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These excerpts taken from the DVN 10-K filed Feb 27, 2009. Derivative
Financial Instruments
Devon is exposed to certain risks relating to its ongoing
business operations. Devon’s largest areas of risk exposure
relate 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 and interest rate risk. Besides these derivative
instruments, Devon also had an embedded option derivative
related to the fair value of its debentures exchangeable into
shares of Chevron common stock. Devon ceased to have this option
when the exchangeable debentures matured on August 15, 2008.
Devon periodically enters into derivative financial instruments
with respect to a portion of its oil and gas production that
hedge the future prices received. These instruments are used to
manage the inherent uncertainty of future revenues due to oil
and gas price volatility. Devon’s derivative financial
instruments include financial price swaps and costless price
collars. Under the terms of the swaps, Devon will receive a
fixed price for its production and pay a variable market price
to the contract counterparty. The 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 to the collars.
Devon periodically enters into interest rate swaps to manage its
exposure to interest rate volatility. Devon uses these swaps to
mitigate a portion of the fair value effects of interest rate
fluctuations on its fixed-rate debt. Under the terms of these
swaps, Devon receives a fixed rate and pays a variable rate on a
total notional amount.
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 the statement of
operations unless specific hedge accounting criteria are met. If
such criteria are met for cash flow hedges, the effective
portion of the change in the fair value is recorded directly to
accumulated other comprehensive income, a component of
stockholders’ equity, until the hedged transaction occurs.
The ineffective portion of the change in fair value is recorded
in the statement of operations. If such criteria are met for
fair value hedges, the change in the fair value is recorded in
the statement of operations with an offsetting amount recorded
for the change in fair value of the hedged item. Cash
settlements with counterparties to Devon’s derivative
financial instruments are also recorded in the statement of
operations.
A derivative financial instrument qualifies for hedge accounting
treatment if Devon designates the instrument as such on the date
the derivative contract is entered into or the date of a
business combination or other transaction that includes
derivative contracts. Additionally, Devon must document the
relationship between the hedging instrument and hedged item, as
well as the risk-management objective and strategy for
undertaking the instrument. Devon must also assess, both at the
instrument’s inception and on an ongoing basis, whether the
derivative is highly effective in offsetting the change in cash
flow of the hedged item. For derivative financial instruments
held during the three-year period ended December 31, 2008,
Devon chose not to meet the necessary criteria to qualify its
derivative financial instruments for hedge accounting treatment.
By using derivative financial instruments to hedge exposures to
changes in commodity prices and interest rates, Devon exposes
itself to credit risk and market 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 minimal 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.
Table of Contents
DEVON
ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Market risk is the change in the value of a derivative financial
instrument that results from a change in commodity prices,
interest rates or other relevant underlyings. The market risks
associated with commodity price and interest rate contracts are
managed by establishing and monitoring parameters that limit the
types and degree of market risk that may be undertaken. The oil
and gas reference prices upon which the commodity instruments
are based reflect various market indices that have a high degree
of historical correlation with actual prices received by Devon.
Devon does not hold or issue derivative financial instruments
for speculative trading purposes.
See Note 3 for the amounts included in Devon’s
accompanying balance sheets and statements of operations
associated with its derivative financial instruments.
Discontinued
Operations
In November 2006 and January 2007, Devon announced plans to
divest its operations in Egypt and West Africa. As a result, all
amounts related to Devon’s operations in Egypt and West
Africa are classified as discontinued operations. The captions
assets held for sale and liabilities associated with assets held
for sale in the accompanying balance sheets present the assets
and liabilities associated with our discontinued operations. See
Note 16 for more discussion regarding these divestitures.
Derivative
Financial Instruments
Devon is exposed to certain risks relating to its ongoing
business operations. Devon’s largest areas of risk exposure
relate 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 and interest rate risk. Besides these derivative
instruments, Devon also had an embedded option derivative
related to the fair value of its debentures exchangeable into
shares of Chevron common stock. Devon ceased to have this option
when the exchangeable debentures matured on August 15, 2008.
Devon periodically enters into derivative financial instruments
with respect to a portion of its oil and gas production that
hedge the future prices received. These instruments are used to
manage the inherent uncertainty of future revenues due to oil
and gas price volatility. Devon’s derivative financial
instruments include financial price swaps and costless price
collars. Under the terms of the swaps, Devon will receive a
fixed price for its production and pay a variable market price
to the contract counterparty. The 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 to the collars.
Devon periodically enters into interest rate swaps to manage its
exposure to interest rate volatility. Devon uses these swaps to
mitigate a portion of the fair value effects of interest rate
fluctuations on its fixed-rate debt. Under the terms of these
swaps, Devon receives a fixed rate and pays a variable rate on a
total notional amount.
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 the statement of
operations unless specific hedge accounting criteria are met. If
such criteria are met for cash flow hedges, the effective
portion of the change in the fair value is recorded directly to
accumulated other comprehensive income, a component of
stockholders’ equity, until the hedged transaction occurs.
The ineffective portion of the change in fair value is recorded
in the statement of operations. If such criteria are met for
fair value hedges, the change in the fair value is recorded in
the statement of operations with an offsetting amount recorded
for the change in fair value of the hedged item. Cash
settlements with counterparties to Devon’s derivative
financial instruments are also recorded in the statement of
operations.
A derivative financial instrument qualifies for hedge accounting
treatment if Devon designates the instrument as such on the date
the derivative contract is entered into or the date of a
business combination or other transaction that includes
derivative contracts. Additionally, Devon must document the
relationship between the hedging instrument and hedged item, as
well as the risk-management objective and strategy for
undertaking the instrument. Devon must also assess, both at the
instrument’s inception and on an ongoing basis, whether the
derivative is highly effective in offsetting the change in cash
flow of the hedged item. For derivative financial instruments
held during the three-year period ended December 31, 2008,
Devon chose not to meet the necessary criteria to qualify its
derivative financial instruments for hedge accounting treatment.
By using derivative financial instruments to hedge exposures to
changes in commodity prices and interest rates, Devon exposes
itself to credit risk and market 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 minimal 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.
Table of Contents
DEVON
ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Market risk is the change in the value of a derivative financial
instrument that results from a change in commodity prices,
interest rates or other relevant underlyings. The market risks
associated with commodity price and interest rate contracts are
managed by establishing and monitoring parameters that limit the
types and degree of market risk that may be undertaken. The oil
and gas reference prices upon which the commodity instruments
are based reflect various market indices that have a high degree
of historical correlation with actual prices received by Devon.
Devon does not hold or issue derivative financial instruments
for speculative trading purposes.
See Note 3 for the amounts included in Devon’s
accompanying balance sheets and statements of operations
associated with its derivative financial instruments.
Discontinued
Operations
In November 2006 and January 2007, Devon announced plans to
divest its operations in Egypt and West Africa. As a result, all
amounts related to Devon’s operations in Egypt and West
Africa are classified as discontinued operations. The captions
assets held for sale and liabilities associated with assets held
for sale in the accompanying balance sheets present the assets
and liabilities associated with our discontinued operations. See
Note 16 for more discussion regarding these divestitures.
Derivative Financial Instruments Devon is exposed to certain risks relating to its ongoing business operations. Devon’s largest areas of risk exposure relate 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 and interest rate risk. Besides these derivative instruments, Devon also had an embedded option derivative related to the fair value of its debentures exchangeable into shares of Chevron common stock. Devon ceased to have this option when the exchangeable debentures matured on August 15, 2008. Devon periodically enters into derivative financial instruments with respect to a portion of its oil and gas production that hedge the future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility. Devon’s derivative financial instruments include financial price swaps and costless price collars. Under the terms of the swaps, Devon will receive a fixed price for its production and pay a variable market price to the contract counterparty. The 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 to the collars. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon uses these swaps to mitigate a portion of the fair value effects of interest rate fluctuations on its fixed-rate debt. Under the terms of these swaps, Devon receives a fixed rate and pays a variable rate on a total notional amount. 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 the statement of operations unless specific hedge accounting criteria are met. If such criteria are met for cash flow hedges, the effective portion of the change in the fair value is recorded directly to accumulated other comprehensive income, a component of stockholders’ equity, until the hedged transaction occurs. The ineffective portion of the change in fair value is recorded in the statement of operations. If such criteria are met for fair value hedges, the change in the fair value is recorded in the statement of operations with an offsetting amount recorded for the change in fair value of the hedged item. Cash settlements with counterparties to Devon’s derivative financial instruments are also recorded in the statement of operations. A derivative financial instrument qualifies for hedge accounting treatment if Devon designates the instrument as such on the date the derivative contract is entered into or the date of a business combination or other transaction that includes derivative contracts. Additionally, Devon must document the relationship between the hedging instrument and hedged item, as well as the risk-management objective and strategy for undertaking the instrument. Devon must also assess, both at the instrument’s inception and on an ongoing basis, whether the derivative is highly effective in offsetting the change in cash flow of the hedged item. For derivative financial instruments held during the three-year period ended December 31, 2008, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. By using derivative financial instruments to hedge exposures to changes in commodity prices and interest rates, Devon exposes itself to credit risk and market 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 minimal 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.
Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Market risk is the change in the value of a derivative financial instrument that results from a change in commodity prices, interest rates or other relevant underlyings. The market risks associated with commodity price and interest rate contracts are managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The oil and gas reference prices upon which the commodity instruments are based reflect various market indices that have a high degree of historical correlation with actual prices received by Devon. Devon does not hold or issue derivative financial instruments for speculative trading purposes. See Note 3 for the amounts included in Devon’s accompanying balance sheets and statements of operations associated with its derivative financial instruments. Discontinued Operations In November 2006 and January 2007, Devon announced plans to divest its operations in Egypt and West Africa. As a result, all amounts related to Devon’s operations in Egypt and West Africa are classified as discontinued operations. The captions assets held for sale and liabilities associated with assets held for sale in the accompanying balance sheets present the assets and liabilities associated with our discontinued operations. See Note 16 for more discussion regarding these divestitures. Derivative Financial Instruments Devon is exposed to certain risks relating to its ongoing business operations. Devon’s largest areas of risk exposure relate 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 and interest rate risk. Besides these derivative instruments, Devon also had an embedded option derivative related to the fair value of its debentures exchangeable into shares of Chevron common stock. Devon ceased to have this option when the exchangeable debentures matured on August 15, 2008. Devon periodically enters into derivative financial instruments with respect to a portion of its oil and gas production that hedge the future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to oil and gas price volatility. Devon’s derivative financial instruments include financial price swaps and costless price collars. Under the terms of the swaps, Devon will receive a fixed price for its production and pay a variable market price to the contract counterparty. The 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 to the collars. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon uses these swaps to mitigate a portion of the fair value effects of interest rate fluctuations on its fixed-rate debt. Under the terms of these swaps, Devon receives a fixed rate and pays a variable rate on a total notional amount. 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 the statement of operations unless specific hedge accounting criteria are met. If such criteria are met for cash flow hedges, the effective portion of the change in the fair value is recorded directly to accumulated other comprehensive income, a component of stockholders’ equity, until the hedged transaction occurs. The ineffective portion of the change in fair value is recorded in the statement of operations. If such criteria are met for fair value hedges, the change in the fair value is recorded in the statement of operations with an offsetting amount recorded for the change in fair value of the hedged item. Cash settlements with counterparties to Devon’s derivative financial instruments are also recorded in the statement of operations. A derivative financial instrument qualifies for hedge accounting treatment if Devon designates the instrument as such on the date the derivative contract is entered into or the date of a business combination or other transaction that includes derivative contracts. Additionally, Devon must document the relationship between the hedging instrument and hedged item, as well as the risk-management objective and strategy for undertaking the instrument. Devon must also assess, both at the instrument’s inception and on an ongoing basis, whether the derivative is highly effective in offsetting the change in cash flow of the hedged item. For derivative financial instruments held during the three-year period ended December 31, 2008, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. By using derivative financial instruments to hedge exposures to changes in commodity prices and interest rates, Devon exposes itself to credit risk and market 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 minimal 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.
Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Market risk is the change in the value of a derivative financial instrument that results from a change in commodity prices, interest rates or other relevant underlyings. The market risks associated with commodity price and interest rate contracts are managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The oil and gas reference prices upon which the commodity instruments are based reflect various market indices that have a high degree of historical correlation with actual prices received by Devon. Devon does not hold or issue derivative financial instruments for speculative trading purposes. See Note 3 for the amounts included in Devon’s accompanying balance sheets and statements of operations associated with its derivative financial instruments. Discontinued Operations In November 2006 and January 2007, Devon announced plans to divest its operations in Egypt and West Africa. As a result, all amounts related to Devon’s operations in Egypt and West Africa are classified as discontinued operations. The captions assets held for sale and liabilities associated with assets held for sale in the accompanying balance sheets present the assets and liabilities associated with our discontinued operations. See Note 16 for more discussion regarding these divestitures. | EXCERPTS ON THIS PAGE:
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