Devon Energy Corporation — 2018 Form 10-K Summary
Business context and reporting period
Devon is an independent oil and gas exploration and production company operating in the U.S. and Canada. This 10-K covers the fiscal year ended December 31, 2018; the filing also provides fourth-quarter results. Amounts are in millions of U.S. dollars unless stated otherwise.
Devon sold its ownership interests in EnLink and its general partner in July 2018, exiting midstream. In February 2019, it announced plans to separate its Canadian and Barnett Shale businesses and focus on four U.S. oil plays: the Delaware Basin, STACK, Eagle Ford and Rockies.
Financial and operating performance
- Revenue: Full-year total revenue was $10.734 billion, up 21% from $8.878 billion in 2017. Upstream revenue was $6.285 billion, up 18%; marketing revenue was $4.449 billion. Full-year revenue includes a $254 million ASC 606 gross-presentation increase to both upstream revenue and production expense, with no effect on earnings.
- Earnings: GAAP net earnings attributable to Devon were $3.064 billion, or $6.10 per diluted share, versus $898 million, or $1.70, in 2017. The 2018 result included a $2.6 billion pre-tax ($2.2 billion after-tax) gain on the EnLink sale. Continuing-operations net earnings were $764 million, or $1.52 per diluted share, compared with $758 million, or $1.43, in 2017. Non-GAAP core earnings attributable to Devon were $655 million, or $1.30 per diluted share, versus $427 million, or $0.81.
- Fourth quarter: Revenue was $3.708 billion; continuing-operations earnings were $1.149 billion, compared with $44 million in fourth-quarter 2017. Fourth-quarter results included $268 million of asset-disposition gains. The EnLink sale gain was recorded in the third quarter, not the fourth.
- Production and pricing: Total production averaged 535 thousand Boe/day, down 2%; retained production averaged 500 thousand Boe/day, up 4%. Delaware Basin and STACK production rose 39% and 20%, respectively. Realized price, excluding derivatives, increased 12% to $29.08/Boe; with hedge settlements it was $28.65/Boe. U.S. realized price increased 28% to $31.86/Boe, while Canada fell 35% to $19.12/Boe.
- Costs and operating performance: Production expenses rose 22% to $2.225 billion, including higher gathering, processing and transportation costs; production expense was $9.66/Boe versus $7.94. Field-level cash margin, a non-GAAP measure, was $3.452 billion versus $3.329 billion. Adjusted field-level cash margin, excluding divested assets, Canada and Barnett Shale, was $2.810 billion versus $1.988 billion.
- Cash flow and investment: Continuing-operations operating cash flow was $2.228 billion, nearly flat with 2017. Capital expenditures were $2.451 billion; operating cash flow funded approximately 91% of capital expenditures and 86% of capital expenditures plus dividends. Cash and equivalents were $2.414 billion at year-end, down from $2.642 billion.
- Debt and liquidity: Total debt was $5.947 billion, down from $6.864 billion; Devon repaid $922 million of principal and reduced debt through tender offers. A $312 million early-retirement loss included $304 million of cash costs. Devon reported $2.9 billion of available revolving credit, no commercial paper borrowings, and no significant maturities until 2021. Its credit-facility debt-to-capitalization ratio was 21%, within the 65% covenant limit.
- Shareholder returns: Devon repurchased 78.1 million shares for approximately $3.0 billion in 2018 and paid $149 million in dividends. The quarterly dividend rose from $0.06 to $0.08 per share in 2018; in February 2019 it was raised to $0.09. The share-repurchase authorization was increased to $5 billion, expiring December 31, 2019.
- Reserves: Proved reserves were 1.927 billion Boe, down 10% from 2017, including 267 million Boe sold with 2018 U.S. non-core asset divestitures. The standardized measure of discounted future net cash flows fell to $10.192 billion from $11.337 billion.
Material changes versus 2017
- Portfolio reshaping was significant: the EnLink and general-partner sale generated $3.125 billion in proceeds, alongside approximately $1.0 billion from U.S. upstream asset sales. The midstream business was reported as discontinued operations.
- Higher U.S. oil and NGL prices and growth in core U.S. oil assets supported upstream revenue and retained production. These gains were partly offset by declining Canadian heavy-oil realizations and reduced production from divested assets.
- Canadian heavy-oil differentials widened sharply in late 2018; fourth-quarter unhedged realized price for Canadian heavy oil was near zero. Devon reduced Jackfish production by about 8 thousand barrels/day in November.
- Reported earnings rose substantially because of the EnLink disposal gain; continuing-operations earnings changed little. Core earnings improved, but should be distinguished from GAAP results.
- Production expenses increased, partly reflecting the ASC 606 gross presentation, which added equal amounts to revenue and expense. General and administrative expense fell 12% to $650 million, primarily following workforce reductions.
Outlook, risks and unusual items
- Outlook and capital allocation: Devon forecast 2019 exploration and development capital of approximately $2.0–$2.25 billion, including Canadian and Barnett assets planned for separation. It said it could meet capital-allocation priorities at $46/Bbl WTI and $3.00/Mcf Henry Hub; a sustained WTI price near $40 would prompt greater emphasis on preserving financial strength and operating continuity.
- Cost-saving target: Management expected $780 million of annualized cost savings by 2021, with approximately 70% expected by the end of 2019. The filing attributes savings to capital costs, workforce and G&A, interest expense, and production expenses; these are forward-looking targets, not realized results.
- Hedging: Approximately 50% of anticipated 2019 oil and gas volumes and 50% of 2019 Canadian heavy-oil production were hedged, including basis protection. Hedging limits downside exposure but can also limit benefit from rising prices; counterparty and valuation risks remain.
- Commodity and operating risks: Results are sensitive to oil, gas and NGL prices, regional price differentials, reserve estimates, drilling outcomes, operating costs and midstream takeaway capacity. Alberta’s 2019 production-curtailment rules were expected to reduce Devon bitumen production by about 10 thousand barrels/day, or roughly 2% of total production.
- Other risks and contingencies: The filing discusses environmental and climate-related regulation, induced-seismicity claims in Oklahoma, pipeline and hydraulic-fracturing rules, cyber risk, third-party operators, counterparty credit and debt. Devon reported negotiations with the EPA over alleged leak-detection noncompliance at a Wyoming gas plant; a resolution could involve a fine or penalty exceeding $100,000. Management stated it knew of no material pending legal proceedings, while noting ongoing royalty, environmental and other claims.
- Unusual accounting and balance-sheet items: Devon adopted ASC 606 in 2018, changing certain processing arrangements from net to gross presentation with no earnings impact. It expected adoption of lease accounting in 2019 to add approximately $400 million of right-of-use assets and corresponding lease liabilities, plus a $19 million after-tax retained-earnings adjustment.
Most important facts for investors to verify
- Progress, structure, proceeds and tax consequences of the planned Canadian and Barnett Shale separations, and the resulting retained-business production and debt profile.
- Whether the $780 million annualized cost-savings target is achieved on schedule, and whether savings translate into improved margins and free cash flow.
- Realized Canadian heavy-oil differentials, Alberta curtailment effects, takeaway capacity and the actual effectiveness and costs of hedges.
- Core U.S. production growth, capital spending, reserve replacement and conversion of proved undeveloped reserves, especially at Jackfish.
- Debt repayment, liquidity and shareholder returns after planned asset transactions; distinguish GAAP earnings from the EnLink gain and other adjustments in non-GAAP core earnings.
- Developments in EPA negotiations, seismicity litigation and other environmental or royalty matters, as well as the effects of regulatory changes.