Devon Energy Corporation — Q2 2010 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2010, compared with the same 2009 periods. Devon was repositioning toward North American onshore exploration and production through offshore-asset sales. Unless stated otherwise, amounts are U.S. dollars.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $2.232 billion | $1.822 billion | $5.452 billion | $3.722 billion |
| Continuing-operations earnings (loss) | $352 million | $190 million | $1.426 billion | $(3.692) billion |
| Discontinued-operations earnings | $354 million | $124 million | $472 million | $47 million |
| Net earnings (loss) | $706 million | $314 million | $1.898 billion | $(3.645) billion |
| Diluted net earnings (loss) per share | $1.58 | $0.70 | $4.24 | $(8.21) |
| Net cash from operating activities | Not separately stated | Not separately stated | $2.892 billion | $2.077 billion |
- Q2 oil, gas and NGL sales were $1.782 billion, up from $1.450 billion. For the first half, they were $3.852 billion versus $2.825 billion. Higher realized prices more than offset lower gas production.
- Combined realized price before hedges rose 27% in Q2 and 42% in the first half. Total production fell 3% and 4%, respectively. Lease operating cost per Boe rose 12% in Q2 to $7.56 and 5% in the first half to $7.49.
- Oil and gas derivatives contributed gains of $45 million in Q2 and $665 million in the first half, including cash settlements of $252 million and $348 million, respectively. First-half results also include $317 million of unrealized derivative gains.
- Marketing and midstream operating profit declined 3% to $125 million in Q2 and 6% to $258 million in the first half, as operating-cost increases outpaced revenue growth.
- Cash capital expenditures were $3.221 billion in the first half. Operating cash flow from continuing operations was $2.619 billion; management said it funded about 81% of cash capital spending, or substantially all excluding the $500 million Pike oil-sands investment.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $2.174 billion on the balance sheet, plus $742 million classified with discontinued operations, for $2.916 billion including those assets. Total assets were $29.971 billion and stockholders’ equity was $16.830 billion.
- Debt was $5.624 billion, including $53 million short-term debt and $5.571 billion long-term debt. Devon had no commercial paper outstanding and repaid $1.4 billion during the first half; it also redeemed $350 million of senior notes before maturity.
- Available capacity under the senior credit facility was $2.565 billion at June 30. The company reported a 16.1% debt-to-capitalization ratio under its credit agreement and compliance with the 65% covenant limit.
- Cash increased $1.905 billion in the first half, with divestiture proceeds a major source. Current assets were $5.049 billion and current liabilities $3.402 billion.
Material changes, outlook and risks
- Devon completed Gulf of Mexico asset sales and sold its Panyu operations in China. Combined after-tax proceeds were $3.617 billion. The Panyu sale generated a $308 million pretax gain ($235 million after tax); no gain was recorded on the Gulf of Mexico sales under full-cost accounting.
- Sales of Azerbaijan and Brazil assets for $5.2 billion were pending at filing: Azerbaijan was scheduled to close August 16, 2010, and Brazil was expected around year-end, subject to Brazilian government approval. A remaining China sale for $0.1 billion and sales of Angola and other international assets were also in process. Devon estimated eventual offshore divestiture proceeds of approximately $10 billion pretax and $8 billion after tax; these were estimates, not completed proceeds.
- Management said proceeds would support North American onshore investment, share repurchases and debt reduction, and that rising oil prices and divestiture proceeds were allowing increased drilling. The filing provides no formal earnings or production guidance.
- Devon acquired a 50% Pike oil-sands interest for $500 million and agreed to fund $155 million of its joint-venture partner’s costs, mostly expected in 2011–2012. It repurchased 7.6 million shares for $495 million under a $3.5 billion authorization, expiring December 31, 2011.
- First-half results improved sharply against 2009, when a $6.408 billion pretax U.S. oil-and-gas property impairment drove a large continuing-operations loss. The 2010 first-half result also benefited from higher commodity prices and derivatives, as well as divestiture-related discontinued-operations earnings.
- Risks include volatile commodity prices, production and reserve uncertainty, drilling and operating costs, currency and interest-rate movements, regulation and environmental exposure, and approval or closing risks for pending asset sales. A 10% increase in forward commodity curves was estimated to reduce gas-derivative fair value by about $160 million and oil-derivative fair value by about $90 million. Management reported no material change in risk factors from the 2009 Form 10-K.
- Asset-retirement obligations increased by a $194 million estimate revision, primarily reflecting higher abandonment-cost estimates and a lower discount rate; $256 million of obligations were assumed by Gulf of Mexico purchasers. Management said routine litigation and environmental exposures were not expected to be material after accruals, while noting actual outcomes could differ from estimates.
Important facts for investors to verify
- Whether the pending Azerbaijan, Brazil, China and other asset sales closed on schedule and at expected proceeds, and what gains, taxes or liabilities were ultimately recognized.
- How much reported earnings and cash generation depended on derivative gains, including unrealized fair-value changes, versus realized operating performance.
- Production trends, particularly natural-gas declines, and whether increased North American onshore drilling offsets them without further unit-cost escalation.
- Use of divestiture proceeds, including remaining share-repurchase authorization, debt levels and funding of the Pike joint venture and capital program.
- Changes in abandonment obligations, environmental or royalty litigation, and the financial effect of commodity-price, interest-rate and regulatory risks.