Devon Energy Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial amounts are in millions of U.S. dollars unless noted. Comparisons are with the corresponding 2021 periods unless otherwise specified.
Business context
Devon is a U.S. oil and gas producer focused on the Delaware Basin and other operating areas. Management describes its strategy as moderating production growth, maintaining capital discipline and low leverage, and returning cash through fixed and variable dividends and share repurchases. In Q3, Devon completed acquisitions of producing assets in the Eagle Ford and Williston Basin.
Financial and operating performance
- Q3 revenue: $5.432 billion, up from $3.466 billion. This total includes oil, gas and NGL sales of $3.668 billion, derivative gains of $248 million, and marketing and midstream revenue of $1.516 billion.
- Q3 earnings: Net earnings attributable to Devon were $1.893 billion, or $2.88 per diluted share, versus $838 million, or $1.24 per diluted share. Earnings before income taxes were $2.465 billion; income tax expense was $565 million.
- Nine-month results: Revenue was $14.870 billion versus $7.933 billion; net earnings attributable to Devon were $4.814 billion versus $1.307 billion, or $7.28 versus $1.95 per diluted share. The 2022 period included $574 million in commodity-derivative valuation gains, while the 2021 period included $597 million in valuation losses.
- Cash flow: Operating cash flow was $2.104 billion in Q3 and $6.619 billion year to date, compared with $1.598 billion and $3.283 billion, respectively, in 2021. Q3 cash settlements on commodity hedges were outflows of $363 million; year-to-date settlements were outflows of $1.179 billion.
- Investment and shareholder returns: Q3 capital expenditures were $628 million; nine-month capital expenditures were $1.738 billion. Year-to-date cash spent on acquisitions was $2.566 billion. Devon paid $2.504 billion in dividends and repurchased $661 million of stock in the first nine months.
- Margins and production: Non-GAAP field-level cash margin was $2.933 billion in Q3 and $8.861 billion year to date, versus $2.080 billion and $5.020 billion in 2021. Q3 production averaged 614 MBoe/d, including 294 MBbl/d of oil; nine-month production averaged 602 MBoe/d.
- Liquidity and debt: Management reported $4.3 billion of liquidity at quarter-end: $1.3 billion of cash and $3.0 billion available under the revolving credit facility. Reported debt was $6.451 billion, including $255 million classified as short-term. There were no borrowings under the credit facility or commercial paper program. The company reported a 23.3% debt-to-capitalization ratio under its credit agreement and compliance with its covenant.
- Balance sheet: Current assets were $4.009 billion and current liabilities were $3.460 billion at September 30, 2022. Total equity was $11.007 billion. Cash, cash equivalents and restricted cash totaled $1.310 billion.
Material changes versus comparable periods
- Higher commodity prices and increased production drove much stronger year-to-date earnings and operating cash flow. Nine-month combined realized price after hedge settlements rose to $59.43/Boe from $36.59/Boe.
- Q3 earnings were approximately flat versus Q2 2022 at $1.9 billion. Lower oil prices were offset by higher gas prices and more favorable hedge valuations. Combined realized price after hedge settlements declined 10% from Q2 to $58.48/Boe.
- Nine-month production increased 8% to 602 MBoe/d, principally reflecting Delaware Basin development; production expenses rose 36% to $2.082 billion, reflecting higher volumes, inflation and commodity-linked taxes.
- Q3 derivative valuation gains were $611 million before tax versus $302 million in Q2. These noncash valuation movements can materially affect reported earnings and are distinct from cash settlements.
- Devon acquired Eagle Ford properties for approximately $1.7 billion and Williston Basin properties for approximately $830 million. Management cited approximately 88 MMBoe and 66 MMBoe of estimated proved reserves, respectively.
Outlook, commentary, risks and unusual items
- Management’s Q4 2022 exploration and development budget was approximately $800 million to $900 million. It expected Eagle Ford production to increase by about 35 MBoe/d in Q4 due to the September acquisition.
- Management emphasized capital discipline and value over volume growth, citing commodity-price backwardation, supply-chain constraints, inflation and geopolitical and economic uncertainty. It said current cash sources were expected to fund planned capital requirements, while noting operating cash flow is sensitive to commodity prices and other variables.
- At September 30, Devon reported hedging approximately 30% of anticipated remaining 2022 oil and gas production, and approximately 25% of 2023 oil and 15% of 2023 gas production. A 10% change in relevant forward curves would have changed the net derivative position by approximately $185 million.
- In November 2022, after quarter-end, Devon declared a $1.35-per-share Q4 dividend—$0.18 fixed and $1.17 variable—totaling approximately $880 million. Future dividends remain at the board’s discretion. The company had used $1.25 billion of its $2.0 billion repurchase authorization by September 30.
- Reported Q3 earnings included a $44 million benefit from reimbursement under a performance guarantee related to previously divested assets. The nine-month period included a $140 million benefit from revising the estimated future guarantee obligation, partly offset by a $20 million Ukraine humanitarian pledge.
- Contingencies include royalty-underpayment litigation, Louisiana coastal environmental claims, climate-related proceedings, and a dispute over alleged legacy responsibility for decommissioning California offshore platforms. Devon says it intends to defend the claims; outcomes and potential costs are uncertain. An EPA notice of violation regarding historical emissions on the Fort Berthold Indian Reservation remained unresolved; a penalty could exceed $0.3 million.
- Other identified risks include commodity-price volatility, derivative and counterparty risk, regulatory and climate-related requirements, midstream constraints, supply-chain disruptions, and leverage and refinancing risks. Devon reported no debt maturities until August 2023 and fixed-rate debt averaging 5.8%.
Important facts for investors to verify
- How much reported earnings and cash generation depend on commodity prices, hedge cash settlements, and noncash derivative fair-value changes.
- Whether the Eagle Ford and Williston acquisitions deliver the expected production, reserves, synergies and returns, and how integration affects costs and capital needs.
- Whether operating cash flow can sustain planned investment, variable dividends and repurchases if commodity prices weaken or operating costs rise.
- The timing and terms of the August 2023 debt maturity, and continued availability of the revolving facility and compliance with its covenant.
- Developments, potential exposure and accrued amounts for royalty, environmental, climate, EPA and legacy decommissioning matters; the filing does not provide a clear ultimate cost for these contingencies.