Devon Energy Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 5, 2015. Amounts are in millions of dollars except per-share, production and price data. Devon is an oil and gas producer with U.S. and Canadian operations and a midstream business reported through EnLink.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $3,393 | $4,510 | $6,658 | $8,235 |
| Operating income (loss) | $(4,363) | $1,774 | $(9,858) | $2,464 |
| Net earnings (loss) attributable to Devon | $(2,816) | $675 | $(6,415) | $999 |
| GAAP diluted earnings (loss) per share | $(6.94) | $1.64 | $(15.81) | $2.44 |
| Core earnings attributable to Devon (non-GAAP) | $320 | $574 | $409 | $1,121 |
| Operating cash flow | $1,101 | $2,049 | $2,749 | $3,459 |
- Q2 oil, gas and NGL sales were $1,587, down from $2,679; marketing and midstream revenue was $2,088, versus $2,230. Total revenue fell 25% in Q2 and 19% for the first half.
- First-half capital expenditures were $3,149 in the cash flow statement; the MD&A reports total capital expenditures of $3,566 including EnLink and acquisition-related spending. First-half operating cash flow covered approximately 87% of cash capital expenditures, excluding acquisition payments.
- Cash and equivalents were $1,725 at June 30, up from $1,480 at year-end. Current assets were $4,730 and current liabilities $3,998.
- Total debt was $12,045, compared with $11,262 at year-end; this includes $2,827 of EnLink debt, which Devon states is non-recourse to it. Devon debt was $9,218. Devon had $170 of commercial paper outstanding and no borrowings under its $3.0 billion revolving credit facility; it reported a 22.1% debt-to-capitalization ratio against a 65% covenant limit.
- EnLink had $150 drawn on its $1.5 billion revolving facility, with approximately $1.3 billion available. Devon paid $197 in common dividends during the first half, or $0.48 per share.
Material changes and operating trends
- Commodity prices were the primary pressure: Q2 realized prices before hedging fell 45% for oil, 49% for gas and 59% for NGLs year over year. First-half prices fell 49%, 46% and 65%, respectively. Total realized price per Boe declined 41% in Q2 and 44% for the first half.
- Total production was 674 MBoe/d in Q2, up 1% year over year; retained production was up 9% to 674 MBoe/d. Growth in Eagle Ford, Permian, Rockies and Canadian bitumen was offset by lower gas production and prior asset sales.
- Cash settlements on commodity hedges were gains of $480 in Q2 and $1,073 for the first half. Including fair-value changes, commodity derivatives produced a Q2 loss of $282 and a first-half gain of $12. Management said over half of projected oil production and approximately 45% of projected gas production for the rest of 2015 were hedged, at average prices of about $88 per barrel and $4 per Mcf, respectively.
- Devon recorded $4,168 of asset impairments in Q2 and $9,628 in the first half, primarily U.S. oil and gas ceiling-test charges caused by lower trailing commodity prices. These noncash charges materially drove the GAAP losses. The 2014 comparable periods included a $1.1 billion pretax gain from the Canadian asset sale and do not include impairment charges.
- Core earnings, a non-GAAP measure excluding specified items, decreased 44% in Q2 and 64% for the first half. Review the company’s reconciliation before comparing it with GAAP results.
- Devon sold EnLink units for approximately $654 net proceeds in the first half and transferred VEX assets to EnLink for approximately $180 in cash and equity. Devon’s EnLink ownership declined from 49% at year-end to 29% at June 30, excluding the General Partner interest.
Outlook, risks and unusual items
- Management said lower commodity prices were expected to continue challenging the industry, while describing Devon as financially strong and planning to adjust capital spending. No specific production, earnings or full-year capital-spending guidance is provided in the supplied filing text.
- Devon expected additional U.S. full-cost impairments in both Q3 and Q4 2015, likely material to net earnings but estimated to be smaller than first-half charges. Canadian impairments were also possible and could be material. Management said impairments would not affect cash flow or liquidity.
- Devon issued $750 of 5.0% senior notes in June, intending to use proceeds to repay $500 of floating-rate notes due December 2015; some proceeds had temporarily reduced commercial paper.
- Q2 tax benefits included $57 from favorable settlements; statutory rate changes in Texas and Alberta increased deferred tax expense by a net $44. The first-half effective tax rate was a benefit of 37%.
- Management said routine legal matters, including royalty and environmental matters, were not expected to create material exposure after recorded accruals. The filing reported no material changes to previously disclosed risk factors or legal proceedings. Forward-looking statements remain subject to commodity-price, operating, transaction, regulatory and market risks.
- Disclosure controls were reported effective as of June 30, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower commodity prices result in further ceiling-test impairments and how reserve values and the full-cost ceiling evolve.
- The amount and economics of remaining 2015 hedge coverage, including derivative settlements, fair-value swings and counterparty exposure.
- Capital-spending plans and operating cash flow relative to investment needs, debt maturities, dividends and other commitments.
- Debt figures and liquidity on a like-for-like basis, distinguishing Devon obligations from EnLink’s non-recourse debt and available facilities.
- The assumptions and exclusions in non-GAAP core earnings, and the operating contribution and ownership implications of EnLink transactions.