Devon Energy Corporation (NYSE: DVN) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report. Devon is a U.S. independent oil and gas exploration and production company operating primarily in the Delaware Basin, Eagle Ford, Anadarko, Williston and Powder River basins. Financial amounts are in U.S. dollars and, unless noted, millions.
Financial and operating performance
| Metric | 2023 | 2022 | Change / context |
|---|---|---|---|
| Oil, gas and NGL sales | $10,791 | $14,082 | Down 23% |
| Total revenues | $15,258 | $19,169 | Down 20%; includes marketing and midstream revenues and derivative results |
| Net earnings | $3,782 | $6,037 | Down 37% |
| Earnings attributable to Devon | $3,747 | $6,015 | Diluted EPS was $5.84, versus $9.12 |
| Core earnings attributable to Devon (non-GAAP) | $3,667 | $5,476 | Diluted core EPS was $5.71, versus $8.31 |
| Operating cash flow | $6,544 | $8,530 | Down 23% |
| Capital expenditures | $3,883 | $2,542 | Up 53%; approximately 60% of 2023 operating cash flow |
| Field-level cash margin (non-GAAP) | $7,863; $32.76/Boe | $11,285; $50.65/Boe | Down 30% in total |
| Total production | 658 MBoe/d | 610 MBoe/d | Up 8%; oil production of 320 MBbls/d was up 7% |
Lower commodity prices were the principal earnings headwind: 2023 average WTI was $77.62/Bbl versus $94.39/Bbl, and Henry Hub gas averaged $2.74/Mcf versus $6.65/Mcf. Higher volumes, including from the 2022 Eagle Ford and Williston acquisitions, partly offset price declines. Production costs totaled $2,928 million, up 5%; lease operating expense rose 33% to $1,428 million, with inflation and acquired assets contributing. The effective income tax rate was 18%, compared with 22% in 2022.
Cash, cash equivalents and restricted cash were $875 million at year-end, down from $1,454 million. Total debt was $6,155 million, including $483 million classified as short-term; fixed-rate debt averaged 5.7%. Devon reported $3.9 billion of liquidity, including approximately $900 million cash and $3.0 billion of available revolving credit. It repaid $242 million of senior notes at maturity. The credit facility covenant limit is a 65% debt-to-capitalization ratio; the reported ratio was 22%, and Devon was in compliance.
Material changes versus 2022
- Lower realized commodity prices reduced earnings; management attributed a $4.3 billion earnings decrease to realized prices. Total cash hedge settlements improved to a $47 million gain from a $1,356 million loss in 2022.
- Production increased 8%, supported by acquisitions completed in 2022 and ongoing development. Oil and gas sales volumes grew, but lower prices more than offset higher volumes.
- Capital expenditures rose by $1,341 million, while operating cash flow fell by $1,986 million.
- Cash dividends paid declined to $1,858 million from $3,379 million; Devon also repurchased $979 million of shares in 2023 and $718 million in 2022.
- Proved reserves ended at 1,817 MMBoe, nearly unchanged from 1,815 MMBoe. Extensions and discoveries added 322 MMBoe, offset principally by production of 240 MMBoe and a 78 MMBoe price-related reduction. Standardized measure fell to $19,313 million from $31,314 million.
Outlook, risks and unusual items
- For 2024, Devon budgeted capital expenditures of approximately $3.3–$3.6 billion, about 10% below 2023, with approximately 60% directed to the Delaware Basin. It expects moderated production growth, improved capital efficiency and material free cash flow at current commodity prices; these are forward-looking expectations, not guarantees.
- Management targeted returning approximately 70% of free cash flow to shareholders through fixed and variable dividends and share repurchases. In February 2024, Devon raised its fixed quarterly dividend to $0.22 per share and announced a $0.44-per-share first-quarter dividend, consisting of $0.22 fixed and $0.22 variable. The board retains discretion over future distributions.
- At year-end, approximately 30% of anticipated 2024 oil production and 20% of anticipated gas production were hedged. Hedging limits some downside exposure but can also constrain gains from higher prices. Management noted that commodity-price volatility, inflation and geopolitical events could affect results; it expected gas prices to remain consistent with 2023 levels and oil prices to face uncertainty.
- Principal risks include commodity-price volatility; reserve-estimate uncertainty and natural production declines; drilling, operating and midstream capacity risks; cost inflation; regulatory and environmental requirements, including methane rules and potential methane fees; climate-related market and physical risks; counterparty and cybersecurity risks; and debt and capital-allocation risks.
- EPA notices of violation concerning alleged historical air-emission and permit matters remain under discussion; management said resolution of each may result in a fine or penalty exceeding $300,000. The company also faces royalty litigation and climate-related lawsuits, among other contingencies, and denies the allegations in specified matters.
- Devon disputes a government order requiring decommissioning of two California offshore platforms. It recorded an increase in asset-retirement obligations in 2023 and said a third-party settlement payment is expected to offset potential liability; it continues to appeal the order. Total asset-retirement obligations were $665 million at year-end.
- Devon spent approximately $115 million on capital projects expected to reduce emissions in 2023 and anticipated similar spending in 2024. It reported no material cybersecurity incident known to it as of the filing date. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; reserves used in depletion were identified as a critical audit matter.
Important facts for investors to verify
- Confirm the sensitivity of cash flow, earnings and shareholder distributions to oil, gas and NGL prices, differentials, and the company’s hedge positions.
- Review the 2024 capital budget, expected production trajectory and the assumptions behind the target to return approximately 70% of free cash flow.
- Assess debt maturities, especially the $472 million due in 2024, and liquidity under lower-price or higher-cost scenarios.
- Examine reserve revisions, reserve replacement and the assumptions underlying the $19.3 billion standardized measure; this measure is a discounted reserve estimate, not a market valuation.
- Track outcomes and potential costs of the EPA matters, royalty and climate litigation, and the California platform decommissioning dispute.
- Reconcile non-GAAP measures such as core earnings, field-level cash margin and free cash flow with GAAP results; definitions may differ from those used by other companies.