Devon Energy Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; financial statements are unaudited. Devon is an oil and gas producer operating in the U.S. and Canada, with marketing and midstream operations. Unless noted otherwise, dollar amounts are in millions.
Financial performance
- Third quarter: Revenue was $2,720, up 46% from $1,865 a year earlier. Net earnings were $429, or $1.05 diluted per share, compared with a net loss of $719, or $1.80 per share, in Q3 2012. The prior-year quarter included $1,128 of asset impairments.
- First nine months: Revenue was $7,783, up 12% from $6,921. Devon reported a net loss of $227, or $0.57 per diluted share, versus earnings of $151, or $0.37 per share, in 2012. The 2013 result included $1,960 of asset impairments, $1,343 after tax.
- Adjusted results (non-GAAP): Q3 adjusted earnings were $526, or $1.29 per share, up 48% and 47%, respectively. Nine-month adjusted earnings were $1,287, or $3.16 per share, up 28% and 27%. These measures exclude specified items, including impairments and derivative effects.
- Production and realized prices: Q3 production averaged 690.8 thousand Boe/day, up 2%; nine-month production averaged 691.8 thousand Boe/day, up 1%. Realized price per Boe, before derivative settlements, rose 32% to $36.84 in Q3 and 20% to $33.71 for nine months. Oil and NGL volumes increased while natural gas volumes declined.
- Operating costs and margin: Operating margin was $23.74/Boe in Q3, up 22%, and $21.31/Boe for nine months, up 11%. Lease operating expense rose 15% to $9.45/Boe in Q3 and 8% to $8.92/Boe for nine months. Midstream operating profit increased 25% to $137 in Q3 and 32% to $383 for nine months.
- Cash flow and investment: Operating cash flow was $1,601 in Q3 and $3,999 for nine months, compared with $1,361 and $3,787, respectively. Nine-month capital expenditures were $5,219, down 16% from $6,228; operating cash flow funded about 80% of cash capital expenditures. Cash and cash equivalents were $4,320 at quarter-end, down from $4,637 at year-end 2012.
- Balance sheet and liquidity: Total debt was $10,068 at September 30, comprising $2,112 short-term and $7,956 long-term, versus $11,644 at December 31, 2012. Devon had $1,600 of commercial paper outstanding and no borrowings under its $3.0 billion revolving facility; available facility capacity was $2.9 billion, net of letters of credit. Its debt-to-capitalization ratio under the credit agreement was 22.4%, below the 65% covenant limit. Current assets were $6,315 and current liabilities $4,782.
Changes, outlook and risks
- Management attributed improved adjusted earnings and cash generation mainly to higher gas prices, increased oil volumes and realizations, and production growth. Lower capital spending also narrowed the cash flow deficit.
- Nine-month impairments of $1,960 reflected lower full-cost ceiling values, primarily due to lower trailing average prices for oil, bitumen and NGLs. Devon cautioned that further price declines or other factors could lead to additional impairments.
- Devon repatriated $2.0 billion of foreign cash in Q2 and said it expected to repatriate an additional $2 billion in a tax-efficient manner around year-end 2013. Approximately $4.1 billion of quarter-end cash was held by foreign subsidiaries. Repatriation of certain other foreign earnings could trigger U.S. and foreign withholding taxes.
- Commodity prices and production are key sensitivities. Devon reported open oil, gas and NGL derivatives covering portions of production through 2015; a 10% change in related forward curves could materially change derivative net asset positions. Derivatives also produced a net loss of $141 in Q3 and $95 for the first nine months, compared with losses of $295 and gains of $515 in the respective 2012 periods.
- On October 21, 2013, Devon announced a proposed combination of substantially all its U.S. midstream assets with Crosstex assets. Devon planned to contribute its midstream subsidiary and $100 cash in exchange for controlling interests; completion was subject to Crosstex shareholder approval.
- The filing provides no specific production, earnings or capital-spending guidance. Management said available liquidity sources were expected to be adequate for future capital expenditures, debt repayments and other commitments. Forward-looking statements remain subject to commodity-market, regulatory, economic and other risks.
- Devon reported that its disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter. Management said there were no material changes to previously disclosed risk factors. Legal matters included royalty and environmental claims; management did not expect them to be material after recorded accruals. A previously recorded $133 liability and matching receivable related to the Chief redemption litigation were reversed after settlement, with settlement payments funded by the indemnifying party.
Important facts for investors to verify
- How much of the nine-month GAAP loss and earnings volatility reflects the $1.96 billion impairment charge and noncash derivative fair-value movements, rather than ongoing operations.
- Whether production growth and higher realized prices can offset rising lease operating costs, declining gas volumes and exposure to commodity-price changes.
- The timing, tax consequences and use of the planned additional $2 billion cash repatriation, and the extent to which cash held abroad is available for U.S. needs.
- Progress and final terms of the proposed Crosstex midstream transaction, including approval, ownership and the effect on Devon’s cash flows and retained midstream exposure.
- Capital spending, debt and liquidity trends, including commercial-paper refinancing needs, and whether future cash generation covers investment and other commitments.