Devon Energy Corporation (NYSE: DVN) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dollar amounts are in millions unless noted. Devon is a U.S. oil and gas producer, with most production from the Delaware Basin.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenues | $5,626 | $2,417 | $9,438 | $4,467 |
| Net earnings attributable to Devon | $1,932 | $256 | $2,921 | $469 |
| Diluted earnings per share | $2.93 | $0.38 | $4.40 | $0.70 |
| Operating cash flow | $2,678 | $1,093 | $4,515 | $1,685 |
| Capital expenditures | $573 | $504 | $1,110 | $1,003 |
- Q2 oil production was 300 MBbl/d; combined production was 616 MBoe/d, up 7% from Q1 2022. Six-month combined production averaged 595 MBoe/d, up 12% year over year.
- Q2 unhedged realized combined price was $73.13/Boe, up 19% from Q1; after hedge settlements it was $64.70/Boe. Q2 field-level cash margin, a non-GAAP measure, was $3,371, or $60.12/Boe, versus $1,641, or $30.48/Boe in Q2 2021.
- Production expenses were $729 in Q2, including production taxes of $278; management attributed increases from Q1 to higher volumes and commodity prices. Q2 DD&A was $528 and G&A was $84.
- At June 30, cash, cash equivalents and restricted cash were $3,457; current assets were $6,351 and current liabilities $4,094. Long-term debt was $6,461 and total equity $10,226.
- Operating cash flow exceeded reported capital expenditures by $2,105 in Q2 and $3,405 for the first half; these simple differences are not company-defined free cash flow.
Material changes and capital allocation
- Year-over-year earnings and cash-flow growth mainly reflected higher commodity prices and increased production. Six-month realized prices with hedges rose 84% for oil, 70% for gas and 62% for NGLs versus 2021.
- Commodity hedge cash settlements were losses of $472 in Q2 and $816 in the first half. Non-cash hedge fair-value changes also materially affected reported earnings: Q2 2022 included a $302 pre-tax gain, while Q2 2021 included a $336 pre-tax loss.
- Devon paid $1,497 in dividends in the first half of 2022, including variable dividends, and repurchased $535 of stock in the first half. The $2.0 billion repurchase authorization had approximately $1.1 billion executed by June 30.
- Debt was broadly unchanged from year-end 2021. Devon reported $6.5 billion of liquidity, comprising $3.5 billion of cash and $3.0 billion available under its revolving facility; it had no facility borrowings and no debt maturities until August 2023. Its credit-facility debt-to-capitalization ratio was 23.9%, versus a 65% maximum covenant.
Outlook, risks and unusual items
- Management emphasized moderated growth, capital discipline, operational efficiency, low leverage and shareholder returns. It said 2022 capital expenditures represented approximately 25% of operating cash flow and expected remaining-2022 exploration and development spending of approximately $1.2–$1.4 billion.
- In July 2022, Devon completed a Williston Basin acquisition for approximately $830 million, net of adjustments; it expected the assets to add approximately 15 MBoe/d in Q3. An $87 million deposit was recorded before quarter-end.
- In August, Devon announced a Q3 dividend of $1.55 per share, comprising a $0.18 fixed dividend and $1.37 variable dividend, totaling approximately $1.0 billion. Variable dividends depend on cash generation and Board discretion.
- Management cited commodity-price volatility and backwardation, supply-chain constraints, geopolitical and economic uncertainty, and potential higher operating costs as considerations for its capital plan. Approximately 25% of anticipated remaining-2022 oil production and 30% of gas production were hedged as of June 30.
- Reported results included a $96 benefit in first-half 2022 from revising a performance-guarantee obligation, partly reflecting improved commodity conditions. The effective tax rate was 22% for the first half, compared with a tax benefit and a negative 75% effective rate in first-half 2021.
- Contingencies include royalty-underpayment lawsuits, climate-related proceedings, Louisiana coastal environmental claims and a disputed government order concerning decommissioning of California offshore facilities. Devon said it intends to defend these matters; it accrued approximately $25 for royalty matters and stated it could not predict outcomes of certain proceedings.
- Forward-looking statements are subject to risks including commodity prices, reserve estimates, regulation and climate-related policy, derivative exposure, counterparty credit, operational and midstream constraints, cyber risks, and the ability to complete transactions and return capital.
Investor verification priorities
- Separate underlying operating performance from the significant derivative fair-value changes and cash hedge settlements.
- Assess whether high commodity prices, production growth and cash flows are sustainable, and how production costs and supply constraints may evolve.
- Review the Williston acquisition’s purchase economics, integration, expected production contribution and effect on capital allocation.
- Evaluate the affordability and variability of dividends and share repurchases under lower-price scenarios, alongside debt maturities and liquidity.
- Monitor the outcomes and potential financial exposure from royalty, environmental, climate and legacy decommissioning matters.