Fitch Affirms Devon Energy Corp's IDR at 'BBB+' on announcement of Strategic Repositioning

Fitch Ratings has affirmed Devon Energy Corporation's (Devon; NYSE:DVN) Issuer Default Rating (IDR) at 'BBB+' following the announcement today that Devon will look to sell its Gulf of Mexico (GOM) and international assets and refocus on its North American onshore properties.

Fitch affirms Devon's ratings as follows:

Devon Energy Corporation

--Long-term IDR at 'BBB+';

--Senior unsecured notes at 'BBB+';

--Senior unsecured credit facility at 'BBB+';

--Short-term IDR at 'F2';

--Commercial paper (CP) at 'F2'.

Devon Financing Corporation U.L.C.

--Senior unsecured notes at 'BBB+'.

Ocean Energy

--Senior unsecured notes at 'BBB'.

Approximately $7.4 billion in total debt is affected. The Rating Outlook will remain Stable.

The senior unsecured notes assumed in the Ocean Energy acquisition have not been explicitly guaranteed by Devon, which is the primary driver for the one-notch differential in the ratings.

Devon's announced exit from its offshore and international properties is anticipated to have a modestly positive impact on the company's ratings longer term. The company's onshore properties entail less geologic risk, lower costs and allow for a more flexible capital expenditure program. In addition, proceeds from asset sales are anticipated to be used for a combination of debt reduction and increased capital expenditures to more aggressively grow the company's retained assets. While the announcement is expected to have positive implications over time, the company is expected to realize weaker credit metrics until the divestitures are completed, as it will increase 2010 capital expenditure plans as it seeks to fund capex for the divested assets as well as increased spending for its remaining portfolio. As a result, execution risk associated with both delays in completing divestitures and/or the realization of lower than expected proceeds are the key risks creditors will be exposed to. While Devon has a history of successfully executing asset sales, global economic and credit market conditions could increase the difficulty of successfully selling the targeted assets. Since the assets targeted for sale are predominately oil related reserves and production, a decline in the long-term expectations for oil prices could mitigate realized prices for the assets. Additional risks related to the potential for even further increased 2010 capex plans beyond those highlighted in today's announcement could mitigate the proceeds available for debt reduction, particularly if price realizations come in at the lower end of the targeted range.

While Fitch maintains a Stable Outlook on Devon's ratings, key drivers which could result in a Negative Outlook would likely stem from slower than expected execution on the announced divestitures or mid-year debt levels exceeding Fitch's expectations stemming from either falling commodity prices (mitigated by the increased hedging activity) and/or further increases to capital expenditure levels. Positive rating actions could be considered longer term following the successful execution of the asset sales, achieving the targeted debt reductions with asset sale proceeds, and after reviewing the company's financial and operational performance associated with the remaining assets.

For the quarter ending Sept. 30, 2009, Devon generated latest-12-months (LTM) EBITDA of $4.9 billion and finished the period with debt of $7.4 billion. As a result, debt-to-EBITDA is currently estimated at 1.5 times (x) and interest coverage is currently 11.7x. Devon generated negative $3.1 billion of free cash flow (FCF) during the LTM period ending Sept. 30, 2009; however, quarterly trends in FCF generation show significant improvement. Devon generated negative free cash flows of $1.04 billion and $224 million during the first and second quarters of the year, respectively, before generating positive FCF of $161 million during the third quarter. Free cash flow levels are expected to again turn negative in 2010 as the company increases capital expenditure levels. This is expected to drive debt levels higher which could result in interim financing needs to support liquidity depending on the timing of asset sales.

Liquidity remained adequate for Devon at Sept. 30, 2009. The company had cash balances of $905 million; however, nearly all cash was held outside of the U.S. Devon also maintains a $2.65 billion long-term senior unsecured credit facility and a $700 million 364-day revolving credit facility. At Sept. 30, 2009, total availability on the two facilities was $1.9 billion as a result of $1.4 billion in commercial paper borrowings and $84 million in outstanding letters of credit. Of the company's senior unsecured credit facility, $500 million matures on April 7, 2012, with the remaining $2.15 billion coming due on April 7, 2013.

Devon's short-term facility was recently extended to Nov. 2, 2010. The credit facilities contain only one financial covenant requiring Devon to maintain a debt-to-capitalization below 65%. At Sept. 30, 2009, Devon's debt-to-capitalization stood at 21.3%.

Debt maturities remain minimal with the maturity of the company's $177 million 10.125% PennzEnergy notes having matured on Nov. 15, 2009. Devon has no debt maturities during 2010 and $2.1 billion in maturities during 2011 when the company's $1.75 billion of 6.875% senior notes mature on Sept. 30, 2011 (Devon Financing Corporation U.L.C. as borrower) and the $350 million of 7.25% senior notes mature on Oct. 1, 2011 (Ocean Energy, Inc. as borrower).

Devon's ratings continue to be supported by the company's sizable reserve base and production profile, competitive levels of leverage as measured by debt per barrel of oil equivalent (BOE) and strong organic reserve replacement rates at competitive finding and development cost.

Offsetting concerns focus on the reduced cash flow expectations for the company following the significant pullback in commodity prices (notably natural gas) combined with expectations of increased borrowing activity during 2010 prior to completion of the company's asset sales. While Devon's strong portfolio of projects is expected to enable the company to generate reserve and production growth in the years ahead, Fitch will continue to monitor the company's ability to grow without the need to pursue acquisitions following the sale of assets Fitch previously anticipated providing for the longer-term growth in reserves and production for the company.

Devon is one of the largest independent oil and gas producers in North America with an estimated 2.4 billion BOE of proven reserves at year-end 2008. Devon also gathers, processes, and markets its own and third-party oil and gas production (including the extraction of natural gas liquids from the gas production) through its midstream business segment.

Additional information is available at 'www.fitchratings.com'.

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