Item 1. Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

		Three Months Ended March 31,
		2022				2021
		(Unaudited)
Oil, gas and NGL sales		$	3,175			$	1,757
Oil, gas and NGL derivatives			(683	)			(528	)
Marketing and midstream revenues			1,320				821
Total revenues			3,812				2,050
Production expenses			618				458
Exploration expenses			2				3
Marketing and midstream expenses			1,324				842
Depreciation, depletion and amortization			489				467
Asset dispositions			(1	)			(32	)
General and administrative expenses			94				107
Financing costs, net			85				77
Restructuring and transaction costs			—				189
Other, net			(61	)			(29	)
Total expenses			2,550				2,082
Earnings (loss) before income taxes			1,262				(32	)
Income tax expense (benefit)			267				(248	)
Net earnings			995				216
Net earnings attributable to noncontrolling interests			6				3
Net earnings attributable to Devon		$	989			$	213
Net earnings per share:
Basic net earnings per share:		$	1.48			$	0.33
Diluted net earnings per share:		$	1.48			$	0.32
Comprehensive earnings:
Net earnings		$	995			$	216
Other comprehensive earnings, net of tax:
Pension and postretirement plans			1				23
Other comprehensive earnings, net of tax			1				23
Comprehensive earnings:		$	996			$	239
Comprehensive earnings attributable to noncontrolling interests			6				3
Comprehensive earnings attributable to Devon		$	990			$	236

See accompanying notes to consolidated financial statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEM****ENTS OF CASH FLOWS

		Three Months Ended March 31,
		2022				2021
		(Unaudited)
Cash flows from operating activities:
Net earnings		$	995			$	216
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation, depletion and amortization			489				467
Leasehold impairments			1				1
Amortization of liabilities			(6	)			(7	)
Total losses on commodity derivatives			683				528
Cash settlements on commodity derivatives			(344	)			(232	)
Gains on asset dispositions			(1	)			(32	)
Deferred income tax expense (benefit)			164				(243	)
Share-based compensation			20				41
Early retirement of debt			—				(20	)
Other			(21	)			—
Changes in assets and liabilities, net			(143	)			(127	)
Net cash from operating activities			1,837				592
Cash flows from investing activities:
Capital expenditures			(537	)			(499	)
Acquisitions of property and equipment			(1	)			—
Divestitures of property and equipment			26				15
WPX acquired cash			—				344
Distributions from equity method investments			8				10
Contributions to equity method investments			(22	)			—
Net cash from investing activities			(526	)			(130	)
Cash flows from financing activities:
Repayments of long-term debt			—				(533	)
Early retirement of debt			—				(27	)
Repurchases of common stock			(211	)			—
Dividends paid on common stock			(667	)			(203	)
Distributions to noncontrolling interests			(8	)			(4	)
Acquisition of noncontrolling interests			—				(24	)
Shares exchanged for tax withholdings and other			(73	)			(33	)
Net cash from financing activities			(959	)			(824	)
Effect of exchange rate changes on cash			2				3
Net change in cash, cash equivalents and restricted cash			354				(359	)
Cash, cash equivalents and restricted cash at beginning of period			2,271				2,237
Cash, cash equivalents and restricted cash at end of period		$	2,625			$	1,878
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents		$	2,459			$	1,683
Restricted cash			166				195
Total cash, cash equivalents and restricted cash		$	2,625			$	1,878

See accompanying notes to consolidated financial statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED B****ALANCE SHEETS

		March 31, 2022				December 31, 2021
ASSETS
Current assets:
Cash, cash equivalents and restricted cash		$	2,625			$	2,271
Accounts receivable			2,002				1,543
Other current assets			346				435
Total current assets			4,973				4,249
Oil and gas property and equipment, based on successful efforts accounting, net			13,566				13,536
Other property and equipment, net ($119 million and $111 million related to CDM in 2022 and 2021, respectively)			1,508				1,472
Total property and equipment, net			15,074				15,008
Goodwill			753				753
Right-of-use assets			229				235
Investments			416				402
Other long-term assets			333				378
Total assets		$	21,778			$	21,025
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	576			$	500
Revenues and royalties payable			1,672				1,456
Other current liabilities			1,506				1,131
Total current liabilities			3,754				3,087
Long-term debt			6,471				6,482
Lease liabilities			251				252
Asset retirement obligations			443				468
Other long-term liabilities			974				1,050
Deferred income taxes			450				287
Stockholders' equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued661 million and 663 million shares in 2022 and 2021, respectively			66				66
Additional paid-in capital			7,371				7,636
Retained earnings			2,013				1,692
Accumulated other comprehensive loss			(131	)			(132	)
Treasury stock, at cost, 0.3 million shares in 2022			(19	)			—
Total stockholders’ equity attributable to Devon			9,300				9,262
Noncontrolling interests			135				137
Total equity			9,435				9,399
Total liabilities and equity		$	21,778			$	21,025

See accompanying notes to consolidated financial statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

																		Other
										Additional								Comprehensive
		Common Stock								Paid-In				Retained				Earnings				Treasury				Noncontrolling				Total
		Shares				Amount				Capital				Earnings				(Loss)				Stock				Interests				Equity
		(Unaudited)
Three Months Ended March 31, 2022
Balance as of December 31, 2021			663			$	66			$	7,636			$	1,692			$	(132	)		$	—			$	137			$	9,399
Net earnings			—				—				—				989				—				—				6				995
Other comprehensive earnings, net of tax			—				—				—				—				1				—				—				1
Restricted stock grants, net of cancellations			2				—				1				—				—				—				—				1
Common stock repurchased			—				—				—				—				—				(305	)			—				(305	)
Common stock retired			(5	)			—				(286	)			—				—				286				—				—
Common stock dividends			—				—				—				(668	)			—				—				—				(668	)
Share-based compensation			1				—				20				—				—				—				—				20
Distributions to noncontrolling interests			—				—				—				—				—				—				(8	)			(8	)
Balance as of March 31, 2022			661			$	66			$	7,371			$	2,013			$	(131	)		$	(19	)		$	135			$	9,435
Three Months Ended March 31, 2021
Balance as of December 31, 2020			382			$	38			$	2,766			$	208			$	(127	)		$	—			$	134			$	3,019
Net earnings			—				—				—				213				—				—				3				216
Other comprehensive earnings, net of tax			—				—				—				—				23				—				—				23
Restricted stock grants, net of cancellations			4				—				—				—				—				—				—				—
Common stock repurchased			—				—				—				—				—				(38	)			—				(38	)
Common stock retired			(2	)			—				(38	)			—				—				38				—				—
Common stock dividends			—				—				—				(203	)			—				—				—				(203	)
Common stock issued			290				29				5,403				—				—				—				—				5,432
Share-based compensation			1				—				41				—				—				—				—				41
Distributions to noncontrolling interests			—				—				—				—				—				—				(4	)			(4	)
Balance as of March 31, 2021			675			$	67			$	8,172			$	218			$	(104	)		$	—			$	133			$	8,486

See accompanying notes to consolidated financial statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

S****ummary of Significant Accounting Policies

The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2021 Annual Report on Form 10-K. The accompanying unaudited interim financial statements in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month periods ended March 31, 2022 and 2021 and Devon’s financial position as of March 31, 2022.

Devon and WPX completed an all-stock merger of equals on January 7, 2021. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. The transaction has been accounted for using the acquisition method of accounting, with Devon being treated as the accounting acquirer. See Note 2 for further discussion.

Restricted Cash

As of March 31, 2022, Devon classified approximately $150 million of cash as restricted cash on the consolidated balance sheets for obligations retained related to the Barnett Shale assets and the Canadian business. Cash payments for these charges related to the Barnett assets and Canada business total approximately $10 million per quarter.

Variable Interest Entity

Cotton Draw Midstream, L.L.C. (“CDM”) is a joint venture entity formed by Devon and an affiliate of QL Capital Partners, LP. CDM provides gathering, compression and dehydration services for natural gas production in the Cotton Draw area of the Delaware Basin. Devon holds a controlling interest in CDM and the portions of CDM’s net earnings and equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated statements of comprehensive earnings and consolidated balance sheets. CDM is considered a VIE to Devon. The assets of CDM cannot be used by Devon for general corporate purposes and are included in, and disclosed parenthetically, on Devon's consolidated balance sheets. The carrying amount of liabilities related to CDM for which the creditors do not have recourse to Devon's assets are also included in, and disclosed parenthetically, if material, on Devon's consolidated balance sheets.

Investments

In conjunction with the Merger, Devon acquired an interest in Catalyst, which is a joint venture established among WPX, an affiliate of Howard Energy Partners, LLC (“HEP”) and certain other investors, to develop oil gathering and natural gas processing infrastructure in the Stateline area of the Delaware Basin. Under the terms of the arrangement, Devon and a holding company owned by the other joint venture investors each have a 50% voting interest in the joint venture legal entity, and HEP serves as the operator. Through 2038, Devon’s production from 50,000 net acres in the Stateline area of the Delaware Basin has been dedicated to Catalyst subject to fixed-fee oil gathering and natural gas processing agreements. The agreements do not include any minimum volume commitments. Devon accounts for the investment in Catalyst as an equity method investment.

Devon's investment in Catalyst is shown within investments on the consolidated balance sheets and Devon's share of Catalyst earnings are reflected as a component of other, net in the accompanying consolidated statements of comprehensive earnings.

				Carrying Amount
Investments		% Interest		March 31, 2022				December 31, 2021
Catalyst		50%		$	361			$	368
Other		Various			55				34
Total				$	416			$	402

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Disaggregation of Revenue

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

		Three Months Ended March 31,
		2022				2021
Oil		$	2,406			$	1,331
Gas			307				202
NGL			462				224
Oil, gas and NGL sales			3,175				1,757
Oil			776				499
Gas			209				147
NGL			335				175
Marketing and midstream revenues			1,320				821
Total revenues from contracts with customers		$	4,495			$	2,578

2. Acquisitions and Dive****stitures

WPX Merger

On January 7, 2021, Devon and WPX completed an all-stock merger of equals. WPX was an oil and gas exploration and production company with assets in the Delaware Basin in Texas and New Mexico and the Williston Basin in North Dakota. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. No fractional shares of Devon’s common stock were issued in the Merger, and holders of WPX common stock instead received cash in lieu of fractional shares of Devon common stock, if any. Based on the closing price of Devon’s common stock on January 7, 2021, the total value of Devon common stock issued to holders of WPX common stock as part of this transaction was approximately $5.4 billion. The Merger was structured as a tax-free reorganization for United States federal income tax purposes. The final allocation of the total purchase price of WPX to the identifiable assets acquired and the liabilities assumed was finalized at December 31, 2021.

Divestitures

In the first quarter of 2021, Devon completed the sale of non-core assets in the Rockies for proceeds of $9 million, net of purchase price adjustments, and recognized a $35 million gain related to the sale. Devon received $4 million in contingent earnout payments related to this transaction in the first quarter of 2022 with the potential for up to an additional $4 million in the future. The total estimated proved reserves associated with these divested assets was approximately 3 MMBoe.

Contingent Earnout Payments

Devon is entitled to contingent earnout payments associated with the sale of its Barnett Shale assets in 2020 with upside participation beginning at a $2.75 Henry Hub natural gas price or a $50 WTI oil price. The contingent payment period commenced on January 1, 2021 and has a term of four years. Devon received $65 million in contingent earnout payments related to this transaction in the first quarter of 2022 and could receive up to an additional $195 million in contingent earnout payments for the remaining performance periods depending on future commodity prices. The valuation of the future contingent earnout payments included within other current assets and other long-term assets in the March 31, 2022 consolidated balance sheet was approximately $51 million and $60 million, respectively. The value was derived utilizing a Monte Carlo valuation model and qualifies as a level 3 fair value measurement.

3.

Derivative Fin****ancial Instruments

Objectives and Strategies

Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. As of March 31, 2022, Devon did not have any open interest rate swap contracts.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

Counterparty Credit Risk

By using derivative financial instruments, 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 contain provisions that provide for collateral payments if Devon’s or its counterparty’s credit rating falls below certain credit rating levels. As of March 31, 2022, Devon neither held cash collateral of its counterparties nor posted cash collateral to its counterparties. Given Devon's current credit ratings and the terms of the underlying contracts, Devon is not currently required to post collateral to its counterparties with respect to its open derivative positions, and we would not be required to post any such collateral as a result of any change to the amount of Devon's net liability for such positions.

Commodity Derivatives

As of March 31, 2022, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second 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)
Q2-Q4 2022			35,258			$	44.50				37,658			$	55.56			$	74.84
Q1-Q4 2023			—			$	—				6,193			$	61.32			$	97.65

		Oil Basis Swaps
Period		Index		Volume (Bbls/d)				Weighted Average Differential to WTI ($/Bbl)
Q2-Q4 2022		BRENT			1,000			$	(7.75	)
Q2-Q4 2022		NYMEX Roll			29,000			$	0.45
Q1-Q4 2023		Midland Sweet			3,000			$	0.73

As of March 31, 2022, 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 and the end of month NYMEX index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.

		Price Swaps (1)								Price Collars (2)
Period		Volume (MMBtu/d)				Weighted Average Price ($/MMBtu)				Volume (MMBtu/d)				Weighted Average Floor Price ($/MMBtu)				Weighted Average Ceiling Price ($/MMBtu)
Q2-Q4 2022			110,000			$	2.79				209,509			$	2.98			$	4.30
Q1-Q4 2023			4,959			$	3.65				58,901			$	3.38			$	5.64

(1)

Related to the 2022 open positions, 10,000 MMBtu/d settle against the Inside FERC first of month Henry Hub index at an average price of $3.65 and 100,000 MMBtu/d settle against the end of month NYMEX index at an average price of $2.70. All 2023 open positions settle against the Inside FERC first of month Henry Hub index.

(2)

Price collars settle against the Inside FERC first of month Henry Hub Index.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

		Natural Gas Basis Swaps
Period		Index		Volume (MMBtu/d)				Weighted Average Differential to Henry Hub ($/MMBtu)
Q2-Q4 2022		El Paso Natural Gas			40,000			$	(0.82	)
Q2-Q4 2022		Houston Ship Channel			10,000			$	(0.17	)
Q2-Q4 2022		WAHA			70,000			$	(0.57	)
Q1-Q4 2023		El Paso Natural Gas			60,000			$	(1.50	)
Q1-Q4 2023		WAHA			70,000			$	(0.51	)
Q1-Q4 2024		WAHA			40,000			$	(0.51	)

As of March 31, 2022, Devon did not have any open NGL positions.

Financial Statement Presentation

All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the consolidated balance sheets. Amounts related to contracts allowed to be netted upon payment subject to a master netting arrangement with the same counterparty are reported on a net basis in the consolidated balance sheets. The tables below present a summary of these positions as of March 31, 2022 and December 31, 2021.

	March 31, 2022												December 31, 2021
	Gross Fair Value				Amounts Netted				Net Fair Value				Gross Fair Value				Amounts Netted				Net Fair Value				Balance Sheet Classification
Commodity derivatives:
Short-term derivative asset	$	15			$	(14	)		$	1			$	6			$	(4	)		$	2			Other current assets
Long-term derivative asset		31				—				31				6				—				6			Other long-term assets
Short-term derivative liability		(953	)			14				(939	)			(579	)			4				(575	)		Other current liabilities
Long-term derivative liability		(1	)			—				(1	)			(2	)			—				(2	)		Other long-term liabilities
Total derivative liability	$	(908	)		$	—			$	(908	)		$	(569	)		$	—			$	(569	)

4.

Share-Base****d Compensation

The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings. The vesting for certain share-based awards was accelerated in 2021 in conjunction with the reduction of workforce described in Note 5 and is included in restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.

		Three Months Ended March 31,
		2022				2021
G&A		$	20			$	20
Restructuring and transaction costs			—				21
Total		$	20			$	41
Related income tax benefit		$	17			$	—

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Under its approved long-term incentive plan, Devon grants share-based awards to its employees. The following table presents a summary of Devon’s unvested restricted stock awards and units and performance share units granted under the plan.

		Restricted Stock Awards & Units								Performance Share Units
		Awards/Units				Weighted Average Grant-Date Fair Value				Units				Weighted Average Grant-Date Fair Value
		(Thousands, except fair value data)
Unvested at 12/31/21			7,656			$	22.15				2,076			$	24.12
Granted			1,249			$	52.23				964			$	44.05
Vested			(2,476	)		$	23.02				(1,194	)		$	28.91
Forfeited			(8	)		$	29.42				—			$	—
Unvested at 3/31/22			6,421			$	27.66				1,846		(1)	$	31.43

(1)

A maximum of 3.7 million common shares could be awarded based upon Devon’s final TSR ranking.

The following table presents the assumptions related to the performance share units granted in 2022, as indicated in the previous summary table.

		2022
Grant-date fair value		$	68.68
Risk-free interest rate			1.81	%
Volatility factor			70.1	%
Contractual term (years)			2.89

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of March 31, 2022.

		Restricted Stock				Performance
		Awards/Units				Share Units
Unrecognized compensation cost		$	122			$	32
Weighted average period for recognition (years)			3.0				2.1

5**. Restructuring and** Transaction Costs

The following table summarizes Devon’s restructuring and transaction costs.

		Three Months Ended March 31,
		2022				2021
Restructuring costs		$	—			$	143
Transaction costs			—				46
Total costs		$	—			$	189

In conjunction with the Merger closing, Devon recognized $143 million of restructuring expenses during the first quarter of 2021 related to employee severance and termination benefits, settlements and curtailments from defined retirement benefits and contract terminations. Of these expenses, $37 million and $21 million resulted from settlements and curtailments of defined retirement benefits and accelerated vesting of share-based grants, respectively, which were non-cash charges. Additionally, in conjunction with the Merger closing, Devon recognized $46 million of transaction costs primarily comprised of bank, legal and accounting fees.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

The following table summarizes Devon’s restructuring liabilities.

		Other				Other
		Current				Long-term
		Liabilities				Liabilities				Total
Balance as of December 31, 2021		$	38			$	111			$	149
Changes related to prior years' restructurings			(4	)			(6	)			(10	)
Balance as of March 31, 2022		$	34			$	105			$	139
Balance as of December 31, 2020		$	35			$	137			$	172
Changes related to prior years' restructurings			59				(7	)			52
Balance as of March 31, 2021		$	94			$	130			$	224

6. Ot****her, Net

The following table summarizes Devon's other expenses (income) presented in the accompanying consolidated comprehensive statement of earnings.

		Three Months Ended March 31,
		2022				2021
Estimated future obligation under a performance guarantee		$	(96	)		$	—
Ukraine charitable pledge			20				—
Asset retirement obligation accretion			7				7
Severance and other non-income tax refunds			(3	)			(36	)
Other			11				—
Total		$	(61	)		$	(29	)

The first quarter of 2022 includes a $96 million benefit related to the revision of a future obligation under a performance guarantee liability for previously divested assets. Due to improved commodity prices and market conditions, the purchaser of these assets was able to fully satisfy the $35 million obligation due in the first quarter of 2022. Further, as of March 31, 2022, Devon also reduced the estimated future exposure of the performance guarantee by $61 million based on probability-weighted cash flows for the remainder of the contract term of four years.

The first quarter of 2022 also includes a $20 million pledge for humanitarian relief for the Ukrainian people and surrounding countries supporting refugees.

The first quarter of 2021 includes a Texas severance tax refund of $36 million related to prior periods.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

7**. Inco****me Taxes**

The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.

		Three Months Ended March 31,
		2022				2021
Earnings (loss) before income taxes		$	1,262			$	(32	)
Current income tax expense (benefit)		$	103			$	(5	)
Deferred income tax expense (benefit)			164				(243	)
Total income tax expense (benefit)		$	267			$	(248	)

U.S. statutory income tax rate			21	%			21	%
State income taxes			1	%			(1	%)
Deferred tax asset valuation allowance			0	%			791	%
Other			(1	%)			(48	%)
Effective income tax rate			21	%			763	%

Prior to December 31, 2021, Devon maintained a valuation allowance against all U.S. federal deferred tax assets. Devon recognized approximately $250 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon had recognized on its U.S. federal deferred tax assets in the first quarter of 2021.

Due to significant increases in commodity pricing and projections of future income, in the fourth quarter of 2021, Devon reassessed its evaluation of the realizability of deferred tax assets in future years and determined that a U.S. federal valuation allowance was no longer necessary at December 31, 2021.

In the table above, the "other" effect for 2021 is composed primarily of permanent differences related to costs incurred in connection with the Merger. Such items represent $15 million of income tax expense in the first quarter of 2021.

8.

Net Earnings Per Share

The following table reconciles net earnings and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings per share.

		Three Months Ended March 31,
		2022				2021
Net earnings:
Net earnings		$	989			$	213
Attributable to participating securities			(16	)			(2	)
Basic and diluted earnings		$	973			$	211
Common shares:
Common shares outstanding - total			663				654
Attributable to participating securities			(7	)			(5	)
Common shares outstanding - basic			656				649
Dilutive effect of potential common shares issuable			2				2
Common shares outstanding - diluted			658				651
Net earnings per share:
Basic		$	1.48			$	0.33
Diluted		$	1.48			$	0.32

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

9**.** Other Comprehensive Earnings (Loss)

Components of other comprehensive earnings (loss) consist of the following:

		Three Months Ended March 31,
		2022				2021
Pension and postretirement benefit plans:
Beginning accumulated pension and postretirement benefits		$	(132	)		$	(127	)
Recognition of net actuarial loss and prior service cost in earnings (1)			1				1
Settlement of pension benefits (2)			—				15
Other (3)			—				7
Accumulated other comprehensive loss, net of tax		$	(131	)		$	(104	)

(1)

Recognition of net actuarial loss and prior service cost are included in the computation of net periodic benefit cost, which is a component of other, net in the accompanying consolidated statements of comprehensive earnings.

(2)

The Merger triggered settlement payments to certain plan participants, and the expense associated with this settlement is recognized as a component of restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.

(3)

Other includes a remeasurement of the pension obligation due to the Merger, which was partially offset by a change in mortality assumption.

10.

Supplemental Information to Statements of Cash Flows

		Three Months Ended March 31,
		2022				2021
Changes in assets and liabilities, net:
Accounts receivable		$	(457	)		$	(63	)
Other current assets			64				(10	)
Other long-term assets			66				(10	)
Accounts payable and revenues and royalties payable			247				16
Other current liabilities			8				(33	)
Other long-term liabilities			(71	)			(27	)
Total		$	(143	)		$	(127	)
Supplementary cash flow data:
Interest paid		$	100			$	114
Income taxes refunded		$	(23	)		$	(6	)

11.

Accounts Receivable

Components of accounts receivable include the following:

		March 31, 2022				December 31, 2021
Oil, gas and NGL sales		$	1,296			$	984
Joint interest billings			161				158
Marketing and midstream revenues			496				370
Other			56				38
Gross accounts receivable			2,009				1,550
Allowance for doubtful accounts			(7	)			(7	)
Net accounts receivable		$	2,002			$	1,543

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

12. Property, Plan****t and Equipment

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

		March 31, 2022				December 31, 2021
Property and equipment:
Proved		$	38,524			$	38,051
Unproved and properties under development			1,101				1,081
Total oil and gas			39,625				39,132
Less accumulated DD&A			(26,059	)			(25,596	)
Oil and gas property and equipment, net			13,566				13,536
Other property and equipment			2,192				2,139
Less accumulated DD&A			(684	)			(667	)
Other property and equipment, net (1)			1,508				1,472
Property and equipment, net		$	15,074			$	15,008

(1)

$119 million and $111 million related to CDM in 2022 and 2021, respectively.

13.

Debt and Re****lated Expenses

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

		March 31, 2022				December 31, 2021
8.25% due August 1, 2023		$	242			$	242
5.25% due September 15, 2024			472				472
5.85% due December 15, 2025			485				485
7.50% due September 15, 2027			73				73
5.25% due October 15, 2027			390				390
5.875% due June 15, 2028			325				325
4.50% due January 15, 2030			585				585
7.875% due September 30, 2031			675				675
7.95% due April 15, 2032			366				366
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 premium (discount) on debentures and notes			137				149
Debt issuance costs			(29	)			(30	)
Total long-term debt		$	6,471			$	6,482

Retirement of Senior Notes

In the first quarter of 2021, Devon redeemed $43 million of the 6.00% senior notes due 2022, $175 million of the 5.875% senior notes due 2028 and $315 million of the 4.50% senior notes due 2030. In the first quarter of 2021, Devon recognized $20 million of gains on early retirement of debt, consisting of $47 million of non-cash premium accelerations, partially offset by $27 million of cash retirement costs. The gain on early retirement is included in net financing costs in the consolidated comprehensive statements of earnings.

Credit Lines

Devon has a $3.0 billion Senior Credit Facility. As of March 31, 2022, Devon had no outstanding borrowings under the Senior Credit Facility and had issued $2 million in outstanding letters of credit under this facility. The 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%. Under the terms of the credit agreement, total capitalization is adjusted to add back

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

non-cash financial write-downs such as impairments. As of March 31, 2022, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 24.7%.

Net Financing Costs

The following schedule includes the components of net financing costs.

		Three Months Ended March 31,
		2022				2021
Interest based on debt outstanding		$	92			$	105
Gain on early retirement of debt			—				(20	)
Interest income			(1	)			(1	)
Other			(6	)			(7	)
Total net financing costs		$	85			$	77

14. Le****ases

The following table presents Devon’s right-of-use assets and lease liabilities as of March 31, 2022 and December 31, 2021.

		March 31, 2022												December 31, 2021
		Finance				Operating				Total				Finance				Operating				Total
Right-of-use assets		$	209			$	20			$	229			$	211			$	24			$	235
Lease liabilities:
Current lease liabilities (1)		$	8			$	15			$	23			$	8			$	18			$	26
Long-term lease liabilities			247				4				251				247				5				252
Total lease liabilities		$	255			$	19			$	274			$	255			$	23			$	278

(1) Current lease liabilities are included in other current liabilities on the consolidated balance sheets.

Devon’s right-of-use operating lease 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. Devon’s right-of-use financing lease assets are related to real estate.

15.

Asset Retir****ement Obligations

The following table presents the changes in Devon’s asset retirement obligations.

		Three Months Ended March 31,
		2022				2021
Asset retirement obligations as of beginning of period		$	485			$	369
Assumed WPX obligations			—				98
Liabilities incurred			8				9
Liabilities settled and divested			(3	)			(17	)
Revision of estimated obligation			(35	)			11
Accretion expense on discounted obligation			7				7
Asset retirement obligations as of end of period			462				477
Less current portion			19				22
Asset retirement obligations, long-term		$	443			$	455

During the first quarter of 2022, Devon reduced its asset retirement obligations by $35 million primarily due to extended retirement dates for oil and gas assets, partially offset by inflation-driven increases to current settlement costs.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

16.

Stockhol****ders’ Equity

Share Repurchases

In November 2021, Devon authorized a share repurchase program of $1.0 billion with a December 31, 2022 expiration date. In February 2022, the Board of Directors authorized an expansion of the share repurchase program to $1.6 billion, and in May 2022, authorized a further expansion to $2.0 billion and extended the expiration date to May 4, 2023. The table below provides information regarding purchases of Devon’s common stock under the $2.0 billion share repurchase program (shares in thousands).

		Total Number of Shares Purchased				Dollar Value of Shares Purchased				Average Price Paid per Share
2021:
Fourth quarter			13,983			$	589			$	42.15
2022:
First quarter			3,979			$	230			$	57.74
Total plan			17,962			$	819			$	45.61

Dividends

Upon completion of the Merger, Devon continued its commitment to pay a quarterly dividend at a fixed rate and instituted a variable quarterly dividend, which is dependent on quarterly cash flows, among other factors. Devon raised its fixed quarterly dividend by 45%, to $0.16 per share, beginning in the first quarter of 2022. The following table summarizes Devon’s fixed and variable dividends for the first quarter of 2022 and 2021, respectively.

	Fixed				Variable				Total				Rate Per Share
2022:
First quarter	$	109			$	558			$	667			$	1.00
2021:
First quarter	$	76			$	127			$	203			$	0.30

In May 2022, Devon announced a cash dividend in the amount of $1.27 per share payable in the second quarter of 2022. The dividend consists of a fixed quarterly dividend in the amount of approximately $106 million (or $0.16 per share) and a variable quarterly dividend in the amount of approximately $732 million (or $1.11 per share).

Noncontrolling Interests

The noncontrolling interests’ share of CDM’s net earnings and the contributions from and distributions to the noncontrolling interests are presented as components of equity.

17.

Commitments and Contingencies

Devon is party to various legal actions arising in connection with its 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, paid royalty proceeds in an untimely manner without including required interest, 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. As of March 31, 2022, Devon has accrued approximately $30 million in other current liabilities pertaining to such royalty matters.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Environmental and Climate Change Matters

Devon’s business is subject to numerous federal, state, tribal and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties, as well as remediation costs. Although Devon believes that it is in substantial compliance with applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on its business, there can be no assurance that this will continue in the future.

Beginning in 2013, various parishes in Louisiana filed suit against numerous 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’ claims against Devon relate primarily to the operations of several of Devon’s corporate predecessors. The plaintiffs seek, among other things, payment of the costs necessary to clear, re-vegetate and otherwise restore the allegedly impacted areas. Although Devon cannot predict the ultimate outcome of these matters, Devon intends to vigorously defend against these claims.

The State of Delaware and various municipalities and other governmental and private parties in California have filed legal proceedings against numerous oil and gas companies, including Devon, seeking relief to abate alleged impacts of climate change. These proceedings include far-reaching claims for monetary damages and injunctive relief. Although Devon cannot predict the ultimate outcome of these matters, Devon intends to vigorously defend against the proceedings.

Other Indemnifications and Legacy Matter****s

Pursuant to various sale agreements relating to divested businesses and assets, Devon has indemnified various purchasers against liabilities that they may incur with respect to the businesses and assets acquired from Devon. Additionally, federal, state and other laws in areas of former operations may require previous operators (including corporate successors of previous operators) to perform or make payments in certain circumstances where the current operator may no longer be able to satisfy the applicable obligation. Such obligations may include plugging and abandoning wells, removing production facilities or performing requirements under surface agreements in existence at the time of disposition.

In November 2020, the Department of the Interior, Bureau of Safety and Environmental Enforcement, ordered several oil and gas operators, including Devon, to perform decommissioning and reclamation activities related to two California offshore oil and gas production platforms and related facilities. The current operator and owner of the platforms contends that it does not have the financial ability to perform these obligations and relinquished the related federal lease in October 2020. In response to the apparent insolvency of the current operator, the government has ordered the former operators and alleged former lease record title owners to decommission the platforms and related facilities. The government contends that an alleged corporate predecessor of Devon owned a partial interest in the subject lease and platforms. Although Devon cannot predict the ultimate outcome of this matter, Devon denies any obligation to decommission the subject platforms, has appealed the order, and believes any decommissioning obligation related to the subject platforms should be assumed by others.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

18.

Fair Value Measurements

The following table provides carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other current payables, accrued expenses and lease liabilities included in the accompanying consolidated balance sheets approximated fair value at March 31, 2022 and December 31, 2021, as applicable. Therefore, such financial assets and liabilities are not presented in the following table.

										Fair Value Measurements Using:
		Carrying				Total Fair				Level 1				Level 2				Level 3
		Amount				Value				Inputs				Inputs				Inputs
March 31, 2022 assets (liabilities):
Cash equivalents		$	2,196			$	2,196			$	2,196			$	—			$	—
Commodity derivatives		$	32			$	32			$	—			$	32			$	—
Commodity derivatives		$	(940	)		$	(940	)		$	—			$	(940	)		$	—
Debt		$	(6,471	)		$	(7,126	)		$	—			$	(7,126	)		$	—
Contingent earnout payments		$	115			$	115			$	—			$	—			$	115
December 31, 2021 assets (liabilities):
Cash equivalents		$	1,421			$	1,421			$	1,421			$	—			$	—
Commodity derivatives		$	8			$	8			$	—			$	8			$	—
Commodity derivatives		$	(577	)		$	(577	)		$	—			$	(577	)		$	—
Debt		$	(6,482	)		$	(7,644	)		$	—			$	(7,644	)		$	—
Contingent earnout payments		$	184			$	184			$	—			$	—			$	184

The following methods and assumptions were used to estimate the fair values in the table 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

Commodity derivatives – The fair value of commodity derivatives is 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 consistently trade actively in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity when active trading is not available.

Level 3 Fair Value Measurements

Contingent Earnout Payments – Devon has the right to receive contingent consideration related to the Barnett and non-core Rockies asset divestitures based on future oil and gas prices. These values were derived using a Monte Carlo valuation model and qualify as a level 3 fair value measurement. For additional information, see Note 2.