Devon Energy Corporation — 2009 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2009, not a standalone fourth-quarter filing. Devon is an independent oil and gas exploration and production company, with North American onshore operations and marketing and midstream businesses. It announced a strategic shift toward North American onshore growth, planning to divest U.S. offshore and international assets. International operations are reported as discontinued; U.S. offshore operations remain in continuing results pending sale.
Key financial and operating metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total revenue | $8.015 billion | $13.858 billion |
| Net income (loss) | $(2.479) billion | $(2.148) billion |
| Continuing operations income (loss) | $(2.753) billion | $(3.039) billion |
| Cash provided by operating activities | $4.737 billion | $9.408 billion |
| Cash and cash equivalents, including assets held for sale | $1.011 billion | $384 million |
| Total debt at year-end | $7.279 billion | $5.841 billion |
| Total assets | $29.686 billion | $31.908 billion |
| Stockholders’ equity | $15.570 billion | $17.060 billion |
| Production | 233 million Boe | 223 million Boe |
| Combined realized price, before hedges | $26.15 per Boe | $52.49 per Boe |
Reported earnings were heavily affected by noncash full-cost ceiling impairments: $6.408 billion pretax in continuing operations in 2009, or $4.085 billion after tax. The filing reports no meaningful conventional operating margin measure in the summary data; per-unit lease operating expense was $7.16 per Boe, down 14% from $8.29.
Material changes versus the prior comparable period
- Revenue fell about 42%, principally because realized oil, gas and NGL prices declined sharply. Combined realized price before hedges fell 50%; gas prices fell 57%, oil 38% and NGLs 44%.
- Production rose 4% to 233 million Boe, while North American onshore production grew 6%. Devon reported 1,135 gross wells drilled with a 99% success rate and said proved reserves additions from extensions, discoveries and performance revisions were 496 million Boe.
- Operating cash flow fell about 50%. Cash capital expenditures decreased to $4.879 billion from $8.843 billion; Devon also reported $4.7 billion of capitalized costs incurred in oil and gas activities.
- Debt increased from $5.841 billion to $7.279 billion, including $1.432 billion of commercial paper at year-end. The company issued $1.2 billion of senior notes in January 2009 and used the proceeds primarily to repay commercial paper, then borrowed again to help fund capital spending and dividends.
- North American proved reserves were 2.733 billion Boe at year-end, versus 2.299 billion Boe in 2008. The increase included positive price revisions, extensions and discoveries; the 2008 reserve base had been reduced substantially by lower year-end commodity prices.
Outlook, commentary, risks and unusual items
- Strategic divestitures: Devon estimated after-tax proceeds of $4.5–$7.5 billion from planned U.S. offshore and international asset sales in 2010, with a portion intended for debt reduction and the remainder for North American onshore investment. Only one planned property had been sold when the report was prepared. Sale timing and proceeds were uncertain.
- 2010 outlook: Estimated production was 231–235 million Boe; capital expenditures were expected to be $6.0–$6.8 billion, including discontinued operations. The company expected marketing and midstream operating profit of $450–$525 million and total LOE of $1.74–$1.90 billion.
- Hedging: As of February 15, 2010, Devon reported collars on about 65% of estimated 2010 oil production and gas swaps, collars and fixed-price contracts covering about 54% of estimated gas production. These instruments limit some price exposure but can also constrain gains when market prices exceed collar ceilings.
- Liquidity and covenants: Devon reported approximately $2.0 billion of available credit capacity as of February 15, 2010 and compliance with its debt-to-capitalization covenant at year-end; its covenant ratio was 20.5% versus a maximum of 65%. It expected to use commercial paper as needed and repay some borrowings from asset-sale proceeds.
- Impairments and restructuring: The $6.408 billion 2009 continuing-operations impairment followed lower commodity prices and the full-cost accounting ceiling test; it was noncash and not reversible in later periods. Devon also recorded $153 million of estimated severance costs in fourth-quarter 2009 related to planned divestitures, with additional restructuring costs anticipated in 2010.
- Other risks and contingencies: Commodity-price volatility, reserve-estimation uncertainty, regulation and environmental costs, and operational and drilling risks could materially affect results. Devon had no coverage for damage caused by named Gulf of Mexico windstorms. It also held $115 million of illiquid auction-rate securities, which management did not consider impaired. The filing disclosed $3.2 billion of gross drilling and facility commitments, including offshore obligations that buyers might assume or Devon might seek to sublease.
- Unusual income item: Devon reversed an $84 million accrual for potential deepwater royalties after the Supreme Court declined to review a ruling invalidating price thresholds in certain leases.
Important facts for investors to verify
- Whether planned offshore and international asset sales close on expected terms, the resulting net proceeds, and whether buyers assume offshore drilling, facility and FPSO commitments.
- Actual 2010 production, capital spending and cash flow versus management’s estimates, especially if commodity prices or divestiture timing differ from assumptions.
- The effect of commodity prices and reserve revisions on future impairments, proved reserves and the economics of undeveloped reserves.
- Debt and liquidity after asset sales, including commercial paper refinancing needs, upcoming maturities and compliance with credit covenants.
- Severance and other restructuring costs, auction-rate security liquidity, and exposure from uninsured Gulf windstorm damage and environmental obligations.
KPMG issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2009.