Devon Energy Corporation — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Financial statements are unaudited; dollar amounts are U.S. dollars. Devon is an oil and gas producer with Domestic, Canada and International segments.
Financial results and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $2.10 billion | $5.98 billion | $6.22 billion | $12.50 billion |
| Net earnings (loss) | $499 million | $2.62 billion | $(3.15) billion | $4.67 billion |
| Diluted earnings (loss) per share | $1.12 | $5.88 | $(7.09) | $10.40 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $3.29 billion | $8.18 billion |
- Q3 oil and gas production was 62 million Boe, up 6%; nine-month production was 189 million Boe, up 8%. However, combined realized price before hedges fell 56% in Q3 and 58% year to date.
- Oil, gas and NGL sales, excluding derivative gains, were $1.73 billion in Q3 and $4.95 billion for nine months, down 54% and 55%, respectively. Reported total revenue also includes marketing and midstream revenue and derivative results.
- Q3 oil and gas derivative gain was $23 million, versus $1.59 billion in Q3 2008; the nine-month gain was $190 million, versus a $411 million loss in 2008. 2009 cash settlements received were $127 million for Q3 and $359 million year to date.
- Nine-month operating cash flow fell about 60%. Cash capital expenditures were $4.18 billion, with operating cash flow funding approximately 80%; the balance was funded with commercial paper borrowings.
- Production and operating costs declined to $9.15 per Boe in Q3 (down 28%) and $8.94 per Boe for nine months (down 25%). Marketing and midstream operating profit declined 41% to $100 million in Q3 and 33% to $367 million year to date.
- At September 30, cash and cash equivalents were $905 million; current assets were $2.61 billion and current liabilities $3.44 billion. Debt was approximately $7.4 billion, including $1.4 billion of commercial paper. Available credit capacity was $1.90 billion at quarter-end and approximately $2.01 billion on November 2. The credit-agreement debt-to-capitalization ratio was 21.3%, below the 65% covenant limit.
Material changes and unusual items
- A first-quarter full-cost ceiling impairment reduced oil and gas property carrying values by $6.52 billion pre-tax, or $4.19 billion net of tax. Management attributed most of the U.S. impairment to lower natural gas prices; an unsuccessful Brazil exploration well also contributed.
- Q3 earnings included an $84 million benefit from reversing a deepwater royalty contingency after the Supreme Court declined review of a ruling against federal lease price thresholds. The company had previously accrued the amount.
- Q3 included $59 million of tax benefits associated with filed and amended returns and a $22 million tax benefit related to unsuccessful international drilling. The nine-month tax benefit also reflects deferred tax effects of the impairment.
- Angola operations returned to continuing operations after a commercial discovery; Devon said it intended to resume marketing them for sale in 2010 after drilling commitment wells. 2008 discontinued-operation earnings included significant West African asset-sale gains.
- Devon issued $1.2 billion of senior notes in January 2009, primarily to repay commercial paper. It made no common-share repurchases in the first nine months of 2009; common dividends totaled $213 million.
Outlook, commentary and risks
- Management expected a challenging commodity-price environment to persist. Its stated strategy was to reduce near-term North American development activity, advance longer-term projects including Jackfish in Canada and Lower Tertiary in the Gulf of Mexico, reduce costs and preserve liquidity.
- Devon guided to 2009 capital expenditures of $4.5 billion to $5.2 billion and said it expected available operating cash flow, credit and commercial-paper resources to fund planned near-term needs. It anticipated additional commercial-paper borrowing during the rest of 2009.
- The company was pursuing a partner for its Gulf of Mexico Lower Tertiary projects to share capital commitments and support liquidity. Long-term project commitments may constrain flexibility to adjust spending as cash flow changes.
- Commodity prices, production and reserves, capital-market access, interest and currency rates, drilling and operating risks, weather, regulation, environmental liability and legal matters are among the disclosed uncertainties. Management reported no material change to the risk factors in its 2008 Form 10-K.
- Devon reported $1 million accrued for environmental remediation and said it did not expect material additional exposure from those matters. It also disclosed ongoing royalty litigation, for which it recorded no liability based on management’s view of its defenses and exposure.
- New SEC oil-and-gas reserve rules were expected to increase proved reserve estimates, but Devon could not estimate the amount. The company had not decided whether to disclose probable and possible reserves.
Important facts for investors to verify
- Review the impairment’s effect on reported earnings, asset carrying values, depletion rates and future full-cost ceiling tests.
- Assess sensitivity to commodity prices and the coverage, expiration and fair-value exposure of hedges; Q3 2009 cash hedge receipts should be distinguished from unrealized derivative gains and losses.
- Compare planned 2009 capital expenditures with cash generation, commercial-paper borrowings, available credit and the short-term facility’s November 2010 maturity.
- Track execution, costs and funding for Jackfish and Lower Tertiary, including whether Devon secures a project partner.
- Confirm subsequent reserve disclosures under the updated SEC rules and review the outcome of disclosed royalty and environmental matters.