Devon Energy Corporation — 2016 Form 10-K
Business context and reporting period
Devon is an independent oil and gas producer operating in the U.S. and Canada, and controls the EnLink midstream business. This annual report covers the fiscal year ended December 31, 2016; fourth-quarter figures are also disclosed. The year was marked by low commodity prices, portfolio divestitures, cost reductions and increased emphasis on the STACK and Delaware Basin.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenues and other | $12.197 billion | $13.145 billion |
| Oil, gas and NGL sales | $4.182 billion | $5.382 billion |
| Net loss attributable to Devon | $3.302 billion; $6.52 per share | $14.454 billion; $35.55 per share |
| Operating cash flow | $1.746 billion | $5.373 billion |
| Capital expenditures, including EnLink | $2.330 billion | $5.308 billion |
| Cash and cash equivalents | $1.959 billion | $2.310 billion |
| Total consolidated debt | $10.154 billion | $13.032 billion |
| Average production | 611 MBoe/d | 680 MBoe/d |
| Proved reserves | 2.058 billion Boe | 2.182 billion Boe |
- Reported operating loss was $2.895 billion. Results included $4.975 billion of noncash asset impairments, $1.893 billion of asset-disposition gains and $267 million of restructuring and transaction costs. Devon’s non-GAAP core loss attributable to Devon was $38 million, or $0.08 per share.
- Oil, gas and NGL sales fell 22%, driven by lower prices and reduced volumes. Realized price excluding hedges declined 14% to $18.72/Boe. Production fell 10% overall; retained-asset production declined 4%, while STACK production rose 37%.
- Lease operating expenses fell 25% to $1.582 billion; LOE per Boe declined 17% to $7.08. Net G&A fell 25% to $645 million. The filing attributes savings to cost initiatives, divestitures and workforce reductions.
- Operating cash flow fell 68%, largely because favorable commodity hedges that contributed $2.4 billion of cash settlements in 2015 mostly expired, alongside lower commodity prices. Cash flow was below total capital expenditures, excluding acquisitions.
- Devon reported $10.154 billion of consolidated debt, including approximately $3.3 billion of EnLink debt that is non-recourse to Devon. Devon’s own debt was approximately $6.859 billion. The company reduced debt through asset-sale proceeds and repurchased or redeemed $2.1 billion of securities, incurring $269 million of early-retirement costs, including $265 million cash costs.
- Devon had a $3.0 billion undrawn Senior Credit Facility and reported approximately $5 billion of liquidity at year-end. It was in compliance with its credit covenant; the agreement-defined debt-to-capitalization ratio was 18.7%. Approximately $644 million of cash was held by foreign subsidiaries.
- Year-end proved reserves were down 6% from 2015. Devon said U.S. operations replaced approximately 175% of 2016 production on a retained-asset basis. The standardized measure of discounted future net cash flows declined to $4.198 billion from $6.688 billion; this SEC measure uses prescribed pricing and a 10% discount rate and is not management’s estimate of fair value.
- Fourth-quarter 2016 revenue and other was $3.350 billion; net earnings attributable to Devon were $331 million, or $0.63 per share. The quarter included a $540 million gain on the Access Pipeline sale and approximately $0.1 billion of asset impairments.
Material changes, outlook and risks
- Devon raised $1.5 billion net in a February 2016 common-stock offering and issued equity as part of its $1.5 billion STACK acquisition. These transactions increased the share count; weighted-average basic shares rose to 513 million from 412 million.
- It sold non-core U.S. upstream assets and its 50% interest in the Access Pipeline for approximately $3.1 billion in 2016. The proceeds primarily supported debt repayment and investment in core plays. The Access sale also created a 25-year transportation commitment with market-based tolls.
- The quarterly dividend was cut from $0.24 to $0.06 per share starting in the second quarter of 2016; annual dividends were $0.42 per share versus $0.96 in 2015.
- For 2017, Devon expected exploration and development capital of $2.0–$2.3 billion and total Devon capital expenditures, excluding EnLink, of $2.3–$2.7 billion. Management anticipated an approximately 80% increase in exploration and development spending and targeted 15% U.S. oil production growth. These are forward-looking targets, not guarantees.
- Planned 2017 investment included approximately $750 million in the STACK and $700 million in the Delaware Basin, with up to 10 operated rigs in each by year-end; management also cited planned spending in Heavy Oil, Eagle Ford and Rockies Oil. It expected to manage activity within cash flow and forecast substantial cash-flow expansion over the next two years.
- Entering 2017, approximately 50% of oil and 45% of gas production was hedged. Commodity-price volatility, reserve-estimation uncertainty, hedge exposure and counterparty risk remain material. Other risks include debt and credit-rating pressure, environmental and regulatory requirements, pipeline capacity, induced-seismicity claims, cybersecurity and acquisition/divestiture execution.
- The company disclosed EPA matters involving alleged Clean Air Act compliance issues at a Wyoming gas plant and an information request concerning Eagle Ford air emissions; either could result in a penalty exceeding $100,000, but outcomes were uncertain. Devon also reported defending against third-party lawsuits alleging induced seismic activity. Management said no material pending legal proceedings were known and did not expect environmental remediation exposure to be material.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Separate the effect of impairment charges and divestiture gains from ongoing operating performance, and review the reconciliation and limitations of non-GAAP core earnings.
- Assess whether the 2017 capital plan, U.S. oil-growth target and expected cash-flow improvement were achieved, particularly in the STACK and Delaware Basin.
- Review debt maturities, the distinction between Devon and non-recourse EnLink debt, liquidity availability and any effect of credit ratings on collateral requirements or financing costs.
- Check hedge volumes, prices and settlements against realized commodity prices, and evaluate exposure as hedges roll off.
- Track reserve revisions, proved undeveloped reserve development plans—especially Jackfish—and the sensitivity of reserve values to commodity prices.
- Monitor the EPA matters, seismicity litigation, Access Pipeline transportation commitments and other environmental or regulatory contingencies.