Devon Energy Corporation — Form 10-Q Summary
Business context and reporting period
Devon is an oil and gas exploration and production company with U.S. and Canadian operations, alongside its EnLink midstream business. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet figures are as of September 30, 2016. Dollar amounts below are in millions unless otherwise indicated.
Key financial and operating metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenues and other | $4,233 | $3,601 | $8,847 | $10,259 |
| Oil, gas and NGL sales | $1,113 | $1,338 | $3,023 | $4,264 |
| Operating income (loss) | $1,465 | $(5,444) | $(3,532) | $(15,302) |
| Net earnings (loss) attributable to Devon | $993 | $(3,507) | $(3,633) | $(9,922) |
| Core earnings (loss) attributable to Devon, non-GAAP | $47 | $316 | $(169) | $725 |
| Cash from operating activities | $726 | $1,553 | $1,210 | $4,302 |
| Total production | 577 MBoe/d | 680 MBoe/d | 635 MBoe/d | 680 MBoe/d |
- Q3 revenue included a $1,351 gain on asset sales; reported earnings therefore should not be viewed as representative of underlying operations. Q3 commodity derivatives added $79 to reported revenue. Q3 realized price was $20.98/Boe before hedge settlements and $21.30/Boe including cash settlements.
- For the first nine months, operating cash flow covered 73% of capital expenditures, excluding acquisitions. Cash and cash equivalents were $2,385 at September 30, 2016, versus $2,310 at December 31, 2015.
- Total debt was $11,354, versus $13,032 at year-end 2015; $350 was current. Devon had no commercial paper or borrowings under its $3.0 billion Senior Credit Facility. The company reported $2.9 billion of available facility capacity and $5.3 billion of total liquidity, including cash.
- Current assets were $4,451 and current liabilities were $2,851. Devon reported a 20.6% debt-to-capitalization ratio under its credit agreement, below the 65% covenant limit. EnLink debt is non-recourse to Devon.
- Marketing and midstream operating profit was $210 in Q3 versus $212 a year earlier, and $619 for nine months versus $630. Total lease operating expense per Boe declined 18% in Q3 and 20% for nine months year over year, to $6.69 and $6.98, respectively.
Material changes versus comparable periods
- Q3 oil, gas and NGL sales fell 17% year over year; nine-month sales fell 29%. Nine-month realized price per Boe declined 24%, to $17.37, and total production declined 7% to 635 MBoe/d.
- Q3 production from retained assets was down 7% year over year. Lower Eagle Ford activity, natural Barnett declines and asset sales weighed on volumes; STACK and Delaware Basin production increased. Devon said it raised 2016 retained-production guidance by 3%, but the filing text does not provide a clear revised production target.
- Operating cash flow decreased 72% for the first nine months, primarily because of lower commodity prices and lower cash settlements from hedges than in 2015. Capital expenditures were $1,659, down from $4,229; exploratory and development investment was reduced approximately 67%.
- The company recognized $4,851 of asset impairments in the first nine months, including $2,810 on U.S. oil and gas assets, $1,166 on Canadian oil and gas assets and $873 of EnLink goodwill. The impairments primarily reflected lower commodity-price assumptions and did not affect liquidity or debt covenants.
- Devon issued shares for the STACK acquisition and raised approximately $1.5 billion net in a February public offering. Shares outstanding increased from 418 million at year-end 2015 to 524 million at September 30, 2016.
Outlook, management commentary, risks and unusual items
- Management cited continued low commodity prices and emphasized cost reductions, portfolio changes, production optimization and balance-sheet strengthening. Its 2016 operating-cost savings target was raised to $1 billion.
- Devon expected fourth-quarter 2016 capital expenditures of $470–$520, excluding acquisitions and EnLink. It expected annualized cash interest expense to decline by approximately $54 following debt retirements.
- Management expected further full-cost impairments in Q4 2016, estimating approximately $500 of impairment on Canadian oil and gas properties and a U.S. impairment below the Q3 amount. Impairment estimates depend on trailing commodity prices and other assumptions.
- Devon sold U.S. non-core upstream assets for approximately $1.9 billion during the first nine months, using proceeds mainly for debt repayment and core investment. After quarter-end, it sold its 50% Access Pipeline interest for $1.1 billion and recorded an approximately $540 gain. The related 25-year transportation agreement includes an initial five-year base commitment averaging $110 annually; Devon expected about $25 of additional LOE in Q4 from the commitment. A further approximately $120 payment is contingent on development of a new Pike lease project.
- The Q3 gain on asset sales and the substantial impairments were unusual and materially affected GAAP results. Nine-month restructuring and transaction costs were $266, including workforce-reduction costs; restructuring liabilities totaled $144 at September 30.
- Devon reduced its quarterly dividend from $0.24 to $0.06 per share beginning in Q2 2016. Credit-rating actions included a downgrade by S&P to BBB with stable outlook, a negative outlook from Fitch on its BBB+ rating, and Moody’s revision of its senior unsecured rating to a stable outlook. Further downgrades could increase collateral requirements or borrowing costs.
- Key risks include commodity-price volatility, reserve and impairment estimation, hedging and counterparty exposure, indebtedness, regulatory and environmental matters, and midstream constraints. Management reported no material pending legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- How much of reported earnings and cash generation is sustainable after excluding the Q3 divestiture gain, impairments, hedge effects and restructuring items; review the company’s non-GAAP reconciliation.
- The realized results, proceeds, tax effects and use of funds from the U.S. asset sales and the post-quarter Access Pipeline sale, including ongoing transportation costs and conditional consideration.
- The scale and timing of anticipated Q4 impairments, and sensitivity of the full-cost ceiling tests to commodity prices and reserve assumptions.
- Whether operating cash flow and available liquidity can support the capital program, debt obligations and EnLink’s remaining $500 acquisition installment.
- Production trends in retained assets, execution of the 2016 guidance and $1 billion cost-savings target, and the impact of the Access transportation commitment on Canadian operating costs.
- Future debt-rating developments, covenant headroom, potential collateral requirements, and the effect of the increased share count and reduced dividend on per-share returns.