Devon Energy Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Dollar amounts are in millions except per-share and per-unit data. Devon is an oil and gas producer transitioning toward a U.S.-focused business; it announced plans to separate its Canadian and Barnett Shale assets.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $1,501 | $2,198 |
| Upstream revenue | $710 | $1,319 |
| Net loss from continuing operations | $(317) | $(211) |
| Net loss attributable to Devon | $(317) | $(197) |
| Diluted loss per share | $(0.74) | $(0.38) total; $(0.41) continuing operations |
| Operating cash flow from continuing operations | $377 | $610 |
| Capital expenditures, including acquisitions | $559 cash outflow | $657 cash outflow |
| Cash and cash equivalents at period end | $1,327 | $2,414 at Dec. 31, 2018 |
| Total debt at period end | $5,786 | $5,947 at Dec. 31, 2018 |
Q1 2019 continuing-operations revenue was down about 32% year over year. The company recorded a $709 million loss on commodity derivatives, primarily from fair-value changes; these losses materially affected reported upstream revenue and earnings. DD&A rose to $459 million from $399 million. Net financing costs fell to $73 million from $387 million, which included $312 million of prior-year debt-retirement charges.
Operating cash flow less reported capital expenditures and acquisitions was approximately $(182) million. Management said working-capital changes reduced operating cash flow by $302 million, primarily reflecting timing effects following widened Canadian differentials in late 2018; excluding that impact, operating cash flow before working-capital changes covered capital expenditures.
Operations, liquidity and capital allocation
- Total production averaged 529 thousand Boe/d, down 3% year over year. “New Devon” production averaged 308 thousand Boe/d, up 23% year over year; Delaware Basin and Powder River Basin growth supported the increase.
- Unhedged realized price was $29.83/Boe, up 8% year over year; realized price after cash hedge settlements was $29.01/Boe. Commodity price and basis exposure remain significant.
- Cash, cash equivalents and restricted cash totaled $1,355 million at quarter-end. The $3.0 billion revolving facility had no borrowings and $52 million of letters of credit; management reported $2.9 billion available. Current assets were $2,703 million and current liabilities $1,968 million.
- Debt was primarily fixed-rate, with a reported average rate of 5.4%; no debt maturities were scheduled until 2021. Devon reported covenant compliance and a 21.6% debt-to-capitalization ratio under its credit agreement.
- Devon repaid $162 million of notes at maturity and repurchased 36.1 million shares for approximately $1.0 billion during the quarter. It had completed $4.0 billion of its expanded $5.0 billion repurchase authorization. The quarterly dividend was increased to $0.09 per share beginning in Q2 2019.
Outlook, management commentary and risks
- Devon expected 2019 exploration and development spending of $1.3–$1.5 billion, excluding Canadian and Barnett Shale assets, and anticipated separating those assets by year-end. Proceeds were intended primarily for debt repayment; the form and proceeds of the separations were not established in the filing.
- Management described a cost-reduction program targeting $780 million of annualized reductions over three years, with roughly 70% expected by year-end 2019. It also reported initiatives completed that were expected to yield $110 million in annualized savings and a target of $200 million in G&A savings by year-end. Further restructuring costs were anticipated.
- Approximately 60% of expected oil and gas production for the remainder of 2019 was hedged, according to management. A 10% change in commodity forward curves was estimated to change derivative net positions by about $230 million.
- Key risks include commodity-price volatility, reserve-estimation uncertainty, hedging and counterparty exposure, regulatory and environmental requirements, midstream constraints, indebtedness, and execution of planned asset separations. Ratings were BBB negative (S&P), BBB+ negative (Fitch), and Ba1 positive (Moody’s).
- Devon reported no material pending legal proceedings, but disclosed royalty-related litigation and Louisiana coastal environmental claims. An EPA settlement relating to alleged Clean Air Act violations at a Wyoming gas plant included a $150,000 penalty; a separate state consent decree and penalty were expected, subject to approval.
- Unusual items included adoption of lease accounting, which added $365 million of right-of-use assets and $365 million of lease liabilities at quarter-end, and an $87 million reduction in asset-retirement obligations, primarily from revised cost estimates and retirement dates.
Most important facts for investors to verify
- Whether the Canadian and Barnett Shale separations close on the expected timetable, on what terms, and with what net proceeds and tax effects.
- Whether cost-reduction targets are achieved, including their timing, cash costs, and distinction between total cost reductions and G&A savings.
- Whether production growth and planned capital spending generate sustainable operating cash flow amid commodity-price, basis, and hedging volatility.
- How much of the reported derivative loss reflects noncash fair-value movements versus realized cash settlements.
- Whether share repurchases, dividends, and any separation proceeds remain consistent with the stated debt and liquidity objectives.
- Potential outcomes and financial exposure from royalty, environmental, and other contingencies; management states it does not expect material exposure after recorded accruals.