Devon Energy Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless otherwise noted. Amounts are in millions of dollars except per-share, per-Boe, and production data.
Business context and financial performance
Devon is an oil and gas producer with U.S. and Canadian operations, alongside marketing and midstream activities. Production averaged 686.9 thousand Boe per day, down 1% year over year.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1,972 | $2,497 | -21% |
| Oil, gas and NGL sales | $1,804 | $1,915 | -6% |
| Net earnings (loss) | $(1,339) | $393 | 2013 loss |
| Adjusted earnings (non-GAAP) | $270 | $427 | -37% |
| Operating cash flow | $1,002 | $1,026 | -2% |
| Adjusted operating cash flow (non-GAAP) | $1,157 | $1,349 | -14% |
| Cash capital expenditures | $1,926 | $2,088 | -8% |
Profitability, cash flow and liquidity
- GAAP loss from continuing operations was $1,339 million, or $3.34 per diluted share, versus income of $414 million, or $1.03 per diluted share, in Q1 2012. The loss primarily reflects $1,913 million of oil and gas asset impairments ($1,308 million after tax).
- Adjusted earnings were $270 million, or $0.66 per share, compared with $427 million, or $1.05 per share. Management attributed the decline primarily to lower oil and NGL prices.
- Operating margin was $18.06 per Boe, down 13% from $20.80. Realized price before hedges was $29.18 per Boe, down 4%. Total lease operating expense rose 2% to $525 million; expense per Boe increased 4% to $8.49.
- Operating cash flow was broadly stable at $1,002 million, but covered about half of cash capital expenditures. Net cash used in investing activities was $782 million; Devon funded the shortfall using cash and net commercial-paper borrowings.
- Cash and short-term investments totaled $6,501 million at March 31, 2013, down from $6,980 million at year-end 2012. Cash and cash equivalents alone were $5,275 million.
- Total debt was $12,152 million: $4,197 million short-term and $7,955 million long-term. Commercial paper outstanding was $3.7 billion at an average rate of 0.35%. The $3.0 billion revolving credit facility had no borrowings, with $2.9 billion available net of letters of credit. Debt-to-capitalization was 26.3%, within the 65% covenant limit.
- Dividends paid were $81 million, or $0.20 per share for the quarter. Devon announced an increase to $0.22 per share beginning in Q2 2013.
Material changes and operating drivers
- Total revenue declined mainly because oil, gas and NGL derivative results swung to a $320 million loss from a $145 million gain. Commodity derivative results included $406 million of unrealized losses, partially offset by $86 million of cash settlements.
- Unhedged oil and NGL prices fell 14% and 21%, respectively; bitumen prices fell 44%. Gas prices rose 22%. Liquids production growth partly offset lower prices and declining gas production: oil volumes rose 13%, bitumen 18%, and NGLs 6%, while gas volumes fell 8%.
- U.S. oil production increased 23%, supported mainly by Permian Basin development. Canadian combined production declined 6%. Marketing and midstream operating profit increased 12% to $125 million.
- Interest expense increased 27% to $110 million, principally due to additional borrowing to fund capital expenditures and lower capitalized interest. Net G&A declined 11% to $150 million.
- Q1 capital expenditures were $1,926 million, including $1,664 million for oil and gas activities and $219 million for midstream. Exploration and development spending was lower year over year, partly reflecting drilling carries under joint ventures.
Outlook, risks and unusual items
- Management stated that operating cash flow is expected to remain the primary source of liquidity and that available funding sources are expected to be adequate for capital spending, debt repayment and other commitments. The filing provides no specific production, earnings or capital-spending guidance.
- Devon expected to repatriate approximately $2 billion of foreign cash to the U.S., using net operating losses and foreign tax credits to reduce tax costs, and anticipated that it might repatriate additional sizeable amounts in 2013 or 2014. It expected to use repatriated funds to repay commercial paper.
- Management warned that additional full-cost ceiling impairments could occur in 2013 if commodity pricing does not improve. The Q1 impairment followed lower trailing average oil, bitumen and NGL prices and reduced proved-reserve values.
- Commodity prices remain a key exposure. Devon reported hedges covering portions of production through 2015; a 10% change in forward curves could materially change derivative asset values, including estimated changes of $(378) million / $367 million for oil and $(347) million / $322 million for gas for a 10% increase / decrease.
- Devon incurred $38 million of restructuring costs as it consolidated U.S. personnel in Oklahoma City. A settlement of the Chief redemption litigation released Devon from claims; Devon reversed a previously recorded $133 million liability and matching receivable in Q1, with settlement payments funded by the indemnifying party.
- Management said it did not believe the disclosed royalty, environmental or other routine legal matters would have a material effect after recorded accruals, while noting actual outcomes could differ from estimates. The filing reports no material changes to previously disclosed risk factors.
- Forward-looking statements are subject to commodity supply and demand, exploration results, political and regulatory developments, and broader economic and financial-market risks.
Most important facts for investors to verify
- Whether commodity prices and full-cost ceiling assumptions stabilize, and whether further impairments are recorded.
- How much foreign cash is repatriated, the associated tax cost, and whether proceeds reduce commercial-paper balances as planned.
- Whether operating cash flow can support the capital program and dividend without continued reliance on cash balances or borrowing.
- Realized oil, bitumen and NGL prices, derivative settlements and mark-to-market changes, and production trends by region.
- Execution and cost effects of the Oklahoma City consolidation and Canadian midstream investments, including the Access Pipeline.