effect on our liquidity or capital resources, they can have an effect on the future results of operations. Generally, the higher the fair value assigned to both the oil and gas properties and non-oil and gas properties, the lower future net earnings will be as a result of higher future depreciation, depletion and amortization expense. Also, a higher fair value assigned to the oil and gas properties, based on higher future estimates of oil and gas prices, will increase the likelihood of a full cost ceiling writedown in the event that subsequent oil and gas prices drop below our price forecast that was used to originally determine fair value. A full cost ceiling writedown would have no effect on our liquidity or capital resources in that period because it is a noncash charge, but it would adversely affect results of operations. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources, Uses and Liquidity,” in calculating our debt-to-capitalization ratio under our credit agreement, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling property impairments or goodwill impairments. Our estimates of reserve quantities are one of the many estimates that are involved in determining the appropriate fair value of the oil and gas properties acquired in a business combination. As previously disclosed in our discussion of the full cost ceiling calculations, during the past five years, our annual revisions to our reserve estimates have averaged approximately 1%. As discussed in the preceding paragraphs, there are numerous estimates in addition to reserve quantity estimates that are involved in determining the fair value of oil and gas properties acquired in a business combination. The inter-relationship of these estimates makes it impractical to provide additional quantitative analyses of the effects of changes in these estimates. valuation of Goodwill Policy Description Goodwill is tested for impairment at least annually. This requires us to estimate the fair values of our own assets and liabilities in a manner similar to the process described above for a business combination. Therefore, considerable judgment similar to that described above in connection with estimating the fair value of an acquired company in a business combination is also required to assess goodwill for impairment. Judgments and Assumptions Generally, the higher the fair value assigned to both the oil and gas properties and non-oil and gas properties, the lower goodwill would be. A lower goodwill value decreases the likelihood of an impairment charge. However, unfavorable changes in reserves or in our price forecast would increase the likelihood of a goodwill impairment charge. A goodwill impairment charge would have no effect on liquidity or capital resources. However, it would adversely affect our results of operations in that period. Due to the inter-relationship of the various estimates involved in assessing goodwill for impairment, it is impractical to provide quantitative analyses of the effects of potential changes in these estimates, other than to note the historical average changes in our reserve estimates previously set forth. reCentlY iSSued aCCountinG StandardS not Yet adopted 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 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation is effective for fiscal years beginning after December 15, 2006, and we will adopt it in the first quarter of 2007. We do not expect the adoption of Interpretation No. 48 to have a material impact on our financial statements and related disclosures. In September 2006, the FASB issued 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. However, this Statement does not require any new fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the effect, if any, the adoption of Statement No. 157 will have on our financial statements and related disclosures. 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 recognition of the overfunded or underfunded status of a defined benefit postretirement plan in the balance sheet. We adopted this recognition requirement as of December 31, 2006. The effects of this adoption are summarized in Note 6 of the accompanying consolidated financial statements. Statement No. 158 also requires the measurement of plan assets and benefit obligations as of the date of the employer’s fiscal year-end. The Statement provides two alternatives to transition to a fiscal year-end measurement date. This measurement requirement is effective for fiscal years ending after December 15, 2008. We have not yet adopted this measurement requirement, but we do not expect such adoption to have a material effect on our results of operations, financial condition, liquidity or compliance with debt covenants. 51 md&a In February 2007, the FASB issued 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 permits entities to choose to measure certain financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Unrealized gains and losses on any items for which we elect the fair value measurement option would be reported in earnings. Statement No. 159 is effective for fiscal years beginning after November 15, 2007. However, early adoption is permitted for fiscal years beginning on or before November 15, 2007, provided we also elect to apply the provisions of Statement No. 157, Fair Value Measurements, at the same time. We are currently assessing the effect, if any, the adoption of Statement No. 159 will have on our financial statements and related disclosures. 2007 eStimateS The forward-looking statements provided in this discussion 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. These forward-looking statements were prepared assuming demand, curtailment, producibility and general market conditions for our oil, natural gas and NGLs during 2007 will be substantially similar to those of 2006, unless otherwise noted. Please refer to “Risk Factors to Forward-Looking Estimates” on page 101 for a discussion of relevant risk factors. Amounts related to Canadian operations have been converted to U.S. dollars using a projected average 2007 exchange rate of $0.89 U.S. dollar to $1.00 Canadian dollar. On November 14, 2006, we announced our intent to divest our Egyptian oil and gas assets and terminate our operations in Egypt. We expect to complete this asset sale during the first half of 2007. Subsequently on January 23, 2007, we announced our intent to divest our West African oil and gas assets and terminate our operations in West Africa. We expect to complete this asset sale by the end of the third quarter in 2007. All Egyptian and West African related revenues, expenses and capital will be reported as discontinued operations in our 2007 financial statements. Accordingly, all forward-looking estimates in the following discussion exclude amounts related to our operations in Egypt and West Africa, unless otherwise noted. The assets held for sale represented less than five percent of our 2006 production and December 31, 2006 proved reserves. oil, Gas and nGl production Set forth in the following paragraphs are individual estimates of oil, gas and NGL production for 2007. We estimate, on a combined basis, that our 2007 oil, gas, and NGL production will total approximately 219 to 221 MMBoe. Of this total, approximately 92% is estimated to be produced from reserves classified as “proved” at December 31, 2006. The following estimates for oil, gas and NGL production are calculated at the midpoint of the estimated range for total production. Oil Production Oil production in 2007 is expected to total approximately 55 MMBbls. Of this total, approximately 99% is estimated to be produced from reserves classified as “proved” at December 31, 2006. The expected production by area is as follows: U.S. Onshore U.S. Offshore Canada International mmBBlS 10 9 15 21 Oil Prices We have not fixed the price we will receive on any of our 2007 oil production. Our 2007 average prices for each of our areas are expected to differ from the NYMEX price as set forth in the following table. The NYMEX price is the monthly average of settled prices on each trading day for benchmark West Texas Intermediate crude oil delivered at Cushing, Oklahoma. U.S. Onshore U.S. Offshore Canada International expeCted ranGe of oil priCeS aS a % of nYmex priCe 86% to 96% 90% to 100% 60% to 70% 83% to 93% Gas Production Gas production in 2007 is expected to total approximately 841 Bcf. Of this total, approximately 88% is estimated to be produced from reserves classified as “proved” at December 31, 2006. The expected production by area is as follows: U.S. Onshore U.S. Offshore Canada International BCf 557 75 207 2 52 md&a Gas Prices Our 2007 average prices for each of our areas are expected to differ from the NYMEX price as set forth in the following table. The NYMEX price is determined to be the first-of-month South Louisiana Henry Hub price index as published monthly in Inside FERC. Based on contracts currently in place, we will have approximately 116 MMcf per day of gas production in 2007 that is subject to either fixed-price contracts, swaps, floors or collars. These amounts represent approximately 5% of our estimated gas production for 2007. Therefore, these various pricing arrangements are not expected to have a material impact on the ranges of estimated gas price realizations set forth in the following table. U.S. Onshore U.S. Offshore Canada International expeCted ranGe of GaS priCeS aS a % of nYmex priCe 80% to 90% 96% to 106% 80% to 90% 100% to 110% NGL Production We expect our 2007 production of NGLs to total approximately 25 MMBbls. Of this total, approximately 95% is estimated to be produced from reserves classified as “proved” at December 31, 2006. The expected production by area is as follows: U.S. Onshore U.S. Offshore Canada mmBBlS 20 1 4 marketing and midstream revenues and expenses Marketing and midstream revenues and expenses are derived primarily from our natural gas processing plants and natural gas transport pipelines. These revenues and expenses vary in response to several factors. The factors include, but are not limited to, changes in production from wells connected to the pipelines and related processing plants, changes in the absolute and relative prices of natural gas and NGLs, provisions of the contract agreements and the amount of repair and workover activity required to maintain anticipated processing levels. These factors, coupled with uncertainty of future natural gas and NGL prices, increase the uncertainty inherent in estimating future marketing and midstream revenues and expenses. Given these uncertainties, we estimate that marketing and midstream revenues will be between $1.70 billion and $2.10 billion, and marketing and midstream expenses will be between $1.31 billion and $1.67 billion. production and operating expenses Our production and operating expenses include lease operating expenses, transportation costs and production taxes. These expenses vary in response to several factors. Among the most significant of these factors are additions to or deletions from the property base, changes in the general price level of services and materials that are used in the operation of the properties, the amount of repair and workover activity required and changes in production tax rates. Oil, natural gas and NGL prices also have an effect on lease operating expenses and impact the economic feasibility of planned workover projects. Given these uncertainties, we estimate that 2007 lease operating expenses (including transportation costs) will be between $1.70 billion and $1.77 billion. Additionally, we estimate our production taxes for 2007 to be between 3.6% and 4.1% of consolidated oil, natural gas and NGL revenues. depreciation, depletion and amortization (“dd&a”) The 2007 oil and gas property DD&A rate will depend on various factors. Most notable among such factors are the amount of proved reserves that will be added from drilling or acquisition efforts in 2007 compared to the costs incurred for such efforts, and the revisions to our year-end 2006 reserve estimates that, based on prior experience, are likely to be made during 2007. Given these uncertainties, we expect our oil and gas property related DD&A rate will be between $11.00 per Boe and $11.50 per Boe. Based on these DD&A rates and the production estimates set forth earlier, oil and gas property related DD&A expense for 2007 is expected to be between $2.42 billion and $2.53 billion. Additionally, we expect our depreciation and amortization expense related to non-oil and gas property fixed assets to total between $210 million and $220 million. accretion of asset retirement obligation Accretion of asset retirement obligation in 2007 is expected to be between $45 million and $55 million. 53 md&a General and administrative expenses (“G&a”) Our G&A includes employee compensation and benefits costs and the costs of many different goods and services used in support of our business. G&A varies with the level of our operating activities and the related staffing and professional services requirements. In addition, employee compensation and benefits costs vary due to various market factors that affect the level and type of compensation and benefits offered to employees. Also, goods and services are subject to general price level increases or decreases. Therefore, significant variances in any of these factors from current expectations could cause actual G&A to vary materially from the estimate. Given these limitations, G&A in 2007 is expected to be between $460 million and $480 million. This estimate includes approximately $60 million of noncash, share- based compensation, net of related capitalization in accordance with the full cost method of accounting for oil and gas properties. reduction of Carrying value of oil and Gas properties We follow the full cost method of accounting for our oil and gas properties described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” Reductions to the carrying value of our oil and gas properties are largely dependent on the success of drilling results and oil and natural gas prices at the end of our quarterly reporting periods. Due to the uncertain nature of future drilling efforts and oil and natural gas prices, we are not able to predict whether we will incur such reductions in 2007. interest expense Future interest rates and debt outstanding have a significant effect on our interest expense. We can only marginally influence the prices we will receive in 2007 from sales of oil, natural gas and NGLs and the resulting cash flow. These factors increase the margin of error inherent in estimating future outstanding debt balances and related interest expense. Other factors which affect outstanding debt balances and related interest expense, such as the amount and timing of capital expenditures and proceeds from the sale of our assets in Egypt and West Africa, are generally within our control. Based on the information related to interest expense set forth below, we expect our 2007 interest expense to be between $400 million and $410 million. This estimate assumes no material changes in prevailing interest rates. This estimate also assumes no material changes in our expected level of indebtedness, except for an assumption that our commercial paper will be repaid at the end of the second quarter of 2007. The interest expense in 2007 related to our fixed-rate debt, including net accretion of related discounts, will be approximately $410 million. This fixed-rate debt removes the uncertainty of future interest rates from some, but not all, of our long-term debt. Our floating rate debt is comprised of variable-rate commercial paper and one debt instrument which has been converted to floating rate debt through the use of an interest rate swap. Our floating rate debt is summarized in the following table: deBt inStrument Commercial paper 4.375% senior notes due in Oct. 2007 notional amount (IN MILLIoNs) $ 1,808 (1) $ 400 floatinG rate Various (2) LIBOR plus 40 basis points (1) Represents outstanding balance as of December 31, 2006. (2) The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. As of December 31, 2006, the average rate on the outstanding balance was 5.37%. Based on estimates of future LIBOR rates as of December 31, 2006, interest expense on floating rate debt, including net amortization of premiums, is expected to total between $80 million and $90 million in 2007. Our interest expense totals include payments of facility and agency fees, amortization of debt issuance costs and other miscellaneous items not related to the debt balances outstanding. We expect between $5 million and $15 million of such items to be included in our 2007 interest expense. Also, we expect to capitalize between $95 million and $105 million of interest during 2007. effects of Changes in foreign Currency rates Foreign currency gains or losses are not expected to be material in 2007. other income We estimate that our other income in 2007 will be between $65 million and $85 million. Historically, we maintained a comprehensive insurance program that included coverage for physical damage to our offshore facilities caused by hurricanes. Our historical insurance program also included substantial business interruption coverage which we are utilizing to recover costs associated with the suspended production related to hurricanes that struck the Gulf of Mexico in the third quarter of 2005. Based on current estimates of physical damage and the anticipated length of time we will have production suspended, we expect our 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 54 md&a settlement of the amount due from our primary insurers. As of December 31, 2006, $154 million of these proceeds had been utilized as reimbursement of past repair costs and deductible amounts. The remaining proceeds of $313 million will be utilized as reimbursement of our anticipated future repair costs. We have not yet received any settlements related to claims filed with our secondary insurers. Should our total policy recoveries, including the partial settlements already received from our primary 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. Based on the most recent estimates of our costs for repairs, we believe that some amount will ultimately be recorded as other income. However, the timing and amount that would be recorded as other income are uncertain. Therefore, the 2007 estimate for other income above does not include any amount related to hurricane proceeds. income taxes Our financial income tax rate in 2007 will vary materially depending on the actual amount of financial pre-tax earnings. The tax rate for 2007 will be significantly affected by the proportional share of consolidated pre-tax earnings generated by U.S., Canadian and International operations due to the different tax rates of each country. There are certain tax deductions and credits that will have a fixed impact on 2007 income tax expense regardless of the level of pre-tax earnings that are produced. Given the uncertainty of pre-tax earnings, we expect that our consolidated financial income tax rate in 2007 will be between 20% and 40%. The current income tax rate is expected to be between 15% and 25%. The deferred income tax rate is expected to be between 5% and 15%. Significant changes in estimated capital expenditures, production levels of oil, natural gas and NGLs, the prices of such products, marketing and midstream revenues, or any of the various expense items could materially alter the effect of the aforementioned tax deductions and credits on 2007 financial income tax rates. discontinued operations As previously discussed, we intend to divest our Egyptian and West African operations in 2007. We expect to complete the sale of Egypt during the first half of 2007 and the sale of West Africa during the third quarter of 2007. The following table shows the estimates for 2007 oil, gas and NGL production as well as the anticipated production and operating expenses associated with these discontinued operations for 2007. These estimates assume the sales of Egypt and West Africa will occur at the end of the second quarter of 2007. Pursuant to accounting rules for discontinued operations, the Egyptian assets will not be subject to DD&A during 2007 and the West African assets will only be subject to DD&A for the first month of 2007. Oil production (MMBbls) Gas production (Bcf) Total production (MMBoe) Production and operating expenses (In millions) Capital expenditures (In millions) Year 2007 potential Capital resources, uses and liquidity eGYpt weSt afriCa 1 — 1 11 17 $ $ 5 3 6 $ $ 34 120 Capital Expenditures Though we have completed several major property acquisitions in recent years, these transactions are opportunity driven. Thus, we do not “budget,” nor can we reasonably predict, the timing or size of such possible acquisitions. Our capital expenditures budget is based on an expected range of future oil, natural gas and NGL prices as well as the expected costs of the capital additions. Should actual prices received differ materially from our price expectations for our future production, some projects may be accelerated or deferred and, consequently, may increase or decrease total 2007 capital expenditures. In addition, if the actual material or labor costs of the budgeted items vary significantly from the anticipated amounts, actual capital expenditures could vary materially from our estimates. Given the limitations discussed above, the following table shows expected drilling, development and facilities expenditures by geographic area. Production capital related to proved reserves relates to reserves classified as proved as of year-end 2006. Other production capital includes drilling that does not offset currently productive units and for which there is not a certainty of continued production from a known productive formation. Exploration capital includes exploratory drilling to find and produce oil or gas in previously untested fault blocks or new reservoirs. u.S. onShore u.S. offShore Canada (IN MILLIoNs) international total Production capital related to proved reserves Other production capital Exploration capital Total $ 1,170- $ 1,270 $ 1,250- $ 1,340 $ 350- $ 380 $ 2,770- $ 2,990 $ 80- $ 90 $ 220- $ 230 $ 290- $ 310 $ 590- $ 630 $ 410- $ 450 $ 590- $ 640 $ 160- $ 170 $ 1,160- $ 1,260 $ 260- $ 280 $ 15- $ 20 $ 75- $ 85 $ 350- $ 385 $ 1,920- $ 2,090 $ 2,075- $ 2,230 $ 875- $ 945 $ 4,870- $ 5,265 55 md&a In addition to the above expenditures for drilling, development and facilities, we expect to spend between $330 million to $370 million on our marketing and midstream assets, which include our oil pipelines, gas processing plants, CO2 removal facilities and gas transport pipelines. We also expect to capitalize between $245 million and $255 million of G&A expenses in accordance with the full cost method of accounting and to capitalize between $95 million and $105 million of interest. We also expect to pay between $40 million and $50 million for plugging and abandonment charges, and to spend between $135 million and $145 million for other non-oil and gas property fixed assets. Other Cash Uses Our management expects the policy of paying a quarterly common stock dividend to continue. With the current $0.14 per share quarterly dividend rate and 444 million shares of common stock outstanding as of December 31, 2006, dividends are expected to approximate $250 million. Also, we have $150 million of 6.49% cumulative preferred stock upon which we will pay $10 million of dividends in 2007. Capital Resources and Liquidity Our estimated 2007 cash uses, including our drilling and development activities, retirement of debt and repurchase of common stock, are expected to be funded primarily through a combination of operating cash flow and proceeds from the sale of our assets in Egypt and West Africa. Any remaining cash uses could be funded by increasing our borrowings under our commercial paper program or with borrowings from the available capacity under our credit facility, which was $408 million at December 31, 2006. The amount of operating cash flow to be generated during 2007 is uncertain due to the factors affecting revenues and expenses as previously cited. However, we expect our combined capital resources to be more than adequate to fund our anticipated capital expenditures and other cash uses for 2007. If significant other acquisitions or other unplanned capital requirements arise during the year, we could utilize our existing credit facility and/or seek to establish and utilize other sources of financing. quantitative and qualitative diSCloSureS aBout market riSk The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil, gas and NGL prices, interest rates and foreign currency exchange rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than speculative trading. Commodity price risk Our major market risk exposure is in the pricing applicable to our oil, gas and NGL production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices applicable to our U.S. and Canadian natural gas and NGL production. Pricing for oil, gas and NGL production has been volatile and unpredictable for several years. Currently, we are largely accepting the volatility risk that oil, natural gas and NGL prices present. None of our future oil production is subject to price swaps or collars. With regard to our future natural gas production, based on contracts currently in place, we will have approximately 116 MMcf per day of gas production in 2007 that is subject to either fixed-price contracts, swaps, floors or collars. This amount represents approximately 5% of our estimated 2007 gas production (3% of our total Boe production). For the years 2008 through 2011, we have fixed-price physical delivery contracts covering Canadian natural gas production ranging from seven Bcf to 14 Bcf per year. These contracts are not expected to have a material effect on our realized gas prices from 2007 through 2011. interest rate risk At December 31, 2006, we had debt outstanding of $7.8 billion. Of this amount, $5.6 billion, or 72%, bears interest at fixed rates averaging 7.3%. Additionally, we had $1.8 billion of outstanding commercial paper bearing interest at floating rates which averaged 5.37% at December 31, 2006. The remaining debt consists of $400 million 4.375% senior notes due in October of 2007. Through the use of an interest rate swap, this fixed-rate debt has been converted to floating-rate debt bearing interest equal to LIBOR plus 40 basis points. We use a sensitivity analysis technique to evaluate the hypothetical effect that changes in interest rates may have on the fair value of any outstanding interest rate swap instruments. At December 31, 2006, a 10% increase in the underlying interest rates would have decreased the fair value of our interest rate swap by $2 million. The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. foreign Currency risk Our net assets, net earnings and cash flows from our Canadian subsidiaries are based on the U.S. dollar equivalent of such amounts measured in the Canadian dollar functional currency. Assets and liabilities of the Canadian subsidiaries are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenues, expenses and cash flow are translated using the average exchange rate during the reporting period. A 10% unfavorable change in the Canadian-to-U.S. dollar exchange rate would not materially impact our December 31, 2006 balance sheet. 56 Report of independent Registered Public Accounting Firm The Board of Directors and Stockholders Devon Energy Corporation: We have audited the accompanying consolidated balance sheets of Devon Energy Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Devon Energy Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As described in Note 1 to the consolidated financial statements, as of January 1, 2006, the Company adopted Statements of Financial Accounting Standards No. 123(R), Share-Based Payment, and as of December 31, 2006 the Company adopted the balance sheet recognition provisions of 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). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Devon Energy Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. Oklahoma City, Oklahoma February 26, 2007 57 Management’s Annual Report on internal Control Over Financial Reporting Devon’s management is responsible for establishing and maintaining adequate internal control over financial reporting for Devon, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of Devon’s management, including our principal executive and principal financial officers, Devon conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this evaluation under the COSO Framework which was completed on February 12, 2007, management concluded that its internal control over financial reporting was effective as of December 31, 2006. Management’s assessment of the effectiveness of Devon’s internal control over financial reporting as of December 31, 2006 has been audited by KPMG LLP, an independent registered public accounting firm who audited Devon’s consolidated financial statements as of and for the year ended December 31, 2006, as stated in their report which is included herein. 58 Report of independent Registered Public Accounting Firm The Board of Directors and Stockholders Devon Energy Corporation: We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting that Devon Energy Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Devon Energy Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Devon Energy Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Devon Energy Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Devon Energy Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated February 26, 2007 expressed an unqualified opinion on those consolidated financial statements. Our report refers to a change in the method of accounting for share-based payments and a change in the balance sheet recognition of defined benefit pension and other postretirement benefit plans. Oklahoma City, Oklahoma February 26, 2007 59 Consolidated balance Sheets DevoN eNerGy CorporAtIoN AND suBsIDIArIes deCemBer 31, (in millionS, exCept Share data) 2006 2005 ASSEtS: Current assets: Cash and cash equivalents Short-term investments Accounts receivable Deferred income taxes Current assets held for sale Other current assets Total current assets Property and equipment, at cost, based on the full cost method of accounting for oil and gas properties ($3,674 and $2,704 excluded from amortization in 2006 and 2005, respectively) Less accumulated depreciation, depletion and amortization Investment in Chevron Corporation common stock, at fair value Goodwill Assets held for sale Other assets Total assets liAbilitiES AnD StOCkhOlDERS’ EquitY: Current liabilities: Accounts payable – trade Revenues and royalties due to others Income taxes payable Short-term debt Accrued interest payable Fair value of derivative financial instruments Current portion of asset retirement obligation Current liabilities associated with assets held for sale Accrued expenses and other current liabilities Total current liabilities Debentures exchangeable into shares of Chevron Corporation common stock Other long-term debt Fair value of derivative financial instruments Asset retirement obligation Liabilities associated with assets held for sale Other liabilities Deferred income taxes Stockholders’ equity: Preferred stock of $1.00 par value. Authorized 4,500,000 shares; issued 1,500,000 ($150 million aggregate liquidation value) Common stock of $0.10 par value. Authorized 800,000,000 shares; issued 444,040,000 in 2006 and 443,488,000 in 2005 Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock, at cost: 11,000 shares in 2006 and 37,000 shares in 2005 Total stockholders’ equity Commitments and contingencies (Note 8) Total liabilities and stockholders’ equity see accompanying notes to consolidated financial statements. 60 $ $ $ 739 574 1,393 102 81 323 3,212 41,889 17,294 24,595 1,043 5,706 185 322 35,063 1,190 529 197 2,205 114 6 61 5 338 4,645 727 4,841 302 833 25 598 5,650 1 44 6,840 9,114 1,444 (1) 17,442 $ 35,063 1,593 680 1,565 158 66 144 4,206 33,824 14,913 18,911 805 5,705 217 429 30,273 928 666 293 662 127 18 50 19 171 2,934 709 5,248 125 610 40 371 5,374 1 44 6,928 6,477 1,414 (2) 14,862 30,273 Consolidated Statements of Operations DevoN eNerGy CorporAtIoN AND suBsIDIArIes Year ended deCemBer 31, (in millionS, exCept per Share amountS) 2006 2005 2004 REvEnuES: Oil sales Gas sales NGL sales Marketing and midstream revenues Total revenues ExPEnSES AnD OthER inCOME, nEt: Lease operating expenses Production taxes Marketing and midstream operating costs and expenses Depreciation, depletion and amortization of oil and gas properties Depreciation and amortization of non-oil and gas properties Accretion of asset retirement obligation General and administrative expenses Interest expense Change in fair value of derivative financial instruments Reduction of carrying value of oil and gas properties Other income, net Total expenses and other income, net Earnings from continuing operations before income tax expense inCOME tAx ExPEnSE: Current Deferred Total income tax expense Earnings from continuing operations DiSCOntinuED OPERAtiOnS: Earnings from discontinued operations before income taxes Income tax (benefit) expense Earnings from discontinued operations Net earnings Preferred stock dividends Net earnings applicable to common stockholders bASiC nEt EARningS PER ShARE: Earnings from continuing operations Earnings from discontinued operations Net earnings DilutED nEt EARningS PER ShARE: Earnings from continuing operations Earnings from discontinued operations Net earnings WEightED AvERAgE COMMOn ShARES OutStAnDing: Basic Diluted see accompanying notes to consolidated financial statements. $ 3,205 4,932 749 1,692 10,578 2,359 5,784 687 1,792 10,622 1,488 341 1,244 2,266 176 49 397 421 178 121 (115) 6,566 4,012 819 370 1,189 2,823 22 (1) 23 2,846 10 2,836 6.37 0.05 6.42 6.29 0.05 6.34 1,324 335 1,342 1,981 160 43 291 533 94 212 (198) 6,117 4,505 1,218 388 1,606 2,899 46 15 31 2,930 10 2,920 6.31 0.07 6.38 6.19 0.07 6.26 $ $ $ $ $ 2,099 4,732 554 1,701 9,086 1,259 255 1,339 2,077 148 44 277 475 62 — (126) 5,810 3,276 725 370 1,095 2,181 17 12 5 2,186 10 2,176 4.50 0.01 4.51 4.37 0.01 4.38 442 448 458 470 482 499 61 Consolidated Statements of Comprehensive income DevoN eNerGy CorporAtIoN AND suBsIDIArIes Year ended deCemBer 31, (in millionS) 2006 2005 2004 Net earnings $ 2,846 2,930 2,186 FOREign CuRREnCY tRAnSlAtiOn: Change in cumulative translation adjustment Income taxes Total DERivAtivE FinAnCiAl inStRuMEntS: Unrealized change in fair value Reclassification adjustment for realized (gains) losses included in net earnings Income taxes Total PEnSiOn AnD POStREtiREMEnt bEnEFit PlAnS: Change in additional minimum pension liability Income taxes Total invEStMEnt in ChEvROn CORPORAtiOn COMMOn StOCk: Unrealized holding gain Income taxes Total Other comprehensive income, net of tax Comprehensive income see accompanying notes to consolidated financial statements. (25) 28 3 — (2) — (2) 30 (13) 17 238 (86) 152 170 3,016 181 (19) 162 (255) 685 (141) 289 (8) 3 (5) 60 (22) 38 484 3,414 426 (38) 388 (848) 635 62 (151) 61 (22) 39 132 (47) 85 361 2,547 $ 62 Consolidated Statements of Stockholders’ Equity DevoN eNerGy CorporAtIoN AND suBsIDIArIes (in millionS) bAlAnCE AS OF DECEMbER 31, 2003 Net earnings Other comprehensive income Stock option exercises Restricted stock grants, net of cancellations Common stock repurchased Common stock retired Conversion of subsidiary preferred stock Common stock dividends Preferred stock dividends Share-based compensation Excess tax benefits on share-based compensation bAlAnCE AS OF DECEMbER 31, 2004 Net earnings Other comprehensive income Stock option exercises Restricted stock grants, net of cancellations Common stock repurchased Common stock retired Common stock dividends Preferred stock dividends Share-based compensation Excess tax benefits on share-based compensation bAlAnCE AS OF DECEMbER 31, 2005 Net earnings Other comprehensive income Adoption of FASB Statement No. 158 (see Note 6) Stock option exercises Restricted stock grants, net of cancellations Common stock repurchased Common stock retired Common stock dividends Preferred stock dividends Share-based compensation Excess tax benefits on share-based compensation preferred Common StoCk StoCk ShareS amount additional paid-in Capital retained earninGS aCCumulated other ComprehenSive inCome treaSurY StoCk total StoCkholderS’ equitY $ 1 — — — — — — — — — — — 1 — — — — — — — — — — 1 — — — — — — — — — — — 472 — — 13 2 (5) — 2 — — — — 484 — — 5 1 (47) — — — — — 443 — — — 3 2 (4) — — — — — $ 47 — — 1 — — — — — — — — 48 — — — — — (4) — — — — 44 — — — — — — — — — — — 9,011 — — 267 — — (341) — — — 11 54 9,002 — — 124 — — (2,269) — — 27 44 6,928 — — — 73 (3) — (278) — — 84 36 1,614 2,186 — — — — — — (97) (10) — — 3,693 2,930 — — — — — (136) (10) — — 6,477 2,846 — — — — — — (199) (10) — — 569 — 361 — — — — — — — — — 930 — 484 — — — — — — — — 1,414 — 170 (140) — — — — — — — — (186) — — (21) — (190) 341 56 — — — — — — — — — (2,275) 2,273 — — — — (2) — — — — — (277) 278 — — — — 11,056 2,186 361 247 — (190) — 56 (97) (10) 11 54 13,674 2,930 484 124 — (2,275) — (136) (10) 27 44 14,862 2,846 170 (140) 73 (3) (277) — (199) (10) 84 36 bAlAnCE AS OF DECEMbER 31, 2006 $ 1 444 $ 44 6,840 9,114 1,444 (1) 17,442 see accompanying notes to consolidated financial statements. 63 Consolidated Statements of Cash Flows DevoN eNerGy CorporAtIoN AND suBsIDIArIes Year ended deCemBer 31, (in millionS) 2006 2005 2004 CASh FlOWS FROM OPERAting ACtivitiES: Net earnings Less earnings from discontinued operations, net of tax Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities: Depreciation, depletion and amortization Deferred income tax expense Net gain on sales of non-oil and gas property and equipment Reduction of carrying value of oil and gas properties Other noncash charges Changes in assets and liabilities: (Increase) decrease in: Accounts receivable Other current assets Long-term other assets Increase (decrease) in: Accounts payable Income taxes payable Debt, including current maturities Other current liabilities Long-term other liabilities Cash provided by operating activities – continuing operations Cash provided by operating activities – discontinued operations Net cash provided by operating activities CASh FlOWS FROM invESting ACtivitiES: Proceeds from sales of property and equipment Capital expenditures Purchases of short-term investments Sales of short-term investments Cash used in investing activities – continuing operations Cash used in investing activities – discontinued operations Net cash used in investing activities CASh FlOWS FROM FinAnCing ACtivitiES: Net commercial paper borrowings, net of issuance costs Debt repayments, including current maturities Proceeds from stock option exercises Repurchases of common stock Excess tax benefits related to share-based compensation Dividends paid on common stock Dividends paid on preferred stock Net cash provided by (used in) financing activities Effect of exchange rate changes on cash Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year (including cash related to assets held for sale) Cash and cash equivalents at end of year (including cash related to assets held for sale) SuPPlEMEntARY CASh FlOW DAtA: Interest paid Income taxes paid see accompanying notes to consolidated financial statements. 64 $ 2,846 (23) 2,930 (31) 2,442 370 (5) 121 270 212 (37) (66) (183) (231) — 78 142 5,936 57 5,993 40 (7,551) (2,395) 2,501 (7,405) (44) (7,449) 1,808 (862) 73 (253) 36 (199) (10) 593 13 (850) 2,141 388 (150) 212 128 (279) (17) 48 255 69 (67) (34) (79) 5,514 98 5,612 2,151 (4,026) (4,020) 4,307 (1,588) (64) (1,652) — (1,258) 124 (2,263) — (136) (10) (3,543) 37 454 2,186 (5) 2,225 370 (34) — 110 (318) (18) (93) 189 208 16 (28) (19) 4,789 27 4,816 95 (3,058) (3,215) 2,589 (3,589) (45) (3,634) — (973) 268 (189) — (97) (10) (1,001) 39 220 1,606 1,152 932 756 1,606 1,152 464 960 663 1,092 474 477 $ $ $ notes to Consolidated Financial Statements DevoN eNerGy CorporAtIoN AND suBsIDIArIes 1. SummarY of SiGnifiCant aCCountinG poliCieS Accounting policies used by Devon Energy Corporation and subsidiaries (“Devon”) reflect industry practices and conform to accounting principles generally accepted in the United States of America. The more significant of such policies are briefly discussed below. nature of Business and principles of Consolidation Devon is engaged primarily in oil and gas exploration, development and production, and the acquisition of properties. Such activities in the United States are concentrated in the following geographic areas: • The Mid-Continent area of the central and southern United States, principally in north and east Texas and Oklahoma; • The Permian Basin within Texas and New Mexico; • The Rocky Mountains area of the United States stretching from the Canadian border into northern New Mexico; • The offshore areas of the Gulf of Mexico; and • The onshore areas of the Gulf Coast, principally in south Texas and south Louisiana. Devon’s Canadian activities are located primarily in the Western Canadian Sedimentary Basin. Devon’s international activities — outside of North America — are located primarily in Azerbaijan, Brazil, China and various countries in West Africa. On January 23, 2007, Devon announced its plans to divest its West African operations. See Note 13. Devon also has marketing and midstream operations which are responsible for marketing natural gas, crude oil and NGLs, and constructing and operating pipelines, storage and treating facilities and gas processing plants. These services are performed for Devon as well as for unrelated third parties. The accounts of Devon’s controlled subsidiaries are included in the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. use of estimates in the preparation of financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include estimates of proved reserves and related present value estimates of future net revenue, the carrying value of oil and gas properties, goodwill impairment assessment, asset retirement obligations, income taxes, valuation of derivative instruments, obligations related to employee benefits and legal and environmental risks and exposures. property and equipment Devon follows the full cost method of accounting for its oil and gas properties. Accordingly, all costs incidental to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Internal costs incurred that are directly identified with acquisition, exploration and development activities undertaken by Devon for its own account, and which are not related to production, general corporate overhead or similar activities, are also capitalized. Interest costs incurred and attributable to unproved oil and gas properties under current evaluation and major development projects of oil and gas properties are also capitalized. All costs related to production activities, including workover costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred. Under the full cost method of accounting, the net book value of oil and gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net revenues, discounted at 10% per annum, from proved oil, natural gas and NGL reserves plus the cost of properties not subject to amortization. Estimated future net revenues exclude future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties. Such limitations are imposed separately on a country-by-country basis and are tested quarterly. In calculating future net revenues, prices and costs used are those as of the end of the appropriate quarterly period. These prices are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including designated cash flow hedges in place. Devon had no such hedges outstanding at December 31, 2006 or December 31, 2005. Any excess of the net book value, less related deferred taxes, over the ceiling is written off as an expense. An expense recorded in one period may not be reversed in a subsequent period even though higher oil and gas prices may have increased the ceiling applicable to the subsequent period. Capitalized costs are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six thousand cubic feet of natural gas to one barrel of oil. Depletion is calculated using the capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values. Unproved properties are excluded from amortized capitalized costs until it is determined whether or not proved reserves can be assigned to such properties. Devon assesses its unproved properties for impairment quarterly. Significant unproved properties are assessed individually. Costs of insignificant unproved properties are transferred to amortizable costs over average holding periods ranging from three years for onshore properties to seven years for offshore properties. 65 notes No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves in a particular country. Depreciation of midstream pipelines are provided on a units-of-production basis. Depreciation and amortization of other property and equipment, including corporate and other midstream assets and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to 39 years. Devon recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites, offshore production platforms, and natural gas processing plants when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement cost. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment. Short-term investments and other marketable Securities Devon reports its short-term investments and other marketable securities at fair value, except for debt securities in which management has the ability and intent to hold until maturity. At December 31, 2006 and 2005, Devon’s short-term investments consisted of $574 million and $680 million, respectively, of auction rate securities classified as available for sale. Although Devon’s auction rate securities have contractual maturities of more than 10 years, the underlying interest rates on such securities reset at intervals ranging from seven to 90 days. Therefore, these auction rate securities are priced and subsequently trade as short-term investments because of the interest rate reset feature. As a result, Devon has classified its auction rate securities as short-term investments in the accompanying consolidated balance sheet. Devon’s only other significant investment security is its investment in approximately 14.2 million shares of Chevron Corporation common stock which is reported at fair value. Except for unrealized losses that are determined to be “other than temporary”, the tax effected unrealized gain or loss on the investment in Chevron Corporation common stock is recognized in other comprehensive income and reported as a separate component of stockholders’ equity. Goodwill Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. The impairment test requires allocating goodwill and all other assets and liabilities to assigned reporting units. The fair value of each reporting unit is estimated and compared to the net book value of the reporting unit. If the estimated fair value of the reporting unit is less than the net book value, including goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense. Because quoted market prices are not available for Devon’s reporting units, the fair values of the reporting units are estimated based upon several valuation analyses, including comparable companies, comparable transactions and premiums paid. Devon performed annual impairment tests of goodwill in the fourth quarters of 2006, 2005 and 2004. Based on these assessments, no impairment of goodwill was required. The table below provides a summary of Devon’s goodwill, by assigned reporting unit, as of December 31, 2006 and 2005: United States Canada International Total 2006 3,053 2,585 68 5,706 $ $ deCemBer 31, (IN MILLIoNs) 2005 3,056 2,581 68 5,705 revenue recognition and Gas Balancing Oil, gas and NGL revenues are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectibility of the revenue is probable. Delivery occurs and title is transferred when production has been delivered to a pipeline or truck or a tanker lifting has occurred. Cash received relating to future production is deferred and recognized when all revenue recognition criteria are met. Taxes assessed by governmental authorities on oil, gas and NGL revenues are presented separately from such revenues as production taxes in the statement of operations. Devon follows the sales method of accounting for gas production imbalances. The volumes of gas sold may differ from the volumes to which Devon is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under produced owner to recoup its entitled share through production. If an imbalance exists at the time the wells’ reserves are depleted, settlements are made among the joint interest owners under a variety of arrangements. The liability is priced based on current market prices. No receivables are recorded for those wells where Devon has taken less than its share of production unless all revenue recognition criteria are met. Marketing and midstream revenues are recorded at the time products are sold or services are provided to third parties at a fixed or determinable price, delivery or performance has occurred, title has transferred and collectibility of the revenue is probable. Revenues and expenses attributable to Devon’s gas and NGL purchase and processing contracts are reported on a gross basis since Devon takes title to the products and has risks and rewards of ownership. The gas purchased under these contracts is processed in Devon-owned plants. 66 notes major purchasers During 2006, revenues received from ExxonMobil and its affiliates were $1.1 billion, or 10% of Devon’s consolidated revenues. No purchaser accounted for over 10% of Devon’s revenues in 2005 or 2004. derivative instruments The majority of Devon’s derivative instruments consist of commodity financial instruments used to manage Devon’s cash flow exposure to oil and gas price volatility. Devon has also entered into interest rate swaps to manage its exposure to interest rate volatility. The interest rate swaps mitigate either the cash flow effects of interest rate fluctuations on interest expense for variable-rate debt instruments, or the fair value effects of interest rate fluctuations on fixed-rate debt. Devon also has an embedded option derivative related to the fair value of its debentures exchangeable into shares of Chevron Corporation common stock. All derivatives are recognized at their current fair value as fair value of derivative financial instruments on the balance sheet. Changes in the fair value of derivative financial instruments are recorded in the statement of operations unless specific hedge accounting criteria are met. If such criteria are met for cash flow hedges, the effective portion of the change in the fair value is recorded directly to accumulated other comprehensive income, a component of stockholders’ equity, until the hedged transaction occurs. The ineffective portion of the change in fair value is recorded in the statement of operations. If such criteria are met for fair value hedges, the change in the fair value is recorded in the statement of operations with an offsetting amount recorded for the change in fair value of the hedged item. A derivative instrument qualifies for hedge accounting treatment if Devon designates the instrument as such on the date the derivative contract is entered into or the date of an acquisition or business combination which includes derivative contracts. Additionally, Devon must document the relationship between the hedging instrument and hedged item, as well as the risk-management objective and strategy for undertaking the instrument. Devon must also assess, both at the instrument’s inception and on an ongoing basis, whether the derivative is highly effective in offsetting the change in cash flow of the hedged item. During 2006, Devon entered into and acquired certain commodity derivative instruments. For such instruments, Devon chose not to meet the necessary criteria to qualify these derivative instruments for hedge accounting treatment. Therefore, Devon recorded a $37 million gain in gas sales in the statement of operations for the change in fair value related to these instruments. The following table presents the components of the 2006, 2005 and 2004 change in fair value of derivative financial instruments presented in the accompanying statement of operations. Significant items are discussed in more detail following the table. Option embedded in exchangeable debentures Non-qualifying commodity hedges Ineffectiveness of commodity hedges Interest rate swaps Total change in fair value of derivative financial instruments 2006 181 — — (3) 178 $ $ 2005 (IN MILLIoNs) 2004 54 39 5 (4) 94 58 — 5 (1) 62 The change in the fair value of the embedded option relates to the debentures exchangeable into shares of Chevron Corporation common stock. These expenses were caused primarily by increases in the price of Chevron Corporation’s common stock. During 2005 and 2004, Devon had a number of commodity derivative instruments that qualified for hedge accounting treatment as described above. During 2005, certain of these derivatives ceased to qualify for hedge accounting treatment. In the third quarter of 2005, certain oil derivatives ceased to qualify for hedge accounting primarily as a result of deferred production caused by hurricanes in the Gulf of Mexico. Because these contracts no longer qualified for hedge accounting, Devon recognized $39 million in losses as change in fair value of derivative financial instruments in the accompanying 2005 statement of operations. In addition to the changes in fair value of non-qualifying commodity hedges presented in the table above, Devon also recognized in 2005 a $55 million loss related to certain oil hedges that no longer qualified for hedge accounting due to the effect of the 2005 property divestiture program. These commodity instruments related to 5,000 barrels per day of U.S. oil production and 3,000 barrels per day of Canadian oil production from properties that were sold as part of Devon’s divestiture program. This loss is presented in other income in the accompanying 2005 statement of operations. During 2004, no derivatives ceased to qualify for hedge accounting. In addition to the changes in fair value of Devon’s interest rate swaps presented in the table above, settlements on these interest rate swaps increased interest expense by $15 million and $12 million in 2006 and 2005, respectively, and decreased interest expense $18 million in 2004. The following table presents the balances of Devon’s accumulated net gain (loss) on cash flow hedges included in accumulated other comprehensive income. December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 (in millionS) $ $ $ $ (135) (286) 3 1 67 notes By using derivative instruments to hedge exposures to changes in commodity prices and interest rates, Devon exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with counterparties that Devon believes are minimal credit risks. It is Devon’s policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Market risk is the change in the value of a derivative instrument that results from a change in commodity prices, interest rates or other relevant underlyings. The market risk associated with commodity price and interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The oil and gas reference prices upon which the commodity hedging instruments are based reflect various market indices that have a high degree of historical correlation with actual prices received by Devon. Devon does not hold or issue derivative instruments for speculative trading purposes. Stock options Effective January 1, 2006, Devon adopted Statement of Financial Accounting Standard No. 123(R), Share-Based Payment, (“SFAS No. 123(R)”), using the modified prospective transition method. SFAS No. 123(R) requires equity-classified, share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Under the modified prospective transition method, share-based awards granted or modified on or after January 1, 2006, are recognized in compensation expense over the applicable vesting period. Also, any previously granted awards that were not fully vested as of January 1, 2006 are recognized as compensation expense over the remaining vesting period. No retroactive or cumulative effect adjustments were required upon Devon’s adoption of SFAS No. 123(R). Prior to adopting SFAS No. 123(R), Devon accounted for its fixed-plan employee stock options using the intrinsic-value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB No. 25”) and related interpretations. This method required compensation expense to be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Had the fair value provisions of SFAS No. 123(R) been applied in 2005 and 2004, Devon’s net earnings and net earnings per share would have differed from the amounts actually reported as shown in the following table. Year ended deCemBer 31, 2004 2005 ( IN MILLIoNs, exCept per shAre AMouNts) Net earnings available to common stockholders, as reported Add share-based employee compensation expense included in reported net earnings, net of related tax expense Deduct total share-based employee compensation expense determined under fair value based method for all awards (see Note 9), net of related tax expense Net earnings available to common stockholders, pro forma Net earnings per share available to common stockholders: As reported: Basic Diluted Pro forma: Basic Diluted $ 2,920 2,176 18 7 (44) 2,894 (31) 2,152 6.38 6.26 6.32 6.21 4.51 4.38 4.46 4.33 $ $ $ $ $ As a result of adopting SFAS No. 123(R), Devon’s 2006 earnings from continuing operations before income tax expense was $26 million lower than if Devon had continued to account for share-based compensation under APB No. 25. Additionally, 2006 earnings from continuing operations and net earnings were both $17 million lower. The related 2006 basic and diluted earnings per share amounts were both approximately $0.04 per share lower. Prior to the adoption of SFAS No. 123(R), Devon presented all tax benefits of deductions resulting from the exercise of stock options as operating cash inflows in the statement of cash flows. SFAS No. 123(R) requires the cash inflows resulting from tax deductions in excess of the compensation expense recognized for those stock options (“excess tax benefits”) to be classified as financing cash inflows. As required by SFAS No. 123(R), Devon recognized $36 million of excess tax benefits as financing cash inflows for 2006. In 2005 and 2004, excess tax benefits of $44 million and $54 million, respectively, were classified as operating cash inflows. 68 notes income taxes Devon accounts for income taxes using the asset and liability method, whereby 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, as well as the future tax consequences attributable to the future utilization of existing tax net operating loss 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 December 31, 2006, undistributed earnings of foreign subsidiaries were determined to be permanently reinvested. Therefore, no U.S. deferred income taxes were provided on such amounts at December 31, 2006. If it becomes apparent that some or all of the undistributed earnings will be distributed, Devon would then record taxes on those earnings. General and administrative expenses General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Devon and net of amounts capitalized pursuant to the full cost method of accounting. net earnings per Common Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share, as calculated using the treasury stock method, reflects the potential dilution that could occur if Devon’s dilutive outstanding stock options were exercised. For 2005 and 2004, the calculation of diluted shares also assumed that Devon’s previously outstanding zero coupon convertible senior debentures were converted to common stock. The following table reconciles earnings from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share for 2006, 2005 and 2004. net earninGS appliCaBle to Common StoCkholderS weiGhted averaGe Common ShareS outStandinG net earninGS per Share (IN MILLIoNs, exCept per shAre AMouNts) YEAR EnDED DECEMbER 31, 2006: Earnings from continuing operations Less preferred stock dividends Basic earnings per share Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options Diluted earnings per share YEAR EnDED DECEMbER 31, 2005: Earnings from continuing operations Less preferred stock dividends Basic earnings per share Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options Dilutive effect of potential common shares issuable upon conversion of senior convertible debentures (increase in net earnings is net of income tax expense of $14 million) (1) Diluted earnings per share YEAR EnDED DECEMbER 31, 2004: Earnings from continuing operations Less preferred stock dividends Basic earnings per share Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options Dilutive effect of potential common shares issuable upon conversion of senior convertible debentures (increase in net earnings is net of income tax expense of $6 million) Diluted earnings per share (1) The senior convertible debentures were retired in June 2005 prior to their stated maturity. $ $ $ $ $ 2,823 (10) 2,813 — 2,813 2,899 (10) 2,889 — 24 2,913 2,181 (10) 2,171 — 10 2,181 $ 442 6 448 458 8 4 470 482 8 9 499 $ 6.37 $ 6.29 $ 6.31 $ 6.19 $ 4.50 $ 4.37 69 notes Certain options to purchase shares of Devon’s common stock were excluded from the dilution calculations because the options were antidilutive. These excluded options totaled 3 million, 0.2 million and 4 million in 2006, 2005 and 2004, respectively. foreign Currency translation adjustments The U.S. dollar is the functional currency for Devon’s consolidated operations except its Canadian subsidiaries which use the Canadian dollar as the functional currency. Therefore, the assets and liabilities of Devon’s Canadian subsidiaries are translated into U.S. dollars based on the current exchange rate in effect at the balance sheet dates. Canadian income and expenses are translated at average rates for the periods presented. Translation adjustments have no effect on net income and are included in accumulated other comprehensive income in stockholders’ equity. The following table presents the balances of Devon’s cumulative translation adjustments included in accumulated other comprehensive income. December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 (in millionS) $ $ $ $ 666 1,054 1,216 1,219 Statements of Cash flows For purposes of the consolidated statements of cash flows, Devon considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents. Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Environmental expenditures are expensed or capitalized in accordance with accounting principles generally accepted in the United States of America. Liabilities for these expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Reference is made to Note 8 for a discussion of amounts recorded for these liabilities. recently issued accounting Standards not Yet adopted 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 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation is effective for fiscal years beginning after December 15, 2006, and Devon will adopt it in the first quarter of 2007. Devon does not expect the adoption of Interpretation No. 48 to have a material impact on its financial statements and related disclosures. In September 2006, the FASB issued 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. However, this Statement does not require any new fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. Devon is currently assessing the effect, if any, the adoption of Statement No. 157 will have on its financial statements and related disclosures. 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 recognition of the overfunded or underfunded status of a defined benefit postretirement plan in the balance sheet. Devon adopted this recognition requirement as of December 31, 2006. The effects of this adoption are summarized in Note 6. Statement No. 158 also requires the measurement of plan assets and benefit obligations as of the date of the employer’s fiscal year-end. The Statement provides two alternatives to transition to a fiscal year-end measurement date. This measurement requirement is effective for fiscal years ending after December 15, 2008. Devon has not yet adopted this measurement requirement, but Devon does not expect such adoption to have a material effect on its results of operations, financial condition, liquidity or compliance with debt covenants. In February 2007, the FASB issued 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 permits entities to choose to measure certain financial instruments and other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Unrealized gains and losses on any items for which Devon elects the fair value measurement option would be reported in earnings. Statement No. 159 is effective for fiscal years beginning after November 15, 2007. However, early adoption is permitted for fiscal years beginning on or before November 15, 2007, provided Devon also elects to apply the provisions of Statement No. 157, Fair Value Measurements, at the same time. Devon is currently assessing the effect, if any, the adoption of Statement No. 159 will have on its financial statements and related disclosures. 70 notes 2. aCCountS reCeivaBle The components of accounts receivable include the following: Oil, gas and NGL revenue Joint interest billings Marketing and midstream revenue Other Allowance for doubtful accounts Net accounts receivable 3. propertY and equipment and aSSet retirement oBliGationS Property and equipment included the following: Oil and gas properties: Subject to amortization Not subject to amortization Accumulated depreciation, depletion and amortization Net oil and gas properties Other property and equipment Accumulated depreciation and amortization Net other property and equipment deCemBer 31, (IN MILLIoNs) deCemBer 31, (IN MILLIoNs) 2006 1,020 209 138 31 1,398 (5) 1,393 $ $ $ 2006 35,798 3,674 (16,610) 22,862 2,417 (684) 1,733 Property and equipment, net of accumulated depreciation, depletion and amortization $ 24,595 2005 1,113 206 173 78 1,570 (5) 1,565 2005 29,257 2,704 (14,398) 17,563 1,863 (515) 1,348 18,911 The costs not subject to amortization relate to unproved properties which are excluded from amortized capital costs until it is determined whether or not proved reserves can be assigned to such properties. The excluded properties are assessed for impairment quarterly. Subject to industry conditions, evaluation of most of these properties, and the inclusion of their costs in the amortized capital costs is expected to be completed within five years. The following is a summary of Devon’s oil and gas properties not subject to amortization as of December 31, 2006: Acquisition costs Exploration costs Development costs Capitalized interest Total oil and gas properties not subject to amortization 2006 2005 CoStS inCurred in 2004 (IN MILLIoNs) $ $ 1,357 423 130 70 1,980 296 239 19 56 610 119 86 — 52 257 prior to 2004 691 62 39 35 827 total 2,463 810 188 213 3,674 At December 31, 2006, Devon’s investment in countries where proved reserves have not been established was $61 million, consisting of $56 million in Nigeria and $5 million in Ghana. 71 notes Chief acquisition On June 29, 2006, Devon acquired the oil and gas assets of privately-owned Chief Holdings LLC (“Chief”). Devon paid $2.0 billion in cash and assumed approximately $0.2 billion of net liabilities in the transaction for a total purchase price of $2.2 billion. Devon funded the acquisition price, and the immediate retirement of $180 million of assumed debt, with $718 million of cash on hand and approximately $1.4 billion of borrowings issued under its commercial paper program. The acquired oil and gas properties consist of 99.7 MMBoe (unaudited) of proved reserves and leasehold totaling 169,000 net acres located in the Barnett Shale area of north Texas. Devon allocated approximately $1.0 billion of the purchase price to proved reserves and approximately $1.2 billion to unproved properties. property divestitures During 2005, Devon divested certain non-core oil and gas properties in the offshore Gulf of Mexico and onshore in the United States and Canada. From these sales, Devon received $2.0 billion of gross proceeds. After-tax, the proceeds were approximately $1.8 billion. Certain information regarding these sales is included in the following table. Gross proceeds After-tax proceeds Asset retirement obligations assumed by purchasers Reserves sold (MMBoe) (unaudited) united StateS Canada total $ $ $ 966 786 160 89 (IN MILLIoNs) 1,029 1,027 39 87 1,995 1,813 199 176 Under full cost accounting rules, a gain or loss on the sale or other disposition of oil and gas properties is not recognized unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center. Because the 2005 divestitures did not significantly alter such relationship, Devon did not recognize a gain or loss on these divestitures. Therefore, the proceeds from these transactions were recognized as an adjustment of capitalized costs in the respective cost centers. On November 14, 2006, Devon announced that it intends to divest its operations in Egypt. Also, on January 23, 2007, Devon announced that it intends to divest its operations in West Africa. See Note 13 for more discussion regarding these planned divestitures. asset retirement obligations Following is a reconciliation of the asset retirement obligation for the years ended December 31, 2006 and 2005. Asset retirement obligation as of beginning of year Liabilities incurred Liabilities settled Liabilities assumed by others Revision of estimated obligation Accretion expense on discounted obligation Foreign currency translation adjustment Asset retirement obligation as of end of year Less current portion Asset retirement obligation, long-term Year ended deCemBer 31, (IN MILLIoNs) 2006 660 102 (62) — 149 49 (4) 894 61 833 $ $ 2005 731 44 (42) (199) 76 43 7 660 50 610 72 notes 4. deBt and related expenSeS A summary of Devon’s short-term and long-term debt is as follows: Commercial paper Debentures exchangeable into shares of Chevron Corporation $ 1,808 2006 deCemBer 31, (IN MILLIoNs) common stock: 4.90% due August 15, 2008 4.95% due August 15, 2008 Discount on exchangeable debentures Other debentures and notes: 2.75% due August 1, 2006 6.55% due August 2, 2006 ($200 million Canadian) 4.375% due October 1, 2007 10.125% due November 15, 2009 6.875% due September 30, 2011 7.25% due October 1, 2011 8.25% due July 1, 2018 7.50% due September 15, 2027 7.875% due September 30, 2031 7.95% due April 15, 2032 Other Fair value adjustment on debt related to interest rate swaps Net premium on other debentures and notes Less amount classified as short-term debt Long-term debt $ 444 316 (33) — — 400 177 1,750 350 125 150 1,250 1,000 — (5) 41 7,773 2,205 5,568 2005 — 444 316 (51) 500 172 400 177 1,750 350 125 150 1,250 1,000 3 (18) 51 6,619 662 5,957 Maturities of short-term and long-term debt as of December 31, 2006, excluding premiums, discounts and the $5 million fair value adjustment, are as follows: 2007 2008 2009 2010 2011 2012 and thereafter Total (in millionS) $ $ 2,208 760 177 — 2,100 2,525 7,770 Credit facilities with Banks Devon has a $2.5 billion five-year, syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). The Senior Credit Facility includes a five-year revolving Canadian subfacility in a maximum amount of U.S. $500 million. The Senior Credit Facility matures on April 7, 2011, and all amounts outstanding will be due and payable at that time unless the maturity is extended. Prior to each April 7 anniversary date, Devon has the option to extend the maturity of the Senior Credit Facility for one year, subject to the approval of the lenders. Devon is working to obtain lender approval to extend the current maturity date of April 7, 2011 to April 7, 2012. If successful, this maturity date extension will be effective on April 7, 2007, provided Devon has not experienced a “material adverse effect,” as defined in the Senior Credit Facility agreement, at that date. Amounts borrowed under the Senior Credit Facility may, at the election of Devon, bear interest at various fixed rate options for periods of up to twelve months. Such rates are generally less than the prime rate. Devon may also elect to borrow at the prime rate. The Senior Credit Facility currently provides for an annual facility fee of $2.3 million that is payable quarterly in arrears. The agreement governing the Senior Credit Facility contains certain covenants and restrictions, including a maximum allowed debt-to-capitalization ratio of 65% as defined in the agreement. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in Devon’s consolidated financial statements. Per the agreement, total funded debt excludes the debentures that are exchangeable into shares of Chevron Corporation common stock. Also, total capitalization is adjusted to add back noncash financial writedowns such as full cost ceiling property impairments or goodwill impairments. At December 31, 2006, Devon was in compliance with such covenants and restrictions. Devon’s debt-to-capitalization ratio at December 31, 2006, as calculated pursuant to the terms of the agreement, was 27.3%. 73 notes As of December 31, 2006, there were no borrowings under the Senior Credit Facility. The available capacity under the Senior Credit Facility as of December 31, 2006, net of $284 million of outstanding letters of credit and $1.8 billion of outstanding commercial paper, was approximately $408 million. Commercial paper Devon also has a commercial paper program under which it may borrow up to $2 billion. Borrowings under the commercial paper program reduce available capacity under the Senior Credit Facility on a dollar-for-dollar basis. Commercial paper debt generally has a maturity of between seven to 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. As of December 31, 2006, Devon had $1.8 billion of commercial paper debt outstanding at an average rate of 5.37%. The $1.8 billion of commercial paper is classified as short-term debt in the accompanying consolidated balance sheet. exchangeable debentures The exchangeable debentures consist of $444 million of 4.90% debentures and $316 million of 4.95% debentures. The exchangeable debentures were issued on August 3, 1998 and mature August 15, 2008. The exchangeable debentures were callable beginning August 15, 2000, initially at 104.0% of principal and at prices declining to 100.5% of principal on or after August 15, 2007. At December 31, 2006, the call price was 101% of principal. The exchangeable debentures are exchangeable at the option of the holders at any time prior to maturity, unless previously redeemed, for shares of Chevron common stock. In lieu of delivering Chevron common stock to an exchanging debenture holder, Devon may, at its option, pay to such holder an amount of cash equal to the market value of the Chevron common stock. At maturity, holders who have not exercised their exchange rights will receive an amount in cash equal to the principal amount of the debentures. As of December 31, 2006, Devon beneficially owned approximately 14.2 million shares of Chevron common stock. These shares have been deposited with an exchange agent for possible exchange for the exchangeable debentures. Each $1,000 principal amount of the exchangeable debentures is exchangeable into 18.6566 shares of Chevron common stock, an exchange rate equivalent to $53.60 per share of Chevron stock. The exchangeable debentures were assumed as part of the 1999 PennzEnergy acquisition. As a result, the fair values of the exchangeable debentures were determined as of August 17, 1999, based on market quotations. In accordance with derivative accounting standards, the total fair value of the debentures was allocated between the interest-bearing debt and the option to exchange Chevron common stock that is embedded in the debentures. Accordingly, a discount was recorded on the debentures and is being accreted using the effective interest method which raised the effective interest rate on the debentures to 7.76%. other debentures and notes Following are descriptions of the various other debentures and notes outstanding at December 31, 2006, as listed in the table presented at the beginning of this note. Ocean Debt In connection with the 2003 Ocean merger, Devon assumed $1.8 billion of debt. The table below summarizes the debt assumed which remains outstanding, the fair value of the debt at April 25, 2003, and the effective interest rate of the debt assumed after determining the fair values of the respective notes using April 25, 2003, market interest rates. The premiums are being amortized using the effective interest method. All of the notes are general unsecured obligations of Devon. deBt aSSumed 4.375% due October 2007 (principal of $400 million) 7.250% due October 2011 (principal of $350 million) 8.250% due July 2018 (principal of $125 million) 7.500% due September 2027 (principal of $150 million) fair value of deBt aSSumed (IN MILLIoNs) $ $ $ $ 410 406 147 169 effeCtive rate of deBt aSSumed 3.8% 4.9% 5.5% 6.5% The $400 million 4.375% senior notes due in October of 2007 are subject to a fixed-to-floating interest rate swap. Through the use of this swap, this fixed-rate debt has been converted to floating-rate debt bearing interest equal to LIBOR plus 40 basis points. 10.125% Debentures due November 15, 2009 These debentures were assumed as part of the PennzEnergy acquisition. The fair value of the debentures was determined using August 17, 1999, market interest rates. As a result, a premium was recorded on these debentures which lowered the effective interest rate to 8.9%. The premium is being amortized using the effective interest method. 6.875% Notes due September 30, 2011 and 7.875% Debentures due September 30, 2031 On October 3, 2001, Devon, through Devon Financing Corporation, U.L.C. (“Devon Financing”), sold these notes and debentures which are unsecured and unsubordinated obligations of Devon Financing. Devon has fully and unconditionally guaranteed on an unsecured and unsubordinated basis the obligations of Devon Financing under the debt securities. The proceeds from the issuance of these debt securities were used to fund a portion of the Anderson acquisition. 7.95% Notes due April 15, 2032 On March 25, 2002, Devon sold these notes which are unsecured and unsubordinated obligations of Devon. The net proceeds received, after discounts and issuance costs, were $986 million and were used to retire other indebtedness. 74 notes interest expense The following schedule includes the components of interest expense between 2004 and 2006. Interest based on debt outstanding Capitalized interest Other interest Total interest expense 2006 486 (79) 14 421 $ $ Year ended deCemBer 31, 2005 (IN MILLIoNs) 507 (70) 96 533 2004 513 (70) 32 475 Interest based on debt outstanding decreased from 2004 to 2006 primarily due to the net effect of debt repayments during 2005 and 2006 partially offset by the effect of commercial paper borrowings during the last half of 2006. During 2005, Devon redeemed its $400 million 6.75% notes due March 15, 2011 and its zero coupon convertible senior debentures prior to their scheduled maturity dates. The other interest category in the table above includes $81 million in 2005 related to these early retirements. During 2004, Devon repaid the balance under its $3 billion term loan credit facility prior to the scheduled repayment date. The other interest category in the table above includes $16 million in 2004 related to this early repayment. 5. finanCial inStrumentS The following table presents the carrying amounts and estimated fair values of Devon’s financial instrument assets (liabilities) at December 31, 2006 and 2005. Investment in Chevron Corporation common stock Oil and gas price hedge agreements Interest rate swap agreements Embedded option in exchangeable debentures Debt 2006 2005 CarrYinG amount fair value CarrYinG amount fair value (IN MILLIoNs) $ $ $ $ $ 1,043 39 (6) (302) (7,773) 1,043 39 (6) (302) (8,725) 805 — (22) (121) (6,619) 805 — (22) (121) (7,642) The following methods and assumptions were used to estimate the fair values of the financial instruments in the above table. The carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable (including income taxes payable and accrued expenses) included in the accompanying consolidated balance sheets approximated fair value at December 31, 2006 and 2005. Investment in Chevron Corporation common stock The fair value of this investment is based on a quoted market price. Oil and gas price hedge agreements The fair values of the oil and gas price hedges were based on either (a) an internal discounted cash flow calculation, (b) quotes obtained from the counterparty to the hedge agreement or (c) quotes provided by brokers. Interest rate swap agreements The fair values of the interest rate swaps are based on internal discounted cash flow calculations, using market quotes of future interest rates, or quotes obtained from counterparties. Embedded option in exchangeable debentures The fair value of the embedded option is based on a quote obtained from a broker. Debt The fair values of fixed-rate debt are based on quotes obtained from brokers or by discounting the principal and interest payments at rates available for debt of similar terms and maturity. The fair values of floating-rate debt are estimated to approximate the carrying amounts because the interest rates paid on such debt are generally set for periods of three months or less. 75 notes 6. retirement planS Devon has various non-contributory defined benefit pension plans, including qualified plans (“Qualified Plans”) and nonqualified plans (“Supplemental Plans”). The Qualified Plans provide retirement benefits for U.S. and Canadian employees meeting certain age and service requirements. Benefits for the Qualified Plans are based on the employee’s years of service and compensation and are funded from assets held in the plans’ trusts. Devon has a funding policy regarding the Qualified Plans such that it will contribute the amount of funds necessary so that the Qualified Plans’ assets will be approximately equal to the related accumulated benefit obligation. As of December 31, 2006 and 2005, the fair value of the Qualified Plans’ assets were $590 million and $533 million, respectively, which was $59 million and $37 million more, respectively, than the related accumulated benefit obligation. The actual amount of contribu- tions required during future periods will depend on investment returns from the plan assets during the same period as well as changes in long-term interest rates. The Supplemental Plans provide retirement benefits for certain employees whose benefits under the Qualified Plans are limited by income tax regulations. The Supplemental Plans’ benefits are based on the employee’s years of service and compensation. For certain Supplemental Plans, Devon has established trusts to fund these plans’ benefit obligations. The total value of these trusts was $59 million at both December 31, 2006 and 2005, and is included in non-current other assets in the consolidated balance sheets. For the remaining Supplemental Plans for which trusts have not been established, benefits are funded from Devon’s available cash and cash equivalents. Devon also has defined benefit postretirement plans (“Postretirement Plans”) which provide benefits for substantially all U.S. employees. The Postretirement Plans provide medical and, in some cases, life insurance benefits and are, depending on the type of plan, either contributory or non-contributory. Benefit obligations for the Postretirement Plans are estimated based on future cost-sharing changes that are consistent with Devon’s expressed intent to increase, where possible, contributions from future retirees. Devon’s funding policy for the Postretirement Plans is to fund the benefits as they become payable with available cash and cash equivalents. Devon uses a November 30 measurement date to value its pension and other postretirement benefits obligations. As described in Note 1, Devon will be required to use a December 31 measurement date beginning with the fiscal year ending December 31, 2008. Devon does not expect the change in its measurement date from November 30 to December 31 will have a material effect on the net periodic benefit cost or benefit obligation. Benefit obligations and plan assets Beginning with Devon’s December 31, 2006 balance sheet, 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) requires Devon to recognize on its consolidated balance sheet the funded status of its defined benefit plans. The funded status is measured as the difference between the projected benefit obligation and the fair value of plan assets. The follow- ing table presents the incremental effect on Devon’s December 31, 2006 balance sheet as a result of adopting this recognition requirement from Statement No. 158. Other noncurrent assets Total assets Other current liabilities Other noncurrent liabilities Deferred income taxes Accumulated other comprehensive income Total stockholders’ equity Total liabilities and stockholders’ equity Before adjuStment adoption adjuStment (IN MILLIoNs) after adjuStment $ $ $ $ $ $ $ $ 448 35,189 326 517 5,729 1,584 17,582 35,189 (126) (126) 12 81 (79) (140) (140) (126) 322 35,063 338 598 5,650 1,444 17,442 35,063 76 notes The following table presents the status of Devon’s pension and other postretirement benefit plans for 2006 and 2005. The benefit obligation for pension plans represents the projected benefit obligation, while the benefit obligation for the postretirement benefit plans represents the accumulated benefit obligation. The accumulated benefit obligation differs from the projected benefit obligation in that the former includes no assumption about future compensation levels. The accumulated benefit obligation for pension plans at December 31, 2006 and 2005 was $652 million and $607 million, respectively. ChAngE in bEnEFit ObligAtiOn: Benefit obligation at beginning of year Service cost Interest cost Participant contributions Amendments Foreign exchange rate changes Actuarial loss Benefits paid Benefit obligation at end of year ChAngE in PlAn ASSEtS: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Participant contributions Benefits paid Foreign exchange rate changes Fair value of plan assets at end of year Funded status at end of year Unrecognized net actuarial loss Unrecognized prior service cost (benefit) Net amount recognized in balance sheet AMOuntS RECOgnizED in bAlAnCE ShEEt: Noncurrent assets Current liabilities Noncurrent liabilities Prepaid cost Accrued benefit cost Intangible asset Additional minimum pension liability Net amount AMOuntS RECOgnizED in ACCuMulAtED OthER COMPREhEnSivE inCOME: Net actuarial loss Prior service cost (benefit) Total penSion BenefitS other poStretirement BenefitS 2006 2005 2006 2005 (IN MILLIoNs) $ $ $ $ $ $ 666 23 39 — 2 1 66 (29) 768 533 79 6 — (29) 1 590 (178) — — (178) 2 (7) (173) — — — — (178) 214 6 220 588 18 35 — — 1 50 (26) 666 456 37 65 — (26) 1 533 (133) 195 6 68 — — — 144 (109) 3 30 68 — — — 54 1 3 2 1 — — (9) 52 — — 6 2 (8) — — (52) — — (52) — (5) (47) — — — — (52) 6 (7) (1) 50 1 3 2 — — 6 (8) 54 — — 6 2 (8) — — (54) 7 (8) (55) — — — — (55) — — (55) — — — The plan assets for pension benefits in the table above exclude the assets held in trusts for the Supplemental Plans. However, employer contributions for pension benefits in the table above include $6 million and $5 million in 2006 and 2005, respectively, which were transferred from the trusts established for the Supplemental Plans. 77 notes Certain of Devon’s pension and postretirement plans have a projected benefit obligation in excess of plan assets at December 31, 2006 and 2005. The aggregate benefit obligation and fair value of plan assets for these plans is included below. Projected benefit obligation Fair value of plan assets $ $ 755 574 2006 deCemBer 31, (IN MILLIoNs) 2005 707 518 Certain of Devon’s pension plans have an accumulated benefit obligation in excess of plan assets at December 31, 2006 and 2005. The aggregate accumulated benefit obligation and fair value of plan assets for these plans is included below. Accumulated benefit obligation Fair value of plan assets $ $ 121 — 2006 deCemBer 31, (IN MILLIoNs) 2005 111 — The plan assets included in the above two tables exclude the Supplemental Plan trusts which had a total value of $59 million at both December 31, 2006 and 2005. 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 postretirement benefit plans for 2006, 2005 and 2004. nEt PERiODiC bEnEFit COSt: Service cost Interest cost Expected return on plan assets Termination benefits Amortization of prior service cost Recognition of net actuarial loss Net periodic benefit cost OthER COMPREhEnSivE inCOME: Change in additional minimum pension liability 2006 penSion BenefitS 2005 2004 2006 (IN MILLIoNs) other poStretirement BenefitS 2005 2004 $ $ $ 23 39 (44) — 1 12 31 18 35 (36) — 1 8 26 15 32 (30) 1 1 7 26 30 (8) 61 1 3 — — — 1 5 — 1 3 — — (1) — 3 — 1 4 — — (1) — 4 — The following table presents the estimated net actuarial loss and prior service cost for the pension and other postretirement plans that will be amortized from penSion BenefitS $ $ 15 1 16 other poStretirement BenefitS (IN MILLIoNs) 1 — 1 accumulated other comprehensive income into net periodic benefit cost during 2007. Net actuarial loss Prior service cost Total 78 notes assumptions The following table presents the weighted average actuarial assumptions that were used to determine benefit obligations and net periodic benefit costs for 2006, 2005 and 2004. ASSuMPtiOnS tO DEtERMinE bEnEFit ObligAtiOnS: Discount rate Rate of compensation increase ASSuMPtiOnS tO DEtERMinE nEt PERiODiC bEnEFit COSt: Discount rate Expected return on plan assets Rate of compensation increase 2006 penSion BenefitS 2005 2004 2006 (IN MILLIoNs) other poStretirement BenefitS 2005 2004 5.72% 7.00% 5.72% 4.50% 5.74% 4.50% 5.50% N/A 5.75% N/A 5.75% N/A 5.72% 8.40% 4.50% 5.98% 8.40% 4.50% 6.23% 8.34% 4.88% 5.75% N/A N/A 6.00% N/A N/A 6.25% N/A N/A Discount rate Future pension and postretirement obligations are discounted at the end of each year based on the rate at which obligations could be effectively settled, considering the timing of estimated benefit payments. This rate is based on high-quality bond yields, after allowing for call and default risk. High quality corporate bond yield indices, such as Moody’s Aa, are considered when selecting the discount rate. Rate of compensation increase For measurement of the 2006 benefit obligation for the pension plans, the 7% compensation increase in the table above represents the assumed increase for 2007 and 2008. The rate was assumed to decrease one percent annually to 5% in the year 2010 and remain at that level thereafter. For measurement of the 2005 and 2004 benefit obligations for the pension plans, the compensation increases in the table above represent the assumed increases for all future years. Expected return on plan assets Devon’s overall investment objective for its retirement plans’ assets is to achieve long-term growth of invested capital to ensure payments of retirement benefits obligations can be funded when required. To assist in achieving this objective, Devon has established certain investment strategies, including target allocation percentages and permitted and prohibited investments, designed to mitigate risks inherent with investing. At December 31, 2006, the target investment allocation for Devon’s plan assets was 50% U.S. large cap equity securities; 15% U.S. small cap equity securities, equally allocated between growth and value; 15% international equity securities, equally allocated between growth and value; and 20% debt securities. Derivatives or other speculative investments considered high- risk are generally prohibited. The expected rate of return on plan assets was determined by evaluating input from external consultants and economists as well as long-term inflation assumptions. Devon expects the long-term asset allocation to approximate the targeted allocation. Therefore, the expected long-term rate of return on plan assets is based on the target allocation of investment types in such assets. The following table presents the weighted-average asset allocation for Devon’s pension plans at December 31, 2006 and 2005, and the target allocation for 2007 by asset category: ASSEt CAtEgORY: Equity securities Debt securities Other Total 2007 2006 (IN MILLIoNs) 2005 80% 20% — 100% 83% 17% — 100% 83% 16% 1% 100% Other assumptions For measurement of the benefit obligation for the other postretirement medical plans, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2007. The rate was assumed to decrease one percent annually to 5% in the year 2012 and remain at that level thereafter. Assumed health care cost-trend rates affect the amounts reported for retiree health care costs. A one-percentage-point change in the assumed health care cost-trend rates would have the following effects on the December 31, 2006 other postretirement benefits obligation and the 2006 service and interest cost components of net periodic benefit cost. Effect on benefit obligation Effect on service and interest costs one perCent inCreaSe $ 1 $ — (IN MILLIoNs) one perCent deCreaSe (1) — 79 notes expected Cash flows The following table presents expected cash flow information for Devon’s pension and other postretirement benefit plans. Devon contributions – 2007 Benefit payments: 2007 2008 2009 2010 2011 2012-2016 penSion BenefitS $ 7 30 $ 31 $ 33 $ 35 $ $ 37 $ 245 other poStretirement BenefitS (IN MILLIoNs) 5 5 5 5 5 5 21 Expected contributions included in the table above include amounts related to Devon’s Qualified Plans, Supplemental Plans and Postretirement Plans. Of the benefits expected to be paid in 2007, $7 million of pension benefits is expected to be funded from the trusts established for the Supplemental Plans and all $5 million of other postretirement benefits is expected to be funded from Devon’s available cash and cash equivalents. Expected employer contributions and benefit payments for other postretirement benefits are presented net of employee contributions. other Benefit plans Devon has a 401(k) Incentive Savings Plan which covers all domestic employees. At its discretion, Devon may match a certain percentage of the employees’ contributions to the plan. The matching percentage is determined annually by the Board of Directors. Devon’s matching contributions to the plan were $15 million, $12 million and $11 million for the years ended December 31, 2006, 2005 and 2004, respectively. Devon has defined contribution pension plans for its Canadian employees. Devon makes a contribution to each employee which is based upon the employee’s base compensation and classification. Such contributions are subject to maximum amounts allowed under the Income Tax Act (Canada). Devon also has a savings plan for its Canadian employees. Under the savings plan, Devon contributes a base percentage amount to all employees and the employee may elect to contribute an additional percentage amount (up to a maximum amount) which is matched by additional Devon contributions. During 2006, 2005 and 2004, Devon’s combined contributions to the Canadian defined contribution plan and the Canadian savings plan were $12 million, $10 million and $9 million, respectively. 7. StoCkholderS’ equitY The authorized capital stock of Devon consists of 800 million shares of common stock, par value $0.10 per share, and 4.5 million shares of preferred stock, par value $1.00 per share. The preferred stock may be issued in one or more series, and the terms and rights of such stock will be determined by the Board of Directors. Effective August 17, 1999, Devon issued 1.5 million shares of 6.49% cumulative preferred stock, Series A, to holders of PennzEnergy 6.49% cumulative preferred stock, Series A. Dividends on the preferred stock are cumulative from the date of original issue and are payable quarterly, in cash, when declared by the Board of Directors. The preferred stock is redeemable at the option of Devon at any time on or after June 2, 2008, in whole or in part, at a redemption price of $100 per share, plus accrued and unpaid dividends to the redemption date. Devon’s Board of Directors has designated a certain number of shares of the preferred stock as Series A Junior Participating Preferred Stock (the “Series A Junior Preferred Stock”) in connection with the adoption of the shareholder rights plan described later in this note. On April 25, 2003, the Board increased the designated shares from 2.0 million to 2.9 million. At December 31, 2006, there were no shares of Series A Junior Preferred Stock issued or outstanding. The Series A Junior Preferred Stock is entitled to receive cumulative quarterly dividends per share equal to the greater of $1.00 or 200 times the aggregate per share amount of all dividends (other than stock dividends) declared on common stock since the immediately preceding quarterly dividend payment date or, with respect to the first payment date, since the first issuance of Series A Junior Preferred Stock. Holders of the Series A Junior Preferred Stock are entitled to 200 votes per share (subject to adjustment to prevent dilution) on all matters submitted to a vote of the stockholders. The Series A Junior Preferred Stock is neither redeemable nor convertible. The Series A Junior Preferred Stock ranks prior to the common stock but junior to all other classes of Preferred Stock. At December 31, 2003, a subsidiary of Devon created in the Ocean merger had 38,000 shares of convertible preferred stock outstanding. In January 2004, these shares of convertible preferred stock were canceled and converted to 2,197,160 shares of Devon common stock pursuant to an automatic conversion feature of the preferred stock. The automatic conversion feature was triggered when the closing price of Devon common stock equaled or exceeded the forced conversion price of $26.20 for 20 consecutive trading days. 80 notes Stock repurchases On September 27, 2004, Devon announced a stock repurchase program to repurchase up to 50 million shares of its common stock. During 2004, Devon repurchased five million shares at a total cost of $189 million, or $37.78 per share. This program was completed in 2005, during which Devon repurchased 44.6 million shares at a total cost of $2.1 billion, or $47.69 per share. The total cost of this program was $2.3 billion, or $46.69 per share. On August 3, 2005, Devon announced another program to repurchase up to 50 million shares of its common stock. During 2005, Devon repurchased 2.2 million shares at a cost of $134 million, or $60.16 per share, under this program. During 2006, Devon repurchased 4.3 million shares at a cost of $253 million, or $59.61 per share, under this program. As of February 1, 2007, Devon has repurchased 6.5 million shares under this program for $387 million, or $59.80 per share. This program was sus- pended in 2006 as a result of the Chief acquisition (see Note 3). In conjunction with the sales of Egypt and West Africa (see Note 13), Devon expects to resume this repur- chase program in late 2007 by using a portion of the sale proceeds to repurchase common stock. Although this program expires at the end of 2007, it could be extended if necessary. Shareholder rights plan Under Devon’s shareholder rights plan, stockholders have one half of one right for each share of common stock held. The rights become exercisable and separately transferable ten business days after (a) an announcement that a person has acquired, or obtained the right to acquire, 15% or more of the voting shares outstanding, or (b) commencement of a tender or exchange offer that could result in a person owning 15% or more of the voting shares outstanding. Each right entitles its holder (except a holder who is the acquiring person) to purchase either (a) 1/100 of a share of Series A Preferred Stock for $185.00, subject to adjustment or, (b) Devon common stock with a value equal to twice the exercise price of the right, subject to adjustment to prevent dilution. In the event of certain merger or asset sale transactions with another party or transactions which would increase the equity ownership of a shareholder who then owned 15% or more of Devon, each Devon right will entitle its holder to purchase securities of the merging or acquiring party with a value equal to twice the exercise price of the right. The rights, which have no voting power, expire on August 17, 2009. The rights may be redeemed by Devon for $0.01 per right until the rights become exercisable. dividends Dividends on Devon’s common stock were paid in 2006, 2005 and 2004 at a per share rate of $0.1125, $0.075 and $0.05 per quarter, respectively. 8. 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. Certain of Devon’s subsidiaries acquired in past mergers are involved in matters in which it has been alleged that such subsidiaries are potentially responsible parties (“PRPs”) under CERCLA or similar state legislation with respect to various waste disposal areas owned or operated by third parties. As of December 31, 2006, Devon’s consolidated balance sheet included $5 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. 81 notes 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. Trial is set for November 2007. 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 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 in its 2006 consolidated financial statements approximately $6 million for royalties that would be due if price thresholds were added to its 1998 and 1999 leases effective October 1, 2006. 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. As of December 31, 2006, $154 million of these proceeds had been utilized as reimbursement of past repair costs and deductible amounts. The remaining proceeds of $313 million will be utilized as reimbursement of Devon’s anticipated future repair costs. Devon has not yet received any settlements related to claims filed with its secondary insurers. Should Devon’s total policy recoveries, including the partial settlements already received from Devon’s primary 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, 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 losses under this new insurance arrangement through December 31, 2006. 82 notes 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. Commitments Devon has certain drilling and facility obligations under contractual agreements with third party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction. Included in the $3.0 billion total of “Drilling and Facility Obligations” in the table below is $1.9 billion which relates to long-term contracts for three deepwater drilling rigs and certain other contracts for onshore drilling and facility obligations in which drilling or facilities construction has not commenced. The $1.9 billion represents the gross commitment under these contracts. Devon’s ultimate payment for these commitments will be reduced by the amounts billed to its partners when net working interests are ultimately determined. Payments for these commitments, net of amounts billed to partners, will be capitalized as a component of oil and gas properties. Devon has certain firm transportation agreements which represent “ship or pay” arrangements whereby Devon has committed to ship certain volumes of oil, gas and NGLs for a fixed transportation fee. Devon has entered into these agreements to aid the movement of its production to market. Devon expects to have sufficient production to utilize the majority of these transportation services. Devon leases certain office space and equipment under operating lease arrangements. Total rental expense included in general and administrative expenses under operating leases, net of sub-lease income, was $36 million, $35 million and $49 million in 2006, 2005 and 2004, respectively. Devon assumed two offshore platform spar leases through the 2003 Ocean merger. The spars are being used in the development of the Nansen and Boomvang fields in the Gulf of Mexico. The Boomvang field was divested as part of the 2005 property divestiture program. The Nansen operating lease is for a 20-year term and contains various options whereby Devon may purchase the lessors’ interests in the spar. Total rental expense included in lease operating expenses under both the Nansen and Boomvang operating leases was $12 million, $14 million and $17 million in 2006, 2005 and 2004, respectively. Devon has guaranteed that the Nansen spar will have a residual value at the end of the operating lease equal to at least 10% of the fair value of the spar at the inception of the lease. The total guaranteed value is $14 million in 2022. However, such amount may be reduced under the terms of the lease agreement. As a result of the sale of the Boomvang field, Devon is subleasing the Boomvang Spar. If the sublessee were to default on its obligation, Devon would continue to be obligated to pay the periodic lease payments and any guaranteed value required at the end of the term. Devon has a floating, production, storage and offloading facility (“FPSO”) that is being used in the Panyu project offshore China and is being leased under operating lease arrangements. This lease expires in September 2009. Devon was also leasing an FPSO that is being used in the Zafiro field offshore Equatorial Guinea. Devon and the other working interest owners purchased this FPSO in the fourth quarter of 2005. Total rental expense included in lease operating expenses under both the China and Equatorial Guinea operating leases was $9 million, $19 million and $20 million in 2006, 2005 and 2004, respectively. The following is a schedule by year of future minimum payments for drilling and facility obligations, firm transportation agreements and leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2006: Year endinG deCemBer 31, 2007 2008 2009 2010 2011 Thereafter Total payments 9. Share-BaSed CompenSation drillinG and faCilitY oBliGationS firm tranSportation aGreementS offiCe and equipment leaSeS (IN MILLIoNs) Spar leaSeS fpSo leaSeS $ $ 886 524 613 480 364 126 2,993 123 92 81 61 45 172 574 48 44 37 29 26 31 215 11 11 11 11 11 141 196 21 31 29 23 23 57 184 On June 8, 2005, Devon’s stockholders adopted the 2005 Long-Term Incentive Plan which expires on June 8, 2013. Devon’s stockholders adopted certain amendments to this plan on June 7, 2006. This plan, as amended, authorizes the Compensation Committee, which consists of non-management members of Devon’s Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards, Canadian restricted stock units, performance units, performance bonuses, stock appreciation rights and cash-out rights to eligible employees. The plan also authorizes the grant of nonqualified stock options, restricted stock awards and stock appreciation rights to directors. A total of 32 million shares of Devon common stock have been reserved for issuance pursuant to the plan. To calculate shares issued 83 notes under the plan, options granted represent one share and other awards represent 2.2 shares. Devon also has stock option plans that were adopted in 2003 and 1997 under which stock options and restricted stock awards were issued to key management and professional employees. Options granted under these plans remain exercisable by the employees owning such options, but no new options or restricted stock awards will be granted under these plans. Devon also has stock options outstanding that were assumed as part of the acquisitions of Ocean, Mitchell Energy & Development Corp., Santa Fe Snyder and PennzEnergy. As discussed in Note 1, on January 1, 2006, Devon changed its method of accounting for share-based compensation from the APB No. 25 intrinsic value accounting method to the fair value recognition provisions of SFAS No. 123(R). The following table presents the effects of share-based compensation included in Devon’s accompanying statement of operations for the years ended December 31, 2006, 2005 and 2004. Gross general and administrative expense Share-based compensation expense capitalized pursuant to the full cost method of accounting for oil and gas properties Related income tax benefit 2006 2005 (IN MILLIoNs) $ $ $ 91 26 23 29 — 11 2004 12 — 5 Stock options Under Devon’s 2005 Long-Term Incentive Plan, the exercise price of stock options granted may not be less than the estimated fair market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which period may not exceed eight years from the date of grant. The recipient must pay the exercise price in cash or in common stock, or a combination thereof, at the time that the option is exercised. Options granted generally have a vesting period that ranges from three to four years. The fair value of stock options on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires Devon to make several assumptions. The volatility of Devon’s common stock is based on the historical volatility of the market price of Devon’s common stock over a period of time equal to the expected term of the option and ending on the grant date. The dividend yield is based on Devon’s historical and current yield in effect at the date of grant. The risk-free interest rate is based on the zero-coupon U.S. Treasury yield for the expected term of the option at the date of grant. The expected term of the options is based on historical exercise and termination experience for various groups of employees and directors. Each group is determined based on the similarity of their historical exercise and termination behavior. The following table presents a summary of the grant-date fair values of stock options granted and the related assumptions for the years ended December 31, 2006, 2005 and 2004. All such amounts represent the weighted-average amounts for each year. Grant-date fair value Volatility factor Dividend yield Risk-free interest rate Expected term (in years) $ 2006 22.41 32.2% 0.5% 5.7% 4.0 2005 (IN MILLIoNs) 19.65 31.0% 0.6% 4.4% 4.2 2004 10.32 32.2% 0.5% 3.2% 4.0 The following table presents a summary of Devon’s outstanding stock options as of December 31, 2006, including changes during the year then ended. Outstanding at December 31, 2005 Granted Exercised Forfeited Outstanding at December 31, 2006 Vested and expected to vest at December 31, 2006 Exercisable at December 31, 2006 weiGhted averaGe exerCiSe priCe $ 32.74 $ 70.00 25.41 $ $ 49.16 $ 38.24 $ 37.51 $ 29.44 optionS (IN thousANDs) 16,732 1,874 (2,846) (377) 15,383 14,952 11,034 weiGhted averaGe remaininG ContraCtual term (IN yeArs) aGGreGate intrinSiC value (IN MILLIoNs) 4.1 4.1 3.8 $ 450 $ 448 $ 416 The aggregate intrinsic value of stock options that were exercised during 2006, 2005 and 2004 was $119 million, $149 million and $168 million, respectively. As of December 31, 2006, Devon’s unrecognized compensation cost related to unvested stock options was $77 million. Such cost is expected to be recognized over a weighted- average period of 2.4 years. 84 notes restricted Stock awards and units Under Devon’s 2005 Long-Term Incentive Plan, restricted stock awards and units are subject to the terms, conditions, restrictions and/or limitations, if any, that the Compensation Committee deems appropriate, including restrictions on continued employment. Generally, restricted stock awards and units vest over a minimum restriction period of at least three years from the date of grant. During the vesting period, recipients of restricted stock awards receive dividends which are not subject to restrictions or other limitations. The fair value of restricted stock awards and units on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of restricted stock awards and units as the closing price of Devon’s common stock on the grant date of the award or unit. The following table presents a summary of Devon’s unvested restricted stock awards as of December 31, 2006, including changes during the year then ended. Unvested at December 31, 2005 Granted Vested Forfeited Unvested at December 31, 2006 reStriCted StoCk awardS (IN thousANDs) 3,417 3,091 (1,156) (190) 5,162 weiGhted averaGe Grant-date fair value $ 46.80 $ 65.68 $ 42.58 $ 47.54 $ 58.35 The aggregate fair value of restricted stock awards that vested during 2006, 2005 and 2004 was $82 million, $51 million and $15 million, respectively. As of December 31, 2006, Devon’s unrecognized compensation cost related to unvested restricted stock awards and units was $253 million. Such cost is expected to be recognized over a weighted-average period of 2.9 years. 10. reduCtion of CarrYinG value of oil and GaS propertieS During 2006 and 2005, Devon reduced the carrying value of certain of its oil and gas properties due to full cost ceiling limitations and unsuccessful exploratory activities. A summary of these reductions and additional discussion is provided below. Unsuccessful exploratory reductions: Nigeria Brazil Angola Ceiling test reduction - Russia Total 2006 GroSS Year ended deCemBer 31, net of taxeS GroSS (IN MILLIoNs) 2005 net of taxeS $ $ 85 16 — 20 121 85 16 — 10 111 — 42 170 — 212 — 42 119 — 161 2006 Reductions Devon has committed to drill four wells in Nigeria. The first two wells were unsuccessful. After drilling the second unsuccessful well in the first quarter of 2006, Devon determined that the capitalized costs related to these two wells should be impaired. Therefore, in the first quarter of 2006, Devon recognized an $85 million impairment of its investment in Nigeria 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. 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. As a result of a decline in projected future net cash flows, the carrying value of Devon’s Russian properties exceeded the full cost ceiling by $10 million at the end of the third quarter of 2006. Therefore, 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. 85 notes 2005 Reductions Devon’s interests in Angola were acquired through the 2003 Ocean Energy merger. Devon’s Angolan drilling program discovered no proven reserves. After drilling three unsuccessful wells in the fourth quarter of 2005, Devon determined that all of the Angolan capitalized costs should be impaired. Prior to the fourth quarter of 2005, Devon was capitalizing the costs of previous unsuccessful efforts in Brazil pending the determination of whether proved reserves would be recorded in Brazil. Devon has been successful in its drilling efforts on block BM-C-8 in Brazil and is currently developing the Polvo project on this block. The ultimate value of the Polvo project is expected to be in excess of the sum of its related costs, plus the costs of the previous unrelated unsuccessful efforts in Brazil which were capitalized. However, the Polvo proved reserves will be recorded over a period of time. At the end of 2005, it was expected that a small initial portion of the proved reserves ultimately expected at Polvo would be recorded in 2006. Based on preliminary estimates developed in the fourth quarter of 2005, the value of this initial partial booking of proved reserves was not sufficient to offset the sum of the related proportionate Polvo costs plus the costs of the previous unrelated unsuccessful efforts. Therefore, Devon determined that the prior unsuccessful costs unrelated to the Polvo project should be impaired. These costs totaled approximately $42 million. There was no tax benefit related to this Brazilian impairment. 11. other inCome The components of other income include the following: Interest and dividend income Net gain on sales of non-oil and gas property and equipment Loss on derivative financial instruments Gains from changes in foreign exchange rates Other Total 12. inCome taxeS 2006 100 6 — — 9 115 $ $ Year ended deCemBer 31, 2005 (IN MILLIoNs) 95 150 (48) 2 (1) 198 2004 45 33 — 23 25 126 At December 31, 2006, Devon had the following net operating loss carryforwards which are available to reduce future taxable income in the jurisdiction where the net operating loss was incurred. These carryforwards will result in a future tax reduction based upon the future tax rate applicable to the taxable income that is ulti- mately offset by the net operating loss carryforward. For financial purposes, the tax effects of these carryforwards have been recognized as reductions to the net deferred tax liability at December 31, 2006. juriSdiCtion Various U.S. states Canada Brazil YearS of expiration 2007 – 2022 2008 – 2027 Indefinite CarrYforward amountS (IN MILLIoNs) $ $ $ 110 143 31 86 notes The earnings from continuing operations before income taxes and the components of income tax expense (benefit) for the years 2006, 2005 and 2004 were as follows: EARningS FROM COntinuing OPERAtiOnS bEFORE inCOME tAxES: U.S. Canada International Total CuRREnt inCOME tAx ExPEnSE: U.S. federal Various states Canada International Total current tax expense DEFERRED inCOME tAx ExPEnSE (bEnEFit): U.S. federal Various states Canada International Total deferred tax expense Total income tax expense 2006 2,435 751 826 4,012 292 7 143 377 819 456 77 (105) (58) 370 1,189 $ $ $ $ Year ended deCemBer 31, 2005 (IN MILLIoNs) 3,254 899 352 4,505 735 26 106 351 1,218 271 (18) 217 (82) 388 1,606 2004 2,264 598 414 3,276 346 10 49 320 725 246 27 149 (52) 370 1,095 The taxes on the results of discontinued operations presented in the accompanying statements of operations were all related to international operations. Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate to earnings from continuing operations before income taxes as a result of the following: Expected income tax expense based on U.S. statutory tax rate of 35% Effect of Canadian tax rate reductions U.S. manufacturing deduction Repatriation of Canadian earnings State income taxes Taxation on foreign operations Other Total income tax expense 2006 1,404 (243) (12) — 55 (22) 7 1,189 $ $ Year ended deCemBer 31, 2005 (IN MILLIoNs) 1,577 (14) (25) 28 6 30 4 1,606 2004 1,146 (36) — — 20 (35) — 1,095 In 2006, 2005 and 2004, deferred income taxes were reduced $243 million, $14 million and $36 million, respectively, due to Canadian statutory rate reductions that were enacted in each such year. In 2006 and 2005, income taxes were reduced $12 million and $25 million, respectively, due to a new U.S. tax deduction for companies with domestic production activities, including oil and gas extraction. In 2006, deferred income taxes increased $39 million due to the effect of a new income-based tax enacted by the state of Texas that replaces a previous franchise tax. The new tax is effective January 1, 2007. The $39 million increase is included in 2006 state income taxes in the above table. In 2005, Devon recognized $28 million of taxes related to its repatriation of $545 million to the U.S. The cash was repatriated due to tax legislation that allowed qualifying companies to repatriate cash from foreign operations at a reduced income tax rate. Substantially all of the cash repatriated by Devon in 2005 related to 87 notes earnings of its Canadian subsidiary. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2006 and 2005 are presented below: DEFERRED tAx ASSEtS: Net operating loss carryforwards Minimum tax credit carryforwards Fair value of derivative financial instruments Asset retirement obligations Pension benefit obligations Insurance proceeds Other Total deferred tax assets DEFERRED tAx liAbilitiES: Property and equipment, principally due to nontaxable business combinations, differences in depreciation, and the expensing of intangible drilling costs for tax purposes Chevron Corporation common stock Long-term debt Other Total deferred tax liabilities Net deferred tax liability deCemBer 31, (IN MILLIoNs) 2006 35 — 97 270 81 113 108 704 (5,743) (326) (148) (35) (6,252) (5,548) $ $ 2005 148 18 52 271 49 — 102 640 (5,406) (247) (168) (35) (5,856) (5,216) As shown in the above table, Devon has recognized $704 million of deferred tax assets as of December 31, 2006. Such amount includes $35 million from various carryforwards available to offset future income taxes. The carryforwards include state net operating loss carryforwards which expire primarily between 2007 and 2022, Canadian net operating loss carryforwards which expire primarily between 2008 and 2027, and Brazilian net operating loss carryforwards which have no expiration. The tax benefits of carryforwards are recorded as an asset to the extent that management assesses the utilization of such carryforwards to be “more likely than not.” When the future utilization of some portion of the carryforwards is determined not to be “more likely than not,” a valuation allowance is provided to reduce the recorded tax benefits from such assets. Devon expects the tax benefits from the net operating loss carryforwards to be utilized between 2007 and 2010. Such expectation is based upon current estimates of taxable income during this period, considering limitations on the annual utilization of these benefits as set forth by tax regulations. Significant changes in such estimates caused by variables such as future oil and gas prices or capital expenditures could alter the timing of the eventual utilization of such carryforwards. There can be no assurance that Devon will generate any specific level of continuing taxable earnings. However, management believes that Devon’s future taxable income will more likely than not be sufficient to utilize substantially all its tax carryforwards prior to their expiration. 88 notes 13. diSContinued operationS egypt On November 14, 2006, Devon announced its plans to divest its operations in Egypt. Pursuant to accounting rules for discontinued operations, Devon has classified all 2006 and prior period amounts related to its operations in Egypt as discontinued operations. Devon anticipates completing the sale of its Egyptian assets during the first half of 2007. As of December 31, 2006, Devon has not recorded any gain or loss associated with this planned sale. Revenues related to Devon’s operations in Egypt totaled $118 million, $119 million and $133 million during 2006, 2005 and 2004, respectively. The following table presents the main classes of assets and liabilities associated with Devon’s operations in Egypt as of December 31, 2006 and 2005. ASSEtS: Cash Accounts receivable Other current assets Current assets Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization liAbilitiES: Current liabilities – accounts payable – trade Asset retirement obligation, long-term Deferred income taxes Other liabilities Long-term liabilities west africa (Subsequent event) aS of deCemBer 31, (IN MILLIoNs) 2006 17 32 32 81 185 5 9 15 1 25 $ $ $ $ $ $ 2005 13 36 17 66 217 19 8 31 1 40 On January 23, 2007 Devon announced its plans to divest its operations in West Africa. Pursuant to accounting rules for discontinued operations, Devon has not classified the assets, liabilities or operating results of its operations in West Africa as discontinued operations as of December 31, 2006. However, such amounts will be classified as discontinued operations beginning with the first quarter of 2007. Devon anticipates completing the sale of its West African assets during the third quarter of 2007. As of December 31, 2006, Devon has not recorded any gain or loss associated with this planned sale. The following table presents the main classes of assets and liabilities associated with Devon’s operations in West Africa as of December 31, 2006 and 2005. ASSEtS: Cash Accounts receivable Other current assets Current assets Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization liAbilitiES: Accounts payable – trade Income taxes payable Current portion of asset retirement obligation Accrued expenses and other current liabilities Current liabilities Asset retirement obligation, long-term Deferred income taxes Other liabilities Long-term liabilities aS of deCemBer 31, (IN MILLIoNs) 2006 47 69 35 151 1,434 43 115 8 2 168 29 360 15 404 $ $ $ $ $ $ $ 2005 62 190 31 283 1,515 64 101 — — 165 24 397 15 436 89 notes 14. SeGment information Devon manages its business by country. As such, Devon identifies its segments based on geographic areas. Devon has three reportable segments: its operations in the U.S., its operations in Canada, and its international operations outside of North America. Substantially all of these segments’ operations involve oil and gas producing activities. Certain information regarding such activities for each segment is included in Note 15. Following is certain financial information regarding Devon’s segments for 2006, 2005 and 2004. The revenues reported are all from external customers. AS OF DECEMbER 31, 2006: Current assets Property and equipment, net of accumulated depreciation, depletion and amortization Goodwill Other assets Total assets Current liabilities Long-term debt Asset retirement obligation, long-term Other liabilities Deferred income taxes Stockholders’ equity Total liabilities and stockholders’ equity YEAR EnDED DECEMbER 31, 2006: Revenues: Oil sales Gas sales NGL sales Marketing and midstream revenues Total revenues Expenses and other income, net: Lease operating expenses Production taxes Marketing and midstream operating costs and expenses Depreciation, depletion and amortization of oil and gas properties Depreciation and amortization of non-oil and gas properties Accretion of asset retirement obligation General and administrative expenses Interest expense Change in fair value of derivative financial instruments Reduction of carrying value of oil and gas properties Other income, net Total expenses and other income, net Earnings from continuing operations before income tax expense Income tax expense (benefit): Current Deferred Total income tax expense Earnings from continuing operations Discontinued operations: Earnings from discontinued operations before income taxes Income tax benefit Earnings from discontinued operations Net earnings Preferred stock dividends Net earnings applicable to common stockholders Capital expenditures 90 u.S. Canada international total (IN MILLIoNs) $ 1,307 616 1,289 3,212 15,253 3,053 1,289 20,902 3,693 2,594 387 864 3,351 10,013 20,902 1,218 3,445 548 1,641 6,852 813 235 1,226 1,311 154 25 316 199 181 — (43) 4,417 2,435 299 533 832 1,603 — — — 1,603 10 1,593 5,814 $ $ $ $ $ $ 6,929 2,585 35 10,165 569 2,974 360 16 1,831 4,415 10,165 603 1,456 201 31 2,291 543 7 10 644 18 21 92 222 (3) — (14) 1,540 751 143 (105) 38 713 — — — 713 — 713 1,670 2,413 68 226 3,996 383 — 86 45 468 3,014 3,996 1,384 31 — 20 1,435 132 99 8 311 4 3 (11) — — 121 (58) 609 826 377 (58) 319 507 22 (1) 23 530 — 530 609 24,595 5,706 1,550 35,063 4,645 5,568 833 925 5,650 17,442 35,063 3,205 4,932 749 1,692 10,578 1,488 341 1,244 2,266 176 49 397 421 178 121 (115) 6,566 4,012 819 370 1,189 2,823 22 (1) 23 2,846 10 2,836 8,093 AS OF DECEMbER 31, 2005: Current assets Property and equipment, net of accumulated depreciation, depletion and amortization Goodwill Other assets Total assets Current liabilities Long-term debt Asset retirement obligation, long-term Other liabilities Deferred income taxes Stockholders’ equity Total liabilities and stockholders’ equity YEAR EnDED DECEMbER 31, 2005: Revenues: Oil sales Gas sales NGL sales Marketing and midstream revenues Total revenues Expenses and other income, net: Lease operating expenses Production taxes Marketing and midstream operating costs and expenses Depreciation, depletion and amortization of oil and gas properties Depreciation and amortization of non-oil and gas properties Accretion of asset retirement obligation General and administrative expenses Interest expense Change in fair value of derivative financial instruments Reduction of carrying value of oil and gas properties Other income, net Total expenses and other income, net Earnings from continuing operations before income tax expense Income tax expense (benefit): Current Deferred Total income tax expense Earnings from continuing operations Discontinued operations: Earnings from discontinued operations before income taxes Income tax expense Earnings from discontinued operations Net earnings Preferred stock dividends Net earnings applicable to common stockholders Capital expenditures notes u.S. Canada international total (IN MILLIoNs) $ 2,042 1,182 982 4,206 10,856 3,056 1,213 17,167 1,736 2,986 320 467 2,864 8,794 17,167 1,062 3,929 484 1,780 7,255 710 273 1,336 1,137 141 25 245 224 86 — (176) 4,001 3,254 761 253 1,014 2,240 — — — 2,240 10 2,230 2,200 $ $ $ $ $ $ 5,877 2,581 17 9,657 925 2,971 261 12 2,008 3,480 9,657 353 1,814 196 12 2,375 498 6 6 570 14 16 59 309 8 — (10) 1,476 899 106 217 323 576 — — — 576 — 576 1,707 2,178 68 221 3,449 273 — 29 57 502 2,588 3,449 944 41 7 — 992 116 56 — 274 5 2 (13) — — 212 (12) 640 352 351 (82) 269 83 46 15 31 114 — 114 308 18,911 5,705 1,451 30,273 2,934 5,957 610 536 5,374 14,862 30,273 2,359 5,784 687 1,792 10,622 1,324 335 1,342 1,981 160 43 291 533 94 212 (198) 6,117 4,505 1,218 388 1,606 2,899 46 15 31 2,930 10 2,920 4,215 91 notes YEAR EnDED DECEMbER 31, 2004: Revenues: Oil sales Gas sales NGL sales Marketing and midstream revenues Total revenues Expenses and other income, net: Lease operating expenses Production taxes Marketing and midstream operating costs and expenses Depreciation, depletion and amortization of oil and gas properties Depreciation and amortization of non-oil and gas properties Accretion of asset retirement obligation General and administrative expenses Interest expense Change in fair value of derivative financial instruments Other income, net Total expenses and other income, net Earnings before income tax expense Income tax expense (benefit): Current Deferred Total income tax expense Earnings from continuing operations Discontinued operations: Earnings from discontinued operations before income taxes Income tax expense Earnings from discontinued operations Net earnings Preferred stock dividends Net earnings applicable to common stockholders Capital expenditures u.S. Canada international total (IN MILLIoNs) $ $ $ 976 3,261 405 1,688 6,330 714 220 1,333 1,242 130 27 221 197 63 (81) 4,066 2,264 356 273 629 1,635 — — — 1,635 10 1,625 1,674 299 1,437 143 13 1,892 438 5 6 522 14 15 56 278 (1) (39) 1,294 598 49 149 198 400 — — — 400 — 400 979 824 34 6 — 864 107 30 — 313 4 2 — — — (6) 450 414 320 (52) 268 146 17 12 5 151 — 151 279 2,099 4,732 554 1,701 9,086 1,259 255 1,339 2,077 148 44 277 475 62 (126) 5,810 3,276 725 370 1,095 2,181 17 12 5 2,186 10 2,176 2,932 15. Supplemental information on oil and GaS operationS (unaudited) The following supplemental unaudited information regarding the oil and gas activities of Devon is presented pursuant to the disclosure requirements promulgated by the Securities and Exchange Commission and SFAS No. 69, Disclosures About Oil and Gas Producing Activities. This supplemental information excludes amounts for all periods presented related to Devon’s discontinued operations in Egypt. Costs incurred The following tables reflect the costs incurred in oil and gas property acquisition, exploration, and development activities: 2006 1,113 1,485 973 4,151 7,722 $ $ total Year ended deCemBer 31, 2005 (IN MILLIoNs) 54 347 890 2,787 4,078 2004 38 141 714 1,917 2,810 Property acquisition costs: Proved properties Unproved properties Exploration costs Development costs Costs incurred 92 notes domeStiC Year ended deCemBer 31, 2005 (IN MILLIoNs) 5 106 422 1,597 2,130 Canada Year ended deCemBer 31, 2005 (IN MILLIoNs) 49 239 361 1,020 1,669 international Year ended deCemBer 31, 2005 (IN MILLIoNs) — 2 107 170 279 2006 1,066 1,366 547 2,558 5,537 2006 23 70 217 1,244 1,554 2006 24 49 209 349 631 2004 27 75 335 1,163 1,600 2004 11 52 272 625 960 2004 — 14 107 129 250 $ $ $ $ $ $ Property acquisition costs: Proved properties Unproved properties Exploration costs Development costs Costs incurred Property acquisition costs: Proved properties Unproved properties Exploration costs Development costs Costs incurred Property acquisition costs: Proved properties Unproved properties Exploration costs Development costs Costs incurred Pursuant to the full cost method of accounting, Devon capitalizes certain of its general and administrative expenses which are related to property acquisition, exploration and development activities. Such capitalized expenses, which are included in the costs shown in the preceding tables, were $269 million, $181 million and $166 million in the years 2006, 2005 and 2004, respectively. Also, Devon capitalizes interest costs incurred and attributable to unproved oil and gas properties and major development projects of oil and gas properties. Capitalized interest expenses, which are included in the costs shown in the preceding tables, were $70 million in each of the years 2006, 2005 and 2004. results of operations for oil and Gas producing activities The following tables include revenues and expenses associated directly with Devon’s oil and gas producing activities, including general and administrative expenses directly related to such producing activities. They do not include any allocation of Devon’s interest costs or general corporate overhead and, therefore, are not necessarily indicative of the contribution to net earnings of Devon’s oil and gas operations. Income tax expense has been calculated by applying statutory income tax rates to oil, gas and NGL sales after deducting costs, including depreciation, depletion and amortization and after giving effect to permanent differences. Oil, gas and NGL sales Production and operating expenses Depreciation, depletion and amortization Accretion of asset retirement obligation General and administrative expenses Reduction of carrying value of oil and gas properties Income tax expense Results of operations Depreciation, depletion and amortization per Boe total Year ended deCemBer 31, 2005 2006 2004 (IN MILLIoNs, exCept per equIvALeNt BArreL AMouNts) $ $ $ 8,886 (1,829) (2,266) (49) (162) (121) (1,448) 3,011 10.59 8,830 (1,659) (1,981) (43) (107) (212) (1,830) 2,998 8.86 7,385 (1,514) (2,077) (44) (104) — (1,342) 2,304 8.41 93 domeStiC Year ended deCemBer 31, 2005 2006 2004 (IN MILLIoNs, exCept per equIvALeNt BArreL AMouNts) $ $ $ 5,211 (1,048) (1,311) (26) (115) (996) 1,715 9.89 5,475 (983) (1,137) (25) (84) (1,145) 2,101 8.35 4,642 (934) (1,242) (27) (75) (807) 1,557 8.23 Canada Year ended deCemBer 31, 2005 2006 2004 (IN MILLIoNs, exCept per equIvALeNt BArreL AMouNts) $ $ $ 2,260 (550) (644) (21) (29) (144) 872 11.17 2,363 (504) (570) (16) (20) (426) 827 9.20 1,879 (443) (522) (15) (16) (275) 608 8.00 international Year ended deCemBer 31, 2005 2006 2004 (IN MILLIoNs, exCept per equIvALeNt BArreL AMouNts) $ $ $ 1,415 (231) (311) (2) (18) (121) (308) 424 13.03 992 (172) (274) (2) (3) (212) (259) 70 10.73 864 (137) (313) (2) (13) — (260) 139 10.13 notes Oil, gas and NGL sales Production and operating expenses Depreciation, depletion and amortization Accretion of asset retirement obligation General and administrative expenses Income tax expense Results of operations Depreciation, depletion and amortization per Boe Oil, gas and NGL sales Production and operating expenses Depreciation, depletion and amortization Accretion of asset retirement obligation General and administrative expenses Income tax expense Results of operations Depreciation, depletion and amortization per Boe Oil, gas and NGL sales Production and operating expenses Depreciation, depletion and amortization Accretion of asset retirement obligation General and administrative expenses Reduction of carrying value of oil and gas properties Income tax expense Results of operations Depreciation, depletion and amortization per Boe 94 notes In 2006, 2005 and 2004, the Canadian income tax amounts in the tables above were reduced by $243 million, $14 million and $36 million, respectively, due to statutory rate reductions that were enacted in each such year. quantities of oil and Gas reserves Set forth below is a summary of the reserves which were evaluated, either by preparation or audit, by independent petroleum consultants for each of the years ended 2006, 2005 and 2004. Domestic Canada International Total 2006 2005 2004 prepared audited prepared audited prepared audited 7% 46% 99% 28% 81% 39% — 61% 9% 46% 98% 31% 79% 26% — 54% 16% 22% 98% 28% 61% — — 35% “Prepared” reserves are those quantities of reserves which were prepared by an independent petroleum consultant. “Audited” reserves are those quantities of revenues which were estimated by Devon employees and audited by an independent petroleum consultant. An audit is an examination of a company’s proved oil and gas reserves and net cash flow by an independent petroleum consultant that is conducted for the purpose of expressing an opinion as to whether such estimates, in aggregate, are reasonable and have been estimated and presented in conformity with generally accepted petroleum engineering and evaluation principles. The domestic reserves were evaluated by the independent petroleum consultants of LaRoche Petroleum Consultants, Ltd. and Ryder Scott Company, L.P. in each of the years presented. The Canadian reserves were evaluated by the independent petroleum consultants of AJM Petroleum Consultants in each of the years presented. The International reserves were evaluated by the independent petroleum consultants of Ryder Scott Company, L.P. in each of the years presented. Set forth below is a summary of the changes in the net quantities of crude oil, natural gas and natural gas liquids reserves for each of the three years ended December 31, 2006. Additional discussion of the significant proved reserve changes follows the tables below. Proved reserves as of December 31, 2003 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2004 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2005 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2006 Proved developed reserves as of: December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 total oil (mmBBlS) GaS (BCf) 646 (82) 19 76 1 (74) (1) 585 (14) 21 166 2 (62) (58) 640 (21) 5 139 — (55) — 708 392 400 355 358 7,316 39 29 988 14 (891) (2) 7,493 78 (2) 1,220 10 (827) (676) 7,296 (89) (106) 1,491 584 (815) (5) 8,356 5,980 6,219 6,111 6,518 natural GaS liquidS (mmBBlS) 209 1 21 25 — (24) — 232 4 16 30 — (24) (12) 246 (7) 5 45 9 (23) — 275 179 204 216 229 total (mmBoe) 2,074 (75) 45 266 3 (247) (1) 2,065 3 37 400 4 (224) (183) 2,102 (44) (6) 433 106 (214) (1) 2,376 1,568 1,640 1,589 1,674 95 notes Proved reserves as of December 31, 2003 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2004 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2005 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2006 Proved developed reserves as of: December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 Proved reserves as of December 31, 2003 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2004 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2005 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2006 Proved developed reserves as of: December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 96 domeStiC oil (mmBBlS) GaS (BCf) 212 5 2 16 — (31) (1) 203 6 2 16 — (25) (29) 173 — — 16 — (19) — 170 171 168 149 147 4,884 8 62 578 8 (602) (2) 4,936 58 238 793 — (555) (306) 5,164 (110) (11) 1,298 580 (566) — 6,355 3,935 4,105 4,343 4,916 Canada GaS (BCf) 2,297 32 (46) 410 6 (279) — 2,420 22 (242) 427 10 (261) (370) 2,006 23 (84) 193 4 (241) (5) 1,896 oil (mmBBlS) 148 (43) 5 50 1 (14) — 147 — 2 144 2 (13) (29) 253 (19) (1) 109 — (13) — 329 natural GaS liquidS (mmBBlS) 161 1 23 16 — (19) — 182 3 19 20 — (18) (9) 197 (3) 6 43 9 (19) — 233 136 161 175 196 natural GaS liquidS (mmBBlS) 48 — (2) 9 — (5) — 50 1 (3) 10 — (6) (3) 49 (4) (1) 2 — (4) — 42 total (mmBoe) 1,187 8 35 129 1 (151) (1) 1,208 19 61 169 — (136) (89) 1,232 (22) 5 274 105 (132) — 1,462 964 1,014 1,049 1,163 total (mmBoe) 579 (38) (5) 127 2 (65) — 600 4 (41) 225 4 (62) (94) 636 (20) (16) 145 1 (58) (1) 687 123 123 103 112 1,964 2,043 1,708 1,560 43 43 41 33 493 507 429 405 notes Proved reserves as of December 31, 2003 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2004 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2005 Revisions due to prices Revisions other than price Extensions and discoveries Purchase of reserves Production Sale of reserves Proved reserves as of December 31, 2006 Proved developed reserves as of: December 31, 2003 December 31, 2004 December 31, 2005 December 31, 2006 oil (mmBBlS) GaS (BCf) international (1) natural GaS liquidS (mmBBlS) 286 (44) 12 10 — (29) — 235 (20) 17 6 — (24) — 214 (2) 6 14 — (23) — 209 98 109 103 99 135 (1) 13 — — (10) — 137 (2) 2 — — (11) — 126 (2) (11) — — (8) — 105 81 71 60 42 — — — — — — — — — — — — — — — — — — — — — — — — — — total (mmBoe) 308 (45) 15 10 — (31) — 257 (20) 17 6 — (26) — 234 (2) 5 14 — (24) — 227 111 119 111 106 (1) Except for nine MMBoe of proved reserves as of December 31, 2006, the preceding International quantities of reserves are attributable to production sharing contracts with various foreign governments. Noteworthy amounts included in the categories of proved reserve changes for the years 2006, 2005 and 2004 in the above tables include: Extensions and Discoveries Of the 433 MMBoe of 2006 extensions and discoveries, 143 MMBoe related to the Barnett Shale area in Texas, 88 MMBoe related to the Jackfish steam-assisted gravity drainage project in Canada which is expected to begin production in 2007, 30 MMBoe related to the Carthage area in east Texas and 20 MMBoe related to the Washakie area in southern Wyoming. The 2006 extensions and discoveries included 202 MMBoe related to additions from Devon’s infill drilling activities, including 127 MMBoe related to the Barnett Shale area and 20 MMBoe related to the Lloydminster area in Canada. Of the 400 MMBoe of 2005 extensions and discoveries, 118 MMBoe related to Jackfish, 54 MMBoe related to the Barnett Shale, and 40 MMBoe related to the Deep Basin in Canada. The 2005 extensions and discoveries included 76 MMBoe related to additions from Devon’s infill drilling activities, including 19 MMBoe related to the Barnett Shale, 16 MMBoe related to Carthage and eight MMBoe related to the Permian Basin in New Mexico and west Texas. Of the 266 MMBoe of 2004 extensions and discoveries, 32 MMBoe related to the Canadian Deep Basin, 29 MMBoe related to the Barnett Shale, and 28 MMBoe related to Carthage. The 2004 extensions and discoveries included 67 MMBoe related to additions from Devon’s infill drilling activities, including 21 MMBoe related to Carthage, 12 MMBoe related to the Permian Basin and nine MMBoe related to the Barnett Shale. Purchase of Reserves The 2006 total includes 100 MMBoe located in the Barnett Shale that was acquired in the Chief acquisition. See Note 3. Sale of Reserves The 2005 total includes 176 MMBoe of reserves related to non-core oil and gas properties in the offshore Gulf of Mexico and onshore in the United States and Canada. See Note 3. 97 notes Standardized measure of discounted future net Cash flows The tables below reflect the standardized measure of discounted future net cash flows relating to Devon’s interest in proved reserves: 2006 total deCemBer 31, 2005 (IN MILLIoNs) 2004 $ 82,354 94,132 66,595 (8,518) (29,408) (13,856) 30,572 (13,999) 16,573 $ 2006 (5,802) (25,063) (21,425) 41,842 (18,784) 23,058 domeStiC deCemBer 31, 2005 (IN MILLIoNs) (4,211) (19,513) (13,704) 29,167 (13,555) 15,612 2004 $ 47,980 55,954 39,214 (4,919) (18,858) (7,588) 16,615 (7,938) 8,677 $ 2006 (2,954) (16,213) (12,582) 24,205 (11,258) 12,947 Canada deCemBer 31, 2005 (IN MILLIoNs) (2,208) (13,181) (7,597) 16,228 (7,129) 9,099 2004 $ 22,575 26,277 18,483 (2,395) (7,431) (3,614) 9,135 (4,318) 4,817 2006 $ (1,984) (6,344) (5,986) 11,963 (5,332) 6,631 international deCemBer 31, 2005 (IN MILLIoNs) (1,353) (4,285) (4,200) 8,645 (4,764) 3,881 2004 $ 11,799 11,901 8,898 (1,204) (3,119) (2,654) 4,822 (1,743) 3,079 $ (864) (2,506) (2,857) 5,674 (2,194) 3,480 (650) (2,047) (1,907) 4,294 (1,662) 2,632 Future cash inflows Future costs: Development Production Future income tax expense Future net cash flows 10% discount to reflect timing of cash flows Standardized measure of discounted future net cash flows Future cash inflows Future costs: Development Production Future income tax expense Future net cash flows 10% discount to reflect timing of cash flows Standardized measure of discounted future net cash flows Future cash inflows Future costs: Development Production Future income tax expense Future net cash flows 10% discount to reflect timing of cash flows Standardized measure of discounted future net cash flows Future cash inflows Future costs: Development Production Future income tax expense Future net cash flows 10% discount to reflect timing of cash flows Standardized measure of discounted future net cash flows 98 notes Future cash inflows are computed by applying year-end prices (averaging $46.11 per barrel of oil, $5.06 per Mcf of gas and $27.63 per barrel of natural gas liquids at December 31, 2006) to the year-end quantities of proved reserves, except in those instances where fixed and determinable price changes are provided by contractual arrangements in existence at year-end. Future development and production costs are computed by estimating the expenditures to be incurred in developing and producing proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Of the $8.5 billion of future development costs, $2.2 billion, $1.5 billion and $0.9 billion are estimated to be spent in 2007, 2008 and 2009, respectively. Future development costs include not only development costs, but also future dismantlement, abandonment and rehabilitation costs. Included as part of the $8.5 billion of future development costs are $1.7 billion of future dismantlement, abandonment and rehabilitation costs. Future production costs include general and administrative expenses directly related to oil and gas producing activities. Future income tax expenses are computed by applying the appropriate statutory tax rates to the future pre-tax net cash flows relating to proved reserves, net of the tax basis of the properties involved. The future income tax expenses give effect to permanent differences and tax credits, but do not reflect the impact of future operations. Changes relating to the Standardized measure of discounted future net Cash flows Principal changes in the standardized measure of discounted future net cash flows attributable to Devon’s proved reserves are as follows: Beginning balance Oil, gas and NGL sales, net of production costs Net changes in prices and production costs Extensions and discoveries, net of future development costs Purchase of reserves, net of future development costs Development costs incurred during the period which reduced future development costs Revisions of quantity estimates Sales of reserves in place Accretion of discount Net change in income taxes Other, primarily changes in timing and foreign exchange rates Ending balance 2006 Year ended deCemBer 31, 2005 (IN MILLIoNs) $ $ 23,058 (6,895) (10,519) 4,579 786 1,691 (2,325) (10) 3,482 4,247 (1,521) 16,573 15,612 (7,064) 11,767 6,096 67 778 (799) (2,897) 2,270 (4,691) 1,919 23,058 2004 15,769 (5,767) 2,027 3,022 31 681 (1,105) (13) 2,243 (1,580) 304 15,612 99 notes 16. Supplemental quarterlY finanCial information (unaudited) Following is a summary of the unaudited interim results of operations for the years ended December 31, 2006 and 2005. Oil, gas and NGL sales Total revenues Net earnings Net earnings per common share: Basic Diluted Oil, gas and NGL sales Total revenues Net earnings Net earnings per common share: Basic Diluted firSt quarter SeCond quarter 2006 third quarter fourth quarter full Year (IN MILLIoNs, exCept per shAre AMouNts) $ $ $ $ $ $ $ $ $ $ 2,222 2,684 700 1.58 1.56 2,192 2,589 859 1.94 1.92 firSt quarter SeCond quarter 2,279 2,696 705 1.59 1.57 2005 third quarter 2,193 2,609 582 1.31 1.29 8,886 10,578 2,846 6.42 6.34 fourth quarter full Year (IN MILLIoNs, exCept per shAre AMouNts) 1,914 2,330 563 1.17 1.14 2,048 2,437 653 1.40 1.38 2,262 2,667 744 1.66 1.63 2,606 3,188 970 2.18 2.14 8,830 10,622 2,930 6.38 6.26 The first, second and third quarters of 2006 include $85 million, $16 million and $20 million, respectively, of reductions of carrying values of oil and gas properties. The after-tax effects of these amounts were $85 million (or $0.19 per share), $16 million (or $0.04 per share) and $10 million (or $0.02 per share), respectively. Also, the second quarter of 2006 included a reduction to income tax expense of $243 million (or $0.55 per share) due to statutory rate reductions in Canada and additional income tax expense of $39 million (or $0.09 per share) due to a new income-based tax enacted by the state of Texas. The adoption of FASB Statement No. 158 in the fourth quarter of 2006 (see Note 6) had no effect on earnings from continuing operations, net earnings or related per share amounts during any of the quarterly periods in 2006. The fourth quarter of 2005 includes a $212 million reduction of carrying value of oil and gas properties and a $14 million income tax benefit due to a statutory rate reduction in Canada. The after-tax effect of the reduction of carrying value was $161 million, or $0.36 per share. The per share effect of the rate reduction tax benefit was $0.03. Oil, gas and natural gas liquids sales for the first, second, third and fourth quarters of 2006 exclude $34 million, $27 million, $25 million and $32 million, respectively, related to discontinued operations in Egypt. Oil, gas and natural gas liquids sales for the first, second, third and fourth quarters of 2005 exclude $21 million, $31 million, $37 million and $30 million, respectively, related to discontinued operations in Egypt. 100 Risk Factors to Forward-looking Estimates The forward-looking estimates beginning on page 52 are based on management’s examination of historical operating trends, the information which was used to prepare the December 31, 2006, reserve reports and other data in Devon’s possession or available from third parties. Devon cautions that its future oil, natural gas and NGL production, revenues and expenses are subject to all of the risks and uncertainties normally incident to the exploration for and development, production and sale of oil, gas and NGLs. These risks include, but are not limited to, price volatility, inflation or lack of availability of goods and services, environmental risks, drilling risks, regulatory changes, the uncertainty inherent in estimating future oil and gas production or reserves, and other risks as outlined below. The production, transportation, processing and marketing of oil, natural gas and NGLs are complex processes which are subject to disruption due to transportation and processing availability, mechanical failure, human error, meteorological events including, but not limited to, hurricanes, and numerous other factors. price volatility Prices for oil, natural gas and NGLs are determined primarily by prevailing market conditions. Market conditions for these products are influenced by regional and worldwide economic conditions, weather and other local market conditions. These factors are beyond Devon’s control and are difficult to predict. In addition to volatility in general, oil, gas and NGL prices may vary considerably due to differences between regional markets, differing quality of oil produced (i.e., sweet crude versus heavy or sour crude), differing Btu contents of gas produced, transportation availability and costs and demand for the various products derived from oil, natural gas and NGLs. Substantially all of Devon’s revenues are attributable to sales, processing and transportation of these three commodities. Consequently, Devon’s financial results and resources are highly influenced by price volatility. oil, Gas, and nGl production Estimates for future production of oil, natural gas and NGLs are based on the assumption that market demand and prices for oil, gas and NGLs will continue at levels that allow for profitable production of these products. There can be no assurance of such stability. Most of Devon’s Canadian production of oil, natural gas and NGLs is subject to government royalties that fluctuate with prices. Thus, price fluctuations can affect reported production. Also, Devon’s international production of oil, natural gas and NGLs is governed by payout agreements with the governments of the countries in which Devon operates. If the payout under these agreements is attained earlier than projected, Devon’s net production and proved reserves in such areas could be reduced. marketing and midstream Estimates for future processing and transport of oil, natural gas and NGLs are based on the assumption that market demand and prices for oil, gas and NGLs will continue at levels that allow for profitable processing and transport of these products. There can be no assurance of such stability. Additionally, Devon cautions that its future marketing and midstream revenues and expenses are subject to all of the risks and uncertainties normally incident to the marketing and midstream business. These risks include, but are not limited to, price volatility, environmental risks, regulatory changes, the uncertainty inherent in estimating future processing volumes and pipeline throughput, cost of goods and services and other risks as outlined herein. foreign exchange Also, the financial results of Devon’s foreign operations are subject to currency exchange rate risks. Unless otherwise noted, all of the dollar amounts are expressed in U.S. dollars. Amounts related to Canadian operations have been converted to U.S. dollars using a projected average 2007 exchange rate of $0.89 U.S. dollar to $1.00 Canadian dollar. The actual 2007 exchange rate may vary materially from this estimate. Such variations could have a material effect on our forward-looking estimates. property acquisitions and dispositions Although Devon has completed several major property acquisitions and dispositions in recent years, these transactions are opportunity driven. Except for the planned divestitures of Devon’s assets in Egypt and West Africa, the forward-looking estimates do not include the financial and operating effects of potential property acquisitions or divestitures during the year 2007. 101 Directors 102 John W. Nichols, 92, is a co-founder of Devon. He was named chairman emeritus in 1999. Nichols was chairman of the board of directors from the time Devon began operations in 1971 until 1999. He is a founding partner of Blackwood & Nichols Co., which put together the first public oil and gas drilling fund ever registered with the Securities and Exchange Commission. Nichols is a non-practicing Certified Public Accountant. J. Larry Nichols, 64, is a co-founder of Devon and has been a director since 1971. He was named chairman of the board of directors in 2000 and serves as chairman of the Dividend Committee. Nichols served as president from 1976 until 2003 and has been chief executive officer since 1980. Nichols serves as a director of Baker Hughes Inc. and Sonic Corp. Nichols has a Bachelor of Arts degree in Geology from Princeton University and a law degree from the University of Michigan. Thomas F. Ferguson, 70, joined the board of directors in 1982 and serves as chairman of the Audit Committee. Ferguson retired in 2005 from his position as managing director of United Gulf Management Ltd., a wholly- owned subsidiary of Kuwait Investment Projects Co. KSC. He has represented Kuwait Investment Projects Co. on the boards of various companies in which it invests, including Baltic Transit Bank in Latvia and Tunis International Bank in Tunisia. Ferguson is a Canadian qualified Certified General Accountant and was formerly employed by the Economist Intelligence Unit of London as a financial consultant. Peter J. Fluor, 59, joined the board of directors in 2003. Fluor served as a director of Ocean Energy Inc. from 1980 to 2003 and has been chairman and chief executive officer of Texas Crude Energy Inc., a private oil and gas company, since January 2001. From 1997 through 2000, Fluor was president and chief executive officer of Texas Crude Energy Inc. He also serves as lead independent director of Fluor Corp. and is a director of Cameron Corp. David M. Gavrin, 72, joined the board of directors in 1979 and is lead director and chairman of the Compensation Committee. Gavrin has been a private investor since 1989 and is a director and chairman of the board of MetBank Holding Corp. He is also president and a director of Arthur J. Gavrin Foundation Inc. From 1978 to 1988, he was a general partner of Windcrest Partners, a private investment partnership in New York City, and, for 14 years prior to that, he was an officer of Drexel Burnham Lambert Inc. John A. Hill, 65, joined the board of directors in 2000 following Devon’s merger with Santa Fe Snyder Corp. and serves as chairman of the Governance Committee. He has been with First Reserve Corp., an oil and gas investment management company, since 1983 and is currently its vice chairman and managing director. Prior to creating First Reserve Corp., Hill was president and chief executive officer of several investment banking and asset management companies and served as the deputy administrator of the Federal Energy Administration during the Ford Administration. Hill is chairman of the board of trustees of the Putnam Funds in Boston, a trustee of Sarah Lawrence College and director of various companies controlled by First Reserve Corp. Robert L. Howard, 70, joined the board of directors in 2003 and is chairman of the Reserves Committee. Howard served as a director of Ocean Energy Inc. from 1996 to 2003. He retired in 1995 from his position as vice president of Domestic Operations, Exploration and Production, of Shell Oil Co. Howard is also a director of Southwestern Energy Co. and McDermott International Inc. William J. Johnson, 72, has been on the board of directors since 1999. Johnson has been a private consultant to the oil and gas industry since 1994. He is president and a director of JonLoc Inc., an oil and gas company of which he and his family are the only stockholders. Johnson has served as a director of Tesoro Corp. since 1996. From 1991 to 1994, Johnson was president, chief operating officer and a director of Apache Corp. Michael M. Kanovsky, 58, joined the board of directors in 1998. He was a co-founder of Northstar Energy Corp. and served on Northstar’s board of directors from 1982 to 1998. He is president of Sky Energy Corp. and serves as a director of Kinwest Energy Corp. and North American Oil Sands Corp., all privately held energy corporations. Kanovsky also is a director of Accrete Energy Inc., ARC Resources Ltd., Bonavista Petroleum Ltd., Pure Technologies Ltd. and TransAlta Corp. J. Todd Mitchell, 48, joined the board of directors in 2002. He served as president of GPM Inc., a family-owned investment company, from 1998 to 2006, and currently serves as its vice president for strategic planning. He also has served as president of Dolomite Resources Inc., a privately owned mineral exploration and investments company, since 1987 and as chairman of Rock Solid Images, a privately owned seismic data analysis software company, since 1998. Mitchell was on the board of directors of Mitchell Energy & Development Corp. from 1993 to 2002. Senior Officers John Richels, 56, was elected president of Devon in 2004. He previously served as a senior vice president of Devon and president and chief executive officer of Devon’s Canadian subsidiary. Richels joined Devon through its 1998 acquisition of Canadian-based Northstar Energy Corp. Prior to joining Northstar, Richels was managing and chief operating partner of the Canadian-based national law firm, Bennett Jones. While employed at Bennett Jones in the 1980s, Richels served as general counsel of the XV Olympic Winter Games Organizing Committee in Calgary. Richels also has served as a director of a number of publicly traded companies. He holds a bachelor’s degree in economics from York University and a law degree from the University of Windsor. Stephen J. Hadden, 52, was elected to the position of senior vice president, Exploration and Production, in 2004. In 1977, Hadden joined Texaco, now Chevron Corp., as a field engineer, subsequently holding a series of engineering and management positions in the United States. He served as vice president of Texaco Exploration and Production and as vice president of the company’s California business unit. In 2002, he became an independent consultant. Hadden received a Bachelor of Science degree in chemical engineering from Pennsylvania State University. Marian J. Moon, 56, was elected to the position of senior vice president, Administration, in 1999. Moon is responsible for office administration, information technology, human resources, corporate resources and corporate governance. Moon has been with Devon for 22 years and served in various capacities, including manager of Corporate Finance and corporate secretary. Prior to joining Devon, Moon was employed by Amarex Inc., an Oklahoma City-based oil and natural gas production and exploration firm, where her last position was treasurer. Moon is a member of the Society of Corporate Secretaries & Governance Professionals and a graduate of Valparaiso University. Darryl G. Smette, 59, was elected to the position of senior vice president, Marketing and Midstream, in 1999. Smette previously held the position of vice president, Marketing and Administrative Planning. His marketing background includes 15 years with Energy Reserves Group Inc./BHP Petroleum (Americas) Inc. He is also an oil and gas industry instructor, approved by the University of Texas Department of Continuing Education. Smette is a member of the Oklahoma Independent Producers Association, Natural Gas Association of Oklahoma and the American Gas Association. He holds an undergraduate degree from Minot State University and a master’s degree from Wichita State University. Lyndon C. Taylor, 48, was elected to the position of senior vice president and general counsel in February 2007. Taylor had served as Devon’s deputy general counsel since August 2005. Prior to joining Devon, Taylor was with Skadden, Arps, Slate, Meagher & Flom, LLP for 20 years, most recently as managing partner of the Houston office’s energy practice. He is admitted to practice law in Oklahoma and Texas. Taylor holds a Bachelor of Science degree in industrial engineering from Oklahoma State University and a law degree from the University of Oklahoma. 103 Glossary Bitumen / A viscous, tar-like oil that requires nonconven- tional production methods such as mining or steam-assisted gravity drainage. Lease / A legal contract that specifies the terms of the business relationship between an energy company and a landowner or mineral rights holder on a particular tract. Block / Refers to a contiguous leasehold position. In federal offshore waters, a block is typically 5,000 acres. British thermal unit (Btu) / A measure of heat value. An Mcf of natural gas is roughly equal to one million Btu. Coalbed natural gas / An unconventional gas resource that is present in certain coal deposits. Deep water / In offshore areas, water depths of greater than 600 feet. Delineation well / A well drilled just outside the proved area of an oil or gas reservoir in an attempt to extend the known boundaries of the reservoir. Development well / A well drilled within the area of an oil or gas reservoir known to be productive. Development wells are relatively low risk. Dry hole / A well found to be incapable of producing oil or gas in sufficient quantities to justify completion. Exploitation / Various methods of optimizing oil and gas production or establishing additional reserves from produc- ing properties through additional drilling or the application of new technology. Exploratory well / A well drilled in an unproved area, either to find a new oil or gas reservoir or to extend a known reservoir. Sometimes referred to as a wildcat. Field / A geographical area under which one or more oil or gas reservoirs lie. Floating production, storage and offloading unit (FPSO) / A moored tanker-type vessel used to develop an offshore oil field. Oil is stored within the FPSO until offloaded to a tanker for transportation to a terminal or refinery. Formation / An identifiable layer of rocks named after the geographical location of its first discovery and dominant rock type. London Inter Bank Offering Rate (LIBOR) / An average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. Natural gas liquids (NGLs) / Liquid hydrocarbons that are extracted and separated from the natural gas stream. NGL products include ethane, propane, butane and natural gasoline. Net acres / Gross acres multiplied by one’s fractional work- ing interest in the property. New York Mercantile Exchange (NYMEX) / The world’s largest physical commodity futures exchange. The prices quoted for oil, gas and other commodity transactions on the exchange are the basis for prices paid throughout the world. Oil sands / A complex mixture of sand, water and clay trap- ping very heavy oil known as bitumen. Pilot program / A small-scale test project used to assess the viability of a concept prior to committing significant capital to a large-scale project. Production / Natural resources, such as oil or gas, taken out of the ground. royalties. Net production / Gross production, minus royalties, multiplied by one’s fractional working interest. Prospect / An area designated for the potential drilling of development or exploratory wells. Proved reserves / Estimates of oil, gas and NGL quantities thought to be recoverable from known reservoirs under existing economic and operating conditions. Recavitate / The process of applying pressure surges on the coal formation at the bottom of a well in order to increase fracturing, enlarge the bottomhole cavity and thereby increase gas production. Fracture, refracture / The process of applying hydraulic pressure to an oil or gas bearing geological formation to crack the formation and stimulate the release of oil and gas. Recompletion / The modification of an existing well for the purpose of producing oil or gas from a different produc- ing formation. Gross acres / The total number of acres in which one owns a working interest. Reservoir / A rock formation or trap containing oil and/or natural gas. Hedge / A financial contract entered into to manage com- modity price risk. Royalty / The owner’s share of the value of minerals (oil and gas) produced on the property. Increased density/infill / A well drilled in addition to the number of wells permitted under initial spacing regulations, used to enhance or accelerate recovery, or prevent the loss of proved reserves. Independent producer / A non-integrated oil and gas producer with no refining or retail marketing operations. Seismic / A tool for identifying underground accumula- tions of oil or gas by sending energy waves or sound waves into the earth and recording the wave reflections. Results indicate the type, size, shape and depth of subsurface rock formations. 2-D seismic provides two-dimensional information while 3-D creates three-dimensional pictures. 4-C, or four-component, seismic utilizes measurement and interpretation of shear wave data. 4-C seismic improves the resolution of seismic images below shallow gas deposits. 104 Steam-assisted gravity drainage (SAGD) / A method of extracting bitumen from oil sands. Steam is injected under ground, softening the bitumen and allowing it to flow to the surface. Undeveloped acreage / Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or gas. Unit / A contiguous parcel of land deemed to cover one or more common reservoirs, as determined by state or federal regulations. Unit interest owners generally share proportionately in costs and revenues. Working interest / The cost-bearing ownership share of an oil or gas lease. Workover / The process of conducting remedial work, such as cleaning out a well bore, to increase or restore production. VOLUME ACRONYMS Bbl / A standard oil measurement that equals one barrel (42 U.S. gallons). MBbl / One thousand barrels MMBbls / One million barrels Mcf / A standard measurement unit for volumes of natural gas that equals one thousand cubic feet. MMcf / One million cubic feet Bcf / One billion cubic feet Tcf / One tillion cubic feet MMcfd / One million cubic feet per day Boe / A method of equating oil, gas and natural gas liquids. Gas is converted to oil based on its relative energy content at the rate of six Mcf of gas to one barrel of oil. NGLs are converted based upon volume: one barrel of natural gas liquids equals one barrel of oil. MBoe / One thousand barrels of oil equivalent MMBoe / One million barrels of oil equivalent MBoed / One thousand barrels of oil equivalent per day Gross production / Total production before deducting MBbld / One thousand barrels per day  This annual report was printed on paper containing a minimum of 10% post-consumer fibers. 105 Forward-Looking Statements This annual report includes “forward-looking statements” as defined by the Securities and Exchange Commission. Such statements are those concerning Devon’s plans, expectations and objectives for future operations including reserve potential and exploration target size. These statements address future financial position, business strategy, future capital expenditures, projected oil and gas production and future costs. Devon believes that the expectations reflected in such forward-looking statements are reasonable. However, important risk factors could cause actual results to differ materially from the company’s expectations. A discussion of these risk factors can be found on page 101 of this report. Further information is available in the company’s Form 10-K and other publicly available reports, which are available free of charge on the company’s website, www.devonenergy.com, or will be furnished upon request to the company.Corporate HeadquartersDevon Energy Corporation20 North BroadwayOklahoma City, OK 73102-8260Telephone: (405) 235-3611Fax: (405) 552-4550Permian, Mid-Continent,Rocky Mountains andMarketing and Midstream OperationsDevon Energy Corporation20 North BroadwayOklahoma City, OK 73102-8260Telephone: (405) 235-3611Fax: (405) 552-4550Gulf, Gulf Coast and International OperationsDevon Energy CorporationDevon Energy Tower1200 Smith StreetHouston, TX 77002-4313Telephone: (713) 286-5700Canadian OperationsDevon Canada Corporation2000, 400 - 3rd Avenue S.W.Calgary, Alberta T2P 4H2Telephone: (403) 232-7100Royalty Owner AssistanceTelephone: (405) 228-4800E-mail: DevonRevenueHotline@dvn.comShareholder AssistanceFor information about transfer or exchange of shares, dividends, address changes, account consolidation, multiple mailings, lost certificates and Form 1099:UMB Bank, n.a.Securities Transfer Division928 Grand BoulevardKansas City, MO 64106 Toll free: (877) 860-5820www.umb.comCompany ContactsVince White, Vice PresidentCommunications and Investor RelationsTelephone: (405) 552-4505E-mail: vince.white@dvn.comInvestor relatIons:Zack HagerManager, Investor RelationsTelephone: (405) 552-4526E-mail: zack.hager@dvn.comShea SnyderSupervisor, Investor RelationsTelephone: (405) 552-4782E-mail: shea.snyder@dvn.comScott CoodySenior Investor Relations AnalystTelephone: (405) 552-4735E-mail: scott.coody@dvn.comMedIa:Brian EngelManager, Public AffairsTelephone: (405) 228-7750E-mail: brian.engel@dvn.comChip MintySenior External Communications SpecialistTelephone: (405) 228-8647E-mail: chip.minty@dvn.comPublicationsA copy of Devon’s annual report to the Securities and Exchange Commission (Form 10-K) and other publications are available at no charge upon request. Direct requests to:Judy RobertsShareholder Services AdministratorTelephone: (405) 552-4570Fax: (405) 552-7818E-mail: judy.roberts@dvn.comAnnual MeetingOur annual shareholders’ meeting will be held at 8 a.m. Central Time on Wednesday, June 6, 2007, on the Third Floor of the Chase Tower, 100 North Broadway, Oklahoma City, OK.Independent AuditorsKPMG LLPOklahoma City, OKStock Trading DataDevon Energy Corporation’s common stock is traded on the New York Stock Exchange (symbol: DVN). There are approximately 16,000 shareholders of record.Common Stock Trading DataInvestor Information2005Quarter HigH Low Last totaL VoLumeFirst $ 49.42 36.48 47.75 195,070,400 Second $ 52.31 40.60 50.68 222,165,200 Third $ 70.35 50.75 68.64 184,169,700 Fourth $ 69.79 54.01 62.54 246,835,700 2006Quarter HigH Low Last totaL VoLumeFirst $ 69.97 55.31 61.17 184,716,100 Second $ 65.25 48.94 60.41 200,005,000 Third $ 74.65 57.19 63.15 214,743,800 Fourth $ 74.48 58.55 67.08 174,048,200 Dollars4504003503002502001501005002001 2002 2003 2004 2005 2006450400350300250200150100500Certifications The Form 10-K which was filed by the company with the Securities and Exchange Commission (SEC) for the fiscal year ending December 31, 2006 includes as exhibits, the certifications of our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, required to be filed with the SEC pursuant to Section 302 of the Sarbanes Oxley Act of 2002. The company has also filed with the New York Stock Exchange the 2006 annual certification of its Chief Executive Officer confirming that the company has complied with the New York Stock Exchange corporate governance listing standards.Stock Performance – 5-Year Cumulative Total ReturnDevonS&P 500SIC Code(1)(1) Stock Index for Crude Petroleum and Natural Gas devonenergy.com How do you define Devon? resource full www.devonenergy.com 

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