DEVON ENERGY CORP annual report, FY2011

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Devon Energy Corporation — 2011 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2011, filed February 23, 2012. Devon is an independent oil and natural gas producer with operations concentrated in North American onshore areas, alongside related gathering, processing and transportation assets. The company completed most of its planned offshore and international divestitures and described its repositioning as a North American onshore business. International operations are reported as discontinued; continuing-operations results still include U.S. Gulf of Mexico operations for periods before their 2010 sale.

Financial and operating performance

  • Revenue: $11.454 billion, up 15% from $9.940 billion in 2010. Components included $8.315 billion of oil, gas and NGL sales, $881 million of commodity-derivative gains, and $2.258 billion of marketing and midstream revenue.
  • Earnings: Continuing-operations earnings were $2.134 billion, down from $2.333 billion; diluted continuing-operations EPS was $5.10 versus $5.29. Net earnings were $4.704 billion, or $11.25 diluted EPS, including $2.570 billion from discontinued operations, largely reflecting divestiture gains.
  • Fourth quarter: Revenue was $2.585 billion and continuing-operations earnings were $521 million, compared with $2.135 billion and $478 million, respectively, in Q4 2010. Net earnings were $507 million versus $562 million, as Q4 2010 included discontinued-operations earnings.
  • Production and realized prices: Annual production rose 5% to 658,000 Boe per day. North American onshore liquids production increased 15%; gas production increased 4%. Combined realized price excluding hedges rose 9% to $34.64 per Boe. Oil and NGL prices increased, while gas prices declined.
  • Costs and margins: Lease operating expense rose 10% to $1.851 billion, and to $7.71 per Boe from $7.42. DD&A rose 17% to $2.248 billion, or $9.37 per Boe. The filing does not provide a single company-wide operating-margin measure.
  • Cash flow and investment: Operating cash flow from continuing operations was $6.246 billion, up 24%. Capital expenditures were $7.534 billion, so operating cash flow did not fully fund investment. Cash and cash equivalents were $5.555 billion; short-term investments were $1.503 billion. A substantial portion of these balances came from international divestiture proceeds held by foreign subsidiaries.
  • Debt and equity: Total debt was $9.780 billion, including $3.726 billion of commercial paper; long-term debt was $5.969 billion. Stockholders’ equity was $21.430 billion. The credit-agreement debt-to-capitalization ratio was 22.8%, and Devon reported compliance with its covenant. The company repurchased $3.5 billion of stock under its program, completed in Q4, and paid $0.67 per share in 2011 dividends.
  • Reserves: Proved reserves reached a reported record 3,005 MMBoe, up from 2,873 MMBoe. Liquids were 41.9% of proved reserves; 782 MMBoe, or 26%, were proved undeveloped.

Material changes versus 2010

  • Revenue increased, supported by higher oil and NGL prices and higher production; lower gas prices partly offset the gains.
  • Continuing-operations earnings declined despite higher revenue. The 2011 effective income-tax rate was 50%, including $725 million of deferred tax expense related to assumed repatriation of foreign earnings.
  • Operating cash flow rose to $6.246 billion from $5.022 billion, while capital expenditures increased to $7.534 billion from $6.476 billion.
  • Debt increased from $5.630 billion to $9.780 billion, primarily as commercial paper borrowings rose to help fund investment and share repurchases. Cash and short-term investments also increased following divestitures.
  • Oil and gas property DD&A increased, reflecting development activity, production growth and exchange-rate effects; operating costs per Boe also rose.

Outlook, management commentary, risks and unusual items

  • Management targeted 6% production growth in 2012, with liquids growth approaching 20%, and expected most drilling activity to focus on oil and liquids-rich gas properties. It expected gas prices to remain challenged, while retaining flexibility to redirect capital as commodity-price conditions change.
  • 2012 capital expenditures were forecast at $6.2–$6.8 billion, including $5.5–$5.9 billion for oil and gas operations. Management said available cash, operating cash flow, hedges and credit capacity should provide adequate funding.
  • In a transaction announced in January 2012, Sinopec was to acquire a 33.3% interest in five new-venture plays for $2.5 billion: $900 million at closing and $1.6 billion toward future drilling costs. Closing was expected in Q1 2012; it was not yet completed at the filing date.
  • Key exposures include volatile commodity prices, uncertain reserve estimates and drilling results, operating and service-cost inflation, dependence on midstream access, hedge-related limits on upside and counterparty risk, environmental and regulatory changes, and potential limits on insurance coverage.
  • Unusual items include a $2.552 billion gain on the Brazil divestiture in discontinued operations and the $725 million deferred tax expense associated with assumed repatriations. In 2009, Devon had recorded a $6.408 billion pre-tax full-cost ceiling write-down; no comparable write-down was reported in 2011 or 2010.
  • A court judgment included $133 million of liability against Devon in a dispute relating to the acquired Chief business. Devon appealed and recorded an equal indemnification receivable; management did not expect net exposure, subject to the appeal and collection from indemnitors. The filing reported no other material pending legal proceedings known to the company.

Most important facts for investors to verify

  • Separate recurring continuing-operations earnings and cash generation from discontinued-operation divestiture gains, derivative fair-value gains and the repatriation-related tax charge.
  • Confirm the location, accessibility and tax consequences of cash and investments held by foreign subsidiaries, and assess the funding needs associated with U.S. commercial paper borrowings and near-term debt maturities.
  • Track delivery of 2012 production and liquids-growth targets, capital-spending plans, and the timing and terms of the Sinopec transaction and drilling carry.
  • Review reserve revisions, the development schedule and economics of proved undeveloped reserves, and the impact of commodity prices on reserve values and full-cost accounting.
  • Monitor per-unit operating costs, gas-price exposure, hedge positions and associated counterparty risks, as well as the outcome of the Chief judgment appeal and related indemnification.