Devon Energy Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons below are with Q1 2017 unless noted. Devon is an oil and gas producer with U.S. and Canadian exploration and production operations and a midstream business through EnLink. Financial amounts are in millions of U.S. dollars unless stated otherwise.
Financial and operating results
| Metric | Q1 2018 | Prior period |
|---|---|---|
| Total revenue | $3,810 | $3,551 in Q1 2017 |
| Net earnings (loss) attributable to Devon | $(197); $(0.38) per diluted share | $303; $0.58 per diluted share in Q1 2017 |
| Core earnings attributable to Devon (non-GAAP) | $108; $0.20 per diluted share | $68; $0.13 per diluted share in Q1 2017 |
| Cash from operating activities | $804 | $746 in Q1 2017 |
| Capital expenditures, including acquisitions, as reported in the overview | $882 | $676 in Q1 2017 |
| Production | 544 thousand Boe/d | 563 thousand Boe/d in Q1 2017 |
| Realized price, excluding derivatives | $27.75/Boe | $25.82/Boe in Q1 2017 |
Total revenue rose about 7% year over year, while GAAP net earnings attributable to Devon moved to a loss. A $312 million loss on early debt retirement was a major unusual expense; net financing costs were $431 million versus $128 million in Q1 2017. The filing reports core earnings of $108 million, a non-GAAP measure that excludes specified items. No consolidated operating-margin figure is clearly provided.
Oil and gas production declined about 3% year over year, with growth in the STACK, Delaware Basin and Rockies partly offset by lower Eagle Ford, Barnett and heavy-oil production. Higher oil and NGL prices supported realized prices, while Canadian oil realizations were pressured by export and pipeline constraints. Adoption of ASC 606 changed the presentation of certain sales and expenses: it increased upstream revenue and production expense by $62 million with no earnings effect, and reduced marketing and midstream revenue and expense by $138 million each.
Cash, debt and liquidity
- Operating cash flow was $804 million. Cash capital expenditures were $832 million, with a further $6 million shown for acquisitions of property and equipment in the cash-flow statement.
- Cash and cash equivalents were $1.424 billion at March 31, down from $2.673 billion at year-end 2017; the cash-flow statement reports $1.470 billion including $46 million of restricted cash.
- Total debt was $9.982 billion, down from $10.406 billion at year-end. Devon repurchased $807 million principal of senior notes, paying $304 million in cash retirement costs and recording an additional $8 million noncash charge. Management estimated annualized cash interest savings of about $64 million.
- Devon reported $2.9 billion available under its $3.0 billion Senior Credit Facility, with no facility borrowings and $51 million of letters of credit. Its debt-to-capitalization covenant ratio was 26.2%, against a maximum of 65%. EnLink and General Partner debt is non-recourse to Devon.
- Q1 common dividends paid were $0.06 per share. Devon announced a 33% increase to $0.08 per share beginning in Q2 and had repurchased $83 million of stock under a newly authorized $1.0 billion program by quarter-end.
Outlook, management commentary and risks
- Management’s 2020 Vision emphasizes cash generation, investment in the Delaware Basin and STACK, non-core asset sales, debt reduction and shareholder returns. Management cited improved well productivity and operating execution in its core development areas.
- Devon forecast full-year 2018 capital expenditures of $2.3–$2.6 billion, including $2.2–$2.4 billion for exploration and production. It said capital investment would be concentrated in the STACK and Delaware Basin and adjusted to remain within operating cash flow.
- Devon had hedged approximately 60% of expected oil and gas production for the remainder of 2018 and was building 2019 positions. A 10% change in relevant commodity forward curves was estimated to change the net derivative position by about $375 million.
- Devon agreed to sell part of its Barnett Shale assets for $553 million, subject to adjustments, with closing expected in Q2 2018. The assets represented approximately 10% of proved reserves; the company expected no gain recognition and an approximately $40 million gas-processing-contract settlement expense. A separate Barnett agreement was expected to provide about $75 million over five years. Management said these and other asset sales represented about $1.1 billion of proceeds toward a longer-term target exceeding $5 billion.
- After quarter-end, Devon announced workforce reductions and other cost initiatives expected to generate $110 million of annualized savings. It expected related restructuring charges and liabilities of $75–$100 million beginning in Q2.
- Key risks include commodity-price volatility, Canadian export and pipeline constraints, derivative and counterparty exposure, operational and regulatory risks, and indebtedness. Management said royalty and environmental matters were not expected to create material exposure after recorded accruals; tax audits may be resolved within 12 months, but timing and payments are uncertain.
- The U.S. corporate tax rate fell to 21% under tax reform. Devon maintained a full valuation allowance against U.S. deferred tax assets and said its tax accounting analysis remained incomplete; it expected a positive future after-tax earnings effect from the lower statutory rate, absent unexpected developments.
Important facts for investors to verify
- Whether the $553 million Barnett sale closed on expected terms, how much cash was received, and whether the anticipated contract-settlement expense was incurred.
- Whether production growth in the STACK and Delaware Basin offsets declines elsewhere, and whether Canadian pricing constraints ease.
- Progress against the $2.3–$2.6 billion capital plan, the $110 million annualized savings target and the broader divestiture target.
- Debt reduction, cash-interest savings, buybacks and the higher dividend relative to operating cash flow and liquidity.
- How commodity prices, hedge settlements and derivative valuations affect realized prices and results; the filing’s sensitivity estimate is significant.