Business context and reporting period
Devon Energy Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2009. Devon explores and produces oil and natural gas and operates marketing and midstream businesses across Domestic, Canada and International segments. Amounts are in U.S. dollars.
Financial and operating performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Total revenue | $2.090B | $3.548B | $4.118B | $6.523B |
| Net earnings (loss) | $314M | $1.301B | ($3.645B) | $2.050B |
| Diluted earnings (loss) per share | $0.70 | $2.88 | ($8.21) | $4.55 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.077B total; $2.070B continuing operations | $5.186B total; $5.080B continuing operations |
| Cash capital expenditures | Not stated for quarter | Not stated for quarter | $3.201B | $3.870B |
- Production rose 12% in Q2 and 9% in the first half to 65 MMBoe and 127 MMBoe, respectively. However, realized oil, gas and NGL price per Boe, excluding hedges, fell 62% in Q2 and 59% in the first half.
- Q2 oil, gas and NGL sales were $1.718B, down 58%; higher volumes added $514M, but lower prices reduced sales by $2.840B. First-half oil, gas and NGL sales declined 56% to $3.221B.
- Q2 net earnings included $297M from continuing operations and $17M from discontinued operations. First-half results included a $6.516B pretax noncash full-cost impairment of oil and gas properties, principally due to lower natural-gas prices; the filing reports an after-tax impact of about $4.2B.
- Marketing and midstream operating profit fell 39% to $125M in Q2 and 29% to $267M in the first half. Production and operating expenses per Boe declined 30% to $8.51 in Q2 and 24% to $8.84 in the first half.
- Net gains on oil and gas derivatives were $13M in Q2 and $167M in the first half, compared with losses of $1.215B and $2.003B in the comparable 2008 periods. 2009 cash settlements provided $114M in Q2 and $232M in the first half.
Financial position, liquidity and material changes
- At June 30, 2009, cash and cash equivalents were $648M, current assets $2.577B and current liabilities $3.492B. Total assets were $27.057B, down from $31.908B at December 31, 2008; property and equipment, net, declined to $18.087B from $22.981B, largely reflecting impairment.
- Debt totaled $7.357B on the balance sheet: $1.508B short-term and $5.849B long-term. Devon reported $1.330B of commercial paper outstanding at June 30, with a 0.48% average rate, and $1.909B of available credit capacity at that date. As of July 31, available capacity was approximately $2.022B.
- Devon issued $1.2B of senior notes in January 2009, using net proceeds primarily to repay commercial paper. It subsequently borrowed $1.3B in commercial paper to help fund capital spending and dividends exceeding operating cash flow. Contractual debt-to-capitalization was 21.8%, below the 65% covenant limit; Devon stated it was in compliance.
- First-half operating cash flow fell about 60% year over year. It funded approximately 65% of cash capital expenditures; commercial paper funded the balance. Cash increased $272M during the half to $656M, including cash related to assets held for sale.
- First-half capital expenditures incurred were approximately $2.6B, compared with $4.0B in 2008; cash paid was $3.201B. Common dividends were $142M, at a quarterly rate of $0.16 per share. No shares were repurchased in the first half of 2009.
Outlook, management commentary and risks
- Management expected challenging commodity prices to persist through the remainder of 2009. Its strategy was to reduce near-term North American development activity, advance longer-term projects including Jackfish 2 in Canada and Lower Tertiary developments in the Gulf of Mexico, reduce costs and preserve liquidity.
- February 2009 guidance projected full-year capital expenditures of $4.7B–$5.4B. Management expected second-half exploration, development and midstream spending to be below first-half levels and said available liquidity, operating cash flow and borrowing sources should support planned spending and near-term commitments.
- Devon was pursuing a partner for its Gulf of Mexico Lower Tertiary projects to provide proceeds, reduce its share of future capital commitments and improve flexibility. No transaction proceeds were assured.
- Angola operations, previously classified as discontinued, returned to continuing operations after a Q2 commercial discovery. Devon suspended marketing the assets for sale and intended to resume marketing in 2010 after drilling remaining commitment wells. A $17M Q2 gain related to post-closing settlements on prior asset sales.
- Commodity-price volatility remains a key exposure. Devon’s derivative contracts were not designated as accounting hedges. Management identified oil and gas prices, production, reserves, access to capital, foreign exchange, regulation, environmental matters, weather and drilling risks as factors that could cause actual results to differ from expectations.
- Devon had accrued $82M for potential royalties on certain deepwater leases, but stopped accruing additional amounts amid legal and legislative uncertainty. It reported $1M accrued for environmental remediation and said it did not expect material additional exposure; actual legal and remediation costs could differ from estimates.
- The first-half impairment substantially reflected lower U.S. natural-gas prices under full-cost ceiling accounting; an unsuccessful exploratory well in Brazil also contributed. Devon expected the SEC’s revised oil-and-gas reserve rules to increase proved-reserve estimates, but could not quantify the effect.
Most important facts for investors to verify
- Whether commodity prices, production and hedge settlements support cash generation as expected, and how much operating cash flow is required to fund capital spending.
- Whether full-year capital expenditures remain within the $4.7B–$5.4B guidance range, and the resulting need for commercial paper or other borrowing.
- Current debt maturities, facility availability and covenant calculations, particularly the short-term credit facility maturing November 3, 2009.
- Whether a Lower Tertiary partner is secured and what proceeds, retained interests and future capital obligations result.
- Developments affecting the $82M deepwater royalty accrual, Angola disposition plans and the commercial outlook for the Brazil and other exploration assets.