Devon Energy Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are in millions of dollars except per-share and production figures. Devon is a U.S. independent oil and natural gas producer operating across five core basins.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $3,454 | $5,626 | $7,277 | $9,438 |
| Net earnings attributable to Devon | $690 | $1,932 | $1,685 | $2,921 |
| Diluted EPS | $1.07 | $2.93 | $2.60 | $4.40 |
| Operating cash flow | $1,405 | $2,678 | $3,082 | $4,515 |
| Capital expenditures | $1,079 | $573 | $2,091 | $1,110 |
- Q2 field-level cash margin, a non-GAAP measure, was $1,774 million, or $29.45 per Boe, versus $1,986 million, or $34.42 per Boe, in Q1 2023. For the first half, it was $3,760 million, or $31.88 per Boe, versus $5,928 million, or $55.00 per Boe, a year earlier.
- At June 30, cash, cash equivalents and restricted cash totaled $488 million, including $116 million restricted; cash and cash equivalents excluding restricted cash were $372 million. Total debt was $6,413 million, including $244 million short-term debt and $6,169 million long-term debt.
- Management reported $3.5 billion of liquidity, including approximately $0.5 billion of cash. The $3.0 billion revolving facility had no borrowings, and Devon was compliant with its debt-to-capitalization covenant at 23.1% against a 65% maximum.
Changes and operating drivers
- Q2 revenue fell about 39% year over year and Devon-attributable earnings declined about 64%. For the first half, revenue declined about 23% and attributable earnings about 42%.
- Lower commodity prices were the main earnings headwind. First-half realized prices with hedges were down year over year: oil 18%, gas 50%, NGLs 47%, and combined realized price per Boe 26%. Management attributed the decline primarily to lower WTI, Henry Hub and Mont Belvieu prices.
- First-half combined production increased 9% to 652 MBoe/d, primarily reflecting the 2022 Eagle Ford and Williston Basin acquisitions and new well activity. Q2 production was 662 MBoe/d, up 3% from Q1.
- First-half production expenses rose 5%; lease operating expense per Boe rose 30%, reflecting acquisitions and inflation. First-half DD&A rose 23%, also primarily due to the acquired assets. Capital spending increased to $2,091 million from $1,110 million.
- Q2 included a $64 million gain from contributing water infrastructure assets to the Water JV. First-half 2022 results included a $96 million benefit from a performance guarantee and a $20 million Ukraine humanitarian pledge, affecting comparison of other income and expenses.
Cash returns, outlook and risks
- Devon paid $1,058 million of dividends and repurchased $745 million of stock in the first half. The share repurchase authorization was increased to $3.0 billion and extended through December 31, 2024; about $2.1 billion had been executed through July 2023.
- In August, Devon declared a Q3 dividend of $0.49 per share, comprising a $0.20 fixed dividend and $0.29 variable dividend, totaling approximately $314 million. Future dividends remain at the Board’s discretion.
- Capital expenditures for the remainder of 2023 were expected to be approximately $1.6–$1.8 billion. Management said it expected to generate material free cash flow at current commodity prices by spending within cash flow, while noting inflation could further pressure margins. Devon had hedged approximately 30% of anticipated remaining 2023 oil and gas production.
- The $242 million of 8.25% senior notes due August 1, 2023 were repaid at maturity after quarter-end. All debt was fixed-rate, averaging 5.8%.
- Risks include commodity-price volatility, cost inflation, midstream capacity constraints, counterparty and hedging risks, regulation and climate-related litigation. Devon is evaluating the 15% corporate alternative minimum tax; management said cash tax effects could depend on operating results and future Treasury guidance.
- Legal matters include royalty claims, Louisiana coastal-damage litigation, climate-change proceedings and a dispute over potential decommissioning obligations for California offshore platforms. Management said no recorded legal accruals were expected to have a material effect, but outcomes remain uncertain. An EPA notice concerning alleged New Mexico air-permit violations could result in a fine or penalty exceeding $300,000.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commodity prices, regional price differentials and realized hedge settlements support the company’s production and cash-flow assumptions.
- How the $1.6–$1.8 billion remaining-2023 capital budget, inflation and production levels affect free cash flow and variable dividends.
- Timing and cash-tax effects of the corporate alternative minimum tax, including any subsequent regulatory guidance.
- Progress on share repurchases and the maturity repayment, and whether liquidity and covenant headroom remain consistent with management’s statements.
- Developments in the EPA matter, royalty and climate litigation, and the California offshore decommissioning dispute; the filing does not provide clear quantified exposure for these matters.