Devon Energy Corporation (DVN) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Devon is a U.S. onshore oil and natural gas producer operating across five core areas.
Key financial and operating metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $3,836 | $5,432 | $11,113 | $14,870 |
| Net earnings attributable to Devon | $910 | $1,893 | $2,595 | $4,814 |
| Diluted earnings per share | $1.42 | $2.88 | $4.03 | $7.28 |
| Operating cash flow | $1,725 | $2,104 | $4,807 | $6,619 |
| Capital expenditures | $882 | $628 | $2,973 | $1,738 |
| EBITDAX (non-GAAP) | $2,025 | $2,488 | $5,646 | $7,456 |
| Field-level cash margin (non-GAAP) | $2,125 | $2,933 | $5,885 | $8,861 |
Q3 oil production averaged 321 thousand barrels per day, up 9% year over year; combined production averaged 665 thousand Boe per day. Q3 realized prices including hedges were $79.81/Bbl for oil, $2.01/Mcf for gas and $20.72/Bbl for NGLs. Combined realized price including hedges was $46.92/Boe.
At September 30, cash, cash equivalents and restricted cash were $761, including $107 of restricted cash. Total debt was $6,162, comprising $487 short-term and $5,675 long-term debt. Devon reported $3.8 billion of liquidity, including approximately $0.8 billion of cash, and $3.0 billion of available revolving credit capacity. The company had no credit-facility or commercial-paper borrowings and was within its debt-to-capitalization covenant. Nine-month operating cash flow exceeded capital expenditures by $1,834; this is a simple arithmetic difference, not a company-defined free-cash-flow measure.
Changes versus comparable periods
- Q3 revenue fell about 29% and Devon-attributable earnings fell about 52% year over year. Management attributed the nine-month earnings decline principally to lower realized commodity prices: realized prices including hedges fell 14% for oil, 57% for gas and 45% for NGLs year over year.
- Higher production partially offset weaker prices: nine-month combined production rose 9%, mainly reflecting the 2022 Eagle Ford and Williston Basin acquisitions and new well activity. Nine-month oil, gas and NGL sales nevertheless declined to $8,054 from $10,943.
- Q3 operating cash flow decreased to $1,725 from $2,104 year over year, while capital expenditures increased to $882 from $628. Nine-month capital spending was approximately 62% of operating cash flow.
- Total debt declined to $6,162 from $6,440 at year-end 2022, including repayment at maturity of $242 of 8.25% notes in August. Cash and restricted cash declined to $761 from $1,454.
- Nine-month dividends paid were $1,370, down from $2,504 in 2022; share repurchases were $745 versus $661. Devon had completed about 68% of its $3.0 billion repurchase authorization by September 30.
Outlook, commentary, risks and unusual items
- Management emphasized capital discipline, moderated production growth, spending within cash flow, maintaining low leverage and returning cash to shareholders. It expected approximately $900 million of capital expenditures for the remainder of 2023 and stated that current commodity prices and hedge positions supported its investment priorities.
- Management warned that elevated cost inflation could continue to pressure margins into 2024, while expressing the expectation of material free cash flow at current commodity prices. The filing does not provide a clear full-year production or earnings guidance figure in the supplied text.
- At September 30, Devon had hedged approximately 35% of anticipated remaining-2023 oil production and 30% of gas production; for 2024, approximately 30% of oil and 20% of gas production. A 10% change in relevant forward curves would change the net value of commodity derivative positions by approximately $290 million.
- In November 2023, Devon announced a fourth-quarter dividend of $0.77 per share, comprising a $0.20 fixed and $0.57 variable dividend, expected to total approximately $492 million. Future dividends remain at the board’s discretion and depend on results and cash requirements.
- Devon recorded additional asset-retirement obligations related to a government order concerning two California offshore platforms. Devon disputes responsibility and is appealing; it said a third-party settlement payment expected in Q4 2023 is believed to offset any potential liability. The amount of any ultimate obligation remains uncertain.
- Other exposures include royalty-underpayment lawsuits and environmental and climate-related proceedings, including Louisiana coastal claims. Management says it intends to defend the matters and does not believe the legal actions, after recorded accruals, are likely to materially affect financial position or results; actual outcomes may differ.
- Devon believes it is subject to the Inflation Reduction Act’s 15% corporate alternative minimum tax and continues to assess potential incremental cash taxes. Tax credits helped keep the reported effective tax rate below 15% in Q3.
Most important facts for investors to verify
- Whether commodity prices, basis differentials and hedge settlements support cash flow and margins; review the disclosed hedge volumes, prices and derivative sensitivity.
- Whether production growth and capital spending remain consistent with management’s capital-discipline objectives and the approximately $900 million remaining-2023 spending outlook.
- How cash returns, including the announced variable dividend and remaining share-repurchase authorization, compare with operating cash flow and liquidity needs.
- The timing and resolution of the California offshore decommissioning appeal, expected settlement collection and resulting asset-retirement liability.
- The potential cash-tax effect of the corporate alternative minimum tax and the continued availability of tax credits.