DEVON ENERGY CORP quarterly report, Q2 FY2016

Devon Energy Corporation — Q2 2016 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2016. Unless otherwise noted, financial amounts are in U.S. dollars; income statement and cash-flow figures below are in millions. Devon is an oil and gas producer and also consolidates EnLink Midstream.

Financial performance and position

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Total operating revenues	$2,488	$3,393	$4,614	$6,658
Net loss attributable to Devon	$(1,570)	$(2,816)	$(4,626)	$(6,415)
Loss per share, diluted	$(3.04)	$(6.94)	$(9.33)	$(15.81)
Operating cash flow	$335	$1,101	$484	$2,749
Capital expenditures	$489	$1,432	$1,238	$3,149

Q2 operating loss was $1,497 million, versus $4,363 million a year earlier. The six-month operating loss was $4,997 million, versus $9,858 million.
Asset impairments were $1,497 million in Q2 and $4,532 million for the first half. The six-month charge included $2,493 million for U.S. oil and gas assets, $1,166 million for Canadian oil and gas assets, and $873 million of EnLink goodwill impairment.
Q2 core earnings, a non-GAAP measure, were $33 million ($0.06 per share); first-half core loss was $216 million ($0.44 per share). These exclude specified items, including impairments, restructuring costs, derivative fair-value changes and, in 2016, a deferred-tax-asset valuation allowance.
Total production averaged 644 MBoe/d in Q2, down 4% year over year; core production was 545 MBoe/d, essentially flat. First-half total production averaged 665 MBoe/d, down 2%, while core production rose 2% to 563 MBoe/d.
Q2 realized price, excluding derivatives, was $18.50/Boe, down 28%; first-half price was $15.78/Boe, down 34%. Lower commodity prices drove most of the decline in oil, gas and NGL sales.
Lease operating expense fell 26% to $416 million in Q2 and 23% to $860 million for the first half. Q2 LOE was $7.09/Boe, down 23%.
At June 30, cash was $1.723 billion and total debt was $12.707 billion, including $350 million classified as short-term. Devon had no commercial paper outstanding and no borrowings under its $3.0 billion revolving facility; $66 million of letters of credit were outstanding. The company reported $4.6 billion of liquidity, including cash and available facility capacity.
Devon’s credit-facility debt-to-capitalization ratio was 23.1%, below the 65% covenant limit. EnLink’s debt is non-recourse to Devon. Total assets were $27.244 billion and total equity was $8.919 billion.

Material changes and capital actions

Compared with the first half of 2015, operating cash flow declined 82%, primarily due to lower commodity prices and less favorable derivative cash settlements. It covered 39% of capital expenditures, excluding acquisitions, versus 87% a year earlier.
Exploration and development capital spending was reduced 69% year over year for the first half. Devon’s 2016 capital program was increased by $200 million following divestiture progress.
Devon issued 79 million common shares in February 2016 and received approximately $1.5 billion in net proceeds. It also issued shares as partial consideration for its STACK acquisition; shares outstanding increased to 524 million from 418 million at year-end 2015.
Devon acquired approximately 80,000 net acres in the STACK play for about $1.5 billion, funded with cash and equity. EnLink acquired Anadarko Basin midstream assets for about $1.5 billion, including a deferred $500 million installment.
Devon reduced its quarterly dividend from $0.24 to $0.06 per share in Q2 in response to depressed commodity prices.

Outlook, management commentary and risks

Management reported moderate commodity-price improvement from Q1 but said prices remained depressed and challenging. WTI ranged approximately $30–$50/Bbl and Henry Hub gas approximately $1.75–$3.00/Mcf during the first half.
Devon raised 2016 core-asset production guidance by 3%. Its 2016 capital expenditure outlook, excluding acquisitions and EnLink, was $1.4–$1.6 billion, including $1.1–$1.3 billion for oil and gas.
Devon targeted $2–$3 billion of divestiture proceeds and reported agreements totaling approximately $3.2 billion, above the top of that range. By August 3, approximately $1.2 billion had closed; the remaining transactions were expected to close in Q3. Management expected to use proceeds primarily for debt repayment and core investment.
After quarter-end, Devon agreed to sell its 50% interest in the Access Pipeline for approximately $1.1 billion. The sale was expected to close in Q3, with an estimated gain of $400–$600 million. The related 25-year transportation commitment is expected to increase annualized LOE by about $100 million; Devon estimated a $35–$40 million increase during the second half of 2016.
Management expected an additional Canadian full-cost impairment in Q3, assuming the Access sale closed. Future impairments remain sensitive to commodity prices and the full-cost ceiling calculation. Impairments do not affect cash flow or debt covenants but reduce reported earnings.
The workforce reduction and transaction costs totaled $271 million for the first half, including $236 million of employee-related costs. Management expected workforce and cost initiatives to reduce gross G&A by approximately $400 million on an annualized basis, with full benefits not yet realized.
Key risks include commodity-price volatility, reserve and impairment-estimation uncertainty, hedging and counterparty risks, indebtedness, divestiture execution, midstream constraints, regulation and environmental obligations. The filing reported no material change to the risk factors in the 2015 Form 10-K.
Devon disclosed negotiations with the EPA concerning alleged Clean Air Act leak-detection and repair noncompliance at a Wyoming gas plant; management could not predict the outcome, and resolution could involve a fine or penalty above $100,000. Other described legal and environmental matters were not expected to be material after recorded accruals.

Important facts for investors to verify

Whether the remaining announced asset sales closed on schedule and at expected proceeds, and how proceeds were applied to debt and capital spending.
Whether the Access Pipeline sale closed, the realized gain, and the actual cost of the long-term transportation commitment.
Commodity-price assumptions, hedge settlements and any further oil and gas or goodwill impairments.
Progress against 2016 production and capital guidance, including whether cost reductions offset lower realized prices.
Debt, EnLink’s non-recourse borrowings, near-term maturities and covenant headroom after divestitures and repayments.
The effect of the share issuance and reduced dividend on per-share results and shareholder returns.