Devon Energy 2006 Annual Report

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Bobby  AaronJohn  AaronMorgan  AaronRandall  AaronHarry  AasmyrShilpa  AbbittWyatt  AbbittChris  AbbottDennis  AbbottDouglas  AbelSharon  AbernathyJohn  AbernethyLuis  AbilaJerry  AblesLauren  AbneyGeri  AbramsDavid  AbshireShannon  ActonCarson  AdamsDavid  AdamsDwayne  AdamsLouise  AdamsNorvella  AdamsRod  AdamsSteven  AdamsVerna  AdamsColby  AddingtonPaul  AddingtonGordon  AddisonJason  AddisonRichard  AdkinsRuthanne  AdolpheJeff  AgostaLeonard  AguilarDwight  AguillardTrevor  AitkenSusan  AizzierSaleem  AkhtarSteve  AlbaughAdam  AlbrightDerek  AlbroMichelle  AldermanTrevor  AldingerGuy  AldrichDavid  AlexanderGreg  AlexanderJames  AlexanderKari-Lynn  AlexanderRicky  AlexanderTodd  AlexanderJoan  Allan-KayserJames  AllbeeMarty  AllemanRobert  AllemandCari  AllenDan  AllenJillian  AllenJim  AllenRob  AllenJeffrey  AllisonMike  AllisonTerri  AllisonJames  AlmondJesse  AlvaradoArlindo  AlvesPedro  AmadorKendall  AmburnLeo  AmiotAhmed  AmmarMichael  AmmermanPaolo  AmorusoArmand  AmyotteJuan  AnayaKenneth  AncarKevin  AndereggAndrea  AndersonBruce  AndersonChad  AndersonChris  AndersonChris  AndersonClayton  AndersonDarren  AndersonDavid  AndersonDewey  AndersonJack  AndersonJohn  AndersonKirk  AndersonLaura  AndersonLinda  AndersonNicole  AndersonRobert  AndersonRoderick  AndersonRonald  AndersonRoyce  AndersonTerry  AndersonAlejandro  AndradeJoseph  AndrepontKenneth  AndresRichard  AndrewsRimontas  AndriekusRena  AndrusDurwood  AntleyJames  AppeltRyan  AquiliniDerek  ArberrySouad  ArboucheCharles  ArcandThomas  ArcherJonathan  ArdoinRobert  ArdoinWade  ArkinstallHoda  Armanious-TawadrouJesse  ArmendarizAnne  ArmstrongClinton  ArmstrongDavid  ArmstrongGinger  ArmstrongJan  ArmstrongJohn  ArmstrongLori  ArnasonAyla  ArneyJohn  ArneyJim  ArnoldMichelle  ArnoldRebecca  ArnoldTom  ArnoldDevender  AroraMitchell  ArringtonHeath  Arstingstall

Jeff  ArvidsonBlake  AryJoseph  AshPatrick  AshDeborah  AshcraftJohn  AshleyCarrie  AskinsHenry  AssenNancy  AstonMark  AtkersonDeborah  AtterburyRick  AtwoodRobert  AtwoodSandra  AtyiaKeith  AubinRyan  AuclairDarrell  AugerJohn  AumanLoren  AusmusSara  AustinScarlett  AustinShari  AustinCurtis  AutenriebJames  AvaryClay  AxtonD. Brian  BabcockPaul  BaclawskiOwen  BadilloPaul  BaezaPete  BaggettGlen  BagwellKelly  BagwellCraig  BaierDaryl  BaileyDebbie  BairdOneta  BairdAlana  BakerBrandon  BakerBrenda  BakerCarole  BakerDave  BakerDavid  BakerJoshua  BakerLarry  BakerMarilyn  BakerMicha  BakerPaul  BakerRosemarie  BakerHank  BakkerKay  BakkerMamadou  BaldeChadwick  BaldesClaude  BaldesDenice  BaldwinTeresa  BaldwinCyril  BalkoJonathan  BalkwillRicky  BallKen  BallardPaul  BalmerJason  BandyCindy  BanksJody  BarbareKristen  BarberMonica  BarberRusty  BarberKes  BarcasPaula  BardwellJames  BarhamKeith  BarkeDonna  BarkerScott  BarlundWayland  BarmoreJim  BarnesJimmy  BarnesRaymond  BarnesTim  BarnesVelta  BarnesAngela  BarnettJudith  BarnettJanet  BarnhillDavid  BarrOlga  BarrRandy  BarrLeticia  BarreraJennifer  BarrerasRandy  BarrettBilly  BarrickJulie  BarryCasandra  BarteeAnna  BarthelemyMarsha  BartlettMary  BartlettBob  BartusiakKay  BarzizaJeff  BaschAdam  BasicGay  BaskinDarryl  BaskindRena  BassitDouglas  BastKent  BastianJoni  BatchelorDiane  BatesRhonda  BatesBarry  BattaglioGerald  BattrickEric  BauerRonnie  BauerleinJames  BaughLynn  BaughmanKelvin  BaumanLewis  BaumgartnerMichael  BaxleyKris  BaxterRon  BaxterLynn  BaylessBradley  BayleyBrian  BaylissLauro  BazanDaryl  BeanDavid  BeanMike  BearBarry  BeattieJohn  BeattieJoyce  BeatyJerome  BeaudoinPhilip  BeaudoinWilliam  Beaudoin

Josh  BebeeCharles  BecanGinger  BeckRalph  BeckJudy  BeckerOlga  BedoyKyle  BeebeDonald  BeekmanJon  BeenKenneth  BeeneyGary  BeesonJeremy  BegemanJeannette  BeggConnie  BegnaudCarla  BeierleCeline  BelandVivian  BelascoMarcel  BelcourtJamel  BelhadiMouloud  BelharcheColby  BellDeanna  BellDonna  BellJulie  BellRobert  BellJudy  BellamyBernard  BellangerMatt  BellerTom  BelshaBetty  BenavidesWilliam  BenderDale  BenedettoArt  BenjaminLaurel  BenjaminRenea  BenjaminBenny  BennettBrady Lee  BennettCharles  BennettMelissa  BennettMyra  BennettRichard  BennettScott  BennettDonald  BenoitBrett  BentleyDuane  BentleyBeverly  BentsonAnthony  BenvegnuGeorge  BenwellJonathan  BenzerChuck  BergDerek  BergRyan  BergMichelle  BergerChad  BergeronRobin  BergeronRoger  BergleyChristopher  BergquistAndrea  BernardyKelly  BernardyDoug  BerridgeJoseph  BerryLinda  BerrymanPhyllis  BertholdLou  BertoliMichael  BerubeKenneth  BerzeDettmar  BesselAllan  BettensonMark  BettsJohn  Bevill Jr.Jasvir  BhangooChris  BiagiLee Ann  BiancoRhonda  BiasucciHermeka  BibbinsFlint  BickfordHal  BiddleBrad  BiddyAnthony  BieleskiDennis  BiendarraBennie  BieryAlex  Big PlumeMike  BigbyKelly  BiggsKim  BiggsRex  BiglerBrian  BillCindy  BilyeuWally  BindaJason  BinghamKeith  BinghamJerome  BiolloScott  BirdShane  BirdRyan  BirkenfeldBrenda  BishopDarrell  BishopGordon  BishopKenneth  BissettJason  BissonnetteAndrew  BittsonAndrae  BlackBruce  BlackPaige  BlackTravis  BlackVernon  BlackRaymond  BlackmoreSteven Blake  BlackshearTim  BlackwellAnn  BlackwoodKingsley  BladesGloria  BlainCynthia  BlaineMargaret  BlairDale  BlakemanHoss  BlakleyJoanne  BlakneyDave  BlanchardMark  BlancheKevin  BlanchetteTerri  BlancoJames  BlandKeith  BlanksSteven  BleakleyKathy  BlickNathan  BlighSusan  BlighJanet  BlissEarl  Blois

Karen  BlomstedtKathy  BloodworthLloyd  BloomerGarry  BlouinJim  BlountKathy  BlountAdam  BlytheDale  BoatwrightKathy  BoazGary  BockMary-Ellen  BodkinAlvin  BoehmeEarl  BoganeyMary  BogleSusanne  BogleBetty  BohanLenard  BohnkeGerald  BoisvertEmile  BoivinTeresa  BoldmanRandy  BollesDale  BolsterBecky  BondThomas  BondarukSpencer  BondickWade  BondsAnthony  BoneDan  BonertzAmber  BonneyJennifer  BonoPeter  BoogersDiana  BooherGarrett  BoomgaardenAlan  BoothSandy  BootheBrian  BordelonJana  BorenDalton  BorleEva  BorregoMichael  BorstDavid  BoschJim  BosleyFred  BossChad  BostickShawna  BostickRick  BottMike  BoucherLarry  BoudreauxWayne  BoudreauxMelany  BoughmanGeorge  BouquinBrenda  BourdonJerry  BourneJohn  BowenDru  Bower-MooreLance  BowersGary  BowkerGreg  BowlingBrandon  BowmanBrent  BowmanCampbell  BowmanJohn  BowmanLaureen  BowmanScott  BowmanWilliam  BownessRobert  BoyceAnn  BoydCarl  BoydPauline  BoydAaron  BoyerRoger  BoykinCaryn  BoykoChristopher  BoykoKelly  BoyleDave  BozemanKevin  BradburyRobert  BraddockMartin  BradfordAaron  BradleyAngela  BradleyDerek  BradleyMark  BradleyMike  BradshawGreg  BradyTravis  BradyVaughn  BraggConnie  BranchJohn  BrandSheila  BranhamJerrid  BrannKelley  BraseltonCharlie  BrasharesBobby  BrassellStephanie  BrassovanGlendora  BraudKeith  BrawdyShawn  BrayTess  BrayBobby  BrazierKory  BreauxRicky  BreauxCynthia  BrenemanPaul  BreretonDwayne  BreshearsJames  BrewerDeborah  Brewster-LindauerRandy  BrezinskiAlex  BridgeJaime  BridgesBob  BridgewaterDoug  BridwellDave  BriereRichard  BrietzkeKathryn  BriganceGreg  BrigdenBobby  BriggsDeborah  BrightMichael  BrightwellBill  BrimmerKenneth  BrinsonHector  BritoBrian  BrittonDavid  BroaddusArmand  BrochuDonald  BrockGerald  BrockmanKathy  BrodeurMitchell  BroganStacy  Brogan

Jane  BronnenbergMike  BrooksDaryl  BrostCaren  BrouilletteDana  BroussardHarold  BroussardHarold  BroussardKirk  BroussardRobert  BroussardSaul  BroussardKaren  BrowerCalvin  BrownDavid  BrownDean  BrownDonna  BrownDonnita  BrownJeremy  BrownKimily  BrownLeroy  BrownMichael  BrownMike  BrownMurray  BrownPatrick  BrownRobert  BrownAmber  BrowningOwen  BroylesJason  BruceKenneth  BruceMike  BruceMonty  BrucePat  BruceLynda  BruckerCaroline  BruggencateJean  BruleDebbie  BrummettDan  BrundigeTiffany-Rose  BruneauCurtis  BrunelleGerald  BruntRonald  BruntBarbara  BryantDoyle  BryantAdam  BrysonAlvis  BrysonGary  BucekStephanie  BuchananSteve  BuchananMike  BuchholzJeannie  BucklesShirley  BucknerDerrick  BuddenByron  BueChad  BulkleyDouglas  BullickJack  BullionCheryl  BumpasGaylan  BunasJimmy  BunnJohn  BuoyClay  BurchamGlenn  BurchnallShanica  BurdexKit  BurdickCody  BurdineMichelle  BurgardGary  BurgessJeremy  BurkhardtJenna  BurkinshawYvonne  BurlesonTimothy  BurnellJosh  BurnettMatt  BurnettSteve  BurnettValerie  BurnopCollin  BurnsJane  BurnsJulie  BurnsStephen  BurnsTodd  BurnsRobert  BurnsideBruce  BurrCharlean  BurrisMichele  BurtchRobert  BurtnettCampbell  BusbyChris  BusbyJay  BuschBilly  BushBob  BushTodd  BushKaren  BustosJamie  ButlerMurray  ButlerRobert  ButlerTy  ButlerLorrie  ButtErnie  ButtrossJennifer  ButtsForrest  BuxtonMichael  ByersDavid  ByrdJustin  ByrneJames  CabeWarren  CadrainSusie  CaffreyMarian  CaggianoJanelle  CahillGraham  CainJim  CalbeckJanet  CalderLaura  CalderwoodJosh  CaldwellScott  CaldwellTom  CaldwellLeigh Ann  CalesSheldon  CallioRalph  CalveOrlando  CalvinhoJosh  CameronMichael  CameronRobert  CameronDoug  CampbellJamaine  CampbellPhillips  CampbellRandell  CampbellSteven  CampbellWendell  CampbellEnrique  CamposMelissa  Cangley

Stefanie  CannonGonzalo  CanoCynthia  CantrellRoland  CantuBambi  CappelleBernie  CaracenaTarquin  CaraherJoy  CaramTimothy  CardenasAlex  CardinalDuane  CardinalLorraine  CardinalTania  CareyBruce  CariensBrian  CarlsonDarrel  CarlsonMark  CarlsonRandy  CarlsonTerrance  CarlsonTerry  CarltonArthur  CarmanGerald  CarmanJackie  CarmoucheAmy  CarpenterJohn  CarpenterTim  CarpenterArnold  CarperWesley  CarrRonnie  CarreDavid  CarrilloHector  CarrizalesKathy  CarrizalesMarla  CarrollClayton  CarsonTanya  CarsonKathy  CartenAlex  CarterDaniel  CarterDoug  CarterJonathan  CarterLarry  CarterMark  CarterMarvin  CarterTracy  CarterGary  CartwrightDuane  CarverDeborah  CasaresJohn  CaseyTana  CashionPatty  CasonTim  CasonKevin  CasperNanci  CassardDolly  CastilloFrank  CastilloJaime  CastilloJoe  CastilloMorris  CastleIrma  CastroMelisa  CastroRonald  CatchickB.J.  CatheyCameron  CatlinDan  CatlinLiz  CatlinAngelia  CaughlinPaul  CaughlinSuzanne  CavalheiroEd  CavalierClay  CavasosMichael  CavazosTeresa  CavazosVeronica  CavazosJoanne  CaveJean  CavesTerry  CavesWayne  CawthornCarrie  CazesKim  CazesChuck  CecilBetty  CesnikMark  C’HairCarl  ChaissonJohn  ChakalisJohn  ChalmersRoy  ChamberlainLinda  ChambersRandy  ChambersLewis  ChampagneCarol  ChanCharles  ChanDenis  ChanDenise  ChanVincent  ChanTroy  ChandlerJerry  ChaneyChristy  ChapmanKay  ChapmanSamantha  ChapmanRoger  ChaputBruce  CharchukElkan  CharikarElana  ChaschinRay  ChatelainDave  CheezumJanet  ChelfDorothy  ChenCraig  ChenowethMichael  CherewkoBruce  CherniakSteven  ChesherBeryl  ChesterJ.P.  ChestermanScott  ChevesLily  ChewRon  CheyneKen  ChibaJanice  ChildersRonald  ChildreMarian  ChinJake  ChipiukLloyd  ChipmanPamela  ChiuRichard  ChoateJim  CholkaLeonard  ChowWillie  ChowAdam  ChrismanKent  Chrisman

Joel  ChristalBrad  ChristensenTim  ChristensenWayne  ChristianSue  ChristiansonBruce  ChristieCarol  ChristieRobert  ChristiePete  ChristmasNathan  ChristmonJeremy  ChristophersonLifu  ChuJeanine  ChubbsGrace  ChungWillie  ChungDavid  ChurchJames  ChyzykWarren  CieszeckiRobin  ClaneyBruce  ClardyDavid  ClarkJimmy  ClarkLeroy  ClarkLindsey  ClarkMery  ClarkPam  ClarkRandy  ClarkRichard  ClarkRocio  ClaybonLeon  ClaypoolDarlea  ClaytonRobert  ClaytonGeorge  CleaseBryan  ClemPam  ClementLloyd  ClementsJack  ClevengerStephen  CliffLuci  ClineSandra  ClineDon  ClouseJoy  ClymerMike  ClyneAlan  CoadThomas  CoanAndy  CoatesJason  CobbKevin  CobbLee  CobbMarjorie  CobbTed  CochraneMichael  CockrellBill  CoffeyRonald  CogganLarry  CogginsDeborah  CoheeMartin  CohenDoug  CohrsJimmy  CokerBarb  ColacoFloyd  ColbertJean  ColbertRon  ColbertBarbara  ColeBob  ColeDale  ColeRobby  ColeRobert  ColeSam  ColeRick  ColemanJutta  ColhounShannon  ColleCharlotte  CollettDon  CollierLeann  CollierDustin  CollinsMaria  CollinsMike  CollinsRandy  CollinsJolene  ColpittsMeggan  ColpittsEddie  ColvinDavid  ComanAllison  ComeauGlen  CommanderBehtaz  Compani-TabriziTammie  ComptonBobby  CongerAlan  ConnellLauren  ConnellTerry  ConnellAllen  ConnerTony  ConnerJoseph  ConnorsHenry  ContrerasFrank  Contreras VegaJay  ConwayShannon  ConwayStephen  ConwayScott  CoodyDanny  CookDavid  CookJaron  CookLarry  CookMike  CookNeill  CookPhil  CookRicky  CookWilliam  CookLorelee  CookeSharen  CookeClaire  CooleyAndy  CoolidgeCraig  CoombesLloyd  CoonanAshley  CooperBeverly  CooperLoretta  CooperLori  CooperMark  CooperTeresa  CooperDanielle  CootsKelly Russell  CopeAnne  CorbetChantal  CorcueraJim  CorkenKelly  CorkenCarl  CormierRoosevelt  Cormier

Shane  CornelisonBarbara  CornellFred  CornellIvan  CornelssenJustin  CornetBob  CornwellPierluigi  CorradiniJeff  CorsonAdrian  CortezElizabeth  CostelloMichael  CottrellDiane  CouillardJames  CoulterLee  CourangeJohn  CoveyOlga  CovingtonKelly  CowanDana  CownsBarbara  CoxBen  CoxFrans  CoxGrant  CoxLaDonna  CoxLinda  CoxRonald  CoxValerie  CoxTimothy  CrabtreeCab  CraigChristopher  CraigJim  CraigMark  CraigPam  CraigStaci  CraigCarolyn  CrainGail  CramerRobert  CrappellDarwin  CrawfordRichard  CreeTimothy  CrespyRickie  CrewsKim  CrillyClarence  CrippenTrent  CrippenErnest  CriswellJohn  CrockerLinda  CrockerDavid  CrockettShelly  CrokerJames  CromerBrooke  CropperHugh  CrosbieJonathan  CrosbyJudy  CrosbyMaurice  CrosbyRandy  CrossSkip  CrossWilliam  CrossmanShar  CrouchMike  CrowleyDon  CruickshankRandy  CruickshankPaul  CullenDon  CulpepperJustin  CulpepperTom  CunninghamWalter  CunninghamElena  Cupac-CingelDebbie  CurleeEarl  CurnutteAndrea  CurrieJason  CurrieRaymond  CurrierDavid  CurryDean  CurryJulie  CurtisPatty  CutbirthDouglas  DahmannDrew  DahmannChristine  DaigleJennifer  DaleRosalind  DamerLarry  DamervalDoug  DamonDwayne  DancyAnn  DanielJeff  DanielMisti  DanielBryant  DanielsJamie  DanielsTim  DanielsAngie  DannaRandy  DarbonneJo-Ann  DArcangeloEarnest  DarceyKunle  DareCourtenay  DarrowGillian  daSilvaPaul  DaSilvaJena  DaughheteeTommy  DauphineHank  DavidChad  DavidsonHoward  DavidsonJeremy  DavidsonRobert  DavidsonAlan  DaviesMarilynn  DaviesCarlos  DavilaBarry  DavisBrandon  DavisChristopher  DavisClint  DavisDaniel  DavisDebbie  DavisGretenal  DavisHarold  DavisJanna  DavisJeff  DavisJesse  DavisKathy  DavisKelly  DavisL.T.  DavisLarry  DavisLee  DavisLuke  DavisMike  DavisMitch  DavisNicole  DavisRickey  Davis

Shane  DavisTom  DavisBrett  DawkinsTroy  DawsonCarol  DayGreg  DayJennifer  DayMark  DayMitch  DayRobert  DayMeridith  De GrootCarlos  De Los SantosKevin  Deacon-RosamondMichael  DeanMichele  DeanSheila  DeasonKati  DeatonParry  DeBusschereDon  DeCarloColleen  DechPhilip  DechantBrad  DeckerHermis  DecoteauEddie  DeculusBrian  DedmonJudith  DeedsClayton  DeeringDavid  DeeringWade  DeesStephen  DeetzGeorge  DekerlegandTroy  DelahoussayeMarianne  DelaneyKevin  DeLayJesse  DelcambreGerard  DeLeeuwOscar  DeleonJaime  DelunaMadonna  DemasSteve  DemecsTeresa  DeMillianoWilbert  DemouchetRoy  DenisonDevin  DennieW.A.  DennisDan  DensonGlenda  DensonTommy  DentonMark  DerouenRonald  DerouenCory  DesantisGuy  DesaunoyScott  DesmaraisIsaac  DeVilliersLarry  DewettElma  DiazCarolyn  DibelloJerry  DicharryBrian  DickKelley  DickensCraig  DierkerHarry  DietrichJay  DietrichPaul  DiffenderferDennis  DildayJohnny  DillardRalph  DillardJohn  DillinderDavid  DillonLeslie  DimionNguyen-Hoa  DinhTish  DinsmoreSteve  DionneHelen  DiserensJohn  DistasoJames  DixonObie  DjordjevicRoger  DlugoszJudith  DobbinJanice  DobbsNelson  DobbsGreg  DoddHomer  DoddLilly  DoddRichard  DoddsEddie  DodsonBev  DoigJames  DonaghyAlan  DonaldsonDanny  DonaldsonRaymond  DonaleshenJohn  DonohoeTodd  DonowhoNerry  DooleyRobert  DooleySusan  DorieMatt  DornanRad  DorrisCatherine  DortchRichard  DoucetBarbara  DoughertyBill  DoughertyPatricia  DouglasNick  DovedanMatthew  DowdCliff  DowdenDeborah  DowdyGeorge  DowdyStacy  DowningAnne  DownsThomas  DowsleyGerhard  DrakeMelanie  DraperRob  DresslerDrina  DrummondTim  DrysdaleTracey  DubeJohnny  DuboisTed  DuboseDerrick  DubyNicole  DudaErin  DuerichenCharles  DuffeyLuanne  DuffyLynn  DugasRoland  DuhonDebra  DukeChristopher  DumanowskiJanette  Dumas

Joel  DumasMeri  DunawayRobert  DunawayAlec  DuncanDavid  DuncanDavid  DuncanFredi  DuncanBob  DunckleyMelanie  DunhamMilton  DunlapAndrew  DunleavyChris  DunnElizabeth  DunnRaymond  DunwaldKevin  DuplantisHarold  DuplechinStephanie  DupuieBarney  DupuisRui  DuqueErnest  DuranPatrick  DurandMark  DurkeeBecky  DurrettJason  DutchakSteven  DutcherScottie  DuvallCary  DwyerRandall  DyckCecil  DyeDarrell  EaglesDavid  EamonRichard  EarlesJanell  EasleyKen  EasonTodd  EasonDarryl  EastLes  EatonSuzanne  Eaves-BunchDana  EberhardtTainialynn  EbrechtDonald  EckfordPriscilla  EddyMatthew  EdgelowJohn  EdigerJanice  EdmistonGloria  EdmondsEdwin  EdwardsKristin  EdwardsLauren  EdwardsLeah  EdwardsMarie  EdwardsRex  EdwardsRobert  EggertMark  EhrhardChristy  EichholzDennis  EisnerRon  ElbrechterLoyd  ElkinsRonald  ElkoMichael  ElledgeTim  EllerBrent  ElliottCarl  ElliottClay  ElliottDavid  ElliottRicky  ElliottRobert  EllisKevin  EllisorFranceaz  ElmanGavin  ElsleyElizabeth  ElsonDarrell  ElyAlice  EmersonJessie  EmersonDale  EmeryTim  EnderlinDanielle  EndsleyBrian  EngelNancy  Engelhardt-MooreJerry  EnglandHope  EnglishMark  EnglishMyles  EnickeSarah  EnixTodd  EnnengaRonald  EnslingerDonnie  EppersonJudy  EppersonMark  ErbDale  EresmanBradley  EricksonDaniel  EricksonTelann  EricksonBrian  ErwinMiguel  EscobedoBrenda  EskelsonRhoda  EsmilioReed  EstesSusan  EstesSteven  EthridgeJ.R.  EubanksMarcus  EubanksDonnie  EuperAimee  EvansBeverly  EvansDanny  EvansDarlene  EvansPaul  EvansPeter  EvansShellie  EvansSteve  EvansJay  EwingJohn  EzekweDean  EzellMatthew  EzellRaymundo  FabelaMartin  FabisSheila  FahlDoyle  FainDebbie  FalckKaren  FalconerJeremy  FallinNicholas  FanaiBob  FantKeith  FardyHamid  FaridLance  FarkasKaren  FastJames  Faulkner

Carol  FavorsRay  FeatherstoneMira  FederucciMitch  FedricMark  FehrmannKevin  FeiselDonna  FelgerElaine  FeltLarry  FeluxTyler  FenleyLance  FentieAngela  FentonRandy  FentonGrant  FergesonCarol  FergusonLorraine  FergusonPeter  FermorClay  FernandezMike  FeroliMark  FessendenBrett  FewellAndrea  FieldEugene  FielderMike  FielderKathleen  FieldsRon  FieldsWarren  FieldsWayne  FieldsStuart  FillerBobby  FinchTrinity  FincherSteve  FineLisa  FinleySteve  FinnKevin  FinnemanDon  FippingerJessica  FischerRon  FischerDavid  FishburnDavid  FiteMichele  FlaigAmy  FlanaganLaurie  FlanaganArlen  FlatenDoug  FlatenDuane  FlathPenny  FlathDiane  FlemingPenny  FlemingFrank  FletcherMichael  FletcherSharon  FlorezRobert  FlowerdayIlene  FloydJason  FluneyAmy  FolsomBridget  FontenetteCodi  FontenotEugene  FontenotJoe  FontenotBrenda  FonvilleLaura  ForbesAlex  FordKeith  ForeMark  ForestTeresa  ForgueThomas  ForrestSteve  ForsterAvery  FortenberryDavid  FortenberryAllan  FortierLouise  FortierDavid  FortnerBlake  FosterBradley  FosterBrent  FosterRobert  FosterWayne  FournierCatherine  FowellDorothy  FowlerLeon  FowlerCurtis  FoxDonald  FoxJay  FoxJohn  FoxMaryann  FoxLeonard  FoytG. Robert  FraleighBart  FraleySam  FrancisTaryn  FrancisCraig  FrankDavid  FrankWally  FrankKevin  FrankenberyHelen  FranklinSandra  FranklinAlex  FranksRay  FranksKevin  FransonColin  FraserDan  FraserMargaret  FraserMark  FraserGeoffrey  FrazerBilly  FrazierVicki  FrederickIan  FreelandDustin  FreemanShawn  FreemanUwe  FreibergLarry  FreminAndy  FreudenrichOliver  FriersonGordon  FriesenNancy  FriesenChristine  FrinscoDan  FrisbeeDavid  FriskeDale  FritzStacie  FugateTeresa  FugittGeorge  FulcoDavid  FulfordPamela  FulkHeather  FullerPhyllis  FullerBill  FultonRobert  Fulton

Steven  FunderburkChris  FurrhCarrie  FyfeJay  GabbardJohn  GabertPhillip  GabouryGwen  GabrielKathy  GabrielsonPolina  GaddyRichard  GafiukBeverley  GageMarcel  GagneBrandon  GainerMervin  GalbraithDanny  GallenbeckStarleng  GallopeJanet  GallowayBlair  GambleWaldemar  GampKim  GannVidya  GannessMichelle  GanttJose  GarateTom  GarbsJoe  GarciaJoel  GarciaJudith  GarciaMichael  GarciaRuben  GarciaNorma  Garcia-SlajerAl  GardinerGeorge  GardinerDoug  GarrardHeather  GarrettKelly  GarrettLynn  GarrettBarney  GaryDouglas  GaryMichael  GaryAlberto  GarzaErnest  GarzaLamar  GaspardDewayne  GaughtClyde  GautreauJudith  GavanRaphael  Gay-De-MontellaTim  GaydosJ. Nick  GeibDavid  GeisLarry  GelbaughOrry  GelowitzCarol  GennarelliKirk  GenoCharles  GentryDale  GeorgeDavid  GeorgeMircea  GeorgescuRadu  GeorgescuJeff  GephartMartha  GerdesJohn  GerdingJohn Jr  GerichKirk  GerichJohn  GerlitzKen  GermanMark  GermanTaylor  GermanDavid  GermscheidMichal  GerovStan  GerowRod  GertsonStan  GeurinNick  GibbensRosalind  GibsonTatiana  GibsonTina  GibsonHeidi  GiesbrechtMark  GiesbrechtDarrell  GilbertEd  GilbertVicky  GillespieRussell  GillettCarolyn  GilleyAngela  GingeraDeena  GirdnerPaul  GirouardRichard  GirouxCarola  GiudicelliJan  GlasgowEd  GlassRay  GlidewellDavid  GloverAndre  GodinJeff  GoffinKris  GoforthPatrick  GohlkeSherman  GoinesDiana  GoldsteinKaren  GolonkaFrancis  GomesAlma  GomezJesse  GomezLawrence  GomezAlbert  GonzalesTerry  GonzalesAbraham  GonzalezMagdalena  GonzalezPilar  GonzalezKevin  GoodCraig  GoodallKrystal  GoodmanCraig  GoodrichLana  GoodrichRickey  GoodsonJohn  GoodspeedShannon  GoodwinAlan  GopenEdward  GordenShane  GordonWendy  GordonJason  GossMark  GossShawn  GossJennifer  GottschPaul  GouldPhilip  GouldDarrin  GowingKerri  GrabowskyCameron  Grace

Tim  GraffAnthony  GrahamCandi  GrahamGary  GrahamJennifer  GrahamJohn  GrahamSean  GrahamVeronica  GrahamJannette  GranstaffGreg  GrassellDean  GravesGalen  GrayJason  GrayKen  GrayLeslie  GrayStephanie  GreaserVicki  GreearAllan  GreenBill  GreenClayton  GreenEarl  GreenGregory  GreenLarry  GreenMonica  GreenPaul  GreenSuzanne  GreenSylvia  GreenTim  GreenDale  GreenfeatherAlan  GreenfieldMichael  GreenhowBill  GreenleesRyan  GreerNicholas  GreggBetty  GregoryJ.R.  GregoryMatt  GregoryLee  GreinerGlenn  GreshamMark  GreskoMark  GressEvelyn  GreyVince  GribbleMichael  GriffinJoel  GrillotAaron  GrimeauRhonda  GrimesJason  GrimmMark  GrinnellLauren  GrissomLetitia  GroceKarin  GroepperAaron  GrossAlbert  GrossJonathon  GrossMary  GrossEric  GrossmanJoe  GrossmanJohn  GroundsRoxanne  GrovesSam  GrovesJoan  GrozellDoug  GrubbMichelle  Guanzo-ReyesCaroline  GuaySonya  GuentherJesse  GuerreroRaquel  GuerreroGary  GuerrieriJoel  GuichardCathy  GuidryChristopher  GuidryWendell  GuidryFloyd  GuilloryMiller  GuilloryJeff  GuillotJay  GuilmetteJanice  GunnGeorge  GurrEric  GuruleEd  GusemanElham  GushtasbiJeff  GussieStacey  GustafsonLinda  GuthrieMike  GutkoskiVeronica  GuzmanThu Ba  HaDebra  HaalandJason  HaasZiad  HaddadSteve  HaddenJim  HagerTeresa  HagerZack  HagerKelly  HaggAdina  Hagi-MemetApril  HagueAllison  HahnMelvin  HakesRick  HaleNancy  HaleyAmos  HallBrad  HallDavid  HallJames  HallJeff  HallKay  HallPaula  HallRobin  HallockTroy  HalsallBev  HalterJackson  HalterJason  HamelPercy  HamiltonRandy  HamiltonSarah  HammondDavid  HamonBlaine  HamptonSteve  HamrickWayne  HanTim  HancsicsakRusty  HandTim  HandJoe  HandleyWes  HandleyHerman  HandstedeMichael  HankinsReagan  Hanks

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resource full

2 LettertoShareholders ChairmanandCEOLarryNicholslooksbackonthe accomplishmentsof2006andshareshisoutlook forthefuture.

5 Five-YearHighlights Atableofkeyfinancialandpropertydatafromthe pastfiveyears.

10 CommunityOutreach Wediscusskeyinitiativesthatstrengthencommunities andenhanceouroperations.

14 EnvironmentalPartnerships Wereviewconservationprogramsthatbenefitthe environmentandimproveourefficiency.

18 Management’sQ&A Managementrespondstoinvestorquestions.

22 ExplorationandProductionResources Adiscussionofsignificantoilandgasproperties.

27 OperatingStatisticsbyArea27 11-YearPropertyData28 KeyPropertyHighlights33 IndextoFinancials102 Directors&SeniorOfficers104 Glossary105 InvestorInformation andStockPerformance

Devon’semployeesareourmostvaluedresource.Thenamesofeachofour4,692employeesareprintedontheinsidefrontcoverandonpages6and32ofthisannualreport.

Resource Full,thethemeofthisannualreport,wasinspiredbyanentryfromKarenPriceinDevon’sPortland,Texas,fieldoffice.Nearly1,200entriesweresubmittedbyemployeesinourannualcontesttoselectthetheme.

Corporate Profile DevonisoneofNorthAmerica’sleadingindependentoilandgasexplorationandproductioncompanies.Devon’soperationsarefocusedprimarilyintheUnitedStatesandCanada;however,thecompanyalsoexploresforandproducesoilandnaturalgasinselectinternationalareas.Wealsoownnaturalgaspipelinesandtreatmentfacilitiesinmanyofourproducingareas,makingusoneofNorthAmerica’slargerprocessorsofnaturalgasliquids.DevonisincludedintheS&P500IndexandtradesontheNewYorkStockExchangeunderthetickersymbolDVN.

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DearFellowShareholders:2006wasayearofoutstandingachievementsforDevon.Earningspershareandcashflowfromoperationsreachednewhighs.Weincreasedoilandgasreservestothehighestlevelsinourhistory,andwemadeimportantstridesinbothhigh-impactexplorationandlow-riskdevelopmentprojectsthatwillfuelDevon’sfuturegrowth.

Gulf of Mexico Success Brings Worldwide AcclaimTheoperationalhighpointofouryearwasthesuccessfulproductiontestoftheJackNo.2wellintheGulfofMexico’sLowerTertiarytrend.During

testing,theJackNo.2wellflowed6,000barrelsofoilperdayfromjust40%ofthehydrocarbon-bearingcolumn.TheresultsindicatethatLowerTertiaryreservoirswillproduceathighratesprovidingcompellingevidencethatDevon’sdeepwaterLowerTertiaryreservoirscanbeprofitablydeveloped.

WhenDevonandco-ownersChevronandStatoilreleasednewsoftheJacktestonSeptember5,2006,theworldawoketothetremendouspotentialoftheLowerTertiarytrend.PunditsapplaudeditasamajornewenergysourcefortheUnitedStates.SomecalleditthebiggestfindsincePrudhoeBay.Timewilljudgetheaccuracyofsuchpredictions,butwebelieveDevon’sproprietarypositionintheLowerTertiarycould,overtime,doubleoreventripleDevon’scurrentprovedreservebaseof2.4billionoil-equivalentbarrels.

Themedia’sexcitementandtheinvestmentcommunity’sfavorablereactiontotheJackannouncementweregratifyingandvalidatedthemeritsofDevon’slong-termgrowthstrategy.Wehaveinvestedmorethan$2billionoverthepastfiveyearsinhigh-impact,multi-yearexplorationprojects.Bytheirverynature,weknewtheseprojectscouldnotdeliveroilandgasreserves,productionorrevenueinthenearterm.However,webelievedtheshort-termsacrificerequiredtomaketheseinvestmentswouldbewellworththelonger-termrewards.TheseinvestmentswillprovideDevonanditsshareholderswithasteadystreamofdevelopmentprojectsoverthenextdecade.

BrighteningtheglowofsuccessfollowingtheJacktestwastheaddedsatisfactionofourfourthsignificantLowerTertiarydiscovery.Thisdiscovery,knownasKaskida,appearstobeevenlargerthanJackandalsolargerthanourfirsttwoLowerTertiarydiscoveries,CascadeandSt.Malo.Furthermore,KaskidaextendstheLowerTertiaryplayintothedeepwaterKeathleyCanyonfederalleaseareawherewehold12additionalexploratoryprospects.

Withfourdiscoveriesoutofsixattempts,ourearlysuccessratiointheLowerTertiaryisexceptionalbyhistoricalstandards.Whilewecannotcountonthislevelofsuccessgoingforward,itdemonstratesthatourseismicinterpretationapproachanddepositionalmodelfortheLowerTertiaryareworkingwell.Weattributethissuccesstotheskillandpreparationofourhighly-seasoneddeepwaterexplorationteams.

WedoubledourworkinginterestintheCascadediscoveryto50%in2006andreachedadecisiontocommerciallydeveloptheproject.CascadewilllikelybethefirstdevelopmentintheGulfofMexicotoemployanFPSO,orfloatingproduction,storageandoffloadingvessel.FPSOtechnologyallowsfortheproductionoflargeoilreservoirscurrentlybeyondthereachofexistingpipelines.OurcurrentplanscallforCascadetobeginproducingoilinlate2009.

Letter to Shareholders

J. LArry NiChoLSCHAIRMAnAnDCHIEFExECutIvEOFFICER

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OverthenextseveralyearswewillexploreotherLowerTertiaryprospectswiththeaimofextendingourimpressivestringofdiscoveries.Wewillalsodrillappraisalwellstofurtherdefineandquantifytheprizeswehavefoundtodate.Theseactivitieswillprovidetheinformationnecessarytomovetheseprojectsintothedevelopmentandproductionphases.EngineeringandmarketingplansforJackandSt.Malocouldbefinalizedthisyearwithfirstproductioninthe2011to2013timeframe.

OurmountingsuccessintheLowerTertiarytrendandotherareasinNorthAmericacausedustore-examinethehigh-impactexplorationsegmentofourportfolio.In2006,wemadethedecisiontodivestourassetsinEgypt,andearlythisyearweannouncedplanstoexitWestAfrica.Bydoingso,wehavetheopportunitytofurtherrefineourfocus.WebelievewecanredeployourtechnicalandfinancialresourcesfromAfricamoreeffectivelytootherpartsofourbusinessthatcangeneratereservesandproductiongrowthmorequickly.WeexpecttoapplytheproceedsofourAfricanassetsalestoinvestinnewprojects,strengthenourbalancesheetandrepurchasesharestofurtherenhancevaluepershare.

Previous investments Coming on Strong Successfulexplorationprojectsultimatelymoveintothedevelopmentphase.In2007,weexpecttoachievefirstproductionfromthreemulti-year

developmentprojects:Polvo,MerganserandJackfish.TheseprojectsareinadditiontothefullyearofincreasedproductionwewillreceivefromtheACGfieldinAzerbaijan.Devon’soilproductionfromACGincreaseddramaticallyinthefourthquarterof2006,andweexpectittoaveragemorethan30,000barrelsperdayin2007.

OffshoreBrazil,weareontracktodeliverfirstproductioninmid-2007fromour2004Polvooildiscovery.Constructionandfabricationofthe$380millionPolvofacilities,inwhichDevonhasa60%workinginterest,progressedthroughout2006.

Wehavenowcompletedmostoftheworknecessarytobringour50%-owneddeepwaterMergansernaturalgasfieldonproductionin2007.Merganser,a2001discovery,shouldbeginproducingintotheIndependenceHubintheeasternGulfofMexicoaroundmid-year.Mooredin8,000feetofwater,theIndependenceHubhostfacilitywillestablishawater-depthrecordforGulfgasproduction.Together,MerganserandPolvowilladdabout35,000oil-equivalentbarrelstoDevon’snetdailyproductionwhenfullyoperational.

InCanada,the100%Devon-ownedJackfishthermaloilsandsprojectisonscheduletobeginproducinginlate2007.Jackfishusessteam-injectiontechnology,andDevonwillbethefirstU.S.-basedindependentproducertocompletesuchaprojectinCanada.Whenfullyoperational,weexpecttheinitialphaseofJackfishtoproduceabout35,000barrelsofoilperdayfor20yearsormore.Inaddition,weareinthelaterstagesofevaluatingalook-alikeprojectonadjacentacreagethatwoulddoubleJackfishproductionto70,000barrelsperday.

ElsewhereinCanada,wehaveelectedtocutbackoncapitalallocatedtoconventionalnaturalgasprojects.RisingcostsinCanada,accentuatedbythestrengtheningCanadiandollar,havehurtgasdrillingeconomics.Weexpectthissituationtocorrectitselfinthenextyearorso.Untilthen,wewillallocateourcapitaltootherNorthAmericanprojectareaswhereupwardcostpressureshavebeenlessintense.

U.S. onshore Projects Add Stability and GrowthHigh-impactexplorationisonlypartofDevon’slong-termgrowthstrategy.Repeatable,low-riskonshoreoilandgasdrillingisanotherimportant

component.Notablyin2006,wesubstantiallystrengthenedourpositionintheBarnettShale,thelargestgasfieldinTexas.The$2.2billionacquisitionofChiefHoldingsinJuneextendedDevon’sleadasthetopacreageholderandgasproducerinthefield.Weexpecttoincreasenetgasproductionfromour736,000BarnettShaleacrestoaboutonebillioncubicfeetequivalentperdayin2009.Toputthisinperspective,onebillioncubicfeetperdayisenoughnaturalgastoheatmorethanfivemillionhomesandrepresentsabout2%oftotalU.S.naturalgasproduction.

Wedrilledour600thhorizontalwellintheBarnettShalein2006,andthemostrecentofthosewellsweredrilledwithnewgenerationrigsthatcandrillwellsmorequickly,safelyandefficiently.Our2006activitydroveDevon’sBarnettShaleproductionupmorethan25%duringtheyeartoover700millioncubicfeetperdayinDecember.

TheBarnettShaleisourlargestasset,butitisjustoneofmanyintheUnitedStatesandCanada.About89%ofourtotaloilandgasproductionin2006camefromNorthAmerica,wherewedrilled2,427wellswitha98%successrate.DevonisthelargestU.S.-basedindependentproducerinCanadaandaleadingproducerinthestatesofNewMexico,Montana,WyomingandTexas.

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Production Growth Today and TomorrowWhatdoesallthisoperationalsuccessmean?First,itmeanssignificantproductiongrowth.Weforecastproductionfromcontinuingoperationsin2007at

219to221millionoil-equivalentbarrels,excludinganyproductionfromthepropertiesinAfricathatweintendtodivest.Thisisa10%increaseoverthe200millionoil-equivalentbarrelsweproducedin2006,withoutAfrica.Wealsoanticipateabouta10%sequentialproductionincreaseagainin2008.

Operationalsuccessalsomeansgrowthinoilandgasreservesinthegroundtobeproducedinfutureyears.Weadded427millionequivalentbarrelsfromsuccessfuldrillingin2006.ThisdoesnotincludeanycontributionfromthemajordiscoverieswehavemadeintheLowerTertiarytrendoradditionaldevelopmentintheJackfisharea.ThereserveadditionsfortheCascade,Jack,St.MaloandKaskidaprojects,aswellasanyadditionaldiscoveriesintheLowerTertiarytrend,willberecordedinfutureyears.AndDevon’sLowerTertiaryinventoryofuntesteddeepwaterGulfofMexicoprospectsrepresentsbillionsofadditionalbarrelsofpotentialresources.

Focused on PerformanceRisingcostsareachallengethroughouttheoilandgasindustry.Competitionforservices,suppliesandpersonnelarereflectedinhighercostsandtighter

profitmargins.Amidthesechallenges,Devonagaindeliveredanoutstandingfinancialperformancein2006.Netearningstopped$2.8billionandpershareearningsreached$6.34,thehighestlevelinourhistory.Devonalsocontinuestogeneratehealthylevelsofcash.Cashflowfromoperationsreached$6billionin2006,anotherall-timehigh.

Explorationandproductionofoilandnaturalgasrequireshighlevelsofcapitalinvestment.Weinvestedmorethan$5billiononexplorationanddevelopmentprojectsin2006plus$2.2billioninthepurchaseoftheChiefproperties.Weplantoinvestupto$5.3billiononexplorationanddevelopmentprojectsin2007.Oursisacapital-intensivebusiness,andDevoniscommittedtomakingtheinvestmentsnecessarytoremainahealthyandgrowingcompany.

IwanttoofferanoteofspecialthankstoDukeLigon,seniorvicepresidentandgeneralcounsel,whoretiredinJanuary.DukeledDevon’sLegalDepartmentfor10years,andwewillmisshisleadershipandwisecounsel.LyndonTaylorhasjoinedDevon’sExecutiveCommitteeasDuke’sreplacement.LyndonbringstoDevonmorethan20yearsoflegalandmanagementexperienceandisawelcomeadditiontotheDevonexecutiveteam.

Asweenter2007,IcouldnotbemoreexcitedaboutDevon’sfuture.Thestepswetookearlyinthisdecadetobuildarobustpipelineoffuturegrowthprojectsarepayingoff;wehavethedeepestinventoryofinvestmentopportunitiesinourhistory.ThethemeofthisreportisResource Full.Thisreferstohowweviewtheopportunitiesaheadofusandthecapabilitiesofthecompanytoexecutethoseopportunities.ItalsoreflectsthecreativespiritandresourcefulnessofDevon’semployeesandbusinesspartners.Itistheseattributesthathaveputthecompanyintheenviablepositionthatweareintoday.Inthisreport,youwillreadcommentsfromavarietyoftheseemployeesandotherstakeholdersaboutDevonanditscorevalues.Ideeplyappreciatethethoughtsofthesecontributorsandthepositivereflectiontheirwordscastuponourentireorganization.

J. LArry NiChoLS

ChairmanandChiefExecutiveOfficer

March20,2007

Devon’s realized price for oil and gas climbed to $41.51 per equivalent barrel in 2006. This enabled the company to earn a record $6.34 per share and drove cash flow to a record $6 billion.

AverAge Price Per Boe($ per Bbl)

eArnings Per shAre ($ Diluted)

17.61

25.9329.92

39.4841.51

02 03 04 05 06

0.30

4.044.38

6.26 6.34

02 03 04 05 06

net cAsh Provided By oPerAting Activities($ Billions)

1.8

3.8

4.8

5.66.0

02 03 04 05 06

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Five-year highlights

LAST yeAryeAr eNDeD DeCeMBer 31, 2002 2003 2004 2005 2006 ChANGe

FiNANCiAL DATA (1)(Millions,exceptpersharedata) totalrevenues $ 4,316 7,309 9,086 10,622 10,578 — totalexpensesandotherincome,net(2) 4,450 5,020 5,810 6,117 6,566 7% Earnings(loss)beforeincometaxes (134) 2,289 3,276 4,505 4,012 (11%)

totalincometaxexpense(benefit) (193) 527 1,095 1,606 1,189 (26%) Earningsfromcontinuingoperations 59 1,762 2,181 2,899 2,823 (3%) Earnings(loss)fromdiscontinuedoperations 45 (31) 5 31 23 (26%) Cumulativeeffectofchangeinaccountingprinciple — 16 — — — n/M

netearnings 104 1,747 2,186 2,930 2,846 (3%) Preferredstockdividends 10 10 10 10 10 — netearningsapplicabletocommonstockholders $ 94 1,737 2,176 2,920 2,836 (3%)

netearningspershare: Basic $ 0.31 4.16 4.51 6.38 6.42 1% Diluted $ 0.30 4.04 4.38 6.26 6.34 1%

Weightedaveragecommonsharesoutstanding: Basic 309 417 482 458 442 (3%) Diluted 313 433 499 470 448 (5%)

Cashflowfromcontinuingoperatingactivities $ 1,726 3,771 4,789 5,514 5,936 8% Cashflowfromdiscontinuedoperatingactivities 28 (3) 27 98 57 (42%) netcashprovidedbyoperatingactivities $ 1,754 3,768 4,816 5,612 5,993 7%

Cashdividendspercommonshare $ 0.10 0.10 0.20 0.30 0.45 50% Closingcommonshareprice $ 22.95 28.63 39.03 62.54 67.08 7%

LAST yeArDeCeMBer 31, 2002 2003 2004 2005 2006 ChANGe

totalassets $ 16,225 27,162 30,025 30,273 35,063 16% Debenturesexchangeableintosharesof ChevronCorporationcommonstock(3) $ 662 677 692 709 727 3% Otherlong-termdebt $ 6,900 7,903 6,339 5,248 4,841 (8%) Stockholders’equity $ 4,653 11,056 13,674 14,862 17,442 17% Workingcapital(deficit) $ 22 293 772 1,272 (1,433) (213%) ProPerTy DATA (1) Provedreserves(netofroyalties) Oil(MMBbls) 444 646 585 640 708 11% Gas(Bcf) 5,836 7,316 7,493 7,296 8,356 15% nGLs(MMBbls) 192 209 232 246 275 12% Oil,GasandnGLs(MMBoe) 1,609 2,074 2,065 2,102 2,376 13%

LAST yeAryeAr eNDeD DeCeMBer 31, 2002 2003 2004 2005 2006 ChANGe

Production(netofroyalties) Oil(MMBbls) 42 60 74 62 55 (11%) Gas(Bcf) 761 863 891 827 815 (1%) nGLs(MMBbls) 19 22 24 24 23 (2%) Oil,GasandnGLs(MMBoe) 188 226 247 224 214 (4%)

(1) theyear2002excludesresultsfromDevon’soperationsinIndonesia,ArgentinaandEgyptthatwerediscontinuedin2002.DevonacquirednewassetsinEgyptintheApril2003Oceanmerger. theyears2003through2006excluderesultsfromoperationsinEgyptthatwerediscontinuedin2006.Revenues,expensesandproductionin2003includeonlyeightandone-fourthmonthsattributable totheOceanmergerand,in2002,includeonly11andone-fourthmonthsattributabletotheMitchellmerger.Allperiodshavebeenadjustedtoreflectthetwo-for-onestocksplitthatoccurredonnovember15,2004.(2) Includesotherincome,whichisnettedagainstotherexpenses.(3) Debenturesexchangeableinto14.2millionsharesofChevroncommonstockownedbyDevon.n/M notameaningfulnumber.

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Russell  HannaSandy  HanneldDaniel  HansbergerBrad  HansenPeter  HansenRonald  HansenKaren  HansonKent  HansonLana  HansonValerie  HansonCrystal  HarbertMike  HarbinJerry  HarborthLance  HarderPeggie-Jean  HarderDarrel  HardesDavid  HardesGisele  HardockChris  HardwickJackie  HardwickDarrel  HardyJacob  HardyJennifer  HargisDavid  HargraveOlivette  HargravesAllan  HargreavesChris  HargroveDoug  HargroveSusan  HargroveBrad  HarguesAshley  HarkinsJD  HarkriderAllison  HarlingChuck  HarlingGordon  HarmsenTed  HarperWallace  HarperLu Ann  HarringtonChris  HarrisDennis  HarrisJoe  HarrisJohn  HarrisKarla  HarrisMichael  HarrisRoyce  HarrisSeyi  HarrisBrian  HarrisonCubby  HarrisonShelly  HarrisonDavid  HartRobert  HartChris  HartleyDonald  HartmanDavid  HartnagelLynn  HartonKara  HarveyDarrell  HarwellKevin  HarwiCharles  HarwoodJo  HastingsGlenn  HatcherDonna  HatchettFlorin  HateganJason  HatfieldKyra  HatfieldRoy  HathcockBrady  HattebergMichel  HattermannTravis  HaugerJoe  HavlikAndy  HawkinsHarold  HawkinsJeffrey  HawkinsTony  HawkinsMichael  HawleyCheryl  HaworthColin  HaworthEasten  HawthorneDavid  HaxtonRobert  HaxtonPrentis  HayAmina  HayatErik  HaycockClayton  HaydenJoe  HaydenBarbara  HaymanChris  HaynesDan  HaynesRobert  HaynesDarrell  HaysMike  HazlettGreg  HeadSherry  HealdGeorge  HeardDanny  HeatlyJarrod  HeatonBrian  HebertBrock  HebertClint  HebertJohn  HebertRod  HebertRussell  HebertGlenn  HedgecokeBrenda  HedgelandDebi  HedgesJessica  HefleyVance  HefleyJohn  HegDon  HeidMike  HeiderRuss  HeideschTracy  HeimClint  HeinBrad  HeinrichsMary  HeinsDonald  HeinsenJim  HeinzeBryan  HelfenbaumTom  HellerLarry  HelmsBrad  HeltonLon  HeltonAustin  HendersonFred  HendersonJames  HendersonLaura  HendersonRonetta  HendersonSylves  HendersonDaniel  Hengel

Cindy  HenleyBrenda  HenryBeth  HensonGregg  HensonMichael  HensonDenise  Heppler-BalkumCathy  HermanTravis  HermanVince  HermesEllen  HerminghausArmando  HernandezBobby  HernandezCheryl  HernandezDorene  HernandezLetty  HernandezLily  HernandezOmar  HernandezRobert  HernandezRoger  HernandezJeanie  HerndonBill  HeroldBraddy  HeroldBrett  HeroldZane  HerringKyle  HerrmannTravis  HerrmannKaren  HertelVicki  HestandJohn  HicksLinda  HicksSeann  HicksDan  HigdonHenry  HigginsJason  HigginsSissy  HigginsNeil  HightowerKelly  HilburnBilly  HillFielder  HillMichelle  HillMindy  HillRichard  HillPhillip  HillianJohn  HillierTricia  HillmanDavid  HillsTrevor  HilsendagerKeith  HimelFrancois  HindletCole  HindsMichael  HinerKen  HinshawLynn  HinsleySteve  HipplerBart  HironGreg  HirschmanCarl  HiscockNick  HiseMargaret  HitchcockPaula  HixDean  HladBryan  HnatiukWilliam  HobbsCharles  HodgePhil  HodgeCindi  HodgesRodney  HodgesMyles  HodgsonGary  HodneBryan  HoefleinCarl  HoelscherGary  HoeselBill  HoffmanBlake  HoffmanRobert  HoffmanDanny  HoganRobert  HojnackiMax  HoldcraftJoe  HoldenChristopher  HolderChad  HolemanBlaine  HolitzkiDavid  HollandChristi  HolleyJanice  HolleyBrandon  HollimanMatt  HollingsworthDoug  HollisterScott  HollowayDavid  HolmLinda  HolmbergMaurie  HolmenCharlotte  HolmesCoyla  HolmesSteve  HolmesTamara  HolmesThom  HolmesTom  HolmesGeoff  HolmlundJerry  HolsworthDebbie  HoltGlen  HoltTheo  HoltDwayne  HolubowichDerrick  HoningKen  HookerSusan  HooperTom  HooperDavid  HopeRick  HopkinsonSteve  HoppeClay  HoppersCandace  HopsonRose  HornJeff  HornerLori  HornerTimothy  HornerSandra  HorningChuck  HorsmanGilbert  HortonDonna  HoskinsAngie  HoultAletha  HouseTarsha  HouseColleen  HoustonJay  HoustonMark  HoustonLes  HovenJaren  Howard

Kay  HowardLinda  HowardMike  HowardMichael  HoweFabian  HowerKaren  HowlandGarnet  HowlettBrandon  HoyeDarrin  HrycakVern  HrycuikXue Fen  HuangJoe  HubbardJoe  HuberMike  HuberRyan  HuberChristine  HuculakAbid  HudaSharon  HuddlestonAlicia  HudgensBrett  HudsonMarvin  HudsonMichael  HudsonRobert  HudsonRuthie  HudsonSantiago  HuertaRay  HuestisJames  HuggardBonnie  HughesJanice  HughesJohn  HughesKathy  HughesPatricia  HughesRobert  HughesRobert  HughesTerence  HughesTeo  HuismanSteve  HulkeJason  HullLeon  HulonAnita  HulseyJeremy  HumphersCharanjeet  HunjanFreddy  HuntRegina  HuntTracy  HuntValarie  HuntAndrew  HunterBlake  HunterJeff  HunterMelissa  HunterGary  HuntsmanNancy  HunzikerElla  HurdRobert  HurdAvie  HutchinsonCarrol  HutchisonGeorge  HuttonMike  HuttonPete  HuttonTimothy  HuxleyHoa  HuynhRick  HyattMarcia  HydeKeith  HymelLaurie  HysellChristine  IbrahimMariana  IftincaEdward  ImberyJames  InnesJanelle  InnocentPaul  IottRoxana  IrizarryJeremy  IrwinMaggie  IrwinMonika  IsbachDan  IsenhowerBrenda  IsonJohn  IvezicCathy  IvinsHiroshi  IwabuchiLonnie  IzardAlan  JacksonBarry  JacksonChance  JacksonEileen  JacksonGarrett  JacksonGeorge  JacksonJanet  JacksonKenneth  JacksonRandy  JacksonSally  JacksonTravis  JacksonWilliam  JacksonGregg  JacobBenson  JacobsRick  JacobsenDeborah  JacobsonKeith  JagordRodney  JakubowskiKenneth  JamesRandall  JamesBret  JamesonDebra  JamesonJoann  JamiesonRick  JanigoRaquel  JanoeJamie  JanotaTom  JantzMichael  JanzLeroy  JardieRobert  JardineMichelle  JarrettDarrell  JarvisRoland  JasoBrian  JeffreyWendy  JenishKathryn  JenkinsKyle  JenkinsRonald  JenkinsDonald  JenningsKim  JensenMargaret  JensenRyan  JensenNick  JensonDee  JeromePierre  JobinBilly  JohnsonBilly  JohnsonChristopher  Johnson

Constance  JohnsonDaniel  JohnsonDavid  JohnsonJesse  JohnsonJudy Lynn  JohnsonMarcel  JohnsonMike  JohnsonMonica  JohnsonPatti  JohnsonPatty  JohnsonRobert  JohnsonTip  JohnsonTommy  JohnsonVivian  JohnsonDennis  JohnstonDuane  JohnstonEverette  JohnstonJoe  JohnstonKimberly  JohnstonHaywood  JoinerBrad  JolleyCassey  JonesCole  JonesCraig  JonesCynthia  JonesDan  JonesDavid  JonesDesmond  JonesDonna  JonesFreddie  JonesFredrick  JonesJ. Phil  JonesJeremiah  JonesJervis  JonesJohn  JonesKatie  JonesKeri  JonesKevin  JonesMike  JonesMike  JonesNorman  JonesPaul  JonesRandy  JonesSamantha  JonesScott  JonesSteven  JonesTim  JonesTraci  JonesDuskin  JordanGregory  JordanRobert  JordanJustin  JornsGreg  JossFlorence  JosueCarolyn  JoyWilliam  JoyChelsea  JozwiakJose  JuarezSteven  JuddRosemary  JunellDana  JurickJohn  JuskaJohn  KachelmeyerKevin  KajorinneMarilyn  KalancheyMurray  KalitaChristine  KalivodaJustin  KallenbergerRay  KallenbergerPatrick  KamannZahir  KanjiJohn  KanouffCurtis  KantenbergerRikki  KanuitMelanie  KappIbrahim  KaraibrahimovicMurray  KarbonikDavid  KargMisty  KasdorfJames  KassionesRuss  KassnerRoger  KearnesFikre  KebedeKossila  KechemirDon  KeeferMary  KeeleAlice  KeelinJudith  KeenJon  KeenzeGarry  KeepingHarold  KeessarPeter  KellarGreg  KelleherFay  KellerKimberly  KellerJeff  KelleyLacy  KelleyLisa  KelleyFred  KellowDebbie  KellyPaul  KempAmanda  Kendall-SeelMalinda  KendrickMichael  KendrickRobert  KennardBreanne  KennedyDan  KennedyGary  KennedyKristin  KennedyTerry  KennedyLinda  KenneyGregory  KentDarren  KeoughKelly  KerbyPhilip  KerigJack  KerkhofMichelle  KermanShannon  KernBill  KerrDaniel  KerrDebbie  KerrJo Ann  KerranSherrill  KerstensDheal  KetchumKim  KetchumAaron  KetterYasin  KhanSandeep  KhuranaMonica  Kibler

Aaron  KiddTracy  KiddRobert  KiesewetterJeff  KiesterRobert  KilleleaghPatty  KillmanKlaholt  KimkerBev  KinchElizabeth  KindleCarolyn  KingReginald  KingKelly  KingsmithMike  KinmanBobbie-Jo  KirbyScharine  KirchoffPat  KirkendollJoyce  KirtleyHal  KissnerSteven  KistlerJennifer  KitchellSusannah  KitchensMark  KitsmillerBarbra  KizmannDavid  KlaassenCheryl  KleinRoger  KleinRusty  KleinSteve  KleinAdam  KlineEd  KlingbellMelissa  KlingerStephen  KnappDale  KnepperCynthia  KnightDavid  KnightEarl  KnightJoanne  KnightKimberly  KnightRandy  KnightRoy  KnightSkipper  KnightBruce  KnopfDale  KnoxJames  KnoxClem  KobelskyBradley  KodamaJanna  KoehnDavid  KoelschBurton  KoenigKyle  KoernerGary  KofoedMichael  KohlCarla  KolodyJennifer  KoloenKevin  KoonJohn  KoopChris  KorczewskiJohn  KorzenoskiJason  KosanovichRon  KosheiffLisa  KossDiane  KossmanJames  KotheL.J.  KotlarichRichard  KovachRaymond  KowalNorman  KowalchukJana  KowalsMichael  KozakErin  KozakiewiczBeverley  KozdrowskiTony  KozyraKathleen  KrahulicMark  KramerKatie  KreggerDarryl  KreutzigerJason  KrobotAna  KruegerSteve  KruegerGary  KrukKevin  KrynowskyJon  KrystinikAlischa  KrystyniakJoe  KuehlerSteve  KuhnNathan  KuhnertPam  KuhrGary  KumpGregory  KuranSusan  KurczabaMelanie  KushnerykErik  KvaleConnie  KwanVirgil  KwiatkowskiEvelyn  KyesJohn  KyesWilliam  La FleurMarc  LaBergeAugust  LaboucanDenis  LabrecqueMonte  LackeyRandy  LackeyMike  LacroixTom  LafferySteve  LafolletteCaroline  LafondAleksander  LajzerCelia  LamChuck  LamarHolly  LambClinton  LambertJenni  LambertKenneth  LamersTodd  LaminskiWalter  LamleCory  LancasterBrian  LanctotTammy  LandisDean  LandryPatrick  LandryStacey  LandryBryan  LaneEmily  LaneFrank  LaneDarryl  LangCasey  LangeKerry  LangeTim  LangenbergMike  Langfield

Craig  LangfordLynne  LangstonDusty  LantzMike  LantzDebra  LanzPete  LapeyrouseAnn  LaPradeChristopher  LaquaJoe  LaraJerry  LaranceAlisha  LargoTerry  LarkoLisa  LarsenRhonda  LarsenDoug  LarsonElizabeth  LarsonGlenn  LarsonGregg  LarsonRobert  LarsonCindy  LasherDarren  LasleyCody  LathamAsif  LatifGlenn  LatimerLynn  LatiolaisChris  LatkiewiczBrian  LaughlinRobert  LauzeCheryl  LavarnwayJoe  LawlisClint  LawrencePerry  LawrenceNancy  LawshaeWhitney  LawsonNicole  LawtonSheila  LazzariVu  LeCorey  LeaPamela  LeaRachel  LeaLou  LeakeJim  LeathersHeath  LebeoufAaron  LeBlancRaymond  LeblancCathy  LebsackBarbara  LeClaireAl  LedbetterAngelo  LeddaCharles  LeeChris  LeeDanny  LeeDidra  LeeJason  LeeJill  LeeJoseph  LeeKevin  LeeLicia  LeeMary  LeeShonda  LeeRonnye  LeechAlesha  LeemasterKristi  LeeperBeatrice  LeerIan  LeesLynda  LeethStephen  LefebvreKaren  LefevreMargaret  LeggeBrad  LeggettPhil  LeibelAllen  LejeuneDarell  LejeuneTommy  LejeuneDavid  LelandTeresa  LemieuxRonald  LemoineAmber  LeMondJohn  LenhartKaren  LennoxLouis  LentzCeci  LeonardHarry  LeonardKyle  LeonardChris  LeongCathy  LerigerCody  LerouxDan  LeslieRobert  LeslieAlarice  LetarteAbby  LetasyAndre  LetourneauJulie  LeungThomson  LeungWarren  LeungCheryl  LevesqueMichael  LevesqueTodd  LevesqueBob  LewisCasey  LewisDavid  LewisDonnell  LewisDwayne  LewisGlenn  LewisLarry  LewisMerle  LewisRebecca  LewisBrian  LewitskiTerry  LeyenbergerDavid  LeylandShanshan  LiYing  LiNathan  LiegmanCharles  LillyTed  LillyDavid  LinJia-Wen  LinThomas  LinWesley  LincolnBenny  LindleyDavid  LindsayTom  LinehanKelsey  LinnellDon  LinscombTraci  LinscombDarryl  LintonJim  LinvilleLeslie  LinvilleMark  Lisbeth

A. Gregory LittleDebbie LittleGary LittleGordon LittleSara Little JimPeter LiuRobert LivelyW. Andrew LivingstonHenry LivingstoneWilliam LivingstoneJaimelyn LiwagTony LochBrian LockWoody LockhartJanell LodgeKent LoefflerDerek LofstromDiane LofstromDebbie LogelinRich LohnerDave LondonSteve LondonDavid LoneyDianna LongKaren LongYvonne Long-StarlingSandy LookabaughMichael LoParcoPamela LopasTy LopesNicole LopezDon LorsonGrant LosCharles LottErik LottermoserAmy LouWilliam LouderAlbert LouieRandy LouviereRussell LouviereJulia LoveRenee LoveNichole LoveyPeter LovieLanny LowDan LoweRyan LoweStephen LoweTrey LoweVance LowesLeonard LoyekBernie LucasBrenda LucyRichard LuedeckeTerry LuedkeJohn LuffStanley LuiAna LuistroPaul LukerAndy LumTerri LumanHelge LundChuck LundeenChristina LundgrenCorrine LungDick LunsfordTony LuomaDevin LuperBrad LuskCarol LustigPerry LutzRobert LuxGeorgia LykidisJustin LynchFrancis LyneMarianne LynnDiane LynnesLeeanne LyonMark LyonMike LyonVictor LyonsBrenda LytleDominic MaTracy MaCorey MacDonaldElaine MacDonaldJames MacDonaldMay-Lee MacDonaldPenny MacDonaldDuane MacgowanScott MacGregorDavid MachukTracy MacijukDeanne MackJonah MackayJerry MackeyPaxton MackeyAnne MacLeanElizabeth MacLeanGrace MacLeanMichael MacLeanRobyn MacLeanTodd MacLeanHugh MacLennanWarren MacPhailW. Reigh MacPhersonLee MadsenLee MaesOlga MagasLindsay MagdalenoBrenda MageeJan MaggardRaymond MaggioreHerb MagleyCatherine MagnanKevin MaguireMichael MaguireKyla MahLilac MahMimi MahVirgil MaierMagella MaillouxMichael MakinJay MalanowichLinda MalaskeZack MaleyKristen MalloryNick MalloryJillayne Malo

Phyllis  MaloneyTara  ManbodhPeter  ManchakBen  ManekLois  ManesDerold  ManeyTracy  ManfordPaul  MangumGary  MannKurt  MannTommy  MannCraig  ManningJudy  MansfieldJohn  ManuelLinda  MaranticaBurgess  MarcantelDonna  MarceauxGarry  MarchWendy  MarchAndrea  MarchandRaymond  MarchandSteven  MarcksRobin  MarcotteAlan  MarcumRoy  MarcyStephanie  MarkCarol  MarkellPaul  MarkerRoss  MarkowskiDavid  MarksKenny  MarkveDeona  MarlarJohn  MarlerConnie  MarlowKimberly  MarquisStuart  MarriottKevan  MarshTravis  MarshGrant  MarshallMarc  MarshallSharon  MarshallVernon  MarshallPat  MartellBruce  MartinDennis  MartinDonnie  MartinHerb  MartinJack  MartinJeremy  MartinJune  MartinLavinia  MartinMaria  MartinMark  MartinRick  MartinRobbin  MartinScott  MartinScott  MartinSteve  MartinGerry  MartineauSandra  MartineauBenny  MartinezMaria  MartinezRudy  MartinezKen  MarxJorge  MarzettiJim  MashawChris  MaskowitzSteve  MasriRocky  MassengaleCarol  MasseyGarnett  MasseyConnie  MataMark  MatalikKenneth  MatchettJerry  MathewsJames  MatlockFred  MattRay  MattStephen  MatthewsRandall  MatychukPaul  MaugerAndre  MaurierRandy  MaxeyMary  MaximDonald  MaxwellKelly  MayPeggy  MayCynthia  MayaDon  MayberryAllan  MayderFrederick  MayerRob  MayeuxGlen  MaynardKevin  MaynardGary  MaysMike  MaysDonna  MazurekJerry  MazurekMark  MazzoliniKelly  McAdamsRobert  McAdamsPerry  McAlisterC. Rodney  McArthurKevin  McAulayMarylin  McAulayStanton  McAvoyNadine  McCabeBrent  McCaffreyDon  McCallJim  McCallumGwen  McCartyKathy  McCartyJohn  McCaskillPat  McCelveyBruce  McClainLaurie  McClainKyle  McClellanGordon  McClellandTiffany  McClendonCraig  McColloughBrian  McComasBernard  McCormickRandy  McCormickRandi  McCorquodaleDebra  McCoyLesley  McCoyWillie  McCoyWill  McCrocklinBrian  McCullagh

Vanetta  McCulloughHeather  McCutcheonCarol  McDanielDerrick  McDanielMark  McDanielCameron  McDonaldCharles  McDonaldDavid  McDonaldDebra  McDonaldJeff  McDonaldJenelle  McDonaldPam  McDougallAlicia  McDuffieRobbie  McEachnieKelly  McElhaneyIrene  McEvoyJody  McEwenLee  McFarlandDean  McGarryMaggie  McGeheeBrandon  McGinleyTodd  McGlauchlinHelena  McGoughSteve  McGoughColin  McGovernErnie  McGowenGregory  McGowenRoy  McGowenJames  McGregorScott  McGregorDwain  McGuireLynn  McGuireMichelle  McGuireLittle  McGullionDavid  McHargKeith  McInroeGary  McIntyreLouise  McIntyreTerry  McIverNeil  McKeachnieVerna  McKeanDanielle  McKeeKyle  McKeeVance  McKeeDan  McKeeverKathryne  McKeeverBobo  McKenzieNicole  McKenzieKenneth  McKibbenCurt  McKinneyMichael  McKinneyScott  McKinneyShaleen  McKinneySteven  McLaughlinMatthew  McLeanW. Jeffrey  McLeanDonald  McLeodTravis  McLeodMike  McMahanBilly  McMillanJeanie  McMillanMark  McMillanRodney  McNabbPhilip  McNeilKyle  McNeillJim  McPheeDanny  McPhetridgeCraig  McPhieRobbie  McPikeKaren  McQuigganTim  McTaggartJeff  McVayRon  McWhorterGlen  McWilliamsNiles  McWilliamsThad  MeadorMichael  MeansFran  MearsSandra  MecheTony  MedleyBarbara  MeekinsJudith  MegliBalu  MeharwadeJoseph  MehringBetty  MeixnerArturo  MejoradoDave  MelanconHarry  MellafontAnna  MeloJ. Dennis  MelocheTeresa  MendiazJorge  MendozaGulanar  MeraliKatie  MerchantMonty  MereckaPhillip  MeredithMaryanne  MerlockCharlene  MerrillGerald  MeshenKathryn  MesiFrank  MessaGregory  MessnerTalbot  MestayerRobert  MetcalfTina  MettingJohn  MetzlerCraig  MeyerEllen  MeyerTravis  MeyersMeagen  MichaelSean  MichalskiMark  MichellAndrew  MickleboroughMike  MiddletonBrenda  MilamCliff  MilamPhil  MilamAndrea  MilesBill  MileyThorin  MileyBetty  MillenBrad  MillerCasey  MillerDonna  MillerFred  MillerGary  MillerJames  MillerJanelle  MillerKurt  Miller

Kyle  MillerLarry  MillerLinda  MillerMelissa  MillerMichael  MillerPatrick  MillerReginald  MillerRyan  MillerYamoria  MillerDon  MillettKathy  MillettDixon  MillicanPeter  MillmanDavid  MillsDon  MillsMichel  MillsRandy  MillsJason  MilnerDane  MiltonJose  MinasKarlee  MinkJohnny  MintonChip  MintyTravis  MironElliott  MiskaDewayne  MisnerRebecca  MissmanGregg  MitchellLisa  MitchellRandy  MitchellRick  MitchellStacey  MitchellTrudy  MitchellJerry  MitchumJohnny  MixonMichael  MlcakClarence  MoberlyAndy  MobleyTodd  MoehlenbrockBobby  MogfordCecilia  Mo-IrvingBryan  MolaisonThomas  MolaisonDelia  MolinaRobert  MollisonGwen  MonarchDoug  MonkEmma  MontgomeryGerald  MontgomeryMariLynn  MontgomeryFrank  MontheyRalph  MontoyaIda  MoodyMark  MoodyMarian  MoonDan  MooneySteve  MooneyBrent  MooreBrian  MooreDavid  MooreDonna  MooreDouglas  MooreJosh  MooreMarc  MoorePatrick  MooreShelley  MooreTravis  MooreTom  MooresLutie  MoraDanny  MoralesOscar  MoralesRay  MoralesRuby  MoranCarla  MoraschRoy  MoreheadVincent  MorelandSteven  MorencyColleen  MorettiJosh  MorganRory  MorganTodd  MorganWarren  MorganBrenda  MorgensenNicole  MorissetteR. Peter  MorissetteRod  MorozBrian  MorrisDavid  MorrisGrant  MorrisPhyliss  MorrisDebbie  MorrisonGreg  MorrisonRodney  MorrisonTracy  MorrisonCharity  MorrisseauFrederick  MorrisseyDick  MorrowDarrell  MosbyFausto  MoscaRobert  MoserAnne  MosesRobyn  MoskMike  MossNeil  MossRochelle  MoteKeith  MottFrank  MotyckaLorraine  MounkesMichael  MoutonKelly  MowerCharles  MowryChristina  MoyBenjamin  MoyeOscar  MuellerMeg  MuhlinghauseGeorge  MullenSteve  MullenTrent  MullenMarius  MullerJustin  MullinaxJeremy  MullinsVictor  MundingPete  MundyAmanda  MunizFabian  MunosSophia  Munoz-GuzmanAurea  MunroKim  MunroMichael  Munsey

George  MunzingJeff  MurphreeBarbara  MurphyBob  MurphyEd  MurphyKenneth  MurphyThomas  MurphyTom  MurphyJordan  MurrayLloyd  MurrayPatti  MurrayPaul  MurrayShawn  MurrayTyler  MurrayDavid  MurrellRichard  MyalDavid  MyersJames  MyersDavid  NaasJohn  NaborsGary  NagorkaRick  NagyAmi  NaikEthan  NallLarry  NantzGary  NashJeff  NationMike  NausTom  NayShiraz  NazeraliFrancis  NazzalTraian  NeacsuRandy  NealRand  NedvedKeith  NeedhamTom  NegenmanJamie  NeibauerDebby  NelsonDonnie  NelsonKelly  NelsonLori  NelsonMartin  NelsonSharlene  NelsonTom  NelsonRosie  Nelson-TaylorCandy  NesomScot  NesomKristian  NesporJimmy  NetowastanumPaul  NeubauerSidney  NeudorfKim  NeugebauerDarla  NeundorfJack  NeunerJon  NewellKelley  NewkirkNancy  NewmanJohn  NewtonNick  NewtonBenny  NgDaniel  NgEsther  NgMichael  NgAlex  NguyenDanh  NguyenJohn  NguyenPhuong  NguyenTom  NguyenTony  NguyenKenneth  NibbelinkVickie  NicholasGeorge  NicholsLarry  NicholsNick  NicholsPaul  NicholsonFrances  NickelMike  NicolPatric  NicolMelanie  NicolaidesDarlene  NicolsDarcy  NiedermaierMarilyn  NielsenTim  NielsenMike  NivensToby  NivensJessie  NixKen  NixonBrian  NolandTaylor  NolandDanny  NolenBlair  NolinDavid  NollschErnie  NonogShannon  NordstromBradley  NoreJanna  NormanMike  NorrisCarol  NortonGlenn  NorwoodTamara  NovogrudskyRudy  NowakDanielle  NusbaumJeff  NutterDale  NyegaardWilliam  NystromJason  OakleyMark  OatesDon  OBeirneEugene  O’BrienWilliam  O’BrienDave  O’BrightKaren  OConnellSteve  O’ConnellMaureen  O’Connor-HorvatDavid  OczkowskiClay  OdenErnest  OdenKarla  ODonnellMike  O’DonnellHeather  OffetDaniel  OffuttLana  OffuttScott  OgierLee  OgleTim  OgleChristopher  OgstonMichael  OharaCalvin  OldfieldPeter  Olesen

Charles  OliverCorby  OliverDwane  OliverJeff  OliverTamara  OllenbergAllan  OllenbergerSean  OlmsteadGrant  OlsenJames  OlsonAdam  OlszewskiWanda  OlszewskiTunde  OluokunJohn  OndreyArt  OnealPatrick  ONeillSandra  OniaScott  OpdykeMark  OrchardRyan  OrcuttTrevor  OrdDennis  OrtegoAndrea  OrtizMarcos  OrtizJay  OrtnerMelissa  OsborneRobert  OsbournCindy  OsinaDale  OslanskiBrooke  OslerDonald  OszustJason  OttoBen  OuelletJason  OuelletJason  OvercashBrian  OvermanAmanda  OwenBen  OwenEddie  OwenGreg  OwenJames  OwenDave  OwensStephanie  OwensSteve  OwensTracee  OwensWhitney  OxleyPaul  OzarKenny  PaceCynthia  PaigeBrad  PakkalaMona  PalChris  PalazzoKatherine  PallisterCourtney  PalmerDouglas  PalmerMichael  PalmerShaun  PalmerBianca  PalosanuNorman  PalsChris  PanNicole  PanielAmy  PannellTom  PapeJames  PappasBob  ParadisoSheila  PardoGloria  Pardo-ContrerasElsa  PareceHector  ParentKim  ParentRobert  ParishBecky  ParkerCarolynn  ParkerDavid  ParkerDon  ParkerLinda  ParkerRandy  ParkerCalvin  ParksFred  ParksJeff  ParksMichele  ParksWalter  ParlangeDennis  ParonLori  ParrGeorge  ParraMariela  ParraPaula  ParrickTed  ParrishSpencer  PartridgeThomas  PascoSonal  PatelPlacido  PatrianaDavid  PattersonDonald  PattersonMartyn  PattersonCarol  PattesonHardy  PattonJeff  PattonMark  PattonSherri  PattonWesley  PaughJoe  PaulTim  PaulMark  PaullMeghan  PaulsonRegina  PauraRob  PawlikWesley  PawlikJohn  PawluskiBen  PayneDal  PayneFred  PayneJohnny  PayneJonathan  PayneKaren  PayneMicheal  PayneRay  PayneDavid  PearceJohn  PearceJoyce  PearnBrandon  PearsonEdward  PearsonJanet  PearsonKathy  PearsonRoss  PearsonBrandon  PeckBridger  PeckHeather  PeckFinn  PedersenDwayne  Pederson

Dave  PeetJorge  PeinadoAlthemus  PellerinJean  PelletierNeil  PelletierApril  PelsCindy  PembertonAl  PenaAmanda  PendegrassTim  PendletonBill  PenhallBarbara  PenmanHolly  PennerCathy  PenningtonMatthew  PenningtonShelby  PenningtonDavid  PennybakerShelagh  PensonKevin  PepplerDenise  PercivalWagner  PeresCarlos  PerezElisa  PerezJohn  PerezChristine  PerkinsDeanna  PerkinsGuy  PerkinsKerry  PerkinsRichard  PerkinsMichael  PerletteDaniel  PernaDeborah  PerraultDebbie  PerrinDusty  PerryKathy  PerryRobert  PessiaAida  PetersGerald  PetersGord  PetersPam  PetersCasey  PetersenPaula  PetersenCharles  PetersonChuck  PetersonGerald  PetersonKyle  PetersonTerry  PetersonKamberly  PeteteAnthony  PetkovichRob  PetroneShannon  PetrusawichAllen  PetryClayton  PetryPatrick  PetryBarbara  PettigrewBill  PettittDavid  PettusMatthew  PettyjohnChip  PhillipsMarvin  PhillipsMatt  PhillipsRussell  PhillipsSherry  PhillipsTyler  PhillipsJimmy  PhippsLily  PhungJudy  PickeringTravis  PickeringMark  PickupMichal  PicquetLawrence  PidkowaPenny  PiekarskiDavid  PierceDuane  PierceEddie  PierceJimmy  PierceJoe  PierrottieJerry  PiersonLeslie  PietronCharlie  PikeKimberly  PikeCharlie  PilandNorman  PimmCathy  PinedaJerri  PinelSusan  PinkneyOlivia  PintoRisa  PippinPeter  PiszRobert  PittJack  PittmanVince  PittsRyan  PivonkaMerle  PlamondonGlen  PlaskaMary  PlattCharlotte  PlombinEarl  PlumbBrandi  PlumleeJohn  PodhaiskyRay  PodobaAlbert  PoetkerDavid  PoirierDebbie  PoirierDanny  PolakPaul  PoleyKimberly  PolhemusMike  PolhemusTerry  PollardTommy  PollyJeffery  PolsfutEva  PolyakMarilyn  PomeroyMarvinette  PonderRichard  PontelloDarris  PonthieuxKelly  PoonLucas  PopinskiRon  PoppengaAl  PoprikCharles  PortelanceJustin  PorterRobin  PorterLenny  PostDan  PostlerRandi  PoteetGreg  PotterRory  PotterTracy  Potter

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Wehavebuiltourcompanyonasolidfoundationofcorebeliefsandvaluesthathaveshapedourpastandmapourfuture.Fromthisfoundation,wedrawuponpreciousresourcessuchasinnovation,teamwork,integrityandperseverance.Morecriticalthantheenergyresourcesweproducearetheconvictionsthatguideusaswework.

Inpreparingthisannualreport,wetalkedwithacrosssectionofDevonemployeesandstakeholdersoutsidethecompanyaboutDevon’scharacterandhowweconductourbusiness.Inthefollowingpages,alongwithcommunity,environmentalandoperationalhighlights,theseindividualssharetheiruniqueperspectives.

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“Theyunderstandthatshareholdervalueandthebottomlineareenhancedbyinvestinginthecommunityandespeciallybyinvestinginthenext generation.”DAviD BoreNPRESIDENT,UNIVERSITYOFOKLAHOMANORMAN,OKLAHOMA

“As president of the University of Oklahoma, my role is to help build an outstanding university, and the leadership at Devon shares my mission.

“It is not a coincidence that strong and productive companies are most often located in strong and flourishing communities. The two go together and Devon understands that. They understand that shareholder value and the bottom line are enhanced by investing in the community and especially by investing in the next generation.

“Devon has invested in new facilities, scholarships, internships and research programs at OU. Their contributions are helping us produce a pool of outstanding graduates that Devon can draw from to maintain its talented workforce.

“Devon has succeeded as a company and is becoming an even greater company because its leaders have the vision to understand that their business interests coincide with the public interest. Devon is not only a corporate partner for OU, its leadership and its values serve as a model and an inspirational guide for our students.”

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“ When my community has a need, we can always count on Devon to get involved. Devon has been in our community for several years, contributing to public education, youth recreation, senior support programs and a variety of other community service efforts.”

Wendy TremblayAboriginAl Committee member of the Conklin métis loCAl #193Conklin, AlbertA

“In the area of community relations, Devon sets an excellent example for others to follow. The company supports public education, its employees are active in the community and it supports public safety programs.”

Roy EatonPublIsher, WIse CounTy MessengerDeCaTur, Texas

“Devon’s like a big family, and that makes it a lot easier for everyone to do their jobs. The friendly environment is why I enjoy coming to work each day, and I think it makes people want to do their best for the company.”

Reah ToRResDevon RecepTIonIsTHousTon, Texas

“Devon’s commitment to innovation means a lot to me as an employee. Our company is always looking at better ways to do our business, which helps me and my staff better monitor our business and accomplish more.”

Mandy WrightDevOn SuperviSOr, AccOunting OperAtiOnSOklAhOmA city, OklAhOmA

“Although our Devon tutors can only spend a short time at our school each week, their faithful dedication has made a significant impact on the lives of our students.”

Trina STanberryCommunities in sChools ProjeCt mAnAgerthomPson elementAry sChoolhouston, texAs

“While Devon provides funding for some of our school activities, the most important gift they give us is their time. Our students light up when their tutors arrive and it’s often the highlight of their day.”

ChuCk TompkinsPrinciPal, Mark TWain ElEMEnTary SchOOlOklahOMa ciTy,OklahOMa

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Ambassadors Strengthen Community Bonds Servingonschoolboards,donatingequipmenttoemergencyrespondersandspeakingtostudentsaboutoilfieldsafetyarefundamentaltoour

business.Devon’semployeesarededicatedtothebusinessofeconomicallyfindingandproducingtheoilandnaturalgasthatmaintainsDevon’spositionasoneoftheindustry’stopenergyproducers.Butthatisonlypartofourroleinthecommunitieswherewedobusiness.Wealsospendtimeasvolunteerteachers,littleleaguecoachesandcitycouncilmembers.

Workingwithinourcommunitiesisessentialtooursuccessasacompany,anditisanintegralpartofourcorporateculture.Bysupportingthecommunitieswhereweliveandwork,weenhancethequalityoflifeforourselvesandourneighbors.Devon’sambassadorprogramisakeycomponentofitscommitmenttocommunityoutreach.

Theambassadorprogramsucceedsbecauseofouremployees.Devonambassadorsareprominentmembersofcommunityorganizations,availabletoanswerquestionsaboutouroperationsandtoopenlinesofcommunicationwithallofourstakeholders.

ForBillSkelton,beingaDevonambassadorinRiverton,Wyoming,requiresowninga“goodpairofboots.”Asanambassador,Billseeksopportunitiestomakeapositiveimpactinhiscommunity.Hevolunteerstohelplocallawenforcementwithsearchandrescueoperations—savingaccidentvictimsandsearchingforlostchildren.

ThousandsofDevonemployeevolunteersbuildrelationshipswithlandowners,civicleadersandregulators.Theserelationshipshelpusworktogether,whetherweareaddressingacommunityneedorrespondingtoanemergencyinthefield.Astheyservetheircommunities,thesevolunteersarestrengtheningbondsandbuildingpartnerships.

Community outreachCommitmentofResources

Tosucceedinthefield,energycompaniesmusthavesupportfromthecommunitiesthatsurroundtheiroperations.Weconsiderourselvespartofthetowns,citiesandruralareaswhereweexploreforandproduceoilandnaturalgas.Welivethere,workthere,playthere,worshipthereandsendourchildrentoschoolthere.

Ourbusinessoperationsdependonasolidfootingthatcanonlycomefromstablecommunities.Thatiswhyweworktobuildrelationshipsanddonatefinancialresourcestocivicorganizations,schools,lawenforcementagencies,firedepartmentsandyouthprograms.

Wearegratefultohaveopportunitiestocontributetoprogramsandservicesthatenhancethequalityoflifeforouremployeesandtheirneighbors.Byinvestinginthefutureofourcommunities,weareinvestinginthefutureofDevon.

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Devon helped re-equip firefighters in vermilion Parish, Louisiana, following the devastating Gulf Coast hurricanes of 2005.

Devon Continues Support for Gulf Coast recoveryMorethanayearafterhurricanesKatrinaandRitapummeledtheGulfCoast,Devonhasnotforgottenthepeoplethatwereimpactedbythe

devastation.Asfamiliesreturntoplacestheyoncecalledhome,manylocalschools,socialserviceorganizationsandemergencyrespondersremainwithoutthesuppliesandequipmenttheyneedtoservetheircommunities.

Immediatelyfollowingthehurricanes,Devonrespondedwithcontributionsandvolunteerstohelpvictimsbeginthehealingprocess.Devon’s$2millioncontributiontoreliefeffortsaidedrestorationinitiativesalongtheLouisianaandTexascoastlines.Butourreliefefforthasnotstoppedthere.Devoncontinuestomakesignificantcontributionstotherestorationprocessbytargetingneedsthatarenotcoveredbygovernmentagenciesandinsuranceprograms.

Forexample,wehaveworkedwithlocalschoolsinLouisianatoidentifywayswecanhelpstudentsandfacultyrecoverfromthelossestheirfacilitiessustainedinthestorms.Asaresult,wehavepurchasedeverythingfromschoolsuppliestofurniture,computerequipmentandevenrainponchostohelpprotectstudentsastheywalkbetweenportableclassrooms.AtErathHighSchoolinLouisiana,wefundedanewfloorforthegymnasium,whichalsoservesasacommunitygatheringplaceandrecreationcenter.

ThestormsalsoconsumedvitalequipmentusedbyfirefightersinVermilionParishLouisiana.Devoncontributed$180,000toensurethatthesefirstrespondersareadequatelyequippedtoservetheircommunities.Devonhasalsocontributedtoorganizationsthatprovidepost-traumacounseling,clothingandtutorsforevacuatedstudents.

Inadditiontocorporatefunding,manyofouremployeescontinuetomakepersonaldonationstoassisthurricanevictims.InDecember2006,DevonemployeesinLouisianamadetheholidaysalittlebrighterbypurchasingclothingandtoysforthechildrenoffamiliesstillstrugglingwiththerecovery.

Whilethehurricaneshavelongbeenover,thedevastationtheycausedcontinuestoaffectthelivesofmanyinthecoastalcommunitieswhereweliveandwork.Asanenergyproducer,wedependonourcommunitiestocreateasolidfoundationforourbusinessandouremployees.BecausewehavebeengracedbythesupportofmanycommunitiesthatsharedinthedisastrouseffectsofKatrinaandRitain2005,wesharetheresponsibilityforpickingupthepiecesthestormsleftbehind.

Mike Naus from Devon’s Gillette office talks with students about wildlife and the environ-ment during the Wyoming hunting and Fishing heritage expo in 2006.

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“There are certain companies that have established themselves as leaders. Through their conduct and their participation they are able to shape the direction of the industry. Devon is one of those companies.”

Marc SMithExEcuTivE DirEcTorinDEpEnDEnT pETrolEum AssociATion of mounTAin sTATEsDEnvEr, colorADo

“The best way to handle a problem is to address it, not back away from it. Devon is the kind of company that works with me. They want to help people and make things work. It’s the mark of an honest company. If there’s a mistake, the honest company will work it out. If they’re dishonest, they’ll never resolve it.”

R.C. MCFallCounTy CommIssIonerJohnson CounTy, Texas

“I see the respect Devon gets from service companies, the Bureau of Land Management and from people who live in the town of Baggs. As a petroleum engineer, working for a company with a good reputation makes my job easier. People are easier to talk to and work with because they trust Devon.”

Megan StarrDevon oPerAtIons engIneerBAggs, WyoMIng

“Credibility is essential to be effective in Washington. Devon exemplifies the new image of an independent producer. It’s big enough to participate in any project, but its roots are solidly in America.“

Lee FuLLerVICe PresIDent, GoVernment relAtIonsInDePenDent Petroleum AssoCIAtIon of AmerICAWAshInGton, D.C.

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“Ourenvironmental,healthandsafetyphilosophystartedwithacommitmentourmanagementwaswillingtomake,andnowitisoneofthethingsthatsetsusapartfromourpeers.”DArreN SMiThDEVONENVIRONMENTALSCIENTISTOKLAHOMACITY,OKLAHOMA

“Devon has adopted an environmental, health and safety philosophy that calls on us to conduct our business ethically and lawfully. It also requires us to seek ways to operate in a manner that is safe and compatible with the environment as well as with the communities that surround our operations.

“The philosophy is more than a priority. It’s part of our system of values, which is important, because priorities can change, but values are concrete.

“Our philosophy is a top-down commitment, and that’s the best part. We are all held accountable for our EHS performance. As a supervisor in our environmental group, that makes my job a lot easier.

“People are welcome to suggest new ideas that could make our operations more efficient, better for the environment and friendlier to our neighbors. Great ideas are coming in from the field because people are encouraged to think that way. As a result, our environmental programs are among the best in the industry.

“Our environmental, health and safety philosophy started with a commitment our management was willing to make, and now it is one of the things that sets us apart from our peers.”

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Technology Drives emissions reduction effortBetween1996and2005,Devonhasaccountedforemissionreductionsofmorethan15milliontonsofcarbondioxideequivalentasreportedthrough

voluntarygovernmentprogramsintheUnitedStatesandCanada.Wehavereducedemissionsthroughtheuseofnewtechnology,andwehavefoundinnovativenewapproachestoourwellcompletionandproductionmethods.Forexample,Devonhasinitiatedaprogramtoreplaceoldpneumaticdeviceswiththelatesttechnologydesignedtosubstantiallyreducemethaneemissions.Devonisreplacinghundredsofthese“oldtechnology”devicesatproductionsitescompanywide.Eachreplacementaccountsforanemissionreductionof100tonsofcarbondioxideequivalenteachyear.Thatisliketaking20carsofftheroad.

Bycapturingnaturalgasnormallylostintheproductionprocess,wehavebeenabletoincreasethevolumeofgasavailableforsale.In2005,wewereabletoretainsixbillioncubicfeetofnaturalgasthatwouldhavebeenlosttotheatmosphereusingtraditionalpractices.Withaneconomicbenefitofmorethan$43million,doingwhatmakessensefortheenvironmentalsoenhancesourprofitability.

Since1999,Devonhasearnedrecognitionbygovernmentagenciesforbeinganindustryleaderinemissionsreductionandreporting.IntheUnitedStates,theEnvironmentalProtectionAgencyhashonoredDevonrepeatedlyforitsperformanceandforitsadvocacy.InCanada,Devon’seffortshaveearnedthecompanyelitestatusfromtheGHGChallengeandRegistryprogramforthepastsixyears.

Whilewearepleasedwithourpastsuccess,wecanachievemuchmore.In2006,wefurtherdefinedourfuturecourseasanindustryleader.Newinitiativesincludeacompanywideinventoryofgreenhousegasemissionsandcontinuedimplementationofnewemissionreductiontechnology.

Agreenhousegasinventory,scheduledforcompletionbytheendof2007,isthebackboneofourfutureemissionsreductionprogram.ThroughtheinventorywewillidentifyreductionopportunitiesatDevonproductionfacilitiesacrossNorthAmerica.Itwillallowustofocusonspecificregions,identifytheirneedsanddevelopreductionstrategies.Thoseeffortswillincludetheapplicationofnewtechnology,improvedproductionmethodsandbetterequipmentconfigurations.

environmental Partnerships AResourcefulApproachtoConservation

Devoniscommittedtothepreservationofournaturalenvironment,especiallyairandwater.OurcommitmenthasresultedinsuccessfulinitiativescompanywidethathaveestablishedDevonasanindustryleaderinenvironmentalresponsibility.

Wearegratifiedbyourprogress,andweareevenmoreexcitedaboutourfutureaswecontinueacourseofinnovationintheareasofemissionsreductionandwaterconservation.WhileDevon’sgreenhousegasemissionsreductionprogramsarealreadyinplace,ouraccomplishmentsin2006createdanewplatformforgreaterreductionsinthefuture.Inadditiontotheseachievements,ourwaterconservationprogramscontinuetoexpandwithnewtechnologythatcouldeventuallybeappliedtoproductionoperationscompanywide.

Conservationisourgoalasagoodneighborandisconsistentwithourobjectivetocontinuetobeatopperformerinthehighlycompetitiveenergyindustry.Bykeepingmorenaturalgasinthepipelineandreducingwaterusage,wecanincreaseproductionandcutoperatingcosts.Thatisnotonlygoodfortheenvironment,itisgoodforourbottomline.

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Supervisor Jay ewing examines a water sample at a Barnett Shale facility. Water recycling is an important element of Devon’s conservation efforts.

OurongoingemissionsreductioneffortsandourinventoryprogramhelppositionDevonforthefuture.Bycontinuallymonitoringourperformanceandlookingforopportunitiestoincreaseefficiency,weenhanceourcompetitivenessaswellasourabilitytorespondtopotentialchangesintheregulatoryenvironment.Wearededicatedtooperatingcompatiblywiththeenvironment,andwebelieveadynamicandrigorousemissionsreductionprogramisvitaltothatcommitment.

Water Conservation initiative expanding in North TexasWaterisanintegralpartofnaturalgasproduction.WhetherweareusingfreshwatertocompletewellsintheBarnettShale,ormanagingbrinefrom

wellsintheRockyMountains,waterconservationisacoreenvironmentalinitiativeforDevon.Forexample,atatimewhensociety’sneedforwaterisatanall-timehigh,Devonhasrespondedbyintroducingrecyclingtechnologythatwillallowustoreduceourdemandandpotentiallyimproveourefficiencycompanywide.Since2005,DevonhaspartneredwithFountainQuailWaterManagementtopioneerrecyclingintheBarnettShalenaturalgasfieldinnorthTexas.

Oureffortshaveresultedinthefirstwaterrecyclingprogramtobepermittedforlong-termusebyindustryregulatorsinthestateofTexas.Devon’suseofthermaldistillationtechnologyhasallowedthecompanytoreclaimwaterrecoveredfromhydraulicfracturestimulationsintheBarnett.Insteadofinjectingwastewaterintodeepdisposalwells,Devonisusingheattoseparatethewaterfromsaltandotherimpurities.Thetreatedwatercanbereusedforfuturecompletionoperations,takingdemandpressureofflocalfreshwatersupplies.

Devon’srecyclingprogramhasmovedbeyondthedevelopmentstage.Today,weareoperatingsevenrecyclingunitswithacombinedtreatmentcapacityof500,000gallonsofwaterperday.Aswebringadditionalunitsintotheregion,weexpectourrecycledvolumestocontinuegrowing.Theimpactofthistechnologycouldbemeaningful.Atfulltreatmentcapacity,upto85percentofthewaterwerecoverfromfracturecompletionsintheBarnettShalecouldbereused,significantlyreducingourdemandforfreshwater.

Whilewearepleasedwithourprogress,wecontinuethepushtodevelopnewideas.InMarch2007,webeganfieldtestingasecondwaterrecyclingtechnologyintheBarnettShale.WehavedevelopedtheEngineeredMembraneSeparationsystemthroughapartnershipwithGeneralElectric.Themembranetechnologyusesaseriesoffilterstotreatwaterwithoutthesubstantialenergyrequirementsofthethermalsystem.Ifsuccessfulinthefield,thenewtechnologymayprovetobemoreeconomical,anditcouldhaveapplicationsinothernaturalgasproducingregions.

Byconservingwater,wereduceourenvironmentalimpactandcreateopportunitiestoimproveouroperationalefficiency.Theprogramallowsustoreducethevolumeofwaterwemustpurchaseforouroperations,andithelpsusavoidcostsassociatedwithsaltwaterdisposal.Overall,waterrecyclingisanexcitinginitiativeforthecompanybecauseofitsbenefitstotheenvironmentandtoourbottomline.

Protecting the natural environment is imperative in our field operations. Devon is the largest independent natural gas producer in New Mexico, where we have been working in harmony with the environment for more than 20 years.

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“IthasbeenmyexperiencethatDevonconductsitsbusinesswithinnovationandprofessionalism, carryingoutitsactivitiesresponsibly,withaneyetowardprotectingtheenvironment.”viCTor CArriLLoTExASRAILROADCOMMISSIONERAUSTIN,TExAS

“As a Texas Railroad Commissioner, I oversee and regulate the oil and gas industry. Devon is incredibly active in Texas and is the top gas producer in the state. It has been my experience that Devon conducts its business with innovation and professionalism, carrying out its activities responsibly, with an eye toward protecting the environment. For example, Devon has responded to freshwater use concerns in north Texas by being the first operator in Texas to test a pilot recycling program to recover water used in natural gas production operations.

“Devon is also pushing the envelope in terms of technological advancements, using innovations in seismic, drilling and production techniques in the Barnett Shale. They are the top producer in the unconventional Barnett Shale gas trend – perhaps the most active natural gas play in the nation. Along with their partners, they are also employing leading edge technology in successfully exploring the ultra-deepwater Lower Tertiary trend in the Gulf of Mexico. Devon is the type of producer we would like to see more of in Texas.”

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“Since joining Devon in 1999, I’ve seen our management tested on repeated occasions. Each time they have demonstrated a commitment to doing what is right, even when it’s not the most convenient or expedient solution.”

Don SanDSDEvon SupErvISor of Gulf of MExIco opEratIonSlafayEttE, louISIana

“Our executives always stop to say hello. When I need to talk to them, their doors are always open, which is very helpful in the work that I do.”

Bill WalterDevOn SupervISOr, InfraStructure anD DatabaSe ServIceSOklahOma cIty, OklahOma

“The rating agencies, banks and companies I work with all have a very high level of trust in us; they know we will follow through on our commitments.”

Jeff RitenouRDevon Manager, CorporaTe FInanCeoklahoMa CITy, oklahoMa

“At Devon, every employee is treated with respect. Our leadership has created an environment of trust and goodwill, and it’s apparent in how our teams work together.”

Jenifer WickDevOn GeOscience TechniciAnOklAhOmA ciTy, OklAhOmA

“Whether we are working with other businesses or with government regulators, integrity is our focus. It’s Devon’s culture. Integrity guides us as professionals and influences us in our personal lives as well.”

Humberto QuintasDevon Attorney AnD LegALCoorDInAtor for expLorAtIon AnD proDuCtIon operAtIons rIo De JAneIro, BrAzIL

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how does Devon compete for qualified employees?Thevitalityandgrowthoftheenergyindustryisstretchingthecapacityofamaturingworkforce.Competingforemployees—fromrecentcollege

graduatestoexperiencedindustryprofessionals—ischallenging.Ourcollegerecruitingeffortsincludecampusvisitsbyyoungeremployeeswhocansharepersonalexperiencesandcanrelatetoastudent’suncertaintyabouttheirfuture.Wealsoprovidefinancialsupportforpetroleumstudiesprogramsandfacilitiesthatraiseouron-campusprofile.Inourcollegeinternshipprogramweinvitemorethan100studentstospendthesummergettingtoknowthecompanyandworkingintheenergyindustry.

ExperiencedpersonnelareattractedbyDevon’sreputationasaleadingindependentoilandgasproduceraswellasbyourcultureoffairnessandopenness.OurobjectiveistohireandretainemployeeswhoarenotonlytechnicallyskilledbutwhoareengagedandenthusiasticaboutDevon’sfuture.Tohelpretainourcurrentstaff,wegaugethepracticesofcompetitorstoensurethatDevonofferscomparablecompensationandbenefitsprograms.However,compensationaloneisnotenoughtoattractandretainthebestpeople.Wealsobelievethatofferingasuperiorworkexperiencethatrewardsintegrity,ingenuityandteamworkpositionsDevonasnotonlyagreatplacetowork,butmoreimportantly,buildsastrongbaseofleadersfocusedoncreatingvalueforourshareholders.Anoverviewofthecompany’sretentionandrecruitingprogramscanbefoundintheCareerssectionofDevon’swebsiteatdevonenergy.com.

Do the Jack production test results apply to your other Lower Tertiary discoveries in the Gulf of Mexico?ThesuccessfulproductiontestoftheJackwellin2006wasasignificantindicatorthatdeepwaterLowerTertiaryreservoirscanproduceoilincommercial

quantities.Althougheachdiscoveryisunique,thetestresultsbuildourconfidenceinthecommercialpotentialofDevon’sLowerTertiaryportfolio.Inaddition,theseresultsmoveusclosertothesanctioninganddevelopmentofeachofourdiscoveriesintheLowerTertiary.

Devon’sfourLowerTertiarydiscoveriestodatearesimilar,butnotidentical.Differencesinwaterdepths,reservoircharacteristics,rockqualities,oilchemistryandotherpropertiesarepresenttovaryingdegreesamongthediscoveries.TheJackwelltestansweredmanyquestions,butthelearningprocesscontinues.AswedevelopourfourLowerTertiaryprojectsandexploreforadditionalLowerTertiarydiscoveries,ourunderstandingofthisimportantnewdomesticenergysourcewillexpandrapidly.

Devon is already the biggest producer in the Barnett Shale. Can you continue to grow this asset?Yes,weareconfidentthatwecancontinuetoincreaseDevon’sprovedreservesandproductionfromtheBarnettShale.Wehavemorethandoubleddaily

productionfromthisoutstandingunconventionalresourcesinceDevonfirstacquireditsBarnettShalepropertiesin2002.WehavealsodoubledprovedreservesintheBarnetttoabout3.6trillioncubicfeetequivalentandhaveproducednearlyonetrillioncubicfeetequivalentduringthesameperiod.Theseincreasesingasproductionandprovedreserveshavebeentheresultofanactivedrillingprogramcomplementedbytechnologicalimprovements,includinghorizontaldrilling,multi-stagecompletionsandextensive3-Dcomputerimaging.Increaseddrillingdensityandenhancedreservoirmanagementtechniqueshavealsoledtoproductionincreases.WehavemorethantripledthenumberofproducingwellsintheBarnettShalesince2002toover2,700today.

In2006,weacquiredthepropertiesofChiefHoldings,whichincreasedDevon’slandpositioninthefieldby169,000netacrestoacurrenttotalof736,000netacres.Devon’sacreagepositionisthelargestintheBarnettShale,andDevonisalsothelargestproducerbyasignificantmargin.FurthergrowthintheBarnettwillbeachievedthroughhighactivitylevelsappliedtothislargerresourcebaseandsupplementedbycontinuedenhancementsindrillingandproductiontechnologies.Weplantodrillatleast385wellsin2007,andwehaveseveralthousandpotentiallocationsininventory.Giventheseabundantdrillingopportunitiesandourtrackrecordofsuccess,webelievewecancontinuetoincreasethesizeandvalueofDevon’sBarnettShaleassetsfarintothefuture.

What does your decision to reduce investment in conventional Canadian natural gas areas say about Devon’s commitment to Canada?CanadaandtheUnitedStatesaretwoofthebestplacesintheworldtoexploreforandproduceoilandgas.Stablegovernmentsandfiscalregimes,access

tomarketsandatalentedandexperiencedworkforceattractustoNorthAmerica.WehavealargeinventoryofhighqualityassetsinCanadaandhavehadgoodperformanceinthepast.However,in2005and2006,theCanadianmarketforland,equipment,servicesandsuppliesbecameoverheated.This,coupledwiththestrongerCanadiandollar,resultedincostescalationthathasseverelysqueezedprofitmargins—especiallyinthemature,conventionalgasdrilling

Management’s Q&A ResourcefulnessSupportsOurStrategy

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areas.Devonrespondedbytemporarilyreducingtheamountofcapitalallocatedtotheseconventionalprojectareas.WewillcontinuetolimitconventionaldrillinginCanadauntilthesituationshowsevidenceofcorrecting.Wewillincreasedrillingintheconventionalgasareasquickly,whenconditionsimprove.

ElsewhereinCanada,suchasatourJackfishoilsandsprojectandintheLloydminsteroilfield,wearemaintainingveryactivedevelopmentprograms.WeexpecttobeginproductionfromtheinitialphaseofJackfishthisyear.CombinedproductionfromanexpandedJackfishprogramandtheLloydminsterareacouldreach100,000barrelsperdayearlyinthenextdecade.

Devon is forecasting 10% production growth from continuing operations in 2007. What projects are driving that growth?Weexpecttoproducefrom219millionto221millionoil-equivalentbarrels,orBoe,in2007.Thisisabout10%morethanweproducedin2006,

excludingproductionfromEgyptandWestAfricafrombothyears.AllofDevon’smajorgeographicproducingareas—theUnitedStates,Canadaandinternational—areexpectedtoparticipateinthegrowth.

IntheUnitedStates,weanticipatecontinuedproductiongainsfromourcoreonshorepropertiessuchastheBarnettShale,GroesbeckandCarthageareasinTexas.Weexpecttoseeathird-quarterboostingasproductionwhenthetwodeepwaterGulfofMexicoMerganserwellsaretiedintotheIndependenceHub.Our50%interestinMerganserisestimatedatabout50millioncubicfeet,orroughly8,000Boe,perday.InCanada,theJackfishoilsandsprojectisexpectedtocommenceproductioninthesecondhalfoftheyear.Jackfishproductionshouldrampupgraduallyuntilreachingitsfullcapacityofabout35,000Boeperdayin2008.

OutsideNorthAmerica,Devon’sinterestintheACGfieldinAzerbaijanisprojectedtocontributemorethan30,000Boeperdayto2007production.OilproductionfromACGincreaseddramaticallyinthefourthquarterof2006,followingthepayoutofourcarriedworkinginterest.InBrazil,thePolvooilprojectisplannedtocomeonstreaminthesummerof2007.OilproductionfromPolvoisexpectedtoquicklyrampuptoabout26,000barrelsperday,nettoDevon’sinterest.Together,theseprojectsgiveusahighlevelofconfidencethatwewillachieveour10%growthtarget.

you invested $2.2 billion to acquire Chief holdings in 2006. Can we expect more acquisitions ahead?

MuchofDevon’shistoricalgrowthcamefromlargecorporatemergersandacquisitionswhereweacquiredentirecompanies.Ourgoalwastobuildacompanywithsuperioroilandgasassetsthatwecouldgroworganicallywiththedrillbit.Atthesametimeweassembledahighlytrainedandmotivatedgroupofprofessionalswhocouldusecuttingedgetechnologytoenhancethatgrowth.Withourlastmajorcorporateacquisitionfouryearsago,weessentiallyaccomplishedthatgoal.

Today,Devon’scompanywideassetbaseisbroadanddiverse.Ourlong-termstrategyisoneoforganicgrowththroughexplorationanddevelopment,supportedbycontinuousimprovementofourassetbase.OuracquisitionofChiefin2006wasatactical,targetedtransaction.Chief’spropertieswerelocatedentirelyintheBarnettShalefieldinnorthTexas.Addingtoourcorepositions,suchastheBarnettShale,anddivestingassetsthatarenotoptimalforachievingourlong-termobjectivesareimportantcontributorstoimprovingDevon’soverallassetquality.Althoughwecannotcompletelyruleoutthepossibilityofanotheraccretivecorporateacquisitioninthefuture,additionaltransactions,ifany,aremorelikelytobefocused,asset-drivenacquisitionssuchasChief.

Led by the Barnett Shale and other significant growth projects, Devon expects overall production to increase by 10% in 2007. Strong growth in the Barnett Shale is expected to continue into 2009.

devon’s cumulAtive BArnett shAle Production (Net, Bcfe)

1,400

1,200

1,000

800

600

400 2004 2005 2006 2007 estimate

Project objective targetNetrate

Barnett Shale 2009 peak production >1.0 BcfdACG Field 2007 average production >30 MBoed Merganser 1st production mid-2007 50 MMcfdPolvo 1st production mid-2007 26 MBoedJackfish 2008 peak production 35 MBoed

significAnt Projects

To date, Devon has produced in excess of one trillion cubic feet of natural gas from the Barnett Shale in north Texas.

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“Whether it’s safety, environmental responsibility, community involvement or our production operations, I know our senior management will support us when honesty and integrity are at the foundation of what we do.”

GeorGe JacksonDevon ProDuctIon SuPervISorBrIDgePort, texaS

“My job as a field engineer is to optimize production from our wells and work alongside others to identify opportunities for improvement. A lot of times, this means finding ways to cut costs and increase production from a single well.”

Kim JohnstonDevon FielD engineergrAnDe PrAirie, AlbertA

“I like the way Devon has followed up on its acquisitions and has taken advantage of its opportunities. Their engineers and geologists have done some very good work, not only with the Barnett Shale assets Devon acquired from Mitchell, but also offshore in the Lower Tertiary trend, where Devon and its partners are working under very difficult conditions.”

GeorGe MitchellInveSTor anD ForMer ChaIrMan anD ChIeF exeCuTIve oFFICer oFMITCheLL energy & DeveLopMenT Corp.houSTon, TexaS

“I am very impressed with the attitude of Devon’s management, particularly their willingness to use local resources, especially people from CNOOC. Devon allowed representatives from CNOOC to make a full technical contribution to the Panyu field development. As a result, the two companies created a very efficient process that allowed us to develop the Panyu field into one of the most successful offshore oil projects in the region.”

Duan Cheng gangVICe PresIDeNt Of fIelD DeVelOPmeNt AND eNgINeerINgChINese NAtIONAl OffshOre OIl COmPANy (CNOOC)sheNzheN, guANgDONg PrOVINCe, ChINA

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“Weareaclosegroupwithagreatteamspirit.Asaresult,wecometoworkeachdaybelievingwecanmakeanimpactonthecompanybygeneratinggoodexplorationprospectswhichlead,hopefully,tomajornewdiscoveriesforourfuture.”

“When I joined Devon through the company’s acquisition of PennzEnergy in 1999, what impressed me was how much emphasis the company placed on its values. Trust, collegiality and goodwill are among those values, and they have special importance to me and the people in my group.

“We are responsible for generating exploration prospects and developing production in the Gulf of Mexico’s deep water, which is one of the most technologically challenging places in the world to operate. We overcome those obstacles by working in an environment that encourages trust, creative thinking and collective effort. If there is no trust, there is no communication or sharing of ideas. Trusting environments allow good ideas to nurture and mature.

“We are a close group with a great team spirit. As a result, we come to work each day believing we can make an impact on the company by generating good exploration prospects which lead, hopefully, to major new discoveries for our future.”

FROMLEFttORIGHt: irMA CASTro, DAtABASESuPERvISOR;DArryL LiNToN, EnGInEER;GreG KeLLeher, DEEPWAtERMAnAGER;roBBie SeNG, GEOLOGISt;ADAM SeiTChiK, GEOPHYSICISt

GreG KeLLeher (CENTER)DEVONDEEPWATERMANAGERGULFDIVISIONHOUSTON,TExAS

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Asoneoftheworld’slargestindependentexplorationandproductioncompanies,Devonisaleaderinthesearchfornewoilandnaturalgasresources.In2006,weincreasedreservesinthegroundandpositionedthecompanyforfuturegrowth.Weincreasedestimatedprovedreservesby13%in2006toarecord2.4billionoil-equivalentbarrels.Weproduced200millionequivalentbarrelsfromcontinuingoperationsin2006andexpecttoproduce219millionto221millionequivalentbarrelsin2007.

Duringthepastyearwedrillednearly2,500wellswithanoverallsuccessrateof98%.Ourrepeatable,low-riskdevelopmentdrillingprojectswereenhancedbyhigh-impactexplorationsuccessesinthedeepwaterGulfofMexico.Alsoduring2006,wemovedseveralmulti-yearoilandgasprojectstowardcompletion.ThefollowingpagesprofilesomeofDevon’smoresignificantexplorationandproductionprojects.

exploration and Production resourcesDevelopingOurFullPotential

Devon drilled a record 2,468 wells in 2006, adding 427 million equivalent barrels of proved reserves with the drill bit. Total proved reserves reached a record 2.376 billion barrels at year-end.

Wells drilled

1,685

2,228 2,1712,362

2,468

02 03 04 05 06

reserve Additions from extensions, discoveries And PerformAnce revisions(MMBoe)

131

172

311

02 03 04 05 06

•

••

437 • •

Proved reserves (net of royalties) (MMBoe)

1,609

2,074 2,0652,102

2,376

02 03 04 05 06

427

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Barnett Shale, a Lasting resourceTheBarnettShaleinnorthTexashasbeencalledthehottestnaturalgasplayintheUnitedStates,andDevonisitslargestproducer.Sinceacquiringour

originalownershipinthefieldin2002,wehavedrilledabout1,600wellsandincreasedournetdailyproductionfrom350millioncubicfeetofnaturalgasequivalenttomorethan710milliontoday.

In2006,weleaptfurtheraheadintheplaybyacquiringtheassetsofanotherBarnettoperator,ChiefHoldings.Devonacquiredmorethan600billioncubicfeetofprovennaturalgasreservesthroughthe$2.2billiontransaction.Importantly,thedealalsogrewourlandpositionto736,000netacres,representingthousandsofpotentialdrillinglocations.

Devon’sdominanceinthelow-riskBarnettShaleisreapinghugerewardsforthecompanyandourshareholders.Wenowhavemorethan2,700producingwellsintheBarnett,representingone-thirdofDevon’stotalgasproductionintheUnitedStates.Devonproducesnearlyhalfthefield’soveralldailyproductionandmorethantwicethatofournearestcompetitor.

ApplicationoftechnologyisanimportantelementofDevon’sleadershippositionintheBarnett.Wefirstintroducedhorizontaldrillingtotheplayin2002anddrilledour600thhorizontalBarnettShalewellin2006.Wehavealsopartneredwithaleadinguniversitytodevelopproprietary,cutting-edgeundergroundimagingtoidentifyoptimaldrillinglocations.

WeareacceleratingproductiongrowthintheBarnettbyincreasingdrillingdensity.The20-acreinfillprogramwestartedin2005isdeliveringimpressiveresults,andwehavenowbegundrilling20-acrewellsoutsidethebordersoftheoriginalcorepilotarea.Thesuccessfulinfillprogram,theadditionofChief’sassetsandexpansionofouroperationsinJohnsonandParkercountiesarecurrentlykeeping30drillingrigsrunning.Weplantodrillatleast385wellsin2007,andbylate2009weexpectourBarnettproductiontoreachonebillioncubicfeetofnaturalgasequivalentperday.

TheBarnettShaleisoneofthecountry’smostimportantnewsourcesofclean-burningnaturalgas,anditrepresented26%ofDevon’scompanywidereservebaseatyear-end2006.Since2002,wehavesignificantlyincreasedtheamountofgaswearerecoveringfromtheBarnettShale,andweexpectadditionaltechnologicaladvancesinthefuturetofurtherincreaserecoveries.TheBarnettShaleisoneofDevon’smostprizedassetsanditwilllikelyremainsoformanyyearstocome.

in addition to being the largest gas producer in the Barnett Shale, Devon also owns and operates an extensive network of natural gas gathering and processing facilities.

As the largest gas producer in Texas, Devon drills day and night to help meet the nation’s energy needs. We drilled our 600th horizontal well in the Barnett Shale in 2006.

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Jack Test Brings Worldwide AttentionSeldomdoesasinglebusinessstorycatchtheattentionofnewsmediaaroundtheworld.Thiswasthecase,however,wheninSeptember2006

Devonanditsco-ownersannouncedthesuccessfultestofthedeepwaterJackNo.2wellintheGulfofMexico.AccordingtoThe Wall Street Journal,theGulf ’sLowerTertiarytrend“couldbecomethenation’sbiggestnewdomesticsourceofoilsincethediscoveryofAlaska’sNorthSlopemorethanagenerationago.”

TheJacktestmadenews,anditwasbignewsforDevonbecausewehavefoursignificantdiscoveriesinthisexcitingnewoilplay.Theproductiontestprovedthatoilfoundinthe2004Jackdiscoverywouldflowtothesurfaceatcommercialrates.Duringthetest,theJackNo.2flowedatarateofmorethan6,000barrelsperdayfromjust40%oftheoil-bearingcolumn.FutureplansforJackincludedrillinganotherappraisalwelltobetterdefinethesizeofthefield.Alsoahead,theco-ownerswilldecideuponthelayoutandengineeringdesignstodevelopthefield.

DevonisfurtheralongwithplanstocommerciallydevelopCascade.This2002discoverywasourfirstintheLowerTertiary.Beginninginlate2009,Cascadeisexpectedtoproduceintothefirstfloatingproduction,storageandoffloadingvessel(FPSO)approvedfortheGulfofMexico.FPSOsenableoffshoreproductioninfrontierareassuchastheLowerTertiarytrendbeforepipelineinfrastructurehasbeenbuilt.

WemadeourfourthdiscoveryintheLowerTertiarytrendin2006.Thediscoverywell,ontheKaskidaprospect,alsoappearstobethelargestofthefour.FutureplansforKaskidaincludeadditionalappraisaldrillingandevaluationofvariousdevelopmentoptions.WiththeadditionofKaskida,Devon’sLowerTertiarydiscoveriestodatemayholdupto900millionbarrelsofresourcepotential.Ontopofthat,wehaveanother18undrilledprospectswithacombinedunriskedresourcepotentialmorethandoubleDevon’scurrentreservesizeof2.4billionoil-equivalentbarrels.

horizontal Drilling Capturing More Gas resourcesAtypicaloilorgaswellisdrilledstraightdown,vertically.Ahorizontalwellstartsoutverticallybutisturnedundergroundtorunparalleltothe

surface.Tovisualizethebenefitsofhorizontaldrilling,imaginetheearth’ssurfaceasthetopofasandwich.Ifyoupushadrinkingstrawbetweentheslicesofbread,youwillencounteralotmorepeanutbutterthanyouwillbystickingthestrawthroughthesandwichlikeatoothpick.Whenpositionedproperly,onehorizontalwellcanrecoverasmuchoilornaturalgasasthreeorfourverticalwells.Thiscanimprovewelleconomicssignificantly,becausethecostofahorizontalwellmaybeonlytwotothreetimesthecostofaverticalwell.

IneastTexas,DevonisapplyingthesamehorizontaldrillingandcompletiontechnologiesthatwehavehonedintheBarnettShalefieldwhiledrillingmorethan600successfulhorizontalwells.DevondrilleditsfirsthorizontalwellineastTexasin2005intheNan-Su-GailfieldwithintheGroesbeckarea.WecontinuedtheNan-Su-Gailprogramin2006,achievinginitialproductionratesof11.5millionand26millioncubicfeetofgasperdayfromthefirsttwowellsand32millioncubicfeetperdayfromathird.Wehave100%workinginterestsinthesewellsandcouldhaveasmanyas200additionaldrillinglocationsthroughouttheGroesbeckarea.

A front page story in The Wall Street Journal captured the significance of the Jack No. 2 well test.

During testing, the Jack No. 2 well in the Gulf of Mexico flowed at a rate of more than 6,000 barrels of oil per day.

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FollowingoursuccessatGroesbeck,webegantryinghorizontaldrillingfurthereastintheCarthagearea.ThefirstwellintheCarthageprogramalsobeganproducingatanimpressiverate—averagingaboutninemillioncubicfeetperdayforthefirst30daysofproduction.WeplantocontinueevaluatinghorizontaldrillingatCarthage,wherewecouldhaveupto70potentialdrillinglocations.

Woodford Shale Shows PromiseWiththetremendoussuccessoftheBarnettShaleinnorthTexas,theoilandgasindustryissearchingforotherlook-alikeshaleplays.Onesuch

candidateistheWoodfordShaleintheArkomabasinofeasternOklahoma.TheWoodfordandBarnettarenotidentical,butsharesomecharacteristics.Bothcontainlargequantitiesofnaturalgas,andbothformationsgiveuptheirgasreluctantly.AsintheBarnettShale,Woodfordwellsmustbehydraulicallyfracturedduringcompletion.Thisaddstothecostandcomplexityofeachwell.Also,asintheBarnettShale,theWoodfordrespondswelltohorizontaldrilling.

DevonhasassembledanacreagepositioninseveraleasternOklahomacountiesthatisprospectivefortheWoodfordShale.Wecurrentlyholdabout70,000netacres,representingseveralhundredpotentialdrillinglocations.WedrilledourfirstWoodfordwellin2005anddrilled40horizontalWoodfordwellsin2006.WeplantokeepfouroperatedrigsrunningonourWoodfordacreagein2007,drilling55wells.

The octopus is ComingPolvo,octopusinPortuguese,isDevon’sfirststart-to-finishoffshoreoilprojectinBrazil.LocatedintheCamposBasin,Polvowillbeoneofthe

quickestoffshoreprojectsbroughttocompletioninBrazil.DiscoveredinJune2004,Polvoisexpectedtoseefirstproductioninmid-2007.Developmentplansanticipate10producingwells.The1.5millionbarrel-capacityFPSOvesselthatwillhandletheproducedoilhasbeencommissionedandisexpectedonlocationinMay.Oilproductionisprojectedtoreachapeakofabout26,000barrelsofoilperday,nettoDevon.WeoperatePolvowitha60%workinginterest.

EncouragedbyoursuccessatPolvo,Devon’sobjectiveistobuildasignificantpresenceinBrazilthroughanongoingexplorationprogram.Brazilwelcomesforeigninvestmenttomakethecountrymoreenergyself-sufficient.DevonhasevenjoinedwithBrazil’sownPetrobrastoacquireleasesinsomeofthecountry’smostpromisingoffshoreexplorationareas.Petrobrasisaworldwideleaderindeepwateroilandgasexplorationandproduction,andweareverypleasedtobepartneredwiththiscompanyinitshomecountry,aswellasintheU.S.GulfofMexico.WecurrentlyholdleasesinnineoffshoreblocksinBrazil.

oil from the Devon-operated Polvo project in Brazil will flow to this 1.5 million barrel vessel.

Polvo is located on block BM-C-8, one of nine Brazilian offshore exploratory blocks held by Devon.

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First Production Slated for Jackfish oil Sands ProjectTheoilsandsofwesternCanadaarebelievedtoholdbillionsofbarrelsofoilintheformofthick,tar-likebitumen.Shallowdepositsofbitumenhave

beensuccessfullyminedformanyyears.Deeperdepositscannotbemined,butcanbeheatedandcoaxedtothesurfacebyinjectingsteamunderground.Devon’s100%-ownedJackfishprojectineasternAlbertautilizesthesteam-assistedgravitydrainage(SAGD)process.

Jackfish,with300millionbarrelsofestimatedrecoverablereserves,hasbeenunderconstructionsince2005.Withconstructionnearingcompletion,weexpecttobegininjectingsteamatJackfishin2007.Asthesteampermeatesandheatsthebitumen,flowswillincrease,reachinganexpected35,000barrelsperdayinlate2008.Jackfishisanimportantcomponentofourproductiongrowthforecastsfor2008and2009.Withoutthedeclinesseeninmostconventionaloilfields,Jackfishisexpectedtoproduceatarelativelysteadyratefor20yearsormore.

WehavealsoaskedtheAlbertagovernmenttoapproveasecondphaseJackfishprojectonouroilsandsleasesadjacenttothefirstphase.Thiswoulddoubletheresourcesizetoapproximately600millionbarrelsanddoubleproductiontoabout70,000barrelsperday.Iftheexpansionprojectisapprovedandsanctionedfordevelopment,firststeamatJackfish2couldcommenceneartheendofthisdecade.

Production Growth from the CaspianAzerbaijanhasarichheritageasanoilproducer.Itwasthebirthplaceoftheoil-refiningindustryandwastheworld’sleadingpetroleumproducerat

thebeginningofthetwentiethcentury.DuringWorldWarII,thecountrysuppliedabout70%oftheformerSovietUnion’stotaloilproduction.TheAzeri-Chirag-Gunashli(ACG)oildevelopmentprojectislocatedintheCaspianSea,nearly75milesoffthecoastofAzerbaijan.ACGisoneofthe

largestoilfieldsunderdevelopmentintheworld,andDevon’ssharerepresentsabout84millionbarrelsoflight,sweetcrudeoil.Devonestablisheditsstakeinthefieldin1999whenweacquiredPennzEnergy.CommercialdevelopmentofACGwasdependentuponconstruction

ofamajorexportpipelinethatwascompletedin2006.Forthepastsevenyears,mostofDevon’sshareofproductionfromACGwenttorepaypartnersforcostsincurredonourbehalfunderthetermsofour5.6%carriedinterestownership.Aramp-upinproductionuponcompletionoftheexportpipelineenabledustorepayourcarriedinterestbalancesinlate2006.

Withtransportationcapacityprovidedbytheexportpipeline,field-wideproductionhasincreasedtomorethan700,000barrelsperday,headingtoamillionbarrelsperdayin2009.Asaresult,Devon’sshareofACGproductionhasalsoincreased,makingACGasignificantcontributortoour10%year-over-yearproductiongrowthforecastfor2007.Devon’sproductionfromACGisexpectedtoaveragemorethan30,000barrelsperdayin2007.

Drilling operations on the ACG field, offshore Azerbaijan, have increased field-wide production to more than 700,000 barrels of oil per day. Devon’s share of production is expected to average more than 30,000 barrels per day in 2007.

Construction nears completion at Devon’s Jackfish thermal oil facility in Alberta, Canada. Commencement of steam injection and first production from Jackfish are planned for 2007.

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operating Statistics by Area(1) mid- rocky gulf u.s. total total Permian continent mountains coast offshore u.s. canada international company

ProducingWellsatYear-End 8,704 6,668 5,785 3,925 687 25,769 7,391 530 33,690

2006Production (Net of royalties) Oil (MMBbls) 7 1 1 2 8 19 13 23 55 Gas (Bcf ) 38 225 95 129 79 566 241 8 815 NGLs (MMBbls) 2 11 1 4 1 19 4 — 23 Oil, Gas and NGLs (MMBoe) 16 49 18 27 22 132 58 24 214

AveragePrices Oil price ($/Bbl) $ 61.20 62.49 55.40 63.11 64.24 62.23 46.94 61.36 58.30 Gas price ($/Mcf) $ 5.80 5.75 5.64 6.39 7.24 6.09 6.05 3.95 6.06 NGLs price ($/Bbl) $ 28.78 28.21 15.63 34.05 35.43 29.42 42.67 — 32.10 Oil, Gas and NGLs ($/Boe) $ 45.40 33.52 35.35 39.27 51.23 39.31 39.21 59.24 41.51

Year-EndReserves (Net of royalties) Oil (MMBbls) 89 6 20 12 43 170 329 209 708 Gas (Bcf ) 265 3,382 1,134 1,198 376 6,355 1,896 105 8,356 NGLs (MMBbls) 22 156 7 45 3 233 42 — 275 Oil, Gas and NGLs (MMBoe) 155 725 216 257 109 1,462 687 227 2,376

Year-EndPresentValueofReserves (In millions) (2)

Before income tax $ 2,178 4,334 1,952 1,890 2,285 12,639 6,714 4,742 24,095 After income tax $ 8,677 4,817 3,079 16,573

Year-EndLeasehold (Net acres in thousands) Developed 308 772 550 552 223 2,385 2,124 299 4,808 Undeveloped 469 603 1,409 545 1,499 4,525 6,304 9,440 20,269

WellsDrilledDuring2006 171 621 515 223 20 1,550 877 41 2,468

CapitalCostsIncurred (In millions) (3)

2006Actual(4) $ 216 3,609 365 666 681 5,537 1,554 631 7,722 2007Forecast $ 220-240 1,515-1,625 350-370 805-875 720-775 3,610-3,885 1,245-1,350 395-440 5,250-5,675

(1) Excludes results from discontinued operations. (2) Estimated future revenue to be generated from the production of proved reserves, net of estimated future production and development costs, discounted at 10% in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities. Devon believes that the pre-tax 10% present value is a useful measure in addition to the after-tax value as it assists in both the determination of future cash flows of the current reserves as well as in making relative value among peer companies. The after-tax present value is dependent on the unique tax situation of each individual company while the pre-tax present value is based on prices and discount factors which are consistent from company to company. We also understand that securities analysts use this pre-tax measure in similar ways.(3) 2006 actual costs incurred and 2007 forecasted capital costs include exploration and production expenditures, capitalized general and administrative costs, capitalized interest costs and asset retirement costs.(4) 2006 costs incurred includes acquisition costs of $2.2 billion in the Mid-Continent region related to the Chief acquisition.

11-year Property Data(1) 5-year 10-year

compound compound 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 growth rate growth rate

Reserves (Net of royalties) Oil (MMBbls) 351 219 166 439 406 527 444 646 585 640 708 6% 7% Gas (Bcf ) 1,131 1,403 1,440 2,785 3,045 5,024 5,836 7,316 7,493 7,296 8,356 11% 22% NGLs (MMBbls) 18 24 21 55 50 108 192 209 232 246 275 21% 31% Oil, Gas and NGLs (MMBoe) 558 477 427 958 963 1,472 1,609 2,074 2,065 2,102 2,376 10% 16% 10% Present Value Before Income Taxes (In millions) (2) $ 3,952 2,100 1,375 5,316 17,075 6,687 15,307 22,438 22,693 34,830 24,095 29% 20%

Production (Net of royalties) Oil (MMBbls) 30 29 20 25 37 36 42 60 74 62 55 9% 6% Gas (Bcf ) 116 180 189 295 417 489 761 863 891 827 815 11% 22% NGLs (MMBbls) 2 3 3 5 7 8 19 22 24 24 23 24% 27% Oil, Gas and NGLs (MMBoe) 52 62 55 79 113 126 188 226 247 224 214 11% 15%

Average Prices Oil (Per Bbl) $ 17.49 17.03 12.28 17.78 24.99 21.41 21.71 25.82 28.22 38.00 58.30 22% 13% Gas (Per Mcf) $ 1.82 2.04 1.78 2.09 3.53 3.84 2.80 4.51 5.32 6.99 6.06 10% 13% NGLs (Per Bbl) $ 13.78 12.61 8.08 13.28 20.87 16.99 14.05 18.65 23.04 28.96 32.10 14% 9% Oil, Gas and NGLs (Per Boe) $ 14.90 14.51 11.09 14.22 22.38 22.19 17.61 25.93 29.92 39.48 41.51 13% 11%

unit Production and operating expense (Per Boe) $ 5.24 4.63 4.29 4.15 4.81 5.29 4.71 5.65 6.13 7.42 8.54 10% 5%

(1) The years 1996 through 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt from the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting.(2) Estimated future revenue to be generated from the production of proved reserves, net of estimated future production and development costs, discounted at 10% in accordance with SFAS No. 69, Disclosures about Oil and Gas Producing Activities. Devon believes that the pre-tax 10% present value is a useful measure in addition to the after-tax value as it assists in both the determination of future cash flows of the current reserves as well as in making relative value among peer companies. The after-tax present value is dependent on the unique tax situation of each individual company while the pre-tax present value is based on prices and discount factors which are consistent from company to company. We also understand that securities analysts use this pre-tax measure in similar ways.

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A / Southeast New Mexico

Profile• 75%averageworkinginterestin548,000acres.• KeyfieldsincludeIngleWells,CatclawDraw,PotatoBasin, RedLake,Gaucho,andOutland.• Producesoilandgasfrommultipleformationsat1,500’ to16,500’.• 44.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted33gaswells.• Drilledandcompleted49oilwells.• Recompleted15wells.2007 Plans• Drill28gaswells.• Drill43oilwells.• Recomplete35wells.

B / West Texas

Profile• 40%averageworkinginterestin1.1millionacres.• KeyfieldsincludeWasson,ReevesandAnton-Irishtothenorth; Ozona,Keystone/KermitandWaddelltothesouth.• Producesoilandgasfrommultipleformationsat2,500’ to18,000’.• 111.3millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted12gaswells.• Drilledandcompleted83oilwells.• Recompleted52wells.• Reactivated11wells.2007 Plans• Drill29gaswells.• Drill71oilwells.• Recomplete48wells.• Reactivate20wells.

MID-CONTINENT

A / Woodford Shale

Profile• 70,000netacresintheArkomaBasinineasternOklahoma.• Operatedworkinginterestsrangefrom50%to100%.• Emergingunconventionalnaturalgasplay.• ProducesgasfromtheWoodfordShaleformationat4,000’ to10,000’.• 10.4millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled40horizontalwells(15operated).• Acquiredadditionalacreage.• Acquired3-Dseismic.2007 Plans• Drill55horizontalwells(40operated).• Expandgasgatheringsystemcapacity.• Continueconstructionof200millioncubicfeetperdaygasplant.• Acquireadditional3-Dseismicandacreage.

B / Barnett Shale

Profile• 736,000netacres(127,000withincorearea)intheFortWorth BasinofnorthTexas.• >93%averageworkinginterestincore.• >84%averageworkinginterestoutsidecore.• ProducesgasfromtheBarnettShaleformationat6,500’to9,200’.• 608.1millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled133wellswithincorearea,including: 54verticalinfillwells. 79horizontalwells.• Drilled250wellsoutsidecorearea,including: 7verticalwells. 243horizontalwells.• AcquiredChief’sassets.• Improveddrillingefficiencieswithnewgenerationrigs.• Acquired3-Dseismicandacreage.2007 Plans• Drill157wellswithincorearea,including: 10verticalinfillwells. 147horizontalwells.• Drill228horizontalwellsoutsidecorearea.• Evaluatefarwestacreage.• Acquireadditional3-Dseismicandacreage.

ROCky MOuNTAINs

A / Bear Paw

Profile• 814,000netacresinnorthcentralMontana.• 90%averageworkinginterestinfederalunits.• 75%averageworkinginterestoutsidefederalunits.• ProducesgasfromtheEagleformationat800’to2,000’.• 18.5millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted49wells.• Recompleted23wells.• Installedartificiallifton39wells.• Expandedgasgatheringsystemcapacity.2007 Plans• Drill95wells.• Continueworkoverprogram.• Addcompressionandperformothergasgathering systemimprovements.• Acquire3-Dseismic.

B / Powder River Coalbed Natural Gas

Profile• 75%averageworkinginterestin346,000acresinnorth easternWyoming.• ProducescoalbednaturalgasfromtheFortUnionCoal formationsat300’to2,000’.• 19.3millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled251coalbednaturalgaswells.• Addedcompressionandperformedothergasgathering systemimprovements.• IncreasedoutsideoperatedactivityinJuniperDraw area(BigGeorgecoal).2007 Plans• Drill342coalbednaturalgaswells.• Continuefocusandexpansionofoperatedandoutside operatedactivityatJuniperDraw.• InitiatefullscaledevelopmentplansforWestPineTreeUnit.

C / Washakie

Profile• 76%averageworkinginterestin210,000acresin southernWyoming.• Producesgasfrommultipleformationsat6,800’to10,300’.• 104.4millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted137wells.• Recompleted3wells.• Installed76plungerlifts.• Installedcompressionandperformedothergasgathering systemimprovements.• Continuedimplementationofautomatedproduction controlsystem.2007 Plans• Drill105wells,including23directionalwells.• Install100plungerlifts.• Addcompressionandperformothergasgathering systemimprovements.• Continueimplementationofautomatedproduction controlsystem.

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A / Groesbeck Area

Profile• 72%averageworkinginterestin292,000acresineast centralTexas.• KeyfieldsincludePersonville,Nan-Su-Gail,Dew,Oaks andBaldPrairie.• ProducesprimarilygasfromtheTravisPeak,CottonValleySand, BossierandCottonValleyLimeformationsat6,000’to13,000’.• Includes677producingwells.• 48.0millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted23verticalwells.• Drilledandcompleted8horizontalwells.• Recompleted3wells.• Acquiredadditionalacreagethroughjointventure.2007 Plans• Drill22verticalwells.• Drill12horizontalwells.• Drill1exploratorywellonjoint-ventureacreage.• Recomplete9wells.• Acquire3-Dseismic.

B / Carthage Area

Profile• 85%averageworkinginterestin205,000acresineastTexas.• KeyfieldsincludeCarthage,Bethany,Waskom,Stockman andAppleby.• ProducesprimarilygasfromthePettit,TravisPeakand CottonValleyformationsat5,700’to9,600’.• Includes1,530producingwells.• 160.8millionbarrelsofoilequivalentreservesat12/31/06.

GuLF - shELF

A / Eugene Island South Area

Profile• Includes8blockslocatedinthesouthernportionof EugeneIslandarea.• Workinginterestsrangefrom14%to100%.• LocatedoffshoreLouisianain250’ofwater.• Producesoilandgasfromsandsat1,500’to13,000’.• 14.7millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled2wellsatEugeneIsland315.• Drilled2wellsatEugeneIsland316.• Drilled1wellatEugeneIsland329.• Drilled1wellatEugeneIsland337.• Completed2005Chopindiscoveryandcommencedproduction.• Drilled1dryholeatEugeneIsland334.2007 Plans• Drill2wellsatEugeneIsland337.• Drill1wellatEugeneIsland333.• Drill1wellatEugeneIsland334.• InitiaterecompletionprogramatEugeneIsland330.Shelf Exploration Prospects

ProfileB / Nimitz• BrazosA-24.• LocatedoffshoreTexasin130’ofwater.• Targetformation:Miocenesandsat19,400’to20,700’.• 20%workinginterest.• Netunriskedreservepotential:undisclosed.

C / Buckeye• WestCameron164.• LocatedoffshoreLouisianain50’ofwater.• Targetformation:LowerMiocenesandsat9,000’to13,000’.• 100%workinginterest.• Netunriskedreservepotential:4millionbarrelsof oilequivalent.D / Sleeping Bear• Mobile826.• LocatedoffshoreAlabamain50’ofwater.• Targetformation:Norphletsandsat21,200’to21,800’.• 75%workinginterest.• Netunriskedreservepotential:16millionbarrelsof oilequivalent.2006 Activity• Finalizedgeophysicalanalysesanddrillingcontracts.• SecuredfarminagreementatNimitz.2007 Plans• Securefarmoutagreementswithindustrypartnersat SleepingBearandBuckeye.• Drillexploratorytestwells.

D / NEBU/32-9 Units

Profile• 25%averageworkinginterestin54,000acresintheSanJuan BasinofnorthwesternNewMexico.• Coalbednaturalgasdevelopmentbeganinthelate1980sand early1990s.• Includes299coalbedgaswells,262conventionalwells,gas andwatergatheringsystemsandanautomatedproduction controlsystem.• ProducesprimarilycoalbednaturalgasfromtheFruitlandCoal formationat3,500’.• 18.1millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted32coalbedgaswells.• Completed171-wellworkoverprogram.• Drilledandcompleted20conventionalgaswells.• Recompleted4conventionalwells.2007 Plans• Drill4coalbedgaswells.• Initiate150-wellworkoverprogram.• Drill33conventionalgaswells.• Recomplete6conventionalwells.

2006 Activity• Drilledandcompleted120verticalwells,including36infillwells.• Drilledandcompleted2horizontalwells.• Recompleted88wells.• Acquiredadditionalacreage.2007 Plans• Drill136verticalwells,including18infillwells.• Drill14horizontalwells.• Recomplete48wells.

C / North Louisiana Area

Profile• 65%averageworkinginterestin654,000acresinnorthLouisiana.• Ownmineralinterestsin139,000netacresontrendwithlower CottonValley/Bossierplay.• Emerginggasexplorationplay.• ProducesfromthelowerCottonValleyandBossierformationsat 13,000’to17,000’.• Includes44producingwells.• 2.4millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted5wellsatVernon-Ansley.• Drilled1exploratorydiscoverywellatEastVernon.• Drilled2appraisalwellsatEastVernon.• Drilled1exploratorywellatMt.Moriah.• Drilled1appraisalwellatVixen.• Acquired3-DseismicatVixenandCaneyLake.

2007 Plans• Drill2explorationwellstotestotherprospectareas.

D / South Texas/South Louisiana

Profile• 66%averageworkinginterestin584,000acres.• KeyareasincludeMatagorda,Zapata,AguaDulce/ N.Brayton,Duval/Hagist,Houston,CentralTexas, CoastalFrioandthePattersonfieldinLouisiana.• ProducesoilandgasfromtheFrio/Vicksburg,Yegua, WilcoxandWoodbinetrendsat1,500’to15,000’.• Includes930producingwells.• 30.9millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted44wells.• Drilled4exploratorywellsintheMatagordaarea.• Recompleted62wells.• Acquired3-DseismicintheZapataarea.2007 Plans• Drill49wells.• Drill1exploratorywellintheMatagordaarea.• Drill3exploratorywellsinsouthLouisiana.• Drill2horizontalAustinChalkwells.• Recomplete63wells.• Acquire3-DseismicintheBrazoriaarea.• Acquire3-DseismicinthePattersonfield.

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A / Nansen

Profile• Includes3blocksincentralEastBreaksarea.• 50%workinginterest.• LocatedoffshoreTexasin3,500’ofwater.• Producesoilandgasfromsandsat9,000’to14,000’.• Utilizestheworld’sfirstopen-hulltrussspar.• 36.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Conductedgeophysicalanalysisfor2-welldevelopmentprogram in2007.2007 Plans• Drill2developmentwells.• Recomplete2wells.

B / Magnolia

Profile• 25%workinginterestinGardenBanks783and784.• LocatedoffshoreLouisianain4,700’ofwater.• Developing1999discovery.• Producesoilandgasfromsandsat12,000’to17,000’.• Utilizestheworld’sdeepesttension-legplatform.• 13.9millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Completedfinal2ofinitial8wells.2007 Plans• Drill2additionaldevelopmentwells.• Performrecompletionsandsidetrackdrillingasnecessary.• Evaluatepotentialforadditionaldrilling.

C / Red Hawk

Profile• 50%workinginterestinGardenBanks876,877,920and921.• LocatedoffshoreLouisianain5,300’ofwater.• 2001discovery.• Producesgasfromsandsat16,000’to18,500’.• Utilizestheworld’sfirstcellspar.• 6.1millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Restoredproductionpreviouslyshut-induetohurricanedamage tothird-partydownstreamfacilities.2007 Plans• Installcompression.• Evaluatepotentialforadditionaldrilling.

D / Merganser (Independence Hub)

Profile• 50%workinginterestinAtwaterValley37.• LocatedoffshoreLouisianain8,100’ofwater.• Developing2001discovery.• Toproducegasfromsandsat19,000’to20,000’.• Cooperativedevelopmentof10nearbyindustrydiscoveries utilizingsubseatie-backstoacentralproductionhub.• 7.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Completedandtested2futureproducingwells.• Continuedconstructionandinstallationofsurfaceand subseafacilities.

2007 Plans• Finishinstallationofsurfaceandsubseafacilities.• Commenceproduction.

Lower Tertiary Discoveries

ProfileE / Cascade• 50%workinginterestinWalkerRidge206.• LocatedoffshoreLouisianain8,200’ofwater.• Targetformation:LowerTertiarysandsat25,000’to27,000’.• Discoverywelldrilledin2002encountered>450’ofnetoilpay.F / St. Malo• 22.5%workinginterestinWalkerRidge678.• LocatedoffshoreLouisianain6,900’ofwater.• Targetformation:LowerTertiarysandsat26,000’to29,000’.• Discoverywelldrilledin2003encountered>450’ofnetoilpay.G / Jack• 25%workinginterestinWalkerRidge759.• LocatedoffshoreLouisianain7,000’ofwater.• Targetformation:LowerTertiarysands.• Discoverywelldrilledin2004encountered>350’ofnetoilpay.H / Kaskida• 20%workinginterestinKeathleyCanyon292.• LocatedoffshoreLouisianain5,900’ofwater.• Targetformation:LowerTertiarysands.• Discoverywelldrilledin2006encounteredapproximately800’of nethydrocarbonbearingsands.• FirstLowerTertiarydiscoveryinKeathleyCanyonarea.2006 Activity• IncreasedownershipinCascadeunitfrom25%to50%.• AnnouncedplanstodevelopCascadewithfirstproductionin late2009.• ReceivedapprovalfromMMSforCascadeConceptualPlanusing anFPSO.• CompletedfirstsuccessfulLowerTertiaryproductiontestatJack.• DrilleddiscoverywellatKaskida.• DrilledsidetrackappraisalwellatKaskida.• Evaluateddevelopmentoptionsandfacilitiesdesignsfor Cascade,JackandSt.Malo.• Acquired13additionalLowerTertiaryblocksthroughfederal leasesale.• Secured2long-termdeepwaterrigcontracts.2007 Plans• SanctioninitialdevelopmentatCascade.• ObtainMMSapprovalofDeepwaterOperatingPlanatCascade.• InitiatedrillingsecondappraisalwellatJack.• InitiatedrillingsecondappraisalwellatSt.Malo.• ContinueevaluationofdevelopmentoptionsatJackandSt.Malo.• InitiateevaluationofdevelopmentoptionsatKaskida.• ConductadditionalappraisaloperationsatKaskida

Miocene Discoveries

ProfileI / Mission Deep• 50%workinginterestinGreenCanyon955.• LocatedoffshoreLouisianain7,300’ofwater.• Targetformation:Miocenesands.• Discoverywelldrilledin2006encountered>250’ofnetoilpay.

J / Sturgis• 25%workinginterestinAtwaterValley183.• LocatedoffshoreLouisianain3,700’ofwater.• Targetformation:Miocenesands.• Discoverywelldrilledin2003encountered>100’ofnetoilpay.• Developmentpotentialwouldbeenhancedbysuccessat SturgisNorth.2006 Activity• DrilleddiscoverywellatMissionDeep.• InitiateddrillingofsidetrackappraisalwellatMissionDeep.2007 Plans• CompletedrillingsidetrackappraisalwellatMissionDeep.• Evaluatedevelopmentoptions.

Deepwater Exploration Prospects

ProfileK / Lower Tertiary Prospect #1• LocatedinKeathleyCanyonarea.• LocatedoffshoreLouisianain6,000’ofwater.• Targetformation:LowerTertiarysands.L / Lower Tertiary Prospect #2• LocatedinWalkerRidgearea.• LocatedoffshoreLouisianain6,500’ofwater.• Targetformation:LowerTertiarysands.2006 Activity• Conductedtechnicalevaluationsandinitiateddrillingcontracts.2007 Plans• Finalizetechnicalevaluationsandcontracts.• Drillexploratorytestwells.

CANADA

A / Mackenzie Delta/Beaufort Sea

Profile• 43%averageworkinginterestin2.1millionexploratoryacresin theMackenzieDeltaandshallowwatersoftheBeaufortSea.• Devonisthelargestholderofexplorationacreageinthisarea.• Drillinglimitedtowinteronly.• 2002TukM-18discoveryestimatedat200-300billion cubicfeetgross.2006 Activity• DrilledandtestedPaktoaexploratorywellinBeaufortSea.• Paktoawellencounteredhydrocarbonsbutdidnotmeet expectations.2007 Plans• ApplyforSignificantDiscoveryLicensetoretainPaktoaacreage.• EvaluatepotentialforfuturedrillingintheMackenzieValley corridor.

B / Northeast British Columbia

Profile• 72%averageworkinginterestin1.7millionacresin northwesternAlbertaandnortheasternBritishColumbia.• KeyareasincludeHamburg,Peggo,Monias,RingBorder andWargen.• Primarilywinter-onlydrilling.• Producesoilandgasfrommultipleformationsincluding theHalfwayandBaldonnelat2,600’to5,000’.• 59.4millionbarrelsofoilequivalentreservesat12/31/06.

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2006 Activity• Drilled64wells,including: 20wellsatWargen. 14wellsatRingBorder. 11 wellsatPeggo. 7wellsatHamburg/Chinchaga.• Recompleted12wells.2007 Plans• Drill68totalwells,including: 26 wellsatWargen. 13wellsatRingBorder. 12wellsatMonias. 7wellsatHamburg/Chinchaga.

C / Peace River Arch

Profile• 69%averageworkinginterestin685,000acresin westernAlberta.• KeyareasincludeBelloy,Cecil,Dunvegan,Eaglesham,Knopcik, TangentandValhalla.• Producesliquids-richgasandlightgravityoilfrommultiple formationsat4,500’to8,000’.• 74.8millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled82wells,including: 16wellsatDunvegan. 16wellsatValhalla. 12wellsatCecil. 9wellsatBelloy. 6wellsatKnopcik.• Recompleted34wells.2007 Plans• Drill62totalwells,including: 13wellsatDunvegan. 10wellsatCecil. 9wellsatTangent. 7wellsatBelloy.

D / Deep Basin

Profile• 46%averageworkinginterestin1.4millionacresinwestern AlbertaandeasternBritishColumbia.• KeyareasincludeBilbo/Cutbank,Hiding,Pinto/Lelandand Wapiti/Elmworth.• ProducesliquidsrichgasfromprimarilyCretaceousformations at2,500’to14,000’.• 96.7millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled115wells,including: 57 wellsatWapiti/Elmworth. 23wellsatBilbo/Cutbank. 21wellsatPinto/Leland. 11wellsatHiding.• Recompleted36wells.2007 Plans• Drill57totalwells,including: 18wellsatWapiti/Elmworth. 16wellsatPinto/Leland. 12wellsatHiding. 11wellsatBilbo/Cutbank.

E / Lloydminster

Profile• 97%workinginterestin2.2millionacresineasternAlberta andSaskatchewan.• KeyareasincludeEndLake,IronRiver,Lloydminster andManatokan.• Producesprimarilyconventional,coldflowheavyoilfrom multipleformationsat1,000’to2,300’.• 84.5millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled397wells,including: 198wellsatIronRiver. 72wellsatLloydminster. 70wellsatManatokan. 46wellsatEndLake.• Recompleted126wells.• ReceiveddownspacingapprovalforIronRiver.

INTERNATIONAL

A / Azerbaijan – ACG

Profile• 5.6%interestin107,000acresintheAzeri-Chirag-Gunashli (ACG)oilfieldsoffshoreAzerbaijan.• Initialpositionobtainedin1999merger.• Majoroilexportpipelinecommencedoperationsin2006.• Expect>30,000barrelsperdaynettoDevonin2007.• 83.8millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted3wellsfromtheCentralAzeriplatform.• Completed2pre-drilledwellsanddrilledandcompleted3 additionalwellsfromtheWestAzeriplatform.• CommencedproductionfromtheWestAzeriplatform.• Completed3pre-drilledwellsandcommencedproductionfrom theEastAzeriplatform.• Drilledandcompleted1wellfromtheChiragplatform.• Pre-drilled4wellsforfutureproductioninthedeepwater Gunashliarea.• CompletedfabricationofdeepwaterGunashlijacket andproductionfacilities.2007 Plans• Drill1producingwellfromtheCentralAzeriplatform.• Drill3producingwellsfromtheWestAzeriplatform.• Complete4pre-drilledwellsfromtheEastAzeriplatform.

• Sidetrack1producingwellfromtheChiragplatform.• Pre-drill4wellsandbegincompletionoperationsinthe deepwaterGunashliarea.• Installplatformsandproductionfacilitiesinthedeepwater Gunashliarea.

B / Brazil

Profile• 1.4millionacresin9licensedblocksoffshoreBrazil: BlockBM-C-8;60%interest. BlockBC-2;17.65%interest. BlockBM-BAR-3;100%interest. BlockBM-C-30;25%interest. BlockBM-C-32;40%interest. BlockBM-C-34(C-M-471);50%interest. BlockBM-C-34(C-M-473);50%interest. BlockBM-C-35;35%interest. BlockBM-CAL-13;100%interest.• LocatedintheCampos,BarreirinhasandCamamuBasinsin waterdepthsrangingfrom330’to9,100’.• Targetoilformationsat7,000’to16,000’.• Developing2004discoveryonblockBM-C-8(Polvodevelopment).• 9.0millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Completedfabricationandinstallationofplatformand productionfacilitiesatPolvo.• ContinuedPolvoFPSOconversion.• Initiateddrillinga3-wellexplorationprogramonblockBM-C-8.• Drilled1unsuccessfulexploratorywellonblockBM-C-30.• Drilled1unsuccessfulexploratorywellonblockBM-C-32.• AcquiredoffshoreblocksBM-C-34,BM-C-35andBM-CAL-13.• Acquired3-DseismiconBM-CAL-13.2007 Plans• Completeplatformhook-upandcommissioningoperations atPolvo.• Completeconversion,installationandcommissioningof PolvoFPSO.• Drill9developmentwellsatPolvo.• Commencefirstproductioninmid-2007atPolvo.• CompleteexplorationdrillingonblockBM-C-8.• Reprocess3-DseismiconblocksBM-C-30,BM-C-32, BM-C-34andBM-C-35.• Farmoutpartialintereststoindustrypartnersonblock BM-BAR-3andBM-CAL-13.• ConductelectromagneticsurveyonBM-BAR-3.• Drill1exploratorywellonblockBC-2.

C / China

Profile• 4.4millionacresin3licensedblocksoffshoreChina: Block15/34(Panyu);24.5%interest. Block42/05;100%interest. Block11/34;100%interest.• LocatedintheSouthChinaSeaandYellowSeainwater depthsrangingfrom100’to4,900’.• Panyufieldsproduceoilfrom1998and1999discoveries.• 16.8millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilledandcompleted6developmentwellsatPanyu.• Initiateddrilling1extendedreachdevelopmentwellatPanyu.• Completedinstallationofwaterhandlingfacilitiesonboth platformsatPanyu.• AcquiredYellowSeablock11/34.• Acquired2-Dseismiconblock11/34.• Acquired3-Dseismiconblock42/05.• Signedcontractstoacquire2additionalexplorationblocksin theSouthChinaSea.2007 Plans• Completeextendedreachdevelopmentdrillinginitiatedin 2006atPanyu.• Drill7developmentwellsatPanyu.• Finalizeacquisitionofblocks53/30and64/18.• Acquire3-Dseismiconblocks53/30and64/18.• Preparefor2008drillingonblocks42/05and11/34.

IndIan Ocean

AtlAntic OceAn

A

C

B

2007 Plans• Drill395totalwells,including: 185wellsatIronRiver. 82wellsatManatokan. 53wellsatEndLake. 51wellsatLloydminster.• AddadditionalprocessingcapacityatManatokanplant.

F / Thermal Heavy Oil

Profile• 97%averageworkinginterestin82,000acresineastern Albertaoilsands.• KeyassetisJackfish(100%interest).• Steam-AssistedGravityDrainage(SAGD)istheprimary recoverymethod.• Expecttoreach35,000barrelsperdayfromJackfishin2008.• 186.2millionbarrelsofoilequivalentreservesat12/31/06.2006 Activity• Drilled19horizontalwellpairsatJackfish.• ContinuedconstructiononJackfishfacilities.• SubmittedapplicationforregulatoryapprovalforJackfish2.• Drilled35stratigraphicwellstofurtherevaluateJackfish areapotential.• ContinuedconstructionofAccessPipelinetoand fromEdmonton.2007 Plans• Completefacilitiesconstructionandinitiatesteaminjection atJackfish.• CompleteconstructionofAccessPipeline.• ContinueengineeringanalysisforJackfish2.• Drillupto50stratigraphicwellstofurtherevaluateJackfish areapotential.

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Chad  PottruffLinda  PottsTed  PottsCatherine  PowellCherie  PowellEd  PowellJamye  PowellLynn  PowellSteve  PowellTimothy  PowellTimothy  PowellShaun  PoweshiekTres  PoynorVijay  PratapTerry  PraterJohn  PratherScott  PratherJim  PreglerWiley  PreskittElvis  PressleyAmy  PrestidgeShelley  PrestonRon  PrewittAllen  PriceDwayne  PriceIldiko  PriceJeff  PriceJohn  PriceKaren  PriceLeigh  PriceRachel  PriceSherie  PriestJarrod  PrimeauxKenneth  PrimeauxAnn  PrinceLaura  PrinceBarbara  ProctorBlake  ProffittAngela  PronkMatthew  PronkDarren  ProstebbyCandace  ProwellFloyd  Prudhomme Jr.Kathy  PryorSue  PryorTim  PryorRichard  PrzybylskiMichael  PuetzWayne  PurchaBradley  PurchaseChristine  PurdyDavid  PurdyJames  PurdyKarolyn  PurnellDavid  PushieJohn  QualiaAnthony  QuanLes  QuanMauro  QuercioliRoland  QuintanaJimmy  QuintelaMike  RaaflaubBrian  RabeRuss  RadkeHenry  RadomskiLaDonna  RaganDale  RagasHady  RahmanRavi  RainaAnnette  RainesJohn  RainesTim  RaleySean  RalstonSammy  RamadanGary  RambergAlonzo  RamirezGabe  RamirezRaymond  RamirezDaniel  RandallAndrea  Randall-ThorpDennis  RandlemanDarla  RandolphHarriett  RandolphPatti  RandolphStephen  RangenSandy  RankinJames  RanksConstance  RansomDean  RasmussenShane  RasmussenSheila  RatliffDuane  RauscherPaul  RavalDouglas  RayTed  RayEddie  RayburnRene  RaymondBud  ReadDuane  ReadGerald  ReadLinny  ReadMarvin  ReadRickey  ReadRussell  ReadRyan  ReadMatt  RecklingSandra  ReddekoppRita  ReddyDaniel  RedmanCharlie  ReedRandy  ReedScott  ReedSteve  ReedCheryl  ReeseBrandi  ReesorRebecca  ReevesRichard  ReevesKimberly  RegaladoRobert  ReganJohn  RegnierRegina  RehChristina  RehkopJennifer  ReidJoseph  ReidKaren  ReidRobert  ReidSherri  ReidSusan  ReidVeronica  Reid

Eric  ReigleDerrill  ReilColleen  ReilanderPat  ReillyDale  ReitzKaren  RekietaBrian  RellandKirk  RellesSteven  RemilySteve  RenkePete  RepkaTheresa  RestaMarlene  RevellBrenda  RevilleBenjamin  ReyesRay  ReyesRichard  ReyesRicky  ReyesDean  ReynoldsEarl  ReynoldsRobert  ReynoldsIrma  RezanourBrace  RhamySteve  RhidenourKenny  RhoadesBrad  RhodesJeneria  RhodesGeorge  RhyasonBill  RiceChase  RiceCindy  RiceFaye  RiceJamie  RichChristopher  RichardDavid  RichardEric  RichardGlenn  RichardJack  RichardsWayne  RichardsIan  RichardsonPaul  RichardsonTroy  RichardsonJohn  RichelsJimmie  RichesonDonnie  RicheyRobert  RicheyZane  RicheyKen  RickenbrodeDerek  RidgwayPatti  RiechersRobert  RieckenCraig  RieglingWanda  RieweVicki  RiffleJim  RigbyLuke  RigginsGayle  RiggsEileen  RiisbergRichard  RileyTony  RileyTron  RileyBrandy  RitenourJeff  RitenourKristi  RitterPablo  RivasRay  RiveraRick  RiveraChad  RoachMike  RoachAaron  RoarkCathy  RoarkStacy  RobbinsDavid  RobersonDarrell  RobertsDarron  RobertsDavid  RobertsGeoff  RobertsJimmy  RobertsJudy  RobertsKen  RobertsMalcolm  RobertsRonnie  RobertsWayne  RobertsDaniel  RobertsonDiane  RobertsonKelly  RobertsonKim  RobertsonRenee  RobertsonScott  RobertsonSusan  RobertsonWilliam  RobertsonRyan  RobichauxDale  RobinsCharlotte  RobinsonJames  RobinsonRick  RobinsonRob  RobinsonShaun  RobinsonShawn  RobinsonTerry  RobinsonTim  RobinsonH.F. Rick  RobsonDuane  RochonGregg  RodenBarbara  RodgersJacob  RodgersCalvin  RodmanAnselmo  RodriguezEdward  RodriguezJesse  RodriguezVivian  RodriguezWillard  RoeSherry  RoebuckMarilyn  RoemischGary  RoganBrenda  RogersMaureen  RogersSteven  RogersWendy  RogersCeleste  RohdeKim  RoletteMarty  RollegPerrin  RollerLorne  RollheiserDouglas  RollingMark  RolsethVicki  RomeoLuis  RomualdezTroy  Ronmark

Larry  RookerTara  RosenbohmSandra  RosenthalJosh  RosinskiJayme  RossSandy  RossJessie  RothRobert  RotherAaron  RothfolkSarah  RoughfaceRyan  RoutleyChad  RoweMary  RoweRebecca  RoweBruce  RowleyLynn  RowleyErnest  RoybalBob  RoyceJennifer  RozanderNoel  RubioDavid  RuddTerry  RuderStan  RuffnerCharles  RuleAllen  RunyonRicky  RupardRandall  RushingErnest  RussellMary  RussellRhonda  RussellStephanie  RussellMerilee  RustagiWayne  RutbergTonja  RutelonisDouglas  RutherfordMarilyn  RutherfordMavis  RutherfordChad  RutledgeKevin  RyanWesley  RyanPhillip  RybackiCookie  RycroftGene  RylandWesley  SaarelaJune  SaastadJustine  SaganWill  SageSusan  SaidyMichael  SainasMorey  SairEdna  SalinasEva  SallerDonna  SalterBrian  SalukSarah  SalverdaJames  SamaripaDavid  SambrooksGary  SampleCarlos  SanchezDaniel  SanchezEdwin  SanchezGilbert  SanchezRaul  SanchezVictoria  SanchezMarco  SandateBrent  SandeGeoff  SanderGene  SanderfordBuck  SandersJeff  SandersJimmie  SandersDiane  SandlinDigna  Sandoval-FlorDonald  SandsKeith  SansingGianni  SantillieTeresita  SantosDavid  SartainRobert  SartoriusTracie  SassauBrian  SatterfieldHeath  SatterfieldJeffrey  SautnerMurray  SavageGarth  SawatzkyMarianne  SawatzkyMark  SawatzkyAmit  SaxenaBee  SchadeckRandy  SchaferDaniel  ScharflDarren  SchellMelinda  SchergerDavid  ScheyErnst  SchierwagenJacob  SchillingRandy  SchmedtWilhelm  SchmidCharles  SchmidtDoug  SchmidtJohn  SchmidtPat  SchmidtBrian  SchmitHarold  SchnaierJeff  SchneiderKimberly  SchneiderMagdalena  SchneiderMarc  SchneiderRyan  SchneiderSarah  SchnellJohn  SchoelenMichael  SchoenJeff  SchonhoferChad  SchorreMichael  SchottaJohn  SchrammChester  SchubertJames  SchuelkeJohn  SchuetteWilliam  SchultheissGary  SchultzHenry  SchultzPamela  SchultzRobert  SchultzMike  SchupbachWendi  SchuurPeter  SchwansApril  SchwartzMisty  Schwartz

Duane  ScottEileen  ScottGlenn  ScottKY  ScottLinda  ScottMarci  ScottMichel  ScottPatti  ScottRobert  ScottValerie  ScottParalea  ScoutenHeath  ScrogumRandall  SealLorri  SealeSusan  SealsTony  SearsChristopher  SeasonsSteven  SeatCatherine  SeatonTony  SeatonSusanna  SeawrightJeff  SeayJames  SebastianMichelle  SecrestBennie  SeeEric  SeegersChad  SeelyMelissa  SegstroDarell  SeibJoseph  SeilaPatrick  SeilaffRobert  SeilaffWes  SeilhantAdam  SeitchikDarren  SeleshankoSummer  SelfDavid  SelingerBrad  SellickRussell  SelmanFraser  SenciallRobbie  SengRoyce  SennTodd  SennerZenwill  SequeiraDean  SergentAntonio  SernaJoann  SeuserJamin  SeversonGina  SewellCarson  SexsmithKenny  ShakotkoGary  ShanerDennis  ShannonLinda  ShannonApoorva  SharmaTerri  SharpCarla  SharpeValerie  ShaverCraig  ShawJerry  ShawSheri-lyn  ShawTeresa  ShawValerie  ShawTroy  ShelbyHenry  ShenHelen  ShepherdJudy  ShepherdJohn  ShererArnold  ShereyPete  ShermanDavid  SherrellJan  SherrodMichael  SherryLarene  SherwoodBrian  ShewchukLea Ann  ShieldsGerald  ShimekGuy  ShipleyTami  ShipleyCecil  ShipmanTruman  ShireyChris  ShirleyMike  ShirleyMyriam  ShirleyWanda  ShoalsBrent  ShounRuth  ShyerTerry  ShyerDeanna  ShymkiwGregory  SibleyDru  SidersCraig  SiebenRhonda  SiffordKen  SiglBenjamin  SigmundJim  SigmundJon  SikesDerrick  SilkPhil  SilvanRobert  SilverRyan  SimardChris  SimmonsDavid  SimmonsGreg  SimmonsKay  SimmonsNancy  SimmonsChris  SimonCameron  SimpsonCandace  SimpsonCarina  SimpsonDale  SimpsonElton  SimpsonIan  SimpsonJulie  SimpsonMark  SimpsonSharon  SimpsonBart  SimsCarl  SimsDeborah  SimsJennifer  SimsNicole  SimsEdward  SinclairNeil  SinclairBirdella  SinegalChristopher  SingletaryLisa  SiriaGerald  SirkinSam  SittonBill  Skelton

Carey  SkjodtJohn  SkollyBob  SkoratkoJohn  SkoyenRandy  SkrepnekLouis  SkrobarczykAdam  SkulskyDoug  SlackLori-Lynn  SlackRonnie  SlackArita  SlateBruce  SlaughterBrian  SlempTroy  SlempEd  SlovacekWilliam  SluntJohn  SlupskyJeff  SmailScott  SmallingSpencer  SmallwoodMickey  SmartGlenn  SmetheramDarryl  SmetteBernard  SminkAndy  SmithAngela  SmithBetty  SmithBradley  SmithBrent  SmithBrittny  SmithDarren  SmithDavid  SmithDickie  SmithG. Thomas  SmithGary  SmithGlenn  SmithGlenn  SmithGwen  SmithHaley  SmithJace  SmithJD  SmithJim  SmithJim  SmithJimmy  SmithJoe  SmithJT  SmithJulie  SmithLarry  SmithLynn  SmithMelinda  SmithMichelle  SmithNita  SmithPaul  SmithRandall  SmithRay  SmithRosie  SmithRoss  SmithRoy  SmithSandy  SmithShanna  SmithSteve  SmithSuzanne  SmithT. Wade  SmithTheresa  SmithTodd  SmithTommy  SmithhartAmy  SmootDan  SnellingKim  SniderShaun  SnisarenkoSteve  SnowbargerDonald  SnowdonCristin  SnyderH. Brent  SnyderShea  SnyderRay  SolisEugene  SolizLuis  SolteroDiane  SoltnerRashida  SomjiGeorge  SonnierLinda  SoperBonnie  SorgeJeff  SoudersBoulos  SoueidiGregory  SouleLynne  SouthwardLuther  SowellJohn  SpaidLeland  SpannDeane  SparkmanMatthew  SparkmanJimmy  SparksLinda  SpathCharles  SpeerGay  SpellerBecky  SpencerCherrie  SpencerClyde  SpencerCorey  SpencerDonald  SpencerSandra  SpencerEric  SperlingRandy  SperlingBarbara  SpicerBrian  SpiegelmannGreg  SpiveyLance  SpradlinDebbie  SpragueDemaris  SpriestersbachEmery  SpronkenGeorgina  SprouleMichael  SpruillTom  SpurlockCathy  SpurrDana  SquiresPatrick  StaffordJulie  StaggsGuy  StagnerRichard  StaleyChris  StammCindy  StampJackie  StanfieldTrent  StangRonald  StangerMary Ann  StankoDavid  StanleyRix  StanleyVance  Stanley

Kevin  StarkGreg  StarleySusan  StarnsMegan  StarrKevin  StashinDarcy  StaszewskiKatarzyna  StaszkiewiczElizabeth  StationMelissa  StefosDavid  SteinDeb  SteinEvan  SteinMatt  SteingerDaniel  StelmaschukDean  StenbeckDonna  StepanianAlex  StepaniukCarl  StephensJames  StephensKim  StephensLisa  StephensRudy  StephensTamara  StephensWayne  StephensNancy  StephensonBrandon  StevensLinda  StevensRay  StevensRick  StevensCorey  StevensonGordon  StevensonBlayne  StewartBrian  StewartDarren  StewartGregory  StewartJadell  StewartJosie  StewartJustin  StewartKevin  StewartLinda  StewartSandra  StewartStephanie  StewartJon  StigantDeEric  StilesRandy  StillAmy Renee  StinerDebora  StinnJerald  StinnettAndrew  StirlingDavid  StizzaDean  StobbeTony  StockardAlan  StocktonDavid  StokesSean  StollerTonya  StoneDavid  StoroschukGreg  StortsRick  StothersDon  StoutMark  StoutStephen  StoutamireHarold  StovallRon  StrahanPeter  StrakaRonald  StrandquistJim  StrawnFred  StrawsonKristina  StreckerEdward  StrembickiClifford  StricklandJason  StricklandMichele  StricklandCarl  StricklerJon  StricklerDiana  StridDavid Dean  StriegelAlan  StroichJason  StubinskyMichael  StuchlyMarlene  StuhrConnie  StumGuy  SturdevantJeff  SudduthWendi  SudhakarLeanne  SuggettRalph  SulakBobby  SullivanLynn  SullivanDan  SunigaJeff  SuskiSusan  SutherlandWayne  SutherlandCarol  SuttererDebra  SuttonAida  SuvagauJan  SvajianMike  SvorenTravis  SwallowCole  SwanemyrDella  SwartzSarah  SweeneyElton  SweetBonnie  SweppenhiserWilliam  SwiderskiMichael  SwiftKevin  SydorkoWilliam  SygutekDoug  SykesJoni  SykesDavid  SyringJonathan  TaberMarilyn  TaberChris  TackelMickey  TadlockKaren  TaggartAbdel  TaherMelody  TaitWilliam  TalleyNancy  TammIgo  TanNick  TangStefanie  TangCharles  TannerRandall  TannerMona  TansownyAngela  TarrantBryan  TarrantAnne  Tate

Glenna  TateMichael  TateTate  TatemBeth  TaylorBilly  TaylorCarroll  TaylorDavida  TaylorJ. Michael  TaylorJack  TaylorJack  TaylorLyndon  TaylorNeil  TaylorNel  TaylorRick  TaylorShad  TaylorSherry  TaylorSteve  TaylorSusan  TaylorTom  TaylorTracy  TaylorValerie  TaylorChris  TeagueRonald  TedderJose  TeixeiraDavid  TempletJames  Ten EyckJulie  TenopirJonathan  TeppinJames  TernesRod  TernesAllan  TerpRob  TerrellRodney  TerrellRonnie  TerrellKevin  TetzSollie  ThamesPeter  ThannhauserJason  TharJoe  TharpTim  ThatcherDeana  ThayerLarry  TherriaultKim  ThielenPaul  ThiemStacy  ThiessenAlan  ThomasAshley  ThomasBarbara  ThomasBarbara  ThomasCatrina  ThomasDavid  ThomasGerald  ThomasJanice  ThomasKrista  ThomasMike  ThomasScott  ThomasTerry  ThomasTol  ThomasWilliam  ThomasWillie  ThomasMarkus  ThomersonAlberta  ThompsonBarry  ThompsonChad  ThompsonCheryl  ThompsonGerri  ThompsonGretchen  ThompsonJerry  ThompsonLindsey  ThompsonNancy  ThompsonRichard  ThompsonSheila  ThompsonShelley  ThompsonSheryl  ThompsonTracey  ThompsonWilliam  ThompsonGeorge  ThomsonKarl  ThomsonLynn  ThomsonRonald  ThomsonMark  ThorneMelva  ThorntonTodd  ThorpeGary  ThrasherJill  ThrushCecil  ThurmondCecil  ThurmondShivi  ThusooTerry  TibbleJason  TillerPaula  TimmAllen  TimmonsSecily  TincherArmstrong  TingLoyd  TinsleyMatt  TisdalePat  TisdaleSandra  TizzardKatalin  TodeaRobert  TodorJanice  ToldanEldon  TolleBarbara  TomajaRalph  TomlinsonGregg  TompkinsPamela  TongsrinarkRon  TonneMike  TooleVincent  TopacioBonnie  ToporowskiErin  ToporowskiBill  TorgusonReah  TorresDavid  TouchetMuriel  TourangeauNicole  TowersJason  TownsendRicky  TownsendTanya  TownsendRobert  TracyRoddy  TrahanRonald  TrahanJake  TrainerSeila  TranKirk  TrascherGary  TravisLynn  TravisNicole  TremblayRhonda  Trent

Mark  TrestBelinda  TrevinoLuis  TrianaHoward  TrinhSteve  TrippTom  TrottEd  TroutmanRichard  TrueheartRon  TrueloveHowie  TruongMladen  TrzokRoy  TsukishimaKerry  TuffordCory  TuffsVance  TurmanKevin  TurnerKurt  TurnerMike  TurnerJudi  TwiggsNick  TwistAndrew  TylerBruce  TylerKyle  TysonChris  TytanicJudy  UlrichLaura  UnderwoodRon  UnderwoodDorothy  UppermanRichard  UptonSherry  UptonDarrell  UrbanLorraine  UrbaniCarrie  UtleyLouis  UtschSonia  UttingSteve  VadnaiPaul  VagisScott  VailBilly  VajdakMarydee  ValdezMiguel  ValdezNick  ValentiLarry  ValleRussel  ValsinJennifer  Van CurenAissa  Van Der VeenLarry  Van HooseBarbara  Van HornLonette  Van MieghemBill  Van WieMike  VanbergJeff  VanceConnie  VandalDarren  VandeGraafJohn  VandeligtShane  VandercruyssenThomas  VandeReepDavid  VanMeterRenier  VanRensburgGerald  vantRietHector  VanVierssen TripJim  VargaGarry  VarneyArmando  VasquezRamaswami  VasudevanCindy  VaughanMatthew  VaughanPam  VaughnTony  VaughnChris  VeazeyRaymond  VegaElaina  VenechukValerie  VenezialeRick  VennDonna  VennardDale  VenningRaymond  VeraartDean  VerbickyPatti  VerhilleAdrienne  VerklerJennifer  VezinaReed  ViceDebbie  VickRichard  VidalDexter  VidrinePhillip  VidrineRobert  VigorenStephanie  VilarosAlejandra  VillaloboJuanita  VillalonRick  VillarmaJason  VillarrealJR  VillarrealLarry  VillarrealVirginia  VillarrealMaggie  VillatoroTony  VilleneuveMelanie  VinbergBarbara  VincentBarry  VincentNathan  VincentBob  VineyAndrew  VinkConstantin  VisanGarry  VisserRobert  VollmanDiana  VolquardsenChuck  VorceAlexandre  VoronineAmy  VriensPam  VukovichLam  VuongDylan  WaddleMichael  WadeMurray  WadeCheri  WagnerDean  WagnerEsther  WagnerJanie  WagnerPat  WagnerRick  WagnerJanice  WagonerKevin  WagonerJames  WahrenbergerDanielle  WalcherKen  WaldJoseph  WaldnerIra  WaldronPatrick  Waldron

Aimee  WalkerDavid  WalkerDebra  WalkerGlynn  WalkerJohn  WalkerJohn  WalkerKenneth  WalkerKim  WalkerLarry  WalkerLinda  WalkerMelissa  WalkerMichelle  WalkerPaul  WalkerRichard  WalkerPeggy  WalkingStickKenneth  WalkoDon  WallDeborah  WallaceHollis  WallaceScott  WallaceMichael  WalleJoan  WallerFrank  WallesBill  WalterColette  WalterGina  WaltersEric  WamplerOwen  WamplerJack  WangPeter  WangRock  WangTony  WangXia Qing  WangGeorge  WankeNick  WarburtonBill  WardDoug  WardEvelyn  WardLloyd  WardWade  WardlowDouglas  WareColleen  WarrellowWilliam  WarrenWin  WarrenKristen  WascomBrian  WashburnClarence  WashingtonFaye Ruffin  WashingtonLen  WatchornMichelle  WaterfieldCaleb  WatkinsCalvin  WatsonGary  WatsonKevin  WatsonLynne  WatsonRon  WatsonTashila  WatsonTony  WatsonMarg  WattShad  WattsBobby  WatzilMurray  WeatherheadEd  WeatherlyDon  WebbGlyn  WebbKris  WebbSharon  WebbPaul  WeberStan  WeedAllan  WeheJoah  WeidemannBret  WeigelGreg  WeildJonathan  WeirRyan  WeisbrotJeffrey  WeissMyles  WeissAlisa  WelchBrook  WelchDiana  WelchGeoff  WelchJoe  WeldonMiles  WelkeCarol  WellsMerla  WellsWallace  WellsYuan Wendy  WenSteven  WendteBeverly  WenzelLacey  WenzelRusty  WerlineHerbert  WernerDaniel  WerthBill  WescottBlake  WestMichelle  WestTimothy  WestRaymond  WestbrookAdam  WestlakeMichelle  WestonTroy  WhartonWendy  WhartonAmanda  WheatIan  WheatleyBill  WheatonNatalie  WheelerRobert  WheelerGaylynn  WheelisLinda  WhelanPeter  WhelanSara  WhelenCathy  WhickerAlan  WhiteBrian  WhiteJennifer  WhiteJim  WhiteJohn  WhiteLisa  WhiteMarilynn  WhiteMike  WhiteMike  WhiteRichard  WhiteRoy  WhiteStephanie  WhiteVince  WhiteJimmy  WhiteheadMarcus  WhiteheadPaul  WhiteheadDouglas  Whiteside

Brad  WhitleyRobert  WhitleyRyan  WhitlowLu’ana  WhitmarshKelly  WhitneyMonte  WhittGreg  WhyteJenifer  WickRebecca  WickeBruce  WiebePaul  WiebeChris  WiggersKrista  WigginsJim  WigleyAlyssa  WilburnDenise  WildersMike  WildersShannon  WileyJason  WilhelmSena  WilkeAnthony  WilkersonKim  WilkersonCalvin  WilkinCraig  WilkinsLynne  WilkinsScott  WilkinsSelwyn  WilkinsonSteve  WilkinsonRobert  WillClark  WillardAustin  WilliamsBonnie  WilliamsBrett  WilliamsBrian  WilliamsChristopher  WilliamsDean  WilliamsDeborah  WilliamsDon  WilliamsFrank  WilliamsH. Russell  WilliamsJeffrey  WilliamsKathy  WilliamsLaura  WilliamsLonetta  WilliamsLynn  WilliamsMark  WilliamsMichael  WilliamsRoger  WilliamsSandie  WilliamsStephanie  WilliamsSteve  WilliamsWanda  WilliamsHelen  WilliamsonJames  WilliamsonNorman  WilliamsonJeff  WillifordLarry  WillisBryan  WillmonDarlene  WilloughbyMatt  WillrathMark  WillstropKen  WilpitzBill  WilseyAlister  WilsonBen  WilsonBrent  WilsonCorey  WilsonDennis  WilsonDon  WilsonGwen  WilsonJacqueline  WilsonJames  WilsonKarla  WilsonKerri  WilsonMeridith  WilsonPatti  WilsonPaul  WilsonRebecca  WilsonSherry  WilsonStafford  WilsonTawny  WilsonTom  WilsonYakini  WilsonNick  WiltgenWilliam  WimbergWendy  WingerterJames  WingoJason  WiniaJames  WinklemanBecky  WinklerVirginia  WinnScott  WinterSandra  WinzigCriston  Wise-KennedyeKristi  WiselyMarsha  WisemanVanessa  WisnoskiGene  WissingerRobert  WitherspoonBrandi  WithrowKen  WolfeMike  WolfeShonna  WolfeTroy  WolfeWayne  WolfeJim  WolzPhillip  WomackRon  WomackTanner  WomackHenry  WongJorge  WongJulie  WongKenneth  WongChristopher  WooColin  WoodDaniel  WoodGeoff  WoodGrant  WoodGrant  WoodJeri  WoodJoseph  WoodSteven  WoodTerianne  WoodWendell  WoodBrian  WoodardCraig  WoodardKevin  WoodardCharlotte  WoodsMark  Woods

Ted  WoodsNicole  WoodsonDee  WoolamJan  WooldridgeMichael  WooldridgeCourtney  WootenRalph  WootonTim  WordChad  WorkmanRobert  WorkmanTom  WorleyCharlie  WrightGregory  WrightKatherine  WrightKelvin  WrightMandy  WrightMary  WrightRobert  WrightLayne  WroblewskiHody  WuXian  WuBrandon  Wuttunee-CampbellVicky  WyalieNorm  WyffelsEverett  WylieRobert  WynessJoseph  WyszynskiHongdi  XuClinton  YaegerCalvin  YakelChristy  YakelWilliam  YakymyshynGerald  YamadaJackie  YardKen  YaremkoLarry  YasmanLori  YatesJonathan  YeeMichael  YehDonald  YepMichael  YesterRobert  YotherAngelica  YoungBurt  YoungCarla  YoungDennis  YoungEileen  YoungLinda  YoungTerri  YoungTim  YoungTony  YoungTrevor  YoungVern  YoungJerry  YoungbloodLorre  YoungbloodBryan  YoungerStephanie  YsasagaFrancis  YuJenny  YuRandy  YuristyDoug  YuzwenkoJohnny  ZacharyBruce  ZagoruyGarnet  ZarownyLeandra  ZarownyKim  ZaudererSean  ZawadaRobert  ZehrMark  ZeskoJames  ZeuchBrian  ZiemmerChris  ZimbelmanLarry  ZimbelmanHarold  ZimmermanClifford  ZingerSteve  ZinkCamilo  ZoletaTatiana  ZouenkoJames  ZukRudy  ZunigaDino  ZuzicCliff  Zwahlen

33

ToTal asseTs($ Billions)

16.2

27.230.0 30.3

35.1

02 03 04 05 06

resource full

34 Selected11-YearFinancialData36 Management’sDiscussionandAnalysisof FinancialConditionandResultsofOperations57 ReportsofIndependentRegistered PublicAccountingFirm60 ConsolidatedBalanceSheets61 ConsolidatedStatementsofOperations62 ConsolidatedStatementsofComprehensiveIncome63 ConsolidatedStatementsofStockholders’Equity64 ConsolidatedStatementsofCashFlows65 NotestoConsolidatedFinancialStatements101 RiskFactorstoForward-LookingEstimates

Over the past five years Devon has more than doubled total assets to $35.1 billion and more than tripled stockholders’ equity to $17.4 billion. During this same period the company has increased its dividend more than four fold to $0.45 per common share in 2006.

sTockholders’ equiTy($ Billions)

4.7

11.1

13.714.9

17.4

02 03 04 05 06

dividend raTe($ Per Common Share)

.10 .10

.20

.30

.45

02 03 04 05 06

34

5-Year 10-Year Compound Compound 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Growthrate Growthrate

operatingresults (In millions, except per share data) Revenues(Netofroyalties): Oilsales $ 529 497 236 436 906 784 909 1,545 2,099 2,359 3,205 33% 20% Gassales 211 367 335 616 1,474 1,878 2,133 3,896 4,732 5,784 4,932 21% 37% NGLsales 29 36 25 68 154 131 275 407 554 687 749 42% 39% Marketingandmidstreamrevenues — 10 8 20 53 71 999 1,461 1,701 1,792 1,692 89% N/M Otherincome 36 36 6 23 37 58 35 106 126 198 115 15% 12%

Totalrevenues 805 946 610 1,163 2,624 2,922 4,321 7,415 9,212 10,820 10,693 30% 30%

Productionandoperatingexpenses 271 288 231 328 544 666 886 1,274 1,514 1,659 1,829 22% 21% Marketingandmidstreamcostsandexpenses — 4 3 10 28 47 808 1,174 1,339 1,342 1,244 93% N/M Depreciation,depletionandamortizationofproperty andequipment 175 268 212 379 662 831 1,211 1,761 2,225 2,141 2,442 24% 30% Accretionofassetretirementobligation — — — — — — — 36 44 43 49 N/M N/M Amortizationofgoodwill(2) — — — 16 41 34 — — — — — N/M N/M Generalandadministrativeexpenses 57 56 48 83 96 114 219 307 277 291 397 28% 21% Expensesrelatedtomergers — — 13 17 60 1 — 7 — — — N/M N/M Interestexpense 59 51 53 122 155 220 533 502 475 533 421 14% 22% Changeinfairvalueoffinancialinstruments — — — — — 2 (28) (1) 62 94 178 145% N/M Reductionofcarryingvalueofoilandgasproperties — 633 354 476 — 979 651 66 — 212 121 -34% N/M ImpairmentofChevronCorporationcommonstock — — — — — — 205 — — — — N/M N/M Incometaxexpense(benefit) 106 (128) (103) (75) 377 5 (193) 527 1,095 1,606 1,189 199% 27%

Totalexpenses 668 1,172 811 1,356 1,963 2,899 4,292 5,653 7,031 7,921 7,870 22% 28%

Netearnings(loss)beforeminorityinterest,cumulativeeffectof changeinaccountingprincipleanddiscontinuedoperations(3) 137 (226) (201) (193) 661 23 59 1,762 2,181 2,899 2,823 162% 35% Netearnings(loss) 151 (218) (236) (154) 730 103 104 1,747 2,186 2,930 2,846 94% 34% Preferredstockdividends 47 12 — 4 10 10 10 10 10 10 10 0% -14% Netearnings(loss)tocommonstockholders $ 104 (230) (236) (158) 720 93 94 1,737 2,176 2,920 2,836 98% 39% Netearnings(loss)percommonshare: Basic $ 0.98 (1.67) (1.66) (0.84) 2.83 0.37 0.31 4.16 4.51 6.38 6.42 77% 21% Diluted $ 0.96 (1.67) (1.66) (0.84) 2.75 0.36 0.30 4.04 4.38 6.26 6.34 77% 21% Weightedaveragesharesoutstanding: Basic 105 137 142 187 255 255 309 417 482 458 442 12% 15% Diluted 111 151 154 199 263 259 313 433 499 470 448 12% 15% BalanceSheetdata (In millions) Totalassets $ 2,242 1,965 1,931 6,096 6,860 13,184 16,225 27,162 30,025 30,273 35,063 22% 32% DebenturesexchangeableintosharesofChevronCorporationcommonstock(4) $ — — — 760 760 649 662 677 692 709 727 2% N/M Otherlong-termdebt $ 511 576 885 1,656 1,289 5,940 6,900 7,903 6,339 5,248 4,841 -4% 25% Deferredincometaxes $ 136 50 15 313 634 2,149 2,627 4,315 4,764 5,374 5,650 21% 45% Stockholders’equity $ 1,160 1,006 750 2,521 3,277 3,259 4,653 11,056 13,674 14,862 17,442 40% 31% Commonsharesoutstanding 126 142 142 253 257 252 314 472 484 443 444 12% 13%

(1) The years 1996 to 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt in the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting. All periods prior to the November 15, 2004 two-for-one stock split have been adjusted to reflect the split.(2) Amortization of goodwill in 1999, 2000 and 2001 resulted from Devon’s 1999 acquisition of PennzEnergy. As of January 1, 2002, goodwill is no longer amortized.(3) Before minority interest in Monterrey Resources, Inc. of ($1) and ($5) million in 1996 and 1997, respectively, and the cumulative effect of change in accounting principle of $49 and $16 million in 2001 and 2003, respectively, and the results of discontinued operations of $15, $13, ($35) $39, $69, $31, $45, ($31), $5, $31 and $23 million in 1996 through 2006, respectively. (4) Devon beneficially owns 14.2 million shares of Chevron Corporation common stock. These shares have been deposited with an exchange agent for possible exchange for $760 million principal amount of exchangeable debentures. The Chevron shares and debentures were acquired through the 1999 acquisition of PennzEnergy. N/M Not a meaningful number.

Selected Eleven-Year Financial Data (1)

35

5-Year 10-Year Compound Compound 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Growthrate Growthrate

operatingresults (In millions, except per share data) Revenues(Netofroyalties): Oilsales $ 529 497 236 436 906 784 909 1,545 2,099 2,359 3,205 33% 20% Gassales 211 367 335 616 1,474 1,878 2,133 3,896 4,732 5,784 4,932 21% 37% NGLsales 29 36 25 68 154 131 275 407 554 687 749 42% 39% Marketingandmidstreamrevenues — 10 8 20 53 71 999 1,461 1,701 1,792 1,692 89% N/M Otherincome 36 36 6 23 37 58 35 106 126 198 115 15% 12%

Totalrevenues 805 946 610 1,163 2,624 2,922 4,321 7,415 9,212 10,820 10,693 30% 30%

Productionandoperatingexpenses 271 288 231 328 544 666 886 1,274 1,514 1,659 1,829 22% 21% Marketingandmidstreamcostsandexpenses — 4 3 10 28 47 808 1,174 1,339 1,342 1,244 93% N/M Depreciation,depletionandamortizationofproperty andequipment 175 268 212 379 662 831 1,211 1,761 2,225 2,141 2,442 24% 30% Accretionofassetretirementobligation — — — — — — — 36 44 43 49 N/M N/M Amortizationofgoodwill(2) — — — 16 41 34 — — — — — N/M N/M Generalandadministrativeexpenses 57 56 48 83 96 114 219 307 277 291 397 28% 21% Expensesrelatedtomergers — — 13 17 60 1 — 7 — — — N/M N/M Interestexpense 59 51 53 122 155 220 533 502 475 533 421 14% 22% Changeinfairvalueoffinancialinstruments — — — — — 2 (28) (1) 62 94 178 145% N/M Reductionofcarryingvalueofoilandgasproperties — 633 354 476 — 979 651 66 — 212 121 -34% N/M ImpairmentofChevronCorporationcommonstock — — — — — — 205 — — — — N/M N/M Incometaxexpense(benefit) 106 (128) (103) (75) 377 5 (193) 527 1,095 1,606 1,189 199% 27%

Totalexpenses 668 1,172 811 1,356 1,963 2,899 4,292 5,653 7,031 7,921 7,870 22% 28%

Netearnings(loss)beforeminorityinterest,cumulativeeffectof changeinaccountingprincipleanddiscontinuedoperations(3) 137 (226) (201) (193) 661 23 59 1,762 2,181 2,899 2,823 162% 35% Netearnings(loss) 151 (218) (236) (154) 730 103 104 1,747 2,186 2,930 2,846 94% 34% Preferredstockdividends 47 12 — 4 10 10 10 10 10 10 10 0% -14% Netearnings(loss)tocommonstockholders $ 104 (230) (236) (158) 720 93 94 1,737 2,176 2,920 2,836 98% 39% Netearnings(loss)percommonshare: Basic $ 0.98 (1.67) (1.66) (0.84) 2.83 0.37 0.31 4.16 4.51 6.38 6.42 77% 21% Diluted $ 0.96 (1.67) (1.66) (0.84) 2.75 0.36 0.30 4.04 4.38 6.26 6.34 77% 21% Weightedaveragesharesoutstanding: Basic 105 137 142 187 255 255 309 417 482 458 442 12% 15% Diluted 111 151 154 199 263 259 313 433 499 470 448 12% 15% BalanceSheetdata (In millions) Totalassets $ 2,242 1,965 1,931 6,096 6,860 13,184 16,225 27,162 30,025 30,273 35,063 22% 32% DebenturesexchangeableintosharesofChevronCorporationcommonstock(4) $ — — — 760 760 649 662 677 692 709 727 2% N/M Otherlong-termdebt $ 511 576 885 1,656 1,289 5,940 6,900 7,903 6,339 5,248 4,841 -4% 25% Deferredincometaxes $ 136 50 15 313 634 2,149 2,627 4,315 4,764 5,374 5,650 21% 45% Stockholders’equity $ 1,160 1,006 750 2,521 3,277 3,259 4,653 11,056 13,674 14,862 17,442 40% 31% Commonsharesoutstanding 126 142 142 253 257 252 314 472 484 443 444 12% 13%

(1) The years 1996 to 2002 exclude results from Devon’s operations in Indonesia, Argentina and Egypt that were discontinued in 2002. Devon acquired new assets in Egypt in the April 2003 Ocean merger. The years 2003 through 2006 exclude results from operations in Egypt that were discontinued in 2006. Data has been restated to reflect the 1998 merger of Devon and Northstar and the 2000 merger of Devon and Santa Fe Snyder in accordance with the pooling-of-interests method of accounting. All periods prior to the November 15, 2004 two-for-one stock split have been adjusted to reflect the split.(2) Amortization of goodwill in 1999, 2000 and 2001 resulted from Devon’s 1999 acquisition of PennzEnergy. As of January 1, 2002, goodwill is no longer amortized.(3) Before minority interest in Monterrey Resources, Inc. of ($1) and ($5) million in 1996 and 1997, respectively, and the cumulative effect of change in accounting principle of $49 and $16 million in 2001 and 2003, respectively, and the results of discontinued operations of $15, $13, ($35) $39, $69, $31, $45, ($31), $5, $31 and $23 million in 1996 through 2006, respectively. (4) Devon beneficially owns 14.2 million shares of Chevron Corporation common stock. These shares have been deposited with an exchange agent for possible exchange for $760 million principal amount of exchangeable debentures. The Chevron shares and debentures were acquired through the 1999 acquisition of PennzEnergy. N/M Not a meaningful number.

36

Management’s Discussion and Analysis of Financial Condition and Results of Operations

overviewof2006reSultSandoutlook

2006wasoneofthebestyearsinDevon’shistory.Weachievedkeyoperationalsuccessesandcontinuedtoexecuteourstrategytoincreasevaluepershare.Asaresult,wedeliveredrecordamountsforearningspershareandoperatingcashflowandgrewprovedreservestoanewall-timehigh.Keymeasuresofourfinancialandoperatingperformancefor2006,aswellascertainoperationaldevelopments,aresummarizedbelow:

• Netearningsdeclined3%from$2.9billionto$2.8billion• Dilutednetearningspershareincreased1%to$6.34perdilutedshare• Netcashprovidedbyoperatingactivitiesreached$6.0billion• EstimatedprovedreservesatDecember31,2006reachedarecordamountof2.4billionBoe• Estimatedprovedreservesincreased533millionBoethroughdrilling,extensions,performancerevisionsandacquisitions• Capitalexpendituresforoilandgasexplorationanddevelopmentactivitieswere$7.7billion,includingthe$2.2billion acquisitionofChief• Combinedrealizedpriceforoil,gasandNGLsperBoeincreased5%to$41.51• Marketingandmidstreamoperatingprofitremainedflatat$448millionfor2006

Weproduced214millionBoein2006,representinga4%decreasecomparedto2005.Excludingtheeffectsofproductionlostduetothesaleofnon-corepropertiesinthefirsthalfof2005,ouryear-over-yearproductionremainedconstant.OperatingcostsincreasedduetoinflationarypressuredrivenbytheeffectsofhighercommoditypricesandduetotheweakenedU.S.dollarcomparedtotheCanadiandollar.Perunitleaseoperatingexpensesincreased17%to$6.95perBoe.

During2006,weutilizedcashonhand,cashflowfromoperations,and$1.8billionofcommercialpaperborrowingstofundourcapitalexpenditures,repay$862millionindebtandrepurchase$253millionofourcommonstock.Weendedtheyearwith$1.3billionofcashandshort-terminvestments.

Fromanoperationalperspective,ourdeepwaterGulfofMexicoexplorationprogramhasreachedseveralimportantmilestonesrelatedtotheLowerTertiarytrend.Todate,wehavedrilledfourdiscoverywellsintheLowerTertiary—Cascadein2002,St.Maloin2003,Jackin2004andKaskidainthethirdquarterof2006.Alsointhethirdquarterof2006,weannouncedthesuccessfulproductiontestoftheJackNo.2wellintheLowerTertiary.Wecurrentlyhold273blocksintheLowerTertiaryandhaveidentified19additionalexploratoryprospectswithintheseblockstodate.TheseachievementssupportourpositiveviewoftheLowerTertiaryanddemonstratethegrowthpotentialofourhigh-impactexplorationstrategyonlong-termproduction,reservesandvalue.

OnJune29,2006,weacquiredChief’soilandgasassetslocatedintheBarnettShaleareaofTexasfor$2.2billion.Thistransactionadded99.7millionBoeofprovedreservesand169,000netacrestoourBarnettShaleassets.ThisacquisitioncombinedwithourorganicgrowthcontinuestoextendourleadershippositionintheBarnettShaleandprovidesyearsofadditionaldrillinginventory.

OnNovember14,2006,weannouncedourplanstodivestouroperationsinEgypt.AtDecember31,2006,EgypthadprovedreservesofeightmillionBoe.Subsequently,onJanuary23,2007,weannouncedourplanstodivestouroperationsinWestAfrica,includingEquatorialGuinea,Coted’Ivoire,andothercountriesintheregion.AtDecember31,2006,ourWestAfricaoperationshadprovedreservesof90millionBoe,or4%oftotalprovedreserves.WeanticipatecompletingthesaleofourEgyptianassetsinthefirsthalfof2007andourWestAfricanassetsinthethirdquarterof2007.DivestingthesepropertieswillallowustoredeployourfinancialandintellectualcapitaltothesignificantgrowthopportunitieswehavedevelopedonshoreinNorthAmericaandinthedeepwaterGulfofMexico.Additionally,wewillsharpenourfocusinNorthAmericaandconcentrateourinternationaloperationsinBrazilandChina,wherewehaveestablishedcompetitiveadvantages.

Lookingto2007,weintendtousetheproceedsfromthesalesofouroperationsinEgyptandWestAfricatorepayouroutstandingcommercialpaperandresumecommonstockrepurchases.Inaddition,ouroperationalaccomplishmentstodatehavelaidthefoundationforcontinuedgrowthinfutureyears,atcompetitiveunitcosts,thatweexpectwillcontinuetocreateadditionalvalueforourinvestors.In2007,weexpecttodeliverreserveadditionsof350to370millionBoewithrelatedcapitalexpendituresintherangeof$5.3to$5.7billion.Weexpectproductionrelatedtoourcontinuingoperationstoincreaseapproximately10%from2006to2007,whichreflectsthesignificantreserveadditionsin2005and2006,andthoseexpectedin2007.

37

md&amd&a

reSultSofoperationS

revenuesChangesinoil,gasandNGLproduction,pricesandrevenuesfrom2004to2006areshowninthefollowingtables.Theamountsforallperiodspresentedexclude

ourEgyptianoperations.Unlessotherwisestated,alldollaramountsareexpressedinU.S.dollars. total YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004

PRODUCTION Oil (MMBbls) 55 -11% 62 -17% 74 Gas (Bcf) 815 -1% 827 -7% 891 NGLs (MMBbls) 23 -2% 24 -1% 24 Oil, gas and NGLs (MMBoe)(1) 214 -4% 224 -9% 247AveRAgePRICes Oil (per Bbl) $ 58.30 +53% 38.00 +35% 28.22 Gas (per Mcf) $ 6.06 -13% 6.99 +32% 5.32 NGLs (per Bbl) $ 32.10 +11% 28.96 +26% 23.04 Oil, gas and NGLs (per Boe)(1) $ 41.51 +5% 39.48 +32% 29.92ReveNUes (in millions) Oil $ 3,205 +36% 2,359 +12% 2,099 Gas 4,932 -15% 5,784 +22% 4,732 NGLs 749 +9% 687 +24% 554 Oil, gas and NGLs $ 8,886 +1% 8,830 +20% 7,385

domeStiC YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004

PRODUCTION Oil (MMBbls) 19 -23% 25 -19% 31 Gas (Bcf) 566 +2% 555 -8% 602 NGLs (MMBbls) 19 +3% 18 -4% 19 Oil, gas and NGLs (MMBoe)(1) 132 -3% 136 -10% 151AveRAgePRICes Oil (per Bbl) $ 62.23 +49% 41.64 +35% 30.84 Gas (per Mcf) $ 6.09 -14% 7.08 +30% 5.43 NGLs (per Bbl) $ 29.42 +10% 26.68 +24% 21.47 Oil, gas and NGLs (per Boe)(1) $ 39.31 -2% 40.21 +31% 30.80ReveNUes (in millions) Oil $ 1,218 +15% 1,062 +9% 976 Gas 3,445 -12% 3,929 +20% 3,261 NGLs 548 +13% 484 +19% 405 Oil, gas and NGLs $ 5,211 -5% 5,475 +18% 4,642

Canada YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004

PRODUCTION Oil (MMBbls) 13 -2% 13 -5% 14 Gas (Bcf) 241 -8% 261 -6% 279 NGLs (MMBbls) 4 -11% 6 +8% 5 Oil, gas and NGLs (MMBoe)(1) 58 -7% 62 -5% 65AveRAgePRICes Oil (per Bbl) $ 46.94 +75% 26.88 +24% 21.60 Gas (per Mcf) $ 6.05 -13% 6.95 +35% 5.15 NGLs (per Bbl) $ 42.67 +15% 37.19 +27% 29.23 Oil, gas and NGLs (per Boe)(1) $ 39.21 +3% 38.17 +33% 28.80ReveNUes (in millions) Oil $ 603 +71% 353 +18% 299 Gas 1,456 -20% 1,814 +26% 1,437 NGLs 201 +2% 196 +38% 143 Oil, gas and NGLs $ 2,260 -4% 2,363 +26% 1,879

38

md&a

international YearendeddeCemBer31, 2006 2006vs2005(2) 2005 2005vs2004(2) 2004

PRODUCTION Oil (MMBbls) 23 -4% 24 -19% 29 Gas (Bcf) 8 -25% 11 +6% 10 NGLs (MMBbls) — N/M — N/M — Oil, gas and NGLs (MMBoe)(1) 24 -7% 26 -17% 31AveRAgePRICes Oil (per Bbl) $ 61.36 +52% 40.26 +41% 28.53 Gas (per Mcf) $ 3.95 +5% 3.75 +13% 3.33 NGLs (per Bbl) $ — N/M 22.81 +8% 21.12 Oil, gas and NGLs (per Boe)(1) $ 59.24 +53% 38.80 +39% 27.99ReveNUes (in millions) Oil $ 1,384 +47% 944 +15% 824 Gas 31 -21% 41 +20% 34 NGLs — N/M 7 +12% 6 Oil, gas and NGLs $ 1,415 +43% 992 +15% 864

(1) GasvolumesareconvertedtoBoeorMMBoeattherateofsixMcfofgasperbarrelofoil,basedupontheapproximaterelativeenergycontentofnaturalgasandoil,whichrateisnotnecessarilyindicativeoftherelationshipofoilandgasprices.NGLvolumesareconvertedtoBoeonaone-to-onebasiswithoil.(2) Allpercentagechangesincludedinthistablearebasedonactualfiguresandnottheroundedfiguresincludedinthistable.N/MNotmeaningful.

Theaveragepricesshownintheprecedingtablesincludetheeffectofouroilandgaspricehedgingactivities.Followingisacomparisonofouraveragepriceswithandwithouttheeffectofhedgesforeachofthelastthreeyears.

withhedGeS withouthedGeS 2006 2005 2004 2006 2005 2004

Oil (per Bbl) $ 58.30 38.00 28.22 58.30 48.43 36.02 Gas (per Mcf) $ 6.06 6.99 5.32 6.01 7.04 5.34 NGLs (per Bbl) $ 32.10 28.96 23.04 32.10 28.96 23.04 Oil, gas and NGLs (per Boe) $ 41.51 39.48 29.92 41.34 42.55 32.37

Thefollowingtabledetailstheeffectsofchangesinvolumesandpricesonouroil,gasandNGLrevenuesbetween2004and2006.

oil GaS nGl total

(INMILLIoNs)

2004ReveNUes $ 2,099 4,732 554 7,385 Changes due to volumes (347) (337) (8) (692) Changes due to prices 607 1,389 141 2,1372005ReveNUes 2,359 5,784 687 8,830 Changes due to volumes (270) (86) (11) (367) Changes due to prices 1,116 (766) 73 4232006ReveNUes $ 3,205 4,932 749 8,886

oilrevenues2006 vs. 2005 Oilrevenuesdecreased$270millionduetoasevenmillionbarreldecreaseinproduction.Productionlostfrompropertiesdivestedin2005accounted

forfourmillionbarrelsofthedecrease.Acontractualreductionofourshareofproductionfromoneofourinternationalpropertiesinmid-2005alsolowered2006volumes.ThesedecreaseswerepartiallyoffsetbyathreemillionbarrelincreaseinproductionresultingfromreachingpayoutofcertaincarriedinterestsinAzerbaijan.

Oilrevenuesincreased$1.1billionasaresultofa53%increaseinourrealizedprice.Theexpirationofoilhedgesattheendof2005anda17%increaseintheaverageNYMEXWestTexasIntermediateindexpricecausedtheincreaseinourrealizedoilprice.

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2005 vs. 2004Oilrevenuesdecreased$347millionduetoa12millionbarreldecreaseinproduction.Productionlostfromthe2005propertydivestituresaccountedforsevenmillionbarrelsofthedecrease.Wealsosuspendedcertaindomesticproductionin2005and2004duetotheeffectsofHurricanesKatrina,Rita,DennisandIvan.Thevolumessuspendedin2005wereonemillionbarrelsmorethanin2004.Theremainderofthedecreaseisduetocertaininternationalpropertiesinwhichourownershipinterestdecreasedafterwerecoveredourcostsundertheapplicableproductionsharingcontracts.

Higherrealizedpricescausedoilrevenuestoincrease$607millionin2005.Our2005oilpricesroseprimarilyduetoa37%increaseintheaverageNYMEXWestTexasIntermediateindexprice.

Gasrevenues2006 vs. 2005 A12Bcfdecreaseinproductioncausedgasrevenuestodecreaseby$86million.Productionlostfromthe2005propertydivestiturescauseda

decreaseof35Bcf.Asaresultofthepreviouslymentionedhurricanes,gasvolumessuspendedin2006werethreeBcfmorethanthosesuspendedin2005.ThesedecreaseswerepartiallyoffsetbytheJune2006Chiefacquisition,whichcontributed10Bcfofproductionduringthelasthalfof2006,andadditionalproductionfromnewdrillinganddevelopmentinourU.S.onshoreandoffshoreproperties.

A13%declineinaveragepricescausedgasrevenuestodecrease$766millionin2006.2005 vs. 2004A64Bcfdecreaseinproductioncausedgasrevenuestodecreaseby$337million.Productionassociatedwiththe2005propertydivestiturescauseda

decreaseof89Bcf.Wealsosuspendedcertaindomesticgasproductionin2005and2004duetothepreviouslymentionedhurricanes.Thevolumessuspendedin2005were12Bcfmorethanin2004.ThesedecreaseswerepartiallyoffsetbynewdrillinganddevelopmentandincreasedperformanceinU.S.onshoreandoffshoreproperties.

A32%increaseinaveragegaspricescontributed$1.4billionofadditionalrevenuesin2005.

marketingandmidstreamrevenuesandoperatingCostsandexpensesThefollowingtabledetailsthechangesinourmarketingandmidstreamrevenuesandoperatingcostsandexpensesbetween2004and2006.Thechangesdueto

pricesinthetablerepresenttheneteffectonbothrevenuesandexpensesduetochangesinthemarketpricesfornaturalgasandNGLs.

revenueS expenSeS

(INMILLIoNs)

2004mARkeTINg&mIDsTReAm $ 1,701 1,339 Changes due to volumes (351) (303) Changes due to prices 442 3062005mARkeTINg&mIDsTReAm 1,792 1,342 Changes due to volumes 159 117 Changes due to prices (259) (215)2006mARkeTINg&mIDsTReAm $ 1,692 1,244

2006 vs. 2005Volumeincreasesinourgaspipeline,gassalesandNGLmarketingactivitiescausedbothrevenuesandexpensestoincreasein2006.ThisadditionalactivitywasprimarilyduetoourcontinuedgrowthintheBarnettShaleandhighernaturalgasdeliveriesfromthird-partyproducers

2005 vs. 2004Volumedecreasesin2005causedbothrevenuesandexpensestodeclinein2005.Theloweractivitywasprimarilyattributabletothesaleofcertainnon-coreassetsin2004and2005.

oil,GasandnGlproductionandoperatingexpensesThedetailsofthechangesinoil,gasandNGLproductionandoperatingexpensesbetween2004and2006areshowninthetablebelow.

YearendeddeCemBer31, 2006 2006vs2005(1) 2005 2005vs2004(1) 2004

PRODUCTIONANDOPeRATINgexPeNses (in millions): Lease operating expenses $ 1,488 +12% 1,324 + 5% 1,259 Production taxes 341 + 2% 335 +31% 255 Total production and operating expenses $ 1,829 +10% 1,659 +10% 1,514PRODUCTIONANDOPeRATINgexPeNsesPeRBOe: Lease operating expenses $ 6.95 +17% 5.92 +16% 5.10 Production taxes 1.59 + 6% 1.50 +46% 1.03 Total production and operating expenses per Boe $ 8.54 +15% 7.42 +21% 6.13

(1) All percentage changes included in this table are based on actual figures and not the rounded figures included in this table.

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2006 vs. 2005Leaseoperatingexpensesincreased$164millionin2006largelyduetohighercommodityprices.Commoditypriceincreasesin2005andthefirsthalfof2006contributedtoindustry-wideinflationarypressuresonmaterialsandpersonnelcosts.Additionally,considerationofhighercommoditypricescontributedtoourdecisiontoperformmorewellworkoversandmaintenanceprojectstomaintainorimproveproductionvolumes.Commoditypriceincreasesalsocausedoperatingcostssuchasadvaloremtaxes,powerandfuelcoststorise.

AhigherCanadian-to-U.S.dollarexchangeratein2006causeda$34millionincreaseinourcosts.Leaseoperatingexpensesalsoincreased$33millionduetotheJune2006ChiefacquisitionandthepayoutsofourcarriedinterestsinAzerbaijaninthelasthalfof2006.Theincreasesinourleaseoperatingexpenseswerepartiallyoffsetbyadecreaseof$82millionrelatedtopropertiesthatweresoldin2005.

ThefactorsdescribedabovewerealsotheprimaryfactorscausingleaseoperatingexpensesperBoetoincreaseduring2006.Althoughwedivestedpropertiesin2005thathadhigherper-unitoperatingcosts,thecostescalationlargelyrelatedtohighercommoditypricesandtheweakerU.S.dollarhadagreatereffectonourperunitcoststhanthepropertydivestitures.

2005 vs. 2004 Leaseoperatingexpensesincreased$65millionin2005largelyduetohighercommodityprices.Asaddressedabove,commoditypriceincreasesledtooverallindustryinflation.Additionally,ahigherCanadian-to-U.S.dollarexchangeratein2005causeda$30millionincreasein2005.Partiallyoffsettingtheseincreaseswasadecreaseof$144millioninleaseoperatingexpensesrelatedtopropertiesthatweresoldin2005.

TheincreasesdescribedabovewerealsotheprimaryfactorscausingleaseoperatingexpensesperBoetoincrease.Althoughwedivestedpropertiesthathadhigherper-unitoperatingcosts,thecostescalationlargelyrelatedtohighercommoditypricesandtheweakerU.S.dollarhadagreatereffectonourperunitcoststhanthepropertydivestitures.

Thefollowingtabledetailsthechangesinproductiontaxesbetween2004and2006.Themajorityofourproductiontaxesareassessedonouronshoredomesticproperties.IntheU.S.,mostoftheproductiontaxesarebasedonafixedpercentageofrevenues.Therefore,thechangesduetorevenuesinthetableprimarilyrelatetochangesinoil,gasandNGLrevenuesfromourU.S.onshoreproperties.

(inmillionS)

2004PRODUCTIONTAxes $ 255 Change due to revenues 50 Change due to rate 302005PRODUCTIONTAxes 335 Change due to revenues (23) Change due to rate 292006PRODUCTIONTAxes $ 341

2006 vs. 2005 Productiontaxesincreased$29millionduetoanincreaseintheeffectiveproductiontaxratein2006.AnewChinese“SpecialPetroleumGain”taxwastheprimarycontributortothehigherrate.

2005 vs. 2004 Productiontaxesincreased$30millionduetoanincreaseintheeffectiveproductiontaxratein2005.AnincreaseinRussianexporttaxrateswastheprimarycontributortothehigherrate.

depreciation,depletionandamortizationofoilandGasproperties(“dd&a”)DD&Aofoilandgaspropertiesiscalculatedbymultiplyingthepercentageoftotalprovedreservevolumesproducedduringtheyear,bythe“depletablebase.”The

depletablebaserepresentsthenetcapitalizedinvestmentplusfuturedevelopmentcostsinthosereserves.Generally,ifreservevolumesarerevisedupordown,thentheDD&Arateperunitofproductionwillchangeinversely.However,ifthedepletablebasechanges,thentheDD&Aratemovesinthesamedirection.TheperunitDD&Arateisnotaffectedbyproductionvolumes.AbsoluteortotalDD&A,asopposedtotherateperunitofproduction,generallymovesinthesamedirectionasproductionvolumes.OilandgaspropertyDD&Aiscalculatedseparatelyonacountry-by-countrybasis.

ThefollowingtabledetailsthechangesinDD&Aofoilandgaspropertiesbetween2004and2006.ThechangesduetovolumesinthetablerepresenttheeffectonDD&Aduetodecreasesincombinedoil,gasandNGLproduction.

(inmillionS)

2004DD&A $ 2,077 Change due to volumes (195) Change due to rate 992005DD&A 1,981 Change due to volumes (85) Change due to rate 3702006DD&A $ 2,266

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2006 vs. 2005 OilandgaspropertyrelatedDD&Aincreased$370millionin2006duetoanincreaseintheDD&Aratefrom$8.86perBoein2005to$10.59perBoein2006.Thelargestcontributortotherateincreasewasinflationarypressureonboththecostsincurredduring2006aswellastheestimateddevelopmentcoststobespentinfutureperiodsonprovedundevelopedreserves.OtherfactorscontributingtotherateincreaseincludetheJune2006Chiefacquisitionandthetransferofpreviouslyunprovedcoststothedepletablebaseasaresultof2006drillingactivities.Areductioninreserveestimatesduetotheeffectsof2006year-endcommoditypricesalsocontributedtotherateincrease.

2005 vs. 2004 OilandgaspropertyrelatedDD&Aincreased$99millionin2005duetoanincreaseintheDD&Aratefrom$8.41perBoein2004to$8.86perBoein2005.Thelargestcontributortotherateincreasewastheeffectofinflationarypressureonfindinganddevelopmentcostsforreservediscoveriesandextensions.ChangesintheCanadian-to-U.S.dollarexchangeratealsocausedtheratetoincrease.Theseincreaseswerepartiallyoffsetbyadecreaseintherateasaresultofour2005propertydivestitures.

Generalandadministrativeexpenses(“G&a”)OurnetG&Aconsistsofthreeprimarycomponents.Thelargestofthesecomponentsisthegrossamountofexpensesincurredforpersonnelcosts,officeexpenses,

professionalfeesandotherG&Aitems.Thegrossamountoftheseexpensesispartiallyreducedbytwooffsettingcomponents.OneistheamountofG&Acapitalizedpursuanttothefullcostmethodofaccountingrelatedtoexplorationanddevelopmentactivities.TheotheristheamountofG&Areimbursedbyworkinginterestownersofpropertiesforwhichweserveastheoperator.Thesereimbursementsarereceivedduringboththedrillingandoperationalstagesofaproperty’slife.ThegrossamountofG&Aincurred,lesstheamountscapitalizedandreimbursed,isrecordedasnetG&Aintheconsolidatedstatementsofoperations.NetG&Aincludesexpensesrelatedtooil,gasandNGLexplorationandproductionactivities,aswellasmarketingandmidstreamactivities.SeethefollowingtableforasummaryofG&Aexpensesbycomponent.

YearendeddeCemBer31, 2006 2006vs2005 2005 2005vs2004 2004

(INMILLIoNs)

Gross G&A $ 769 +33% 577 +6% 545Capitalized G&A (269) +49% (181) +9% (166)Reimbursed G&A (103) -2% (105) +3% (102) Net G&A $ 397 +36% 291 +5% 277

2006 vs. 2005GrossG&Aincreased$192million.HigheremployeecompensationandbenefitscostscausedgrossG&Atoincrease$149million.Ofthisincrease,$34millionrepresentedstockoptionexpenserecognizedpursuanttoouradoptionin2006ofStatementofFinancialAccountingStandardNo.123(R),Share-Based Payment.Anadditional$28millionoftheincreaserelatedtohigherrestrictedstockcompensation.Inaddition,changesintheCanadian-to-U.S.dollarexchangeratecausedan$11millionincreaseincosts.

2005 vs. 2004 GrossG&Aincreased$32million.HigheremployeecompensationandbenefitscostscausedgrossG&Atoincrease$35million.Ofthisincrease,$17millionrelatedtohigherrestrictedstockcompensation.Inaddition,changesintheCanadian-to-U.S.dollarexchangeratecauseda$9millionincreaseincosts.Theseincreaseswerepartiallyoffsetbyan$8milliondecreaseinrentexpenseresultingprimarilyfromtheabandonmentofcertainCanadianofficespacein2004.

Thefactorsdiscussedabovewerealsotheprimaryfactorsthatcausedthe$88millionand$15millionincreasesincapitalizedG&Ain2006and2005,respectively.

interestexpenseThefollowingscheduleincludesthecomponentsofinterestexpensebetween2004and2006.

YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Interest based on debt outstanding $ 486 507 513Capitalized interest (79) (70) (70)Other interest 14 96 32 Total interest expense $ 421 533 475

Interestbasedondebtoutstandingdecreasedfrom2004to2006primarilyduetotheneteffectofdebtrepaymentsduring2005and2006.Thiswaspartiallyoffsetbytheeffectofincreasedcommercialpaperborrowingsduringthelasthalfof2006relatedtotheacquisitionoftheChiefproperties.

During2005,weredeemedour$400million6.75%notesdueMarch15,2011andourzerocouponconvertibleseniordebenturespriortotheirscheduledmaturitydates.Theotherinterestcategoryinthetableaboveincludes$81millionin2005relatedtotheseearlyretirements.

During2004,werepaidthebalanceunderour$3billiontermloancreditfacilitypriortothescheduledrepaymentdate.Theotherinterestcategoryinthetableaboveincludes$16millionin2004relatedtothisearlyrepayment.

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reductionofCarryingvalueofoilandGaspropertiesDuring2006and2005,wereducedthecarryingvalueofcertainofouroilandgaspropertiesduetofullcostceilinglimitationsandunsuccessfulexploratory

activities.AdetaileddescriptionofhowfullcostceilinglimitationsaredeterminedisincludedintheCriticalAccountingPoliciesandEstimatessectionofthisreport.Asummaryofthesereductionsandadditionaldiscussionisprovidedbelow. YearendeddeCemBer31, 2006 2005 netof netof GroSS taxeS GroSS taxeS

(INMILLIoNs)

Unsuccessful exploratory reductions: Nigeria $ 85 85 — — Brazil 16 16 42 42 Angola — — 170 119Ceiling test reduction – Russia 20 10 — — Total $ 121 111 212 161

2006 ReductionsWehavecommittedtodrillfourwellsinNigeria.Thefirsttwowellswereunsuccessful.Afterdrillingthesecondunsuccessfulwellinthefirstquarterof2006,wedeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthefirstquarterof2006,werecognizedan$85millionimpairmentofourinvestmentinNigeriaequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.

Duringthesecondquarterof2006,wedrilledtwounsuccessfulexploratorywellsinBrazilanddeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthesecondquarterof2006,werecognizeda$16millionimpairmentofourinvestmentinBrazilequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.ThetwowellswereunrelatedtoDevon’sPolvodevelopmentprojectinBrazil.

Asaresultofadeclineinprojectedfuturenetcashflows,thecarryingvalueofourRussianpropertiesexceededthefullcostceilingby$10millionattheendofthethirdquarterof2006.Therefore,werecognizeda$20millionreductionofthecarryingvalueofouroilandgaspropertiesinRussia,offsetbya$10milliondeferredincometaxbenefit.

2005 ReductionsOurinterestsinAngolawereacquiredthroughthe2003OceanEnergymerger.OurAngolandrillingprogramdiscoverednoprovenreserves.Afterdrillingthreeunsuccessfulwellsinthefourthquarterof2005,wedeterminedthatalloftheAngolancapitalizedcostsshouldbeimpaired.

Priortothefourthquarterof2005,wewerecapitalizingthecostsofpreviousunsuccessfuleffortsinBrazilpendingthedeterminationofwhetherprovedreserveswouldberecordedinBrazil.WehavebeensuccessfulinourdrillingeffortsonblockBM-C-8inBrazilandarecurrentlydevelopingthePolvoprojectonthisblock.TheultimatevalueofthePolvoprojectisexpectedtobeinexcessofthesumofitsrelatedcosts,plusthecostsofthepreviousunrelatedunsuccessfuleffortsinBrazilwhichwerecapitalized.However,thePolvoprovedreserveswillberecordedoveraperiodoftime.Attheendof2005,itwasexpectedthatasmallinitialportionoftheprovedreservesultimatelyexpectedatPolvowouldberecordedin2006.Basedonpreliminaryestimatesdevelopedinthefourthquarterof2005,thevalueofthisinitialpartialbookingofprovedreserveswasnotsufficienttooffsetthesumoftherelatedproportionatePolvocostsplusthecostsofthepreviousunrelatedunsuccessfulefforts.Therefore,wedeterminedthatthepriorunsuccessfulcostsunrelatedtothePolvoprojectshouldbeimpaired.Thesecoststotaledapproximately$42million.TherewasnotaxbenefitrelatedtothisBrazilianimpairment.

ChangeinfairvalueofderivativefinancialinstrumentsThedetailsofthechangesinfairvalueofderivativefinancialinstrumentsbetween2004and2006areshowninthetablebelow.

2006 2005 2004

(INMILLIoNs)

Option embedded in exchangeable debentures $ 181 54 58Non-qualifying commodity hedges — 39 —Ineffectiveness of commodity hedges — 5 5Interest rate swaps (3) (4) (1) Total $ 178 94 62

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ThechangeinthefairvalueoftheembeddedoptionrelatestothedebenturesexchangeableintosharesofChevronCorporationcommonstock.TheseexpenseswerecausedprimarilybyincreasesinthepriceofChevronCorporation’scommonstock.

In2005,werecognizeda$39millionlossoncertainoilderivativefinancialinstrumentsthatnolongerqualifiedforhedgeaccountingbecausethehedgedproductionexceededactualandprojectedproductionunderthesecontracts.ThelowerthanexpectedproductionwascausedprimarilybyhurricanesthataffectedoffshoreproductionintheGulfofMexico.

otherincome,netThefollowingscheduleincludesthecomponentsofotherincomebetween2004and2006.

2006 2005 2004

(INMILLIoNs)

Interest and dividend income $ 100 95 45Net gain on sales of non-oil and gas property and equipment 6 150 33Loss on derivative financial instruments — (48) —Gains from changes in foreign exchange rates — 2 23Other 9 (1) 25 Total $ 115 198 126

Interestanddividendincomeincreasedfrom2004to2005primarilyduetoanincreaseincashandshort-terminvestmentbalancesandhigherinterestrates.During2005,wesoldcertainnon-coremidstreamassetsforanetgainof$150million.Alsoduring2005,weincurreda$55millionlossoncertaincommodity

hedgesthatnolongerqualifiedforhedgeaccountingandweresettledpriortotheendoftheiroriginalterm.ThesehedgesrelatedtoU.S.andCanadianoilproductionfrompropertiessoldaspartofour2005propertydivestitureprogram.Thislosswaspartiallyoffsetbya$7milliongainrelatedtointerestrateswapsthatweresettledpriortotheendoftheiroriginalterminconjunctionwiththeearlyredemptionofthe$400million6.75%seniornotesin2005.

Thegainsin2005and2004fromchangesinforeignexchangerateswereprimarilyrelatedto$400millionofCanadiansubsidiarydebtthatwasdenominatedinU.S.dollars.Thedebtwasretiredin2005.

incometaxesThefollowingtablepresentsourtotalincometaxexpenserelatedtocontinuingoperationsandareconciliationofoureffectiveincometaxratetotheU.S.statutory

incometaxrateforeachofthepastthreeyears.Theprimaryfactorscausingoureffectiveratestovaryfrom2004to2006,anddifferfromtheU.S.statutoryrate,arediscussedbelow.

2006 2005 2004

(INMILLIoNs)

Total income tax expense $ 1,189 1,606 1,095 U.S. statutory income tax rate 35% 35% 35%Canadian statutory rate reductions (6%) — (1%)Texas income-based tax 1% — —United States manufacturing deduction — (1%) —Repatriation of Canadian earnings — 1% —Other — 1% (1%) Effective income tax rate 30% 36% 33%

In2006,2005and2004,deferredincometaxeswerereduced$243million,$14millionand$36million,respectively,duetoCanadianstatutoryratereductionsthatwereenactedineachsuchyear.

In2006,deferredincometaxesincreased$39millionduetotheeffectofanewincome-basedtaxenactedbythestateofTexasthatreplacesapreviousfranchisetax.ThenewtaxiseffectiveJanuary1,2007.

In2006and2005,incometaxeswerereduced$12millionand$25million,respectively,duetoanewU.S.taxdeductionforcompanieswithdomesticproductionactivities,includingoilandgasextraction.

In2005,werecognized$28millionoftaxesrelatedtoourrepatriationof$545milliontotheU.S.Thecashwasrepatriatedduetotaxlegislationthatallowedqualifyingcompaniestorepatriatecashfromforeignoperationsatareducedincometaxrate.Substantiallyallofthecashrepatriatedbyusin2005relatedtoearningsofourCanadiansubsidiary.

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earningsfromdiscontinuedoperationsOnNovember14,2006,weannouncedourplanstodivestouroperationsinEgypt.WeanticipatecompletingthesaleofourEgyptianoperationsinthefirsthalfof

2007.Pursuanttoaccountingrulesfordiscontinuedoperations,Egyptisconsideredadiscontinuedoperationattheendof2006.Asaresult,theEgyptfinancialresultsfor2006andallpriorperiodshavebeenreclassifiedandarepresentedasdiscontinuedoperations.

Followingarethecomponentsoftheresultsofdiscontinuedoperationsbetween2004and2006.

2006 2005 2004

(INMILLIoNs)

Earnings from discontinued operations before income taxes $ 22 46 17Income tax (benefit) expense (1) 15 12 Earnings from discontinued operations $ 23 31 5

CapitalreSourCeS,uSeSandliquiditY

Thefollowingdiscussionofcapitalresourcesandliquidityshouldbereadinconjunctionwiththeconsolidatedfinancialstatementsincludedinthisreport.

SourcesandusesofCashThefollowingtablepresentsthesourcesandusesofourcashandcashequivalentsfrom2004to2006.Thetablepresentscapitalexpendituresonacashbasis.

Therefore,theseamountsdifferfromtheamountsofcapitalexpenditures,includingaccruals,thatarereferredtoelsewhereinthisdocument.Additionaldiscussionoftheseitemsfollowsthetable.

2006 2005 2004

(INMILLIoNs)

SOuRCES OF CASh AnD CASh EquivAlEntS: Operating cash flow – continuing operations $ 5,936 5,514 4,789 Sales of property and equipment 40 2,151 95 Net commercial paper borrowings 1,808 — — Stock option exercises 73 124 268 Net decrease in short-term investments 106 287 — Other 36 — — Total sources of cash and cash equivalents 7,999 8,076 5,152

uSES OF CASh AnD CASh EquivAlEntS: Capital expenditures (7,551) (4,026) (3,058) Debt repayments (862) (1,258) (973) Repurchases of common stock (253) (2,263) (189) Dividends (209) (146) (107) Net increase in short-term investments — — (626) Total uses of cash and cash equivalents (8,875) (7,693) (4,953)Increase (decrease) from continuing operations (876) 383 199Increase (decrease) from discontinued operations 13 34 (18)Effect of foreign exchange rates 13 37 39Net increase (decrease) in cash and cash equivalents $ (850) 454 220 Cash and cash equivalents at end of year $ 756 1,606 1,152Short-term investments at end of year $ 574 680 967

Operating Cash Flow – Continuing Operations Netcashprovidedbyoperatingactivities(“operatingcashflow”)isourprimarysourceofcapitalandliquidity.Changesinoperatingcashflowarelargelyduetothesamefactorsthataffectournetearnings,withtheexceptionofthoseearningschangesduetosuchnoncashexpensesasDD&A,propertyimpairments,derivativefairvaluechangesanddeferredincometaxexpense.Asaresult,ouroperatingcashflowincreasedin2006and2005comparedtothepreviousyearslargelyduetoincreasesinnetearnings,asdiscussedinthe“ResultsofOperations”sectionofthisreport.

Sales of Property and Equipment In2005,wegenerated$2.2billioninpre-taxproceedsfromsalesofpropertyandequipment.Theseconsistedof$2.0billionrelatedtothesaleofnon-coreoilandgaspropertiesand$0.2billionrelatedtothesaleofnon-coremidstreamassets.Netofrelatedincometaxes,theseproceedswere$1.8billionforoilandgaspropertiesand$0.1billionformidstreamassets.

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Net Commercial Paper Borrowings OnJune29,2006,weacquiredChieffor$2billionofcashandtheassumptionof$0.2billionofliabilities.Wefundedaportionofthepurchasepricewith$1.4billionofborrowingsissuedunderourcommercialpaperprogram.AsaresultoftheChiefacquisitionandsuccessinotheronshoreU.S.locations,weacceleratedcertainoilandgasdevelopmentactivitiesintothelasthalfof2006.Weborrowedanadditional$0.4billionofcommercialpapertofundthisaccelerateddevelopment.

Capital Expenditures Theincreasesinoperatingcashflowhaveenabledustoinvestlargeramountsincapitalprojects.Asaresult,excludingtheacquisitionoftheChiefproperties,ourcapitalexpendituresincreased38%in2006.Themajorityofthisincreaserelatedtoourexpendituresfortheacquisition,drillingordevelopmentofoilandgasproperties,whichtotaled$5.0billionin2006,excludingtheChiefacquisition.InflationarypressuredrivenbyhighercommoditypricesandincreaseddrillingactivitiesintheBarnettShale,GulfofMexico,CarthageandGroesbeckareasoftheU.S.contributedtotheincrease.Inaddition,thepayoutsofourcarriedinterestsinAzerbaijaninthelasthalfof2006andtheweakerU.S.dollarimpactonourCanadianoperationsalsocontributedtotheincrease.

Capitalexpendituresin2005increased32%comparedto2004primarilyduetoanincreaseinourexpendituresfortheacquisition,drillingordevelopmentofoilandgasproperties,whichtotaled$3.9billionin2005.IncreaseddrillingactivitiesintheBarnettShale,theapproximately$200millionacquisitionofIronRiveracreageinCanadaandthe$74millionpurchaseoftheSerpentinaFPSOinoffshoreEquatorialGuineawerelargecontributorstotheincrease.InflationarypressuredrivenbyhighercommoditypricesandtheweakerU.S.dollaralsocausedourexpenditurestoincreasefrom2004to2005.

Debt Repayments Ournetdebtretirementswere$0.9billion,$1.3billionand$1.0billionin2006,2005and2004,respectively.Theseamountsconsistedofpaymentsatthescheduledmaturitydateswiththeexceptionofthefollowingpayments.The2006amountincludes$0.2billionrelatedtotherepaymentofdebtacquiredintheChiefacquisition.The2005amountincludes$0.8billionrelatedtotheretirementofzerocouponconvertibledebenturesduein2020and6.75%notesduein2011.The2004amountincludes$635millionforthepaymentoftheoutstandingbalanceundera$3billiontermloancreditfacilityduein2006.

Repurchases of Common Stock InAugust2005,wecompletedasharerepurchaseprogramthatbeganinOctober2004.Underthisprogram,werepurchased49.6millionsharesofourcommonstockatatotalcostof$2.3billion,or$46.69pershare.InAugust2005,weannouncedanotherprogramtorepurchaseuptoanadditional50millionsharesofourcommonstock.During2005and2006,werepurchased6.5millionsharesfor$387million,or$59.80pershare,underthisprogram.

Dividends Ourcommonstockdividendswere$199million,$136millionand$97millionin2006,2005and2004,respectively.Wealsopaid$10millionofpreferredstockdividendsin2006,2005and2004.The2006and2005increasesincommonstockdividendswereprimarilyrelatedtoa50%increaseinthedividendrateinthefirstquarterofboth2006and2005,partiallyoffsetbyadecreaseinoutstandingsharesduetosharerepurchases.

Changes in Short-Term Investments Tomaximizeourincomeonavailablecashbalances,weinvestinhighlyliquid,short-terminvestments.Thepurchaseandsaleoftheseshort-terminvestmentswillcausecashandcashequivalentstodecreaseandincrease,respectively.Short-terminvestmentbalancesdecreased$106millionand$287millionin2006and2005,respectively,andincreased$626millionin2004.

liquidityHistorically,ourprimarysourceofcapitalandliquidityhasbeenoperatingcashflow.Additionally,wemaintainarevolvinglineofcreditandacommercialpaper

programwhichcanbeaccessedasneededtosupplementoperatingcashflow.Otheravailablesourcesofcapitalandliquidityincludetheissuanceofequitysecuritiesandlong-termdebt.During2007,anothermajorsourceofliquiditywillbeproceedsfromthesalesofouroperationsinEgyptandWestAfrica.Weexpectthecombinationofthesesourcesofcapitalwillbemorethanadequatetofundfuturecapitalexpenditures,debtrepayments,commonstockrepurchases,andothercontractualcommitmentsasdiscussedlaterinthissection.

Operating Cash Flow Ouroperatingcashflowhasincreasednearly25%since2004,reachingatotalof$5.9billionin2006.Weexpectoperatingcashflowtocontinuetobeourprimarysourceofliquidity.Ouroperatingcashflowissensitivetomanyvariables,themostvolatileofwhichispricingoftheoil,naturalgasandNGLsproduced.Pricesforthesecommoditiesaredeterminedprimarilybyprevailingmarketconditions.Regionalandworldwideeconomicactivity,weatherandothersubstantiallyvariablefactorsinfluencemarketconditionsfortheseproducts.Thesefactorsarebeyondourcontrolandaredifficulttopredict.

Weperiodicallybelieveitappropriatetomitigatesomeoftheriskinherentinoilandnaturalgasprices.Wehaveusedavarietyofavenuestoachievethispartialriskmitigation.Wehaveutilizedpricecollarstosetminimumandmaximumpricesonaportionofourproduction.Wehavealsoutilizedvariouspriceswapcontractsandfixed-pricephysicaldeliverycontractstofixthepricetobereceivedforaportionoffutureoilandnaturalgasproduction.Basedoncontractscurrentlyinplace,approximately5%ofourestimated2007naturalgasproduction(3%ofourtotalBoeproduction)issubjecttoeitherpricecollars,swapsorfixed-pricecontracts.

Commoditypricescanalsoaffectouroperatingcashflowthroughanindirecteffectonoperatingexpenses.Significantcommoditypriceincreases,asexperiencedinrecentyears,canleadtoanincreaseindrillinganddevelopmentactivities.Asaresult,thedemandandcostforpeople,services,equipmentandmaterialsmayalsoincrease,causinganegativeimpactonourcashflow.

Credit Lines Anothersourceofliquidityisour$2.5billionfive-year,syndicated,unsecuredrevolvinglineofcredit(the“SeniorCreditFacility”).TheSeniorCreditFacilityincludesafive-yearrevolvingCanadiansubfacilityinamaximumamountofU.S.$500million.AmountsborrowedundertheSeniorCreditFacilitymay,atourelection,bearinterestatvariousfixedrateoptionsforperiodsofuptotwelvemonths.Suchratesaregenerallylessthantheprimerate.However,wemayelecttoborrowattheprimerate.AsofDecember31,2006,therewerenoborrowingsundertheSeniorCreditFacility.TheavailablecapacityundertheSeniorCreditFacilityasofDecember31,2006,netof$1.8billionofoutstandingcommercialpaperand$284millionofoutstandinglettersofcredit,wasapproximately$408million.

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TheSeniorCreditFacilitymaturesonApril7,2011,andallamountsoutstandingwillbedueandpayableatthattimeunlessthematurityisextended.PriortoeachApril7anniversarydate,wehavetheoptiontoextendthematurityoftheSeniorCreditFacilityforoneyear,subjecttotheapprovalofthelenders.WeareworkingtoobtainlenderapprovaltoextendthecurrentmaturitydateofApril7,2011toApril7,2012.Ifsuccessful,thismaturitydateextensionwillbeeffectiveApril7,2007,providedwehavenotexperienceda“materialadverseeffect,”asdefinedintheSeniorCreditFacilityagreement,atthatdate.

TheSeniorCreditFacilitycontainsonlyonematerialfinancialcovenant.Thiscovenantrequiresourratiooftotalfundeddebttototalcapitalizationtobelessthan65%.Thecreditagreementcontainsdefinitionsoftotalfundeddebtandtotalcapitalizationthatincludeadjustmentstotherespectiveamountsreportedinourconsolidatedfinancialstatements.Asdefinedintheagreement,totalfundeddebtexcludesthedebenturesthatareexchangeableintosharesofChevronCorporationcommonstock.Also,totalcapitalizationisadjustedtoaddbacknoncashfinancialwritedownssuchasfullcostceilingimpairmentsorgoodwillimpairments.AsofDecember31,2006,ourdebttocapitalizationratioascalculatedpursuanttothiscovenantwas27.3%.

OuraccesstofundsfromtheSeniorCreditFacilityisnotrestrictedunderany“materialadverseeffect”clauses.Itisnotuncommonforcreditagreementstoincludesuchclauses.Theseclausescanremovetheobligationofthebankstofundthecreditlineifanyconditionoreventwouldreasonablybeexpectedtohaveamaterialandadverseeffectontheborrower’sfinancialcondition,operations,propertiesorbusinessconsideredasawhole,theborrower’sabilitytomaketimelydebtpayments,ortheenforceabilityofmaterialtermsofthecreditagreement.WhileourSeniorCreditFacilityincludescovenantsthatrequireustoreportaconditionoreventhavingamaterialadverseeffect,theobligationofthebankstofundtheSeniorCreditFacilityisnotconditionedontheabsenceofamaterialadverseeffect.

Wealsohaveaccesstoshort-termcreditunderourcommercialpaperprogram.Totalborrowingsunderthecommercialpaperprogrammaynotexceed$2billion.Also,anyborrowingsunderthecommercialpaperprogramreduceavailablecapacityundertheSeniorCreditFacilityonadollar-for-dollarbasis.Commercialpaperdebtgenerallyhasamaturityofbetweensevenand90days,althoughitcanhaveamaturityofupto365days,andbearsinterestatratesagreedtoatthetimeoftheborrowing.TheinterestrateisbasedonastandardindexsuchastheFederalFundsRate,LIBOR,orthemoneymarketrateasfoundonthecommercialpapermarket.AsofDecember31,2006,wehad$1.8billionofcommercialpaperdebtoutstandingatanaveragerateof5.37%.

Debt RatingsWereceivedebtratingsfromthemajorratingsagenciesintheUnitedStates.Indeterminingourdebtratings,theagenciesconsideranumberofitemsincluding,butnotlimitedto,debtlevels,plannedassetsales,near-termandlong-termproductiongrowthopportunitiesandcapitalallocationchallenges.Liquidity,assetquality,coststructure,reservemix,andcommoditypricinglevelsarealsoconsideredbytheratingagencies.OurcurrentdebtratingsareBBBwithapositiveoutlookbyStandard&Poor’s,Baa2withapositiveoutlookbyMoody’sandBBBwithapositiveoutlookbyFitch.

Thereareno“ratingtriggers”inanyofourcontractualobligationsthatwouldacceleratescheduledmaturitiesshouldourdebtratingfallbelowaspecifiedlevel.OurcostofborrowingunderourSeniorCreditFacilityispredicatedonourcorporatedebtrating.Therefore,eventhougharatingsdowngradewouldnotacceleratescheduledmaturities,itwouldadverselyimpacttheinterestrateonanyborrowingsunderourSeniorCreditFacility.UnderthetermsoftheSeniorCreditFacility,aone-notchdowngradewouldincreasethefully-drawnborrowingcostsfortheSeniorCreditFacilityfromLIBORplus45basispointstoanewrateofLIBORplus65basispoints.Aratingsdowngradecouldalsoadverselyimpactourabilitytoeconomicallyaccessdebtmarketsinthefuture.AsofDecember31,2006,wewerenotawareofanypotentialratingsdowngradesbeingcontemplatedbytheratingagencies.

Capital ExpendituresInFebruary2007,weprovidedguidanceforour2007capitalexpenditureswhichareexpectedtorangefrom$5.7billionto$6.2billion.Thisrepresentsthelargestplanneduseofour2007operatingcashflow,withthehighendoftherangebeing11%higherthanour2006capitalexpenditures,excludingtheChiefacquisition.Toacertaindegree,theultimatetimingofthesecapitalexpendituresiswithinourcontrol.Therefore,ifoilandnaturalgaspricesfluctuatefromcurrentestimates,wecouldchoosetodeferaportionoftheseplanned2007capitalexpendituresuntillaterperiods,oracceleratecapitalexpendituresplannedforperiodsbeyond2007toachievethedesiredbalancebetweensourcesandusesofliquidity.Baseduponcurrentoilandnaturalgaspriceexpectationsfor2007,weanticipatehavingadequatecapitalresourcestofundour2007capitalexpenditures.

Common Stock Repurchase ProgramInAugust2005,weannouncedaprogramtorepurchaseupto50millionsharesofourcommonstock.Wehadrepurchased6.5millionsharesunderthisprogramthroughthemiddleof2006whentheprogramwassuspendedasaresultoftheChiefacquisition.InconjunctionwiththesalesofourEgyptianandWestAfricanoperations,weexpecttoresumethisrepurchaseprograminlate2007byusingaportionofthesalesproceedstorepurchasecommonstock.Althoughthisprogramexpiresattheendof2007,itcouldbeextendedifnecessary.

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Contractual ObligationsAsummaryofourcontractualobligationsasofDecember31,2006,isprovidedinthefollowingtable. paYmentSdueBYperiod leSSthan 1-3 3-5 morethan total 1Year YearS YearS 5YearS

(INMILLIoNs)

Long-term debt (1) $ 7,770 2,208 937 2,100 2,525Interest expense (2) 5,797 492 764 690 3,851Drilling and facility obligations (3) 2,993 886 1,137 844 126Asset retirement obligations (4) 894 61 75 143 615Firm transportation agreements (5) 574 123 173 106 172Lease obligations (6) 595 80 163 123 229Other 37 28 5 4 — Total $ 18,660 3,878 3,254 4,010 7,518

(1) Long-term debt amounts represent scheduled maturities of our debt obligations at December 31, 2006, excluding $5 million of fair value adjustments and $8 million of net premiums included in the carrying value of debt. The “Less than 1 Year” amount includes $1.8 billion of short-term commercial paper borrowings. We intend to use the proceeds from the sales of our Egyptian and West African assets to repay our outstanding commercial paper. The “1-3 Years” amount includes $760 million related to our debentures exchangeable into shares of Chevron Corporation common stock. As of December 31, 2006, we beneficially owned approximately 14.2 million shares of Chevron common stock for possible exchange for the exchangeable debentures. In addition, $284 million of letters of credit that have been issued by commercial banks on our behalf are excluded from the table. The majority of these letters of credit, if funded, would become borrowings under our revolving credit facility. Most of these letters of credit have been granted by financial institutions to support our international and Canadian drilling commitments.(2) Interest expense amounts represent the scheduled fixed-rate and variable-rate cash payments related to our debt. Interest on our variable-rate debt was estimated based upon expected future interest rates as of December 31, 2006.(3) Drilling and facility obligations represent contractual agreements with third party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction. Included in the $3.0 billion total is $1.9 billion which relates to long-term contracts for three deepwater drilling rigs and certain other contracts for onshore drilling and facility obligations in which drilling or facilities construction has not commenced. The $1.9 billion represents the gross commitment under these contracts. Our ultimate payment for these commitments will be reduced by the amounts billed to our working interest partners. Payments for these commitments, net of amounts billed to partners, will be capitalized as a component of oil and gas properties.(4) Asset retirement obligations represent estimated discounted costs for future dismantlement, abandonment and rehabilitation costs. These obligations are recorded as liabilities on our December 31, 2006 balance sheet.(5) Firm transportation agreements represent “ship or pay” arrangements whereby we have committed to ship certain volumes of oil, gas and NGLs for a fixed transportation fee. We have entered into these agreements to aid the movement of our gas production to market. We expect to have sufficient production to utilize the majority of these transportation services.(6) Lease obligations consist of operating leases for office space and equipment, an offshore platform spar and FPSO’s. Office and equipment leases represent non-cancelable leases for office space and equipment used in our daily operations. We have an offshore platform spar that is being used in the development of the Nansen field in the Gulf of Mexico. This spar is subject to a 20-year lease and contains various options whereby we may purchase the lessors’ interests in the spar. We have guaranteed that the spar will have a residual value at the end of the term equal to at least 10% of the fair value of the spar at the inception of the lease. The total guaranteed value is $14 million in 2022. However, such amount may be reduced under the terms of the lease agreement. In 2005, we sold our interests in the Boomvang field in the Gulf of Mexico, which has a spar lease with terms similar to those of the Nansen lease. As a result of the sale, we are subleasing the Boomvang Spar. The table above does not include any amounts related to the Boomvang spar lease. However, if the sublessee were to default on its obligation, we would continue to be obligated to pay the periodic lease payments and any guaranteed value required at the end of the term. We also lease two FPSO’s that are being used in the Panyu project offshore China and the Polvo project offshore Brazil. The Panyu FPSO lease term expires in September 2009. The Polvo FPSO lease term expires in 2014.

Pension Funding and Estimates Funded Status Ascomparedtothe“projectedbenefitobligation,”ourqualifiedandnonqualifieddefinedbenefitplanswereunderfundedby$178millionand$133millionatDecember31,2006and2005,respectively.Adetailedreconciliationofthe2006changestoourunderfundedstatusisincludedinNote6totheaccompanyingconsolidatedfinancialstatements.Ofthe$178millionunderfundedstatusattheendof2006,$156millionisattributabletovariousnonqualifieddefinedbenefitplanswhichhavenoplanassets.However,wehaveestablishedcertaintruststofundthebenefitobligationsofsuchnonqualifiedplans.AsofDecember31,2006,thesetrustshadinvestmentswithafairvalueof$59million.Thevalueofthesetrustsisincludedinnoncurrentotherassetsinouraccompanyingconsolidatedbalancesheets.

Ascomparedtothe“accumulatedbenefitobligation,”ourqualifieddefinedbenefitplanswereoverfundedby$59millionatDecember31,2006.Theaccumulatedbenefitobligationdiffersfromtheprojectedbenefitobligationinthattheformerincludesnoassumptionaboutfuturecompensationlevels.Ourcurrentintentionsaretoprovidesufficientfundinginfutureyearstoensuretheaccumulatedbenefitobligationremainsfullyfunded.Theactualamountofcontributionsrequiredduringthisperiodwilldependoninvestmentreturnsfromtheplanassets.Requiredcontributionsalsodependuponchangesinactuarialassumptionsmadeduringthesameperiod,particularlythediscountrateusedtocalculatethepresentvalueoftheaccumulatedbenefitobligation.For2007,weanticipatetheaccumulatedbenefitobligationwillremainfullyfundedwithoutcontributingtoourdefinedbenefitplans.Therefore,wedon’texpecttocontributetotheplansduring2007.

Pension Estimate Assumptions Ourpensionexpenseisrecognizedonanaccrualbasisoveremployees’approximateserviceperiodsandisgenerallycalculatedindependentoffundingdecisionsorrequirements.Werecognizedexpenseforourdefinedbenefitpensionplansof$31million,$26millionand$26millionin2006,2005and2004,respectively.Weestimatethatourpensionexpensewillapproximate$43millionin2007.

Thecalculationofpensionexpenseandpensionliabilityrequirestheuseofanumberofassumptions.Changesintheseassumptionscanresultindifferentexpenseandliabilityamounts,andfutureactualexperiencecandifferfromtheassumptions.Webelievethatthetwomostcriticalassumptionsaffectingpensionexpenseandliabilitiesaretheexpectedlong-termrateofreturnonplanassetsandtheassumeddiscountrate.

Weassumedthatourplanassetswouldgeneratealong-termweightedaveragerateofreturnof8.40%atbothDecember31,2006and2005.Wedevelopedtheseexpectedlong-termrateofreturnassumptionsbyevaluatinginputfromexternalconsultantsandeconomistsaswellaslong-terminflationassumptions.Theexpectedlong-termrateofreturnonplanassetsisbasedonatargetallocationofinvestmenttypesinsuchassets.Thetargetinvestmentallocationforourplanassetsis50%U.S.largecapequitysecurities;15%U.S.smallcapequitysecurities,equallyallocatedbetweengrowthandvalue;15%internationalequitysecurities,equallyallocated

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betweengrowthandvalue;and20%debtsecurities.Weexpectourlong-termassetallocationonaveragetoapproximatethetargetedallocation.Weregularlyreviewouractualassetallocationandperiodicallyrebalancetheinvestmentstothetargetedallocationwhenconsideredappropriate.

Pensionexpenseincreasesastheexpectedrateofreturnonplanassetsdecreases.Adecreaseinourlong-termrateofreturnassumptionof100basispoints(from8.40%to7.40%)wouldincreasetheexpected2007pensionexpenseby$6million.

Wediscountedourfuturepensionobligationsusingaweightedaveragerateof5.72%atbothDecember31,2006and2005.Thediscountrateisdeterminedattheendofeachyearbasedontherateatwhichobligationscouldbeeffectivelysettled.Thisrateisbasedonhigh-qualitybondyields,afterallowingforcallanddefaultrisk.Weconsiderhighqualitycorporatebondyieldindices,suchasMoody’sAa,whenselectingthediscountrate.

Thepensionliabilityandfuturepensionexpensebothincreaseasthediscountrateisreduced.Loweringthediscountrateby25basispoints(from5.72%to5.47%)wouldincreaseourpensionliabilityatDecember31,2006,by$25million,andincreaseestimated2007pensionexpenseby$3million.

AtDecember31,2006,wehadactuariallossesof$214millionwhichwillberecognizedasacomponentofpensionexpenseinfutureyears.Theselossesareprimarilyduetoreductionsinthediscountratesince2001andincreasesinparticipantwages.Weestimatethatapproximately$15millionand$13millionoftheunrecognizedactuariallosseswillbeincludedinpensionexpensein2007and2008,respectively.The$15millionestimatedtoberecognizedin2007isacomponentofthetotalestimated2007pensionexpenseof$43millionreferredtoearlierinthissection.

Futurechangesinplanassetreturns,assumeddiscountratesandvariousotherfactorsrelatedtotheparticipantsinourdefinedbenefitpensionplanswillimpactfuturepensionexpenseandliabilities.Wecannotpredictwithcertaintywhatthesefactorswillbeinthefuture.

OnAugust17,2006,thePensionProtectionActwassignedintolaw.Beginningin2008,thisactwillcauseextensivechangesinthedeterminationofboththeminimumrequiredcontributionandthemaximumtaxdeductiblelimit.Becausethenewrequiredcontributionwillapproximateourcurrentpolicyoffullyfundingtheaccumulatedbenefitobligation,thechangesarenotexpectedtohaveasignificantimpactonfuturecashflows.

BeginningwithourDecember31,2006balancesheet,StatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)requiresustorecognizeonourconsolidatedbalancesheetthefundedstatusofourdefinedbenefitplans.Thefundedstatusismeasuredasthedifferencebetweentheprojectedbenefitobligationandthefairvalueofplanassets.Asaresult,werecognizedasliabilitiestheactuariallossesandothercoststhatwerepreviouslyunrecognizedunderprioraccountingrules,andtheneteffectwasalsorecordedasareductiontostockholders’equityonDecember31,2006.Thisreductionwas$140million,orlessthan1%ofourstockholders’equity.

ContinGenCieSandleGalmatterS

Foradetaileddiscussionofcontingenciesandlegalmatters,seeNote8oftheaccompanyingconsolidatedfinancialstatements.

CritiCalaCCountinGpoliCieSandeStimateS

ThepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualamountscoulddifferfromtheseestimates,andchangesintheseestimatesarerecordedwhenknown.

Thecriticalaccountingpoliciesusedbymanagementinthepreparationofourconsolidatedfinancialstatementsarethosethatareimportantbothtothepresentationofourfinancialconditionandresultsofoperationsandrequiresignificantjudgmentsbymanagementwithregardtoestimatesused.Ourcriticalaccountingpoliciesandsignificantjudgmentsandestimatesrelatedtothosepoliciesaredescribedbelow.WehavereviewedthesecriticalaccountingpolicieswiththeAuditCommitteeoftheBoardofDirectors.

fullCostCeilingCalculationsPolicy Description Wefollowthefullcostmethodofaccountingforouroilandgasproperties.Thefullcostmethodsubjectscompaniestoquarterlycalculations

ofa“ceiling,”orlimitationontheamountofpropertiesthatcanbecapitalizedonthebalancesheet.Theceilinglimitationisthediscountedestimatedafter-taxfuturenetrevenuesfromprovedoilandgasproperties,excludingfuturecashoutflowsassociatedwithsettlingassetretirementobligationsincludedinthenetbookvalueofoilandgasproperties,plusthecostofpropertiesnotsubjecttoamortization.Ifournetbookvalueofoilandgasproperties,lessrelateddeferredincometaxes,isinexcessofthecalculatedceiling,theexcessmustbewrittenoffasanexpense,exceptasdiscussedinthefollowingparagraph.Theceilinglimitationisimposedseparatelyforeachcountryinwhichwehaveoilandgasproperties.

If,subsequenttotheendofthequarterbutpriortotheapplicablefinancialstatementsbeingpublished,pricesincreasetolevelssuchthattheceilingwouldexceedthecoststoberecovered,awritedownotherwiseindicatedattheendofthequarterisnotrequiredtoberecorded.Awritedownindicatedattheendofaquarterisalsonotrequiredifthevalueofadditionalreservesproveduponpropertiesaftertheendofthequarterbutpriortothepublishingofthefinancialstatementswouldresultin

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theceilingexceedingthecoststoberecovered,aslongasthepropertieswereownedattheendofthequarter.Anexpenserecordedinoneperiodmaynotbereversedinasubsequentperiodeventhoughhigheroilandgaspricesmayhaveincreasedtheceilingapplicabletothesubsequentperiod.

Judgments and Assumptions Thediscountedpresentvalueoffuturenetrevenuesforourprovedoil,naturalgasandNGLreservesisamajorcomponentoftheceilingcalculation,andrepresentsthecomponentthatrequiresthemostsubjectivejudgments.Estimatesofreservesareforecastsbasedonengineeringdata,projectedfutureratesofproductionandthetimingoffutureexpenditures.Theprocessofestimatingoil,naturalgasandNGLreservesrequiressubstantialjudgment,resultinginimprecisedeterminations,particularlyfornewdiscoveries.Differentreserveengineersmaymakedifferentestimatesofreservequantitiesbasedonthesamedata.Certainofourreserveestimatesarepreparedorauditedbyoutsidepetroleumconsultants,whileotherreserveestimatesarepreparedbyourengineers.SeeNote15oftheaccompanyingconsolidatedfinancialstatements.

Thepassageoftimeprovidesmorequalitativeinformationregardingestimatesofreserves,andrevisionsaremadetopriorestimatestoreflectupdatedinformation.Inthepastfiveyears,annualrevisionstoourreserveestimates,whichhavebeenbothincreasesanddecreasesinindividualyears,haveaveragedapproximately1%ofthepreviousyear’sestimate.However,therecanbenoassurancethatmoresignificantrevisionswillnotbenecessaryinthefuture.Iffuturesignificantrevisionsarenecessarythatreducepreviouslyestimatedreservequantities,itcouldresultinafullcostpropertywritedown.Inadditiontotheimpactoftheestimatesofprovedreservesonthecalculationoftheceiling,estimatesofprovedreservesarealsoasignificantcomponentofthecalculationofDD&A.

Whilethequantitiesofprovedreservesrequiresubstantialjudgment,theassociatedpricesofoil,naturalgasandNGLreserves,andtheapplicablediscountrate,thatareusedtocalculatethediscountedpresentvalueofthereservesdonotrequirejudgment.Theceilingcalculationdictatesthata10%discountfactorbeusedandthatpricesandcostsineffectasofthelastdayoftheperiodareheldconstantindefinitely.Therefore,thefuturenetrevenuesassociatedwiththeestimatedprovedreservesarenotbasedonourassessmentoffuturepricesorcosts.Rather,theyarebasedonsuchpricesandcostsineffectasoftheendofeachquarterwhentheceilingcalculationisperformed.Incalculatingtheceiling,weadjusttheend-of-periodpricebytheeffectofcashflowhedgesinplace.Thisadjustmentrequireslittlejudgmentastheend-of-periodpriceisadjustedusingthecontractpricesforourcashflowhedges.WehadnosuchhedgesoutstandingatDecember31,2006.

Becausetheceilingcalculationdictatesthatpricesineffectasofthelastdayoftheapplicablequarterareheldconstantindefinitely,andrequiresa10%discountfactor,theresultingvalueisnotindicativeofthetruefairvalueofthereserves.Oilandnaturalgaspriceshavehistoricallybeenvolatile.Onanyparticulardayattheendofaquarter,pricescanbeeithersubstantiallyhigherorlowerthanourlong-termpriceforecastthatisabarometerfortruefairvalue.Therefore,oilandgaspropertywritedownsthatresultfromapplyingthefullcostceilinglimitation,andthatarecausedbyfluctuationsinpriceasopposedtoreductionstotheunderlyingquantitiesofreserves,shouldnotbeviewedasabsoluteindicatorsofareductionoftheultimatevalueoftherelatedreserves.

derivativefinancialinstrumentsPolicy Description Themajorityofourhistoricalderivativeinstrumentshaveconsistedofcommodityfinancialinstrumentsusedtomanageourcashflow

exposuretooilandgaspricevolatility.Wehavealsoenteredintointerestrateswapstomanageourexposuretointerestratevolatility.Theinterestrateswapsmitigateeitherthecashfloweffectsofinterestratefluctuationsoninterestexpenseforvariable-ratedebtinstruments,orthefairvalueeffectsofinterestratefluctuationsonfixed-ratedebt.WealsohaveanembeddedoptionderivativerelatedtothefairvalueofourdebenturesexchangeableintosharesofChevronCorporationcommonstock.

Allderivativesarerecognizedattheircurrentfairvalueonourbalancesheet.Changesinthefairvalueofderivativefinancialinstrumentsarerecordedinthestatementofoperationsunlessspecifichedgeaccountingcriteriaaremet.Ifsuchcriteriaaremetforcashflowhedges,theeffectiveportionofthechangeinthefairvalueisrecordeddirectlytoaccumulatedothercomprehensiveincome,acomponentofstockholders’equity,untilthehedgedtransactionoccurs.Theineffectiveportionofthechangeinfairvalueisrecordedinthestatementofoperations.Ifhedgeaccountingcriteriaaremetforfairvaluehedges,thechangeinthefairvalueisrecordedinthestatementofoperationswithanoffsettingamountrecordedforthechangeinfairvalueofthehedgeditem.

Aderivativeinstrumentqualifiesforhedgeaccountingtreatmentifwedesignatetheinstrumentassuchonthedatethederivativecontractisenteredintoorthedateofanacquisitionorbusinesscombinationwhichincludesderivativecontracts.Additionally,wemustdocumenttherelationshipbetweenthehedginginstrumentandhedgeditem,aswellastherisk-managementobjectiveandstrategyforundertakingtheinstrument.Wemustalsoassess,bothattheinstrument’sinceptionandonanongoingbasis,whetherthederivativeishighlyeffectiveinoffsettingthechangeincashflowofthehedgeditem.

Judgments and Assumptions Theestimatesofthefairvaluesofourcommodityderivativeinstrumentsrequiresubstantialjudgment.Fortheseinstruments,weobtainforwardpriceandvolatilitydataforallmajoroilandgastradingpointsinNorthAmericafromindependentthirdparties.Theseforwardpricesarecomparedtothepriceparameterscontainedinthehedgeagreements.TheresultingestimatedfuturecashinflowsoroutflowsoverthelivesofthehedgecontractsarediscountedusingLIBORandmoneymarketfuturesratesforthefirstyearandmoneymarketfuturesandswapratesthereafter.Inaddition,weestimatetheoptionvalueofpricefloorsandpricecapsusinganoptionpricingmodel.Thesepricinganddiscountingvariablesaresensitivetotheperiodofthecontractandmarketvolatilityaswellaschangesinforwardprices,regionalpricedifferentialsandinterestrates.Fairvaluesofourotherderivativeinstrumentsrequirelessjudgmenttoestimateandareprimarilybasedonquotesfromindependentthirdpartiessuchascounterpartiesorbrokers.

Quarterlychangesinestimatesoffairvaluehaveonlyaminimalimpactonourliquidity,capitalresourcesorresultsofoperations,aslongasthederivativeinstrumentsqualifyforhedgeaccountingtreatment.Changesinthefairvaluesofderivativesthatdonotqualifyforhedgeaccountingtreatmentcanhaveasignificantimpactonourresultsofoperations,butgenerallywillnotimpactourliquidityorcapitalresources.Settlementsofderivativeinstruments,regardlessofwhethertheyqualifyforhedgeaccounting,dohaveanimpactonourliquidityandresultsofoperations.Generally,ifactualmarketpricesarehigherthanthepriceofthederivativeinstruments,ournetearningsandcashflowfromoperationswillbelowerrelativetotheresultsthatwouldhaveoccurredabsenttheseinstruments.Theoppositeisalso

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true.Additionalinformationregardingtheeffectsthatchangesinmarketpriceswillhaveonourderivativefinancialinstruments,netearningsandcashflowfromoperationsisincludedinthe“QuantitativeandQualitativeDisclosuresaboutMarketRisk”sectionofthisreport.

BusinessCombinationsPolicy Description Wehavegrownsubstantiallyduringrecentyearsthroughacquisitionsofotheroilandnaturalgascompanies.Mostoftheseacquisitionshave

beenaccountedforusingthepurchasemethodofaccounting,andrecentaccountingpronouncementsrequirethatallfutureacquisitionswillbeaccountedforusingthepurchasemethod.

Underthepurchasemethod,theacquiringcompanyaddstoitsbalancesheettheestimatedfairvaluesoftheacquiredcompany’sassetsandliabilities.Anyexcessofthepurchasepriceoverthefairvaluesofthetangibleandintangiblenetassetsacquiredisrecordedasgoodwill.Goodwillisassessedforimpairmentatleastannually.

Judgments and Assumptions Therearevariousassumptionswemakeindeterminingthefairvaluesofanacquiredcompany’sassetsandliabilities.Themostsignificantassumptions,andtheonesrequiringthemostjudgment,involvetheestimatedfairvaluesoftheoilandgaspropertiesacquired.Todeterminethefairvaluesoftheseproperties,weprepareestimatesofoil,naturalgasandNGLreserves.Theseestimatesarebasedonworkperformedbyourengineersandthatofoutsideconsultants.Thejudgmentsassociatedwiththeseestimatedreservesaredescribedearlierinthissectioninconnectionwiththefullcostceilingcalculation.

However,therearefactorsinvolvedinestimatingthefairvaluesofacquiredoil,naturalgasandNGLpropertiesthatrequiremorejudgmentthanthatinvolvedinthefullcostceilingcalculation.Asstatedabove,thefullcostceilingcalculationappliesend-of-periodpriceandcostinformationtothereservestoarriveattheceilingamount.Bycontrast,thefairvalueofreservesacquiredinabusinesscombinationmustbebasedonourestimatesoffutureoil,naturalgasandNGLprices.Ourestimatesoffuturepricesarebasedonourownanalysisofpricingtrends.Theseestimatesarebasedoncurrentdataobtainedwithregardtoregionalandworldwidesupplyanddemanddynamicssuchaseconomicgrowthforecasts.Theyarealsobasedonindustrydataregardingnaturalgasstorageavailability,drillingrigactivity,changesindeliverycapacity,trendsinregionalpricingdifferentialsandotherfundamentalanalysis.Forecastsoffuturepricesfromindependentthirdpartiesarenotedwhenwemakeourpricingestimates.

Weestimatefuturepricestoapplytotheestimatedreservequantitiesacquired,andestimatefutureoperatinganddevelopmentcosts,toarriveatestimatesoffuturenetrevenues.Forestimatedprovedreserves,thefuturenetrevenuesarethendiscountedusingaratedeterminedappropriateatthetimeofthebusinesscombinationbaseduponourcostofcapital.

Wealsoapplythesesamegeneralprinciplestoestimatethefairvalueofunprovedpropertiesacquiredinabusinesscombination.Theseunprovedpropertiesgenerallyrepresentthevalueofprobableandpossiblereserves.Becauseoftheirverynature,probableandpossiblereserveestimatesaremoreimprecisethanthoseofprovedreserves.Tocompensatefortheinherentriskofestimatingandvaluingunprovedreserves,thediscountedfuturenetrevenuesofprobableandpossiblereservesarereducedbywhatweconsidertobeanappropriaterisk-weightingfactorineachparticularinstance.Itiscommonforthediscountedfuturenetrevenuesofprobableandpossiblereservestobereducedbyfactorsrangingfrom30%to80%toarriveatwhatweconsidertobetheappropriatefairvalues.

Generally,inourbusinesscombinations,thedeterminationofthefairvaluesofoilandgaspropertiesrequiresmuchmorejudgmentthanthefairvaluesofotherassetsandliabilities.Theacquiredcompaniescommonlyhavelong-termdebtthatweassumeintheacquisition,andthisdebtmustberecordedattheestimatedfairvalueasifwehadissuedsuchdebt.However,significantjudgmentonourbehalfisusuallynotrequiredinthesesituationsduetotheexistenceofcomparablemarketvaluesofdebtissuedbypeercompanies.

Exceptforthe2002Mitchellmerger,ourmergersandacquisitionshaveinvolvedotherentitieswhoseoperationswerepredominantlyintheareaofexploration,developmentandproductionactivitiesrelatedtooilandgasproperties.However,inadditiontoexploration,developmentandproductionactivities,Mitchell’sbusinessalsoincludedsubstantialmarketingandmidstreamactivities.Therefore,aportionoftheMitchellpurchasepricewasallocatedtothefairvalueofMitchell’smarketingandmidstreamfacilitiesandequipment.Thisconsistedprimarilyofnaturalgasprocessingplantsandnaturalgaspipelinesystems.

TheMitchellmidstreamassetsprimarilyservedgasproducingpropertiesthatwealsoacquiredfromMitchell.Therefore,certainoftheassumptionsregardingfutureoperationsofthegasproducingpropertieswerealsointegraltothevalueofthemidstreamassets.Forexample,futurequantitiesofnaturalgasestimatedtobeprocessedbynaturalgasprocessingplantswerebasedonthesameestimatesusedtovaluetheprovedandunprovedgasproducingproperties.FutureexpectedpricesformarketingandmidstreamproductsaleswerealsobasedonpricecasesconsistentwiththoseusedtovaluetheoilandgasproducingassetsacquiredfromMitchell.Basedonhistoricalcostsandknowntrendsandcommitments,wealsoestimatedfutureoperatingandcapitalcostsofthemarketingandmidstreamassetstoarriveatestimatedfuturecashflows.Thesecashflowswerediscountedatratesconsistentwiththoseusedtodiscountfuturenetcashflowsfromoilandgasproducingassetstoarriveatourestimatedfairvalueofthemarketingandmidstreamfacilitiesandequipment.

Inadditiontothevaluationmethodsdescribedabove,weperformotherquantitativeanalysestosupporttheindicatedvalueinanybusinesscombination.Theseanalysesincludeinformationrelatedtocomparablecompanies,comparabletransactionsandpremiumspaid.

Inacomparablecompaniesanalysis,wereviewthepublicstockmarkettradingmultiplesforselectedpubliclytradedindependentexplorationandproductioncompanieswithcomparablefinancialandoperatingcharacteristics.Suchcharacteristicsaremarketcapitalization,locationofprovedreservesandthecharacterizationofthosereservesthatwedeemtobesimilartothoseofthepartytotheproposedbusinesscombination.Wecomparethesecomparablecompanymultiplestotheproposedbusinesscombinationcompanymultiplesforreasonableness.

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Inacomparabletransactionsanalysis,wereviewcertainacquisitionmultiplesforselectedindependentexplorationandproductioncompanytransactionsandoilandgasassetpackagesannouncedrecently.Wecomparethesecomparabletransactionmultiplestotheproposedbusinesscombinationtransactionmultiplesforreasonableness.

Inapremiumspaidanalysis,weuseasampleofselectedindependentexplorationandproductioncompanytransactionsinadditiontoselectedtransactionsofallpubliclytradedcompaniesannouncedrecently,toreviewthepremiumspaidtothepriceofthetargetoneday,oneweekandonemonthpriortotheannouncementofthetransaction.Weusethisinformationtodeterminethemeanandmedianpremiumspaidandcomparethemtotheproposedbusinesscombinationpremiumforreasonableness.

Whiletheseestimatesoffairvalueforthevariousassetsacquiredandliabilitiesassumedhavenoeffectonourliquidityorcapitalresources,theycanhaveaneffectonthefutureresultsofoperations.Generally,thehigherthefairvalueassignedtoboththeoilandgaspropertiesandnon-oilandgasproperties,thelowerfuturenetearningswillbeasaresultofhigherfuturedepreciation,depletionandamortizationexpense.Also,ahigherfairvalueassignedtotheoilandgasproperties,basedonhigherfutureestimatesofoilandgasprices,willincreasethelikelihoodofafullcostceilingwritedownintheeventthatsubsequentoilandgaspricesdropbelowourpriceforecastthatwasusedtooriginallydeterminefairvalue.Afullcostceilingwritedownwouldhavenoeffectonourliquidityorcapitalresourcesinthatperiodbecauseitisanoncashcharge,butitwouldadverselyaffectresultsofoperations.Asdiscussedin“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations—CapitalResources,UsesandLiquidity,”incalculatingourdebt-to-capitalizationratiounderourcreditagreement,totalcapitalizationisadjustedtoaddbacknoncashfinancialwritedownssuchasfullcostceilingpropertyimpairmentsorgoodwillimpairments.

Ourestimatesofreservequantitiesareoneofthemanyestimatesthatareinvolvedindeterminingtheappropriatefairvalueoftheoilandgaspropertiesacquiredinabusinesscombination.Aspreviouslydisclosedinourdiscussionofthefullcostceilingcalculations,duringthepastfiveyears,ourannualrevisionstoourreserveestimateshaveaveragedapproximately1%.Asdiscussedintheprecedingparagraphs,therearenumerousestimatesinadditiontoreservequantityestimatesthatareinvolvedindeterminingthefairvalueofoilandgaspropertiesacquiredinabusinesscombination.Theinter-relationshipoftheseestimatesmakesitimpracticaltoprovideadditionalquantitativeanalysesoftheeffectsofchangesintheseestimates.

valuationofGoodwillPolicy Description Goodwillistestedforimpairmentatleastannually.Thisrequiresustoestimatethefairvaluesofourownassetsandliabilitiesinamanner

similartotheprocessdescribedaboveforabusinesscombination.Therefore,considerablejudgmentsimilartothatdescribedaboveinconnectionwithestimatingthefairvalueofanacquiredcompanyinabusinesscombinationisalsorequiredtoassessgoodwillforimpairment.

Judgments and Assumptions Generally,thehigherthefairvalueassignedtoboththeoilandgaspropertiesandnon-oilandgasproperties,thelowergoodwillwouldbe.Alowergoodwillvaluedecreasesthelikelihoodofanimpairmentcharge.However,unfavorablechangesinreservesorinourpriceforecastwouldincreasethelikelihoodofagoodwillimpairmentcharge.Agoodwillimpairmentchargewouldhavenoeffectonliquidityorcapitalresources.However,itwouldadverselyaffectourresultsofoperationsinthatperiod.

Duetotheinter-relationshipofthevariousestimatesinvolvedinassessinggoodwillforimpairment,itisimpracticaltoprovidequantitativeanalysesoftheeffectsofpotentialchangesintheseestimates,otherthantonotethehistoricalaveragechangesinourreserveestimatespreviouslysetforth.

reCentlYiSSuedaCCountinGStandardSnotYetadopted

InJune2006,theFinancialAccountingStandardsBoard(“FASB”)issuedFASBInterpretationNo.48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.InterpretationNo.48clarifiestheaccountingforuncertaintyinincometaxesrecognizedinanenterprise’sfinancialstatementsinaccordancewithFASBStatementNo.109,Accounting for Income Taxes.ThisInterpretationiseffectiveforfiscalyearsbeginningafterDecember15,2006,andwewilladoptitinthefirstquarterof2007.WedonotexpecttheadoptionofInterpretationNo.48tohaveamaterialimpactonourfinancialstatementsandrelateddisclosures.

InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.157,Fair Value Measurements.StatementNo.157providesacommondefinitionoffairvalue,establishesaframeworkformeasuringfairvalueandexpandsdisclosuresaboutfairvaluemeasurements.However,thisStatementdoesnotrequireanynewfairvaluemeasurements.StatementNo.157iseffectiveforfiscalyearsbeginningafterNovember15,2007.Wearecurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.157willhaveonourfinancialstatementsandrelateddisclosures.

InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).StatementNo.158requirestherecognitionoftheoverfundedorunderfundedstatusofadefinedbenefitpostretirementplaninthebalancesheet.WeadoptedthisrecognitionrequirementasofDecember31,2006.TheeffectsofthisadoptionaresummarizedinNote6oftheaccompanyingconsolidatedfinancialstatements.StatementNo.158alsorequiresthemeasurementofplanassetsandbenefitobligationsasofthedateoftheemployer’sfiscalyear-end.TheStatementprovidestwoalternativestotransitiontoafiscalyear-endmeasurementdate.ThismeasurementrequirementiseffectiveforfiscalyearsendingafterDecember15,2008.Wehavenotyetadoptedthismeasurementrequirement,butwedonotexpectsuchadoptiontohaveamaterialeffectonourresultsofoperations,financialcondition,liquidityorcompliancewithdebtcovenants.

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InFebruary2007,theFASBissuedStatementofFinancialAccountingStandardsNo.159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.StatementNo.159permitsentitiestochoosetomeasurecertainfinancialinstrumentsandotheritemsatfairvalue.Theobjectiveistoimprovefinancialreportingbyprovidingentitieswiththeopportunitytomitigatevolatilityinreportedearningscausedbymeasuringrelatedassetsandliabilitiesdifferentlywithouthavingtoapplycomplexhedgeaccountingprovisions.Unrealizedgainsandlossesonanyitemsforwhichweelectthefairvaluemeasurementoptionwouldbereportedinearnings.StatementNo.159iseffectiveforfiscalyearsbeginningafterNovember15,2007.However,earlyadoptionispermittedforfiscalyearsbeginningonorbeforeNovember15,2007,providedwealsoelecttoapplytheprovisionsofStatementNo.157,Fair Value Measurements,atthesametime.Wearecurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.159willhaveonourfinancialstatementsandrelateddisclosures.

2007eStimateS

Theforward-lookingstatementsprovidedinthisdiscussionarebasedonourexaminationofhistoricaloperatingtrends,theinformationwhichwasusedtopreparetheDecember31,2006reservereportsandotherdatainourpossessionoravailablefromthirdparties.Theseforward-lookingstatementswerepreparedassumingdemand,curtailment,producibilityandgeneralmarketconditionsforouroil,naturalgasandNGLsduring2007willbesubstantiallysimilartothoseof2006,unlessotherwisenoted.Pleasereferto“RiskFactorstoForward-LookingEstimates”onpage101foradiscussionofrelevantriskfactors.AmountsrelatedtoCanadianoperationshavebeenconvertedtoU.S.dollarsusingaprojectedaverage2007exchangerateof$0.89U.S.dollarto$1.00Canadiandollar.

OnNovember14,2006,weannouncedourintenttodivestourEgyptianoilandgasassetsandterminateouroperationsinEgypt.Weexpecttocompletethisassetsaleduringthefirsthalfof2007.SubsequentlyonJanuary23,2007,weannouncedourintenttodivestourWestAfricanoilandgasassetsandterminateouroperationsinWestAfrica.Weexpecttocompletethisassetsalebytheendofthethirdquarterin2007.AllEgyptianandWestAfricanrelatedrevenues,expensesandcapitalwillbereportedasdiscontinuedoperationsinour2007financialstatements.Accordingly,allforward-lookingestimatesinthefollowingdiscussionexcludeamountsrelatedtoouroperationsinEgyptandWestAfrica,unlessotherwisenoted.Theassetsheldforsalerepresentedlessthanfivepercentofour2006productionandDecember31,2006provedreserves.

oil,GasandnGlproductionSetforthinthefollowingparagraphsareindividualestimatesofoil,gasandNGLproductionfor2007.Weestimate,onacombinedbasis,thatour2007oil,gas,and

NGLproductionwilltotalapproximately219to221MMBoe.Ofthistotal,approximately92%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Thefollowingestimatesforoil,gasandNGLproductionarecalculatedatthemidpointoftheestimatedrangefortotalproduction.

Oil Production Oilproductionin2007isexpectedtototalapproximately55MMBbls.Ofthistotal,approximately99%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Theexpectedproductionbyareaisasfollows: mmBBlS

U.S. Onshore 10 U.S. Offshore 9 Canada 15 International 21

Oil Prices Wehavenotfixedthepricewewillreceiveonanyofour2007oilproduction.Our2007averagepricesforeachofourareasareexpectedtodifferfromtheNYMEXpriceassetforthinthefollowingtable.TheNYMEXpriceisthemonthlyaverageofsettledpricesoneachtradingdayforbenchmarkWestTexasIntermediatecrudeoildeliveredatCushing,Oklahoma. expeCtedranGeofoilpriCeS aSa%ofnYmexpriCe

U.S. Onshore 86% to 96% U.S. Offshore 90% to 100% Canada 60% to 70% International 83% to 93%

Gas Production Gasproductionin2007isexpectedtototalapproximately841Bcf.Ofthistotal,approximately88%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Theexpectedproductionbyareaisasfollows: BCf

U.S. Onshore 557 U.S. Offshore 75 Canada 207 International 2

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Gas Prices Our2007averagepricesforeachofourareasareexpectedtodifferfromtheNYMEXpriceassetforthinthefollowingtable.TheNYMEXpriceisdeterminedtobethefirst-of-monthSouthLouisianaHenryHubpriceindexaspublishedmonthlyin Inside FERC.

Basedoncontractscurrentlyinplace,wewillhaveapproximately116MMcfperdayofgasproductionin2007thatissubjecttoeitherfixed-pricecontracts,swaps,floorsorcollars.Theseamountsrepresentapproximately5%ofourestimatedgasproductionfor2007.Therefore,thesevariouspricingarrangementsarenotexpectedtohaveamaterialimpactontherangesofestimatedgaspricerealizationssetforthinthefollowingtable.

expeCtedranGeofGaSpriCeS aSa%ofnYmexpriCe

U.S. Onshore 80% to 90% U.S. Offshore 96% to 106% Canada 80% to 90% International 100% to 110%

NGL Production Weexpectour2007productionofNGLstototalapproximately25MMBbls.Ofthistotal,approximately95%isestimatedtobeproducedfromreservesclassifiedas“proved”atDecember31,2006.Theexpectedproductionbyareaisasfollows: mmBBlS

U.S. Onshore 20 U.S. Offshore 1 Canada 4

marketingandmidstreamrevenuesandexpensesMarketingandmidstreamrevenuesandexpensesarederivedprimarilyfromournaturalgasprocessingplantsandnaturalgastransportpipelines.Theserevenues

andexpensesvaryinresponsetoseveralfactors.Thefactorsinclude,butarenotlimitedto,changesinproductionfromwellsconnectedtothepipelinesandrelatedprocessingplants,changesintheabsoluteandrelativepricesofnaturalgasandNGLs,provisionsofthecontractagreementsandtheamountofrepairandworkoveractivityrequiredtomaintainanticipatedprocessinglevels.

Thesefactors,coupledwithuncertaintyoffuturenaturalgasandNGLprices,increasetheuncertaintyinherentinestimatingfuturemarketingandmidstreamrevenuesandexpenses.Giventheseuncertainties,weestimatethatmarketingandmidstreamrevenueswillbebetween$1.70billionand$2.10billion,andmarketingandmidstreamexpenseswillbebetween$1.31billionand$1.67billion.

productionandoperatingexpensesOurproductionandoperatingexpensesincludeleaseoperatingexpenses,transportationcostsandproductiontaxes.Theseexpensesvaryinresponsetoseveral

factors.Amongthemostsignificantofthesefactorsareadditionstoordeletionsfromthepropertybase,changesinthegeneralpricelevelofservicesandmaterialsthatareusedintheoperationoftheproperties,theamountofrepairandworkoveractivityrequiredandchangesinproductiontaxrates.Oil,naturalgasandNGLpricesalsohaveaneffectonleaseoperatingexpensesandimpacttheeconomicfeasibilityofplannedworkoverprojects.Giventheseuncertainties,weestimatethat2007leaseoperatingexpenses(includingtransportationcosts)willbebetween$1.70billionand$1.77billion.Additionally,weestimateourproductiontaxesfor2007tobebetween3.6%and4.1%ofconsolidatedoil,naturalgasandNGLrevenues.

depreciation,depletionandamortization(“dd&a”)

The2007oilandgaspropertyDD&Aratewilldependonvariousfactors.Mostnotableamongsuchfactorsaretheamountofprovedreservesthatwillbeaddedfromdrillingoracquisitioneffortsin2007comparedtothecostsincurredforsuchefforts,andtherevisionstoouryear-end2006reserveestimatesthat,basedonpriorexperience,arelikelytobemadeduring2007.

Giventheseuncertainties,weexpectouroilandgaspropertyrelatedDD&Aratewillbebetween$11.00perBoeand$11.50perBoe.BasedontheseDD&Aratesandtheproductionestimatessetforthearlier,oilandgaspropertyrelatedDD&Aexpensefor2007isexpectedtobebetween$2.42billionand$2.53billion.

Additionally,weexpectourdepreciationandamortizationexpenserelatedtonon-oilandgaspropertyfixedassetstototalbetween$210millionand$220million.

accretionofassetretirementobligationAccretionofassetretirementobligationin2007isexpectedtobebetween$45millionand$55million.

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Generalandadministrativeexpenses(“G&a”)OurG&Aincludesemployeecompensationandbenefitscostsandthecostsofmanydifferentgoodsandservicesusedinsupportofourbusiness.G&Avarieswith

thelevelofouroperatingactivitiesandtherelatedstaffingandprofessionalservicesrequirements.Inaddition,employeecompensationandbenefitscostsvaryduetovariousmarketfactorsthataffectthelevelandtypeofcompensationandbenefitsofferedtoemployees.Also,goodsandservicesaresubjecttogeneralpricelevelincreasesordecreases.Therefore,significantvariancesinanyofthesefactorsfromcurrentexpectationscouldcauseactualG&Atovarymateriallyfromtheestimate.

Giventheselimitations,G&Ain2007isexpectedtobebetween$460millionand$480million.Thisestimateincludesapproximately$60millionofnoncash,share-basedcompensation,netofrelatedcapitalizationinaccordancewiththefullcostmethodofaccountingforoilandgasproperties.

reductionofCarryingvalueofoilandGaspropertiesWefollowthefullcostmethodofaccountingforouroilandgaspropertiesdescribedin“Management’sDiscussionandAnalysisofFinancialConditionandResults

ofOperations—CriticalAccountingPoliciesandEstimates.”Reductionstothecarryingvalueofouroilandgaspropertiesarelargelydependentonthesuccessofdrillingresultsandoilandnaturalgaspricesattheendofourquarterlyreportingperiods.Duetotheuncertainnatureoffuturedrillingeffortsandoilandnaturalgasprices,wearenotabletopredictwhetherwewillincursuchreductionsin2007.

interestexpenseFutureinterestratesanddebtoutstandinghaveasignificanteffectonourinterestexpense.Wecanonlymarginallyinfluencethepriceswewillreceivein2007

fromsalesofoil,naturalgasandNGLsandtheresultingcashflow.Thesefactorsincreasethemarginoferrorinherentinestimatingfutureoutstandingdebtbalancesandrelatedinterestexpense.Otherfactorswhichaffectoutstandingdebtbalancesandrelatedinterestexpense,suchastheamountandtimingofcapitalexpendituresandproceedsfromthesaleofourassetsinEgyptandWestAfrica,aregenerallywithinourcontrol.

Basedontheinformationrelatedtointerestexpensesetforthbelow,weexpectour2007interestexpensetobebetween$400millionand$410million.Thisestimateassumesnomaterialchangesinprevailinginterestrates.Thisestimatealsoassumesnomaterialchangesinourexpectedlevelofindebtedness,exceptforanassumptionthatourcommercialpaperwillberepaidattheendofthesecondquarterof2007.

Theinterestexpensein2007relatedtoourfixed-ratedebt,includingnetaccretionofrelateddiscounts,willbeapproximately$410million.Thisfixed-ratedebtremovestheuncertaintyoffutureinterestratesfromsome,butnotall,ofourlong-termdebt.

Ourfloatingratedebtiscomprisedofvariable-ratecommercialpaperandonedebtinstrumentwhichhasbeenconvertedtofloatingratedebtthroughtheuseofaninterestrateswap.Ourfloatingratedebtissummarizedinthefollowingtable:

notional deBtinStrument amount floatinGrate

(INMILLIoNs)

Commercial paper $ 1,808 (1) Various (2)

4.375% senior notes due in Oct. 2007 $ 400 LIBOR plus 40 basis points

(1) Represents outstanding balance as of December 31, 2006.(2) The interest rate is based on a standard index such as the Federal Funds Rate, LIBOR, or the money market rate as found on the commercial paper market. As of December 31, 2006, the average rate on the outstanding balance was 5.37%.

BasedonestimatesoffutureLIBORratesasofDecember31,2006,interestexpenseonfloatingratedebt,includingnetamortizationofpremiums,isexpectedtototalbetween$80millionand$90millionin2007.

Ourinterestexpensetotalsincludepaymentsoffacilityandagencyfees,amortizationofdebtissuancecostsandothermiscellaneousitemsnotrelatedtothedebtbalancesoutstanding.Weexpectbetween$5millionand$15millionofsuchitemstobeincludedinour2007interestexpense.Also,weexpecttocapitalizebetween$95millionand$105millionofinterestduring2007.

effectsofChangesinforeignCurrencyratesForeigncurrencygainsorlossesarenotexpectedtobematerialin2007.

otherincomeWeestimatethatourotherincomein2007willbebetween$65millionand$85million.Historically,wemaintainedacomprehensiveinsuranceprogramthatincludedcoverageforphysicaldamagetoouroffshorefacilitiescausedbyhurricanes.Our

historicalinsuranceprogramalsoincludedsubstantialbusinessinterruptioncoveragewhichweareutilizingtorecovercostsassociatedwiththesuspendedproductionrelatedtohurricanesthatstrucktheGulfofMexicointhethirdquarterof2005.

Basedoncurrentestimatesofphysicaldamageandtheanticipatedlengthoftimewewillhaveproductionsuspended,weexpectourpolicyrecoverieswillexceedrepaircostsanddeductibleamounts.Thisexpectationisbaseduponseveralvariables,includingthe$467millionreceivedinthethirdquarterof2006asafull

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settlementoftheamountduefromourprimaryinsurers.AsofDecember31,2006,$154millionoftheseproceedshadbeenutilizedasreimbursementofpastrepaircostsanddeductibleamounts.Theremainingproceedsof$313millionwillbeutilizedasreimbursementofouranticipatedfuturerepaircosts.Wehavenotyetreceivedanysettlementsrelatedtoclaimsfiledwithoursecondaryinsurers.

Shouldourtotalpolicyrecoveries,includingthepartialsettlementsalreadyreceivedfromourprimaryinsurers,exceedallrepaircostsanddeductibleamounts,suchexcesswillberecognizedasotherincomeinthestatementofoperationsintheperiodinwhichsuchdeterminationcanbemade.Basedonthemostrecentestimatesofourcostsforrepairs,webelievethatsomeamountwillultimatelyberecordedasotherincome.However,thetimingandamountthatwouldberecordedasotherincomeareuncertain.Therefore,the2007estimateforotherincomeabovedoesnotincludeanyamountrelatedtohurricaneproceeds.

incometaxesOurfinancialincometaxratein2007willvarymateriallydependingontheactualamountoffinancialpre-taxearnings.Thetaxratefor2007willbesignificantly

affectedbytheproportionalshareofconsolidatedpre-taxearningsgeneratedbyU.S.,CanadianandInternationaloperationsduetothedifferenttaxratesofeachcountry.Therearecertaintaxdeductionsandcreditsthatwillhaveafixedimpacton2007incometaxexpenseregardlessofthelevelofpre-taxearningsthatareproduced.

Giventheuncertaintyofpre-taxearnings,weexpectthatourconsolidatedfinancialincometaxratein2007willbebetween20%and40%.Thecurrentincometaxrateisexpectedtobebetween15%and25%.Thedeferredincometaxrateisexpectedtobebetween5%and15%.Significantchangesinestimatedcapitalexpenditures,productionlevelsofoil,naturalgasandNGLs,thepricesofsuchproducts,marketingandmidstreamrevenues,oranyofthevariousexpenseitemscouldmateriallyaltertheeffectoftheaforementionedtaxdeductionsandcreditson2007financialincometaxrates.

discontinuedoperationsAspreviouslydiscussed,weintendtodivestourEgyptianandWestAfricanoperationsin2007.WeexpecttocompletethesaleofEgyptduringthefirsthalfof2007

andthesaleofWestAfricaduringthethirdquarterof2007.Thefollowingtableshowstheestimatesfor2007oil,gasandNGLproductionaswellastheanticipatedproductionandoperatingexpensesassociatedwiththesediscontinuedoperationsfor2007.TheseestimatesassumethesalesofEgyptandWestAfricawilloccurattheendofthesecondquarterof2007.Pursuanttoaccountingrulesfordiscontinuedoperations,theEgyptianassetswillnotbesubjecttoDD&Aduring2007andtheWestAfricanassetswillonlybesubjecttoDD&Aforthefirstmonthof2007.

eGYpt weStafriCa

Oil production (MMBbls) 1 5Gas production (Bcf) — 3Total production (MMBoe) 1 6 Production and operating expenses (In millions) $ 11 $ 34Capital expenditures (In millions) $ 17 $ 120

Year2007potentialCapitalresources,usesandliquidityCapital Expenditures Thoughwehavecompletedseveralmajorpropertyacquisitionsinrecentyears,thesetransactionsareopportunitydriven.Thus,wedonot

“budget,”norcanwereasonablypredict,thetimingorsizeofsuchpossibleacquisitions.Ourcapitalexpendituresbudgetisbasedonanexpectedrangeoffutureoil,naturalgasandNGLpricesaswellastheexpectedcostsofthecapitaladditions.

Shouldactualpricesreceiveddiffermateriallyfromourpriceexpectationsforourfutureproduction,someprojectsmaybeacceleratedordeferredand,consequently,mayincreaseordecreasetotal2007capitalexpenditures.Inaddition,iftheactualmaterialorlaborcostsofthebudgeteditemsvarysignificantlyfromtheanticipatedamounts,actualcapitalexpenditurescouldvarymateriallyfromourestimates.

Giventhelimitationsdiscussedabove,thefollowingtableshowsexpecteddrilling,developmentandfacilitiesexpendituresbygeographicarea.Productioncapitalrelatedtoprovedreservesrelatestoreservesclassifiedasprovedasofyear-end2006.Otherproductioncapitalincludesdrillingthatdoesnotoffsetcurrentlyproductiveunitsandforwhichthereisnotacertaintyofcontinuedproductionfromaknownproductiveformation.Explorationcapitalincludesexploratorydrillingtofindandproduceoilorgasinpreviouslyuntestedfaultblocksornewreservoirs. u.S. u.S. onShore offShore Canada international total

(INMILLIoNs)

Production capital related to proved reserves $ 1,170- $ 1,270 $ 80- $ 90 $ 410- $ 450 $ 260- $ 280 $ 1,920- $ 2,090Other production capital $ 1,250- $ 1,340 $ 220- $ 230 $ 590- $ 640 $ 15- $ 20 $ 2,075- $ 2,230Exploration capital $ 350- $ 380 $ 290- $ 310 $ 160- $ 170 $ 75- $ 85 $ 875- $ 945 Total $ 2,770- $ 2,990 $ 590- $ 630 $ 1,160- $ 1,260 $ 350- $ 385 $ 4,870- $ 5,265

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Inadditiontotheaboveexpendituresfordrilling,developmentandfacilities,weexpecttospendbetween$330millionto$370milliononourmarketingandmidstreamassets,whichincludeouroilpipelines,gasprocessingplants,CO

2removalfacilitiesandgastransportpipelines.Wealsoexpecttocapitalizebetween$245

millionand$255millionofG&Aexpensesinaccordancewiththefullcostmethodofaccountingandtocapitalizebetween$95millionand$105millionofinterest.Wealsoexpecttopaybetween$40millionand$50millionforpluggingandabandonmentcharges,andtospendbetween$135millionand$145millionforothernon-oilandgaspropertyfixedassets.

Other Cash Uses Ourmanagementexpectsthepolicyofpayingaquarterlycommonstockdividendtocontinue.Withthecurrent$0.14persharequarterlydividendrateand444millionsharesofcommonstockoutstandingasofDecember31,2006,dividendsareexpectedtoapproximate$250million.Also,wehave$150millionof6.49%cumulativepreferredstockuponwhichwewillpay$10millionofdividendsin2007.

Capital Resources and Liquidity Ourestimated2007cashuses,includingourdrillinganddevelopmentactivities,retirementofdebtandrepurchaseofcommonstock,areexpectedtobefundedprimarilythroughacombinationofoperatingcashflowandproceedsfromthesaleofourassetsinEgyptandWestAfrica.Anyremainingcashusescouldbefundedbyincreasingourborrowingsunderourcommercialpaperprogramorwithborrowingsfromtheavailablecapacityunderourcreditfacility,whichwas$408millionatDecember31,2006.Theamountofoperatingcashflowtobegeneratedduring2007isuncertainduetothefactorsaffectingrevenuesandexpensesaspreviouslycited.However,weexpectourcombinedcapitalresourcestobemorethanadequatetofundouranticipatedcapitalexpendituresandothercashusesfor2007.

Ifsignificantotheracquisitionsorotherunplannedcapitalrequirementsariseduringtheyear,wecouldutilizeourexistingcreditfacilityand/orseektoestablishandutilizeothersourcesoffinancing.

quantitativeandqualitativediSCloSureSaBoutmarketriSk

Theprimaryobjectiveofthefollowinginformationistoprovideforward-lookingquantitativeandqualitativeinformationaboutourpotentialexposuretomarketrisks.Theterm“marketrisk”referstotheriskoflossarisingfromadversechangesinoil,gasandNGLprices,interestratesandforeigncurrencyexchangerates.Thedisclosuresarenotmeanttobepreciseindicatorsofexpectedfuturelosses,butratherindicatorsofreasonablypossiblelosses.Thisforward-lookinginformationprovidesindicatorsofhowweviewandmanageourongoingmarketriskexposures.Allofourmarketrisksensitiveinstrumentswereenteredintoforpurposesotherthanspeculativetrading.

CommoditypriceriskOurmajormarketriskexposureisinthepricingapplicabletoouroil,gasandNGLproduction.Realizedpricingisprimarilydrivenbytheprevailingworldwideprice

forcrudeoilandspotmarketpricesapplicabletoourU.S.andCanadiannaturalgasandNGLproduction.Pricingforoil,gasandNGLproductionhasbeenvolatileandunpredictableforseveralyears.

Currently,wearelargelyacceptingthevolatilityriskthatoil,naturalgasandNGLpricespresent.Noneofourfutureoilproductionissubjecttopriceswapsorcollars.Withregardtoourfuturenaturalgasproduction,basedoncontractscurrentlyinplace,wewillhaveapproximately116MMcfperdayofgasproductionin2007thatissubjecttoeitherfixed-pricecontracts,swaps,floorsorcollars.Thisamountrepresentsapproximately5%ofourestimated2007gasproduction(3%ofourtotalBoeproduction).Fortheyears2008through2011,wehavefixed-pricephysicaldeliverycontractscoveringCanadiannaturalgasproductionrangingfromsevenBcfto14Bcfperyear.Thesecontractsarenotexpectedtohaveamaterialeffectonourrealizedgaspricesfrom2007through2011.

interestrateriskAtDecember31,2006,wehaddebtoutstandingof$7.8billion.Ofthisamount,$5.6billion,or72%,bearsinterestatfixedratesaveraging7.3%.Additionally,we

had$1.8billionofoutstandingcommercialpaperbearinginterestatfloatingrateswhichaveraged5.37%atDecember31,2006.Theremainingdebtconsistsof$400million4.375%seniornotesdueinOctoberof2007.Throughtheuseofaninterestrateswap,thisfixed-ratedebthasbeenconvertedtofloating-ratedebtbearinginterestequaltoLIBORplus40basispoints.

Weuseasensitivityanalysistechniquetoevaluatethehypotheticaleffectthatchangesininterestratesmayhaveonthefairvalueofanyoutstandinginterestrateswapinstruments.AtDecember31,2006,a10%increaseintheunderlyinginterestrateswouldhavedecreasedthefairvalueofourinterestrateswapby$2million.

Theabovesensitivityanalysisforinterestrateriskexcludesaccountsreceivable,accountspayableandaccruedliabilitiesbecauseoftheshort-termmaturityofsuchinstruments.

foreignCurrencyriskOurnetassets,netearningsandcashflowsfromourCanadiansubsidiariesarebasedontheU.S.dollarequivalentofsuchamountsmeasuredintheCanadiandollar

functionalcurrency.AssetsandliabilitiesoftheCanadiansubsidiariesaretranslatedtoU.S.dollarsusingtheapplicableexchangerateasoftheendofareportingperiod.Revenues,expensesandcashflowaretranslatedusingtheaverageexchangerateduringthereportingperiod.A10%unfavorablechangeintheCanadian-to-U.S.dollarexchangeratewouldnotmateriallyimpactourDecember31,2006balancesheet.

57

Report of independent Registered Public Accounting Firm

TheBoardofDirectorsandStockholdersDevonEnergyCorporation:

WehaveauditedtheaccompanyingconsolidatedbalancesheetsofDevonEnergyCorporationandsubsidiariesasofDecember31,2006and2005,andtherelatedconsolidatedstatementsofoperations,comprehensiveincome,stockholders’equityandcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2006.TheseconsolidatedfinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.

WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.

Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofDevonEnergyCorporationandsubsidiariesasofDecember31,2006and2005,andtheresultsoftheiroperationsandtheircashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2006,inconformitywithU.S.generallyacceptedaccountingprinciples.

AsdescribedinNote1totheconsolidatedfinancialstatements,asofJanuary1,2006,theCompanyadoptedStatementsofFinancialAccountingStandardsNo.123(R),Share-Based Payment,andasofDecember31,2006theCompanyadoptedthebalancesheetrecognitionprovisionsofStatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).

Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theeffectivenessofDevonEnergyCorporation’sinternalcontroloverfinancialreportingasofDecember31,2006,basedoncriteriaestablishedinInternal Control – Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),andourreportdatedFebruary26,2007expressedanunqualifiedopiniononmanagement’sassessmentof,andtheeffectiveoperationof,internalcontroloverfinancialreporting.

OklahomaCity,OklahomaFebruary26,2007

58

Devon’smanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingforDevon,assuchtermisdefinedinRules13a-15(f)and15d-15(f)undertheSecuritiesExchangeActof1934.UnderthesupervisionandwiththeparticipationofDevon’smanagement,includingourprincipalexecutiveandprincipalfinancialofficers,DevonconductedanevaluationoftheeffectivenessofitsinternalcontroloverfinancialreportingbasedontheframeworkinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(the“COSOFramework”).BasedonthisevaluationundertheCOSOFrameworkwhichwascompletedonFebruary12,2007,managementconcludedthatitsinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2006.

Management’sassessmentoftheeffectivenessofDevon’sinternalcontroloverfinancialreportingasofDecember31,2006hasbeenauditedbyKPMGLLP,anindependentregisteredpublicaccountingfirmwhoauditedDevon’sconsolidatedfinancialstatementsasofandfortheyearendedDecember31,2006,asstatedintheirreportwhichisincludedherein.

Management’s Annual Report on internal Control Over Financial Reporting

59

Report of independent Registered Public Accounting Firm

TheBoardofDirectorsandStockholdersDevonEnergyCorporation:

Wehaveauditedmanagement’sassessment,includedintheaccompanyingManagement’sAnnualReportonInternalControlOverFinancialReportingthatDevonEnergyCorporationmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2006,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).DevonEnergyCorporation’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting.Ourresponsibilityistoexpressanopiniononmanagement’sassessmentandanopinionontheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.

WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.

Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.

Inouropinion,management’sassessmentthatDevonEnergyCorporationmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2006,isfairlystated,inallmaterialrespects,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).Also,inouropinion,DevonEnergyCorporationmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2006,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).

Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofDevonEnergyCorporationandsubsidiariesasofDecember31,2006and2005,andtherelatedconsolidatedstatementsofoperations,comprehensiveincome,stockholders’equityandcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2006,andourreportdatedFebruary26,2007expressedanunqualifiedopiniononthoseconsolidatedfinancialstatements.Ourreportreferstoachangeinthemethodofaccountingforshare-basedpaymentsandachangeinthebalancesheetrecognitionofdefinedbenefitpensionandotherpostretirementbenefitplans.

OklahomaCity,OklahomaFebruary26,2007

60

deCemBer31,(inmillionS,exCeptSharedata) 2006 2005

ASSEtS:Currentassets: Cashandcashequivalents $ 739 1,593 Short-terminvestments 574 680 Accountsreceivable 1,393 1,565 Deferredincometaxes 102 158 Currentassetsheldforsale 81 66 Othercurrentassets 323 144 Totalcurrentassets 3,212 4,206Propertyandequipment,atcost,basedonthefullcostmethodof accountingforoilandgasproperties($3,674and$2,704excluded fromamortizationin2006and2005,respectively) 41,889 33,824Lessaccumulateddepreciation,depletionandamortization 17,294 14,913 24,595 18,911InvestmentinChevronCorporationcommonstock,atfairvalue 1,043 805Goodwill 5,706 5,705Assetsheldforsale 185 217Otherassets 322 429 Totalassets $ 35,063 30,273

liAbilitiES AnD StOCkhOlDERS’ EquitY: Currentliabilities: Accountspayable–trade $ 1,190 928 Revenuesandroyaltiesduetoothers 529 666 Incometaxespayable 197 293 Short-termdebt 2,205 662 Accruedinterestpayable 114 127 Fairvalueofderivativefinancialinstruments 6 18 Currentportionofassetretirementobligation 61 50 Currentliabilitiesassociatedwithassetsheldforsale 5 19 Accruedexpensesandothercurrentliabilities 338 171 Totalcurrentliabilities 4,645 2,934DebenturesexchangeableintosharesofChevronCorporationcommonstock 727 709Otherlong-termdebt 4,841 5,248Fairvalueofderivativefinancialinstruments 302 125Assetretirementobligation 833 610Liabilitiesassociatedwithassetsheldforsale 25 40Otherliabilities 598 371Deferredincometaxes 5,650 5,374Stockholders’equity: Preferredstockof$1.00parvalue.Authorized4,500,000shares; issued1,500,000($150millionaggregateliquidationvalue) 1 1 Commonstockof$0.10parvalue.Authorized800,000,000shares; issued444,040,000in2006and443,488,000in2005 44 44 Additionalpaid-incapital 6,840 6,928 Retainedearnings 9,114 6,477 Accumulatedothercomprehensiveincome 1,444 1,414 Treasurystock,atcost:11,000sharesin2006and37,000sharesin2005 (1) (2) Totalstockholders’equity 17,442 14,862Commitmentsandcontingencies(Note8) Totalliabilitiesandstockholders’equity $ 35,063 30,273 seeaccompanyingnotestoconsolidatedfinancialstatements.

Consolidated balance SheetsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes

61

Consolidated Statements of OperationsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes

YearendeddeCemBer31,(inmillionS,exCeptperShareamountS) 2006 2005 2004

REvEnuES: Oilsales $ 3,205 2,359 2,099 Gassales 4,932 5,784 4,732 NGLsales 749 687 554 Marketingandmidstreamrevenues 1,692 1,792 1,701 Totalrevenues 10,578 10,622 9,086

ExPEnSES AnD OthER inCOME, nEt: Leaseoperatingexpenses 1,488 1,324 1,259 Productiontaxes 341 335 255 Marketingandmidstreamoperatingcostsandexpenses 1,244 1,342 1,339 Depreciation,depletionandamortizationofoilandgasproperties 2,266 1,981 2,077 Depreciationandamortizationofnon-oilandgasproperties 176 160 148 Accretionofassetretirementobligation 49 43 44 Generalandadministrativeexpenses 397 291 277 Interestexpense 421 533 475 Changeinfairvalueofderivativefinancialinstruments 178 94 62 Reductionofcarryingvalueofoilandgasproperties 121 212 — Otherincome,net (115) (198) (126) Totalexpensesandotherincome,net 6,566 6,117 5,810Earningsfromcontinuingoperationsbeforeincometaxexpense 4,012 4,505 3,276

inCOME tAx ExPEnSE: Current 819 1,218 725 Deferred 370 388 370 Totalincometaxexpense 1,189 1,606 1,095Earningsfromcontinuingoperations 2,823 2,899 2,181

DiSCOntinuED OPERAtiOnS: Earningsfromdiscontinuedoperationsbeforeincometaxes 22 46 17 Incometax(benefit)expense (1) 15 12 Earningsfromdiscontinuedoperations 23 31 5Netearnings 2,846 2,930 2,186Preferredstockdividends 10 10 10Netearningsapplicabletocommonstockholders $ 2,836 2,920 2,176

bASiC nEt EARningS PER ShARE: Earningsfromcontinuingoperations $ 6.37 6.31 4.50 Earningsfromdiscontinuedoperations 0.05 0.07 0.01 Netearnings $ 6.42 6.38 4.51

DilutED nEt EARningS PER ShARE: Earningsfromcontinuingoperations $ 6.29 6.19 4.37 Earningsfromdiscontinuedoperations 0.05 0.07 0.01 Netearnings $ 6.34 6.26 4.38

WEightED AvERAgE COMMOn ShARES OutStAnDing: Basic 442 458 482 Diluted 448 470 499

seeaccompanyingnotestoconsolidatedfinancialstatements.

62

Consolidated Statements of Comprehensive incomeDevoNeNerGyCorporAtIoNANDsuBsIDIArIes

YearendeddeCemBer31,(inmillionS) 2006 2005 2004

Netearnings $ 2,846 2,930 2,186

FOREign CuRREnCY tRAnSlAtiOn: Changeincumulativetranslationadjustment (25) 181 426 Incometaxes 28 (19) (38) Total 3 162 388

DERivAtivE FinAnCiAl inStRuMEntS: Unrealizedchangeinfairvalue — (255) (848) Reclassificationadjustmentforrealized(gains)lossesincludedinnetearnings (2) 685 635 Incometaxes — (141) 62 Total (2) 289 (151)

PEnSiOn AnD POStREtiREMEnt bEnEFit PlAnS: Changeinadditionalminimumpensionliability 30 (8) 61 Incometaxes (13) 3 (22) Total 17 (5) 39

invEStMEnt in ChEvROn CORPORAtiOn COMMOn StOCk: Unrealizedholdinggain 238 60 132 Incometaxes (86) (22) (47) Total 152 38 85Othercomprehensiveincome,netoftax 170 484 361Comprehensiveincome $ 3,016 3,414 2,547

seeaccompanyingnotestoconsolidatedfinancialstatements.

63

Consolidated Statements of Stockholders’ Equity DevoNeNerGyCorporAtIoNANDsuBsIDIArIes

aCCumulated additional other total preferredCommonStoCk paid-in retained ComprehenSive treaSurY StoCkholderS’(inmillionS) StoCk ShareS amount Capital earninGS inCome StoCk equitY

bAlAnCE AS OF DECEMbER 31, 2003 $ 1 472 $ 47 9,011 1,614 569 (186) 11,056Netearnings — — — — 2,186 — — 2,186Othercomprehensiveincome — — — — — 361 — 361Stockoptionexercises — 13 1 267 — — (21) 247Restrictedstockgrants,netofcancellations — 2 — — — — — —Commonstockrepurchased — (5) — — — — (190) (190)Commonstockretired — — — (341) — — 341 —Conversionofsubsidiarypreferredstock — 2 — — — — 56 56Commonstockdividends — — — — (97) — — (97)Preferredstockdividends — — — — (10) — — (10)Share-basedcompensation — — — 11 — — — 11Excesstaxbenefitsonshare-basedcompensation — — — 54 — — — 54

bAlAnCE AS OF DECEMbER 31, 2004 1 484 48 9,002 3,693 930 — 13,674Netearnings — — — — 2,930 — — 2,930Othercomprehensiveincome — — — — — 484 — 484Stockoptionexercises — 5 — 124 — — — 124Restrictedstockgrants,netofcancellations — 1 — — — — — —Commonstockrepurchased — (47) — — — — (2,275) (2,275)Commonstockretired — — (4) (2,269) — — 2,273 —Commonstockdividends — — — — (136) — — (136)Preferredstockdividends — — — — (10) — — (10)Share-basedcompensation — — — 27 — — — 27Excesstaxbenefitsonshare-basedcompensation — — — 44 — — — 44

bAlAnCE AS OF DECEMbER 31, 2005 1 443 44 6,928 6,477 1,414 (2) 14,862Netearnings — — — — 2,846 — — 2,846Othercomprehensiveincome — — — — — 170 — 170AdoptionofFASBStatementNo.158(seeNote6) — — — — — (140) — (140)Stockoptionexercises — 3 — 73 — — — 73Restrictedstockgrants,netofcancellations — 2 — (3) — — — (3)Commonstockrepurchased — (4) — — — — (277) (277)Commonstockretired — — — (278) — — 278 —Commonstockdividends — — — — (199) — — (199)Preferredstockdividends — — — — (10) — — (10)Share-basedcompensation — — — 84 — — — 84Excesstaxbenefitsonshare-basedcompensation — — — 36 — — — 36

bAlAnCE AS OF DECEMbER 31, 2006 $ 1 444 $ 44 6,840 9,114 1,444 (1) 17,442

seeaccompanyingnotestoconsolidatedfinancialstatements.

64

Consolidated Statements of Cash FlowsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes

YearendeddeCemBer31,(inmillionS) 2006 2005 2004

CASh FlOWS FROM OPERAting ACtivitiES: Netearnings $ 2,846 2,930 2,186 Lessearningsfromdiscontinuedoperations,netoftax (23) (31) (5) Adjustmentstoreconcilenetearningsfromcontinuingoperations tonetcashprovidedbyoperatingactivities: Depreciation,depletionandamortization 2,442 2,141 2,225 Deferredincometaxexpense 370 388 370 Netgainonsalesofnon-oilandgaspropertyandequipment (5) (150) (34) Reductionofcarryingvalueofoilandgasproperties 121 212 — Othernoncashcharges 270 128 110 Changesinassetsandliabilities: (Increase)decreasein: Accountsreceivable 212 (279) (318) Othercurrentassets (37) (17) (18) Long-termotherassets (66) 48 (93) Increase(decrease)in: Accountspayable (183) 255 189 Incometaxespayable (231) 69 208 Debt,includingcurrentmaturities — (67) 16 Othercurrentliabilities 78 (34) (28) Long-termotherliabilities 142 (79) (19) Cashprovidedbyoperatingactivities–continuingoperations 5,936 5,514 4,789 Cashprovidedbyoperatingactivities–discontinuedoperations 57 98 27 Netcashprovidedbyoperatingactivities 5,993 5,612 4,816CASh FlOWS FROM invESting ACtivitiES: Proceedsfromsalesofpropertyandequipment 40 2,151 95 Capitalexpenditures (7,551) (4,026) (3,058) Purchasesofshort-terminvestments (2,395) (4,020) (3,215) Salesofshort-terminvestments 2,501 4,307 2,589 Cashusedininvestingactivities–continuingoperations (7,405) (1,588) (3,589) Cashusedininvestingactivities–discontinuedoperations (44) (64) (45) Netcashusedininvestingactivities (7,449) (1,652) (3,634)CASh FlOWS FROM FinAnCing ACtivitiES: Netcommercialpaperborrowings,netofissuancecosts 1,808 — — Debtrepayments,includingcurrentmaturities (862) (1,258) (973) Proceedsfromstockoptionexercises 73 124 268 Repurchasesofcommonstock (253) (2,263) (189) Excesstaxbenefitsrelatedtoshare-basedcompensation 36 — — Dividendspaidoncommonstock (199) (136) (97) Dividendspaidonpreferredstock (10) (10) (10) Netcashprovidedby(usedin)financingactivities 593 (3,543) (1,001)Effectofexchangeratechangesoncash 13 37 39Net(decrease)increaseincashandcashequivalents (850) 454 220Cashandcashequivalentsatbeginningofyear(includingcash relatedtoassetsheldforsale) 1,606 1,152 932Cashandcashequivalentsatendofyear(includingcashrelated toassetsheldforsale) $ 756 1,606 1,152

SuPPlEMEntARY CASh FlOW DAtA:

Interestpaid $ 464 663 474Incometaxespaid $ 960 1,092 477

seeaccompanyingnotestoconsolidatedfinancialstatements.

65

notes to Consolidated Financial StatementsDevoNeNerGyCorporAtIoNANDsuBsIDIArIes

1.SummarYofSiGnifiCantaCCountinGpoliCieS

AccountingpoliciesusedbyDevonEnergyCorporationandsubsidiaries(“Devon”)reflectindustrypracticesandconformtoaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Themoresignificantofsuchpoliciesarebrieflydiscussedbelow.

natureofBusinessandprinciplesofConsolidationDevonisengagedprimarilyinoilandgasexploration,developmentandproduction,andtheacquisitionofproperties.SuchactivitiesintheUnitedStatesare

concentratedinthefollowinggeographicareas:

•TheMid-ContinentareaofthecentralandsouthernUnitedStates,principallyinnorthandeastTexasandOklahoma;•ThePermianBasinwithinTexasandNewMexico;•TheRockyMountainsareaoftheUnitedStatesstretchingfromtheCanadianborderintonorthernNewMexico;•TheoffshoreareasoftheGulfofMexico;and•TheonshoreareasoftheGulfCoast,principallyinsouthTexasandsouthLouisiana.

Devon’sCanadianactivitiesarelocatedprimarilyintheWesternCanadianSedimentaryBasin.Devon’sinternationalactivities—outsideofNorthAmerica—arelocatedprimarilyinAzerbaijan,Brazil,ChinaandvariouscountriesinWestAfrica.OnJanuary23,2007,DevonannounceditsplanstodivestitsWestAfricanoperations.SeeNote13.

Devonalsohasmarketingandmidstreamoperationswhichareresponsibleformarketingnaturalgas,crudeoilandNGLs,andconstructingandoperatingpipelines,storageandtreatingfacilitiesandgasprocessingplants.TheseservicesareperformedforDevonaswellasforunrelatedthirdparties.

TheaccountsofDevon’scontrolledsubsidiariesareincludedintheaccompanyingconsolidatedfinancialstatements.Allsignificantintercompanyaccountsandtransactionshavebeeneliminatedinconsolidation.

useofestimatesinthepreparationoffinancialStatementsThepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomake

estimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualamountscoulddifferfromtheseestimates,andchangesintheseestimatesarerecordedwhenknown.Significantitemssubjecttosuchestimatesandassumptionsincludeestimatesofprovedreservesandrelatedpresentvalueestimatesoffuturenetrevenue,thecarryingvalueofoilandgasproperties,goodwillimpairmentassessment,assetretirementobligations,incometaxes,valuationofderivativeinstruments,obligationsrelatedtoemployeebenefitsandlegalandenvironmentalrisksandexposures.

propertyandequipmentDevonfollowsthefullcostmethodofaccountingforitsoilandgasproperties.Accordingly,allcostsincidentaltotheacquisition,explorationanddevelopmentof

oilandgasproperties,includingcostsofundevelopedleasehold,dryholesandleaseholdequipment,arecapitalized.Internalcostsincurredthataredirectlyidentifiedwithacquisition,explorationanddevelopmentactivitiesundertakenbyDevonforitsownaccount,andwhicharenotrelatedtoproduction,generalcorporateoverheadorsimilaractivities,arealsocapitalized.Interestcostsincurredandattributabletounprovedoilandgaspropertiesundercurrentevaluationandmajordevelopmentprojectsofoilandgaspropertiesarealsocapitalized.Allcostsrelatedtoproductionactivities,includingworkovercostsincurredsolelytomaintainorincreaselevelsofproductionfromanexistingcompletioninterval,arechargedtoexpenseasincurred.

Underthefullcostmethodofaccounting,thenetbookvalueofoilandgasproperties,lessrelateddeferredincometaxes,maynotexceedacalculated“ceiling.”Theceilinglimitationistheestimatedafter-taxfuturenetrevenues,discountedat10%perannum,fromprovedoil,naturalgasandNGLreservesplusthecostofpropertiesnotsubjecttoamortization.Estimatedfuturenetrevenuesexcludefuturecashoutflowsassociatedwithsettlingassetretirementobligationsincludedinthenetbookvalueofoilandgasproperties.Suchlimitationsareimposedseparatelyonacountry-by-countrybasisandaretestedquarterly.Incalculatingfuturenetrevenues,pricesandcostsusedarethoseasoftheendoftheappropriatequarterlyperiod.Thesepricesarenotchangedexceptwheredifferentpricesarefixedanddeterminablefromapplicablecontractsfortheremainingtermofthosecontracts,includingdesignatedcashflowhedgesinplace.DevonhadnosuchhedgesoutstandingatDecember31,2006orDecember31,2005.

Anyexcessofthenetbookvalue,lessrelateddeferredtaxes,overtheceilingiswrittenoffasanexpense.Anexpenserecordedinoneperiodmaynotbereversedinasubsequentperiodeventhoughhigheroilandgaspricesmayhaveincreasedtheceilingapplicabletothesubsequentperiod.

Capitalizedcostsaredepletedbyanequivalentunit-of-productionmethod,convertinggastooilattheratioofsixthousandcubicfeetofnaturalgastoonebarrelofoil.Depletioniscalculatedusingthecapitalizedcosts,includingestimatedassetretirementcosts,plustheestimatedfutureexpenditures(basedoncurrentcosts)tobeincurredindevelopingprovedreserves,netofestimatedsalvagevalues.

Unprovedpropertiesareexcludedfromamortizedcapitalizedcostsuntilitisdeterminedwhetherornotprovedreservescanbeassignedtosuchproperties.Devonassessesitsunprovedpropertiesforimpairmentquarterly.Significantunprovedpropertiesareassessedindividually.Costsofinsignificantunprovedpropertiesaretransferredtoamortizablecostsoveraverageholdingperiodsrangingfromthreeyearsforonshorepropertiestosevenyearsforoffshoreproperties.

66

notes

Nogainorlossisrecognizedupondisposalofoilandgaspropertiesunlesssuchdisposalsignificantlyalterstherelationshipbetweencapitalizedcostsandprovedreservesinaparticularcountry.

Depreciationofmidstreampipelinesareprovidedonaunits-of-productionbasis.Depreciationandamortizationofotherpropertyandequipment,includingcorporateandothermidstreamassetsandleaseholdimprovements,areprovidedusingthestraight-linemethodbasedonestimatedusefullivesrangingfromthreeto39years.

Devonrecognizesliabilitiesforretirementobligationsassociatedwithtangiblelong-livedassets,suchasproducingwellsites,offshoreproductionplatforms,andnaturalgasprocessingplantswhenthereisalegalobligationassociatedwiththeretirementofsuchassetsandtheamountcanbereasonablyestimated.Theinitialmeasurementofanassetretirementobligationisrecordedasaliabilityatitsfairvalue,withanoffsettingassetretirementcostrecordedasanincreasetotheassociatedpropertyandequipmentontheconsolidatedbalancesheet.Ifthefairvalueofarecordedassetretirementobligationchanges,arevisionisrecordedtoboththeassetretirementobligationandtheassetretirementcost.Theassetretirementcostisdepreciatedusingasystematicandrationalmethodsimilartothatusedfortheassociatedpropertyandequipment.

Short-terminvestmentsandothermarketableSecuritiesDevonreportsitsshort-terminvestmentsandothermarketablesecuritiesatfairvalue,exceptfordebtsecuritiesinwhichmanagementhastheabilityandintent

toholduntilmaturity.AtDecember31,2006and2005,Devon’sshort-terminvestmentsconsistedof$574millionand$680million,respectively,ofauctionratesecuritiesclassifiedasavailableforsale.AlthoughDevon’sauctionratesecuritieshavecontractualmaturitiesofmorethan10years,theunderlyinginterestratesonsuchsecuritiesresetatintervalsrangingfromsevento90days.Therefore,theseauctionratesecuritiesarepricedandsubsequentlytradeasshort-terminvestmentsbecauseoftheinterestrateresetfeature.Asaresult,Devonhasclassifieditsauctionratesecuritiesasshort-terminvestmentsintheaccompanyingconsolidatedbalancesheet.

Devon’sonlyothersignificantinvestmentsecurityisitsinvestmentinapproximately14.2millionsharesofChevronCorporationcommonstockwhichisreportedatfairvalue.Exceptforunrealizedlossesthataredeterminedtobe“otherthantemporary”,thetaxeffectedunrealizedgainorlossontheinvestmentinChevronCorporationcommonstockisrecognizedinothercomprehensiveincomeandreportedasaseparatecomponentofstockholders’equity.

GoodwillGoodwillrepresentstheexcessofthepurchasepriceofbusinesscombinationsoverthefairvalueofthenetassetsacquiredandistestedforimpairmentatleast

annually.Theimpairmenttestrequiresallocatinggoodwillandallotherassetsandliabilitiestoassignedreportingunits.Thefairvalueofeachreportingunitisestimatedandcomparedtothenetbookvalueofthereportingunit.Iftheestimatedfairvalueofthereportingunitislessthanthenetbookvalue,includinggoodwill,thenthegoodwilliswrittendowntotheimpliedfairvalueofthegoodwillthroughachargetoexpense.BecausequotedmarketpricesarenotavailableforDevon’sreportingunits,thefairvaluesofthereportingunitsareestimatedbaseduponseveralvaluationanalyses,includingcomparablecompanies,comparabletransactionsandpremiumspaid.Devonperformedannualimpairmenttestsofgoodwillinthefourthquartersof2006,2005and2004.Basedontheseassessments,noimpairmentofgoodwillwasrequired.

ThetablebelowprovidesasummaryofDevon’sgoodwill,byassignedreportingunit,asofDecember31,2006and2005: deCemBer31, 2006 2005

(INMILLIoNs)

United States $ 3,053 3,056 Canada 2,585 2,581 International 68 68 Total $ 5,706 5,705

revenuerecognitionandGasBalancingOil,gasandNGLrevenuesarerecognizedwhenproductionissoldtoapurchaseratafixedordeterminableprice,deliveryhasoccurred,titlehastransferredand

collectibilityoftherevenueisprobable.Deliveryoccursandtitleistransferredwhenproductionhasbeendeliveredtoapipelineortruckoratankerliftinghasoccurred.Cashreceivedrelatingtofutureproductionisdeferredandrecognizedwhenallrevenuerecognitioncriteriaaremet.Taxesassessedbygovernmentalauthoritiesonoil,gasandNGLrevenuesarepresentedseparatelyfromsuchrevenuesasproductiontaxesinthestatementofoperations.

Devonfollowsthesalesmethodofaccountingforgasproductionimbalances.ThevolumesofgassoldmaydifferfromthevolumestowhichDevonisentitledbasedonitsinterestsintheproperties.Thesedifferencescreateimbalancesthatarerecognizedasaliabilityonlywhentheestimatedremainingreserveswillnotbesufficienttoenabletheunderproducedownertorecoupitsentitledsharethroughproduction.Ifanimbalanceexistsatthetimethewells’reservesaredepleted,settlementsaremadeamongthejointinterestownersunderavarietyofarrangements.Theliabilityispricedbasedoncurrentmarketprices.NoreceivablesarerecordedforthosewellswhereDevonhastakenlessthanitsshareofproductionunlessallrevenuerecognitioncriteriaaremet.

Marketingandmidstreamrevenuesarerecordedatthetimeproductsaresoldorservicesareprovidedtothirdpartiesatafixedordeterminableprice,deliveryorperformancehasoccurred,titlehastransferredandcollectibilityoftherevenueisprobable.RevenuesandexpensesattributabletoDevon’sgasandNGLpurchaseandprocessingcontractsarereportedonagrossbasissinceDevontakestitletotheproductsandhasrisksandrewardsofownership.ThegaspurchasedunderthesecontractsisprocessedinDevon-ownedplants.

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notes

majorpurchasersDuring2006,revenuesreceivedfromExxonMobilanditsaffiliateswere$1.1billion,or10%ofDevon’sconsolidatedrevenues.Nopurchaseraccountedforover10%

ofDevon’srevenuesin2005or2004.

derivativeinstrumentsThemajorityofDevon’sderivativeinstrumentsconsistofcommodityfinancialinstrumentsusedtomanageDevon’scashflowexposuretooilandgasprice

volatility.Devonhasalsoenteredintointerestrateswapstomanageitsexposuretointerestratevolatility.Theinterestrateswapsmitigateeitherthecashfloweffectsofinterestratefluctuationsoninterestexpenseforvariable-ratedebtinstruments,orthefairvalueeffectsofinterestratefluctuationsonfixed-ratedebt.DevonalsohasanembeddedoptionderivativerelatedtothefairvalueofitsdebenturesexchangeableintosharesofChevronCorporationcommonstock.

Allderivativesarerecognizedattheircurrentfairvalueasfairvalueofderivativefinancialinstrumentsonthebalancesheet.Changesinthefairvalueofderivativefinancialinstrumentsarerecordedinthestatementofoperationsunlessspecifichedgeaccountingcriteriaaremet.Ifsuchcriteriaaremetforcashflowhedges,theeffectiveportionofthechangeinthefairvalueisrecordeddirectlytoaccumulatedothercomprehensiveincome,acomponentofstockholders’equity,untilthehedgedtransactionoccurs.Theineffectiveportionofthechangeinfairvalueisrecordedinthestatementofoperations.Ifsuchcriteriaaremetforfairvaluehedges,thechangeinthefairvalueisrecordedinthestatementofoperationswithanoffsettingamountrecordedforthechangeinfairvalueofthehedgeditem.

AderivativeinstrumentqualifiesforhedgeaccountingtreatmentifDevondesignatestheinstrumentassuchonthedatethederivativecontractisenteredintoorthedateofanacquisitionorbusinesscombinationwhichincludesderivativecontracts.Additionally,Devonmustdocumenttherelationshipbetweenthehedginginstrumentandhedgeditem,aswellastherisk-managementobjectiveandstrategyforundertakingtheinstrument.Devonmustalsoassess,bothattheinstrument’sinceptionandonanongoingbasis,whetherthederivativeishighlyeffectiveinoffsettingthechangeincashflowofthehedgeditem.

During2006,Devonenteredintoandacquiredcertaincommodityderivativeinstruments.Forsuchinstruments,Devonchosenottomeetthenecessarycriteriatoqualifythesederivativeinstrumentsforhedgeaccountingtreatment.Therefore,Devonrecordeda$37milliongainingassalesinthestatementofoperationsforthechangeinfairvaluerelatedtotheseinstruments.

Thefollowingtablepresentsthecomponentsofthe2006,2005and2004changeinfairvalueofderivativefinancialinstrumentspresentedintheaccompanyingstatementofoperations.Significantitemsarediscussedinmoredetailfollowingthetable.

2006 2005 2004

(INMILLIoNs)

Option embedded in exchangeable debentures $ 181 54 58Non-qualifying commodity hedges — 39 —Ineffectiveness of commodity hedges — 5 5Interest rate swaps (3) (4) (1) Total change in fair value of derivative financial instruments $ 178 94 62

ThechangeinthefairvalueoftheembeddedoptionrelatestothedebenturesexchangeableintosharesofChevronCorporationcommonstock.TheseexpenseswerecausedprimarilybyincreasesinthepriceofChevronCorporation’scommonstock.

During2005and2004,Devonhadanumberofcommodityderivativeinstrumentsthatqualifiedforhedgeaccountingtreatmentasdescribedabove.During2005,certainofthesederivativesceasedtoqualifyforhedgeaccountingtreatment.Inthethirdquarterof2005,certainoilderivativesceasedtoqualifyforhedgeaccountingprimarilyasaresultofdeferredproductioncausedbyhurricanesintheGulfofMexico.Becausethesecontractsnolongerqualifiedforhedgeaccounting,Devonrecognized$39millioninlossesaschangeinfairvalueofderivativefinancialinstrumentsintheaccompanying2005statementofoperations.

Inadditiontothechangesinfairvalueofnon-qualifyingcommodityhedgespresentedinthetableabove,Devonalsorecognizedin2005a$55millionlossrelatedtocertainoilhedgesthatnolongerqualifiedforhedgeaccountingduetotheeffectofthe2005propertydivestitureprogram.Thesecommodityinstrumentsrelatedto5,000barrelsperdayofU.S.oilproductionand3,000barrelsperdayofCanadianoilproductionfrompropertiesthatweresoldaspartofDevon’sdivestitureprogram.Thislossispresentedinotherincomeintheaccompanying2005statementofoperations.During2004,noderivativesceasedtoqualifyforhedgeaccounting.

InadditiontothechangesinfairvalueofDevon’sinterestrateswapspresentedinthetableabove,settlementsontheseinterestrateswapsincreasedinterestexpenseby$15millionand$12millionin2006and2005,respectively,anddecreasedinterestexpense$18millionin2004.

ThefollowingtablepresentsthebalancesofDevon’saccumulatednetgain(loss)oncashflowhedgesincludedinaccumulatedothercomprehensiveincome.

(inmillionS)

December 31, 2003 $ (135) December 31, 2004 $ (286) December 31, 2005 $ 3 December 31, 2006 $ 1

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notes

Byusingderivativeinstrumentstohedgeexposurestochangesincommoditypricesandinterestrates,Devonexposesitselftocreditriskandmarketrisk.Creditriskisthefailureofthecounterpartytoperformunderthetermsofthederivativecontract.Tomitigatethisrisk,thehedginginstrumentsareplacedwithcounterpartiesthatDevonbelievesareminimalcreditrisks.ItisDevon’spolicytoenterintoderivativecontractsonlywithinvestmentgraderatedcounterpartiesdeemedbymanagementtobecompetentandcompetitivemarketmakers.

Marketriskisthechangeinthevalueofaderivativeinstrumentthatresultsfromachangeincommodityprices,interestratesorotherrelevantunderlyings.Themarketriskassociatedwithcommoditypriceandinterestratecontractsismanagedbyestablishingandmonitoringparametersthatlimitthetypesanddegreeofmarketriskthatmaybeundertaken.TheoilandgasreferencepricesuponwhichthecommodityhedginginstrumentsarebasedreflectvariousmarketindicesthathaveahighdegreeofhistoricalcorrelationwithactualpricesreceivedbyDevon.Devondoesnotholdorissuederivativeinstrumentsforspeculativetradingpurposes.

StockoptionsEffectiveJanuary1,2006,DevonadoptedStatementofFinancialAccountingStandardNo.123(R),Share-Based Payment,(“SFASNo.123(R)”),usingthemodified

prospectivetransitionmethod.SFASNo.123(R)requiresequity-classified,share-basedpaymentstoemployees,includinggrantsofemployeestockoptions,tobevaluedatfairvalueonthedateofgrantandtobeexpensedovertheapplicablevestingperiod.Underthemodifiedprospectivetransitionmethod,share-basedawardsgrantedormodifiedonorafterJanuary1,2006,arerecognizedincompensationexpenseovertheapplicablevestingperiod.Also,anypreviouslygrantedawardsthatwerenotfullyvestedasofJanuary1,2006arerecognizedascompensationexpenseovertheremainingvestingperiod.NoretroactiveorcumulativeeffectadjustmentswererequireduponDevon’sadoptionofSFASNo.123(R).

PriortoadoptingSFASNo.123(R),Devonaccountedforitsfixed-planemployeestockoptionsusingtheintrinsic-valuebasedmethodprescribedbyAccountingPrinciplesBoardOpinionNo.25,Accounting for Stock Issued to Employees, (“APBNo.25”)andrelatedinterpretations.Thismethodrequiredcompensationexpensetoberecordedonthedateofgrantonlyifthecurrentmarketpriceoftheunderlyingstockexceededtheexerciseprice.

HadthefairvalueprovisionsofSFASNo.123(R)beenappliedin2005and2004,Devon’snetearningsandnetearningspersharewouldhavedifferedfromtheamountsactuallyreportedasshowninthefollowingtable.

YearendeddeCemBer31, 2005 2004

(INMILLIoNs,exCeptpershAreAMouNts)

Net earnings available to common stockholders, as reported $ 2,920 2,176Add share-based employee compensation expense included in reported net earnings, net of related tax expense 18 7Deduct total share-based employee compensation expense determined under fair value based method for all awards (see Note 9), net of related tax expense (44) (31)Net earnings available to common stockholders, pro forma $ 2,894 2,152

Net earnings per share available to common stockholders: As reported: Basic $ 6.38 4.51 Diluted $ 6.26 4.38 Pro forma: Basic $ 6.32 4.46 Diluted $ 6.21 4.33

AsaresultofadoptingSFASNo.123(R),Devon’s2006earningsfromcontinuingoperationsbeforeincometaxexpensewas$26millionlowerthanifDevonhadcontinuedtoaccountforshare-basedcompensationunderAPBNo.25.Additionally,2006earningsfromcontinuingoperationsandnetearningswereboth$17millionlower.Therelated2006basicanddilutedearningspershareamountswerebothapproximately$0.04persharelower.PriortotheadoptionofSFASNo.123(R),Devonpresentedalltaxbenefitsofdeductionsresultingfromtheexerciseofstockoptionsasoperatingcashinflowsinthestatementofcashflows.SFASNo.123(R)requiresthecashinflowsresultingfromtaxdeductionsinexcessofthecompensationexpenserecognizedforthosestockoptions(“excesstaxbenefits”)tobeclassifiedasfinancingcashinflows.AsrequiredbySFASNo.123(R),Devonrecognized$36millionofexcesstaxbenefitsasfinancingcashinflowsfor2006.In2005and2004,excesstaxbenefitsof$44millionand$54million,respectively,wereclassifiedasoperatingcashinflows.

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notes

incometaxesDevonaccountsforincometaxesusingtheassetandliabilitymethod,wherebydeferredtaxassetsandliabilitiesarerecognizedforthefuturetaxconsequences

attributabletodifferencesbetweenthefinancialstatementcarryingamountsofassetsandliabilitiesandtheirrespectivetaxbases,aswellasthefuturetaxconsequencesattributabletothefutureutilizationofexistingtaxnetoperatinglossandothertypesofcarryforwards.Deferredtaxassetsandliabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesandcarryforwardsareexpectedtoberecoveredorsettled.Theeffectondeferredtaxassetsandliabilitiesofachangeintaxratesisrecognizedinincomeintheperiodthatincludestheenactmentdate.AtDecember31,2006,undistributedearningsofforeignsubsidiariesweredeterminedtobepermanentlyreinvested.Therefore,noU.S.deferredincometaxeswereprovidedonsuchamountsatDecember31,2006.Ifitbecomesapparentthatsomeoralloftheundistributedearningswillbedistributed,Devonwouldthenrecordtaxesonthoseearnings.

GeneralandadministrativeexpensesGeneralandadministrativeexpensesarereportednetofamountsreimbursedbyworkinginterestownersoftheoilandgaspropertiesoperatedbyDevonandnet

ofamountscapitalizedpursuanttothefullcostmethodofaccounting.

netearningsperCommonShareBasicearningspershareiscomputedbydividingincomeavailabletocommonstockholdersbytheweightedaveragenumberofcommonsharesoutstandingfor

theperiod.Dilutedearningspershare,ascalculatedusingthetreasurystockmethod,reflectsthepotentialdilutionthatcouldoccurifDevon’sdilutiveoutstandingstockoptionswereexercised.For2005and2004,thecalculationofdilutedsharesalsoassumedthatDevon’spreviouslyoutstandingzerocouponconvertibleseniordebentureswereconvertedtocommonstock.

Thefollowingtablereconcilesearningsfromcontinuingoperationsandcommonsharesoutstandingusedinthecalculationsofbasicanddilutedearningspersharefor2006,2005and2004.

net earninGS weiGhted appliCaBleto averaGe net Common CommonShareS earninGS StoCkholderS outStandinG perShare

(INMILLIoNs,exCeptpershAreAMouNts)

YEAR EnDED DECEMbER 31, 2006: Earnings from continuing operations $ 2,823 Less preferred stock dividends (10) Basic earnings per share 2,813 442 $ 6.37 Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options — 6 Diluted earnings per share $ 2,813 448 $ 6.29

YEAR EnDED DECEMbER 31, 2005: Earnings from continuing operations $ 2,899 Less preferred stock dividends (10) Basic earnings per share 2,889 458 $ 6.31 Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options — 8 Dilutive effect of potential common shares issuable upon conversion of senior convertible debentures (increase in net earnings is net of income tax expense of $14 million) (1) 24 4 Diluted earnings per share $ 2,913 470 $ 6.19

YEAR EnDED DECEMbER 31, 2004: Earnings from continuing operations $ 2,181 Less preferred stock dividends (10) Basic earnings per share 2,171 482 $ 4.50 Dilutive effect of potential common shares issuable upon the exercise of outstanding stock options — 8 Dilutive effect of potential common shares issuable upon conversion of senior convertible debentures (increase in net earnings is net of income tax expense of $6 million) 10 9 Diluted earnings per share $ 2,181 499 $ 4.37

(1) The senior convertible debentures were retired in June 2005 prior to their stated maturity.

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notes

CertainoptionstopurchasesharesofDevon’scommonstockwereexcludedfromthedilutioncalculationsbecausetheoptionswereantidilutive.Theseexcludedoptionstotaled3million,0.2millionand4millionin2006,2005and2004,respectively.

foreignCurrencytranslationadjustmentsTheU.S.dollaristhefunctionalcurrencyforDevon’sconsolidatedoperationsexceptitsCanadiansubsidiarieswhichusetheCanadiandollarasthefunctional

currency.Therefore,theassetsandliabilitiesofDevon’sCanadiansubsidiariesaretranslatedintoU.S.dollarsbasedonthecurrentexchangerateineffectatthebalancesheetdates.Canadianincomeandexpensesaretranslatedataverageratesfortheperiodspresented.Translationadjustmentshavenoeffectonnetincomeandareincludedinaccumulatedothercomprehensiveincomeinstockholders’equity.ThefollowingtablepresentsthebalancesofDevon’scumulativetranslationadjustmentsincludedinaccumulatedothercomprehensiveincome.

(inmillionS)

December 31, 2003 $ 666 December 31, 2004 $ 1,054 December 31, 2005 $ 1,216 December 31, 2006 $ 1,219

StatementsofCashflowsForpurposesoftheconsolidatedstatementsofcashflows,Devonconsidersallhighlyliquidinvestmentswithoriginalcontractualmaturitiesofthreemonthsor

lesstobecashequivalents.

CommitmentsandContingenciesLiabilitiesforlosscontingenciesarisingfromclaims,assessments,litigationorothersourcesarerecordedwhenitisprobablethataliabilityhasbeenincurredand

theamountcanbereasonablyestimated.EnvironmentalexpendituresareexpensedorcapitalizedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Liabilitiesfortheseexpendituresarerecordedwhenitisprobablethatobligationshavebeenincurredandtheamountscanbereasonablyestimated.ReferenceismadetoNote8foradiscussionofamountsrecordedfortheseliabilities.

recentlyissuedaccountingStandardsnotYetadoptedInJune2006,theFinancialAccountingStandardsBoard(“FASB”)issuedFASBInterpretationNo.48,Accounting for Uncertainty in Income Taxes—an interpretation of

FASB Statement No. 109.InterpretationNo.48clarifiestheaccountingforuncertaintyinincometaxesrecognizedinanenterprise’sfinancialstatementsinaccordancewithFASBStatementNo.109,Accounting for Income Taxes.ThisInterpretationiseffectiveforfiscalyearsbeginningafterDecember15,2006,andDevonwilladoptitinthefirstquarterof2007.DevondoesnotexpecttheadoptionofInterpretationNo.48tohaveamaterialimpactonitsfinancialstatementsandrelateddisclosures.

InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.157,Fair Value Measurements.StatementNo.157providesacommondefinitionoffairvalue,establishesaframeworkformeasuringfairvalueandexpandsdisclosuresaboutfairvaluemeasurements.However,thisStatementdoesnotrequireanynewfairvaluemeasurements.StatementNo.157iseffectiveforfiscalyearsbeginningafterNovember15,2007.Devoniscurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.157willhaveonitsfinancialstatementsandrelateddisclosures.

InSeptember2006,theFASBissuedStatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). StatementNo.158requirestherecognitionoftheoverfundedorunderfundedstatusofadefinedbenefitpostretirementplaninthebalancesheet.DevonadoptedthisrecognitionrequirementasofDecember31,2006.TheeffectsofthisadoptionaresummarizedinNote6.StatementNo.158alsorequiresthemeasurementofplanassetsandbenefitobligationsasofthedateoftheemployer’sfiscalyear-end.TheStatementprovidestwoalternativestotransitiontoafiscalyear-endmeasurementdate.ThismeasurementrequirementiseffectiveforfiscalyearsendingafterDecember15,2008.Devonhasnotyetadoptedthismeasurementrequirement,butDevondoesnotexpectsuchadoptiontohaveamaterialeffectonitsresultsofoperations,financialcondition,liquidityorcompliancewithdebtcovenants.

InFebruary2007,theFASBissuedStatementofFinancialAccountingStandardsNo.159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.StatementNo.159permitsentitiestochoosetomeasurecertainfinancialinstrumentsandotheritemsatfairvalue.Theobjectiveistoimprovefinancialreportingbyprovidingentitieswiththeopportunitytomitigatevolatilityinreportedearningscausedbymeasuringrelatedassetsandliabilitiesdifferentlywithouthavingtoapplycomplexhedgeaccountingprovisions.UnrealizedgainsandlossesonanyitemsforwhichDevonelectsthefairvaluemeasurementoptionwouldbereportedinearnings.StatementNo.159iseffectiveforfiscalyearsbeginningafterNovember15,2007.However,earlyadoptionispermittedforfiscalyearsbeginningonorbeforeNovember15,2007,providedDevonalsoelectstoapplytheprovisionsofStatementNo.157, Fair Value Measurements,atthesametime.Devoniscurrentlyassessingtheeffect,ifany,theadoptionofStatementNo.159willhaveonitsfinancialstatementsandrelateddisclosures.

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notes

2.aCCountSreCeivaBle

Thecomponentsofaccountsreceivableincludethefollowing:

deCemBer31, 2006 2005

(INMILLIoNs)

Oil, gas and NGL revenue $ 1,020 1,113 Joint interest billings 209 206 Marketing and midstream revenue 138 173 Other 31 78 1,398 1,570 Allowance for doubtful accounts (5) (5) Net accounts receivable $ 1,393 1,565

3.propertYandequipmentandaSSetretirementoBliGationS

Propertyandequipmentincludedthefollowing:

deCemBer31, 2006 2005

(INMILLIoNs)

Oil and gas properties: Subject to amortization $ 35,798 29,257 Not subject to amortization 3,674 2,704 Accumulated depreciation, depletion and amortization (16,610) (14,398) Net oil and gas properties 22,862 17,563 Other property and equipment 2,417 1,863 Accumulated depreciation and amortization (684) (515) Net other property and equipment 1,733 1,348 Property and equipment, net of accumulated depreciation, depletion and amortization $ 24,595 18,911

Thecostsnotsubjecttoamortizationrelatetounprovedpropertieswhichareexcludedfromamortizedcapitalcostsuntilitisdeterminedwhetherornotprovedreservescanbeassignedtosuchproperties.Theexcludedpropertiesareassessedforimpairmentquarterly.Subjecttoindustryconditions,evaluationofmostoftheseproperties,andtheinclusionoftheircostsintheamortizedcapitalcostsisexpectedtobecompletedwithinfiveyears.

ThefollowingisasummaryofDevon’soilandgaspropertiesnotsubjecttoamortizationasofDecember31,2006:

CoStSinCurredin priorto 2006 2005 2004 2004 total

(INMILLIoNs)

Acquisition costs $ 1,357 296 119 691 2,463 Exploration costs 423 239 86 62 810 Development costs 130 19 — 39 188 Capitalized interest 70 56 52 35 213 Total oil and gas properties not subject to amortization $ 1,980 610 257 827 3,674

AtDecember31,2006,Devon’sinvestmentincountrieswhereprovedreserveshavenotbeenestablishedwas$61million,consistingof$56millioninNigeriaand$5millioninGhana.

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notes

ChiefacquisitionOnJune29,2006,Devonacquiredtheoilandgasassetsofprivately-ownedChiefHoldingsLLC(“Chief”).Devonpaid$2.0billionincashandassumed

approximately$0.2billionofnetliabilitiesinthetransactionforatotalpurchasepriceof$2.2billion.Devonfundedtheacquisitionprice,andtheimmediateretirementof$180millionofassumeddebt,with$718millionofcashonhandandapproximately$1.4billionofborrowingsissuedunderitscommercialpaperprogram.Theacquiredoilandgaspropertiesconsistof99.7MMBoe(unaudited)ofprovedreservesandleaseholdtotaling169,000netacreslocatedintheBarnettShaleareaofnorthTexas.Devonallocatedapproximately$1.0billionofthepurchasepricetoprovedreservesandapproximately$1.2billiontounprovedproperties.

propertydivestituresDuring2005,Devondivestedcertainnon-coreoilandgaspropertiesintheoffshoreGulfofMexicoandonshoreintheUnitedStatesandCanada.Fromthesesales,

Devonreceived$2.0billionofgrossproceeds.After-tax,theproceedswereapproximately$1.8billion.Certaininformationregardingthesesalesisincludedinthefollowingtable. unitedStateS Canada total

(INMILLIoNs)

Gross proceeds $ 966 1,029 1,995 After-tax proceeds $ 786 1,027 1,813 Asset retirement obligations assumed by purchasers $ 160 39 199 Reserves sold (MMBoe) (unaudited) 89 87 176

Underfullcostaccountingrules,againorlossonthesaleorotherdispositionofoilandgaspropertiesisnotrecognizedunlessthegainorlosswouldsignificantlyaltertherelationshipbetweencapitalizedcostsandprovedreservesofoilandgasattributabletoacostcenter.Becausethe2005divestituresdidnotsignificantlyaltersuchrelationship,Devondidnotrecognizeagainorlossonthesedivestitures.Therefore,theproceedsfromthesetransactionswererecognizedasanadjustmentofcapitalizedcostsintherespectivecostcenters.

OnNovember14,2006,DevonannouncedthatitintendstodivestitsoperationsinEgypt.Also,onJanuary23,2007,DevonannouncedthatitintendstodivestitsoperationsinWestAfrica.SeeNote13formorediscussionregardingtheseplanneddivestitures.

assetretirementobligationsFollowingisareconciliationoftheassetretirementobligationfortheyearsendedDecember31,2006and2005.

YearendeddeCemBer31, 2006 2005

(INMILLIoNs)

Asset retirement obligation as of beginning of year $ 660 731 Liabilities incurred 102 44 Liabilities settled (62) (42) Liabilities assumed by others — (199) Revision of estimated obligation 149 76 Accretion expense on discounted obligation 49 43 Foreign currency translation adjustment (4) 7 Asset retirement obligation as of end of year 894 660 Less current portion 61 50 Asset retirement obligation, long-term $ 833 610

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notes

4.deBtandrelatedexpenSeS

AsummaryofDevon’sshort-termandlong-termdebtisasfollows:

deCemBer31, 2006 2005

(INMILLIoNs)

Commercial paper $ 1,808 — Debentures exchangeable into shares of Chevron Corporation common stock: 4.90% due August 15, 2008 444 444 4.95% due August 15, 2008 316 316 Discount on exchangeable debentures (33) (51) Other debentures and notes: 2.75% due August 1, 2006 — 500 6.55% due August 2, 2006 ($200 million Canadian) — 172 4.375% due October 1, 2007 400 400 10.125% due November 15, 2009 177 177 6.875% due September 30, 2011 1,750 1,750 7.25% due October 1, 2011 350 350 8.25% due July 1, 2018 125 125 7.50% due September 15, 2027 150 150 7.875% due September 30, 2031 1,250 1,250 7.95% due April 15, 2032 1,000 1,000 Other — 3 Fair value adjustment on debt related to interest rate swaps (5) (18) Net premium on other debentures and notes 41 51 7,773 6,619 Less amount classified as short-term debt 2,205 662 Long-term debt $ 5,568 5,957

Maturitiesofshort-termandlong-termdebtasofDecember31,2006,excludingpremiums,discountsandthe$5millionfairvalueadjustment,areasfollows:

(inmillionS)

2007 $ 2,208 2008 760 2009 177 2010 — 2011 2,100 2012 and thereafter 2,525 Total $ 7,770

CreditfacilitieswithBanksDevonhasa$2.5billionfive-year,syndicated,unsecuredrevolvinglineofcredit(the“SeniorCreditFacility”).TheSeniorCreditFacilityincludesafive-year

revolvingCanadiansubfacilityinamaximumamountofU.S.$500million.TheSeniorCreditFacilitymaturesonApril7,2011,andallamountsoutstandingwillbedueandpayableatthattimeunlessthematurityisextended.Priortoeach

April7anniversarydate,DevonhastheoptiontoextendthematurityoftheSeniorCreditFacilityforoneyear,subjecttotheapprovalofthelenders.DevonisworkingtoobtainlenderapprovaltoextendthecurrentmaturitydateofApril7,2011toApril7,2012.Ifsuccessful,thismaturitydateextensionwillbeeffectiveonApril7,2007,providedDevonhasnotexperienceda“materialadverseeffect,”asdefinedintheSeniorCreditFacilityagreement,atthatdate.

AmountsborrowedundertheSeniorCreditFacilitymay,attheelectionofDevon,bearinterestatvariousfixedrateoptionsforperiodsofuptotwelvemonths.Suchratesaregenerallylessthantheprimerate.Devonmayalsoelecttoborrowattheprimerate.TheSeniorCreditFacilitycurrentlyprovidesforanannualfacilityfeeof$2.3millionthatispayablequarterlyinarrears.

TheagreementgoverningtheSeniorCreditFacilitycontainscertaincovenantsandrestrictions,includingamaximumalloweddebt-to-capitalizationratioof65%asdefinedintheagreement.ThecreditagreementcontainsdefinitionsoftotalfundeddebtandtotalcapitalizationthatincludeadjustmentstotherespectiveamountsreportedinDevon’sconsolidatedfinancialstatements.Pertheagreement,totalfundeddebtexcludesthedebenturesthatareexchangeableintosharesofChevronCorporationcommonstock.Also,totalcapitalizationisadjustedtoaddbacknoncashfinancialwritedownssuchasfullcostceilingpropertyimpairmentsorgoodwillimpairments.AtDecember31,2006,Devonwasincompliancewithsuchcovenantsandrestrictions.Devon’sdebt-to-capitalizationratioatDecember31,2006,ascalculatedpursuanttothetermsoftheagreement,was27.3%.

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notes

AsofDecember31,2006,therewerenoborrowingsundertheSeniorCreditFacility.TheavailablecapacityundertheSeniorCreditFacilityasofDecember31,2006,netof$284millionofoutstandinglettersofcreditand$1.8billionofoutstandingcommercialpaper,wasapproximately$408million.

CommercialpaperDevonalsohasacommercialpaperprogramunderwhichitmayborrowupto$2billion.Borrowingsunderthecommercialpaperprogramreduceavailable

capacityundertheSeniorCreditFacilityonadollar-for-dollarbasis.Commercialpaperdebtgenerallyhasamaturityofbetweensevento90days,althoughitcanhaveamaturityofupto365days,andbearsinterestatratesagreedtoatthetimeoftheborrowing.TheinterestrateisbasedonastandardindexsuchastheFederalFundsRate,LIBOR,orthemoneymarketrateasfoundonthecommercialpapermarket.AsofDecember31,2006,Devonhad$1.8billionofcommercialpaperdebtoutstandingatanaveragerateof5.37%.The$1.8billionofcommercialpaperisclassifiedasshort-termdebtintheaccompanyingconsolidatedbalancesheet.

exchangeabledebenturesTheexchangeabledebenturesconsistof$444millionof4.90%debenturesand$316millionof4.95%debentures.Theexchangeabledebentureswereissuedon

August3,1998andmatureAugust15,2008.TheexchangeabledebentureswerecallablebeginningAugust15,2000,initiallyat104.0%ofprincipalandatpricesdecliningto100.5%ofprincipalonorafterAugust15,2007.AtDecember31,2006,thecallpricewas101%ofprincipal.Theexchangeabledebenturesareexchangeableattheoptionoftheholdersatanytimepriortomaturity,unlesspreviouslyredeemed,forsharesofChevroncommonstock.InlieuofdeliveringChevroncommonstocktoanexchangingdebentureholder,Devonmay,atitsoption,paytosuchholderanamountofcashequaltothemarketvalueoftheChevroncommonstock.Atmaturity,holderswhohavenotexercisedtheirexchangerightswillreceiveanamountincashequaltotheprincipalamountofthedebentures.

AsofDecember31,2006,Devonbeneficiallyownedapproximately14.2millionsharesofChevroncommonstock.Theseshareshavebeendepositedwithanexchangeagentforpossibleexchangefortheexchangeabledebentures.Each$1,000principalamountoftheexchangeabledebenturesisexchangeableinto18.6566sharesofChevroncommonstock,anexchangerateequivalentto$53.60pershareofChevronstock.

Theexchangeabledebentureswereassumedaspartofthe1999PennzEnergyacquisition.Asaresult,thefairvaluesoftheexchangeabledebenturesweredeterminedasofAugust17,1999,basedonmarketquotations.Inaccordancewithderivativeaccountingstandards,thetotalfairvalueofthedebentureswasallocatedbetweentheinterest-bearingdebtandtheoptiontoexchangeChevroncommonstockthatisembeddedinthedebentures.Accordingly,adiscountwasrecordedonthedebenturesandisbeingaccretedusingtheeffectiveinterestmethodwhichraisedtheeffectiveinterestrateonthedebenturesto7.76%.

otherdebenturesandnotesFollowingaredescriptionsofthevariousotherdebenturesandnotesoutstandingatDecember31,2006,aslistedinthetablepresentedatthebeginningofthis

note.

Ocean DebtInconnectionwiththe2003Oceanmerger,Devonassumed$1.8billionofdebt.Thetablebelowsummarizesthedebtassumedwhichremainsoutstanding,thefairvalueofthedebtatApril25,2003,andtheeffectiveinterestrateofthedebtassumedafterdeterminingthefairvaluesoftherespectivenotesusingApril25,2003,marketinterestrates.Thepremiumsarebeingamortizedusingtheeffectiveinterestmethod.AllofthenotesaregeneralunsecuredobligationsofDevon.

fairvalueof effeCtiverateof deBtaSSumed deBtaSSumed deBtaSSumed

(INMILLIoNs)

4.375% due October 2007 (principal of $400 million) $ 410 3.8% 7.250% due October 2011 (principal of $350 million) $ 406 4.9% 8.250% due July 2018 (principal of $125 million) $ 147 5.5% 7.500% due September 2027 (principal of $150 million) $ 169 6.5%

The$400million4.375%seniornotesdueinOctoberof2007aresubjecttoafixed-to-floatinginterestrateswap.Throughtheuseofthisswap,thisfixed-ratedebt

hasbeenconvertedtofloating-ratedebtbearinginterestequaltoLIBORplus40basispoints.10.125% Debentures due November 15, 2009 ThesedebentureswereassumedaspartofthePennzEnergyacquisition.Thefairvalueofthedebentureswas

determinedusingAugust17,1999,marketinterestrates.Asaresult,apremiumwasrecordedonthesedebentureswhichloweredtheeffectiveinterestrateto8.9%.Thepremiumisbeingamortizedusingtheeffectiveinterestmethod.

6.875% Notes due September 30, 2011 and 7.875% Debentures due September 30, 2031OnOctober3,2001,Devon,throughDevonFinancingCorporation,U.L.C.(“DevonFinancing”),soldthesenotesanddebentureswhichareunsecuredandunsubordinatedobligationsofDevonFinancing.DevonhasfullyandunconditionallyguaranteedonanunsecuredandunsubordinatedbasistheobligationsofDevonFinancingunderthedebtsecurities.TheproceedsfromtheissuanceofthesedebtsecuritieswereusedtofundaportionoftheAndersonacquisition.

7.95% Notes due April 15, 2032OnMarch25,2002,DevonsoldthesenoteswhichareunsecuredandunsubordinatedobligationsofDevon.Thenetproceedsreceived,afterdiscountsandissuancecosts,were$986millionandwereusedtoretireotherindebtedness.

75

notes

interestexpenseThefollowingscheduleincludesthecomponentsofinterestexpensebetween2004and2006.

YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Interest based on debt outstanding $ 486 507 513 Capitalized interest (79) (70) (70) Other interest 14 96 32 Total interest expense $ 421 533 475

Interestbasedondebtoutstandingdecreasedfrom2004to2006primarilyduetotheneteffectofdebtrepaymentsduring2005and2006partiallyoffsetbytheeffectofcommercialpaperborrowingsduringthelasthalfof2006.

During2005,Devonredeemedits$400million6.75%notesdueMarch15,2011anditszerocouponconvertibleseniordebenturespriortotheirscheduledmaturitydates.Theotherinterestcategoryinthetableaboveincludes$81millionin2005relatedtotheseearlyretirements.

During2004,Devonrepaidthebalanceunderits$3billiontermloancreditfacilitypriortothescheduledrepaymentdate.Theotherinterestcategoryinthetableaboveincludes$16millionin2004relatedtothisearlyrepayment.

5.finanCialinStrumentS

ThefollowingtablepresentsthecarryingamountsandestimatedfairvaluesofDevon’sfinancialinstrumentassets(liabilities)atDecember31,2006and2005. 2006 2005 CarrYinG fair CarrYinG fair amount value amount value

(INMILLIoNs)

Investment in Chevron Corporation common stock $ 1,043 1,043 805 805 Oil and gas price hedge agreements $ 39 39 — — Interest rate swap agreements $ (6) (6) (22) (22) Embedded option in exchangeable debentures $ (302) (302) (121) (121) Debt $ (7,773) (8,725) (6,619) (7,642)

Thefollowingmethodsandassumptionswereusedtoestimatethefairvaluesofthefinancialinstrumentsintheabovetable.Thecarryingvaluesofcashandcashequivalents,short-terminvestments,accountsreceivableandaccountspayable(includingincometaxespayableandaccruedexpenses)includedintheaccompanyingconsolidatedbalancesheetsapproximatedfairvalueatDecember31,2006and2005.

Investment in Chevron Corporation common stock Thefairvalueofthisinvestmentisbasedonaquotedmarketprice.Oil and gas price hedge agreements Thefairvaluesoftheoilandgaspricehedgeswerebasedoneither(a)aninternaldiscountedcashflowcalculation,(b)quotes

obtainedfromthecounterpartytothehedgeagreementor(c)quotesprovidedbybrokers.Interest rate swap agreements Thefairvaluesoftheinterestrateswapsarebasedoninternaldiscountedcashflowcalculations,usingmarketquotesoffuture

interestrates,orquotesobtainedfromcounterparties.Embedded option in exchangeable debentures Thefairvalueoftheembeddedoptionisbasedonaquoteobtainedfromabroker.Debt Thefairvaluesoffixed-ratedebtarebasedonquotesobtainedfrombrokersorbydiscountingtheprincipalandinterestpaymentsatratesavailablefordebt

ofsimilartermsandmaturity.Thefairvaluesoffloating-ratedebtareestimatedtoapproximatethecarryingamountsbecausetheinterestratespaidonsuchdebtaregenerallysetforperiodsofthreemonthsorless.

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notes

6.retirementplanS

Devonhasvariousnon-contributorydefinedbenefitpensionplans,includingqualifiedplans(“QualifiedPlans”)andnonqualifiedplans(“SupplementalPlans”).TheQualifiedPlansprovideretirementbenefitsforU.S.andCanadianemployeesmeetingcertainageandservicerequirements.BenefitsfortheQualifiedPlansarebasedontheemployee’syearsofserviceandcompensationandarefundedfromassetsheldintheplans’trusts.

DevonhasafundingpolicyregardingtheQualifiedPlanssuchthatitwillcontributetheamountoffundsnecessarysothattheQualifiedPlans’assetswillbeapproximatelyequaltotherelatedaccumulatedbenefitobligation.AsofDecember31,2006and2005,thefairvalueoftheQualifiedPlans’assetswere$590millionand$533million,respectively,whichwas$59millionand$37millionmore,respectively,thantherelatedaccumulatedbenefitobligation.Theactualamountofcontribu-tionsrequiredduringfutureperiodswilldependoninvestmentreturnsfromtheplanassetsduringthesameperiodaswellaschangesinlong-terminterestrates.

TheSupplementalPlansprovideretirementbenefitsforcertainemployeeswhosebenefitsundertheQualifiedPlansarelimitedbyincometaxregulations.TheSupplementalPlans’benefitsarebasedontheemployee’syearsofserviceandcompensation.ForcertainSupplementalPlans,Devonhasestablishedtruststofundtheseplans’benefitobligations.Thetotalvalueofthesetrustswas$59millionatbothDecember31,2006and2005,andisincludedinnon-currentotherassetsintheconsolidatedbalancesheets.FortheremainingSupplementalPlansforwhichtrustshavenotbeenestablished,benefitsarefundedfromDevon’savailablecashandcashequivalents.

Devonalsohasdefinedbenefitpostretirementplans(“PostretirementPlans”)whichprovidebenefitsforsubstantiallyallU.S.employees.ThePostretirementPlansprovidemedicaland,insomecases,lifeinsurancebenefitsandare,dependingonthetypeofplan,eithercontributoryornon-contributory.BenefitobligationsforthePostretirementPlansareestimatedbasedonfuturecost-sharingchangesthatareconsistentwithDevon’sexpressedintenttoincrease,wherepossible,contributionsfromfutureretirees.Devon’sfundingpolicyforthePostretirementPlansistofundthebenefitsastheybecomepayablewithavailablecashandcashequivalents.

DevonusesaNovember30measurementdatetovalueitspensionandotherpostretirementbenefitsobligations.AsdescribedinNote1,DevonwillberequiredtouseaDecember31measurementdatebeginningwiththefiscalyearendingDecember31,2008.DevondoesnotexpectthechangeinitsmeasurementdatefromNovember30toDecember31willhaveamaterialeffectonthenetperiodicbenefitcostorbenefitobligation.

BenefitobligationsandplanassetsBeginningwithDevon’sDecember31,2006balancesheet,StatementofFinancialAccountingStandardsNo.158,Employers’ Accounting for Defined Benefit Pension

and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) requiresDevontorecognizeonitsconsolidatedbalancesheetthefundedstatusofitsdefinedbenefitplans.Thefundedstatusismeasuredasthedifferencebetweentheprojectedbenefitobligationandthefairvalueofplanassets.Thefollow-ingtablepresentstheincrementaleffectonDevon’sDecember31,2006balancesheetasaresultofadoptingthisrecognitionrequirementfromStatementNo.158. Before adoption after adjuStment adjuStment adjuStment

(INMILLIoNs)

Other noncurrent assets $ 448 (126) 322 Total assets $ 35,189 (126) 35,063 Other current liabilities $ 326 12 338 Other noncurrent liabilities $ 517 81 598 Deferred income taxes $ 5,729 (79) 5,650 Accumulated other comprehensive income $ 1,584 (140) 1,444 Total stockholders’ equity $ 17,582 (140) 17,442 Total liabilities and stockholders’ equity $ 35,189 (126) 35,063

77

notes

ThefollowingtablepresentsthestatusofDevon’spensionandotherpostretirementbenefitplansfor2006and2005.Thebenefitobligationforpensionplansrepresentstheprojectedbenefitobligation,whilethebenefitobligationforthepostretirementbenefitplansrepresentstheaccumulatedbenefitobligation.Theaccumulatedbenefitobligationdiffersfromtheprojectedbenefitobligationinthattheformerincludesnoassumptionaboutfuturecompensationlevels.TheaccumulatedbenefitobligationforpensionplansatDecember31,2006and2005was$652millionand$607million,respectively.

other penSion poStretirement BenefitS BenefitS 2006 2005 2006 2005

(INMILLIoNs)

ChAngE in bEnEFit ObligAtiOn: Benefit obligation at beginning of year $ 666 588 54 50 Service cost 23 18 1 1 Interest cost 39 35 3 3 Participant contributions — — 2 2 Amendments 2 — 1 — Foreign exchange rate changes 1 1 — — Actuarial loss 66 50 — 6 Benefits paid (29) (26) (9) (8) Benefit obligation at end of year 768 666 52 54

ChAngE in PlAn ASSEtS: Fair value of plan assets at beginning of year 533 456 — — Actual return on plan assets 79 37 — — Employer contributions 6 65 6 6 Participant contributions — — 2 2 Benefits paid (29) (26) (8) (8) Foreign exchange rate changes 1 1 — — Fair value of plan assets at end of year 590 533 — —

Funded status at end of year (178) (133) (52) (54)Unrecognized net actuarial loss — 195 — 7Unrecognized prior service cost (benefit) — 6 — (8) Net amount recognized in balance sheet $ (178) 68 (52) (55)

AMOuntS RECOgnizED in bAlAnCE ShEEt: Noncurrent assets $ 2 — — — Current liabilities (7) — (5) — Noncurrent liabilities (173) — (47) — Prepaid cost — 144 — — Accrued benefit cost — (109) — (55) Intangible asset — 3 — — Additional minimum pension liability — 30 — — Net amount $ (178) 68 (52) (55)

AMOuntS RECOgnizED in ACCuMulAtED OthER COMPREhEnSivE inCOME: Net actuarial loss $ 214 — 6 — Prior service cost (benefit) 6 — (7) — Total $ 220 — (1) —

TheplanassetsforpensionbenefitsinthetableaboveexcludetheassetsheldintrustsfortheSupplementalPlans.However,employercontributionsforpensionbenefitsinthetableaboveinclude$6millionand$5millionin2006and2005,respectively,whichweretransferredfromthetrustsestablishedfortheSupplementalPlans.

78

notes

CertainofDevon’spensionandpostretirementplanshaveaprojectedbenefitobligationinexcessofplanassetsatDecember31,2006and2005.Theaggregatebenefitobligationandfairvalueofplanassetsfortheseplansisincludedbelow. deCemBer31, 2006 2005

(INMILLIoNs)

Projected benefit obligation $ 755 707 Fair value of plan assets $ 574 518

CertainofDevon’spensionplanshaveanaccumulatedbenefitobligationinexcessofplanassetsatDecember31,2006and2005.Theaggregateaccumulatedbenefitobligationandfairvalueofplanassetsfortheseplansisincludedbelow. deCemBer31, 2006 2005

(INMILLIoNs)

Accumulated benefit obligation $ 121 111 Fair value of plan assets $ — —

TheplanassetsincludedintheabovetwotablesexcludetheSupplementalPlantrustswhichhadatotalvalueof$59millionatbothDecember31,2006and2005.

netperiodicBenefitCostandotherComprehensiveincomeThefollowingtablepresentsthecomponentsofnetperiodicbenefitcostandothercomprehensiveincomeforDevon’spensionandotherpostretirementbenefit

plansfor2006,2005and2004. other penSionBenefitS poStretirementBenefitS 2006 2005 2004 2006 2005 2004

(INMILLIoNs)

nEt PERiODiC bEnEFit COSt: Service cost $ 23 18 15 1 1 1 Interest cost 39 35 32 3 3 4 Expected return on plan assets (44) (36) (30) — — — Termination benefits — — 1 — — — Amortization of prior service cost 1 1 1 — (1) (1) Recognition of net actuarial loss 12 8 7 1 — — Net periodic benefit cost $ 31 26 26 5 3 4

OthER COMPREhEnSivE inCOME: Change in additional minimum pension liability $ 30 (8) 61 — — —

Thefollowingtablepresentstheestimatednetactuariallossandpriorservicecostforthepensionandotherpostretirementplansthatwillbeamortizedfromaccumulatedothercomprehensiveincomeintonetperiodicbenefitcostduring2007. other penSion poStretirement BenefitS BenefitS

(INMILLIoNs)

Net actuarial loss $ 15 1 Prior service cost 1 — Total $ 16 1

79

notes

assumptionsThefollowingtablepresentstheweightedaverageactuarialassumptionsthatwereusedtodeterminebenefitobligationsandnetperiodicbenefitcostsfor2006,

2005and2004. other penSionBenefitS poStretirementBenefitS 2006 2005 2004 2006 2005 2004

(INMILLIoNs)

ASSuMPtiOnS tO DEtERMinE bEnEFit ObligAtiOnS: Discount rate 5.72% 5.72% 5.74% 5.50% 5.75% 5.75% Rate of compensation increase 7.00% 4.50% 4.50% N/A N/A N/A

ASSuMPtiOnS tO DEtERMinE nEt PERiODiC bEnEFit COSt: Discount rate 5.72% 5.98% 6.23% 5.75% 6.00% 6.25% Expected return on plan assets 8.40% 8.40% 8.34% N/A N/A N/A Rate of compensation increase 4.50% 4.50% 4.88% N/A N/A N/A

Discount rateFuturepensionandpostretirementobligationsarediscountedattheendofeachyearbasedontherateatwhichobligationscouldbeeffectivelysettled,consideringthetimingofestimatedbenefitpayments.Thisrateisbasedonhigh-qualitybondyields,afterallowingforcallanddefaultrisk.Highqualitycorporatebondyieldindices,suchasMoody’sAa,areconsideredwhenselectingthediscountrate.

Rate of compensation increaseFormeasurementofthe2006benefitobligationforthepensionplans,the7%compensationincreaseinthetableaboverepresentstheassumedincreasefor2007and2008.Theratewasassumedtodecreaseonepercentannuallyto5%intheyear2010andremainatthatlevelthereafter.Formeasurementofthe2005and2004benefitobligationsforthepensionplans,thecompensationincreasesinthetableaboverepresenttheassumedincreasesforallfutureyears.

Expected return on plan assetsDevon’soverallinvestmentobjectiveforitsretirementplans’assetsistoachievelong-termgrowthofinvestedcapitaltoensurepaymentsofretirementbenefitsobligationscanbefundedwhenrequired.Toassistinachievingthisobjective,Devonhasestablishedcertaininvestmentstrategies,includingtargetallocationpercentagesandpermittedandprohibitedinvestments,designedtomitigaterisksinherentwithinvesting.AtDecember31,2006,thetargetinvestmentallocationforDevon’splanassetswas50%U.S.largecapequitysecurities;15%U.S.smallcapequitysecurities,equallyallocatedbetweengrowthandvalue;15%internationalequitysecurities,equallyallocatedbetweengrowthandvalue;and20%debtsecurities.Derivativesorotherspeculativeinvestmentsconsideredhigh-riskaregenerallyprohibited.

Theexpectedrateofreturnonplanassetswasdeterminedbyevaluatinginputfromexternalconsultantsandeconomistsaswellaslong-terminflationassumptions.Devonexpectsthelong-termassetallocationtoapproximatethetargetedallocation.Therefore,theexpectedlong-termrateofreturnonplanassetsisbasedonthetargetallocationofinvestmenttypesinsuchassets.

Thefollowingtablepresentstheweighted-averageassetallocationforDevon’spensionplansatDecember31,2006and2005,andthetargetallocationfor2007byassetcategory:

2007 2006 2005

(INMILLIoNs)

ASSEt CAtEgORY: Equity securities 80% 83% 83% Debt securities 20% 17% 16% Other — — 1% Total 100% 100% 100%

Other assumptions Formeasurementofthebenefitobligationfortheotherpostretirementmedicalplans,a10%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitswasassumedfor2007.Theratewasassumedtodecreaseonepercentannuallyto5%intheyear2012andremainatthatlevelthereafter.Assumedhealthcarecost-trendratesaffecttheamountsreportedforretireehealthcarecosts.Aone-percentage-pointchangeintheassumedhealthcarecost-trendrateswouldhavethefollowingeffectsontheDecember31,2006otherpostretirementbenefitsobligationandthe2006serviceandinterestcostcomponentsofnetperiodicbenefitcost. oneperCent oneperCent inCreaSe deCreaSe

(INMILLIoNs)

Effect on benefit obligation $ 1 (1) Effect on service and interest costs $ — —

80

notes

expectedCashflowsThefollowingtablepresentsexpectedcashflowinformationforDevon’spensionandotherpostretirementbenefitplans.

other penSion poStretirement BenefitS BenefitS

(INMILLIoNs)

Devon contributions – 2007 $ 7 5

Benefit payments: 2007 $ 30 5 2008 $ 31 5 2009 $ 33 5 2010 $ 35 5 2011 $ 37 5 2012-2016 $ 245 21

ExpectedcontributionsincludedinthetableaboveincludeamountsrelatedtoDevon’sQualifiedPlans,SupplementalPlansandPostretirementPlans.Ofthebenefitsexpectedtobepaidin2007,$7millionofpensionbenefitsisexpectedtobefundedfromthetrustsestablishedfortheSupplementalPlansandall$5millionofotherpostretirementbenefitsisexpectedtobefundedfromDevon’savailablecashandcashequivalents.Expectedemployercontributionsandbenefitpaymentsforotherpostretirementbenefitsarepresentednetofemployeecontributions.

otherBenefitplansDevonhasa401(k)IncentiveSavingsPlanwhichcoversalldomesticemployees.Atitsdiscretion,Devonmaymatchacertainpercentageoftheemployees’

contributionstotheplan.ThematchingpercentageisdeterminedannuallybytheBoardofDirectors.Devon’smatchingcontributionstotheplanwere$15million,$12millionand$11millionfortheyearsendedDecember31,2006,2005and2004,respectively.

DevonhasdefinedcontributionpensionplansforitsCanadianemployees.Devonmakesacontributiontoeachemployeewhichisbasedupontheemployee’sbasecompensationandclassification.SuchcontributionsaresubjecttomaximumamountsallowedundertheIncomeTaxAct(Canada).DevonalsohasasavingsplanforitsCanadianemployees.Underthesavingsplan,Devoncontributesabasepercentageamounttoallemployeesandtheemployeemayelecttocontributeanadditionalpercentageamount(uptoamaximumamount)whichismatchedbyadditionalDevoncontributions.During2006,2005and2004,Devon’scombinedcontributionstotheCanadiandefinedcontributionplanandtheCanadiansavingsplanwere$12million,$10millionand$9million,respectively.

7.StoCkholderS’equitY

TheauthorizedcapitalstockofDevonconsistsof800millionsharesofcommonstock,parvalue$0.10pershare,and4.5millionsharesofpreferredstock,parvalue$1.00pershare.Thepreferredstockmaybeissuedinoneormoreseries,andthetermsandrightsofsuchstockwillbedeterminedbytheBoardofDirectors.

EffectiveAugust17,1999,Devonissued1.5millionsharesof6.49%cumulativepreferredstock,SeriesA,toholdersofPennzEnergy6.49%cumulativepreferredstock,SeriesA.Dividendsonthepreferredstockarecumulativefromthedateoforiginalissueandarepayablequarterly,incash,whendeclaredbytheBoardofDirectors.ThepreferredstockisredeemableattheoptionofDevonatanytimeonorafterJune2,2008,inwholeorinpart,ataredemptionpriceof$100pershare,plusaccruedandunpaiddividendstotheredemptiondate.

Devon’sBoardofDirectorshasdesignatedacertainnumberofsharesofthepreferredstockasSeriesAJuniorParticipatingPreferredStock(the“SeriesAJuniorPreferredStock”)inconnectionwiththeadoptionoftheshareholderrightsplandescribedlaterinthisnote.OnApril25,2003,theBoardincreasedthedesignatedsharesfrom2.0millionto2.9million.AtDecember31,2006,therewerenosharesofSeriesAJuniorPreferredStockissuedoroutstanding.TheSeriesAJuniorPreferredStockisentitledtoreceivecumulativequarterlydividendspershareequaltothegreaterof$1.00or200timestheaggregatepershareamountofalldividends(otherthanstockdividends)declaredoncommonstocksincetheimmediatelyprecedingquarterlydividendpaymentdateor,withrespecttothefirstpaymentdate,sincethefirstissuanceofSeriesAJuniorPreferredStock.HoldersoftheSeriesAJuniorPreferredStockareentitledto200votespershare(subjecttoadjustmenttopreventdilution)onallmatterssubmittedtoavoteofthestockholders.TheSeriesAJuniorPreferredStockisneitherredeemablenorconvertible.TheSeriesAJuniorPreferredStockrankspriortothecommonstockbutjuniortoallotherclassesofPreferredStock.

AtDecember31,2003,asubsidiaryofDevoncreatedintheOceanmergerhad38,000sharesofconvertiblepreferredstockoutstanding.InJanuary2004,thesesharesofconvertiblepreferredstockwerecanceledandconvertedto2,197,160sharesofDevoncommonstockpursuanttoanautomaticconversionfeatureofthepreferredstock.TheautomaticconversionfeaturewastriggeredwhentheclosingpriceofDevoncommonstockequaledorexceededtheforcedconversionpriceof$26.20for20consecutivetradingdays.

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notes

StockrepurchasesOnSeptember27,2004,Devonannouncedastockrepurchaseprogramtorepurchaseupto50millionsharesofitscommonstock.During2004,Devonrepurchased

fivemillionsharesatatotalcostof$189million,or$37.78pershare.Thisprogramwascompletedin2005,duringwhichDevonrepurchased44.6millionsharesatatotalcostof$2.1billion,or$47.69pershare.Thetotalcostofthisprogramwas$2.3billion,or$46.69pershare.

OnAugust3,2005,Devonannouncedanotherprogramtorepurchaseupto50millionsharesofitscommonstock.During2005,Devonrepurchased2.2millionsharesatacostof$134million,or$60.16pershare,underthisprogram.During2006,Devonrepurchased4.3millionsharesatacostof$253million,or$59.61pershare,underthisprogram.AsofFebruary1,2007,Devonhasrepurchased6.5millionsharesunderthisprogramfor$387million,or$59.80pershare.Thisprogramwassus-pendedin2006asaresultoftheChiefacquisition(seeNote3).InconjunctionwiththesalesofEgyptandWestAfrica(seeNote13),Devonexpectstoresumethisrepur-chaseprograminlate2007byusingaportionofthesaleproceedstorepurchasecommonstock.Althoughthisprogramexpiresattheendof2007,itcouldbeextendedifnecessary.

ShareholderrightsplanUnderDevon’sshareholderrightsplan,stockholdershaveonehalfofonerightforeachshareofcommonstockheld.Therightsbecomeexercisableandseparately

transferabletenbusinessdaysafter(a)anannouncementthatapersonhasacquired,orobtainedtherighttoacquire,15%ormoreofthevotingsharesoutstanding,or(b)commencementofatenderorexchangeofferthatcouldresultinapersonowning15%ormoreofthevotingsharesoutstanding.

Eachrightentitlesitsholder(exceptaholderwhoistheacquiringperson)topurchaseeither(a)1/100ofashareofSeriesAPreferredStockfor$185.00,subjecttoadjustmentor,(b)Devoncommonstockwithavalueequaltotwicetheexercisepriceoftheright,subjecttoadjustmenttopreventdilution.Intheeventofcertainmergerorassetsaletransactionswithanotherpartyortransactionswhichwouldincreasetheequityownershipofashareholderwhothenowned15%ormoreofDevon,eachDevonrightwillentitleitsholdertopurchasesecuritiesofthemergingoracquiringpartywithavalueequaltotwicetheexercisepriceoftheright.

Therights,whichhavenovotingpower,expireonAugust17,2009.TherightsmayberedeemedbyDevonfor$0.01perrightuntiltherightsbecomeexercisable.

dividendsDividendsonDevon’scommonstockwerepaidin2006,2005and2004atapersharerateof$0.1125,$0.075and$0.05perquarter,respectively.

8.CommitmentSandContinGenCieS

Devonispartytovariouslegalactionsarisinginthenormalcourseofbusiness.MattersthatareprobableofunfavorableoutcometoDevonandwhichcanbereasonablyestimatedareaccrued.Suchaccrualsarebasedoninformationknownaboutthematters,Devon’sestimatesoftheoutcomesofsuchmattersanditsexperienceincontesting,litigatingandsettlingsimilarmatters.NoneoftheactionsarebelievedbymanagementtoinvolvefutureamountsthatwouldbematerialtoDevon’sfinancialpositionorresultsofoperationsafterconsiderationofrecordedaccrualsalthoughactualamountscoulddiffermateriallyfrommanagement’sestimate.

environmentalmattersDevonissubjecttocertainlawsandregulationsrelatingtoenvironmentalremediationactivitiesassociatedwithpastoperations,suchastheComprehensive

EnvironmentalResponse,Compensation,andLiabilityAct(“CERCLA”)andsimilarstatestatutes.Inresponsetoliabilitiesassociatedwiththeseactivities,accrualshavebeenestablishedwhenreasonableestimatesarepossible.Suchaccrualsprimarilyincludeestimatedcostsassociatedwithremediation.Devonhasnotuseddiscountingindeterminingitsaccruedliabilitiesforenvironmentalremediation,andnomaterialclaimsforpossiblerecoveryfromthirdpartyinsurersorotherpartiesrelatedtoenvironmentalcostshavebeenrecognizedinDevon’sconsolidatedfinancialstatements.Devonadjuststheaccrualswhennewremediationresponsibilitiesarediscoveredandprobablecostsbecomeestimable,orwhencurrentremediationestimatesmustbeadjustedtoreflectnewinformation.

CertainofDevon’ssubsidiariesacquiredinpastmergersareinvolvedinmattersinwhichithasbeenallegedthatsuchsubsidiariesarepotentiallyresponsibleparties(“PRPs”)underCERCLAorsimilarstatelegislationwithrespecttovariouswastedisposalareasownedoroperatedbythirdparties.AsofDecember31,2006,Devon’sconsolidatedbalancesheetincluded$5millionofnon-currentaccruedliabilities,reflectedin“Otherliabilities,”relatedtotheseandotherenvironmentalremediationliabilities.Devondoesnotcurrentlybelievethereisareasonablepossibilityofincurringadditionalmaterialcostsinexcessofthecurrentaccrualsrecognizedforsuchenvironmentalremediationactivities.WithrespecttothesitesinwhichDevonsubsidiariesarePRPs,Devon’sconclusionisbasedinlargeparton(i)Devon’sparticipationinconsentdecreeswithbothotherPRPsandtheEnvironmentalProtectionAgency,whichprovideforperformingthescopeofworkrequiredforremediationandcontaincovenantsnottosueasprotectiontothePRPs,(ii)participationingroupsasade minimisPRP,and(iii)theavailabilityofotherdefensestoliability.Asaresult,Devon’smonetaryexposureisnotexpectedtobematerial.

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notes

royaltymattersNumerousgasproducersandrelatedparties,includingDevon,havebeennamedinvariouslawsuitsallegingviolationofthefederalFalseClaimsAct.Thesuits

allegethattheproducersandrelatedpartiesusedbelow-marketprices,improperdeductions,impropermeasurementtechniquesandtransactionswithaffiliateswhichresultedinunderpaymentofroyaltiesinconnectionwithnaturalgasandnaturalgasliquidsproducedandsoldfromfederalandIndianownedorcontrolledlands.TheprincipalsuitinwhichDevonisadefendantisUnitedStatesexrel.Wrightv.ChevronUSA,Inc.etal.(the“Wrightcase”).ThesuitwasoriginallyfiledinAugust1996intheUnitedStatesDistrictCourtfortheEasternDistrictofTexas,butwasconsolidatedinOctober2000withtheothersuitsforpre-trialproceedingsintheUnitedStatesDistrictCourtfortheDistrictofWyoming.OnJuly10,2003,theDistrictofWyomingremandedtheWrightcasebacktotheEasternDistrictofTexastoresumeproceedings.TrialissetforNovember2007.Devonbelievesthatithasactedreasonably,haslegitimateandstrongdefensestoallallegationsinthesuit,andhaspaidroyaltiesingoodfaith.Devondoesnotcurrentlybelievethatitissubjecttomaterialexposureinassociationwiththislawsuitandnoliabilityhasbeenrecordedinconnectiontherewith.

In1995,theUnitedStatesCongresspassedtheDeepWaterRoyaltyReliefAct.TheintentofthislegislationwastoencouragedeepwaterexplorationintheGulfofMexicobyprovidingrelieffromtheobligationtopayroyaltiesoncertainfederalleases.DeepwaterleasesissuedincertainyearsbytheMineralsManagementService(the“MMS”)havecontainedpricethresholds,suchthatifthemarketpricesforoilornaturalgasexceededthethresholdsforagivenyear,royaltyreliefwouldnotbegrantedforthatyear.Deepwaterleasesissuedin1998and1999didnotincludepricethresholds.TheMMSin2006informedDevonandotheroilandgascompaniesthattheomissionofpricethresholdsfromtheseleaseswasanerroronitspartandwasnotitsintention.Accordingly,theMMSinvitedDevonandtheotheraffectedoilandgasproducerstorenegotiatethetermsandconditionsofthe1998and1999leasestoaddpricethresholdprovisionstotheleaseagreementsforperiodsafterOctober1,2006.DevonhassincehadseveraldiscussionswithMMSrepresentativesonthisissue,buthasnotyetenteredintorenegotiatedleases.

TheU.S.HouseofRepresentativesinJanuary2007passedlegislationthatwouldrequirecompaniestorenegotiatethe1998and1999leasesasaconditionofsecuringfuturefederalleases.Ifthislegislationweretobecomelaw,itwouldrequirepricethresholdstobeeffectiveintherenegotiated1998and1999leaseseffectiveOctober1,2006.AlthoughDevonhasnotyetsignedrenegotiatedleases,ithasaccruedinits2006consolidatedfinancialstatementsapproximately$6millionforroyaltiesthatwouldbedueifpricethresholdswereaddedtoits1998and1999leaseseffectiveOctober1,2006.

equatorialGuineainvestigation

TheSEChasbeenconductinganinquiryintopaymentsmadetothegovernmentofEquatorialGuineaandtoofficialsandpersonsaffiliatedwithofficialsofthegovernmentofEquatorialGuinea.OnAugust9,2005,DevonreceivedasubpoenaissuedbytheSECpursuanttoaformalorderofinvestigation.DevonhascooperatedfullywiththeSEC’srequestsforinformationinthisinquiry.Afterrespondingin2005tosuchrequestsforinformation,DevonhasnotbeencontactedbytheSEC.IntheeventthatDevonreceivesanyfurtherinquiries,DevonwillworkwiththeSECinconnectionwithitsinvestigation.

hurricaneContingenciesHistorically,Devonmaintainedacomprehensiveinsuranceprogramthatincludedcoverageforphysicaldamagetoitsoffshorefacilitiescausedbyhurricanes.

Devon’shistoricalinsuranceprogramalsoincludedsubstantialbusinessinterruptioncoveragewhichDevonisutilizingtorecovercostsassociatedwiththesuspendedproductionrelatedtohurricanesthatstrucktheGulfofMexicointhethirdquarterof2005.Underthetermsofthisinsuranceprogram,Devonwasentitledtobereimbursedfortheportionofproductionsuspendedlongerthanforty-fivedays,subjecttoupperlimitstooilandnaturalgasprices.Also,thetermsoftheinsuranceincludeastandard,per-eventdeductibleof$1millionforoffshorelossesaswellasa$15millionaggregateannualdeductible.

BasedoncurrentestimatesofphysicaldamageandtheanticipatedlengthoftimeDevonwillhaveproductionsuspended,Devonexpectsitspolicyrecoverieswillexceedrepaircostsanddeductibleamounts.Thisexpectationisbaseduponseveralvariables,includingthe$467millionreceivedinthethirdquarterof2006asafullsettlementoftheamountduefromDevon’sprimaryinsurers.AsofDecember31,2006,$154millionoftheseproceedshadbeenutilizedasreimbursementofpastrepaircostsanddeductibleamounts.Theremainingproceedsof$313millionwillbeutilizedasreimbursementofDevon’santicipatedfuturerepaircosts.Devonhasnotyetreceivedanysettlementsrelatedtoclaimsfiledwithitssecondaryinsurers.

ShouldDevon’stotalpolicyrecoveries,includingthepartialsettlementsalreadyreceivedfromDevon’sprimaryinsurers,exceedallrepaircostsanddeductibleamounts,suchexcesswillberecognizedasotherincomeinthestatementofoperationsintheperiodinwhichsuchdeterminationcanbemade.

ThepolicyunderlyingtheinsuranceprogramtermsdescribedaboveexpiredonAugust31,2006.Duringthethirdquarterof2006,Devonwasabletore-establishacomprehensiveinsuranceprogramthatincludesbusinessinterruptionandphysicaldamagecoverageforitsbusiness.However,duetosignificantchangesinthemarketplace,DevonwasonlyabletoobtainademinimisamountofcoverageforanydamagethatmaybecausedbynamedwindstormsintheGulfofMexico.DevonhasnotexperiencedanylossesunderthisnewinsurancearrangementthroughDecember31,2006.

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othermattersDevonisinvolvedinothervariousroutinelegalproceedingsincidentaltoitsbusiness.However,toDevon’sknowledgeasofthedateofthisreport,therewereno

othermaterialpendinglegalproceedingstowhichDevonisapartyortowhichanyofitspropertyissubject.

CommitmentsDevonhascertaindrillingandfacilityobligationsundercontractualagreementswiththirdpartyserviceproviderstoprocuredrillingrigsandotherrelatedservices

fordevelopmentalandexploratorydrillingandfacilitiesconstruction.Includedinthe$3.0billiontotalof“DrillingandFacilityObligations”inthetablebelowis$1.9billionwhichrelatestolong-termcontractsforthreedeepwaterdrillingrigsandcertainothercontractsforonshoredrillingandfacilityobligationsinwhichdrillingorfacilitiesconstructionhasnotcommenced.The$1.9billionrepresentsthegrosscommitmentunderthesecontracts.Devon’sultimatepaymentforthesecommitmentswillbereducedbytheamountsbilledtoitspartnerswhennetworkinginterestsareultimatelydetermined.Paymentsforthesecommitments,netofamountsbilledtopartners,willbecapitalizedasacomponentofoilandgasproperties.

Devonhascertainfirmtransportationagreementswhichrepresent“shiporpay”arrangementswherebyDevonhascommittedtoshipcertainvolumesofoil,gasandNGLsforafixedtransportationfee.Devonhasenteredintotheseagreementstoaidthemovementofitsproductiontomarket.Devonexpectstohavesufficientproductiontoutilizethemajorityofthesetransportationservices.

Devonleasescertainofficespaceandequipmentunderoperatingleasearrangements.Totalrentalexpenseincludedingeneralandadministrativeexpensesunderoperatingleases,netofsub-leaseincome,was$36million,$35millionand$49millionin2006,2005and2004,respectively.

Devonassumedtwooffshoreplatformsparleasesthroughthe2003Oceanmerger.ThesparsarebeingusedinthedevelopmentoftheNansenandBoomvangfieldsintheGulfofMexico.TheBoomvangfieldwasdivestedaspartofthe2005propertydivestitureprogram.TheNansenoperatingleaseisfora20-yeartermandcontainsvariousoptionswherebyDevonmaypurchasethelessors’interestsinthespar.TotalrentalexpenseincludedinleaseoperatingexpensesunderboththeNansenandBoomvangoperatingleaseswas$12million,$14millionand$17millionin2006,2005and2004,respectively.DevonhasguaranteedthattheNansensparwillhavearesidualvalueattheendoftheoperatingleaseequaltoatleast10%ofthefairvalueofthesparattheinceptionofthelease.Thetotalguaranteedvalueis$14millionin2022.However,suchamountmaybereducedunderthetermsoftheleaseagreement.AsaresultofthesaleoftheBoomvangfield,DevonissubleasingtheBoomvangSpar.Ifthesublesseeweretodefaultonitsobligation,Devonwouldcontinuetobeobligatedtopaytheperiodicleasepaymentsandanyguaranteedvaluerequiredattheendoftheterm.

Devonhasafloating,production,storageandoffloadingfacility(“FPSO”)thatisbeingusedinthePanyuprojectoffshoreChinaandisbeingleasedunderoperatingleasearrangements.ThisleaseexpiresinSeptember2009.DevonwasalsoleasinganFPSOthatisbeingusedintheZafirofieldoffshoreEquatorialGuinea.DevonandtheotherworkinginterestownerspurchasedthisFPSOinthefourthquarterof2005.TotalrentalexpenseincludedinleaseoperatingexpensesunderboththeChinaandEquatorialGuineaoperatingleaseswas$9million,$19millionand$20millionin2006,2005and2004,respectively.

Thefollowingisaschedulebyyearoffutureminimumpaymentsfordrillingandfacilityobligations,firmtransportationagreementsandleasesthathaveinitialorremainingnoncancelableleasetermsinexcessofoneyearasofDecember31,2006: drillinG and firm offiCeand faCilitY tranSportation equipment Spar fpSoYearendinGdeCemBer31, oBliGationS aGreementS leaSeS leaSeS leaSeS

(INMILLIoNs)

2007 $ 886 123 48 11 21 2008 524 92 44 11 31 2009 613 81 37 11 29 2010 480 61 29 11 23 2011 364 45 26 11 23 Thereafter 126 172 31 141 57 Total payments $ 2,993 574 215 196 184

9.Share-BaSedCompenSation

OnJune8,2005,Devon’sstockholdersadoptedthe2005Long-TermIncentivePlanwhichexpiresonJune8,2013.Devon’sstockholdersadoptedcertainamendmentstothisplanonJune7,2006.Thisplan,asamended,authorizestheCompensationCommittee,whichconsistsofnon-managementmembersofDevon’sBoardofDirectors,tograntnonqualifiedandincentivestockoptions,restrictedstockawards,Canadianrestrictedstockunits,performanceunits,performancebonuses,stockappreciationrightsandcash-outrightstoeligibleemployees.Theplanalsoauthorizesthegrantofnonqualifiedstockoptions,restrictedstockawardsandstockappreciationrightstodirectors.Atotalof32millionsharesofDevoncommonstockhavebeenreservedforissuancepursuanttotheplan.Tocalculatesharesissued

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undertheplan,optionsgrantedrepresentoneshareandotherawardsrepresent2.2shares.Devonalsohasstockoptionplansthatwereadoptedin2003and1997underwhichstockoptionsandrestrictedstockawardswereissuedtokeymanagementand

professionalemployees.Optionsgrantedundertheseplansremainexercisablebytheemployeesowningsuchoptions,butnonewoptionsorrestrictedstockawardswillbegrantedundertheseplans.DevonalsohasstockoptionsoutstandingthatwereassumedaspartoftheacquisitionsofOcean,MitchellEnergy&DevelopmentCorp.,SantaFeSnyderandPennzEnergy.

AsdiscussedinNote1,onJanuary1,2006,Devonchangeditsmethodofaccountingforshare-basedcompensationfromtheAPBNo.25intrinsicvalueaccountingmethodtothefairvaluerecognitionprovisionsofSFASNo.123(R).Thefollowingtablepresentstheeffectsofshare-basedcompensationincludedinDevon’saccompanyingstatementofoperationsfortheyearsendedDecember31,2006,2005and2004.

2006 2005 2004

(INMILLIoNs)

Gross general and administrative expense $ 91 29 12Share-based compensation expense capitalized pursuant to the full cost method of accounting for oil and gas properties $ 26 — —Related income tax benefit $ 23 11 5

StockoptionsUnderDevon’s2005Long-TermIncentivePlan,theexercisepriceofstockoptionsgrantedmaynotbelessthantheestimatedfairmarketvalueofthestockatthe

dateofgrant.Inaddition,optionsgrantedareexercisableduringaperiodestablishedforeachgrant,whichperiodmaynotexceedeightyearsfromthedateofgrant.Therecipientmustpaytheexercisepriceincashorincommonstock,oracombinationthereof,atthetimethattheoptionisexercised.Optionsgrantedgenerallyhaveavestingperiodthatrangesfromthreetofouryears.

Thefairvalueofstockoptionsonthedateofgrantisexpensedovertheapplicablevestingperiod.DevonestimatesthefairvaluesofstockoptionsgrantedusingaBlack-Scholesoptionvaluationmodel,whichrequiresDevontomakeseveralassumptions.ThevolatilityofDevon’scommonstockisbasedonthehistoricalvolatilityofthemarketpriceofDevon’scommonstockoveraperiodoftimeequaltotheexpectedtermoftheoptionandendingonthegrantdate.ThedividendyieldisbasedonDevon’shistoricalandcurrentyieldineffectatthedateofgrant.Therisk-freeinterestrateisbasedonthezero-couponU.S.Treasuryyieldfortheexpectedtermoftheoptionatthedateofgrant.Theexpectedtermoftheoptionsisbasedonhistoricalexerciseandterminationexperienceforvariousgroupsofemployeesanddirectors.Eachgroupisdeterminedbasedonthesimilarityoftheirhistoricalexerciseandterminationbehavior.

Thefollowingtablepresentsasummaryofthegrant-datefairvaluesofstockoptionsgrantedandtherelatedassumptionsfortheyearsendedDecember31,2006,2005and2004.Allsuchamountsrepresenttheweighted-averageamountsforeachyear.

2006 2005 2004

(INMILLIoNs)

Grant-date fair value $ 22.41 19.65 10.32Volatility factor 32.2% 31.0% 32.2%Dividend yield 0.5% 0.6% 0.5%Risk-free interest rate 5.7% 4.4% 3.2%Expected term (in years) 4.0 4.2 4.0

ThefollowingtablepresentsasummaryofDevon’soutstandingstockoptionsasofDecember31,2006,includingchangesduringtheyearthenended.

weiGhted weiGhted averaGe averaGe remaininG aGGreGate exerCiSe ContraCtual intrinSiC optionS priCe term value

(INthousANDs) (INyeArs) (INMILLIoNs)

Outstanding at December 31, 2005 16,732 $ 32.74 Granted 1,874 $ 70.00 Exercised (2,846) $ 25.41 Forfeited (377) $ 49.16 Outstanding at December 31, 2006 15,383 $ 38.24 4.1 $ 450Vested and expected to vest at December 31, 2006 14,952 $ 37.51 4.1 $ 448Exercisable at December 31, 2006 11,034 $ 29.44 3.8 $ 416

Theaggregateintrinsicvalueofstockoptionsthatwereexercisedduring2006,2005and2004was$119million,$149millionand$168million,respectively.AsofDecember31,2006,Devon’sunrecognizedcompensationcostrelatedtounvestedstockoptionswas$77million.Suchcostisexpectedtoberecognizedoveraweighted-averageperiodof2.4years.

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restrictedStockawardsandunitsUnderDevon’s2005Long-TermIncentivePlan,restrictedstockawardsandunitsaresubjecttotheterms,conditions,restrictionsand/orlimitations,ifany,thatthe

CompensationCommitteedeemsappropriate,includingrestrictionsoncontinuedemployment.Generally,restrictedstockawardsandunitsvestoveraminimumrestrictionperiodofatleastthreeyearsfromthedateofgrant.Duringthevestingperiod,recipientsofrestrictedstockawardsreceivedividendswhicharenotsubjecttorestrictionsorotherlimitations.Thefairvalueofrestrictedstockawardsandunitsonthedateofgrantisexpensedovertheapplicablevestingperiod.DevonestimatesthefairvaluesofrestrictedstockawardsandunitsastheclosingpriceofDevon’scommonstockonthegrantdateoftheawardorunit.

ThefollowingtablepresentsasummaryofDevon’sunvestedrestrictedstockawardsasofDecember31,2006,includingchangesduringtheyearthenended.

weiGhted reStriCted averaGe StoCk Grant-date awardS fairvalue

(INthousANDs)

Unvested at December 31, 2005 3,417 $ 46.80 Granted 3,091 $ 65.68 Vested (1,156) $ 42.58 Forfeited (190) $ 47.54Unvested at December 31, 2006 5,162 $ 58.35

Theaggregatefairvalueofrestrictedstockawardsthatvestedduring2006,2005and2004was$82million,$51millionand$15million,respectively.AsofDecember31,2006,Devon’sunrecognizedcompensationcostrelatedtounvestedrestrictedstockawardsandunitswas$253million.Suchcostisexpectedtoberecognizedoveraweighted-averageperiodof2.9years.

10.reduCtionofCarrYinGvalueofoilandGaSpropertieS

During2006and2005,Devonreducedthecarryingvalueofcertainofitsoilandgaspropertiesduetofullcostceilinglimitationsandunsuccessfulexploratoryactivities.Asummaryofthesereductionsandadditionaldiscussionisprovidedbelow.

YearendeddeCemBer31, 2006 2005 netof netof GroSS taxeS GroSS taxeS

(INMILLIoNs)

Unsuccessful exploratory reductions: Nigeria $ 85 85 — — Brazil 16 16 42 42 Angola — — 170 119Ceiling test reduction - Russia 20 10 — — Total $ 121 111 212 161

2006 ReductionsDevonhascommittedtodrillfourwellsinNigeria.Thefirsttwowellswereunsuccessful.Afterdrillingthesecondunsuccessfulwellinthefirstquarterof2006,Devondeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthefirstquarterof2006,Devonrecognizedan$85millionimpairmentofitsinvestmentinNigeriaequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.

Duringthesecondquarterof2006,DevondrilledtwounsuccessfulexploratorywellsinBrazilanddeterminedthatthecapitalizedcostsrelatedtothesetwowellsshouldbeimpaired.Therefore,inthesecondquarterof2006,Devonrecognizeda$16millionimpairmentofitsinvestmentinBrazilequaltothecoststodrillthetwodryholesandaproportionateshareofblock-relatedcosts.Therewasnotaxbenefitrelatedtothisimpairment.ThetwowellswereunrelatedtoDevon’sPolvodevelopmentprojectinBrazil.

Asaresultofadeclineinprojectedfuturenetcashflows,thecarryingvalueofDevon’sRussianpropertiesexceededthefullcostceilingby$10millionattheendofthethirdquarterof2006.Therefore,Devonrecognizeda$20millionreductionofthecarryingvalueofitsoilandgaspropertiesinRussia,offsetbya$10milliondeferredincometaxbenefit.

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2005 ReductionsDevon’sinterestsinAngolawereacquiredthroughthe2003OceanEnergymerger.Devon’sAngolandrillingprogramdiscoverednoproven

reserves.Afterdrillingthreeunsuccessfulwellsinthefourthquarterof2005,DevondeterminedthatalloftheAngolancapitalizedcostsshouldbeimpaired.Priortothefourthquarterof2005,DevonwascapitalizingthecostsofpreviousunsuccessfuleffortsinBrazilpendingthedeterminationofwhetherproved

reserveswouldberecordedinBrazil.DevonhasbeensuccessfulinitsdrillingeffortsonblockBM-C-8inBrazilandiscurrentlydevelopingthePolvoprojectonthisblock.TheultimatevalueofthePolvoprojectisexpectedtobeinexcessofthesumofitsrelatedcosts,plusthecostsofthepreviousunrelatedunsuccessfuleffortsinBrazilwhichwerecapitalized.However,thePolvoprovedreserveswillberecordedoveraperiodoftime.Attheendof2005,itwasexpectedthatasmallinitialportionoftheprovedreservesultimatelyexpectedatPolvowouldberecordedin2006.Basedonpreliminaryestimatesdevelopedinthefourthquarterof2005,thevalueofthisinitialpartialbookingofprovedreserveswasnotsufficienttooffsetthesumoftherelatedproportionatePolvocostsplusthecostsofthepreviousunrelatedunsuccessfulefforts.Therefore,DevondeterminedthatthepriorunsuccessfulcostsunrelatedtothePolvoprojectshouldbeimpaired.Thesecoststotaledapproximately$42million.TherewasnotaxbenefitrelatedtothisBrazilianimpairment.

11.otherinCome

Thecomponentsofotherincomeincludethefollowing:

YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Interest and dividend income $ 100 95 45Net gain on sales of non-oil and gas property and equipment 6 150 33Loss on derivative financial instruments — (48) —Gains from changes in foreign exchange rates — 2 23Other 9 (1) 25 Total $ 115 198 126

12.inCometaxeS

AtDecember31,2006,Devonhadthefollowingnetoperatinglosscarryforwardswhichareavailabletoreducefuturetaxableincomeinthejurisdictionwherethenetoperatinglosswasincurred.Thesecarryforwardswillresultinafuturetaxreductionbaseduponthefuturetaxrateapplicabletothetaxableincomethatisulti-matelyoffsetbythenetoperatinglosscarryforward.Forfinancialpurposes,thetaxeffectsofthesecarryforwardshavebeenrecognizedasreductionstothenetdeferredtaxliabilityatDecember31,2006. YearSof CarrYforward juriSdiCtion expiration amountS

(INMILLIoNs)

Various U.S. states 2007 – 2022 $ 110Canada 2008 – 2027 $ 143Brazil Indefinite $ 31

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notes

Theearningsfromcontinuingoperationsbeforeincometaxesandthecomponentsofincometaxexpense(benefit)fortheyears2006,2005and2004wereasfollows: YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

EARningS FROM COntinuing OPERAtiOnS bEFORE inCOME tAxES: U.S. $ 2,435 3,254 2,264 Canada 751 899 598 International 826 352 414 Total $ 4,012 4,505 3,276

CuRREnt inCOME tAx ExPEnSE: U.S. federal $ 292 735 346 Various states 7 26 10 Canada 143 106 49 International 377 351 320 Total current tax expense 819 1,218 725

DEFERRED inCOME tAx ExPEnSE (bEnEFit): U.S. federal 456 271 246 Various states 77 (18) 27 Canada (105) 217 149 International (58) (82) (52) Total deferred tax expense 370 388 370 Total income tax expense $ 1,189 1,606 1,095

Thetaxesontheresultsofdiscontinuedoperationspresentedintheaccompanyingstatementsofoperationswereallrelatedtointernationaloperations.TotalincometaxexpensedifferedfromtheamountscomputedbyapplyingtheU.S.federalincometaxratetoearningsfromcontinuingoperationsbeforeincome

taxesasaresultofthefollowing:

YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Expected income tax expense based on U.S. statutory tax rate of 35% $ 1,404 1,577 1,146 Effect of Canadian tax rate reductions (243) (14) (36) U.S. manufacturing deduction (12) (25) — Repatriation of Canadian earnings — 28 — State income taxes 55 6 20 Taxation on foreign operations (22) 30 (35) Other 7 4 — Total income tax expense $ 1,189 1,606 1,095

In2006,2005and2004,deferredincometaxeswerereduced$243million,$14millionand$36million,respectively,duetoCanadianstatutoryratereductionsthatwereenactedineachsuchyear.

In2006and2005,incometaxeswerereduced$12millionand$25million,respectively,duetoanewU.S.taxdeductionforcompanieswithdomesticproductionactivities,includingoilandgasextraction.

In2006,deferredincometaxesincreased$39millionduetotheeffectofanewincome-basedtaxenactedbythestateofTexasthatreplacesapreviousfranchisetax.ThenewtaxiseffectiveJanuary1,2007.The$39millionincreaseisincludedin2006stateincometaxesintheabovetable.

In2005,Devonrecognized$28millionoftaxesrelatedtoitsrepatriationof$545milliontotheU.S.Thecashwasrepatriatedduetotaxlegislationthatallowedqualifyingcompaniestorepatriatecashfromforeignoperationsatareducedincometaxrate.SubstantiallyallofthecashrepatriatedbyDevonin2005relatedto

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earningsofitsCanadiansubsidiary.ThetaxeffectsoftemporarydifferencesthatgaverisetosignificantportionsofthedeferredtaxassetsandliabilitiesatDecember31,2006and2005arepresented

below:

deCemBer31, 2006 2005

(INMILLIoNs)

DEFERRED tAx ASSEtS: Net operating loss carryforwards $ 35 148 Minimum tax credit carryforwards — 18 Fair value of derivative financial instruments 97 52 Asset retirement obligations 270 271 Pension benefit obligations 81 49 Insurance proceeds 113 — Other 108 102 Total deferred tax assets 704 640

DEFERRED tAx liAbilitiES: Property and equipment, principally due to nontaxable business combinations, differences in depreciation, and the expensing of intangible drilling costs for tax purposes (5,743) (5,406) Chevron Corporation common stock (326) (247) Long-term debt (148) (168) Other (35) (35) Total deferred tax liabilities (6,252) (5,856) Net deferred tax liability $ (5,548) (5,216)

Asshownintheabovetable,Devonhasrecognized$704millionofdeferredtaxassetsasofDecember31,2006.Suchamountincludes$35millionfromvariouscarryforwardsavailabletooffsetfutureincometaxes.Thecarryforwardsincludestatenetoperatinglosscarryforwardswhichexpireprimarilybetween2007and2022,Canadiannetoperatinglosscarryforwardswhichexpireprimarilybetween2008and2027,andBraziliannetoperatinglosscarryforwardswhichhavenoexpiration.Thetaxbenefitsofcarryforwardsarerecordedasanassettotheextentthatmanagementassessestheutilizationofsuchcarryforwardstobe“morelikelythannot.”Whenthefutureutilizationofsomeportionofthecarryforwardsisdeterminednottobe“morelikelythannot,”avaluationallowanceisprovidedtoreducetherecordedtaxbenefitsfromsuchassets.

Devonexpectsthetaxbenefitsfromthenetoperatinglosscarryforwardstobeutilizedbetween2007and2010.Suchexpectationisbaseduponcurrentestimatesoftaxableincomeduringthisperiod,consideringlimitationsontheannualutilizationofthesebenefitsassetforthbytaxregulations.Significantchangesinsuchestimatescausedbyvariablessuchasfutureoilandgaspricesorcapitalexpenditurescouldalterthetimingoftheeventualutilizationofsuchcarryforwards.TherecanbenoassurancethatDevonwillgenerateanyspecificlevelofcontinuingtaxableearnings.However,managementbelievesthatDevon’sfuturetaxableincomewillmorelikelythannotbesufficienttoutilizesubstantiallyallitstaxcarryforwardspriortotheirexpiration.

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13.diSContinuedoperationS

egyptOnNovember14,2006,DevonannounceditsplanstodivestitsoperationsinEgypt.Pursuanttoaccountingrulesfordiscontinuedoperations,Devonhasclassified

all2006andpriorperiodamountsrelatedtoitsoperationsinEgyptasdiscontinuedoperations.DevonanticipatescompletingthesaleofitsEgyptianassetsduringthefirsthalfof2007.AsofDecember31,2006,Devonhasnotrecordedanygainorlossassociatedwiththisplannedsale.

RevenuesrelatedtoDevon’soperationsinEgypttotaled$118million,$119millionand$133millionduring2006,2005and2004,respectively.ThefollowingtablepresentsthemainclassesofassetsandliabilitiesassociatedwithDevon’soperationsinEgyptasofDecember31,2006and2005.

aSofdeCemBer31, 2006 2005

(INMILLIoNs)

ASSEtS: Cash $ 17 13 Accounts receivable 32 36 Other current assets 32 17 Current assets $ 81 66 Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization $ 185 217 liAbilitiES: Current liabilities – accounts payable – trade $ 5 19 Asset retirement obligation, long-term $ 9 8 Deferred income taxes 15 31 Other liabilities 1 1 Long-term liabilities $ 25 40

westafrica(Subsequentevent)OnJanuary23,2007DevonannounceditsplanstodivestitsoperationsinWestAfrica.Pursuanttoaccountingrulesfordiscontinuedoperations,Devonhasnot

classifiedtheassets,liabilitiesoroperatingresultsofitsoperationsinWestAfricaasdiscontinuedoperationsasofDecember31,2006.However,suchamountswillbeclassifiedasdiscontinuedoperationsbeginningwiththefirstquarterof2007.DevonanticipatescompletingthesaleofitsWestAfricanassetsduringthethirdquarterof2007.AsofDecember31,2006,Devonhasnotrecordedanygainorlossassociatedwiththisplannedsale.

ThefollowingtablepresentsthemainclassesofassetsandliabilitiesassociatedwithDevon’soperationsinWestAfricaasofDecember31,2006and2005.

aSofdeCemBer31, 2006 2005

(INMILLIoNs)

ASSEtS: Cash $ 47 62 Accounts receivable 69 190 Other current assets 35 31 Current assets $ 151 283 Long-term assets – property and equipment, net of accumulated depreciation, depletion and amortization $ 1,434 1,515 liAbilitiES: Accounts payable – trade $ 43 64 Income taxes payable 115 101 Current portion of asset retirement obligation 8 — Accrued expenses and other current liabilities 2 — Current liabilities $ 168 165 Asset retirement obligation, long-term $ 29 24 Deferred income taxes 360 397 Other liabilities 15 15 Long-term liabilities $ 404 436

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14.SeGmentinformation

Devonmanagesitsbusinessbycountry.Assuch,Devonidentifiesitssegmentsbasedongeographicareas.Devonhasthreereportablesegments:itsoperationsintheU.S.,itsoperationsinCanada,anditsinternationaloperationsoutsideofNorthAmerica.Substantiallyallofthesesegments’operationsinvolveoilandgasproducingactivities.CertaininformationregardingsuchactivitiesforeachsegmentisincludedinNote15.

FollowingiscertainfinancialinformationregardingDevon’ssegmentsfor2006,2005and2004.Therevenuesreportedareallfromexternalcustomers.

u.S. Canada international total

(INMILLIoNs)

AS OF DECEMbER 31, 2006: Current assets $ 1,307 616 1,289 3,212Property and equipment, net of accumulated depreciation, depletion and amortization 15,253 6,929 2,413 24,595Goodwill 3,053 2,585 68 5,706Other assets 1,289 35 226 1,550 Total assets $ 20,902 10,165 3,996 35,063

Current liabilities $ 3,693 569 383 4,645Long-term debt 2,594 2,974 — 5,568Asset retirement obligation, long-term 387 360 86 833Other liabilities 864 16 45 925Deferred income taxes 3,351 1,831 468 5,650Stockholders’ equity 10,013 4,415 3,014 17,442 Total liabilities and stockholders’ equity $ 20,902 10,165 3,996 35,063

YEAR EnDED DECEMbER 31, 2006: Revenues: Oil sales $ 1,218 603 1,384 3,205 Gas sales 3,445 1,456 31 4,932 NGL sales 548 201 — 749 Marketing and midstream revenues 1,641 31 20 1,692 Total revenues 6,852 2,291 1,435 10,578Expenses and other income, net: Lease operating expenses 813 543 132 1,488 Production taxes 235 7 99 341 Marketing and midstream operating costs and expenses 1,226 10 8 1,244 Depreciation, depletion and amortization of oil and gas properties 1,311 644 311 2,266 Depreciation and amortization of non-oil and gas properties 154 18 4 176 Accretion of asset retirement obligation 25 21 3 49 General and administrative expenses 316 92 (11) 397 Interest expense 199 222 — 421 Change in fair value of derivative financial instruments 181 (3) — 178 Reduction of carrying value of oil and gas properties — — 121 121 Other income, net (43) (14) (58) (115) Total expenses and other income, net 4,417 1,540 609 6,566Earnings from continuing operations before income tax expense 2,435 751 826 4,012Income tax expense (benefit): Current 299 143 377 819 Deferred 533 (105) (58) 370 Total income tax expense 832 38 319 1,189Earnings from continuing operations 1,603 713 507 2,823Discontinued operations: Earnings from discontinued operations before income taxes — — 22 22 Income tax benefit — — (1) (1) Earnings from discontinued operations — — 23 23Net earnings 1,603 713 530 2,846Preferred stock dividends 10 — — 10Net earnings applicable to common stockholders $ 1,593 713 530 2,836 Capital expenditures $ 5,814 1,670 609 8,093

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u.S. Canada international total

(INMILLIoNs)

AS OF DECEMbER 31, 2005:Current assets $ 2,042 1,182 982 4,206Property and equipment, net of accumulated depreciation, depletion and amortization 10,856 5,877 2,178 18,911Goodwill 3,056 2,581 68 5,705Other assets 1,213 17 221 1,451 Total assets $ 17,167 9,657 3,449 30,273

Current liabilities $ 1,736 925 273 2,934Long-term debt 2,986 2,971 — 5,957Asset retirement obligation, long-term 320 261 29 610Other liabilities 467 12 57 536Deferred income taxes 2,864 2,008 502 5,374Stockholders’ equity 8,794 3,480 2,588 14,862 Total liabilities and stockholders’ equity $ 17,167 9,657 3,449 30,273

YEAR EnDED DECEMbER 31, 2005:Revenues: Oil sales $ 1,062 353 944 2,359 Gas sales 3,929 1,814 41 5,784 NGL sales 484 196 7 687 Marketing and midstream revenues 1,780 12 — 1,792 Total revenues 7,255 2,375 992 10,622Expenses and other income, net: Lease operating expenses 710 498 116 1,324 Production taxes 273 6 56 335 Marketing and midstream operating costs and expenses 1,336 6 — 1,342 Depreciation, depletion and amortization of oil and gas properties 1,137 570 274 1,981 Depreciation and amortization of non-oil and gas properties 141 14 5 160 Accretion of asset retirement obligation 25 16 2 43 General and administrative expenses 245 59 (13) 291 Interest expense 224 309 — 533 Change in fair value of derivative financial instruments 86 8 — 94 Reduction of carrying value of oil and gas properties — — 212 212 Other income, net (176) (10) (12) (198) Total expenses and other income, net 4,001 1,476 640 6,117Earnings from continuing operations before income tax expense 3,254 899 352 4,505Income tax expense (benefit): Current 761 106 351 1,218 Deferred 253 217 (82) 388 Total income tax expense 1,014 323 269 1,606Earnings from continuing operations 2,240 576 83 2,899Discontinued operations: Earnings from discontinued operations before income taxes — — 46 46 Income tax expense — — 15 15 Earnings from discontinued operations — — 31 31Net earnings 2,240 576 114 2,930Preferred stock dividends 10 — — 10Net earnings applicable to common stockholders $ 2,230 576 114 2,920 Capital expenditures $ 2,200 1,707 308 4,215

92

notes

u.S. Canada international total

(INMILLIoNs)

YEAR EnDED DECEMbER 31, 2004:Revenues: Oil sales $ 976 299 824 2,099 Gas sales 3,261 1,437 34 4,732 NGL sales 405 143 6 554 Marketing and midstream revenues 1,688 13 — 1,701 Total revenues 6,330 1,892 864 9,086Expenses and other income, net: Lease operating expenses 714 438 107 1,259 Production taxes 220 5 30 255 Marketing and midstream operating costs and expenses 1,333 6 — 1,339 Depreciation, depletion and amortization of oil and gas properties 1,242 522 313 2,077 Depreciation and amortization of non-oil and gas properties 130 14 4 148 Accretion of asset retirement obligation 27 15 2 44 General and administrative expenses 221 56 — 277 Interest expense 197 278 — 475 Change in fair value of derivative financial instruments 63 (1) — 62 Other income, net (81) (39) (6) (126) Total expenses and other income, net 4,066 1,294 450 5,810Earnings before income tax expense 2,264 598 414 3,276Income tax expense (benefit): Current 356 49 320 725 Deferred 273 149 (52) 370 Total income tax expense 629 198 268 1,095Earnings from continuing operations 1,635 400 146 2,181Discontinued operations: Earnings from discontinued operations before income taxes — — 17 17 Income tax expense — — 12 12 Earnings from discontinued operations — — 5 5Net earnings 1,635 400 151 2,186Preferred stock dividends 10 — — 10Net earnings applicable to common stockholders $ 1,625 400 151 2,176 Capital expenditures $ 1,674 979 279 2,932

15.SupplementalinformationonoilandGaSoperationS(unaudited)

ThefollowingsupplementalunauditedinformationregardingtheoilandgasactivitiesofDevonispresentedpursuanttothedisclosurerequirementspromulgatedbytheSecuritiesandExchangeCommissionandSFASNo.69,Disclosures About Oil and Gas Producing Activities.ThissupplementalinformationexcludesamountsforallperiodspresentedrelatedtoDevon’sdiscontinuedoperationsinEgypt.

CostsincurredThefollowingtablesreflectthecostsincurredinoilandgaspropertyacquisition,exploration,anddevelopmentactivities:

total YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Property acquisition costs: Proved properties $ 1,113 54 38 Unproved properties 1,485 347 141Exploration costs 973 890 714Development costs 4,151 2,787 1,917 Costs incurred $ 7,722 4,078 2,810

93

notes

domeStiC YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Property acquisition costs: Proved properties $ 1,066 5 27 Unproved properties 1,366 106 75Exploration costs 547 422 335Development costs 2,558 1,597 1,163 Costs incurred $ 5,537 2,130 1,600

Canada YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Property acquisition costs: Proved properties $ 23 49 11 Unproved properties 70 239 52Exploration costs 217 361 272Development costs 1,244 1,020 625 Costs incurred $ 1,554 1,669 960

international YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Property acquisition costs: Proved properties $ 24 — — Unproved properties 49 2 14Exploration costs 209 107 107Development costs 349 170 129 Costs incurred $ 631 279 250

Pursuanttothefullcostmethodofaccounting,Devoncapitalizescertainofitsgeneralandadministrativeexpenseswhicharerelatedtopropertyacquisition,explorationanddevelopmentactivities.Suchcapitalizedexpenses,whichareincludedinthecostsshownintheprecedingtables,were$269million,$181millionand$166millionintheyears2006,2005and2004,respectively.Also,Devoncapitalizesinterestcostsincurredandattributabletounprovedoilandgaspropertiesandmajordevelopmentprojectsofoilandgasproperties.Capitalizedinterestexpenses,whichareincludedinthecostsshownintheprecedingtables,were$70millionineachoftheyears2006,2005and2004.

resultsofoperationsforoilandGasproducingactivitiesThefollowingtablesincluderevenuesandexpensesassociateddirectlywithDevon’soilandgasproducingactivities,includinggeneralandadministrative

expensesdirectlyrelatedtosuchproducingactivities.TheydonotincludeanyallocationofDevon’sinterestcostsorgeneralcorporateoverheadand,therefore,arenotnecessarilyindicativeofthecontributiontonetearningsofDevon’soilandgasoperations.Incometaxexpensehasbeencalculatedbyapplyingstatutoryincometaxratestooil,gasandNGLsalesafterdeductingcosts,includingdepreciation,depletionandamortizationandaftergivingeffecttopermanentdifferences.

total YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)

Oil, gas and NGL sales $ 8,886 8,830 7,385Production and operating expenses (1,829) (1,659) (1,514)Depreciation, depletion and amortization (2,266) (1,981) (2,077)Accretion of asset retirement obligation (49) (43) (44)General and administrative expenses (162) (107) (104)Reduction of carrying value of oil and gas properties (121) (212) —Income tax expense (1,448) (1,830) (1,342) Results of operations $ 3,011 2,998 2,304Depreciation, depletion and amortization per Boe $ 10.59 8.86 8.41

94

notes

domeStiC YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)

Oil, gas and NGL sales $ 5,211 5,475 4,642Production and operating expenses (1,048) (983) (934)Depreciation, depletion and amortization (1,311) (1,137) (1,242)Accretion of asset retirement obligation (26) (25) (27)General and administrative expenses (115) (84) (75)Income tax expense (996) (1,145) (807) Results of operations $ 1,715 2,101 1,557Depreciation, depletion and amortization per Boe $ 9.89 8.35 8.23

Canada YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)

Oil, gas and NGL sales $ 2,260 2,363 1,879Production and operating expenses (550) (504) (443)Depreciation, depletion and amortization (644) (570) (522)Accretion of asset retirement obligation (21) (16) (15)General and administrative expenses (29) (20) (16)Income tax expense (144) (426) (275) Results of operations $ 872 827 608Depreciation, depletion and amortization per Boe $ 11.17 9.20 8.00

international YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs,exCeptperequIvALeNtBArreLAMouNts)

Oil, gas and NGL sales $ 1,415 992 864Production and operating expenses (231) (172) (137)Depreciation, depletion and amortization (311) (274) (313)Accretion of asset retirement obligation (2) (2) (2)General and administrative expenses (18) (3) (13)Reduction of carrying value of oil and gas properties (121) (212) —Income tax expense (308) (259) (260) Results of operations $ 424 70 139Depreciation, depletion and amortization per Boe $ 13.03 10.73 10.13

95

notes

In2006,2005and2004,theCanadianincometaxamountsinthetablesabovewerereducedby$243million,$14millionand$36million,respectively,duetostatutoryratereductionsthatwereenactedineachsuchyear.

quantitiesofoilandGasreserves

Setforthbelowisasummaryofthereserveswhichwereevaluated,eitherbypreparationoraudit,byindependentpetroleumconsultantsforeachoftheyearsended2006,2005and2004.

2006 2005 2004 prepared audited prepared audited prepared audited

Domestic 7% 81% 9% 79% 16% 61% Canada 46% 39% 46% 26% 22% — International 99% — 98% — 98% — Total 28% 61% 31% 54% 28% 35%

“Prepared”reservesarethosequantitiesofreserveswhichwerepreparedbyanindependentpetroleumconsultant.“Audited”reservesarethosequantitiesofrevenueswhichwereestimatedbyDevonemployeesandauditedbyanindependentpetroleumconsultant.Anauditisanexaminationofacompany’sprovedoilandgasreservesandnetcashflowbyanindependentpetroleumconsultantthatisconductedforthepurposeofexpressinganopinionastowhethersuchestimates,inaggregate,arereasonableandhavebeenestimatedandpresentedinconformitywithgenerallyacceptedpetroleumengineeringandevaluationprinciples.

ThedomesticreserveswereevaluatedbytheindependentpetroleumconsultantsofLaRochePetroleumConsultants,Ltd.andRyderScottCompany,L.P.ineachoftheyearspresented.TheCanadianreserveswereevaluatedbytheindependentpetroleumconsultantsofAJMPetroleumConsultantsineachoftheyearspresented.TheInternationalreserveswereevaluatedbytheindependentpetroleumconsultantsofRyderScottCompany,L.P.ineachoftheyearspresented.

Setforthbelowisasummaryofthechangesinthenetquantitiesofcrudeoil,naturalgasandnaturalgasliquidsreservesforeachofthethreeyearsendedDecember31,2006.Additionaldiscussionofthesignificantprovedreservechangesfollowsthetablesbelow.

total natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)

Proved reserves as of December 31, 2003 646 7,316 209 2,074 Revisions due to prices (82) 39 1 (75) Revisions other than price 19 29 21 45 Extensions and discoveries 76 988 25 266 Purchase of reserves 1 14 — 3 Production (74) (891) (24) (247) Sale of reserves (1) (2) — (1) Proved reserves as of December 31, 2004 585 7,493 232 2,065 Revisions due to prices (14) 78 4 3 Revisions other than price 21 (2) 16 37 Extensions and discoveries 166 1,220 30 400 Purchase of reserves 2 10 — 4 Production (62) (827) (24) (224) Sale of reserves (58) (676) (12) (183) Proved reserves as of December 31, 2005 640 7,296 246 2,102 Revisions due to prices (21) (89) (7) (44) Revisions other than price 5 (106) 5 (6) Extensions and discoveries 139 1,491 45 433 Purchase of reserves — 584 9 106 Production (55) (815) (23) (214) Sale of reserves — (5) — (1) Proved reserves as of December 31, 2006 708 8,356 275 2,376 Proved developed reserves as of: December 31, 2003 392 5,980 179 1,568 December 31, 2004 400 6,219 204 1,640 December 31, 2005 355 6,111 216 1,589 December 31, 2006 358 6,518 229 1,674

96

notes

domeStiC natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)

Proved reserves as of December 31, 2003 212 4,884 161 1,187 Revisions due to prices 5 8 1 8 Revisions other than price 2 62 23 35 Extensions and discoveries 16 578 16 129 Purchase of reserves — 8 — 1 Production (31) (602) (19) (151) Sale of reserves (1) (2) — (1) Proved reserves as of December 31, 2004 203 4,936 182 1,208 Revisions due to prices 6 58 3 19 Revisions other than price 2 238 19 61 Extensions and discoveries 16 793 20 169 Purchase of reserves — — — — Production (25) (555) (18) (136) Sale of reserves (29) (306) (9) (89) Proved reserves as of December 31, 2005 173 5,164 197 1,232 Revisions due to prices — (110) (3) (22) Revisions other than price — (11) 6 5 Extensions and discoveries 16 1,298 43 274 Purchase of reserves — 580 9 105 Production (19) (566) (19) (132) Sale of reserves — — — — Proved reserves as of December 31, 2006 170 6,355 233 1,462 Proved developed reserves as of: December 31, 2003 171 3,935 136 964 December 31, 2004 168 4,105 161 1,014 December 31, 2005 149 4,343 175 1,049 December 31, 2006 147 4,916 196 1,163

Canada natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)

Proved reserves as of December 31, 2003 148 2,297 48 579 Revisions due to prices (43) 32 — (38) Revisions other than price 5 (46) (2) (5) Extensions and discoveries 50 410 9 127 Purchase of reserves 1 6 — 2 Production (14) (279) (5) (65) Sale of reserves — — — — Proved reserves as of December 31, 2004 147 2,420 50 600 Revisions due to prices — 22 1 4 Revisions other than price 2 (242) (3) (41) Extensions and discoveries 144 427 10 225 Purchase of reserves 2 10 — 4 Production (13) (261) (6) (62) Sale of reserves (29) (370) (3) (94) Proved reserves as of December 31, 2005 253 2,006 49 636 Revisions due to prices (19) 23 (4) (20) Revisions other than price (1) (84) (1) (16) Extensions and discoveries 109 193 2 145 Purchase of reserves — 4 — 1 Production (13) (241) (4) (58) Sale of reserves — (5) — (1) Proved reserves as of December 31, 2006 329 1,896 42 687 Proved developed reserves as of: December 31, 2003 123 1,964 43 493 December 31, 2004 123 2,043 43 507 December 31, 2005 103 1,708 41 429 December 31, 2006 112 1,560 33 405

97

notes

international(1)

natural GaS oil GaS liquidS total (mmBBlS) (BCf) (mmBBlS) (mmBoe)

Proved reserves as of December 31, 2003 286 135 — 308 Revisions due to prices (44) (1) — (45) Revisions other than price 12 13 — 15 Extensions and discoveries 10 — — 10 Purchase of reserves — — — — Production (29) (10) — (31) Sale of reserves — — — — Proved reserves as of December 31, 2004 235 137 — 257 Revisions due to prices (20) (2) — (20) Revisions other than price 17 2 — 17 Extensions and discoveries 6 — — 6 Purchase of reserves — — — — Production (24) (11) — (26) Sale of reserves — — — — Proved reserves as of December 31, 2005 214 126 — 234 Revisions due to prices (2) (2) — (2) Revisions other than price 6 (11) — 5 Extensions and discoveries 14 — — 14 Purchase of reserves — — — — Production (23) (8) — (24) Sale of reserves — — — — Proved reserves as of December 31, 2006 209 105 — 227 Proved developed reserves as of: December 31, 2003 98 81 — 111 December 31, 2004 109 71 — 119 December 31, 2005 103 60 — 111 December 31, 2006 99 42 — 106

(1) Except for nine MMBoe of proved reserves as of December 31, 2006, the preceding International quantities of reserves are attributable to production sharing contracts with various foreign governments.

Noteworthyamountsincludedinthecategoriesofprovedreservechangesfortheyears2006,2005and2004intheabovetablesinclude:Extensions and DiscoveriesOfthe433MMBoeof2006extensionsanddiscoveries,143MMBoerelatedtotheBarnettShaleareainTexas,88MMBoerelatedto

theJackfishsteam-assistedgravitydrainageprojectinCanadawhichisexpectedtobeginproductionin2007,30MMBoerelatedtotheCarthageareaineastTexasand20MMBoerelatedtotheWashakieareainsouthernWyoming.

The2006extensionsanddiscoveriesincluded202MMBoerelatedtoadditionsfromDevon’sinfilldrillingactivities,including127MMBoerelatedtotheBarnettShaleareaand20MMBoerelatedtotheLloydminsterareainCanada.

Ofthe400MMBoeof2005extensionsanddiscoveries,118MMBoerelatedtoJackfish,54MMBoerelatedtotheBarnettShale,and40MMBoerelatedtotheDeepBasininCanada.The2005extensionsanddiscoveriesincluded76MMBoerelatedtoadditionsfromDevon’sinfilldrillingactivities,including19MMBoerelatedtotheBarnettShale,16MMBoerelatedtoCarthageandeightMMBoerelatedtothePermianBasininNewMexicoandwestTexas.

Ofthe266MMBoeof2004extensionsanddiscoveries,32MMBoerelatedtotheCanadianDeepBasin,29MMBoerelatedtotheBarnettShale,and28MMBoerelatedtoCarthage.The2004extensionsanddiscoveriesincluded67MMBoerelatedtoadditionsfromDevon’sinfilldrillingactivities,including21MMBoerelatedtoCarthage,12MMBoerelatedtothePermianBasinandnineMMBoerelatedtotheBarnettShale.

Purchase of ReservesThe2006totalincludes100MMBoelocatedintheBarnettShalethatwasacquiredintheChiefacquisition.SeeNote3.Sale of ReservesThe2005totalincludes176MMBoeofreservesrelatedtonon-coreoilandgaspropertiesintheoffshoreGulfofMexicoandonshoreinthe

UnitedStatesandCanada.SeeNote3.

98

notes

StandardizedmeasureofdiscountedfuturenetCashflowsThetablesbelowreflectthestandardizedmeasureofdiscountedfuturenetcashflowsrelatingtoDevon’sinterestinprovedreserves:

total deCemBer31, 2006 2005 2004

(INMILLIoNs)

Future cash inflows $ 82,354 94,132 66,595Future costs: Development (8,518) (5,802) (4,211) Production (29,408) (25,063) (19,513)Future income tax expense (13,856) (21,425) (13,704)Future net cash flows 30,572 41,842 29,16710% discount to reflect timing of cash flows (13,999) (18,784) (13,555)Standardized measure of discounted future net cash flows $ 16,573 23,058 15,612

domeStiC deCemBer31, 2006 2005 2004

(INMILLIoNs)

Future cash inflows $ 47,980 55,954 39,214Future costs: Development (4,919) (2,954) (2,208) Production (18,858) (16,213) (13,181)Future income tax expense (7,588) (12,582) (7,597)Future net cash flows 16,615 24,205 16,22810% discount to reflect timing of cash flows (7,938) (11,258) (7,129)Standardized measure of discounted future net cash flows $ 8,677 12,947 9,099

Canada deCemBer31, 2006 2005 2004

(INMILLIoNs)

Future cash inflows $ 22,575 26,277 18,483Future costs: Development (2,395) (1,984) (1,353) Production (7,431) (6,344) (4,285)Future income tax expense (3,614) (5,986) (4,200)Future net cash flows 9,135 11,963 8,64510% discount to reflect timing of cash flows (4,318) (5,332) (4,764)Standardized measure of discounted future net cash flows $ 4,817 6,631 3,881

international deCemBer31, 2006 2005 2004

(INMILLIoNs)

Future cash inflows $ 11,799 11,901 8,898Future costs: Development (1,204) (864) (650) Production (3,119) (2,506) (2,047)Future income tax expense (2,654) (2,857) (1,907)Future net cash flows 4,822 5,674 4,29410% discount to reflect timing of cash flows (1,743) (2,194) (1,662)Standardized measure of discounted future net cash flows $ 3,079 3,480 2,632

99

notes

Futurecashinflowsarecomputedbyapplyingyear-endprices(averaging$46.11perbarrelofoil,$5.06perMcfofgasand$27.63perbarrelofnaturalgasliquidsatDecember31,2006)totheyear-endquantitiesofprovedreserves,exceptinthoseinstanceswherefixedanddeterminablepricechangesareprovidedbycontractualarrangementsinexistenceatyear-end.

Futuredevelopmentandproductioncostsarecomputedbyestimatingtheexpenditurestobeincurredindevelopingandproducingprovedoilandgasreservesattheendoftheyear,basedonyear-endcostsandassumingcontinuationofexistingeconomicconditions.Ofthe$8.5billionoffuturedevelopmentcosts,$2.2billion,$1.5billionand$0.9billionareestimatedtobespentin2007,2008and2009,respectively.

Futuredevelopmentcostsincludenotonlydevelopmentcosts,butalsofuturedismantlement,abandonmentandrehabilitationcosts.Includedaspartofthe$8.5billionoffuturedevelopmentcostsare$1.7billionoffuturedismantlement,abandonmentandrehabilitationcosts.

Futureproductioncostsincludegeneralandadministrativeexpensesdirectlyrelatedtooilandgasproducingactivities.Futureincometaxexpensesarecomputedbyapplyingtheappropriatestatutorytaxratestothefuturepre-taxnetcashflowsrelatingtoprovedreserves,netofthetaxbasisofthepropertiesinvolved.Thefutureincometaxexpensesgiveeffecttopermanentdifferencesandtaxcredits,butdonotreflecttheimpactoffutureoperations.

ChangesrelatingtotheStandardizedmeasureofdiscountedfuturenetCashflowsPrincipalchangesinthestandardizedmeasureofdiscountedfuturenetcashflowsattributabletoDevon’sprovedreservesareasfollows:

YearendeddeCemBer31, 2006 2005 2004

(INMILLIoNs)

Beginning balance $ 23,058 15,612 15,769Oil, gas and NGL sales, net of production costs (6,895) (7,064) (5,767)Net changes in prices and production costs (10,519) 11,767 2,027Extensions and discoveries, net of future development costs 4,579 6,096 3,022Purchase of reserves, net of future development costs 786 67 31Development costs incurred during the period which reduced future development costs 1,691 778 681Revisions of quantity estimates (2,325) (799) (1,105)Sales of reserves in place (10) (2,897) (13)Accretion of discount 3,482 2,270 2,243Net change in income taxes 4,247 (4,691) (1,580)Other, primarily changes in timing and foreign exchange rates (1,521) 1,919 304Ending balance $ 16,573 23,058 15,612

100

notes

16.SupplementalquarterlYfinanCialinformation(unaudited)

FollowingisasummaryoftheunauditedinterimresultsofoperationsfortheyearsendedDecember31,2006and2005.

2006 firSt SeCond third fourth full quarter quarter quarter quarter Year

(INMILLIoNs,exCeptpershAreAMouNts)

Oil, gas and NGL sales $ 2,222 2,192 2,279 2,193 8,886Total revenues $ 2,684 2,589 2,696 2,609 10,578Net earnings $ 700 859 705 582 2,846Net earnings per common share: Basic $ 1.58 1.94 1.59 1.31 6.42 Diluted $ 1.56 1.92 1.57 1.29 6.34

2005 firSt SeCond third fourth full quarter quarter quarter quarter Year

(INMILLIoNs,exCeptpershAreAMouNts)

Oil, gas and NGL sales $ 1,914 2,048 2,262 2,606 8,830Total revenues $ 2,330 2,437 2,667 3,188 10,622Net earnings $ 563 653 744 970 2,930Net earnings per common share: Basic $ 1.17 1.40 1.66 2.18 6.38 Diluted $ 1.14 1.38 1.63 2.14 6.26

Thefirst,secondandthirdquartersof2006include$85million,$16millionand$20million,respectively,ofreductionsofcarryingvaluesofoilandgasproperties.Theafter-taxeffectsoftheseamountswere$85million(or$0.19pershare),$16million(or$0.04pershare)and$10million(or$0.02pershare),respectively.Also,thesecondquarterof2006includedareductiontoincometaxexpenseof$243million(or$0.55pershare)duetostatutoryratereductionsinCanadaandadditionalincometaxexpenseof$39million(or$0.09pershare)duetoanewincome-basedtaxenactedbythestateofTexas.

TheadoptionofFASBStatementNo.158inthefourthquarterof2006(seeNote6)hadnoeffectonearningsfromcontinuingoperations,netearningsorrelatedpershareamountsduringanyofthequarterlyperiodsin2006.

Thefourthquarterof2005includesa$212millionreductionofcarryingvalueofoilandgaspropertiesanda$14millionincometaxbenefitduetoastatutoryratereductioninCanada.Theafter-taxeffectofthereductionofcarryingvaluewas$161million,or$0.36pershare.Thepershareeffectoftheratereductiontaxbenefitwas$0.03.

Oil,gasandnaturalgasliquidssalesforthefirst,second,thirdandfourthquartersof2006exclude$34million,$27million,$25millionand$32million,respectively,relatedtodiscontinuedoperationsinEgypt.Oil,gasandnaturalgasliquidssalesforthefirst,second,thirdandfourthquartersof2005exclude$21million,$31million,$37millionand$30million,respectively,relatedtodiscontinuedoperationsinEgypt.

101

Theforward-lookingestimatesbeginningonpage52arebasedonmanagement’sexaminationofhistoricaloperatingtrends,theinformationwhichwasusedtopreparetheDecember31,2006,reservereportsandotherdatainDevon’spossessionoravailablefromthirdparties.Devoncautionsthatitsfutureoil,naturalgasandNGLproduction,revenuesandexpensesaresubjecttoalloftherisksanduncertaintiesnormallyincidenttotheexplorationforanddevelopment,productionandsaleofoil,gasandNGLs.Theserisksinclude,butarenotlimitedto,pricevolatility,inflationorlackofavailabilityofgoodsandservices,environmentalrisks,drillingrisks,regulatorychanges,theuncertaintyinherentinestimatingfutureoilandgasproductionorreserves,andotherrisksasoutlinedbelow.Theproduction,transportation,processingandmarketingofoil,naturalgasandNGLsarecomplexprocesseswhicharesubjecttodisruptionduetotransportationandprocessingavailability,mechanicalfailure,humanerror,meteorologicaleventsincluding,butnotlimitedto,hurricanes,andnumerousotherfactors.

pricevolatilityPricesforoil,naturalgasandNGLsaredeterminedprimarilybyprevailingmarketconditions.Marketconditionsfortheseproductsareinfluencedbyregionaland

worldwideeconomicconditions,weatherandotherlocalmarketconditions.ThesefactorsarebeyondDevon’scontrolandaredifficulttopredict.Inadditiontovolatilityingeneral,oil,gasandNGLpricesmayvaryconsiderablyduetodifferencesbetweenregionalmarkets,differingqualityofoilproduced(i.e.,sweetcrudeversusheavyorsourcrude),differingBtucontentsofgasproduced,transportationavailabilityandcostsanddemandforthevariousproductsderivedfromoil,naturalgasandNGLs.SubstantiallyallofDevon’srevenuesareattributabletosales,processingandtransportationofthesethreecommodities.Consequently,Devon’sfinancialresultsandresourcesarehighlyinfluencedbypricevolatility.

oil,Gas,andnGlproductionEstimatesforfutureproductionofoil,naturalgasandNGLsarebasedontheassumptionthatmarketdemandandpricesforoil,gasandNGLswillcontinueatlevels

thatallowforprofitableproductionoftheseproducts.Therecanbenoassuranceofsuchstability.MostofDevon’sCanadianproductionofoil,naturalgasandNGLsissubjecttogovernmentroyaltiesthatfluctuatewithprices.Thus,pricefluctuationscanaffectreportedproduction.Also,Devon’sinternationalproductionofoil,naturalgasandNGLsisgovernedbypayoutagreementswiththegovernmentsofthecountriesinwhichDevonoperates.Ifthepayoutundertheseagreementsisattainedearlierthanprojected,Devon’snetproductionandprovedreservesinsuchareascouldbereduced.

marketingandmidstreamEstimatesforfutureprocessingandtransportofoil,naturalgasandNGLsarebasedontheassumptionthatmarketdemandandpricesforoil,gasandNGLswill

continueatlevelsthatallowforprofitableprocessingandtransportoftheseproducts.Therecanbenoassuranceofsuchstability.Additionally,Devoncautionsthatitsfuturemarketingandmidstreamrevenuesandexpensesaresubjecttoalloftherisksanduncertaintiesnormallyincidenttothemarketingandmidstreambusiness.Theserisksinclude,butarenotlimitedto,pricevolatility,environmentalrisks,regulatorychanges,theuncertaintyinherentinestimatingfutureprocessingvolumesandpipelinethroughput,costofgoodsandservicesandotherrisksasoutlinedherein.

foreignexchangeAlso,thefinancialresultsofDevon’sforeignoperationsaresubjecttocurrencyexchangeraterisks.Unlessotherwisenoted,allofthedollaramountsareexpressed

inU.S.dollars.AmountsrelatedtoCanadianoperationshavebeenconvertedtoU.S.dollarsusingaprojectedaverage2007exchangerateof$0.89U.S.dollarto$1.00Canadiandollar.Theactual2007exchangeratemayvarymateriallyfromthisestimate.Suchvariationscouldhaveamaterialeffectonourforward-lookingestimates.

propertyacquisitionsanddispositionsAlthoughDevonhascompletedseveralmajorpropertyacquisitionsanddispositionsinrecentyears,thesetransactionsareopportunitydriven.Exceptforthe

planneddivestituresofDevon’sassetsinEgyptandWestAfrica,theforward-lookingestimatesdonotincludethefinancialandoperatingeffectsofpotentialpropertyacquisitionsordivestituresduringtheyear2007.

Risk Factors to Forward-looking Estimates

102

John W. Nichols, 92, is a co-founder of Devon. He was named chairman emeritus in 1999. Nichols was chairman of the board of directors from the time Devon began operations in 1971 until 1999. He is a founding partner of Blackwood & Nichols Co., which put together the first public oil and gas drilling fund ever registered with the Securities and Exchange Commission. Nichols is a non-practicing Certified Public Accountant.

J. Larry Nichols, 64, is a co-founder of Devon and has been a director since 1971. He was named chairman of the board of directors in 2000 and serves as chairman of the Dividend Committee. Nichols served as president from 1976 until 2003 and has been chief executive officer since 1980. Nichols serves as a director of Baker Hughes Inc. and Sonic Corp. Nichols has a Bachelor of Arts degree in Geology from Princeton University and a law degree from the University of Michigan.

Thomas F. Ferguson, 70, joined the board of directors in 1982 and serves as chairman of the Audit Committee. Ferguson retired in 2005 from his position as managing director of United Gulf Management Ltd., a wholly-owned subsidiary of Kuwait Investment Projects Co. KSC. He has represented Kuwait Investment Projects Co. on the boards of various companies in which it invests, including Baltic Transit Bank in Latvia and Tunis International Bank in Tunisia. Ferguson is a Canadian qualified Certified General Accountant and was formerly employed by the Economist Intelligence Unit of London as a financial consultant.

Peter J. Fluor, 59, joined the board of directors in 2003. Fluor served as a director of Ocean Energy Inc. from 1980 to 2003 and has been chairman and chief executive officer of Texas Crude Energy Inc., a private oil and gas company, since January 2001. From 1997 through 2000, Fluor was president and chief executive officer of Texas Crude Energy Inc. He also serves as lead independent director of Fluor Corp. and is a director of Cameron Corp.

David M. Gavrin, 72, joined the board of directors in 1979 and is lead director and chairman of the Compensation Committee. Gavrin has been a private investor since 1989 and is a director and chairman of the board of MetBank Holding Corp. He is also president and a director of Arthur J. Gavrin Foundation Inc. From 1978 to 1988, he was a general partner of Windcrest Partners, a private investment partnership in New York City, and, for 14 years prior to that, he was an officer of Drexel Burnham Lambert Inc.

John A. Hill, 65, joined the board of directors in 2000 following Devon’s merger with Santa Fe Snyder Corp. and serves as chairman of the Governance Committee. He has been with First Reserve Corp., an oil and gas investment management company, since 1983 and is currently its vice chairman and managing director. Prior to creating First Reserve Corp., Hill was president and chief executive officer of several investment banking and asset management companies and served as the deputy administrator of the Federal Energy Administration during the Ford Administration. Hill is chairman of the board of trustees of the Putnam Funds in Boston, a trustee of Sarah Lawrence College and director of various companies controlled by First Reserve Corp.

Robert L. Howard, 70, joined the board of directors in 2003 and is chairman of the Reserves Committee. Howard served as a director of Ocean Energy Inc. from 1996 to 2003. He retired in 1995 from his position as vice president of Domestic Operations, Exploration and Production, of Shell Oil Co. Howard is also a director of Southwestern Energy Co. and McDermott International Inc.

William J. Johnson, 72, has been on the board of directors since 1999. Johnson has been a private consultant to the oil and gas industry since 1994. He is president and a director of JonLoc Inc., an oil and gas company of which he and his family are the only stockholders. Johnson has served as a director of Tesoro Corp. since 1996. From 1991 to 1994, Johnson was president, chief operating officer and a director of Apache Corp.

Michael M. Kanovsky, 58, joined the board of directors in 1998. He was a co-founder of Northstar Energy Corp. and served on Northstar’s board of directors from 1982 to 1998. He is president of Sky Energy Corp. and serves as a director of Kinwest Energy Corp. and North American Oil Sands Corp., all privately held energy corporations. Kanovsky also is a director of Accrete Energy Inc., ARC Resources Ltd., Bonavista Petroleum Ltd., Pure Technologies Ltd. and TransAlta Corp.

J. Todd Mitchell, 48, joined the board of directors in 2002. He served as president of GPM Inc., a family-owned investment company, from 1998 to 2006, and currently serves as its vice president for strategic planning. He also has served as president of Dolomite Resources Inc., a privately owned mineral exploration and investments company, since 1987 and as chairman of Rock Solid Images, a privately owned seismic data analysis software company, since 1998. Mitchell was on the board of directors of Mitchell Energy & Development Corp. from 1993 to 2002.

Directors

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John Richels, 56, was elected president of Devon in 2004. He previously served as a senior vice president of Devon and president and chief executive officer of Devon’s Canadian subsidiary. Richels joined Devon through its 1998 acquisition of Canadian-based Northstar Energy Corp. Prior to joining Northstar, Richels was managing and chief operating partner of the Canadian-based national law firm, Bennett Jones. While employed at Bennett Jones in the 1980s, Richels served as general counsel of the XV Olympic Winter Games Organizing Committee in Calgary. Richels also has served as a director of a number of publicly traded companies. He holds a bachelor’s degree in economics from York University and a law degree from the University of Windsor.

Stephen J. Hadden, 52, was elected to the position of senior vice president, Exploration and Production, in 2004. In 1977, Hadden joined Texaco, now Chevron Corp., as a field engineer, subsequently holding a series of engineering and management positions in the United States. He served as vice president of Texaco Exploration and Production and as vice president of the company’s California business unit. In 2002, he became an independent consultant. Hadden received a Bachelor of Science degree in chemical engineering from Pennsylvania State University.

Marian J. Moon, 56, was elected to the position of senior vice president, Administration, in 1999. Moon is responsible for office administration, information technology, human resources, corporate resources and corporate governance. Moon has been with Devon for 22 years and served in various capacities, including manager of Corporate Finance and corporate secretary. Prior to joining Devon, Moon was employed by Amarex Inc., an Oklahoma City-based oil and natural gas production and exploration firm, where her last position was treasurer. Moon is a member of the Society of Corporate Secretaries & Governance Professionals and a graduate of Valparaiso University.

Darryl G. Smette, 59, was elected to the position of senior vice president, Marketing and Midstream, in 1999. Smette previously held the position of vice president, Marketing and Administrative Planning. His marketing background includes 15 years with Energy Reserves Group Inc./BHP Petroleum (Americas) Inc. He is also an oil and gas industry instructor, approved by the University of Texas Department of Continuing Education. Smette is a member of the Oklahoma Independent Producers Association, Natural Gas Association of Oklahoma and the American Gas Association. He holds an undergraduate degree from Minot State University and a master’s degree from Wichita State University.

Lyndon C. Taylor, 48, was elected to the position of senior vice president and general counsel in February 2007. Taylor had served as Devon’s deputy general counsel since August 2005. Prior to joining Devon, Taylor was with Skadden, Arps, Slate, Meagher & Flom, LLP for 20 years, most recently as managing partner of the Houston office’s energy practice. He is admitted to practice law in Oklahoma and Texas. Taylor holds a Bachelor of Science degree in industrial engineering from Oklahoma State University and a law degree from the University of Oklahoma.

Senior Officers

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Glossary

Bitumen / A viscous, tar-like oil that requires nonconven-tional production methods such as mining or steam-assisted gravity drainage.

Block / Refers to a contiguous leasehold position. In federal offshore waters, a block is typically 5,000 acres.

British thermal unit (Btu) / A measure of heat value. An Mcf of natural gas is roughly equal to one million Btu.

Coalbed natural gas / An unconventional gas resource that is present in certain coal deposits.

Deep water / In offshore areas, water depths of greater than 600 feet.

Delineation well / A well drilled just outside the proved area of an oil or gas reservoir in an attempt to extend the known boundaries of the reservoir.

Development well / A well drilled within the area of an oil or gas reservoir known to be productive. Development wells are relatively low risk.

Dry hole / A well found to be incapable of producing oil or gas in sufficient quantities to justify completion.

Exploitation / Various methods of optimizing oil and gas production or establishing additional reserves from produc-ing properties through additional drilling or the application of new technology.

Exploratory well / A well drilled in an unproved area, either to find a new oil or gas reservoir or to extend a known reservoir. Sometimes referred to as a wildcat.

Field / A geographical area under which one or more oil or gas reservoirs lie.

Floating production, storage and offloading unit (FPSO) / A moored tanker-type vessel used to develop an offshore oil field. Oil is stored within the FPSO until offloaded to a tanker for transportation to a terminal or refinery.

Formation / An identifiable layer of rocks named after the geographical location of its first discovery and dominant rock type.

Fracture, refracture / The process of applying hydraulic pressure to an oil or gas bearing geological formation to crack the formation and stimulate the release of oil and gas.

Gross acres / The total number of acres in which one owns a working interest.

Hedge / A financial contract entered into to manage com-modity price risk.

Increased density/infill / A well drilled in addition to the number of wells permitted under initial spacing regulations, used to enhance or accelerate recovery, or prevent the loss of proved reserves.

Independent producer / A non-integrated oil and gas producer with no refining or retail marketing operations.

Lease / A legal contract that specifies the terms of the business relationship between an energy company and a landowner or mineral rights holder on a particular tract.

London Inter Bank Offering Rate (LIBOR) / An average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London.

Natural gas liquids (NGLs) / Liquid hydrocarbons that are extracted and separated from the natural gas stream. NGL products include ethane, propane, butane and natural gasoline.

Net acres / Gross acres multiplied by one’s fractional work-ing interest in the property.

New York Mercantile Exchange (NYMEX) / The world’s largest physical commodity futures exchange. The prices quoted for oil, gas and other commodity transactions on the exchange are the basis for prices paid throughout the world.

Oil sands / A complex mixture of sand, water and clay trap-ping very heavy oil known as bitumen.

Pilot program / A small-scale test project used to assess the viability of a concept prior to committing significant capital to a large-scale project.

Production / Natural resources, such as oil or gas, taken out of the ground.

Gross production / Total production before deducting royalties.

Net production / Gross production, minus royalties, multiplied by one’s fractional working interest.

Prospect / An area designated for the potential drilling of development or exploratory wells.

Proved reserves / Estimates of oil, gas and NGL quantities thought to be recoverable from known reservoirs under existing economic and operating conditions.

Recavitate / The process of applying pressure surges on the coal formation at the bottom of a well in order to increase fracturing, enlarge the bottomhole cavity and thereby increase gas production.

Recompletion / The modification of an existing well for the purpose of producing oil or gas from a different produc-ing formation.

Reservoir / A rock formation or trap containing oil and/or natural gas.

Royalty / The owner’s share of the value of minerals (oil and gas) produced on the property.

Seismic / A tool for identifying underground accumula-tions of oil or gas by sending energy waves or sound waves into the earth and recording the wave reflections. Results indicate the type, size, shape and depth of subsurface rock formations. 2-D seismic provides two-dimensional information while 3-D creates three-dimensional pictures. 4-C, or four-component, seismic utilizes measurement and interpretation of shear wave data. 4-C seismic improves the resolution of seismic images below shallow gas deposits.

Steam-assisted gravity drainage (SAGD) / A method of extracting bitumen from oil sands. Steam is injected under ground, softening the bitumen and allowing it to flow to the surface.

Undeveloped acreage / Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil or gas.

Unit / A contiguous parcel of land deemed to cover one or more common reservoirs, as determined by state or federal regulations. Unit interest owners generally share proportionately in costs and revenues.

Working interest / The cost-bearing ownership share of an oil or gas lease.

Workover / The process of conducting remedial work, such as cleaning out a well bore, to increase or restore production.

VOLUME ACRONYMS

Bbl / A standard oil measurement that equals one barrel (42 U.S. gallons).

MBbl / One thousand barrels

MMBbls / One million barrels

MBbld / One thousand barrels per day

Mcf / A standard measurement unit for volumes of natural gas that equals one thousand cubic feet.

MMcf / One million cubic feet

Bcf / One billion cubic feet

Tcf / One tillion cubic feet

MMcfd / One million cubic feet per day

Boe / A method of equating oil, gas and natural gas liquids. Gas is converted to oil based on its relative energy content at the rate of six Mcf of gas to one barrel of oil. NGLs are converted based upon volume: one barrel of natural gas liquids equals one barrel of oil.

MBoe / One thousand barrels of oil equivalent

MMBoe / One million barrels of oil equivalent

MBoed / One thousand barrels of oil equivalent per day

Forward-Looking Statements This annual report includes “forward-looking statements” as defined by the Securities and Exchange Commission. Such statements are those concerning Devon’s plans, expectations and objectives for future operations including reserve potential and exploration target size. These statements address future financial position, business strategy, future capital expenditures, projected oil and gas production and future costs. Devon believes that the expectations reflected in such forward-looking statements are reasonable. However, important risk factors could cause actual results to differ materially from the company’s expectations. A discussion of these risk factors can be found on page 101 of this report. Further information is available in the company’s Form 10-K and other publicly available reports, which are available free of charge on the company’s website, www.devonenergy.com, or will be furnished upon request to the company.

Corporate HeadquartersDevon Energy Corporation20 North BroadwayOklahoma City, OK 73102-8260Telephone: (405) 235-3611Fax: (405) 552-4550

Permian, Mid-Continent,Rocky Mountains andMarketing and Midstream OperationsDevon Energy Corporation20 North BroadwayOklahoma City, OK 73102-8260Telephone: (405) 235-3611Fax: (405) 552-4550

Gulf, Gulf Coast and International OperationsDevon Energy CorporationDevon Energy Tower1200 Smith StreetHouston, TX 77002-4313Telephone: (713) 286-5700

Canadian OperationsDevon Canada Corporation2000, 400 - 3rd Avenue S.W.Calgary, Alberta T2P 4H2Telephone: (403) 232-7100

Royalty Owner AssistanceTelephone: (405) 228-4800E-mail: DevonRevenueHotline@dvn.com

Shareholder AssistanceFor information about transfer or exchange of shares, dividends, address changes, account consolidation, multiple mailings, lost certificates and Form 1099:

UMB Bank, n.a.Securities Transfer Division928 Grand BoulevardKansas City, MO 64106 Toll free: (877) 860-5820www.umb.com

Company ContactsVince White, Vice PresidentCommunications and Investor RelationsTelephone: (405) 552-4505E-mail: vince.white@dvn.com

Investor relatIons:Zack HagerManager, Investor RelationsTelephone: (405) 552-4526E-mail: zack.hager@dvn.com

Shea SnyderSupervisor, Investor RelationsTelephone: (405) 552-4782E-mail: shea.snyder@dvn.com

Scott CoodySenior Investor Relations AnalystTelephone: (405) 552-4735E-mail: scott.coody@dvn.com

MedIa:Brian EngelManager, Public AffairsTelephone: (405) 228-7750E-mail: brian.engel@dvn.com

Chip MintySenior External Communications SpecialistTelephone: (405) 228-8647E-mail: chip.minty@dvn.com

PublicationsA copy of Devon’s annual report to the Securities and Exchange Commission (Form 10-K) and other publications are available at no charge upon request. Direct requests to:

Judy RobertsShareholder Services AdministratorTelephone: (405) 552-4570Fax: (405) 552-7818E-mail: judy.roberts@dvn.com

Annual MeetingOur annual shareholders’ meeting will be held at 8 a.m. Central Time on Wednesday, June 6, 2007, on the Third Floor of the Chase Tower, 100 North Broadway, Oklahoma City, OK.

Independent AuditorsKPMG LLPOklahoma City, OK

Stock Trading DataDevon Energy Corporation’s common stock is traded on the New York Stock Exchange (symbol: DVN). There are approximately 16,000 shareholders of record.

Common Stock Trading Data

Investor Information

2005Quarter HigH Low Last totaLVoLume

First $49.42 36.48 47.75 195,070,400Second $52.31 40.60 50.68 222,165,200Third $70.35 50.75 68.64 184,169,700Fourth $69.79 54.01 62.54 246,835,700

2006Quarter HigH Low Last totaLVoLume

First $69.97 55.31 61.17 184,716,100Second $65.25 48.94 60.41 200,005,000Third $74.65 57.19 63.15 214,743,800Fourth $74.48 58.55 67.08 174,048,200

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Certifications The Form 10-K which was filed by the company with the Securities and Exchange Commission (SEC) for the fiscal year ending December 31, 2006 includes as exhibits, the certifications of our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, required to be filed with the SEC pursuant to Section 302 of the Sarbanes Oxley Act of 2002. The company has also filed with the New York Stock Exchange the 2006 annual certification of its Chief Executive Officer confirming that the company has complied with the New York Stock Exchange corporate governance listing standards.

Stock Performance – 5-Year Cumulative Total Return

DevonS&P 500SIC Code(1)

(1) Stock Index for Crude Petroleum and Natural Gas

This annual report was printed on paper containing a minimum of 10% post-consumer fibers.

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