Devon Energy Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Devon is an oil and gas producer with U.S. and Canadian operations and a midstream business through EnLink. Dollar amounts are in millions unless noted.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total operating revenues | $2,126 | $3,265 |
| Operating loss | $(3,500) | $(5,495) |
| Net loss attributable to Devon | $(3,056); $(6.44) per share | $(3,599); $(8.88) per share |
| Core loss attributable to Devon, non-GAAP | $(249); $(0.53) per share | Core earnings of $89; $0.22 per share |
| Operating cash flow | $149 | $1,648 |
| Capital expenditures, excluding acquisitions | $749 consolidated | $1,717 consolidated |
| Cash and cash equivalents | $1,635 | $2,310 at Dec. 31, 2015 |
| Total debt, including EnLink | $12,545 | $13,032 at Dec. 31, 2015 |
- Oil, gas and NGL sales were $825, down 38%; marketing and midstream revenue was $1,268, down 22%. Commodity sales were pressured primarily by lower prices: realized price per Boe fell 39% to $13.23. Total production was unchanged at 685 MBoe/d, while core production rose 4% to 581 MBoe/d.
- Asset impairments totaled $3,035, including $1,608 for U.S. oil and gas properties, $554 for Canadian properties and $873 of EnLink goodwill. The impairments were noncash and management said they did not affect operating cash flow or debt covenants.
- Net loss was partly offset by a $217 income tax benefit. A valuation allowance against U.S. deferred tax assets and nondeductible goodwill impairment reduced the tax benefit; the effective tax benefit rate was 6%.
- LOE declined 20% to $444, and LOE per Boe fell 21% to $7.13. Net G&A fell 23% to $194. Midstream operating profit increased 4% to $202.
- Cash from operations covered 20% of capital expenditures, excluding acquisitions, versus 96% in Q1 2015. Investing cash outflow was $2,359, including $1,627 for acquisitions. Financing cash flow was $1,509, supported in part by $1,469 of net common-stock offering proceeds.
- Current assets were $2,950 and current liabilities $2,600 at March 31. Devon reported $4.6 billion of liquidity: $1.6 billion of cash and $3.0 billion of available capacity under its senior credit facility.
- Total debt included $9,341 of Devon debt and $3,204 of EnLink debt; EnLink and General Partner debt is non-recourse to Devon. Devon had no commercial paper outstanding and was compliant with its 65% debt-to-capitalization covenant, reporting a ratio of 22.6%. Management said no major long-term debt maturities were due before December 2018.
Material changes and transactions
- Devon acquired about 80,000 net acres in the STACK for approximately $1.5 billion, funded with about $830 million cash and $659 million in common shares.
- EnLink acquired Anadarko Basin midstream assets for approximately $1.5 billion. It paid about $1.02 billion at closing; a further $500 million was due within a year, with an option to defer $250 million for up to 24 months.
- Devon issued 79 million shares in a February public offering for net proceeds of approximately $1.5 billion, in addition to shares issued for the STACK acquisition. Issued shares increased to 524 million from 418 million at year-end 2015.
- Devon reduced its quarterly dividend from $0.24 to $0.06 per share beginning Q2 2016. Q1 common dividends paid were $125 million.
- Devon reduced commercial paper borrowings by $626 million; consolidated total debt declined by $487 million from year-end. EnLink borrowings increased to help fund acquisitions.
- A February workforce reduction generated $234 million of employee-related costs; total restructuring and transaction costs were $247 million. About $67 million of the workforce costs reflected accelerated vesting of awards and was noncash.
Outlook, commentary and risks
- Management cited continued depressed commodity prices and said pricing was expected to remain challenging. Its stated priorities were cost control, capital efficiency, limiting production declines and protecting the balance sheet.
- Devon raised its 2016 full-year production target by 3%. It expected 2016 capital expenditures, excluding acquisitions and EnLink, of $1.2–$1.4 billion, including $900 million–$1.1 billion for oil and gas; spending was forecast to decline through the year.
- Management expected additional Q2 2016 full-cost impairments of approximately $2–$3 billion in aggregate, based on trailing prices and its short-term price outlook. The amount was described as difficult to measure.
- Devon targeted $2–$3 billion in proceeds from divestitures of non-core assets and expected to complete the program by year-end 2016. After quarter-end it agreed to sell Mississippian assets for $200 million; closing was expected in Q2. Management said proceeds would help reduce debt.
- Hedges provided partial downside protection. As of April 29, 2016, Devon reported coverage for the remaining nine months of 2016 of 73,000 Bbl/d of oil at $38.85 and 224,000 MMBtu/d of natural gas at $2.70. These are management’s summarized hedge figures; contracts include swaps, collars and sold calls.
- Moody’s lowered its senior unsecured rating from Baa1 to Ba2 with a negative outlook; S&P lowered Devon from BBB+ to BBB with a stable outlook, and Fitch affirmed BBB+ but moved its outlook to negative. The filing warns that downgrades could affect borrowing costs and access to debt markets, although it reports no rating-triggered acceleration clauses.
- Key risks include commodity-price volatility, reserve and impairment estimates, hedging and counterparty risks, indebtedness, regulatory and environmental matters, divestiture execution and midstream constraints. Management reported no material change to the risk factors in its 2015 Form 10-K and no material pending legal proceedings beyond routine matters.
Important facts for investors to verify
- Whether operating cash flow and liquidity can support capital spending, debt service and the EnLink acquisition installment obligations if commodity prices remain weak.
- The size and timing of Q2 impairments, and the underlying price and reserve assumptions that drive full-cost ceiling tests.
- Progress, closing conditions and net proceeds from the $2–$3 billion divestiture program, including the Mississippian sale and Access Pipeline process.
- Actual production, realized prices and hedge settlements versus management’s 2016 production and capital-spending outlook.
- The effects of the share issuance and dividend reduction on per-share results, shareholder returns and capital structure; also assess the non-GAAP core-loss reconciliation alongside GAAP results.
- EnLink’s debt, acquisition payment schedule and goodwill exposure; the filing identifies limited headroom above carrying value for its Texas reporting unit after impairment.