Fitch Upgrades Devon Energy's (DVN) IDR, Unsecured Ratings to 'BBB+', Outlook Stable

Fitch Ratings has upgraded Devon Energy Corporation's (Devon) (NYSE DVN) long-term Issuer Default Rating (IDR) and senior unsecured debt ratings to 'BBB+' from 'BBB'. Additionally, Fitch has affirmed the company's short-term IDR and commercial paper ratings at 'F2'. The Rating Outlook for Devon is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS
The upgrade is driven by debt reduction that has occurred since the acquisition of GeoSouthern Energy Corporation in February of this year. Effectively, Devon has quickly returned credit metrics to previous levels prior to the primarily debt financed acquisition of GeoSouthern. Net proceeds from assets sales in the second and third quarter totaled approximately $4.5 billion after tax and have been used to reduce debt balances.

Devon's ratings reflect its large proven reserve base in North America, sizeable production levels balanced between liquids and natural gas and conservative financial policies. Fitch estimates that proven reserves currently total approximately 2.8 billion barrel of oil equivalent (boe) over multiple basins with over 60% of these reserves developed. Fitch expects 2015 production to average somewhere between 660,000 and 700,000 boe per day with 60% of the production being liquids. Balance sheet debt - post-redemption of $1.9 billion in senior notes due 2016 & 2017 - should be approximately $10 billion inclusive of approximately $1.7 billion in EnLink debt that is non-recourse to Devon. The redemption of Devon's senior notes due 2016 and 2017 is expected to occur on Nov. 13. After this occurs, Fitch estimated gross E&P debt to proven reserves and daily production should approximate $3/boe and $13,000 per boe per day, respectively.

With the acquisition of liquids focused GeoSouthern and divestures of certain natural gas assets, Devon's portfolio re-balancing is complete. The company's production mix the fourth quarter is estimated to be approximately 37% oil, 20% natural gas liquids (NGLs) and 43% natural gas. Oil production will likely grow more than 20% in 2015 primarily a result of operations in the Eagle Ford, Permian Basin and in Canada (Jackfish 3). Devon has hedged a majority of its oil production for 2015 at above current market prices. Natural gas production is primarily focused in the Barnett Shale which still accounts for approximately a third of the firm's overall production from a geographic prospective.

Free Cash Flow (FCF) & Expectations
Fitch believes that Devon will experience favorable cash flow trends given its liquids focused production mix, growth targets and completion of Jackfish 3. Further, Fitch expects Devon to balance its capital spending and dividends with internally generated cash flow and be FCF neutral to positive on a go forward basis. Consolidated debt/EBITDA is expected to be less than 1.5x in 2015.

LIQUIDITY
Liquidity is provided primarily by cash flow from operations, the company's undrawn $3 billion unsecured revolver due 2018 and its commercial paper program. Additionally, Fitch estimates Devon possesses approximately $1.7 billion in cash that is held outside the U.S. The company's revolver has only one material covenant which is a 65% maximum funded debt to capitalization. As of June 30, 2014, Devon's funded debt to capitalization was 23.4%. After the redemption of the senior notes on Nov. 13, maturities are $500 million of floating rate notes (FRNs) due December 2015, $350 million of FRNs due December 2016, $125 million in senior notes due July 2018 and $750 in senior notes million due December 2018.

RATING SENSITIVITIES:

Negative: Future developments that could, individually or collectively, lead to negative rating action include:

--Leveraging acquisition;
--Material and sustained negative free cash flow that results in higher leverage;
--Levered share repurchases or major dividend increases;
--Material disappointments in reserve replacement or production levels.
Positive: Future developments that could, individually or collectively, lead to positive rating actions include:

--E&P debt/PD below $4.50 and debt/production below 12,000 boe/d on a sustained basis;
--Consistent strong reserve replacement with competitive finding and development costs;
--Demonstrating positive or neutral free cash flow after capex and dividends on a sustained basis.

Fitch has upgraded Devon as follows:

Devon Energy Corporation
--Long-term IDR to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB;
--Senior unsecured credit facility to 'BBB+' from 'BBB.

Devon Financing Corporation U.L.C.
--Long-term IDR to 'BBB+' from 'BBB' and withdrawn;
--Senior unsecured notes to 'BBB+' from 'BBB'.

Ocean Energy
--Long-term IDR to 'BBB 'from 'BBB-';
--Senior unsecured notes to 'BBB' from 'BBB-'.

Fitch has affirmed the following ratings:

Devon Energy Corporation
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.

The Rating Outlooks for Devon and Ocean are Stable.

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