Devon Energy Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 4, 2015. Unless stated otherwise, financial amounts are in millions of dollars. Devon is an oil and gas producer with U.S. and Canadian exploration and production operations and a midstream investment in EnLink.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total operating revenues | $3,601 | $5,336 | $10,259 | $13,571 |
| Operating income (loss) | $(5,444) | $1,774 | $(15,302) | $4,238 |
| Net earnings (loss) attributable to Devon | $(3,507) | $1,016 | $(9,922) | $2,015 |
| Diluted earnings (loss) per share | $(8.64) | $2.47 | $(24.45) | $4.91 |
| Operating cash flow | $1,553 | $1,559 | $4,302 | $5,018 |
- Q3 and nine-month non-GAAP core earnings attributable to Devon were $316 million and $725 million, respectively, down 43% and 57% year over year; core EPS was $0.76 and $1.76.
- Q3 oil, gas and NGL sales were $1,338 million, down from $2,588 million. Derivative gains recorded in revenues were $414 million for the quarter and $426 million year to date; these include fair-value changes as well as settlements.
- Production averaged 680 thousand Boe/d in both Q3 and the nine-month period, up 1% year over year for each period. Realized price before hedge settlements fell 49% in Q3 to $21.37/Boe and 46% year to date to $22.98/Boe.
- Lease operating expense was $510 million in Q3 and $1,625 million year to date; expense per Boe declined 14% and 8%, respectively. Net G&A rose 2% in Q3 and 11% year to date.
- Cash and equivalents were $1,787 million at September 30, 2015, versus $1,480 million at year-end 2014. Current assets were $4,298 million and current liabilities $3,501 million.
- Total debt was $11,900 million, compared with $11,262 million at year-end 2014; cash less total debt was approximately $10,113 million. Devon had no commercial-paper borrowings and no borrowings under its $3.0 billion revolving facility. Its debt-to-capitalization covenant ratio was 21.9%, against a 65% maximum. EnLink debt is non-recourse to Devon.
- Nine-month capital expenditures were $4,229 million, with a further $530 million for acquisitions of property, equipment and businesses. Cash from operations covered capital expenditures, excluding acquisitions, according to management.
Material changes and unusual items
- Devon recorded $5,851 million of impairments in Q3 and $15,479 million year to date. The nine-month total included $14,340 million for U.S. oil and gas properties, $336 million for Canadian oil and gas properties, and $799 million for EnLink goodwill and intangible assets. The oil and gas charges reflected lower commodity-price assumptions in the full-cost ceiling tests. The impairments were noncash.
- Commodity-price declines drove the deterioration: Q3 realized oil prices before hedges fell 54%, gas 37%, and NGLs 66% year over year. Management cited lower oil, gas and NGL prices as the principal pressure on earnings and cash flow.
- EnLink’s impairment reflected sustained energy-sector weakness and a decline in its unit price. Devon’s ownership interest in EnLink fell from 49% at December 31, 2014 to 29% at September 30, 2015, excluding the General Partner interest, following unit sales and other transactions.
- Compared with 2014, the nine-month period had no comparable impairments and did not include the prior-year $1.1 billion gain on Canadian asset sales. 2014 results also reflected major asset divestitures and related tax items.
Outlook, risks and contingencies
- Management expected commodity prices to remain challenged into Q4 2015 and 2016, and warned that the expiry of a significant portion of 2015 hedges in Q4 would pressure earnings and core earnings.
- Approximately half of 2015 oil and gas production was hedged at about $90 per barrel and $4 per Mcf; hedge settlements generated $1.7 billion of cash flow through the first nine months. Management estimated 2015 hedges would generate about $2 billion for the full year. 2016 production was largely unhedged; if prices remained at 2015 levels and favorable hedges were unavailable, management estimated 2016 operating cash flow could be approximately $2 billion lower.
- Assuming its pricing expectations, Devon expected low-single-digit oil production growth in 2016 and an exploration and production capital budget of $2.0–$2.5 billion.
- Management expected further Q4 2015 full-cost impairments, estimated at approximately $5 billion in aggregate; the U.S. charge was expected to be below Q3’s $4.7 billion, while the Canadian charge was expected to exceed Q3’s $336 million. Management said these charges would not affect cash flow or liquidity.
- Key risks include commodity-price volatility, reserve-estimation uncertainty, production and drilling execution, and general market, regulatory and political conditions. Devon reported no material changes to the risk factors in its 2014 Form 10-K. It said routine legal matters, including royalty-underpayment claims and environmental remediation, were not expected to be material after recorded accruals; actual outcomes could differ.
- Management reported effective disclosure controls as of September 30, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether future commodity prices, hedge coverage and hedge settlements support the stated 2016 cash-flow and production outlook.
- The scale and timing of subsequent full-cost impairments, and the assumptions underlying reserve values and EnLink valuations.
- Cash-flow coverage of capital spending, debt service and distributions, particularly as 2015 hedges expire.
- Debt maturities, EnLink’s non-recourse debt and facility availability, and continued compliance with financial covenants.
- The basis and exclusions in Devon’s non-GAAP core earnings measures when comparing performance across periods.