DBRS Upgrades Devon Energy Corporation to BBB (high) with a Stable Trend

DBRS has upgraded Devon Energy Corporation (Devon or the Company) and its subsidiary, Devon Finance Corporation, to BBB (high) from BBB. DBRS has also assigned an R-2 (high) Commercial Paper rating for the Company. All trends are now Stable. Additionally, DBRS has discontinued its rating of Devon Canada Corporation as the medium-term notes that were rated have been repaid.

The rating upgrades reflect Devon’s improved operational metrics, solid financial profile and visible pipeline of development projects that should drive production growth, which is targeted by the Company at 9% to 11% annually over the next three years.

Devon’s operational performance has notably improved over the past two years reflecting the benefit of strategic acquisitions completed from 2001 to 2003 that established key growth platforms in the Barnett Shale in Texas, the deepwater Gulf of Mexico (GOM) and western Canada. Devon’s reserve replacement was 228% and the Company’s reserve life increased to over 11 years in 2006, both of which compare well with its peers. While the Company’s reserve replacement costs have risen in recent years alongside the industry, Devon’s three-year average reserve replacement costs of $12.48/boe remain competitive.

Expected to average 602,000 boe/d in 2007 (representing a 10% increase from 2006, pro forma for Egypt and West Africa divestitures), Devon should be able to sustain strong internal reserve replacement and production growth from readily identified projects, including the following: (1) Merganser in the deepwater GOM with first production in August 2007 at a peak net rate of 50,000 mcf/d. (2) The Polvo oil development in Brazil achieved first production in July 2007, with plateau production of 26,000 boe/d net to Devon. (3) Devon’s 100%-owned Jackfish thermal heavy oil project in Canada commenced steaming in July 2007 and is expected to ramp-up production to 35,000 b/d in 2008. Also, the Company plans to drill 500 wells in the Barnett Shale which should contribute to growth with relatively low risk. Devon augmented its position in the Barnett Shale through the acquisition of Chief Holdings LLC for $2.2 billion in 2006 which should accelerate the Company’s strong growth in this region.

In July 2007, Devon announced that it would form a Master Limited Partnership (MLP) to own a minority interest in Devon’s U.S. onshore marketing and midstream business. The business includes natural gas gathering and processing assets in Texas, Oklahoma, Wyoming and Montana. As the majority owner, Devon will continue to consolidate the MLP in its financial filings, and DBRS does not expect the new structure to affect the Company’s credit profile. The proceeds from the offering are expected to be used mainly to pay down debt and for share repurchases.

Devon has budgeted for its E&P capital program to be $4.9 billion to $5.3 billion ($5.7 billion to $6.2 billion total capex) in 2007. Having historically hedged significant production following leveraged acquisitions, the Company only has 3% of production hedged in 2007 and it will be relying on continuing strong commodity prices to internally fund its aggressive capital spending plans. However, Devon has good flexibility in its capital program if commodity prices were to decline significantly, and DBRS expects the Company would act to preserve its financial profile. Devon has $1.6 billion of commercial paper (as of June 30, 2007) and $400 million of term debt maturing near-term offset by liquidity from cash and short-term investments of $1.4 billion and bank revolver availability of $2.1 billion (including a new $1.5 billion, 364-day bank revolver with a one-year term out). It expects cash proceeds from its Egypt ($300 million after tax) and West Africa divestitures will be used to repay outstanding commercial paper by year end. DBRS believes that Devon has good capital markets access and could refinance or repay maturing debt, and that its strong credit metrics and operations support the upgrade.

Notes:
All figures are in U.S. dollars unless otherwise noted.
Devon Finance Corporation’s rating is based on the irrevocable guarantee of Devon Energy Corporation.