Jim (cont'd):     

Start of Interview with
Larry Nichols, CEO
Devon Energy

Jim:         Mr. Nichols, welcome back to Mad Money. Good to see you.

Mr. Nichols:     Hi Jim, how are you? Good to see you.

Jim:     Alright, first how can there be such a gigantic disparity between the stock price and what even the analysts who don’t care for your company are saying it is worth?

Mr. Nichols:     It is the short term. You look at the short term, natural gas prices are weak. They are going to be weak for a while. But natural gas will rectify itself very quickly. The decline rate in North America is steep, and when our industry scales back in drilling, natural gas production will come down in this country. Devon will be in a great position, because we will have a lot of acreage that we can go drill. And when that market comes back, which it will, we can take advantage of it.

Jim:     Now, one of the things that I know is very difficult… in your conference call you say just over 3 months ago Devon reported the largest quarterly earnings in our history, in contrast in the fourth quarter as a result of this ceiling test… very difficult concept… we recorded our ever largest quarterly loss. Isn’t that too hard for investors to stomach? That kind of volatility?

Mr. Nichols:     It is because it really takes away from the reality of our reserves, our results. The SEC for decades has had a very arbitrary old-fashioned rule, that has you book your reserves on a given day, and pretend that is the reality. It worked in the 50’s and 60’s when you had fixed oil and gas prices. The SEC themselves have realized the fallacy of that, and they changed the rules. Unfortunately, the new rules don’t go into affect until the end of this year.

Jim:     So, will we feel better at the end of this year when we see that, do you think?

Mr. Nichols:     Oh yeah, if the new rules had been in affect, we would have shown $4.4B of earnings, a record. We would have shown $10B in cash flow for the year, a record. As you mentioned, 245% reserve replacement. 2 ½ times our reserves.

Jim:     I don’t know any other company that did that, which is one of the reasons why when I heard that you could come on this show, I wanted you on. Because this kind of misconception tends not to last for very long.

Mr. Nichols:     We drilled 2,441 wells last year, with a 98% success rate.

Jim:     You are the great wildcatter in this county. Now, here is something, again, because I am trying to understand… this is a piece, by people… this is an Oppenheimer piece, the guy they kind of like you… and he said Devon shares have significantly lacked their peer average in the S&P this year, the shares have declined 25% this year, compared to declines 8.3% for the peer average, 12.7% for the S&P… why do you think given that incredible replacement, you are lacking your peers?

Mr. Nichols:     I think the main reason is we haven’t hedged very much.

Jim:     Right, because Hacken hedged… Anadarko hedged really well.

Mr. Nichols:     Hedging is just one way to mitigate risk. It is not a way for an oil and gas company to speculate, it is a way to mitigate risk. We do that in a different way. We keep a really clean balance sheet, we are strong investment grade, we keep really high profit properties, we get rid of all the lower margin properties, and that has allowed us to get right through all of these economic declines in the past. And we will get through this one, the same way.

Jim:     Here is another one.. .this is from Jeffries… he said, liquidity is not a concern despite planning to outspend internally generated cash flow by $1B… that doesn’t sound conservative?

Mr. Nichols:     Well, as I said we are using the balance sheet rather than hedging. And so we are using the balance sheet, you keep a strong balance sheet so that when you have these downturns in commodity prices or the economy, you can use that balance sheet. We are going to keep all of our long term projects going. The discoveries that we have had in the Gulf of Mexico, the heavy oil up in Canada, all of these long term projects we keep going. Even though they are not generating a lot of cash this year. What we are scaling back on are the gas properties.

Jim:     Right, like the great Oklahoma find, but you are not doing much with it, right?

Mr. Nichols:     Why, well there are companies that get rewarded in this market for having a lot of production growth, why would you want to maximize production growth when gas markets are terrible? You know, you keep all the gas in the ground, you do all of your geology, you find out what is there, so that when this market turns, which it will later this year or next year, nobody knows for sure. We will be in an ideal position. We have 27,000 identified, undrilled locations. Why would you drill those now? Keep those where they are, get ready to drill them, when the market turns, we will have one of the best if not the best inventories in the country.

Jim:     Larry Nichols, thank you for explaining this. I will admit, and I am a good student of this, the ceiling test was hard for me, it was a hard thing to understand. But you have explained that the SEC issues… and I think that is why the misinformation, the misconception is the opportunity. Thank you for coming on Mad Money.

Mr. Nichols:     Thank you sir...   Larry Nichols, CEO of Devon Energy.