DEVON ENERGY CORPORATION’S SPIRITOF CREATIVITY 1996 ANNUAL REPORT Devon Energy Corporation, is an oil and gas exploration and production company with its headquarters in Oklahoma City, Oklahoma. We produce and sell oil and gas from wells located primarily in New Mexico, Texas, Oklahoma, Wyoming, and Alberta, Canada. We strive to build value per share by: ▼ PURCHASING PRODUCING OIL AND GAS PROPERTIES, ▼ EXPLORING FOR UNDISCOVERED OIL AND GAS RESERVES, and ▼ OPTIMIZING PRODUCTION FROM OUR OIL AND GAS PROPERTIES. ON THE COVER This photograph provides an unusual perspective on an ordinary object- a fluid storage tank. Devon finds unique opportunities by creatively viewing its everyday business from unusual perspectives. Contents 7 Letter to Shareholders 2 Outside the Box Five-Year 4 Highlights Pushing 11 the Envelope Focus on Operations 19 15 A Different Point of View 25 Financial Statements and Management’s Discussion and Analysis Board of Directors 64 65 Corporate Officers Glossary 66 67 Investor Information and Common Stock Trading Data D EVON ENERGY CORPORATION 1 DEAR Fellow Shareholders evon Energy Corporation's None of these accomplishments would have been 1996 will undoubtedly be possible without creativity. remembered as one of extra- Many of our achievements were attained because we ordinary achievement. approach problem solving from a different viewpoint than Consider the following: many of our competitors. Inspired by the innovative pio- ◆ Net earnings were $34.8 neers who molded our industry, Devon recognizes that million, or $1.57 per unique opportunities can be created in our day-to-day busi- common share, up 140 per- ness. During 1996, for example, much of Devon's growth cent from 1995. in oil and gas reserves resulted from an innovative and D◆ Cash margins (revenues less cash expenses) climbed 62 unique transaction with Kerr-McGee Corporation. percent to $96.0 million. On December 31, 1996, ◆ Revenues were up 45 per- Inspired by the we merged Kerr-McGee's cent to $164.0 million. North American onshore oil ◆ Oil and natural gas pro- innovative pioneers and gas exploration and pro- duction grew to 10.7 who molded our duction businesses into Devon million barrels of oil equiva- in exchange for 9.95 million lent, setting a new record industry, Devon shares of Devon common for the ninth year in a row. recognizes that unique stock. Through the merger, ◆ Estimated proven oil and Kerr-McGee became a 31 per- gas reserves reached 179 opportunities can be cent shareholder of Devon. million barrels of oil equiva- created in our This allows Kerr-McGee to lent—also our ninth maintain an investment in the consecutive record. day-to-day business. onshore oil and gas business in ◆ We enhanced Devon's North America. At the same financial flexibility by issuing $149.5 million of 6.5% Trust time, it eliminates the burden of the overhead, the direct Convertible Preferred Securities. expenses and the capital requirements of those activities. ◆ Two nationally recognized credit rating agencies, Duff & Devon, on the other hand, increased its proved reserves by Phelps and Standard & Poor's, joined our commercial about 50 percent and strengthened core operating areas. banks in rating Devon as an "investment-grade" company. This provides additional economies of scale and increased ◆ Mergers and acquisitions boosted reserves by some 65 marketing leverage in our core areas. We also tripled our million barrels of oil equivalent. inventory of undeveloped acreage—primarily in areas where ◆ We drilled 194 oil and gas wells, 190 of which were we already operate. Additionally, the transaction provides successful. Devon with critical mass in a new core area, western ◆ Through mergers, acquisitions and drilling, Devon Canada. Overall, greater operational efficiencies are now replaced more than 700 percent of the year's production. possible than were ever feasible under separate ownership. ◆ Quarterly dividends were increased to five cents per While the benefits of this merger are obvious, the common share. This represents a 66 percent increase over transaction is nonetheless unique. It requires the mutual the three-cent amount previously paid. trust of the two companies. Kerr-McGee must trust Devon 2 DEVON ENERGY CORPORATION with the stewardship of a significant group of properties. Although Devon completed And Devon must trust Kerr-McGee, a large and powerful more than $250 million in mergers company, with a very significant ownership position in and acquisitions during 1996, we Devon's common stock. This mutual trust should result in now have more liquidity than ever rewards for the shareholders of both companies. before. As a company capitalized at In conjunction with the Kerr-McGee transaction, more than a billion dollars with Luke R. Corbett, Tom J. McDaniel and Lawrence H. virtually no debt, we are positioned J. LARRY NICHOLS Towell became new members of Devon's Board of to aggressively continue our Directors. This increases the size of Devon's Board to nine growth. members. Each of the three gentlemen is an officer or Devon has come a long way since its founding some director of Kerr-McGee or its subsidiaries. More impor- 25 years ago. Yet, the essence of this company is the very tantly, these three directors bring a wealth of oil and gas same as it was when we started. We are optimistic about experience to our board. our future, creative in our problem solving, resourceful in In 1997, we will continue to expand Devon's asset optimizing our opportunities, and, above all else, honest in base by investing some $120 million in exploration and our dealings with everyone. development projects. A portion of this will be used to con- tinue pursuing the drilling activities that we began in 1996. Further, we expect to begin new development of the former Kerr-McGee assets. We believe this activity will add incre- J. LARRY NICHOLS mental value to these properties. President and Chief Executive Officer Oklahoma City, Oklahoma March 31, 1997 Proved Oil and Gas Reserves Total Revenues Cash Margin * Net Income (MMBoe) ($ Millions) ($ Millions) ($ Millions) 34.8 96 – 179 164 – – 113 59 20.5 115 101 53 55 – 106 99 14.6 14.5 38 13.7 78 – 72 61 – 36 12 30 – -15.0 – 91 92 93 94 95 96 91 92 93 94 95 96 91 92 93 94 95 96 91 92 93 94 95 96 * Revenues less cash expenses. Devon has increased total oil and ...resulting in 1996 revenues Higher oil and gas production ...and the highest net earnings gas reserves by almost 400% over of more than five times and prices led to record cash in the company’s history. the last five years... those of 1991. margins in 1996... DEVON ENERGY CORPORATION 3 Survey stakes used to plot the paths of gas lines at ▼ Five-Year Highlights Devon’s Northeast Blanco Unit. In 1996, we initiated a major expansion of this gas-gathering system. LAST YEAR Year Ended December 31, 1992 1993 1994 1995 1996 CHANGE FINANCIAL DATA (Thousands, except per share data) Total Revenues $ 71,564 98,757 100,773 113,303 164,017 45% Cash Expenses $ 33,424 45,864 45,699 54,086 68,066 26% Cash Margin $ 38,140 52,893 55,074 59,217 95,951 62% Non-cash Expenses $ 23,525 33,707 41,329 44,715 61,150 37% Unusual Gain(1) $ - 1,300---NM Net Earnings $ 14,615 20,486 13,745 14,502 34,801 140% Net Earnings per Share: Assuming No Dilution $ 0.94 0.98 0.64 0.66 1.57 138% Assuming Full Dilution $ 0.90 0.98 0.64 0.66 1.52 130% Cash Dividends: Per Preferred Share $ 1.46----NM Per Common Share $ - 0.09 0.12 0.12 0.14 17% Total Assets $ 225,972 285,553 351,448 421,564 746,251 77% Working Capital $ 12,630 15,140 8,305 9,316 19,734 112% Trust Convertible Preferred Securities(2) $----149,500 NM Long-term Debt $ 54,450 80,000 98,000 143,000 8,000 -94% PROPERTY DATA Production Oil and Natural Gas Liquids (MBbls) 1,558 2,748 2,968 3,900 4,768 22% Gas (MMcf) 28,374 35,598 39,335 36,886 35,714 -3% Total (MBoe) 6,287 8,681 9,524 10,047 10,720 7% Reserves Oil and Natural Gas Liquids (MBbls) 17,360 16,751 47,607 53,935 80,060 48% Gas (MMcf) 263,598 369,254 347,560 363,846 595,519 64% Total (MBoe) 61,294 78,293 105,534 114,576 179,313 57% SEC @ 10% Present Value (Thousands)(3) $ 314,566 380,471 398,206 534,248 1,621,992 204% (1) One-time, non-cash gain of $1.3 million from the required adoption of Statement of Financial Accounting Standards No.109. (2) Reflects the issuance of 2.99 million shares of preferred securities on July 10, 1996. (3) Before income taxes. NM Not a meaningful figure. Oil and Gas Production Earnings Per Share Total Assets (MMBoe) ($) ($ Millions) 1.57 10.7 – 746 10.0 9.5 – 8.7 – .98 .94 422 6.3 – .66 351 – .64 286 226 3.1 – 102 – -1.99 – 91 92 93 94 95 96 91 92 93 94 95 96 91 92 93 94 95 96 Devon set its ninth consec- ...and earnings per share Over the last five years, utive record for oil and gas reached a new high. Devon increased total assets production in 1996... more than seven-fold. 4 DEVON ENERGY CORPORATION DEVON’S SPIRIT of CREATIVITY Tank containing ▼ fresh water used by a drilling rig at a well location. We often find long-term value by looking beyond short-term trends.