Devon Energy Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in millions of dollars except per-share, production and per-unit data. Devon completed its all-stock merger with WPX Energy on January 7, 2021; accordingly, 2021 results include WPX for nearly all of the period, while 2020 comparisons largely exclude it and are not directly comparable.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $2,417 | $394 | $4,467 | $2,481 |
| Net earnings (loss) attributable to Devon | $256 | $(670) | $469 | $(2,486) |
| Diluted earnings (loss) per share | $0.38 | $(1.78) | $0.70 | $(6.60) |
| Cash from continuing operations | $1,093 | $150 | $1,685 | $679 |
| Capital expenditures | $504 | $307 | $1,003 | $732 |
- Production averaged 567 thousand Boe/d in Q2, up 14% from Q1 2021 and 3% above plan. Q2 field-level cash margin, a company-defined non-GAAP measure, was $1.641 billion, or $31.79/Boe, versus $1.299 billion, or $28.95/Boe, in Q1.
- Q2 combined realized price was $41.75/Boe before hedge settlements and $34.64/Boe after settlements. Commodity derivative cash settlements were a $367 million outflow in Q2 and a $599 million outflow for the first half.
- At June 30, cash, cash equivalents and restricted cash were $1.539 billion; management reported $4.5 billion of total liquidity, including $3.0 billion available under the revolving credit facility. The company had $6.502 billion of long-term debt, no revolver borrowings, and no debt maturities until 2023. Its debt-to-capitalization ratio under the credit agreement was 25.6%, within the 65% covenant limit.
- Current assets were $3.076 billion and current liabilities were $3.072 billion at June 30. The balance sheet included $191 million of restricted cash, primarily for retained obligations.
- Cash from operations less reported capital expenditures was approximately $589 million in Q2 and $682 million for the first half; these simple differences are not the company’s defined free-cash-flow measure.
Material changes and notable items
- Year-over-year revenue and earnings comparisons reflect the WPX merger as well as a sharp recovery in commodity prices from 2020. For the first half, average production was 533 thousand Boe/d, up 58% year over year; management attributed much of the increase to WPX assets and additional Delaware Basin activity.
- Devon reported a $2.486 billion attributable loss for the first half of 2020, including $2.666 billion of asset impairments, compared with first-half 2021 attributable earnings of $469 million. No proved-asset impairments were recorded in the first half of 2021.
- Q2 2021 earnings included a $336 million non-cash derivative valuation loss and a $65 million increase in the estimated value of the Barnett Shale divestiture earnout. The earnout asset was valued at $135 million at June 30. Mark-to-market derivative changes can make reported earnings diverge from cash settlements.
- The merger issued approximately 290 million Devon shares and was recorded using acquisition accounting. The preliminary purchase-price allocation included $5.432 billion of consideration and remains subject to change for up to one year after closing.
- Merger-related restructuring and transaction costs totaled $212 million in the first half, including $166 million of restructuring costs. Devon said most related cash outflows had been paid by June 30.
- Debt increased from $4.298 billion at year-end 2020 to $6.502 billion at June 30, reflecting assumed WPX debt and subsequent repayments. Devon redeemed approximately $1.2 billion of senior notes in the first half and reported a $30 million gain on early debt retirement.
Outlook, risks and contingencies
- Management forecast Q3 production of approximately 566–594 thousand Boe/d and 2021 capital expenditures of $1.7–$2.0 billion. The remaining 2021 exploration and development budget was estimated at $700–$900 million.
- Management expected approximately $600 million of annualized merger-related cost savings by year-end 2021. It described a maintenance-capital approach and said it did not intend to add growth projects until market fundamentals improve, excess inventory clears and curtailed OPEC+ volumes are absorbed.
- In August 2021, Devon announced a $0.49-per-share Q3 dividend: $0.11 fixed and $0.38 variable. The variable dividend depends on cash generation and remains subject to board discretion.
- Management cited oil, gas and NGL price volatility, COVID-19 and variants, OPEC+ decisions, hedging exposure, counterparty credit, regulation and climate-related risks, midstream constraints, and merger integration as significant uncertainties. A 10% change in relevant commodity forward curves would have changed the net derivative position by approximately $335 million.
- Devon recorded a $129 million estimated liability for a performance guarantee tied to gathering and processing commitments associated with assets WPX sold in 2018 ($95 million long-term and $34 million current).
- Legal and environmental matters include royalty disputes, climate-related proceedings, Louisiana coastal claims, and a government order concerning California offshore platforms that Devon disputes and has appealed. The company said it could not predict outcomes; management did not believe current matters, after recorded accruals, were likely to be material to financial position or results.
- The filing disclosed two EPA notices of violation concerning alleged historical air-emission or permit violations. Management said resolution of each may result in a fine or penalty exceeding $300,000; outcomes remain uncertain.
Important facts for investors to verify
- How much of reported earnings and cash generation is attributable to commodity prices, merger-related volume growth and non-cash hedge valuation movements.
- Progress toward the $600 million annualized cost-savings target and the expected $1.7–$2.0 billion full-year capital budget.
- Debt reduction, the assumptions behind the $4.5 billion liquidity figure, and the company’s ability to sustain fixed and variable dividends through commodity-price changes.
- Final WPX purchase accounting, including valuation assumptions for oil and gas properties and acquired contracts, and whether those assumptions affect future DD&A or impairments.
- Developments in the $129 million performance-guarantee exposure, EPA matters, offshore decommissioning dispute and other disclosed legal and environmental contingencies.