Devon Energy Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts are in millions unless otherwise noted. The filing reflects the severe commodity-market disruption associated with COVID-19; Barnett Shale and Canadian operations are reported as discontinued operations.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenues | $1,067 | $1,746 | $3,548 | $4,631 |
| Net earnings (loss) attributable to Devon | ($92) | $109 | ($2,578) | $287 |
| Diluted net earnings (loss) per share | ($0.25) | $0.27 | ($6.85) | $0.69 |
| Operating cash flow, continuing operations | $427 | $595 | $1,106 | $1,464 |
| Capital expenditures | $204 | $526 | $936 | $1,502 |
| EBITDAX (non-GAAP) | $359 | $626 | $1,174 | $1,785 |
| Field-level cash margin (non-GAAP) | $407 | $626 | $1,057 | $1,901 |
- Q3 continuing-operations loss was $103 million, compared with earnings of $136 million a year earlier. The reported attributable loss also includes discontinued operations and noncontrolling interests.
- The nine-month continuing-operations loss was $2.47 billion, driven principally by $2.666 billion of proved-asset impairments and $149 million of unproved impairments. Impairments reflected lower commodity-price expectations and reduced investment following the market downturn.
- Q3 total production was 326 MBoe/d, down 1% year over year; oil production was 146 MBbls/d. Q3 combined realized price including hedge settlements was $22.93/Boe, down 30% year over year. Q3 field-level cash margin was $13.59/Boe versus $20.73/Boe.
- At September 30, cash and cash equivalents were $1.707 billion, plus $190 million restricted for discontinued-operation obligations. Long-term debt was $4.297 billion; total current assets were $3.477 billion and current liabilities $1.709 billion. The $3.0 billion revolving facility had no borrowings, and Devon reported a 19.5% debt-to-capitalization ratio against a 65% covenant limit.
- Operating cash flow funded capital expenditures and dividends in the first nine months. Nine-month cash flow was lower year over year, while capital expenditures fell 38%. The reported $4.9 billion of liquidity includes $1.9 billion of cash (including restricted cash) and $3.0 billion of available revolver capacity.
Material changes and unusual items
- Compared with Q3 2019, revenue and operating cash flow declined amid lower realized commodity prices. Q3 oil, gas and NGL sales were $678 million versus $919 million; derivative results were a loss of $87 million versus a gain of $127 million.
- Versus Q2 2020, Devon’s continuing-operations loss narrowed to $103 million from $677 million, primarily as higher benchmark prices lifted unhedged realized prices and field margins. Q3 cash hedge settlements were $10 million, down from $232 million in Q2; noncash derivative valuation changes remained volatile.
- Devon recognized a $90 million income-tax benefit in Q3 and a $510 million benefit for the first nine months. It maintained a full valuation allowance against net deferred tax assets; CARES Act loss carrybacks contributed a reported $105 million tax benefit.
- Q3 restructuring expense was $32 million, including $11 million of noncash accelerated share-award vesting. The company cited workforce and cost-reduction actions.
- The Barnett Shale sale closed October 1, 2020 for net proceeds of $490 million, including a previously received $170 million deposit. It also provides potential earnouts of up to $260 million over four years, subject to commodity-price conditions. Devon recorded a $28 million Q3 discontinued-operations expense for a proposed royalty-class settlement, subject to a final agreement and court approval.
Outlook, strategy and risks
- Management forecast Q4 2020 production of approximately 318–334 MBoe/d and exploration and development spending of $160–$200 million. The 2020 capital outlook had been reduced by approximately $800 million, or 45%, from the original budget.
- Devon targeted approximately $100 million of annualized G&A savings by year-end 2020 and described broader initiatives to reduce annualized production, administrative and financing expenses. It also authorized a $1.5 billion debt-repurchase program; purchases depend on market conditions.
- Devon and WPX agreed to an all-stock merger of equals, with each WPX share exchangeable for 0.5165 Devon shares. The deal was expected to close in Q1 2021, subject to shareholder, regulatory and other approvals. Devon intended to adopt a fixed-plus-variable dividend strategy after closing, with variable dividends potentially up to 50% of excess quarterly free cash flow, subject to criteria.
- Devon paid its regular $0.11-per-share Q3 dividend and paid a separate $0.26-per-share special dividend on October 1, 2020. Share repurchases were temporarily suspended.
- Key risks include continued COVID-19 effects, volatile commodity prices, production and takeaway constraints, counterparty and credit risks, and the possibility of further impairments. Merger risks include failure to obtain approvals, integration and synergy challenges, litigation, restrictions on operations pending closing, and a possible $75 million termination fee under certain circumstances.
Important facts for investors to verify
- Track realized prices, hedge settlements and derivative fair-value changes separately; the filing indicates material period-to-period volatility.
- Assess the sustainability of cash flow after capital spending, dividends, restricted cash obligations and the October special dividend.
- Review the basis for the $2.666 billion continuing-operations impairment and the sensitivity of asset values to commodity prices and planned investment.
- Confirm Barnett sale proceeds, any earnout realization, and the status and final cost of the royalty settlement.
- Monitor WPX merger approvals, expected synergies, integration costs, financing effects and the proposed post-merger dividend policy.