Fitch rates Devon Energy bonds 'BBB+' -- Maintains Stable Outlook 05/07

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(The following statement was released by the rating agency)

May 7 - Fitch Ratings has assigned a 'BBB+' rating to Devon Energy Corporation's expected issuance of unsecured notes with maturities of 2017, 2022, and 2042. The proceeds are to be used to repaycommercial paper borrowings as they come due, to repay amounts drawn on the revolving credit facility and for other general corporate purposes. The Rating Outlook for Devon remains Stable. A complete list of ratings is provided at the end of this release.

Devon's ratings reflect the company's large, low cost proven reserve base in North America, its significant and growing production, its conservative financial strategy and robust credit profile. Devon's proven reserve base is roughly 3 billion barrels of oil equivalent (boe) split approximately 58% natural gas and 42% liquids. The proved developed (PD) component of the proven reserve base is 74%. In the first quarter of 2012, Devon's production grew to approximately 694,000 boe/d and is expected to be roughly flat in the near term, while growing modestly by year end.

Devon generated EBITDA of $6.4 billion in the latest 12 months (LTM) period resulting in debt/EBITDA of 1.7 times (x) and EBITDA/interest expense of over 15x. The company's gross debt of $10.8 billion at March 31, 2012 consisted of senior unsecured notes of nearly $6 billion, $750 million of revolver borrowings and approximately $4.2 billion of commercial paper outstanding. According to the preliminary prospectus at April 30, 2012 revolver borrowings were $600 million and $3.7 billion of commercial paper was outstanding for an implied gross debt total of $10.2 billion. Devon also possesses approximately $7.1 billion in cash and marketable securities that resulted largely from its international divestiture program over the several quarters. At this time, nearly this entire amount resides offshore awaiting potential changes to tax repatriation law in the U.S.

Using March 31, 2012 debt balances, Fitch calculates reserve based leverage metrics that result in an adjusted gross E&P debt/PD of approximately $5.24/boe of PD reserves after factoring asset retirement obligations and giving some credit for the company's consolidated midstream operations. Adjusted gross E&P debt/flowing barrel of production is $16,790/boe/d.

Largely as a result of growth oriented spending, Devon has been free cash flow negative in the LTM period by about $2.1 billion (nearly $500 million of this deficit is due a pension contribution in 2011). Fitch expects this trend to continue in 2012 given challenging price realizations and capital spending expectations.

Liquidity is provided by the aforementioned cash on hand and marketable securities, cash flow from operations and availability under the company's $2.16 billion unsecured credit facility due April 7, 2013 ($600 million drawn at April 30, 2012). The facility contains only one material financial covenant which0 requires Devon's ratio of total funded debt to total capitalization to be less than 65%. As of March 31, 2012, Devon had ample headroom under this covenant, with total debt to capitalization of 24%. Significant maturities other than commercial paper balances are relatively light and include $500 million due in 2014 and $500 million due 2016.

Potential catalysts for a positive rating action include continued robust reserve replacement rates at competitive F&D costs accompanied by a commitment from management to maintain a robust financial profile throughout industry cycles. Negative rating changes would likely result from significantly leveraging share repurchase activity, a leveraging acquisition, or from further increases to capital expenditure levels resulting in significantly higher than expected debt levels.


Devon Energy Corporation (DVN:$64.392,0$-0.638,0-0.98%)
--Long-term Issuer Default Rating at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Senior unsecured credit facility at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) at 'F2'.

Devon Financing Corporation U.L.C.
--Senior unsecured notes at 'BBB+'.

Ocean Energy
--Senior unsecured notes at 'BBB'.

The Rating Outlook for Devon remains Stable.