Moody's Lowers Outlook on Devon's (DVN) Debt to Negative

Moody's Investors Service affirmed Devon Energy Corporation's (NYSE: DVN) Baa1 long-term debt and Prime-2 commercial paper ratings and changed the rating outlook to negative from stable.

"Devon's negative rating outlook reflects the challenges of transitioning the company's production profile to include a greater mix of higher-return liquids production, which has resulted in weaker returns and rising debt balances," commented Gretchen French, Moody's Vice President. "While the company's large and diversified asset base supports its Baa1 rating, we are concerned that relative to its Baa1 peers, Devon's credit profile could further weaken in 2013 and may not see meaningful improvement until at least 2014."

Issuer: Devon Energy Corporation

-Outlook Actions:

*** Outlook, Changed To Negative From Stable

- Affirmations:

*** Multiple Seniority Shelf, Affirmed (P)Baa1

*** US$1500M Multiple Seniority Shelf, Affirmed (P)Baa1

*** US$1500M Multiple Seniority Shelf, Affirmed (P)Baa2

*** US$1500M Multiple Seniority Shelf, Affirmed (P)Baa3

*** Senior Unsecured Commercial Paper, Affirmed P-2

*** US$1000M 7.95% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$500M 5.625% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$700M 6.3% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$500M 2.4% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$500M 4% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$1250M 5.6% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$750M 1.875% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$1000M 3.25% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$750M 4.75% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Issuer: Devon Financing Corporation U.L.C.

- Outlook Actions:

*** Outlook, Changed To Negative From Stable

- Affirmations:

*** US$1250M 7.875% Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

*** US$1500M Senior Unsecured Shelf, Affirmed (P)Baa1

Issuer: Devon Financing Trust II

- Outlook Actions:

*** Outlook, Changed To Negative From Stable

- Affirmations:

*** US$1500M Pref. Stock Shelf, Affirmed (P)Baa3

RATINGS RATIONALE

Devon's flexibility in the Baa1 rating has diminished as the company continues a multi-year transition to a more liquids-based company. Cash margins and return metrics are expected to be weak for the rating category in 2013 due to the company's relatively high production exposure to natural gas, as well as low price realizations on its natural gas liquids production and Canadian oil sands production. In addition, we expect Devon to generate negative free cash flow in 2013, which will likely be funded with a combination of commercial paper, cash on the balance sheet and asset monetizations.

Devon's Baa1 senior unsecured rating remains supported by the significant size and scale of its E&P operations, its diversified geographic presence across key onshore hydrocarbon basins in North America, and a history of consistent organic reserve replacement with a deep project inventory for production and reserves growth over the long term. The rating is also supported by a sizeable and valuable midstream business and by the degree of financial flexibility afforded by the company's large offshore cash balances.

While Devon's current spending levels relative to cash flow and rising debt trends are deemed credit negative, the company's large cash and short-term investments balance of roughly $7.0 billion does help to mitigate more immediate rating pressures. Nevertheless, with nearly all (except for about $500 million) of Devon's cash currently held offshore, Devon has heavily relied on commercial paper borrowings to fund cash flow overspending. While the large cash balances are supportive, until short-term debt balances are meaningfully reduced and leverage metrics are strengthened, the rating outlook will likely remain negative.

Returning the outlook to stable will be contingent on management's ability to maintain capital discipline and reduce debt balances, namely short-term debt balances, to a level more consistent with the Baa1 rating category (debt/production declining closer to $16,000 boe/d or retained cash flow/debt rising above 45%).

If debt metrics do not improve from current levels (debt/production remaining over $18,000 boe/d or retained cash flow to debt below 40%) and there is not visibility to returns improving (leveraged full-cycle ratio above 1.0x), the rating could be downgraded. The rating could also be downgraded as a result of large debt-financed acquisitions or if Devon were to pursue shareholder return programs without first meaningfully reducing debt levels.

While not expected at this time, a positive outlook or an upgrade could be considered if Devon is able to reverse rising leverage trends, is able to improve its returns (leveraged full-cycle ratio greater than 2.0x), and more conservatively manages is commercial paper program.

The principal methodology used in this rating was Global Independent Exploration & Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Devon Energy Corporation is headquartered in Oklahoma City, Oklahoma.

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