Devon Energy Corporation — Q1 2021 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2021. Devon completed its all-stock merger of equals with WPX Energy on January 7, issuing approximately 290 million shares; the transaction’s stated equity consideration was approximately $5.4 billion. Results include WPX from the closing date, so year-over-year comparisons are not on a like-for-like basis.
Key financial results
- Revenue: $1.762 billion, versus $2.087 billion in Q1 2020. Oil, gas and NGL sales rose to $1.788 billion from $807 million, but reported revenue also includes commodity derivative results: a $528 million loss in Q1 2021 versus a $720 million gain in Q1 2020.
- Earnings: Net earnings were $216 million, including $213 million attributable to Devon; diluted EPS was $0.32. Q1 2020 had a net loss of $1.815 billion, including a $2.666 billion asset impairment charge. Management’s non-GAAP core earnings attributable to Devon were $298 million, or $0.45 per diluted share.
- Cash flow and investment: Operating cash flow from continuing operations was $592 million, compared with $529 million. Capital expenditures were $499 million, leaving operating cash flow $93 million above capex. The filing does not present that difference as a GAAP or company-defined free-cash-flow measure.
- Operations and cash margin: Production averaged 499 MBoe/d, up 43% from Q1 2020, reflecting the merger and higher Delaware Basin volumes. Field-level cash margin, a non-GAAP measure, was $1.299 billion, or $28.95/Boe, versus $489 million, or $15.41/Boe.
- Liquidity and debt: Cash, cash equivalents and restricted cash totaled $1.878 billion, including $195 million of restricted cash. Devon reported approximately $4.9 billion of liquidity, including $3.0 billion available under its revolving facility. Total debt was $7.268 billion; there were no borrowings under the facility, and Devon was within its debt covenant.
- Shareholder returns: Q1 dividends totaled $0.30 per share ($0.11 fixed and $0.19 variable), or $203 million. In May, Devon announced a Q2 dividend of $0.34 per share.
Material changes versus prior periods
- Compared with Q1 2020, production, oil and gas sales, and operating cash flow increased, principally from the WPX merger and stronger commodity prices. The comparison is also affected by Q1 2020’s large impairment charge and favorable derivative valuation results; Q1 2021 recorded a $296 million commodity hedge valuation loss in continuing operations.
- Q1 2021 included $189 million of merger-related restructuring and transaction costs. Devon also recorded a $248 million income tax benefit, primarily related to the merger; its effective tax rate was unusually high at 763%.
- Devon assumed approximately $3.3 billion of WPX principal debt and redeemed senior notes. It reported approximately $530 million of debt reduction in Q1 and additional redemptions in April; it gave notice in May to retire its 5.75% notes due 2026 in June.
- The merger increased reported assets, property and equipment, debt, and share count substantially. Purchase accounting remained preliminary and subject to adjustment for up to one year after closing.
Outlook, commentary and risks
- Management forecast Q2 production of approximately 538–561 MBoe/d and full-year 2021 capital expenditures of $1.7–$2.0 billion.
- Devon expected approximately $600 million of annualized merger-related cost savings by year-end 2021. Management said the capital program was designed to operate within or near operating cash flow and described a maintenance-capital approach, with no growth projects planned until market fundamentals improve.
- Management reported approximately 50% of expected 2021 oil production and 60% of gas production hedged. Commodity price volatility remains a key earnings and cash-flow risk; a 10% change in relevant forward curves was estimated to change the net derivative position by approximately $335 million.
- Other material risks include COVID-19 impacts, integration and realization of merger synergies, environmental and climate-related regulation and litigation, royalty claims, counterparty credit exposure, and operational or midstream constraints.
- Devon recorded a $164 million estimated obligation under an assumed WPX performance guarantee for gathering and processing commitments; $36 million was current and $128 million long-term. The filing says the purchaser of the related assets is not expected to have the financial ability to meet the commitments.
- Devon disclosed ongoing environmental and other legal matters, including Louisiana coastal claims, climate-related proceedings, and a federal order concerning decommissioning California offshore platforms, which Devon contests. Management said it could not predict the outcome of these matters.
Important facts for investors to verify
- How much of the reported improvement reflects WPX’s inclusion versus better prices and underlying performance; confirm comparable pro forma production, earnings and cash-flow trends.
- Whether Devon realizes the targeted $600 million of annualized savings and how merger integration costs and preliminary purchase accounting evolve.
- Debt repayment progress, refinancing or redemption costs, and liquidity after dividends, capital spending and restricted-cash obligations.
- Exposure to commodity prices after hedges, including hedge settlement effects and the impact of the disclosed derivative positions.
- Developments in the performance-guarantee obligation, contingent divestiture earnouts, and legal, environmental and decommissioning matters.