DBRS Comments on Devon Energy Corporation’s $2.2 Billion Joint Venture Transaction with Sinopec International Petroleum Exploration and Production Corporation

DBRS has today commented following the announcement of Devon Energy Corporation’s (Devon or the Company) $2.2 billion joint venture transaction (the Transaction) with Sinopec International Petroleum Exploration and Production Corporation (Sinopec) involving five new venture plays. The Transaction will consist of $900 million in cash to be paid upon closing and $1.6 billion to be paid in the form of a drilling carry. Sinopec’s contribution is in exchange for one-third of Devon’s interest in five new venture plays located in the Tuscaloosa Marine Shale, Niobrara Shale, Mississippian, Ohio Utica Shale and the Michigan Basin.

This Transaction does not materially impact the Company’s overall business risk profile. However, DBRS views the Transaction as positive from a business risk perspective as it reduces future capital expenditures, and limits risk associated with development costs. Sinopec’s drilling carry covers 70% of Devon’s capital requirements relating to the new venture plays and translates into Sinopec paying 80% of the overall development costs during the carry period, lasting likely until year-end 2014. Devon’s free cash flow position should improve in the short term following the Transaction, given the reduction in capex contributions. However, Devon will receive lower contributions from the ventures when they begin generating cash flow as a result of the one-third interest transferred to Sinopec. If similar risk hedging ventures are pursued going forward, the Company could benefit from lower capex requirements and reduced developmental risks.

Financially, the Transaction does not materially change Devon’s risk profile. Devon already has a favourable liquidity position, with approximately $9.2 billion in debt and $6.9 billion in offsetting cash and short-term investments, as at September 30, 2011. A further increase of $900 million in cash does not materially change the Company’s liquidity position.

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

The applicable methodology is Rating Oil & Gas Companies, which can be found on the DBRS website under Methodologies.