Devon Energy Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Devon is an oil and gas producer, with U.S. and Canadian reporting segments. Financial figures are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $2,497 | $2,147 |
| Continuing-operations earnings | $414; $1.03 diluted EPS | $389; $0.91 diluted EPS |
| Net earnings | $393; $0.97 diluted EPS | $416; $0.97 diluted EPS |
| Operating cash flow, continuing operations | $1,000 | $1,266 |
| Capital expenditures | $2,088 cash paid | $1,827 |
| Cash and cash equivalents | $5,828 | $5,555 at Dec. 31, 2011 |
| Short-term investments | $1,282 | $1,503 at Dec. 31, 2011 |
| Short-term and long-term debt | $10,839 total | $9,780 at Dec. 31, 2011 |
- Revenue rose about 16%, while continuing-operations earnings increased about 6%. Net earnings fell because discontinued operations recorded a $21 million after-tax loss, versus $27 million of earnings in Q1 2011.
- Oil, gas and NGL production increased 10% to 694 MBoe/d. Oil and NGL volumes rose 26% and 21%, respectively; gas volumes increased 4%.
- Combined realized price before hedges declined 8% to $30.33/Boe. Oil prices rose 8%, but gas and NGL prices fell 35% and 5%, respectively. Derivatives contributed a $145 million net gain, compared with a $168 million net loss in Q1 2011.
- Operating cost pressures included lease operating expense of $514 million, up 21% (to $8.15/Boe, up 9%); DD&A of $680 million, up 34%; and net G&A of $168 million, up 30%. Marketing and midstream operating profit was $112 million, down 7%.
- Net cash from operating activities was $1,026 million, compared with $1,260 million. Cash declined by $321 million from working-capital changes. Capital spending exceeded continuing-operations operating cash flow; net borrowings helped fund the difference.
- Cash plus short-term investments totaled approximately $7.1 billion at quarter-end, but Devon said most of these funds were held by foreign subsidiaries and were not expected to be repatriated. The current ratio and a company-wide liquidity runway are not stated.
- Debt included $4.1 billion of commercial paper and $750 million drawn under the $2.65 billion senior revolving credit facility. The reported debt-to-capitalization ratio was 24.4%, below the 65% covenant limit. Devon reported $1.5 billion of facility capacity as of April 18.
Material changes, outlook and management commentary
- Management attributed earnings support to record production from development areas including the Permian, Jackfish, Cana-Woodford and Barnett, despite depressed natural gas prices. Operating cash flow was pressured by lower commodity prices and higher expenses.
- Devon increased its estimated 2012 capital spending by $1.0 billion after expanding exploration and leasehold activity. The filing gives the prior estimate as $6.2–$6.8 billion but does not state a revised range.
- In April 2012, Devon closed a $2.5 billion Sinopec joint venture: Sinopec paid approximately $900 million for a 33.3% interest in five U.S. exploration plays and committed to fund approximately $1.6 billion of Devon’s future costs. This is a subsequent event, not Q1 cash flow.
- Devon completed its offshore divestiture program with the March sale of Angola operations for $71 million. Aggregate divestiture proceeds were $10.1 billion, or approximately $8 billion after tax assuming repatriation of a substantial portion under current tax law. The Angola sale generated a $21 million after-tax discontinued-operations loss.
- Q1 asset-retirement obligations increased by $399 million from revisions, primarily reflecting higher abandonment-cost estimates; the reported long-term balance rose to $1.944 billion. Verify the resulting effects on future cash obligations and estimates.
- Commodity-price hedges covered portions of production through 2014. A 10% increase in forward curves would reduce the net value of oil derivatives by $397 million and gas derivatives by $86 million; a 10% decrease would increase their values by $371 million and $85 million, respectively. Devon said it did not use derivatives for speculative trading.
- A court judgment included $133 million against Devon in a dispute related to the 2006 Chief acquisition. Devon was appealing and recorded an offsetting $133 million indemnification receivable; it said it did not expect net exposure, subject to the appeal and indemnification recovery.
- Management identified commodity-price, supply-and-demand, exploration, political and regulatory, and broader economic and market risks. The filing reported no material change in previously disclosed risk factors; management said disclosure controls were effective and no material internal-control change occurred.
Important facts for investors to verify
- How the higher 2012 capital-spending plan, exploration commitments and Sinopec funding carry affect cash needs and production growth.
- Whether production growth and product mix can offset low natural-gas prices, lower realized prices overall, and rising unit costs.
- The availability and location of cash and investments, U.S. borrowing needs, commercial-paper refinancing exposure and debt covenant headroom.
- The basis and future cash implications of the $399 million asset-retirement-obligation revision.
- The outcome of the Chief litigation appeal and collectability of the recorded indemnification receivable.
- The filing’s operating-cash-flow comparison is inconsistent: the overview says a 19% decrease, while the reported $1,000 million versus $1,266 million implies about 21%; verify the intended percentage.