Devon Energy Corporation — 2012 Form 10-K
Business context and reporting period. Devon is an independent oil and gas producer with North American onshore operations, midstream assets and Canadian oil sands projects. This annual report covers the fiscal year ended December 31, 2012; quarterly data show a material loss in the second half, including fourth-quarter continuing-operations loss of $357 million.
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $9.502 billion | $11.454 billion |
| Continuing-operations earnings (loss) | $(185) million | $2.134 billion |
| Net earnings (loss), including discontinued operations | $(206) million | $4.704 billion |
| Adjusted earnings (non-GAAP) | $1.322 billion; $3.26 per share | $2.536 billion; $6.07 per share |
| Operating cash flow, continuing operations | $4.930 billion | $6.246 billion |
| Capital expenditures | $8.225 billion cash basis | $7.534 billion |
| Production | 682.3 MBoe/d | 657.7 MBoe/d |
| Operating margin per Boe | $19.41 | $25.15 |
| Proved reserves | 2.963 billion Boe | 3.005 billion Boe |
- Revenue fell 17%. Oil and bitumen sales rose with production, but total commodity sales declined as realized gas prices fell 34% and NGL prices fell 26%; realized oil prices fell 3% and bitumen prices fell 18%.
- Oil and bitumen production increased 20%; overall production grew 4%. Gas production declined 2%.
- Reported results included $2.024 billion of noncash asset impairments, reducing earnings by $1.308 billion after tax. The charges reflected lower commodity-price-based full-cost ceilings and reduced expected cash flows from certain midstream assets.
- At year-end, assets were $43.326 billion, stockholders’ equity $21.278 billion and total debt $11.644 billion, including $3.189 billion of short-term debt. Cash and short-term investments totaled $6.980 billion; current assets were $8.971 billion and current liabilities $6.003 billion.
- Devon paid $324 million in dividends, or $0.80 per share. No open-market share repurchases were reported for 2012.
Material changes, outlook and risks
- Operating cash flow declined 21%, while capital spending increased. Cash flow funded about three-fourths of cash capital expenditures net of divestiture proceeds; debt funded much of the remaining investment. Long-term debt increased from $5.969 billion to $8.455 billion.
- Devon completed joint ventures with Sinopec and Sumitomo. They provided about $1.3 billion in cash and had approximately $2.3 billion of remaining drilling carries at year-end, helping fund development.
- Management expected 2013 capital expenditures of $6.4–$7.0 billion and anticipated adequate funding from operating cash flow, hedges, cash and credit. It planned to prioritize oil and liquids-rich projects and expected similar oil and bitumen production growth in 2013.
- Management saw possible stabilization or modest improvement in natural gas prices, but expected NGL prices to remain challenged and commodity prices to remain volatile. Pipeline constraints, outages and refinery downtime had pressured Canadian heavy-oil realizations; Devon was beginning to use rail.
- Liquidity included a $3.0 billion revolving facility, with $2.9 billion available at year-end, and a $5.0 billion commercial-paper program, of which $3.2 billion was drawn. About $6.5 billion of cash and short-term investments was held by foreign subsidiaries; Devon did not expect to repatriate it, citing Canadian investment plans and U.S. tax costs. The facility debt-to-capitalization covenant was 25.4% against a 65% maximum.
- Key risks include commodity-price volatility, reserve-estimation uncertainty, further impairment charges, operating-cost inflation, midstream access and transportation constraints, regulatory and environmental changes, and execution of development plans. Management warned further full-cost impairments could occur in 2013 if prices did not improve.
- The Houston office consolidation generated $80 million of 2012 restructuring costs; total costs were estimated at about $135 million. Management reported no material pending legal proceedings, and the auditor opined that the financial statements were fairly presented and internal control over financial reporting was effective.
Important facts for investors to verify
- Whether commodity prices, differentials and hedging settlements support cash flow and planned 2013 spending.
- Whether reserve additions and development offset production depletion and price-related revisions; 2012 reserves fell 1% despite replacing 152% of production through extensions, discoveries and non-price revisions.
- Whether further impairment charges, operating-cost increases or Canadian heavy-oil transportation constraints affect asset values and margins.
- The timing and refinancing of $3.189 billion of short-term debt, and the practical availability of foreign-held cash to U.S. operations.
- Progress on joint-venture drilling carries, project schedules and expected production growth; adjusted earnings and adjusted cash flow are non-GAAP measures.