Devon Energy Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Devon is a U.S. onshore oil and natural gas producer focused on the Delaware Basin, Eagle Ford, Anadarko, Williston and Powder River basins. Unless noted otherwise, financial amounts are in millions of dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $3,823 | $3,812 | Broadly flat; oil, gas and NGL sales fell while derivative results improved. |
| Net earnings attributable to Devon | $995 | $989 | Up slightly. |
| Diluted EPS | $1.53 | $1.48 | Up 3%. |
| Operating cash flow | $1,677 | $1,837 | Down about 9%. |
| Capital expenditures | $1,012 | $537 | Up substantially, partly reflecting investment in assets acquired in 2022 and inflation. |
| Cash flow less capital expenditures | $665 | $1,300 | Simple calculation from reported operating cash flow less capex; not a company-defined measure. |
| Field-level cash margin | $1,986; $34.42/Boe | $2,557; $49.45/Boe | Non-GAAP measure; lower chiefly due to weaker realized prices. |
Combined production averaged 641 thousand Boe per day, up 12% year over year; oil production averaged 320 thousand barrels per day, up 11%. The increase included contributions from the 2022 Eagle Ford and Williston Basin acquisitions and ongoing development.
Unhedged realized combined price declined 24% year over year to $46.44/Boe; hedged realized price declined 15% to $46.66/Boe. Oil, gas and NGL sales were $2,679, down from $3,175, while oil, gas and NGL derivatives contributed $64 versus a loss of $683 in Q1 2022.
Production expense was $693, up 12%; lease operating expense rose to $5.67/Boe from $4.33/Boe, primarily due to acquisitions and inflation. DD&A increased 26% to $615, also primarily reflecting acquired assets. Effective income tax rate was 18%, compared with 21%.
At March 31, cash, cash equivalents and restricted cash were $887, versus $1,454 at year-end 2022; current assets were $3,189 and current liabilities $2,931. Total debt was $6,422, including $247 classified as short-term debt. Devon reported $3.9 billion of liquidity, including $0.9 billion of cash, and approximately $3.0 billion of available borrowing capacity. The $3.0 billion revolving facility had no borrowings and Devon was in compliance with its 65% debt-to-capitalization covenant, reporting a 23.2% ratio.
Material changes and capital returns
- Compared with Q1 2022, higher production contributed an estimated $359 million increase in earnings, while lower realized prices reduced earnings by $855 million. Improved derivative results and other items partly offset the price decline.
- Cash returned to shareholders included $517 million of share repurchases and $596 million of dividends in Q1. Devon repurchased about 10.1 million shares under its program for $545 million, at an average $53.96 per share.
- In May 2023, after quarter-end, the board expanded the share repurchase authorization to $3.0 billion and extended it through December 31, 2024. Through April, the company reported approximately $2.0 billion repurchased since the program began.
- The fixed quarterly dividend rose to $0.20 per share in Q1 2023. In May, Devon declared a Q2 dividend of $0.72 per share, comprising $0.20 fixed and $0.52 variable, totaling approximately $461 million.
- Total debt was little changed from year-end 2022. Devon amended and restated its revolving facility in March, extending maturity to March 2028, with extension options subject to lender consent.
Outlook, risks and unusual items
- Capital expenditures for the remainder of 2023 were expected to be approximately $2.6 billion to $2.8 billion. Management emphasized moderated production growth, capital discipline and spending within cash flow.
- Management said it expected to continue generating material free cash flow at current commodity price levels, but noted commodity-price volatility, cost inflation, supply constraints and geopolitical and economic uncertainty. It warned inflation could erode efficiencies and pressure margins.
- Approximately 25% of anticipated remaining 2023 oil and gas production was hedged. The filing reports that a 10% change in relevant forward curves would change the net derivative position by approximately $115 million.
- Devon believes it is subject to the Inflation Reduction Act’s 15% corporate alternative minimum tax; the potential impact remains under assessment and could include material incremental cash taxes, depending on results and future guidance.
- Asset retirement obligations increased by $27 million in Q1, primarily from inflation-driven revisions to estimated retirement costs. Restricted cash of $126 million and remaining restructuring liabilities primarily relate to an abandoned Canadian firm transportation agreement.
- Legal exposures include royalty-underpayment claims, Louisiana coastal-damage litigation, climate-related proceedings, and a federal order concerning decommissioning of California offshore platforms, which Devon disputes and is appealing. Management said it could not predict the outcomes and did not believe recorded legal matters were likely to have a material effect, subject to disclosed contingencies.
- Devon received an EPA notice of violation in February 2023 concerning alleged 2020 air-permit violations in New Mexico; resolution may result in a fine or penalty exceeding $300,000. The filing gives no clear estimate of the ultimate outcome.
- Q1 2022 included a $96 million benefit from a performance guarantee and a $20 million Ukraine humanitarian pledge; these items did not recur in Q1 2023. Q1 2023 income taxes included research-related credits for 2018–2021.
Most important facts for investors to verify
- How commodity prices, regional differentials and hedging settlements affect realized prices and cash generation.
- Whether planned capital spending, inflation and operating costs remain consistent with management’s production and cash-flow priorities.
- The sustainability of variable dividends and share repurchases given commodity-price volatility and the board’s discretion over future dividends.
- The actual cash-tax impact of the corporate alternative minimum tax and the effect of future tax guidance.
- Developments in the disclosed royalty, environmental, climate, offshore decommissioning and EPA matters, including any resulting financial obligations.
- Debt maturities, liquidity and compliance with credit-facility terms; $242 million of notes were due August 2023.