Devon Energy Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017, compared with the same 2016 periods. Devon is an oil and gas producer with U.S. and Canadian exploration and production operations and a separately reported midstream business, EnLink.
Key financial and operating metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenues and other | $3.156B | $4.233B | $9.976B | $8.847B |
| Operating income (loss) | $326M | $1.465B | $1.574B | ($3.532B) |
| Net earnings (loss) attributable to Devon | $228M | $993M | $1.218B | ($3.633B) |
| Diluted EPS attributable to Devon | $0.43 | $1.89 | $2.31 | ($7.22) |
| Operating cash flow | $776M | $727M | $2.420B | $1.237B |
| Capital expenditures, including acquisitions | $833M | $457M | $2.371B | $3.428B |
- Q3 core earnings, a non-GAAP measure, were $242M, or $0.46 per diluted share, versus $47M, or $0.09, in Q3 2016. Nine-month core earnings were $636M, or $1.20 per diluted share, versus a $169M loss, or $0.34 loss per share.
- Q3 oil, gas and NGL sales rose to $1.245B from $1.113B; the reported derivative impact was a $144M loss, versus a $79M gain in Q3 2016. Marketing and midstream revenues were $2.055B, with $242M operating profit.
- Q3 production was 527,000 Boe/d, down 9% year over year; nine-month production was 542,000 Boe/d, down 15%. Retained production declined 4% and 6%, respectively. Realized price per Boe, excluding derivatives, increased 22% to $25.67 in Q3 and 46% to $25.41 for the nine months.
- At September 30, cash and cash equivalents were $2.781B; total debt was $10.403B, implying approximately $7.622B of net debt. Current assets were $4.622B and current liabilities $2.832B. Devon had no borrowings under its $3.0B revolving facility and $2.9B of available capacity after letters of credit.
- For the first nine months, operating cash flow exceeded reported cash capital expenditures of $2.203B by $217M. Total debt increased $249M from year-end 2016; Devon’s standalone debt was $6.862B and EnLink debt $3.541B. EnLink debt is non-recourse to Devon.
Material changes versus prior comparable period
- Commodity prices drove higher sales, operating cash flow and core earnings, while lower production partly offset the benefit. The filing attributes production declines in part to reduced prior-year investment and 2016 asset sales; Hurricane Harvey temporarily disrupted Eagle Ford operations in Q3 2017.
- Reported GAAP comparisons are significantly affected by unusual 2016 items: Q3 2016 included a $1.351B asset-sale gain, while nine-month 2016 included $4.851B of impairments and $266M of restructuring and transaction costs. These items explain much of the lower reported Q3 2017 earnings and the prior-year nine-month loss.
- Devon’s Q3 2017 operating income was $326M versus $1.465B in Q3 2016; excluding the prior-year asset-sale gain, 2016 operating income was substantially lower than the reported figure. Nine-month 2017 operating income improved from the prior-year loss.
- Nine-month consolidated operating cash flow rose 96%, while capital expenditures including acquisitions fell 31%. Devon completed approximately $400M of its planned upstream divestitures by quarter-end, versus approximately $1.9B of U.S. asset sales in the first nine months of 2016.
Outlook, management commentary, risks and unusual items
- Management’s “2020 Vision” targets disciplined investment in the STACK and Delaware Basin, higher-value liquids growth, lower operating costs through technology, several billion dollars of additional portfolio monetizations, debt reduction and shareholder returns.
- For 2017, Devon expected capital expenditures excluding EnLink of $2.4B–$2.5B, including $2.0B–$2.1B for exploration and development. It expected Q4 spending of $0.7B–$0.8B. Management said retained, highest-margin U.S. oil production was expected to exit 2017 about 20% above year-end 2016.
- The announced upstream divestiture program targets approximately $1B. About $400M had closed by September 30; initial bids for remaining Barnett Shale properties were expected in Q4 2017.
- Management reported approximately 65% of remaining 2017 forecast oil production hedged at an average floor of $50/Bbl and 66% of remaining forecast natural gas production hedged at an average floor of $3.10/MMBtu; it was building 2018–2019 hedge positions at similar prices. A 10% change in relevant commodity forward curves would have changed derivative net asset positions by approximately $170M.
- The $3.0B Devon credit facility covenant limit is a 65% debt-to-capitalization ratio; Devon reported 18.9% and compliance. No significant Devon debt maturities were expected until 2021. EnLink had a remaining $250M acquisition installment payable by January 2018.
- Risks include commodity price and reserve uncertainty, hedging and counterparty exposure, debt and access to capital, regulatory and environmental obligations, midstream constraints, and execution of development and divestiture plans. Management said no material changes had occurred to previously disclosed risk factors; it reported no material pending legal proceedings and effective disclosure controls.
- Devon reduced estimated asset retirement obligations by $184M in Q1 2017, primarily due to revised inflation assumptions and retirement dates. A full valuation allowance remained against U.S. deferred tax assets, with a partial allowance against certain Canadian assets. Adoption of the new revenue standard was expected in 2018 and was not expected to materially affect earnings or cash flows, though revenue presentation and disclosures could change.
Important facts for investors to verify
- Separate underlying operating performance from the 2016 asset-sale gain, impairment charges and restructuring costs; assess the assumptions used in Devon’s non-GAAP core earnings reconciliation.
- Track production and well performance in the STACK and Delaware Basin, including whether higher-margin retained U.S. oil production meets management’s exit-2017 expectation.
- Check progress and net proceeds from the remaining divestiture program, and whether proceeds are applied to debt reduction and planned investment.
- Monitor commodity prices, hedge volumes and settlement exposure, along with the effect of hedges on realized prices and future cash flow.
- Confirm capital spending, free cash flow, debt levels, EnLink’s installment payment and the company’s liquidity and covenant headroom.