Business context and reporting period
Devon Energy Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the same period in 2016. Devon’s business includes U.S. and Canadian oil and gas exploration and production, and its EnLink midstream operations.
Financial and operating performance
- Revenue: Total revenues and other were $3.547 billion, up from $2.126 billion. Oil, gas and NGL sales rose to $1.309 billion from $825 million; marketing and midstream revenues were $2.010 billion.
- Earnings: Operating income was $706 million, versus an operating loss of $3.500 billion. Net earnings attributable to Devon were $565 million, or $1.07 per diluted share, compared with a $3.056 billion loss, or $6.44 per share. Non-GAAP core earnings were $217 million, or $0.41 per share, versus a $249 million core loss, or $0.53 per share.
- Cash flow and investment: Operating cash flow was $834 million, compared with $165 million. Capital expenditures were $747 million; cash capital expenditures plus acquisitions totaled $767 million. Operating cash flow exceeded capital expenditures by $87 million. Ending cash was $2.119 billion.
- Production and prices: Total production fell 18% to 563 thousand Boe per day, including divested production in the comparison period; retained production fell 8% to 563 thousand Boe per day. Realized price before derivatives increased 95% to $25.82 per Boe. Oil, gas and NGL derivative gains recognized in revenue were $232 million, including $224 million of fair-value gains.
- Costs and margins: Lease operating expenses declined 13% to $386 million, but LOE per Boe rose 7% to $7.62, driven partly by Canadian costs and pipeline tolls. Marketing and midstream operating profit increased 3% to $207 million. Total DD&A declined 30% to $381 million.
- Debt and liquidity: Long-term debt was $10.381 billion, up from $10.154 billion at year-end; management’s comparison table reports total debt down 17% from $12.545 billion in Q1 2016. Devon had no borrowings under its $3.0 billion senior credit facility and approximately $2.9 billion available. Devon’s debt-to-capitalization ratio under the facility covenant was 19.2%, versus a maximum of 65%. EnLink debt is non-recourse to Devon. Current assets were $3.775 billion and current liabilities $2.470 billion.
Material changes versus the prior comparable period
- Higher commodity prices drove most of the increase in oil, gas and NGL sales: the filing attributes $653 million of the year-over-year sales increase to prices, partly offset by a $169 million decline from volumes.
- The prior-year quarter included $3.035 billion of asset impairments and $247 million of restructuring and transaction costs. These unusually large charges were absent or substantially lower in Q1 2017.
- Q1 2017 included significant favorable derivative fair-value changes. Accordingly, reported GAAP earnings exceeded non-GAAP core earnings by a substantial amount.
- Net financing costs declined 22% to $127 million, primarily reflecting Devon debt repayments. Production remained lower year over year following reduced drilling in 2016 and asset divestitures.
Outlook, commentary, risks and unusual items
- Devon planned 2017 capital expenditures, excluding EnLink, of $2.3 billion to $2.7 billion, including $2.0 billion to $2.3 billion for exploration and development. Capital was to be concentrated in the STACK and Delaware Basin, with investment managed directionally within cash flow.
- Management expected production to grow from the fourth-quarter 2016 level as 2017 drilling and completion investment increased; no specific full-year production target is stated in the provided filing text.
- Management targeted hedging approximately 50% of forecast oil and natural gas production. At March 31, 2017, it reported roughly 50% of forecast 2017 oil production hedged at an average $50 per barrel and gas production at an average $3 per MMBtu.
- In May 2017, Devon announced plans to divest approximately $1 billion of upstream assets over an expected 12–18 months, with proceeds intended for U.S. resource plays and strengthening its investment-grade financial position. This was announced after the reporting date.
- Management cited approximately $5.1 billion of cash and senior credit facility capacity, investment-grade ratings, and no significant Devon debt maturities until 2021. Ratings actions after quarter-end included Moody’s upgrade to Ba1 and elimination of $92 million of letters of credit.
- Key risks include commodity-price volatility, reserve and exploration uncertainty, hedging and counterparty risks, indebtedness, regulation and environmental matters, midstream capacity constraints, and execution of asset sales. Devon said downstream marketing commitments were expected to weigh on margins through 2017. It also maintained a 100% valuation allowance against U.S. deferred tax assets.
- Other notable items: Devon reduced estimated asset retirement obligations by $184 million, primarily due to revised inflation assumptions and retirement dates. The filing reported no material pending legal proceedings known to Devon and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- How much of Q1 earnings and future reported results depends on derivative fair-value movements rather than cash settlements and operating performance.
- Whether production growth from Q4 2016 and the planned STACK and Delaware Basin investment are achieved within the stated capital range.
- Progress, timing, proceeds and intended use of the announced approximately $1 billion upstream asset divestiture.
- EnLink’s borrowing, installment-payment obligations and operating performance, noting its debt is non-recourse to Devon.
- Commodity-price exposure and hedge coverage, as well as the expected effect of downstream marketing commitments and Canadian operating costs on margins.