Devon Energy Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Devon is an independent oil and gas producer operating primarily in the United States and Canada, with related marketing and midstream businesses.
Financial and operating performance
- Revenue: $10.397 billion, up 9% from $9.501 billion in 2012. Oil, gas and NGL sales were $8.522 billion; derivatives contributed a net loss of $191 million, versus a $693 million gain in 2012.
- Profit: GAAP net loss was $20 million, or $0.06 per diluted share, compared with a $206 million net loss in 2012. The 2013 loss included $1.976 billion of pre-tax asset impairments ($1.353 billion after tax). Adjusted earnings, a non-GAAP measure, were $1.734 billion, or $4.26 per share, versus $1.305 billion, or $3.22 per share.
- Fourth quarter: Revenue was $2.624 billion; net earnings were $207 million, or $0.51 per diluted share. Fourth-quarter 2012 net loss was $357 million.
- Production and pricing: Average production rose 2% to 692.9 MBoe/d. Oil production increased 19% to 116.8 MBbl/d; gas declined 7% to 2,393.4 MMcf/d; NGL production rose 15% to 125.7 MBbl/d. Realized price before hedge settlements increased 18% to $33.70/Boe, mainly reflecting higher oil and gas prices. Total production cost was $8.97/Boe, up 8%.
- Cash flow and investment: Operating cash flow from continuing operations was $5.436 billion, up 10%. Capital expenditures were $6.758 billion, down from $8.225 billion; operating cash flow covered about 80% of cash capital spending. Dividends were $348 million ($0.86 per share); no share repurchases were reported for 2013.
- Balance sheet and liquidity: Cash and cash equivalents were $6.066 billion at year-end; total debt was $12.022 billion, including $4.066 billion classified as short-term. Stockholders’ equity was $20.499 billion. Devon reported $2.9 billion of available capacity under its $3.0 billion revolving facility, plus a $3.0 billion commercial-paper program with $1.317 billion outstanding. The credit-agreement debt-to-capitalization ratio was 25.7%, within the 65% covenant limit.
- Reserves: Proved reserves were 2.963 billion Boe, unchanged from 2012; proved undeveloped reserves were 701 MMBoe, down 17%. The standardized measure of discounted future net cash flows was $15.741 billion, compared with $13.221 billion in 2012; it is an estimate using prescribed prices and a 10% discount rate, not a market valuation.
Material changes versus 2012
- Revenue and adjusted earnings improved, supported by higher realized prices, oil growth and stronger marketing and midstream results. Operating cash flow increased, while capital spending declined.
- GAAP results remained loss-making, principally because of large noncash impairment charges in both years: $1.976 billion in 2013 versus $2.024 billion in 2012. The impairments reflected lower full-cost ceilings, largely tied to trailing commodity prices; certain midstream assets were also written down.
- Liquids production growth was concentrated in U.S. core and emerging properties. Gas production continued to decline, especially in non-core areas, while NGL prices remained weak.
- Total debt increased to $12.022 billion from $11.644 billion. Year-end cash increased from $4.637 billion, while short-term investments fell from $2.343 billion to zero.
Outlook, transactions and risks
- Management expected 2014 oil prices to be broadly consistent with 2013; natural gas prices to be broadly steady or moderately higher; and NGL prices to remain relatively flat. It emphasized that commodity prices remain volatile.
- Devon planned 2014 capital expenditures of $6.4–$6.9 billion, excluding the proposed Eagle Ford acquisition, with $5.4–$5.8 billion for oil and gas operations. Management said available cash, operating cash flow, hedges and credit capacity were expected to fund the plan.
- The $6 billion cash acquisition of GeoSouthern’s Eagle Ford assets was expected to close in the first quarter of 2014. Devon issued $2.25 billion of senior notes and arranged a potential $2 billion term loan to help finance it. If the acquisition did not close by June 30, 2014, the notes were subject to redemption at 101% of principal plus accrued interest.
- Devon also planned to combine substantially all U.S. midstream assets with Crosstex assets, subject to shareholder approval, and to divest non-core properties. On February 19, 2014, it announced an agreement to sell most Canadian conventional assets for approximately $2.8 billion; closing was expected early in the second quarter. These were pending transactions as described in the filing.
- Key risks include commodity-price and regional-differential volatility; reserve-estimation uncertainty and impairment exposure; drilling, operating and environmental hazards; reliance on third-party gathering and transport; regulatory changes, including hydraulic-fracturing and greenhouse-gas rules; and hedging counterparty, interest-rate and foreign-exchange risks. The Canadian reporting unit’s fair value exceeded carrying value by about 11% at the 2013 goodwill test, making it sensitive to adverse assumptions.
- Management reported no material pending legal proceedings and stated that environmental exposure was not expected to be material. The filing cautions that estimates, forecasts and forward-looking statements are subject to risks and may differ from actual outcomes.
Important facts for investors to verify
- Whether the GeoSouthern acquisition and Crosstex/EnLink combination closed on the expected terms, and the resulting financing, ownership and midstream cash flows.
- Whether announced divestitures completed near expected values and timing, including the Canadian asset sale, and how proceeds affected debt and the production mix.
- Whether 2014 capital spending and production plans were achieved, particularly oil growth, gas decline and the planned shift to a higher oil share.
- How much of adjusted earnings and operating cash flow reflects recurring operations versus commodity prices, hedges, impairments and other adjustments; review the non-GAAP reconciliations.
- Debt maturities, liquidity after transaction funding, ratings outlooks, and the effect of commodity-price changes on cash flow, reserves and full-cost ceiling tests.