Devon Energy Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are with December 31, 2013. Devon is an oil and gas producer and, following the March 7 formation of EnLink, also consolidates a midstream business. The quarter includes GeoSouthern results from its February 28 acquisition and EnLink results after formation, so reported revenue and operating comparisons reflect changes in business scope as well as underlying performance.
Financial and operating metrics
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Total operating revenue | $3.725 billion | $1.971 billion |
| Operating income (loss) | $690 million | $(1.857) billion |
| Net earnings (loss) attributable to Devon | $324 million; $0.79 diluted EPS | $(1.339) billion; $(3.34) diluted EPS |
| Adjusted earnings attributable to Devon (non-GAAP) | $547 million; $1.34 per share | $270 million; $0.66 per share |
| Operating cash flow | $1.410 billion | $1.002 billion |
| Production | 690.9 MBoe/d | 686.9 MBoe/d |
| Realized price per Boe, before hedges | $41.13 | $29.18 |
| Cash and cash equivalents | $2.027 billion | $6.066 billion at Dec. 31, 2013 |
| Total debt, including EnLink | $15.512 billion | $12.022 billion at Dec. 31, 2013 |
GAAP operating margin was approximately 18.5% in Q1 2014, calculated as operating income divided by operating revenue; Q1 2013 had an operating loss, including $1.913 billion of impairments. Adjusted operating income per Boe rose 41% to $25.47. Revenue growth was driven by higher commodity prices and the inclusion of acquired/consolidated operations; marketing and midstream revenue also increased substantially, with related product-purchase costs.
Oil, gas and NGL sales were $2.557 billion, up from $1.804 billion. Commodity derivatives reduced reported revenue by $320 million in both periods; Q1 2014 cash settlements were a $100 million loss versus an $86 million gain in Q1 2013. Lease operating expense rose 14% to $598 million, and LOE per Boe increased 13% to $9.61. Net G&A increased 41% to $211 million; DD&A was $739 million, up 5%.
Cash used in investing activities was $7.282 billion, including $5.935 billion for the GeoSouthern acquisition and $1.583 billion of capital expenditures. The company reported $7.518 billion of total capital expenditures in MD&A, including acquisition-related spending. Operating cash flow funded about 90% of capital expenditures excluding the GeoSouthern acquisition. Cash declined by $4.039 billion during the quarter. Current assets were $5.020 billion versus current liabilities of $7.580 billion; the filing does not provide a conventional current-ratio discussion.
Material changes and transactions
- Devon closed the approximately $6.0 billion GeoSouthern acquisition on February 28, acquiring about 82,000 net acres and approximately 250 MMBoe of proved reserves in the Eagle Ford. The purchase allocation was preliminary.
- On March 7, Devon combined substantially all of its U.S. midstream assets with Crosstex assets to form EnLink. Devon retained control and consolidates EnLink; noncontrolling interests are reported separately. EnLink debt of $1.732 billion is non-recourse to Devon.
- On April 1, after quarter-end, Devon sold most Canadian conventional assets for approximately $2.7 billion after tax. Devon expected to repatriate the proceeds in Q2 and repay the $2.0 billion GeoSouthern term loan.
- Q1 production was nearly flat overall, but the mix shifted: combined oil production rose 28%, gas production fell 10%, and NGL production rose 12%. Higher oil and gas prices, liquids growth and improved realizations lifted reported realized price per Boe by 41%.
Outlook, risks and unusual items
- No specific production, earnings or commodity-price guidance is provided in the supplied filing text. Management said operating cash flow is expected to remain the primary liquidity source and believes available capital sources should be adequate for planned spending, debt repayments and other commitments.
- Commodity prices are a key source of cash-flow risk. Devon had oil, gas and NGL hedges extending through 2016; a 10% change in forward curves could materially change derivative values. The company does not use derivatives for speculative trading.
- Devon reported $37 million of restructuring costs related to Canadian divestitures, including $14 million from accelerated share-award vesting. The EnLink formation generated a $48 million deferred-tax liability and increased goodwill; EnLink goodwill was approximately $3.8 billion at quarter-end.
- Canadian reporting-unit goodwill was $2.7 billion and exceeded carrying value by about 11% at the October 2013 annual test. Management warned that lower share or commodity prices, weaker results or unfavorable reserve changes could lead to impairment.
- Reported net earnings differ substantially from adjusted earnings, which exclude specified items including derivative valuation effects, restructuring, EnLink deferred taxes and, in 2013, impairments. Assess both measures and their reconciliations.
- Devon disclosed royalty litigation, particularly concerning New Mexico, with mediation or trial expected before year-end 2014; management did not believe the exposure was material. Environmental and other routine legal matters were also disclosed, with no material exposure expected after recorded accruals.
- Devon had $3.0 billion available under its revolving credit facility, no borrowings under that facility, and $1.6 billion of commercial paper outstanding. Its debt-to-capitalization covenant limit was 65%; the reported ratio was 28.3%, and Devon was in compliance.
Important facts for investors to verify
- How much of revenue, production growth and earnings reflects acquired GeoSouthern assets and consolidated EnLink, versus comparable operations?
- Whether the Canadian asset-sale proceeds were repatriated and the planned $2.0 billion term-loan repayment occurred in Q2 2014.
- The final purchase-price allocations for GeoSouthern and EnLink, which were preliminary, and the recoverability of the substantial EnLink and Canadian goodwill balances.
- Commodity-hedge settlements, fair-value impacts and remaining hedge volumes, including their effect on realized prices and cash flow.
- Trends in production costs, particularly higher Canadian royalties and LOE per Boe, and the funding of capital spending after the acquisition.
- Developments in New Mexico royalty litigation and any changes to contractual obligations, debt maturities or liquidity following the divestiture.