Devon Energy Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 17, 2021. Although the request identifies 2020 Q4, this is an annual filing and the figures below generally cover the full year. Unless noted, dollar amounts are in millions.
Business context
Devon is a U.S. independent oil and gas exploration and production company. Its 2020 portfolio included the Delaware, Powder River, Eagle Ford and Anadarko basins. Devon sold its Barnett Shale assets in October 2020 for net proceeds of $490 million, with potential contingent payments. The all-stock merger with WPX closed January 7, 2021, after year-end; the filing’s 2020 operating and financial data generally exclude WPX.
Financial and operating performance
- Revenue: $4.828 billion, down 22% from $6.220 billion in 2019. Oil, gas and NGL sales were $2.695 billion versus $3.809 billion.
- Profit: Net loss attributable to Devon was $2.680 billion, or $7.12 per diluted share, compared with a $355 million loss, or $0.89 per diluted share, in 2019. Continuing-operations loss attributable to Devon was $2.552 billion.
- Major unusual charge: Continuing-operations asset impairments were $2.693 billion, principally associated with proved properties in the Anadarko Basin and Rockies amid the COVID-19-driven commodity downturn. Barnett discontinued operations recorded an additional $182 million impairment in 2020.
- Cash flow and investment: Continuing-operations operating cash flow was $1.464 billion, down 28% from $2.043 billion. Capital expenditures were $1.153 billion, down 40% from $1.910 billion. Operating cash flow covered capital expenditures and dividends.
- Margins and costs: Non-GAAP field-level cash margin fell to $1.572 billion from $2.612 billion; per-Boe margin declined to $12.89 from $21.90. Production expenses decreased 6% to $1.123 billion, while G&A fell 29% to $338 million.
- Production and pricing: Continuing-operations production averaged 333 MBoe/d, up 2%. Oil production averaged 155 MBbl/d. The combined unhedged realized price fell 31% to $22.10/Boe; hedging raised the realized price to $24.70/Boe. WTI averaged $39.59/Bbl versus $57.02 in 2019.
- Liquidity and debt: Year-end liquidity was approximately $5.2 billion, including $2.2 billion of cash and $3.0 billion of available credit. Debt was $4.298 billion; there were no scheduled maturities before 2025. The company reported a 25% debt-to-capitalization ratio under its credit agreement and compliance with its covenant.
- Other: The company paid $257 million in common dividends, including a $97 million special dividend. Its reported year-end proved reserves were 752 MMBoe, down from 757 MMBoe in 2019, primarily reflecting price-related revisions.
Material changes versus 2019
- Lower commodity prices drove a $1.2 billion reduction in earnings from field prices; cash hedge settlements rose to $316 million from $170 million.
- Devon cut planned 2020 capital spending by 45% in response to the pandemic and reduced activity. Production nevertheless increased modestly, led by the Delaware Basin, partly offset by lower Anadarko activity.
- Continuing-operations net loss widened substantially, principally due to the $2.693 billion impairment charge. Net loss from discontinued operations narrowed to $128 million from $274 million, reflecting the timing of the Canadian and Barnett divestitures and related prior-year items.
- Cash increased to $2.237 billion from $1.844 billion. Capital spending, dividends and share repurchases together were lower than in 2019; 2020 repurchases were $38 million versus $1.849 billion.
Outlook, commentary and risks
- Merger and strategy: Management said the WPX combination is intended to strengthen the Delaware Basin position, improve scale and advance a free-cash-flow and shareholder-return model. Devon issued approximately 290 million shares, valued at about $5.4 billion at the closing price, and assumed approximately $3.3 billion of WPX debt. Integration benefits and purchase-price accounting remained subject to execution and estimation.
- 2021 plans: Post-merger exploration and development capital budget of approximately $1.6–$1.8 billion; production guidance of approximately 543–580 MBoe/d. Management also described 2021 combined oil production as expected to remain near 2020 levels. These figures reflect different statements in the filing; the filing does not provide a clear reconciliation between them.
- Returns and savings: Management targeted annualized cost savings and margin improvements of $575 million by year-end 2021, with expected merger-related restructuring and transaction cash outflows of $220–$255 million. The fixed-plus-variable dividend framework provides for a fixed quarterly dividend, then $0.11 per share, and a potential variable dividend of up to 50% of excess free cash flow. In February 2021, Devon announced a $0.19-per-share variable dividend.
- Hedging: Post-merger, management reported approximately 50% of anticipated 2021 oil volumes and 55% of gas volumes hedged. Hedging reduces downside exposure but can limit participation in price increases and carries counterparty risk.
- Principal risks: Commodity-price volatility, COVID-19 and demand uncertainty, reserve-estimation uncertainty, operational and midstream constraints, debt and counterparty risks, and environmental, climate, permitting and hydraulic-fracturing regulation. The filing specifically discusses potential restrictions on federal leasing and permitting under the incoming U.S. administration.
- Contingencies and other items: Devon accrued approximately $40 million for royalty matters. It disputed a government order concerning decommissioning of two California offshore platforms and said it could not predict the outcome. The company also planned to seek Delaware Chancery Court confirmation relating to late delivery of some merger proxy materials; it stated the affected votes could not have changed the approval outcome.
Most important facts for investors to verify
- How the WPX merger affects pro forma debt, liquidity, production, capital spending and realized synergies; 2020 standalone figures exclude WPX.
- Whether the $575 million annualized savings target and $220–$255 million merger-related cash costs are achieved or exceeded.
- Commodity-price assumptions, hedge coverage and terms, and the sensitivity of cash flow and asset values to price changes.
- Whether 2021 production guidance of 543–580 MBoe/d is consistent with management’s stated expectation for approximately flat combined oil production.
- Reserve revisions, impairment exposure and the assumptions underlying the $2.693 billion impairment and standardized reserve valuation.
- The capacity to sustain fixed and variable dividends while funding capital needs and managing debt, including WPX’s assumed debt.
- Developments in the royalty claims, California decommissioning dispute, proxy-related court application and federal permitting restrictions.