Devon Energy Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Devon completed a major portfolio reshaping: it acquired GeoSouthern’s Eagle Ford assets for approximately $6.0 billion, formed and retained control of EnLink Midstream, and sold non-core Canadian and U.S. assets. EnLink and GeoSouthern results are included only from their respective transaction dates, limiting direct comparability with 2013.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $5,336 | $2,714 | $13,571 | $7,773 |
| Operating income (loss) | $1,774 | $733 | $4,238 | $(24) |
| Net earnings (loss) attributable to Devon | $1,016 | $429 | $2,015 | $(227) |
| Diluted earnings (loss) per share | $2.47 | $1.05 | $4.91 | $(0.57) |
| Adjusted earnings per share (non-GAAP) | $1.34 | $1.29 | $4.08 | $3.16 |
| Operating cash flow | $1,559 | $1,601 | $5,018 | $3,999 |
Operating margin, calculated as operating income divided by operating revenue, was approximately 33.2% in Q3 2014 versus 27.0% in Q3 2013; for the nine-month periods it was 31.2% versus negative 0.3%. Adjusted operating income per Boe was $29.42 in Q3, up 20%, and $29.51 for nine months, up 37%.
- Production averaged 671 MBoe/d in Q3, down 3% year over year; realized price was $41.92/Boe, up 14%. Nine-month production averaged 676 MBoe/d, down 2%, while realized price increased 26% to $42.38/Boe.
- Cash and cash equivalents were $3,408 at September 30, down from $6,066 at year-end 2013. Current assets of $5,973 were slightly below current liabilities of $5,994.
- Total debt was $12,059, including $1,898 classified as short-term; Devon reported no commercial paper outstanding and $3.0 billion available under its revolving credit facility. Devon’s debt-to-capitalization covenant ratio was 22.7%, against a 65% maximum.
- Operating cash flow exceeded cash capital expenditures of $5,013 by approximately $5 million before other investing and financing needs. Investing cash outflow was $5,922; financing cash outflow was $1,739.
- Common dividends paid were $287 for the first nine months; the quarterly rate had increased to $0.24 per share in Q2 2014.
Material changes and unusual items
- Q3 operating revenue growth reflected the inclusion of EnLink and GeoSouthern, higher production from acquired and developing U.S. liquids assets, and a $748 million gain on oil, gas and NGL derivatives. Marketing and midstream revenue also increased substantially with EnLink and expanded marketing activity.
- Q3 GAAP net earnings included significant derivative fair-value gains. Nine-month 2014 earnings included a $1.072 billion Canadian asset-sale gain ($0.6 billion after tax); the U.S. non-core sale generated no gain or loss. Devon reported adjusted earnings of $1.673 billion for nine months, excluding specified unusual items and derivative effects.
- 2013 comparisons included $1.960 billion of asset impairments, contributing to the prior-year nine-month loss. 2014 included $44 million of restructuring costs associated with Canadian divestitures.
- Net debt declined during the first nine months, aided by $5.2 billion of divestiture proceeds. Devon announced a planned November 2014 redemption of $1.9 billion of senior notes, funded with divestiture proceeds.
Outlook, risks and contingencies
- The filing provides no specific earnings, production, or capital-spending guidance. Management stated that operating cash flow is expected to remain the primary liquidity source and that available liquidity was expected to be adequate for capital expenditures, debt repayments, and other commitments.
- Results and cash flow remain sensitive to oil, gas and NGL prices. Derivative positions reduce some price exposure but create fair-value earnings volatility; a 10% move in forward curves was estimated to change net derivative positions by approximately $(518) million to $520 million for oil and $(144) million to $133 million for gas.
- Management identified Canadian goodwill as more exposed to impairment: its estimated fair value exceeded carrying value by approximately 11%, with $2.0 billion of goodwill allocated to that reporting unit. Lower commodity prices, weaker projected results, or unfavorable reserve changes could trigger impairment.
- Contractual obligations totaled $33.2 billion, including $12.1 billion of debt, $7.7 billion of scheduled interest, and $5.6 billion of purchase obligations. Approximately $2.1 billion of operational agreements were with EnLink.
- Devon reported routine legal matters, including royalty lawsuits, and environmental remediation obligations; management did not expect material exposure after recorded accruals. Actual outcomes could differ from estimates. The filing reported no material changes to previously disclosed risk factors.
- Management reported effective disclosure controls as of September 30, 2014, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Separate recurring operating performance from derivative fair-value movements and the Canadian divestiture gain; review the non-GAAP reconciliation and its exclusions.
- Assess the post-acquisition production, costs and returns of GeoSouthern’s Eagle Ford assets, and the impact of sold non-core properties on production and cash flow.
- Confirm completion and funding of the announced $1.9 billion note redemption, and track total debt, liquidity and EnLink’s separate borrowing and covenant position.
- Monitor commodity prices, hedge coverage and Canadian goodwill impairment headroom, together with the substantial contractual and midstream commitments.