Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

Report of Independent Registered Public Accounting Firm		51
Consolidated Financial Statements
Consolidated Comprehensive Statements of Earnings		53
Consolidated Statements of Cash Flows		54
Consolidated Balance Sheets		55
Consolidated Statements of Equity		56
Notes to Consolidated Financial Statements		57
Note 1 – Summary of Significant Accounting Policies		57
Note 2 – Acquisitions and Divestitures		67
Note 3 – Derivative Financial Instruments		69
Note 4 – Share-Based Compensation		71
Note 5 – Asset Impairments		74
Note 6 – Restructuring and Transaction Costs		74
Note 7 – Other Expenses		75
Note 8 – Income Taxes		76
Note 9 – Net Earnings (Loss) Per Share From Continuing Operations		81
Note 10 – Other Comprehensive Earnings		81
Note 11 – Supplemental Information to Statements of Cash Flows		82
Note 12 – Accounts Receivable		82
Note 13 – Property, Plant and Equipment		83
Note 14 – Other Current Liabilities		84
Note 15 – Debt and Related Expenses		85
Note 16 – Asset Retirement Obligations		87
Note 17 – Retirement Plans		87
Note 18 – Stockholders’ Equity		91
Note 19 – Discontinued Operations and Assets Held For Sale		93
Note 20 – Commitments and Contingencies		95
Note 21 – Fair Value Measurements		97
Note 22 – Segment Information		98
Note 23 – Supplemental Information on Oil and Gas Operations (Unaudited)		100
Note 24 – Supplemental Quarterly Financial Information (Unaudited)		107

All financial statement schedules are omitted as they are inapplicable or the required information has been included in the consolidated financial statements or notes thereto.

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Devon Energy Corporation:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Devon Energy Corporation and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Adoption of New Accounting Standard

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC 606).

Basis for Opinion

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting contained in “Item 9A. Controls and Procedures.” Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

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

Index to Financial Statements

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.

/s/ KPMG LLP

We have served as the Company’s auditor since 1980.

Oklahoma City, Oklahoma

February 20, 2019

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

		Year Ended December 31,
		2018				2017				2016
Upstream revenues		$	6,285			$	5,307			$	3,981
Marketing revenues			4,449				3,571				2,772
Total revenues			10,734				8,878				6,753
Production expenses			2,225				1,823				1,805
Exploration expenses			177				380				215
Marketing expenses			4,363				3,619				2,821
Depreciation, depletion and amortization			1,658				1,529				1,592
Asset impairments			156				—				437
Asset dispositions			(263	)			(217	)			(1,496	)
General and administrative expenses			650				737				733
Financing costs, net			594				317				717
Restructuring and transaction costs			114				—				261
Other expenses			140				(83	)			101
Total expenses			9,814				8,105				7,186
Earnings (loss) from continuing operations before income taxes			920				773				(433	)
Income tax expense			156				15				141
Net earnings (loss) from continuing operations			764				758				(574	)
Net earnings (loss) from discontinued operations, net of income tax expense			2,460				320				(884	)
Net earnings (loss)			3,224				1,078				(1,458	)
Net earnings (loss) attributable to noncontrolling interests			160				180				(402	)
Net earnings (loss) attributable to Devon		$	3,064			$	898			$	(1,056	)
Basic net earnings (loss) per share:
Basic earnings (loss) from continuing operations per share		$	1.53			$	1.44			$	(1.14	)
Basic earnings (loss) from discontinued operations per share			4.61				0.27				(0.95	)
Basic net earnings (loss) per share		$	6.14			$	1.71			$	(2.09	)
Diluted net earnings (loss) per share:
Diluted earnings (loss) from continuing operations per share		$	1.52			$	1.43			$	(1.14	)
Diluted earnings (loss) from discontinued operations per share			4.58				0.27				(0.95	)
Diluted net earnings (loss) per share		$	6.10			$	1.70			$	(2.09	)
Comprehensive earnings (loss):
Net earnings (loss)		$	3,224			$	1,078			$	(1,458	)
Other comprehensive earnings (loss), net of tax:
Foreign currency translation			(152	)			83				11
Pension and postretirement plans			44				29				22
Other comprehensive earnings (loss), net of tax			(108	)			112				33
Comprehensive earnings (loss)			3,116				1,190				(1,425	)
Comprehensive earnings (loss) attributable to noncontrolling interests			160				180				(402	)
Comprehensive earnings (loss) attributable to Devon		$	2,956			$	1,010			$	(1,023	)

See accompanying notes to consolidated financial statements.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year Ended December 31,
		2018				2017				2016
Cash flows from operating activities:
Net earnings (loss)		$	3,224			$	1,078			$	(1,458	)
Adjustments to reconcile net earnings to net cash from operating activities:
Net (earnings) loss from discontinued operations, net of income tax expense			(2,460	)			(320	)			884
Depreciation, depletion and amortization			1,658				1,529				1,592
Asset impairments			156				—				437
Leasehold impairments			95				219				113
Accretion on discounted liabilities			61				63				75
Total (gains) losses on commodity derivatives			(608	)			(157	)			201
Cash settlements on commodity derivatives			(84	)			53				1
Gains on asset dispositions			(263	)			(217	)			(1,496	)
Deferred income tax expense (benefit)			226				(97	)			43
Share-based compensation			161				150				203
Early retirement of debt			312				—				269
Total (gains) losses on foreign exchange			139				(132	)			(121	)
Settlements of intercompany foreign denominated assets/liabilities			(241	)			9				63
Other			(5	)			(1	)			4
Changes in assets and liabilities, net			(143	)			32				24
Net cash from operating activities - continuing operations			2,228				2,209				834
Cash flows from investing activities:
Capital expenditures			(2,451	)			(1,968	)			(1,384	)
Acquisitions of property and equipment			(55	)			(46	)			(849	)
Divestitures of property and equipment			1,013				426				3,020
Net cash from investing activities - continuing operations			(1,493	)			(1,588	)			787
Cash flows from financing activities:
Repayments of long-term debt principal			(922	)			—				(2,492	)
Net short-term debt repayments			—				—				(626	)
Early retirement of debt			(304	)			—				(265	)
Issuance of common stock			—				—				1,469
Repurchases of common stock			(2,956	)			—				—
Dividends paid on common stock			(149	)			(127	)			(221	)
Shares exchanged for tax withholdings			(48	)			(59	)			(35	)
Other			(7	)			—				—
Net cash from financing activities - continuing operations			(4,386	)			(186	)			(2,170	)
Effect of exchange rate changes on cash:
Settlements of intercompany foreign denominated assets/liabilities			241				(9	)			(63	)
Other			(35	)			15				2
Total effect of exchange rate changes on cash - continuing operations			206				6				(61	)
Net change in cash, cash equivalents and restricted cash of continuing operations			(3,445	)			441				(610	)
Cash flows from discontinued operations:
Operating activities			476				700				666
Investing activities			2,548				(611	)			(1,381	)
Financing activities			183				195				974
Net change in cash, cash equivalents and restricted cash of discontinued operations			3,207				284				259
Net change in cash, cash equivalents and restricted cash			(238	)			725				(351	)
Cash, cash equivalents and restricted cash at beginning of period			2,684				1,959				2,310
Cash, cash equivalents and restricted cash at end of period		$	2,446			$	2,684			$	1,959
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents		$	2,414			$	2,642			$	1,947
Restricted cash included in other current assets			32				11				—
Cash and cash equivalents included in current assets held for sale			—				31				12
Total cash, cash equivalents and restricted cash		$	2,446			$	2,684			$	1,959

See accompanying notes to consolidated financial statements.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31, 2018				December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	2,414			$	2,642
Accounts receivable			885				989
Current assets held for sale			197				760
Other current assets			941				400
Total current assets			4,437				4,791
Oil and gas property and equipment, based on successful efforts accounting, net			12,813				13,318
Other property and equipment, net			1,122				1,266
Total property and equipment, net			13,935				14,584
Goodwill			841				841
Other long-term assets			353				296
Long-term assets held for sale			—				9,729
Total assets		$	19,566			$	30,241
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	662			$	633
Revenues and royalties payable			898				748
Short-term debt			162				115
Current liabilities held for sale			69				991
Other current liabilities			435				828
Total current liabilities			2,226				3,315
Long-term debt			5,785				6,749
Asset retirement obligations			1,030				1,099
Other long-term liabilities			462				549
Long-term liabilities held for sale			—				3,936
Deferred income taxes			877				489
Equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 450 million and 525 million shares in 2018 and 2017, respectively			45				53
Additional paid-in capital			4,486				7,333
Retained earnings			3,650				702
Accumulated other comprehensive earnings			1,027				1,166
Treasury stock, at cost, 1.0 million shares in 2018			(22	)			—
Total stockholders’ equity attributable to Devon			9,186				9,254
Noncontrolling interests			—				4,850
Total equity			9,186				14,104
Total liabilities and equity		$	19,566			$	30,241

See accompanying notes to consolidated financial statements.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

														Retained				Accumulated
										Additional				Earnings				Other
		Common Stock								Paid-In				(Accumulated				Comprehensive				Treasury				Noncontrolling				Total
		Shares				Amount				Capital				Deficit)				Earnings				Stock				Interests				Equity
Balance as of December 31, 2015			418			$	42			$	4,996			$	1,112			$	1,021			$	—			$	3,940			$	11,111
Net loss			—				—				—				(1,056	)			—				—				(402	)			(1,458	)
Other comprehensive earnings, net of tax			—				—				—				—				33				—				—				33
Restricted stock grants, net of cancellations			2				—				—				—				—				—				—				—
Common stock repurchased			—				—				—				—				—				(28	)			—				(28	)
Common stock retired			—				—				(28	)			—				—				28				—				—
Common stock dividends			—				—				(96	)			(125	)			—				—				—				(221	)
Common stock issued			103				10				2,117				—				—				—				—				2,127
Share-based compensation			—				—				168				—				—				—				—				168
Subsidiary equity transactions			—				—				80				—				—				—				1,214				1,294
Distributions to noncontrolling interests			—				—				—				—				—				—				(304	)			(304	)
Balance as of December 31, 2016			523			$	52			$	7,237			$	(69	)		$	1,054			$	—			$	4,448			$	12,722
Net earnings			—				—				—				898				—				—				180				1,078
Other comprehensive earnings, net of tax			—				—				—				—				112				—				—				112
Restricted stock grants, net of cancellations			1				1				—				—				—				—				—				1
Common stock repurchased			—				—				—				—				—				(44	)			—				(44	)
Common stock retired			—				—				(44	)			—				—				44				—				—
Common stock dividends			—				—				—				(127	)			—				—				—				(127	)
Share-based compensation			1				—				126				—				—				—				—				126
Subsidiary equity transactions			—				—				14				—				—				—				576				590
Distributions to noncontrolling interests			—				—				—				—				—				—				(354	)			(354	)
Balance as of December 31, 2017			525			$	53			$	7,333			$	702			$	1,166			$	—			$	4,850			$	14,104
Net earnings			—				—				—				3,064				—				—				160				3,224
Other comprehensive loss, net of tax			—				—				—				—				(108	)			—				—				(108	)
Restricted stock grants, net of cancellations			3				—				—				—				—				—				—				—
Common stock repurchased			—				—				—				—				—				(3,017	)			—				(3,017	)
Common stock retired			(79	)			(8	)			(2,987	)			—				—				2,995				—				—
Common stock dividends			—				—				—				(149	)			—				—				—				(149	)
Share-based compensation			1				—				140				—				—				—				—				140
Divestment of subsidiary equity investment			—				—				—				—				2				—				(4,863	)			(4,861	)
Subsidiary equity transactions			—				—				—				—				—				—				72				72
Distributions to noncontrolling interests			—				—				—				—				—				—				(219	)			(219	)
Other			—				—				—				33				(33	)			—				—				—
Balance as of December 31, 2018			450			$	45			$	4,486			$	3,650			$	1,027			$	(22	)		$	—			$	9,186

See accompanying notes to consolidated financial statements.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Summary of Significant Accounting Policies

Devon is a leading independent energy company engaged primarily in the exploration, development and production of oil, natural gas and NGLs. Devon’s operations are concentrated in various North American onshore areas in the U.S. and Canada.

As further discussed in Note 2, Devon sold its interests in EnLink and the General Partner on July 18, 2018. Activity relating to EnLink and the General Partner are classified as discontinued operations within Devon’s consolidated comprehensive statements of earnings and consolidated statements of cash flows. The associated assets and liabilities of EnLink and the General Partner are presented as assets and liabilities held for sale on the consolidated balance sheets.

Accounting policies used by Devon and its subsidiaries conform to accounting principles generally accepted in the U.S. and reflect industry practices. The more significant of such policies are discussed below.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Devon and entities in which it holds a controlling interest. All intercompany transactions have been eliminated. Undivided interests in oil and natural gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in non-controlled entities, over which Devon has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost and subsequently adjusted for Devon’s proportionate share of earnings, losses, contributions and distributions. Investments accounted for using the equity method and cost method are reported as a component of other long-term assets.

Use of Estimates

The preparation of financial statements 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 the following:

	•	proved reserves and related present value of future net revenues;

	•	evaluation of suspended well costs;

	•	the carrying and fair values of oil and gas properties, other property and equipment and product and equipment inventories;

	•	derivative financial instruments;

	•	the fair value of reporting units and related assessment of goodwill for impairment;

	•	income taxes;

	•	asset retirement obligations;

	•	obligations related to employee pension and postretirement benefits;

	•	legal and environmental risks and exposures; and

	•	general credit risk associated with receivables and other assets.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Revenue Recognition

Impact of ASC 606 Adoption

In January 2018, Devon adopted ASC 606 – Revenue from Contracts with Customers (ASC 606) using the modified retrospective method and has applied the standard to all existing contracts. ASC 606 supersedes previous revenue recognition requirements in ASC 605 and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services.

The impact of adoption in the current period results is as follows:

		Year Ended December 31, 2018
		Under ASC 606				Under ASC 605				Increase/ (Decrease)
Upstream revenues		$	6,285			$	6,031			$	254
Marketing revenues			4,449				4,449				—
Total impacted revenues		$	10,734			$	10,480			$	254
Production expenses		$	2,225			$	1,971			$	254
Marketing expenses			4,363				4,363				—
Total impacted expenses		$	6,588			$	6,334			$	254
Earnings from continuing operations before income taxes		$	920			$	920			$	—

Changes to upstream revenues and production expenses are due to the conclusion that Devon represents the principal and controls a promised product before transferring it to the ultimate third party customer in accordance with the control model in ASC 606. This is a change from previous conclusions reached for these agreements utilizing the principal versus agent indicators under ASC 605 where the assessment was focused on Devon passing title and not control to the processing entity and Devon ultimately receiving a net price from the third-party end customer. As a result, Devon has changed the presentation of revenues and expenses for these agreements. Revenues related to these agreements are now presented on a gross basis for amounts expected to be received from third-party customers through the marketing process. Gathering, processing and transportation expenses related to these agreements, incurred prior to the transfer of control to the customer at the tailgate of the natural gas processing facilities, are now presented as production expenses.

Upstream Revenues

Upstream revenues include the sale of oil, gas and NGL production. Oil, gas and NGL sales are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. Devon’s performance obligations are satisfied at a point in time. This occurs when control is transferred to the purchaser upon delivery of contract specified production volumes at a specified point. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced, if required, by calendar month based on volumes at contractually based rates with payment typically received within 30 days of the end of the production month. Taxes assessed by governmental authorities on oil, gas and NGL sales are presented separately from such revenues in the accompanying consolidated comprehensive statements of earnings.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Natural gas and NGL sales

Under Devon’s natural gas processing contracts, natural gas is delivered to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds for the resulting sales of NGLs and residue gas. In these scenarios, Devon evaluates whether it is the principal or the agent in the transaction. Devon has concluded it is the principal under these contracts and the ultimate third party is the customer. Revenue is recognized on a gross basis, with gathering, processing and transportation fees presented as a component of production expenses in the consolidated comprehensive statements of earnings.

In certain natural gas processing agreements, Devon may elect to take residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the product is delivered to the ultimate third-party purchaser at a contractually agreed-upon delivery point, and Devon receives a specified index price from the purchaser. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as gathering, processing and transportation expense as a component of production expenses in the consolidated comprehensive statements of earnings.

Oil sales

Devon’s oil sales contracts are generally structured in one of two ways. First, production is sold at the wellhead at an agreed-upon index price, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received. Alternatively, production is delivered to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. Under this arrangement, a third party is paid to transport the product and Devon receives a specified index price from the purchaser with no transportation deduction. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. The third-party costs are recorded as gathering, processing and transportation expense as a component of production expenses in the consolidated comprehensive statements of earnings.

Marketing Revenues

Marketing revenues are generated primarily as a result of Devon selling commodities purchased from third parties. Marketing revenues are recognized when performance obligations are satisfied. This occurs at the time contract specified products are sold to third parties at a contractually fixed or determinable price, delivery occurs at a specified point or performance has occurred, control has transferred and collectability of the revenue is probable. The transaction price used to recognize revenue and invoice customers is based on a contractually stated fee or on a third party published index price plus or minus a known differential. Devon typically receives payment for invoiced amounts within 30 days. Marketing revenues and expenses attributable to oil, gas and NGL purchases are reported on a gross basis when Devon takes control of the products and has risks and rewards of ownership.

Satisfaction of Performance Obligations and Revenue Recognitions

Because Devon has a right to consideration from its customers in amounts that correspond directly to the value that the customer receives from the performance completed on each contract, Devon recognizes revenue for sales at the time the natural gas, NGLs or crude oil are delivered at a fixed or determinable price.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Transaction Price Allocated to Remaining Performance Obligations

Most of Devon’s contracts are short-term in nature with a contract term of one year or less. Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For contracts with terms greater than one year, Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under Devon’s contracts, each unit of product typically represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

Contract Balances

Cash received relating to future performance obligations is deferred and recognized when all revenue recognition criteria are met. Contract liabilities generated from such deferred revenue are not considered material as of December 31, 2018. Devon’s product sales and marketing contracts do not give rise to contract assets.

Disaggregation of Revenue

Revenue from oil, gas and NGL sales and marketing revenues represent revenue from contracts with customers. Disaggregation of revenue disclosures can be found in Note 22.

Customers

During 2018, Devon had one purchaser that accounted for approximately 11% of Devon’s consolidated sales revenue.

During 2017 and 2016, no purchaser accounted for more than 10% of Devon’s consolidated sales revenue.

Derivative Financial Instruments

Devon is exposed to certain risks relating to its ongoing business operations, including risks related to commodity prices, interest rates and Canadian to U.S. dollar exchange rates. As discussed more fully below, Devon uses derivative instruments primarily to manage commodity price risk, interest rate risk and foreign exchange risk. Devon does not intend to issue or hold derivative financial instruments for speculative trading purposes.

Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. These instruments are used to manage the inherent uncertainty of future revenues resulting from commodity price volatility. Devon’s derivative financial instruments typically include financial price swaps, basis swaps and costless price collars. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional index prices and pays a variable differential on the same two index prices to the contract counterparty. For price collars, Devon utilizes both two-way price collars and three-way price collars. The two-way price collars set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty. The three-way price collars consist of a two-way collar with an additional short put option sold by Devon, and cash-settle similarly to the two-way collars unless the market price falls below the additional short put causing the company to receive the market price plus the long put to short put price differential.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility and foreign exchange forward contracts to manage its exposure to fluctuations in the U.S. and Canadian dollar exchange rates. As of December 31, 2018, Devon did not have any open foreign exchange contracts.

All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheet. Changes in the fair value of these derivative financial instruments are recorded in earnings unless specific hedge accounting criteria are met. For derivative financial instruments held during the three-year period ended December 31, 2018, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. Cash settlements with counterparties on Devon’s derivative financial instruments are also recorded in earnings.

By using derivative financial instruments to hedge exposures to changes in commodity prices, interest rates and foreign currency rates, Devon is exposed to credit 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 a number of counterparties whom Devon believes are acceptable 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. Additionally, Devon’s derivative contracts generally require cash collateral to be posted if either its or the counterparty’s credit rating falls below certain credit rating levels. As of December 31, 2018, Devon held no cash collateral of its counterparties nor posted collateral to its counterparties.

General and Administrative Expenses

G&A is reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Devon.

Share-Based Compensation

Devon grants share-based awards to members of its Board of Directors and select employees. All such awards are measured at fair value on the date of grant and are generally recognized as a component of G&A in the accompanying consolidated comprehensive statements of earnings over the applicable requisite service periods. As a result of Devon’s restructuring activity discussed in Note 6, certain share-based awards were accelerated and recognized as a component of restructuring costs in the accompanying consolidated comprehensive statements of earnings.

Generally, Devon uses new shares from approved incentive programs to grant share-based awards and to issue shares upon stock option exercises. Shares repurchased under approved programs are generally available to be issued as part of Devon’s share-based awards. However, Devon has historically canceled these shares upon repurchase.

Income Taxes

Devon is subject to current income taxes assessed by the federal and various state jurisdictions in the U.S. and by other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, 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 basis. 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.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. If the future utilization of some portion of the deferred tax assets is determined to be unlikely, a valuation allowance is provided to reduce the recorded tax benefits from such assets. Devon periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence, such as cumulative losses in recent years. See Note 8 for further discussion.

Devon recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in other current liabilities. Interest and penalties related to unrecognized tax benefits are included in current income tax expense.

Devon estimates its annual effective income tax rate in recording its provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the period in which they occur.

Net Earnings (Loss) Per Share Attributable to Devon

Devon’s basic earnings per share amounts have been computed based on the average number of shares of common stock outstanding for the period. Basic earnings per share includes the effect of participating securities, which primarily consist of Devon’s outstanding restricted stock awards, as well as performance-based restricted stock awards that have met the requisite performance targets. Diluted earnings per share is calculated using the treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities. Such securities primarily consist of unvested performance share units.

Cash and Cash Equivalents

Devon considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents.

Accounts Receivable

Devon’s accounts receivable balance primarily consists of oil and gas sales receivables, marketing revenue receivables and joint interest receivables for which Devon does not require collateral security. Devon has established an allowance for bad debts equal to the estimable portions of accounts receivable, including joint interest receivables, for which failure to collect is considered probable. When a portion of the receivable is deemed uncollectible, the write-off is made against the allowance.

Property and Equipment

Oil and Gas Property and Equipment

Devon follows the successful efforts method of accounting for its oil and gas properties. Exploration costs, such as exploratory geological and geophysical costs, and costs associated with nonproductive exploratory wells, delay rentals and exploration overhead are charged against earnings as incurred. Costs of drilling successful

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

exploratory wells along with acquisition costs and the costs of drilling development wells, including those that are unsuccessful, are capitalized. Devon groups its oil and gas properties with a common geological structure or stratigraphic condition (“common operating field”) for purposes of computing DD&A, assessing proved property impairments and accounting for asset dispositions.

Exploratory drilling costs and exploratory-type stratigraphic test wells are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, drilling costs remain capitalized as proved properties. Costs of unsuccessful wells are charged to exploration expense. For exploratory wells that find reserves that cannot be classified as proved when drilling is completed, costs continue to be capitalized as suspended exploratory well costs if there have been sufficient reserves found to justify completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed. In some instances, this determination may take longer than one year. Devon reviews the status of all suspended exploratory drilling costs quarterly.

Capitalized costs of proved oil and gas properties are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six Mcf of gas to one Bbl of oil. Proved leasehold acquisition costs, less accumulated amortization, are depleted over total proved reserves, which includes proved undeveloped reserves. Capitalized costs of wells and related equipment and facilities, including estimated asset retirement costs, net of estimated salvage values and less accumulated amortization are depreciated over proved developed reserves associated with those capitalized costs. Depletion is calculated by applying the DD&A rate (amortizable base divided by beginning of period proved reserves) to current period production.

Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Devon assesses its unproved properties for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Significant unproved properties are assessed individually. Costs of insignificant unproved properties are amortized to exploration expense on a group basis using estimated lease surrender rates over average lease terms.

Proved properties are assessed for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Individual assets are grouped for impairment purposes based on a common operating field. If there is an indication the carrying amount of an asset may not be recovered, the asset is assessed for potential impairment by management through an established process. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset, the carrying value is written down to estimated fair value. Because there is usually a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or by comparable transactions. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review.

Gains or losses are recorded for sales or dispositions of oil and gas properties which constitute an entire common operating field or which result in a significant alteration of the common operating field’s DD&A rate. These gains and losses are classified as asset dispositions in the accompanying consolidated statements of earnings. Partial common operating field sales or dispositions deemed not to significantly alter the DD&A rates are generally accounted for as adjustments to capitalized costs with no gain or loss recognized.

Devon capitalizes interest costs incurred and attributable to material unproved oil and gas properties and major development projects of oil and gas properties.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other Property and Equipment

Depreciation and amortization of other property and equipment, including corporate and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to 60 years. Interest costs incurred and attributable to major corporate construction projects are also capitalized.

Asset Retirement Obligations

Devon recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites 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. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. Devon’s asset retirement obligations also include estimated environmental remediation costs which arise from normal operations and are associated with the retirement of such long-lived assets. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.

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 annually, or more frequently if events or changes in circumstances dictate that the carrying value of goodwill may not be recoverable. Such test includes a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, then a quantitative goodwill impairment test is performed. The quantitative goodwill impairment test requires the fair value of each reporting unit be compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value, an impairment charge will be recognized for the amount by which the carrying amount exceeds the fair value. 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 impairment tests of goodwill in the fourth quarters of 2018, 2017 and 2016. No impairment was required as a result of the annual tests in these time periods.

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. Liabilities for environmental remediation or restoration claims resulting from allegations of improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with Devon’s accounting policy for property and equipment.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Fair Value Measurements

Certain of Devon’s assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price.” Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels:

	•	Level 1 – Inputs consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. When available, Devon measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

	•	Level 2 – Inputs consist of quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active.

	•	Level 3 – Inputs are not observable from objective sources and have the lowest priority. The most common Level 3 fair value measurement is an internally developed cash flow model.

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. 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 an average exchange rate during the reporting period. Translation adjustments have no effect on net income and are included in accumulated other comprehensive earnings in stockholders’ equity.

Noncontrolling Interests

Noncontrolling interests represent third-party ownership in the net assets of Devon’s consolidated subsidiaries and are presented as a component of equity. Changes in Devon’s ownership interests in subsidiaries that do not result in deconsolidation are recognized in equity.

Recently Adopted Accounting Standards

In January 2018, Devon adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606), using the modified retrospective method. See revenue recognition section above for further discussion regarding Devon’s adoption of this revenue recognition standard.

In January 2018, Devon adopted ASU 2017-07, Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires entities to present the service cost component of net periodic benefit cost in the same line item as other employee compensation costs. Only the service cost component of net periodic benefit cost is eligible for capitalization. As a result of the adoption of this ASU, consolidated statements of earnings presentation changes were applied retrospectively, while service cost component capitalization was applied prospectively. Upon adoption, Devon reclassified $7 million and $14 million of non-service cost components of net periodic benefit costs for 2017 and 2016, respectively, from G&A to other expenses.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In January 2018, Devon adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires an entity to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statement of cash flows and to provide a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. As a result of the adoption of this ASU, Devon made changes to the statement of cash flows to include the required presentation and reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents retrospectively. Other than presentation, adoption of this ASU did not have a material impact on Devon’s consolidated statements of cash flows.

In the fourth quarter of 2018, Devon early adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Reform Legislation. As a result of adopting this ASU, Devon reclassified $33 million from accumulated other comprehensive income to retained earnings in the December 31, 2018 consolidated balance sheet.

In the fourth quarter of 2018, Devon early adopted ASU 2018-14, Compensation, Retirement Benefits and Defined Benefit Plans (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU eliminated and added certain disclosure requirements for employers that sponsors defined benefit plans and/or other postretirement plans. Other than changes to required disclosures, this ASU did not have a material impact on Devon’s consolidated financial statements and related disclosures.

The SEC released Final Rule No. 33 -10532, Disclosure Update and Simplification, which amends various SEC disclosure requirements determined to be redundant, duplicative, overlapping, outdated or superseded as part of the SEC’s ongoing disclosure effectiveness initiative. The rule was effective November 5, 2018. The rule amended numerous SEC rules, items and forms covering a diverse group of topics. Devon has implemented these required changes to disclosures which generally reduced or eliminated disclosures. Devon will adopt the requirement of presenting a current and comparative year-to-date change in stockholder’s equity roll forward during the first quarter of 2019.

Issued Accounting Standards Not Yet Adopted

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU will supersede the lease requirements in Topic 840, Leases. Its objective is to increase transparency and comparability among organizations. This ASU provides guidance requiring lessees to recognize most leases on their balance sheet. Short-term leases can continue being accounted for off balance sheet based on a policy election. Lessor accounting does not significantly change, except for some changes made to align with new revenue recognition requirements. Devon is adopting this ASU beginning January 1, 2019.

Devon will apply the guidance using a modified retrospective transition method at the adoption date. Devon has elected the practical expedient provided in the standard that allows the new guidance to be applied prospectively to all new or modified land easements and rights-of-way. Devon also has elected a policy not to recognize right-of-use assets and lease liabilities related to short-term leases. Devon will be allowed to continue to apply the legacy guidance in Topic 840, including its disclosure requirements, in the comparative periods presented with the 2019 adoption year. Devon has implemented processes, controls, and a technology solution needed to comply with the requirements of this ASU.

To adopt Topic 842, Devon expects to recognize right-of-use assets of approximately $400 million with a corresponding lease liability based on the present value of the remaining term minimum lease payments. Devon’s right-of-use assets are for certain leases related to real estate, drilling rigs and other equipment related to the exploration, development and production of oil and gas. Additionally, Devon will recognize a $24 million before tax, $19 million net of tax cumulative-effect adjustment to reduce retained earnings.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The FASB issued ASU 2018-04, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. This ASU will eliminate, add and modify certain disclosure requirements for fair value measurement. The ASU is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted for either the entire standard or only the provisions that eliminate or modify requirements. The ASU requires the additional disclosure requirements to be adopted using a retrospective approach. Devon is currently evaluating the provisions of this ASU and assessing the impact it may have on its disclosures in the notes to the consolidated financial statements.

The FASB issued ASU 2018-05-15, Intangibles, Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU will require a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This ASU is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted. Entities have the option to adopt the ASU using either a retrospective approach or a prospective approach applied to all implementation costs incurred after the date of the adoption. Devon is currently evaluating the provisions of this ASU and assessing the impact it may have on its consolidated financial statements.

2.	Acquisitions and Divestitures

Acquisitions

In January 2016, Devon acquired approximately 80,000 net acres and assets in the STACK play for approximately $1.5 billion. Devon funded the acquisition with $849 million of cash, after adjustments, and $659 million of equity. The allocation of the purchase price was approximately $1.3 billion to unproved properties and approximately $200 million to proved properties.

Divestitures

EnLink and General Partner

During the third quarter of 2018, Devon completed the sale of its aggregate ownership interests in EnLink and the General Partner for $3.125 billion and recognized a gain of approximately $2.6 billion ($2.2 billion after-tax). The proceeds from the sale were utilized to increase Devon’s share repurchase program to $4.0 billion, which is discussed further in Note 18. Additional information on these discontinued operations can be found in Note 19.

Upstream Assets

During 2018, Devon received proceeds of approximately $1.0 billion and recognized a net gain on asset dispositions of approximately $260 million, primarily from sales of non-core assets in the Barnett Shale and Delaware Basin. As part of the transactions, approximately $84 million of asset retirement obligations were assumed by the purchasers. In conjunction with the divestitures, Devon settled certain gas processing contracts and recognized $40 million in settlement expense, which is included in asset dispositions within the 2018 consolidated statements of earnings. In aggregate, the total estimated proved reserves associated with these divested assets were approximately 267 MMBoe, or 18%, of total U.S. proved reserves.

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Additionally, in the first quarter of 2019, Devon completed two separate divestitures of non-core assets in the Permian Basin totaling $300 million. One of the divestitures related to the sale of an entire common operating field, and Devon expects to recognize a gain of approximately $35 million during the first quarter of 2019. As of December 31, 2018, these associated assets and liabilities were classified as held for sale in the accompanying consolidated balance sheet. See Note 19 for additional information. In aggregate, the total estimated proved reserves associated with these divested assets were approximately 25 MMBoe, or less than 2%, of total U.S. proved reserves.

During 2017, Devon received proceeds totaling approximately $420 million, and recognized a net gain on asset dispositions of $212 million. Estimated proved reserves associated with these assets were less than 1% of total U.S. proved reserves.

During 2016, Devon received proceeds totaling approximately $1.9 billion and recognized a net gain on asset dispositions of $809 million, primarily from sales of non-core assets in the Mississippian, east Texas, the Anadarko Basin and the Midland Basin. Estimated proved reserves associated with these assets were approximately 157 MMBoe, or 10%, of total U.S. proved reserves. As part of the transactions, approximately $290 million of asset retirement obligations were assumed by purchasers and approximately $80 million of goodwill was allocated to these divested assets.

Access Pipeline

In October 2016, Devon divested its 50% interest in Access Pipeline for $1.1 billion ($1.4 billion Canadian dollars) and recognized a gain of approximately $540 million on the transaction. In conjunction with the divestiture, Devon entered into a transportation agreement whereby Devon’s Canadian thermal-oil acreage is dedicated to Access Pipeline for an initial term of 25 years. Devon will be charged a market-based toll on its thermal-oil production over this term. Devon is committed to use less than 90% of the potential pipeline capacity. In addition, Devon is entitled to an incremental payment of approximately $150 million Canadian dollars following sanctioning and committing to the requisite volume increase in respect of a new thermal-oil project on Devon’s Pike lease in Alberta, with such incremental payment being received prior to tolls being payable on such volumes.

Canada and Barnett Shale (Subsequent Event)

In February 2019, Devon announced its intent to separate its Canadian business and Barnett Shale assets from the Company, based on authorizations provided by its Board of Directors subsequent to December 31, 2018. Devon will evaluate multiple methods of separation for these assets, including potential sales or spin-offs. Devon is in the early stages of marketing these assets and does not currently have any indications that it would recognize an impairment upon separating its Canadian business or its Barnett Shale assets.

Devon anticipates reporting all financial information for its Canadian business and Barnett Shale assets as discontinued operations in 2019 when all the requisite criteria are met for such financial statement presentation.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3.	Derivative Financial Instruments

Commodity Derivatives

As of December 31, 2018, Devon had the following open oil derivative positions. The first two tables present Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The third table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

		Price Swaps								Price Collars
Period		Volume (Bbls/d)				Weighted Average Price ($/Bbl)				Volume (Bbls/d)				Weighted Average Floor Price ($/Bbl)				Weighted Average Ceiling Price ($/Bbl)
Q1-Q4 2019			51,719			$	59.48				87,921			$	54.48			$	64.49
Q1-Q4 2020			1,740			$	62.88				8,951			$	52.85			$	63.13

		Three-Way Price Collars
Period		Volume (Bbls/d)				Weighted Average Floor Sold Price ($/Bbl)				Weighted Average Floor Purchased Price ($/Bbl)				Weighted Average Ceiling Price ($/Bbl)
Q1-Q4 2019			5,000			$	50.00			$	63.00			$	74.80

		Oil Basis Swaps
Period		Index		Volume (Bbls/d)				Weighted Average Differential to WTI ($/Bbl)
Q1-Q4 2019		Midland Sweet			28,000			$	(0.46	)
Q1-Q4 2019		Argus LLS			17,500			$	5.00
Q1-Q4 2019		Argus MEH			16,000			$	2.84
Q1-Q4 2019		NYMEX Roll			38,000			$	0.45
Q1-Q4 2019		Western Canadian Select			31,505			$	(21.73	)
Q1-Q4 2020		NYMEX Roll			38,000			$	0.31
Q1-Q4 2020		Western Canadian Select			915			$	(20.75	)

As of December 31, 2018, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.

		Price Swaps								Price Collars
Period		Volume (MMBtu/d)				Weighted Average Price ($/MMBtu)				Volume (MMBtu/d)				Weighted Average Floor Price ($/MMBtu)				Weighted Average Ceiling Price ($/MMBtu)
Q1-Q4 2019			266,293			$	2.86				231,474			$	2.69			$	3.06
Q1-Q4 2020			26,480			$	2.92				24,490			$	2.74			$	3.04

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

		Natural Gas Basis Swaps
Period		Index		Volume (MMBtu/d)				Weighted Average Differential to Henry Hub ($/MMBtu)
Q1-Q4 2019		Panhandle Eastern Pipe Line			84,466			$	(0.73	)
Q1-Q4 2019		El Paso Natural Gas			130,000			$	(1.46	)
Q1-Q4 2019		Houston Ship Channel			142,637			$	0.01
Q1-Q4 2019		Transco Zone 4			7,397			$	(0.03	)

As of December 31, 2018, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.

				Price Swaps
Period		Product		Volume (Bbls/d)				Weighted Average Price ($/Bbl)
Q1-Q4 2019		Ethane			1,000			$	11.55
Q1-Q4 2019		Natural Gasoline			4,500			$	55.93
Q1-Q4 2019		Normal Butane			4,000			$	33.69
Q1-Q4 2019		Propane			8,500			$	30.01

Interest Rate Derivatives

As of December 31, 2018, Devon had the following open interest rate derivative positions:

Notional				Rate Received			Rate Paid		Expiration
$	100			1.76%			Three Month LIBOR		January 2019

In January 2019, this interest rate derivative position settled.

Financial Statement Presentation

The following table presents the net gains and losses by derivative financial instrument type followed by the corresponding individual consolidated comprehensive statements of earnings caption.

		Year Ended December 31,
		2018				2017				2016
Commodity derivatives:
Upstream revenues		$	608			$	157			$	(201	)
Marketing revenues			(1	)			3				(2	)
Interest rate derivatives:
Other expenses			65				(22	)			(19	)
Foreign currency derivatives:
Other expenses			—				—				(153	)
Net gains (losses) recognized		$	672			$	138			$	(375	)

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the derivative fair values by derivative financial instrument type followed by the corresponding individual consolidated balance sheet caption.

		December 31, 2018				December 31, 2017
Commodity derivative assets:
Other current assets		$	637			$	203
Other long-term assets			40				2
Interest rate derivative assets:
Other current assets			—				1
Total derivative assets		$	677			$	206
Commodity derivative liabilities:
Other current liabilities		$	67			$	259
Other long-term liabilities			1				27
Interest rate derivative liabilities:
Other current liabilities			—				64
Total derivative liabilities		$	68			$	350

4.	Share-Based Compensation

In 2017, Devon’s stockholders approved the 2017 Plan. The 2017 Plan replaces the 2015 Plan. From the effective date of the 2017 Plan, no further awards may be made under the 2015 Plan, and awards previously granted will continue to be governed by the terms of the respective award documents. Subject to the terms of the 2017 Plan, awards may be made for a total of 33.5 million shares of Devon common stock, plus the number of shares available for issuance under the 2015 Plan (including shares subject to outstanding awards that were transferred to the 2017 Plan in accordance with its terms). The 2017 Plan authorizes the Compensation Committee, which consists of independent, non-management members of Devon’s Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards or units, Canadian restricted stock units, performance units and stock appreciation rights to eligible employees. The 2017 Plan also authorizes the grant of nonqualified stock options, restricted stock awards or units and stock appreciation rights to non-employee directors. To calculate the number of shares that may be granted in awards under the 2017 Plan, options and stock appreciation rights represent one share and other awards represent 2.3 shares.

The vesting for certain share-based awards was accelerated in 2018 and 2016 in conjunction with the reduction of workforce activities described in Note 6 and is included in restructuring and transaction costs in the accompanying consolidated comprehensive statements of earnings.

The table below presents the share-based compensation expense included in Devon’s accompanying consolidated comprehensive statements of earnings.

		Year Ended December 31,
		2018				2017				2016
G&A		$	122			$	141			$	124
Exploration expenses			4				7				6
Restructuring and transaction costs			31				—				60
Total		$	157			$	148			$	190
Related income tax benefit		$	22			$	6			$	6

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents a summary of Devon’s unvested restricted stock awards and units, performance-based restricted stock awards and performance share units granted under the plans.

		Restricted Stock								Performance-Based								Performance
		Awards and Units								Restricted Stock Awards								Share Units
		Awards and Units				Weighted Average Grant-Date Fair Value				Awards				Weighted Average Grant-Date Fair Value				Units							Weighted Average Grant-Date Fair Value
		(Thousands, except fair value data)
Unvested at 12/31/17			6,328			$	36.81				575			$	38.92				2,758						$	41.21
Granted			3,592			$	35.98				—			$	—				845						$	37.40
Vested			(3,114	)		$	38.75				(273	)		$	42.22				(571	)					$	84.22
Forfeited			(843	)		$	35.58				—			$	—				(164	)					$	33.92
Unvested at 12/31/18			5,963			$	35.47				302			$	35.93				2,868			(1	)		$	30.14

(1)	A maximum of 5.7 million common shares could be awarded based upon Devon’s final TSR ranking.

The following table presents the aggregate fair value of awards and units that vested during the indicated period.

		2018				2017				2016
Restricted Stock Awards and Units		$	111			$	105			$	73
Performance-Based Restricted Stock Awards		$	10			$	10			$	5
Performance Share Units		$	20			$	38			$	13

The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of December 31, 2018.

						Performance-Based
		Restricted Stock				Restricted Stock				Performance
		Awards and Units				Awards				Share Units
Unrecognized compensation cost		$	117			$	1			$	23
Weighted average period for recognition (years)			2.4				1.0				1.7

Restricted Stock Awards and Units

Restricted stock awards and units are subject to the terms, conditions, restrictions and limitations, if any, that the Compensation Committee deems appropriate, including restrictions on continued employment. Generally, the service requirement for vesting ranges from one to four years. During the vesting period, recipients of restricted stock awards made under the 2015 Plan or 2009 Plan receive dividends that are not subject to restrictions or other limitations. However, dividends declared during the vesting period with respect to restricted stock awards made under the 2017 Plan and all restricted stock units will not be paid until the underlying award vests. 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, which is expensed over the applicable vesting period.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Performance-Based Restricted Stock Awards

Performance-based restricted stock awards were granted to certain members of Devon’s senior management. Vesting of the awards is dependent on Devon meeting certain internal performance targets and the recipient meeting certain service requirements. Generally, the service requirement for vesting ranges from one to four years. In order for awards to vest, the performance target must be met in the first year. If the performance target is met, the recipient is entitled to dividends under the same terms described above for nonperformance-based restricted stock. If the performance target and service period requirements are not met, the award does not vest. Devon estimates the fair values of the awards as the closing price of Devon’s common stock on the grant date of the award, which is expensed over the applicable vesting period.

Performance Share Units

Performance share units are granted to certain members of Devon’s management and senior employees. Each unit that vests entitles the recipient to one share of Devon common stock. The vesting of these units is based on comparing Devon’s TSR to the TSR of a predetermined group of fourteen peer companies over the specified three-year performance period. The vesting of units may be between zero and 200% of the units granted depending on Devon’s TSR as compared to the peer group on the vesting date.

At the end of the vesting period, recipients receive dividend equivalents with respect to the number of units vested. The fair value of each performance share unit is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all grants made under the plan: (i) a risk-free interest rate based on U.S. Treasury rates as of the grant date; (ii) a volatility assumption based on the historical realized price volatility of Devon and the designated peer group; and (iii) an estimated ranking of Devon among the designated peer group. The fair value of the unit on the date of grant is expensed over the applicable vesting period. The following table presents the assumptions related to performance share units granted.

		2018										2017										2016
Grant-date fair value			$36.23			—		$	37.88				$51.05			—			$53.12				$9.24			—			$10.61
Risk-free interest rate		2.28%										1.50%										0.94%
Volatility factor		45.8%										45.8%										37.7%
Contractual term (years)		2.89										2.89										2.83

Stock Options

In accordance with Devon’s incentive plans, the exercise price of stock options granted may not be less than the market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which 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. Generally, the service requirement for vesting ranges from one to four years. The fair value of stock options on the date of grant is expensed over the applicable vesting period. No stock options were granted in 2018, 2017 and 2016. The following table presents a summary of Devon’s outstanding stock options.

						Weighted Average
		Options				Exercise Price				Remaining Term				Intrinsic Value
		(Thousands)								(Years)
Outstanding at December 31, 2017			1,746			$	70.04
Expired			(1,029	)		$	72.51
Outstanding at December 31, 2018			717			$	66.49				0.87			$	—
Exercisable at December 31, 2018			717			$	66.49				0.87			$	—

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2018, Devon had no unrecognized compensation cost related to unvested stock options.

5.	Asset Impairments

The following table presents a summary of Devon’s asset impairments. Unproved impairments shown below are included in exploration expenses in the consolidated comprehensive statements of earnings.

		Year Ended December 31,
		2018				2017				2016
Proved oil and gas assets		$	109			$	—			$	435
Other assets			47				—				2
Total asset impairments		$	156			$	—			$	437
Unproved impairments		$	95			$	217			$	77

Proved Oil and Gas and Other Asset Impairments

In 2018, Devon recognized $109 million of proved asset impairments relating to U.S. non-core assets no longer in its development plans and approximately $47 million of non-oil and gas asset impairments.

In 2016, Devon impaired a portion of its U.S. oil and gas portfolio due to lower forecasted oil, gas and NGL prices.

Unproved Impairments

In 2018, 2017 and 2016, Devon allowed certain non-core acreage to expire without plans for development resulting in unproved impairments.

6.	Restructuring and Transaction Costs

The following table summarizes Devon’s restructuring liabilities presented in the accompanying consolidated balance sheets.

		Other				Other
		Current				Long-term
		Liabilities				Liabilities				Total
Balance as of December 31, 2016		$	48			$	62			$	110
Changes related to prior years’ restructurings			(29	)			(31	)			(60	)
Balance as of December 31, 2017		$	19			$	31			$	50
Changes due to 2018 workforce reductions			30				—				30
Changes related to prior years’ restructurings			(2	)			(15	)			(17	)
Balance as of December 31, 2018		$	47			$	16			$	63

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2018 Workforce Reductions

In 2018, Devon announced workforce reductions and other initiatives designed to enhance its operational focus and cost structure. As a result, Devon recognized $114 million of restructuring expenses during 2018, primarily consisting of employee-related costs. Of these expenses, $31 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, $14 million resulted from estimated settlements of defined retirement benefits.

Prior Years’ Restructurings

In 2016, Devon recognized $227 million in employee-related and other costs associated with a reduction in workforce that was made in response to the depressed commodity price environment. Of these employee-related costs, approximately $60 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, approximately $24 million resulted from estimated defined benefit settlements.

As a result of the reduction of workforce, Devon ceased using certain office space that was subject to non-cancellable operating lease arrangements. Devon recognized $23 million in restructuring costs that represent the present value of its future obligations under the leases and impairment charges for leasehold improvements and furniture associated with the office space it ceased using.

Transaction Costs

In 2016, Devon recognized $11 million in transaction costs primarily associated with the closing of the STACK acquisition discussed in Note 2.

7.	Other Expenses

The following table summarizes Devon’s other expenses presented in the accompanying consolidated comprehensive statements of earnings.

		Year Ended December 31,
		2018				2017				2016
Foreign exchange (gain) loss, net		$	139			$	(132	)		$	39
Asset retirement obligation accretion			59				62				75
Other, net			(58	)			(13	)			(13	)
Total		$	140			$	(83	)		$	101

Foreign exchange (gain) loss, net

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. The amounts in the table above include both unrealized and realized foreign exchange impacts of foreign currency denominated monetary assets and liabilities, including intercompany loans between subsidiaries with different functional currencies. Unrealized gains and losses arise from the remeasurement of these foreign currency denominated monetary assets and liabilities and intercompany loans. Realized gains and losses arise when there are settlements of these foreign currency denominated monetary assets and liabilities and intercompany loans.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Foreign currency denominated intercompany loan activity during 2018 resulted in a realized loss of $241 million, as a result of the strengthening of the U.S. dollar in relation to the Canadian dollar. These losses during 2018, were partially offset by reversing $195 million of previously recognized unrealized losses on intercompany loan activity.

Foreign currency denominated intercompany loan activity during 2016 resulted in a realized gain of $63 million, as a result of the weakening of the U.S. dollar in relation to the Canadian dollar. These gains during 2016, were partially offset by reversing $10 million of previously recognized unrealized gains on intercompany loan activity.

8.	Income Taxes

Income Tax Expense (Benefit)

The following table presents Devon’s income tax components.

		Year Ended December 31,
		2018				2017				2016
Current income tax expense (benefit):
U.S. federal		$	(14	)		$	9			$	3
Various states			(3	)			—				(11	)
Canada and various provinces			(53	)			103				106
Total current tax expense (benefit)			(70	)			112				98
Deferred income tax expense (benefit):
U.S. federal			248				—				—
Various states			63				—				—
Canada and various provinces			(85	)			(97	)			43
Total deferred tax expense (benefit)			226				(97	)			43
Total income tax expense		$	156			$	15			$	141

Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate to earnings before income taxes as a result of the following:

		Year Ended December 31,
		2018				2017				2016
Current income tax expense (benefit)		$	(70	)		$	112			$	98
Deferred income tax expense (benefit)			226				(97	)			43
Total income tax expense		$	156			$	15			$	141
U.S. statutory income tax rate			21	%			35	%			35	%
U.S. Tax Reform			0	%			36	%			0	%
Legal entity restructuring			2	%			(94	%)			19	%
State income taxes			5	%			0	%			10	%
Change in unrecognized tax benefits			(5	%)			2	%			(16	%)
Other			(0	%)			(13	%)			8	%
Deferred tax asset valuation allowance			(6	%)			36	%			(89	%)
Effective income tax rate			17	%			2	%			(33	%)

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Devon and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. Devon’s tax reserves are related to tax years that may be subject to examinations by the relevant taxing authority. Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business.

Devon assesses the realizability of its deferred tax assets. If Devon concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws.

2018

In the second quarter of 2018, Devon’s Canadian segment utilized a portion of its capital losses as a part of an internal legal entity restructuring. A valuation allowance remains recorded against the remaining balance of the capital losses.

During 2018, Devon recorded a tax benefit of $42 million related to unrecognized tax benefits, primarily as a result of a favorable Canadian court decision and the closure of prior year IRS audits.

Throughout 2017 and through the first two quarters of 2018, Devon’s U.S. segment maintained a 100% valuation allowance against its U.S. deferred tax assets. However, upon closing the EnLink divestiture in the third quarter of 2018, Devon realized a pre-tax gain of $2.6 billion. Based on its net deferred tax liability position, current period projected net operating loss utilization, and projections of future taxable income, Devon reassessed its position and determined that its U.S. segment is no longer in a full valuation allowance position, maintaining only valuation allowances against certain deferred tax assets, including certain tax credits and state net operating losses. As part of its reassessment, Devon determined that apart from the sale of EnLink and the General Partner, Devon’s U.S. segment would have remained in a full valuation allowance position. Accordingly, the deferred tax benefit resulting from the release of the valuation allowance that was generated in the first two quarters was allocated to continuing operations, while the $259 million of the deferred tax benefit resulting from the release of the remainder of the full valuation allowance position was allocated entirely to discontinued operations. A partial valuation allowance continues to be held against certain Canadian segment deferred tax assets. During 2018, the Canadian segment reduced its valuation allowance by approximately $59 million.

2017

The Tax Reform Legislation, enacted on December 22, 2017, contained several key tax provisions that affected Devon, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018. Devon was required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring U.S. deferred tax assets and liabilities and reassessing the net realizability of deferred tax assets and liabilities. Devon’s U.S. segment recognized $167 million of deferred tax expense for the one-time mandatory transition tax on accumulated foreign earnings, and $108 million in deferred tax expense related to the reduction of the U.S. corporate income tax rate to 21%.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In the fourth quarter of 2017, Devon’s Canadian segment generated nonrecurring capital losses from internal legal entity restructuring. A deferred tax asset of $727 million was recognized related to the capital losses, offset by a $641 million increase in the valuation allowance.

Devon maintained a 100% valuation allowance against its U.S. deferred tax assets resulting from prior year cumulative financial losses largely due to asset impairments and significant net operating losses for U.S. federal and state income tax. Devon reduced its U.S. segment valuation allowance by $323 million in 2017 based primarily on the financial income recorded during the period. Furthermore, a partial allowance continues to be held against certain Canadian segment deferred tax assets.

Also in the table above, the “other” effect is primarily composed of permanent differences for which dollar amounts do not increase or decrease in relation to the change in pre-tax earnings. Generally, such items have an insignificant impact on our effective income tax rate. However, these items have a more noticeable impact to our rate in 2017 due to lower relative earnings during the period.

2016

Devon recorded a tax expense of $63 million related to unrecognized tax benefits during 2016, primarily as a result of Canadian audits and legal proceedings.

During 2016, Devon’s U.S. segment recognized an additional $313 million valuation allowance against its deferred tax assets. The allowance resulted from continued financial losses in 2016. As of December 31, 2016, the allowance continued to represent a 100% valuation against the U.S. net deferred tax assets. Additionally, the Canadian segment recognized a $71 million partial valuation allowance resulting from continued financial losses.

During the third quarter of 2016, Devon derecognized $83 million of goodwill related to its U.S. operations in conjunction with the divestiture of certain non-core U.S. upstream oil and gas assets. These items were not deductible for purposes of calculating income tax and, therefore, impacted the effective tax rate.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Deferred Tax Assets and Liabilities

The following table presents the tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities.

		December 31,
		2018				2017
Deferred tax assets:
Asset retirement obligations		$	300			$	313
Accrued liabilities			50				62
Net operating loss carryforwards			287				796
Pension benefit obligations			44				54
Canadian capital loss carryforwards			609				760
Other			87				135
Total deferred tax assets before valuation allowance			1,377				2,120
Less: valuation allowance			(640	)			(968	)
Net deferred tax assets			737				1,152
Deferred tax liabilities:
Property and equipment			(1,473	)			(1,288	)
Long-term debt			—				(92	)
Other			(141	)			(261	)
Total deferred tax liabilities			(1,614	)			(1,641	)
Net deferred tax liability		$	(877	)		$	(489	)

At December 31, 2018, Devon has recognized $287 million of deferred tax assets related to various net operating loss carryforwards available to offset future income taxes. The Canadian segment has $595 million of noncapital loss carryforwards expiring between 2029 and 2038. Devon’s U.S. segment has $389 million of U.S. federal net operating loss carryforwards expiring in 2037 and $784 million of U.S. state net operating loss carryforwards expiring between 2019 and 2038. In the current environment, Devon expects tax benefits from the U.S. federal, majority of U.S. state and Canadian noncapital loss carryforwards to be utilized in 2019 and beyond.

As a result of Devon’s sale of its aggregate ownership interests in EnLink and the General Partner during the third quarter of 2018, Devon’s U.S. segment reassessed its position and released its full valuation allowance position, maintaining only $31 million of valuation allowance against certain deferred tax assets, including certain tax credits and state net operating losses. Also during 2018, Devon’s Canadian segment maintained a valuation allowance of $609 million against the deferred tax asset related to the Canadian capital loss carryforward due to projected lack of future capital gain income. In the event Devon were to determine that it would be able to realize the deferred income tax assets in the future, Devon would adjust the valuation allowance, reducing the provision for income taxes in the period of such adjustment.

After enactment of the Tax Reform Legislation, Devon’s Canadian segment is the sole foreign operation to be considered for the indefinitely reinvested assertion of APB 23. Devon’s Canadian operations are robust and active and requires continuing capital investment. Accordingly, as of December 31, 2018, no income taxes should be accrued by Devon relative to its investment in its Canadian operations. In view of Devon’s decision in February 2019 to dispose of the Canadian business, the indefinitely reinvested assertion of APB 23 and any required accrual of income tax will be reevaluated in 2019.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Unrecognized Tax Benefits

The following table presents changes in Devon’s unrecognized tax benefits.

		December 31,
		2018				2017
Balance at beginning of year		$	115			$	202
Tax positions taken in prior periods			(43	)			(7	)
Tax positions taken in current year			(2	)			(3	)
Accrual of interest related to tax positions taken			3				16
Settlements			—				(101	)
Foreign currency translation			(3	)			8
Balance at end of year		$	70			$	115

Devon’s unrecognized tax benefit balance at December 31, 2018 and 2017 included $12 million and $28 million, respectively, of interest and penalties. If recognized, $70 million of Devon’s unrecognized tax benefits as of December 31, 2018 would affect Devon’s effective income tax rate. During 2018, Devon removed $43 million of unrecognized tax benefits, including $20 million of interest, as a result of the closure of certain tax examinations. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

Jurisdiction		Tax Years Open
U.S. Federal		2015-2018
Various U.S. states		2014-2018
Canada Federal		2004-2018
Various Canadian provinces		2004-2018

Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9**.**	Net Earnings (Loss) Per Share from Continuing Operations

The following table reconciles net earnings (loss) from continuing operations and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings (loss) per share from continuing operations.

		Year Ended December 31,
		2018				2017				2016
Net earnings (loss) from continuing operations:
Net earnings (loss) from continuing operations		$	764			$	758			$	(574	)
Attributable to participating securities			(9	)			(8	)			(2	)
Basic and diluted earnings (loss) from continuing operations		$	755			$	750			$	(576	)
Common shares:
Common shares outstanding - total			499				525				513
Attributable to participating securities			(5	)			(5	)			(6	)
Common shares outstanding - basic			494				520				507
Dilutive effect of potential common shares issuable			3				3				—
Common shares outstanding - diluted			497				523				507
Net earnings (loss) per share from continuing operations:
Basic		$	1.53			$	1.44			$	(1.14	)
Diluted		$	1.52			$	1.43			$	(1.14	)
Antidilutive options (1)			1				2				3

(1)	Amounts represent options to purchase shares of Devon’s common stock that are excluded from the diluted net earnings per share calculations because the options are antidilutive.

10.	Other Comprehensive Earnings

Components of other comprehensive earnings consist of the following:

		Year Ended December 31,
		2018				2017				2016
Foreign currency translation:
Beginning accumulated foreign currency translation		$	1,309			$	1,226			$	1,215
Change in cumulative translation adjustment			(166	)			113				22
Income tax benefit (expense)			14				(30	)			(11	)
Ending accumulated foreign currency translation			1,157				1,309				1,226
Pension and postretirement benefit plans:
Beginning accumulated pension and postretirement benefits			(143	)			(172	)			(194	)
Net actuarial loss and prior service cost arising in current year			(3	)			10				(28	)
Recognition of net actuarial loss and prior service cost in earnings (1)			12				19				26
Curtailment and settlement of pension benefits			47				—				24
Income tax expense			(12	)			—				—
Other (2)			(33	)			—				—
Ending accumulated pension and postretirement benefits			(132	)			(143	)			(172	)
Other			2				—				—
Accumulated other comprehensive earnings, net of tax		$	1,027			$	1,166			$	1,054

(1)	These accumulated other comprehensive earnings components are included in the computation of net periodic benefit cost, which is a component of other expenses in the accompanying consolidated comprehensive statements of earnings. See Note 17 for additional details.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(2)	As a result of Devon’s early adoption of ASU 2018-02 in the fourth quarter of 2018, Devon reclassified $33 million from accumulated other comprehensive income to retained earnings in the December 31, 2018 consolidated balance sheet. See Note 1 for additional details.

11.	Supplemental Information to Statements of Cash Flows

		Year Ended December 31,
		2018				2017				2016
Changes in assets and liabilities, net
Accounts receivable		$	88			$	(94	)		$	(58	)
Other current assets			(128	)			20				326
Other long-term assets			(28	)			(47	)			36
Accounts payable			—				113				(196	)
Revenues and royalties payable			153				106				(26	)
Other current liabilities			(150	)			(53	)			(74	)
Other long-term liabilities			(78	)			(13	)			16
Total		$	(143	)		$	32			$	24
Supplementary cash flow data - total operations:
Interest paid (net of capitalized interest)		$	385			$	481			$	569
Income taxes paid (received)		$	40			$	78			$	(159	)

In 2016, Devon’s acquisition of certain STACK assets included the noncash issuance of Devon common stock. See Note 2 for additional details. Further, in 2016, EnLink’s acquisition of Anadarko Basin gathering and processing midstream assets included noncash issuance of General Partner common units. Additionally, EnLink’s formation of a joint venture during the third quarter of 2016 included non-monetary asset contributions.

12.	Accounts Receivable

Components of accounts receivable include the following:

		December 31, 2018				December 31, 2017
Oil, gas and NGL sales		$	430			$	559
Joint interest billings			155				134
Marketing revenues			285				278
Other			23				29
Gross accounts receivable			893				1,000
Allowance for doubtful accounts			(8	)			(11	)
Net accounts receivable		$	885			$	989

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13.Property, Plant and Equipment

Capitalized Costs

The following table reflects the aggregate capitalized costs related to Devon’s oil and gas and non-oil and gas activities.

		December 31, 2018
		U.S.				Canada				Total
Property and equipment:
Proved		$	40,378			$	6,427			$	46,805
Unproved and properties under development			833				1,434				2,267
Total oil and gas			41,211				7,861				49,072
Less accumulated DD&A			(32,229	)			(4,030	)			(36,259	)
Oil and gas property and equipment, net		$	8,982			$	3,831			$	12,813
Other property and equipment											1,832
Less accumulated DD&A											(710	)
Other property and equipment, net											1,122
Property and equipment, net										$	13,935
		December 31, 2017
		U.S.				Canada				Total
Property and equipment:
Proved		$	40,491			$	6,804			$	47,295
Unproved and properties under development			984				1,473				2,457
Total oil and gas			41,475				8,277				49,752
Less accumulated DD&A			(32,379	)			(4,055	)			(36,434	)
Oil and gas property and equipment, net		$	9,096			$	4,222			$	13,318
Other property and equipment											1,955
Less accumulated DD&A											(689	)
Other property and equipment, net											1,266
Property and equipment, net										$	14,584

Suspended Exploratory Well Costs

The following summarizes the changes in suspended exploratory well costs for the three years ended December 31, 2018.

		Year Ended December 31,
		2018				2017				2016
Beginning balance		$	313			$	261			$	225
Additions pending determination of proved reserves			672				504				247
Charges to exploration expense			—				—				(29	)
Reclassifications to proved properties			(662	)			(466	)			(189	)
Foreign currency translation adjustment			(19	)			14				7
Ending balance		$	304			$	313			$	261

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides an aging of capitalized well costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year since the completion of drilling.

		Year Ended December 31,
		2018				2017				2016
Exploratory well costs capitalized for a period of one year or less		$	110			$	113			$	88
Exploratory well costs capitalized for a period greater than one year			194				200				173
Ending balance		$	304			$	313			$	261
Number of projects with exploratory well costs capitalized for a period greater than one year			2				2				2

Projects with suspended exploratory well costs capitalized for a period greater than one year since the completion of drilling relate to Devon’s heavy oil operations. Management believes these projects with suspended exploratory well costs exhibit sufficient quantities of hydrocarbons to justify potential development. Currently, Devon has not planned additional exploratory work in the near future on these assets and will continue to assess its future development timeline of these long cycle projects as it competes for capital allocation within Devon’s portfolio. Devon’s interest in this acreage does not begin to expire until 2025.

14.	Other Current Liabilities

Components of other current liabilities include the following:

	December 31, 2018				December 31, 2017
Derivative liabilities	$	67			$	323
Accrued interest payable		80				96
Income taxes payable		14				144
Restructuring liabilities		47				19
Other		227				246
Other current liabilities	$	435			$	828

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

15.	Debt and Related Expenses

See below for a summary of debt instruments and balances. The notes and debentures are senior, unsecured obligations of Devon.

		December 31, 2018				December 31, 2017
8.25% due July 1, 2018 (1)		$	—			$	20
2.25% due December 15, 2018			—				95
6.30% due January 15, 2019			162				162
4.00% due July 15, 2021			500				500
3.25% due May 15, 2022			1,000				1,000
5.85% due December 15, 2025			485				485
7.50% due September 15, 2027 (1)			73				73
7.875% due September 30, 2031 (2) (3)			675				1,059
7.95% due April 15, 2032 (2)			366				789
5.60% due July 15, 2041			1,250				1,250
4.75% due May 15, 2042			750				750
5.00% due June 15, 2045			750				750
Net discount on debentures and notes			(24	)			(30	)
Debt issuance costs			(40	)			(39	)
Total debt			5,947				6,864
Less amount classified as short-term debt (4)			162				115
Total long-term debt		$	5,785			$	6,749

(1)

These instruments were assumed by Devon in April 2003 in conjunction with the merger with Ocean Energy. The fair value and effective rates of these 8.25% notes and 7.50% notes at the time assumed was $147 million and 5.5%, respectively, and $169 million and 6.5%, respectively.These instruments are the unsecured and unsubordinated obligations of Devon OEI Operating, L.L.C. and are guaranteed by Devon Energy Production Company, L.P. Each of these entities is a wholly-owned subsidiary of Devon.

(2)	These senior notes were included in 2018 tender offer repurchases discussed below.

(3)	Issued in October 2001, these are the unsecured and unsubordinated obligations of Devon Financing, a wholly owned subsidiary of Devon. These instruments are fully and unconditionally guaranteed by Devon.

(4)	2018 short-term debt consists of $162 million of 6.30% senior notes due January 15, 2019.

Debt maturities as of December 31, 2018, excluding debt issuance costs, premiums and discounts, are as follows:

		Total
2019		$	162
2020			—
2021			500
2022			1,000
2023			—
Thereafter			4,349
Total		$	6,011

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Credit Lines

Under its 2012 Senior Credit Facility, Devon had $3.0 billion of available credit. On October 5, 2018, Devon terminated its 2012 Senior Credit Facility and subsequently entered into its new $3.0 billion revolving 2018 Senior Credit Facility. The 2018 Senior Credit Facility matures on October 5, 2023, with the option to extend the maturity date by two additional one-year periods subject to lender consent. Amounts borrowed under the 2018 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. However, Devon may elect to borrow at the prime rate. The 2018 Senior Credit Facility currently provides for an annual facility fee of $6.1 million. As of December 31, 2018, Devon had $48 million in outstanding letters of credit under the 2018 Senior Credit Facility. There were no borrowings under the Senior Credit Facility as of December 31, 2018.

The 2018 Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be no greater than 65%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the accompanying consolidated financial statements. For example, total capitalization is adjusted to add back noncash financial write-downs such as asset impairments. As of December 31, 2018, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 21.0%.

Commercial Paper

Devon’s 2018 Senior Credit Facility supports its $3.0 billion of short-term credit under its commercial paper program. Commercial paper debt generally has a maturity of between 1 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 generally based on a standard index such as the Federal Funds Rate, LIBOR or the money market rate as found in the commercial paper market. As of December 31, 2018, Devon had no outstanding commercial paper borrowings.

Retirement of Senior Notes

During 2018, Devon completed tender offers to repurchase $807 million in aggregate principal amount of debt using cash on hand. This included $384 million of the 7.875% senior notes due September 30, 2031 and $423 million of the 7.95% senior notes due April 15, 2032. Devon recognized a $312 million loss on early retirement of debt, consisting of $304 million in cash retirement costs and $8 million of noncash charges. These costs, along with other charges associated with retiring the debt, are included in net financing costs in the consolidated comprehensive statements of earnings. In December 2018, Devon repaid the $95 million of 2.25% senior notes at maturity. Additionally, in January 2019, Devon repaid the $162 million of 6.30% senior notes at maturity.

During 2016, Devon completed tender offers to repurchase $2.1 billion of debt securities, using proceeds from the asset divestitures discussed in Note 2. Devon recognized a loss on early retirement of debt, primarily consisting of $265 million in cash retirement costs and other fees. These costs, along with other minimal noncash charges associated with retiring the debt, are included in net financing costs in the consolidated comprehensive statements of earnings.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Financing Costs, Net

The following schedule includes the components of net financing costs.

		Year Ended December 31,
		2018				2017				2016
Interest based on debt outstanding		$	339			$	390			$	488
Early retirement of debt			312				—				269
Capitalized interest			(41	)			(69	)			(61	)
Other			(16	)			(4	)			21
Total net financing costs		$	594			$	317			$	717

16.	Asset Retirement Obligations

The following table presents the changes in asset retirement obligations.

		Year Ended December 31,
		2018				2017
Asset retirement obligations as of beginning of period		$	1,138			$	1,258
Liabilities incurred			39				40
Liabilities settled and divested			(116	)			(68	)
Revision of estimated obligation			(25	)			(184	)
Accretion expense on discounted obligation			59				62
Foreign currency translation adjustment			(38	)			30
Asset retirement obligations as of end of period			1,057				1,138
Less current portion			27				39
Asset retirement obligations, long-term		$	1,030			$	1,099

During 2018, Devon reduced its asset retirement obligation by $84 million, primarily as a result of Devon’s 2018 divestitures. For additional information, see Note 2.

During 2017, Devon reduced its asset retirement obligations by $184 million, primarily due to changes in the assumed inflation rate and retirement dates for its oil and gas assets.

17.	Retirement Plans

Defined Contribution Plans

Devon sponsors defined contribution plans covering its employees in the U.S. and Canada. Such plans include its 401(k) plan, enhanced contribution plan and Canadian pension and savings plan. Contributions are primarily based upon percentages of annual compensation and years of service. In addition, each plan is subject to regulatory limitations by each respective government. Devon contributed $50 million, $53 million and $57 million to these plans in 2018, 2017 and 2016, respectively.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Defined Benefit Plans

Devon has various non-contributory defined benefit pension plans, including qualified plans and nonqualified plans covering eligible U.S. and Canadian employees and former employees meeting certain age and service requirements. Benefits under the defined benefit plans have been closed to new employees; however, eligible employees continue to accrue benefits based upon years of service and compensation. Benefits are primarily funded from assets held in the plans’ trusts.

Devon’s investment objective for its plans’ assets is to achieve stability of the funded status while providing long-term growth of invested capital and income to ensure benefit payments can be funded when required. Devon has established certain investment strategies, including target allocation percentages and permitted and prohibited investments, designed to mitigate risks inherent with investing. Devon’s target allocations for its plan assets are 70% fixed income, 20% equity and 10% other. See the following discussion for Devon’s pension assets by asset class.

Fixed-income – Devon’s fixed-income securities consist of U.S. Treasury obligations, bonds issued by investment-grade companies from diverse industries and asset-backed securities. These fixed-income securities are actively traded securities that can be redeemed upon demand. The fair values of these Level 1 securities are based upon quoted market prices and were $193 million and $342 million at December 31, 2018 and 2017, respectively. Also, included are commingled funds that primarily invest in long-term bonds and U.S. Treasury securities. These fixed income securities can be redeemed on demand but are not actively traded. The fair values of these securities are based upon the net asset values provided by the investment managers and were $301 million and $401 million at December 31, 2018 and 2017, respectively.

Equity – Devon’s equity securities include commingled global equity funds that invest in large, mid and small capitalization stocks across the world’s developed and emerging markets and international large cap equity securities. These equity securities can be sold on demand but are not actively traded. The fair values of these securities are based upon the net asset values provided by the investment managers and were $84 million and $157 million at December 31, 2018 and 2017, respectively.

Other – Devon’s other securities include short-term investment funds and a hedge fund that invest both long and short using a variety of investment strategies. The fair value of these securities is based upon the net asset values provided by investment managers and were $132 million and $135 million at December 31, 2018 and 2017, respectively.

Defined Postretirement Plans

Devon also has defined benefit postretirement plans that provide benefits for substantially all qualifying U.S. retirees. Benefit obligations for such plans are estimated based on Devon’s future cost-sharing intentions. Devon’s funding policy for the plans is to fund the benefits as they become payable with available cash and cash equivalents.

Benefit Obligations and Funded Status

The following table summarizes the benefit obligations, assets, funded status and balance sheet impacts associated with its defined pension and postretirement plans. Devon’s benefit obligations and plan assets are measured each year as of December 31. The accumulated benefit obligation for pension plans approximated the projected benefit obligation at December 31, 2018 and 2017.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

		Pension Benefits								Postretirement Benefits
		2018				2017				2018				2017
Change in benefit obligation:
Benefit obligation at beginning of year		$	1,279			$	1,249			$	19			$	21
Service cost			10				15				—				—
Interest cost			39				42				—				—
Actuarial loss (gain)			(83	)			59				(3	)			—
Plan amendments			—				—				—				—
Plan curtailments			2				—				2				—
Plan settlements			(241	)			—				—				—
Foreign exchange rate changes			(3	)			2				—				—
Participant contributions			—				—				2				1
Benefits paid			(60	)			(88	)			(3	)			(3	)
Benefit obligation at end of year			943				1,279				17				19
Change in plan assets:
Fair value of plan assets at beginning of year			1,035				985				—				—
Actual return on plan assets			(36	)			122				—				—
Employer contributions			14				14				1				2
Participant contributions			—				—				2				1
Plan settlements			(241	)			—				—				—
Benefits paid			(60	)			(88	)			(3	)			(3	)
Foreign exchange rate changes			(3	)			2				—				—
Fair value of plan assets at end of year			709				1,035				—				—
Funded status at end of year		$	(234	)		$	(244	)		$	(17	)		$	(19	)
Amounts recognized in balance sheet:
Other long-term assets		$	3			$	4			$	—			$	—
Other current liabilities			(14	)			(13	)			(3	)			(3	)
Other long-term liabilities			(223	)			(235	)			(14	)			(16	)
Net amount		$	(234	)		$	(244	)		$	(17	)		$	(19	)
Amounts recognized in accumulated other comprehensive earnings:
Net actuarial loss (gain)		$	202			$	257			$	(11	)		$	(11	)
Prior service cost (credit)			4				6				(2	)			(3	)
Total		$	206			$	263			$	(13	)		$	(14	)

During the third quarter of 2018, Devon entered into a group annuity contract, under which a third party has permanently assumed certain of Devon’s defined benefit pension obligations. The purchase of this group annuity contract reduced Devon’s pension assets and liabilities and is the primary component of the $241 million of plan settlements within the preceding table. In connection with the group annuity contract transaction, Devon recorded a settlement expense of approximately $33 million, which was reclassified from other comprehensive earnings to other expense on the consolidated comprehensive statements of earnings in 2018.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Certain of Devon’s pension plans have a combined projected benefit obligation or accumulated benefit obligation in excess of plan assets at December 31, 2018 and December 31, 2017, as presented in the table below.

		December 31,
		2018				2017
Projected benefit obligation		$	922			$	1,255
Accumulated benefit obligation		$	906			$	1,226
Fair value of plan assets		$	685			$	1,007

The following table presents the components of net periodic benefit cost and other comprehensive earnings.

		Pension Benefits												Postretirement Benefits
		2018				2017				2016				2018				2017				2016
Net periodic benefit cost:
Service cost		$	10			$	15			$	15			$	—			$	—			$	—
Interest cost			39				42				42				—				—				1
Expected return on plan assets			(49	)			(54	)			(55	)			—				—				—
Recognition of net actuarial loss (gain) (1)			13				19				25				(1	)			(1	)			(1	)
Recognition of prior service cost (1)			1				2				3				(1	)			(1	)			(1	)
Total net periodic benefit cost (2)			14				24				30				(2	)			(2	)			(1	)
Other comprehensive loss (earnings):
Actuarial loss (gain) arising in current year			4				(9	)			26				(1	)			(1	)			—
Prior service cost arising in current year			—				—				2				—				—				—
Recognition of net actuarial gain (loss), including settlement expense, in net periodic benefit cost (3)			(60	)			(19	)			(43	)			1				1				1
Recognition of prior service cost, including curtailment, in net periodic benefit cost (3)			(2	)			(2	)			(9	)			1				1				1
Total other comprehensive loss (earnings)			(58	)			(30	)			(24	)			1				1				2
Total recognized		$	(44	)		$	(6	)		$	6			$	(1	)		$	(1	)		$	1

(1)	These net periodic benefit costs were reclassified out of other comprehensive earnings in the current period.

(2)	The service cost component of net periodic benefit cost is included in G&A expense and the remaining components of net periodic benefit costs are included in other expenses in the accompanying consolidated comprehensive statements of earnings.

(3)	These amounts include restructuring costs that were reclassified out of other comprehensive earnings in 2018 and 2016. See Note 6 for further discussion.

Assumptions

		Pension Benefits												Postretirement Benefits
		2018				2017				2016				2018				2017				2016
Assumptions to determine benefit obligations:
Discount rate		4.21%				3.59%				4.07%				4.01%				3.25%				3.46%
Rate of compensation increase		2.50%				2.50%				4.49%				N/A				N/A				N/A
Assumptions to determine net periodic benefit cost:
Discount rate - service cost		3.98%				4.29%				4.39%				4.13%				4.22%				3.63%
Discount rate - interest cost		3.22%				2.99%				4.39%				2.67%				2.39%				3.63%
Rate of compensation increase		2.50%				4.48%				4.49%				N/A				N/A				N/A
Expected return on plan assets		5.67%				5.69%				5.20%				N/A				N/A				N/A

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Discount Rate - Future pension and post-retirement obligations are discounted based on the rate at which obligations could be effectively settled, considering the timing of expected future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk.

Expected return on plan assets – This was determined by evaluating input from external consultants and economists, as well as long-term inflation assumptions and consideration of target allocation of investment types.

Mortality rate – Devon utilized the Society of Actuaries produced mortality tables and an improvement scale derived from the updated tables for 2017 and 2018 and the actuary’s best estimate of mortality for 2016 for the population of participants in Devon’s plans.

Other assumptions – For measurement of the 2018 benefit obligation for the other postretirement medical plans, a 7.1% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2019. The rate was assumed to decrease annually to an ultimate rate of 5% in the year 2029 and remain at that level thereafter.

Expected Cash Flows

Devon expects benefit plan payments to average approximately $59 million a year for the next five years and $153 million total for the five years thereafter. Of these payments to be paid in 2019, $17 million is expected to be funded from Devon’s available cash, cash equivalents and other assets.

18.	Stockholders’ Equity

The authorized capital stock of Devon consists of 1.0 billion 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.

Common Stock Issued

In January 2016, Devon issued approximately 23 million shares of common stock in conjunction with the STACK asset acquisition discussed in Note 2. Additionally, in February 2016, Devon issued 79 million shares of common stock to the public, inclusive of 10 million shares sold as part of the underwriters’ option. Net proceeds from the offering were $1.5 billion.

Share Repurchase Program

In March 2018, Devon announced a share repurchase program to buy up to $1.0 billion of shares of common stock. In June 2018, in conjunction with the announced divestiture of its investment in EnLink and the General Partner, Devon increased its program by an additional $3.0 billion. In February 2019, Devon’s Board of Directors authorized an expansion of the share repurchase program by an additional $1.0 billion, bringing the total to $5.0 billion. The share repurchase program expires December 31, 2019.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the third quarter of 2018, Devon entered into and completed an ASR transaction to repurchase $1.0 billion of the $4.0 billion program. The table below provides information regarding purchases of Devon’s common stock that were made during 2018 (shares in thousands).

		Total Number of Shares Purchased				Dollar Value of Shares Purchased				Average Price Paid per Share
First quarter 2018:
Open-Market			2,561			$	82			$	32.19
Second quarter 2018:
Open-Market			11,154				439				39.35
Third quarter 2018:
Open-Market			16,492				712				43.13
ASR			24,330				1,000				41.10
Total			40,822				1,712				41.92
Fourth quarter 2018:
Open-Market			23,612				745				31.57
Total year-to-date			78,149			$	2,978			$	38.11

Dividends

The table below summarizes the dividends Devon paid on its common stock.

	Amounts				Rate Per Share
Year Ended 2018:
First quarter	$	32			$	0.06
Second quarter		42			$	0.08
Third quarter		38			$	0.08
Fourth quarter		37			$	0.08
Total year-to-date	$	149
Year Ended 2017:
First quarter	$	32			$	0.06
Second quarter		33			$	0.06
Third quarter		30			$	0.06
Fourth quarter		32			$	0.06
Total year-to-date	$	127
Year Ended 2016:
First quarter	$	125			$	0.24
Second quarter		33			$	0.06
Third quarter		32			$	0.06
Fourth quarter		31			$	0.06
Total year-to-date	$	221

In response to the depressed commodity price environment, Devon reduced the quarterly dividend rate from $0.24 to $0.06 per share in the second quarter of 2016. Devon increased the quarterly dividend by 33% to $0.08 per share in the second quarter of 2018. In February 2019, Devon announced a 12.5% increase to its quarterly dividend, to $0.09 per share, beginning in the second quarter of 2019.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

19.	Discontinued Operations and Assets Held For Sale

On June 6, 2018, Devon announced that it had entered into an agreement to sell its aggregate ownership interests in EnLink and the General Partner for $3.125 billion. Upon entering into the agreement to sell its ownership interest in June 2018, Devon concluded that the transaction was a strategic shift and met the requirements of assets held for sale and discontinued operations. As part of its assessment, Devon considered the following: 1) Devon is exiting its entire midstream business ownership; 2) EnLink and the General Partner are a separate reportable segment and are a component of Devon’s business; and 3) the transaction resulted in a material reduction in total assets, debt, revenues, net earnings and operating cash flows. As a result, Devon classified the results of operations and cash flows related to EnLink and the General Partner as discontinued operations on its consolidated financial statements. Additionally, Devon ceased depreciation and amortization for all plant, property and equipment and intangible assets classified as assets held for sale on the date the sales agreement was signed.

On July 18, 2018, Devon completed the sale of its aggregate ownership interests in EnLink and the General Partner for $3.125 billion and recognized a gain of approximately $2.6 billion ($2.2 billion after-tax). Current (cash) income tax associated with the transaction was approximately $12 million. The vast majority of the tax effect relates to deferred tax expense offset by the valuation allowance adjustment explained in Note 8.

As part of the sale agreement, Devon extended its fixed-fee gathering and processing contracts with respect to the Bridgeport and Cana plants with EnLink through 2029. Although the agreements were extended to 2029, the minimum volume commitments for the Bridgeport and Cana plants expired at the end of 2018. Devon has minimum volume commitments for gathering and processing of 77-128 MMcf/d with EnLink at the Chisholm plant through early 2021.

From the period of July 19, 2018 through December 31, 2018, Devon had net outflows of approximately $380 million with EnLink, which primarily related to gathering and processing expenses. These net outflows represent gross cash amounts and not net working interest amounts.

Prior to the divestment of Devon’s aggregate ownership of EnLink and the General Partner, certain activity between Devon and EnLink were eliminated in consolidation. Subsequent to the divestment, all activity related to EnLink represent third-party transactions and are no longer eliminated in consolidation.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the amounts reported in the consolidated comprehensive statements of earnings as discontinued operations.

		Year Ended December 31,
		2018				2017				2016
Marketing and midstream revenues		$	3,567			$	5,071			$	3,551
Marketing and midstream expenses			2,912				4,111				2,712
Depreciation, depletion and amortization			244				545				504
General and administrative expenses			65				128				118
Financing costs, net			98				181				190
Asset impairments			—				17				873
Asset dispositions			(2,607	)			—				13
Other expenses			(8	)			(34	)			25
Total expenses			704				4,948				4,435
Earnings (loss) from discontinued operations before income taxes			2,863				123				(884	)
Income tax expense (benefit)			403				(197	)			—
Net earnings (loss) from discontinued operations, net of income tax expense			2,460				320				(884	)
Net earnings (loss) attributable to noncontrolling interests			160				180				(403	)
Net earnings (loss) from discontinued operations attributable to Devon		$	2,300			$	140			$	(481	)

The following table presents the carrying amounts of the assets and liabilities classified as held for sale on the consolidated balance sheets. The assets and liabilities classified as held for sale at December 31, 2018 are related to the divestiture of non-core upstream Permian Basin assets which closed in January 2019 as further discussed in Note 2. The assets and liabilities classified as held for sale at December 31, 2017 are related to the divestiture of EnLink and the General Partner.

		December 31, 2018				December 31, 2017
Cash and cash equivalents		$	—			$	31
Accounts receivable			7				681
Other current assets			—				48
Oil and gas property and equipment, based on successful efforts accounting, net			190				—
Midstream and other property and equipment, net			—				6,587
Goodwill			—				1,542
Other long-term assets			—				1,600
Total assets held for sale		$	197			$	10,489
Accounts payable		$	3			$	186
Revenues and royalties payable			—				432
Other current liabilities			19				373
Long-term debt			—				3,542
Deferred income taxes			—				346
Asset retirement obligations			47				14
Other long-term liabilities			—				34
Total liabilities held for sale		$	69			$	4,927

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

20.	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 likely involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. Actual amounts could differ materially from management’s estimates.

Royalty Matters

Numerous oil and natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. Devon is currently named as a defendant in a number of such lawsuits, including some lawsuits in which the plaintiffs seek to certify classes of similarly situated plaintiffs. Among the allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with oil, natural gas and NGLs produced and sold. Devon is also involved in governmental agency proceedings and royalty audits and is subject to related contracts and regulatory controls in the ordinary course of business, some that may lead to additional royalty claims. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

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 and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured remediation costs. Devon’s monetary exposure for environmental matters is not expected to be material.

Beginning in 2013, various parishes in Louisiana filed suit against more than 100 oil and gas companies, including Devon, alleging that the companies’ operations and activities in certain fields violated the State and Local Coastal Resource Management Act of 1978, as amended, and caused substantial environmental contamination, subsidence and other environmental damages to land and water bodies located in the coastal zone of Louisiana. The plaintiffs seek, among other things, the payment of the costs necessary to clear, re-vegetate and otherwise restore the allegedly impacted areas. Although we cannot predict the ultimate outcome of these matters, Devon is vigorously defending against these claims.

Other Matters

Devon is involved in other various legal proceedings incidental to its business. However, to Devon’s knowledge, there were no material pending legal proceedings to which Devon is a party or to which any of its property is subject.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Commitments

The following table presents Devon’s commitments that have initial or remaining noncancelable terms in excess of one year as of December 31, 2018.

Year Ending December 31,		Purchase Obligations				Drilling and Facility Obligations				Operational Agreements				Office and Equipment Leases
2019		$	541			$	274			$	587			$	64
2020			567				85				519				43
2021			140				48				373				31
2022			—				14				419				26
2023			—				8				354				25
Thereafter			—				16				3,374				311
Total		$	1,248			$	445			$	5,626			$	500

Purchase obligation amounts represent contractual commitments primarily to purchase condensate at market prices for use at Devon’s heavy oil projects in Canada. Devon has entered into these agreements because condensate is an integral part of the heavy oil transportation process. Any disruption in Devon’s ability to obtain condensate could negatively affect its ability to transport heavy oil at these locations. Devon’s total obligation related to condensate purchases expires in 2021. The value of the obligation in the table above is based on the contractual volumes and Devon’s internal estimate of future condensate market prices.

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. The value of the drilling obligations reported is based on gross contractual value.

Devon has certain operational agreements whereby Devon has committed to transport or process certain volumes of oil, gas and NGLs for a fixed fee. Devon has entered into these agreements to aid the movement of its production to downstream markets.

Devon leases certain office space and equipment under operating lease arrangements. Total rental expense recognized for operating leases, net of sublease income, was $11 million, $7 million and $11 million in 2018, 2017 and 2016, respectively.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

21.	Fair Value Measurements

The following table provides carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. None of the items below are measured using Level 3 inputs. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other current payables and accrued expenses included in the accompanying consolidated balance sheets approximated fair value at December 31, 2018 and December 31, 2017, as applicable. Therefore, such financial assets and liabilities are not presented in the following table. Additionally, the fair values of oil and gas assets and related impairments are measured as of the impairment date using Level 3 inputs. Additional information on asset impairments and the pension plan assets is provided in Note 5, and Note 17, respectively.

										Fair Value Measurements Using:
		Carrying				Total Fair				Level 1				Level 2
		Amount				Value				Inputs				Inputs
December 31, 2018 assets (liabilities):
Cash equivalents		$	1,505			$	1,505			$	1,405			$	100
Commodity derivatives		$	677			$	677			$	—			$	677
Commodity derivatives		$	(68	)		$	(68	)		$	—			$	(68	)
Debt		$	(5,947	)		$	(5,965	)		$	—			$	(5,965	)
December 31, 2017 assets (liabilities):
Cash equivalents		$	1,533			$	1,533			$	1,454			$	79
Commodity derivatives		$	205			$	205			$	—			$	205
Commodity derivatives		$	(286	)		$	(286	)		$	—			$	(286	)
Interest rate derivatives		$	1			$	1			$	—			$	1
Interest rate derivatives		$	(64	)		$	(64	)		$	—			$	(64	)
Debt		$	(6,864	)		$	(8,131	)		$	—			$	(8,131	)

The following methods and assumptions were used to estimate the fair values in the tables above.

Level 1 Fair Value Measurements

Cash equivalents – Amounts consist primarily of money market investments and the fair value approximates the carrying value.

Level 2 Fair Value Measurements

Cash equivalents – Amounts consist primarily of commercial paper and Canadian agency and provincial securities investments. The fair value approximates the carrying value.

Commodity and interest rate derivatives– The fair values of commodity and interest rate derivatives are estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.

Debt – Devon’s debt instruments do not actively trade in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

22.	Segment Information

Devon manages its operations through distinct operating segments, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its U.S. operating segments into one reporting segment due to the similar nature of the businesses. However, Devon’s Canadian exploration and production operating segment is reported as a separate reporting segment primarily due to the significant differences between the U.S. and Canadian regulatory environments. Devon’s U.S. and Canadian segments are both primarily engaged in oil and gas exploration and production activities, and certain information regarding such activities for each segment is included in Note 23.

Devon considers EnLink, combined with the General Partner, to be a segment that is distinct from the U.S. and Canadian operating segments. EnLink’s operations consist of midstream assets and operations located in the U.S. Additionally, EnLink has a management team that is primarily responsible for capital and resource allocation decisions. However, with Devon’s closing of the divestment of EnLink and the General Partner in July 2018, activity related to EnLink and the General Partner have now been classified as discontinued operations within Devon’s consolidated comprehensive statements of earnings and consolidated statements of cash flows, and the associated assets and liabilities of EnLink and the General Partner are presented as assets and liabilities held for sale on the consolidated balance sheets. Additional information can be found in Note 19.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

		U.S.				Canada				Total
Year Ended December 31, 2018:
Revenues from external customers (1)		$	9,674			$	1,060			$	10,734
Depreciation, depletion and amortization		$	1,328			$	330			$	1,658
Interest expense		$	469			$	166			$	635
Asset impairments		$	156			$	—			$	156
Asset dispositions		$	(263	)		$	—			$	(263	)
Restructuring and transaction costs		$	97			$	17			$	114
Earnings (loss) from continuing operations before income taxes		$	1,294			$	(374	)		$	920
Income tax expense (benefit)		$	294			$	(138	)		$	156
Net earnings (loss) from continuing operations		$	1,000			$	(236	)		$	764
Property and equipment, net		$	10,026			$	3,909			$	13,935
Total assets (2)		$	14,853			$	4,516			$	19,369
Capital expenditures, including acquisitions		$	2,294			$	282			$	2,576
Year Ended December 31, 2017:
Revenues from external customers		$	7,326			$	1,552			$	8,878
Depreciation, depletion and amortization		$	1,149			$	380			$	1,529
Interest expense		$	324			$	12			$	336
Asset dispositions		$	(218	)		$	1			$	(217	)
Earnings from continuing operations before income taxes		$	443			$	330			$	773
Income tax expense		$	9			$	6			$	15
Net earnings from continuing operations		$	434			$	324			$	758
Property and equipment, net		$	10,274			$	4,310			$	14,584
Total assets (3)		$	14,254			$	5,498			$	19,752
Capital expenditures, including acquisitions		$	1,821			$	348			$	2,169
Year Ended December 31, 2016:
Revenues from external customers		$	5,722			$	1,031			$	6,753
Depreciation, depletion and amortization		$	1,178			$	414			$	1,592
Interest expense		$	624			$	100			$	724
Asset impairments		$	435			$	2			$	437
Asset dispositions		$	(955	)		$	(541	)		$	(1,496	)
Restructuring and transaction costs		$	242			$	19			$	261
Earnings (loss) from continuing operations before income taxes		$	(757	)		$	324			$	(433	)
Income tax expense (benefit)		$	(8	)		$	149			$	141
Net earnings (loss) from continuing operations		$	(749	)		$	175			$	(574	)
Property and equipment, net		$	10,166			$	4,110			$	14,276
Total assets (3)		$	13,390			$	5,071			$	18,461
Capital expenditures, including acquisitions		$	2,640			$	186			$	2,826

(1) Revenues from oil, gas and NGL sales and marketing revenues represent revenue from contracts with customers.

(2) Total assets in the table above do not include assets held for sale related to Devon’s non-core assets in the Permian Basin closed in January 2019, which totaled $197 million.

(3) Total assets in the table above do not include assets held for sale related to Devon’s discontinued operations, which totaled $10.5 billion and $10.2 billion in 2017 and 2016, respectively.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents revenue from contracts with customers that are disaggregated based on the type of good.

		Year Ended December 31, 2018
		U.S.				Canada				Total
Oil		$	2,957			$	814			$	3,771
Gas			950				—				950
NGL			956				—				956
Oil, gas and NGL revenues from contracts with customers			4,863				814				5,677
Oil, gas and NGL derivatives			457				151				608
Upstream revenues			5,320				965				6,285
Oil			2,745				95				2,840
Gas			738				—				738
NGL			871				—				871
Total marketing revenues from contracts with customers			4,354				95				4,449
Total revenues		$	9,674			$	1,060			$	10,734

23.	Supplemental Information on Oil and Gas Operations (Unaudited)

Supplemental unaudited information regarding Devon’s oil and gas activities is presented in this note. The information is provided separately by country.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Costs Incurred

The following tables reflect the costs incurred in oil and gas property acquisition, exploration and development activities.

		Year Ended December 31, 2018
		U.S.				Canada				Total
Property acquisition costs:
Proved properties		$	2			$	—			$	2
Unproved properties			71				—				71
Exploration costs			679				85				764
Development costs			1,537				249				1,786
Costs incurred		$	2,289			$	334			$	2,623
		Year Ended December 31, 2017
		U.S.				Canada				Total
Property acquisition costs:
Proved properties		$	2			$	—			$	2
Unproved properties			50				4				54
Exploration costs			590				87				677
Development costs			1,036				225				1,261
Costs incurred		$	1,678			$	316			$	1,994
		Year Ended December 31, 2016
		U.S.				Canada				Total
Property acquisition costs:
Proved properties		$	237			$	—			$	237
Unproved properties			1,356				2				1,358
Exploration costs			282				78				360
Development costs			875				54				929
Costs incurred		$	2,750			$	134			$	2,884

Development costs in the tables above include additions and revisions to Devon’s asset retirement obligations. Additionally, 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 $41 million, $69 million and $61 million in 2018, 2017 and 2016, respectively.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Results of Operations

The following tables include revenues and expenses associated with Devon’s oil and gas 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 DD&A and after giving effect to permanent differences.

		Year Ended December 31, 2018
		U.S.				Canada				Total
Oil, gas and NGL sales		$	4,863			$	814			$	5,677
Production expenses			(1,620	)			(605	)			(2,225	)
Exploration expenses			(129	)			(48	)			(177	)
Depreciation, depletion and amortization			(1,234	)			(325	)			(1,559	)
Asset dispositions			262				—				262
Asset impairments			(109	)			—				(109	)
Accretion of asset retirement obligations			(35	)			(24	)			(59	)
Income tax (expense) benefit			(460	)			51				(409	)
Results of operations		$	1,538			$	(137	)		$	1,401
Depreciation, depletion and amortization per Boe		$	8.08			$	7.63			$	7.98

		Year Ended December 31, 2017
		U.S.				Canada				Total
Oil, gas and NGL sales		$	3,746			$	1,404			$	5,150
Production expenses			(1,232	)			(591	)			(1,823	)
Exploration expenses			(346	)			(34	)			(380	)
Depreciation, depletion and amortization			(1,050	)			(369	)			(1,419	)
Asset dispositions			211				1				212
Accretion of asset retirement obligations			(38	)			(24	)			(62	)
Income tax expense			—				(104	)			(104	)
Results of operations		$	1,291			$	283			$	1,574
Depreciation, depletion and amortization per Boe		$	6.97			$	7.73			$	7.15
		Year Ended December 31, 2016
		U.S.				Canada				Total
Oil, gas and NGL sales		$	3,198			$	984			$	4,182
Production expenses			(1,313	)			(492	)			(1,805	)
Exploration expenses			(176	)			(39	)			(215	)
Depreciation, depletion and amortization			(1,066	)			(380	)			(1,446	)
Asset dispositions			946				1				947
Asset impairments			(435	)			—				(435	)
Accretion of asset retirement obligations			(49	)			(26	)			(75	)
Income tax expense			—				(13	)			(13	)
Results of operations		$	1,105			$	35			$	1,140
Depreciation, depletion and amortization per Boe		$	6.11			$	7.75			$	6.47

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Proved Reserves

The following table presents Devon’s estimated proved reserves by product and by country.

														Bitumen																NGL
		Oil (MMBbls)												(MMBbls)				Gas (Bcf)												(MMBbls)				Combined (MMBoe) (1)
		U.S.				Canada				Total				Canada				U.S.				Canada				Total				U.S.				U.S.				Canada				Total
Proved developed and undeveloped reserves:
December 31, 2015			242				22				264				520				5,808				13				5,821				428				1,638				544				2,182
Revisions due to prices			(18	)			(2	)			(20	)			23				(103	)			—				(103	)			(13	)			(48	)			21				(27	)
Revisions other than price			(2	)			3				1				(19	)			628				10				638				48				151				(14	)			137
Extensions and discoveries			36				2				38				—				280				—				280				42				124				2				126
Purchase of reserves			8				—				8				—				33				—				33				7				20				—				20
Production			(47	)			(8	)			(55	)			(40	)			(510	)			(7	)			(517	)			(42	)			(174	)			(49	)			(223	)
Sale of reserves			(25	)			—				(25	)			—				(521	)			—				(521	)			(45	)			(157	)			—				(157	)
December 31, 2016			194				17				211				484				5,615				16				5,631				425				1,554				504				2,058
Revisions due to prices			12				(1	)			11				(37	)			398				1				399				32				111				(38	)			73
Revisions other than price			6				2				8				(10	)			—				2				2				(10	)			(5	)			(7	)			(12	)
Extensions and discoveries			90				4				94				12				403				—				403				63				221				16				237
Production			(42	)			(7	)			(49	)			(40	)			(433	)			(6	)			(439	)			(36	)			(150	)			(48	)			(198	)
Sale of reserves			(3	)			—				(3	)			—				(9	)			—				(9	)			(1	)			(6	)			—				(6	)
December 31, 2017			257				15				272				409				5,974				13				5,987				473				1,725				427				2,152
Revisions due to prices			12				1				13				10				94				(3	)			91				12				40				11				51
Revisions other than price			(10	)			2				(8	)			2				(163	)			(4	)			(167	)			(23	)			(60	)			3				(57	)
Extensions and discoveries			93				5				98				7				446				—				446				64				232				11				243
Production			(47	)			(7	)			(54	)			(35	)			(397	)			(4	)			(401	)			(39	)			(153	)			(42	)			(195	)
Sale of reserves			(7	)			—				(7	)			—				(1,195	)			—				(1,195	)			(61	)			(267	)			—				(267	)
December 31, 2018			298				16				314				393				4,759				2				4,761				426				1,517				410				1,927
Proved developed reserves:
December 31, 2015			203				22				225				219				5,694				13				5,707				411				1,563				243				1,806
December 31, 2016			160				17				177				190				5,361				16				5,377				387				1,439				210				1,649
December 31, 2017			178				15				193				200				5,619				13				5,632				410				1,524				218				1,742
December 31, 2018			198				16				214				187				4,331				2				4,333				359				1,278				204				1,482
Proved developed-producing reserves:
December 31, 2015			192				19				211				219				5,546				13				5,559				393				1,509				240				1,749
December 31, 2016			143				13				156				190				5,243				16				5,259				370				1,386				207				1,593
December 31, 2017			165				12				177				197				5,512				13				5,525				397				1,481				212				1,693
December 31, 2018			189				12				201				187				4,261				2				4,263				349				1,249				199				1,448
Proved undeveloped reserves:
December 31, 2015			39				—				39				301				114				—				114				17				75				301				376
December 31, 2016			34				—				34				294				254				—				254				38				115				294				409
December 31, 2017			79				—				79				209				355				—				355				63				201				209				410
December 31, 2018			100				—				100				206				428				—				428				67				239				206				445

(1)	Gas reserves are converted to Boe at the rate of six Mcf per Bbl of oil, based upon the approximate relative energy content of gas and oil. This rate is not necessarily indicative of the relationship of natural gas and oil prices. Bitumen and NGL reserves are converted to Boe on a one-to-one basis with oil.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Proved Undeveloped Reserves

The following table presents the changes in Devon’s total proved undeveloped reserves during 2018 (MMBoe).

		U.S.				Canada				Total
Proved undeveloped reserves as of December 31, 2017			201				209				410
Extensions and discoveries			107				6				113
Revisions due to prices			1				6				7
Revisions other than price			(8	)			(15	)			(23	)
Sale of reserves			(10	)			—				(10	)
Conversion to proved developed reserves			(52	)			—				(52	)
Proved undeveloped reserves as of December 31, 2018			239				206				445

Total proved undeveloped reserves increased 9% from 2017 to 2018 with the year-end 2018 balance representing 23% of total proved reserves. Devon’s focus on drilling and development activities in the STACK and Delaware Basin was the primary driver of the 113 MMBoe in extensions and discoveries. Continued development primarily in the STACK and Delaware Basin led to the conversion of 52 MMBoe, or 26%, of the 2017 U.S. proved undeveloped reserves to proved developed reserves. Costs incurred to develop and convert Devon’s proved undeveloped reserves were approximately $691 million for 2018.

A significant amount of Devon’s proved undeveloped reserves at the end of 2018 related to its Jackfish operations. At December 31, 2018 and 2017, Devon’s Jackfish proved undeveloped reserves were 206 MMBoe and 209 MMBoe, respectively. Development schedules for the Jackfish reserves are primarily controlled by the need to keep the processing plants at their 35 MBbl daily facility capacity. Processing plant capacity is controlled by factors such as total steam processing capacity and steam-oil ratios. Furthermore, development of these projects involves the up-front construction of steam injection/distribution and bitumen processing facilities. Due to the large up-front capital investments and large reserves required to provide economic returns, the project conditions meet the specific circumstances requiring a period greater than five years for conversion to developed reserves. As a result, these reserves are classified as proved undeveloped for more than five years. Currently, the development schedule for these reserves extends through 2032. At the end of 2018, approximately 125 MMBoe of proved undeveloped reserves at Jackfish have remained undeveloped for five years or more since the initial booking. No other projects have proved undeveloped reserves that have remained undeveloped more than five years from the initial booking of the reserves. Furthermore, approximately 81 MMBoe of proved undeveloped reserves at Jackfish will require in excess of five years, from the date of this filing, to develop.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Price Revisions

Reserves increased 40 MMBoe in the U.S. primarily due to price increases in the trailing 12 month average for oil, gas and NGLs in 2018. Reserves increased 11 MMBoe in Canada due to a decrease in the trailing 12 month average price for bitumen in 2018. The decreased price has the effect of decreasing the applicable royalties, which increases the after-royalty volumes.

Reserves increased 111 MMBoe in the U.S. primarily due to significant price increases in the trailing 12 month average for oil, gas and NGLs in 2017. Reserves decreased 38 MMBoe in Canada due to a significant increase in the trailing 12 month average price for bitumen in 2017. The increased price has the effect of increasing the royalties, which decreases the after-royalty volumes.

Reserves decreased 27 MMBoe during 2016 primarily due to lower commodity prices for oil and gas. The lower bitumen price increased Canadian reserves due to the decline in royalties, which increases Devon’s after-royalty volumes.

Revisions Other Than Price

Total revisions other than price in 2018 primarily related to Devon’s evaluation of certain oil and dry gas regions, with the largest revisions being made in the STACK.

Total revisions other than price in 2016 primarily related to Devon’s evaluation of certain dry gas regions and NGLs, with the largest revisions being made in the Barnett Shale and STACK (Cana-Woodford Shale).

Extensions and Discoveries

2018 – Approximately 72% of the additions were through our focused efforts in the STACK (87 MMBoe) and the Delaware Basin (88 MMBoe). The remaining extensions were added throughout the remainder of Devon’s portfolio.

The 2018 extensions and discoveries included 21 MMBoe related to additions from Devon’s infill drilling activities, primarily relating to the STACK.

2017 – Over 80% of the additions were through our focused efforts in the STACK (120 MMBoe) and the Delaware Basin (79 MMBoe). The remaining extensions were added throughout the remainder of Devon’s portfolio.

The 2017 extensions and discoveries included 66 MMBoe related to additions from Devon’s infill drilling activities primarily related to the STACK.

2016 – Of the 126 MMBoe of extensions and discoveries, 97 MMBoe related to STACK, 18 MMBoe related to the Delaware Basin and 7 MMBoe related to the Eagle Ford.

The 2016 extensions and discoveries included 74 MMBoe related to additions from Devon’s infill drilling activities primarily related to the STACK.

Purchase of Reserves

2016 – Primarily related to Devon’s acquisition in the STACK play.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Sale of Reserves

Related to Devon’s 2018, 2017 and 2016 U.S. non-core asset divestitures as discussed further in Note 2.

Standardized Measure

The following tables reflect Devon’s standardized measure of discounted future net cash flows from its proved reserves.

		Year Ended December 31, 2018
		U.S.				Canada				Total
Future cash inflows		$	40,183			$	9,146			$	49,329
Future costs:
Development			(3,444	)			(1,558	)			(5,002	)
Production			(18,107	)			(5,445	)			(23,552	)
Future income tax expense			(2,969	)			—				(2,969	)
Future net cash flow			15,663				2,143				17,806
10% discount to reflect timing of cash flows			(6,897	)			(717	)			(7,614	)
Standardized measure of discounted future net cash flows		$	8,766			$	1,426			$	10,192
		Year Ended December 31, 2017
		U.S.				Canada				Total
Future cash inflows		$	34,701			$	13,602			$	48,303
Future costs:
Development			(3,316	)			(1,853	)			(5,169	)
Production			(15,526	)			(5,986	)			(21,512	)
Future income tax expense			—				(988	)			(988	)
Future net cash flow			15,859				4,775				20,634
10% discount to reflect timing of cash flows			(7,541	)			(1,756	)			(9,297	)
Standardized measure of discounted future net cash flows		$	8,318			$	3,019			$	11,337
		Year Ended December 31, 2016
		U.S.				Canada				Total
Future cash inflows		$	22,847			$	9,672			$	32,519
Future costs:
Development			(2,784	)			(2,201	)			(4,985	)
Production			(11,934	)			(6,049	)			(17,983	)
Future income tax expense			—				(121	)			(121	)
Future net cash flow			8,129				1,301				9,430
10% discount to reflect timing of cash flows			(3,524	)			(466	)			(3,990	)
Standardized measure of discounted future net cash flows		$	4,605			$	835			$	5,440

Future cash inflows, development costs and production costs were computed using the same assumptions for prices and costs that were used to estimate Devon’s proved oil and gas reserves at the end of each year. For 2018 estimates, Devon’s future realized prices were assumed to be $58.64 per Bbl of oil, $22.12 per Bbl of bitumen, $2.45 per Mcf of gas and $24.72 per Bbl of NGLs. Of the $5.0 billion of future development costs as of the end of 2018, $1.2 billion, $0.6 billion and $0.3 billion are estimated to be spent in 2019, 2020 and 2021, respectively.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Future development costs include not only development costs but also future asset retirement costs. Included as part of the $5.0 billion of future development costs are $1.4 billion of future asset retirement costs. The future income tax expenses have been computed using statutory tax rates, giving effect to allowable tax deductions and tax credits under current laws.

The principal changes in Devon’s standardized measure of discounted future net cash flows are as follows:

		Year Ended December 31,
		2018				2017				2016
Beginning balance		$	11,337			$	5,440			$	7,883
Net changes in prices and production costs			(243	)			5,218				(2,027	)
Oil, bitumen, gas and NGL sales, net of production costs			(3,452	)			(3,327	)			(2,377	)
Changes in estimated future development costs			(216	)			789				112
Extensions and discoveries, net of future development costs			3,139				2,497				674
Purchase of reserves			—				2				224
Sales of reserves in place			(588	)			(3	)			(577	)
Revisions of quantity estimates			(414	)			(318	)			(21	)
Previously estimated development costs incurred during the period			962				559				663
Accretion of discount			960				1,034				537
Foreign exchange and other			(329	)			(7	)			72
Net change in income taxes			(964	)			(547	)			277
Ending balance		$	10,192			$	11,337			$	5,440

24.	Supplemental Quarterly Financial Information (Unaudited)

The following tables present a summary of Devon’s unaudited interim results of operations.

		2018
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year
Total revenues		$	2,198			$	2,249			$	2,579			$	3,708			$	10,734
Asset dispositions (1)		$	(12	)		$	23			$	(6	)		$	(268	)		$	(263	)
Earnings (loss) from continuing operations before income taxes (2)		$	(245	)		$	(481	)		$	162			$	1,484			$	920
Net earnings (loss) from continuing operations		$	(211	)		$	(474	)		$	300			$	1,149			$	764
Net earnings from discontinued operations, net of income tax expense (3)		$	58			$	139			$	2,263			$	—			$	2,460
Net earnings (loss) attributable to Devon		$	(197	)		$	(425	)		$	2,537			$	1,149			$	3,064
Basic net earnings (loss) per share attributable to Devon		$	(0.38	)		$	(0.83	)		$	5.17			$	2.50			$	6.14
Diluted net earnings (loss) per share attributable to Devon		$	(0.38	)		$	(0.83	)		$	5.14			$	2.48			$	6.10

		2017
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year
Total revenues		$	2,400			$	2,165			$	1,933			$	2,380			$	8,878
Asset dispositions (1)		$	(8	)		$	(22	)		$	(170	)		$	(17	)		$	(217	)
Earnings from continuing operations before income taxes		$	313			$	207			$	207			$	46			$	773
Net earnings from continuing operations		$	308			$	212			$	194			$	44			$	758
Net earnings from discontinued operations, net of income tax expense		$	9			$	33			$	18			$	260			$	320
Net earnings attributable to Devon		$	303			$	219			$	193			$	183			$	898
Basic net earnings per share attributable to Devon		$	0.58			$	0.41			$	0.37			$	0.35			$	1.71
Diluted net earnings per share attributable to Devon		$	0.58			$	0.41			$	0.37			$	0.35			$	1.70

(1)	Additional discussion regarding asset dispositions can be found in Note 2.

Index to Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(2)	Includes asset impairments of approximately $150 million in the second quarter of 2018. Additional discussion regarding asset impairments can be found in Note 5.

(3)	Includes a gain on sale associated with the divestment of Devon’s aggregate ownership interests in EnLink and the General Partner of approximately $2.2 billion (after-tax) in the third quarter of 2018, as discussed in Note 19.

Index to Financial Statements