Devon Energy Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also provides unaudited fourth-quarter results. Devon is a North American oil and gas producer and consolidates EnLink, its midstream business. The filing was signed February 17, 2016.
Financial and operating results
- Revenue: $13.145 billion, down 33% from $19.566 billion in 2014. Oil, gas and NGL sales were $5.382 billion, down 46%; midstream revenue was $7.260 billion, down 5%.
- Profit: GAAP net loss attributable to Devon was $14.454 billion, or $35.55 per share, versus net income of $1.607 billion in 2014. Operating loss was $20.727 billion. The principal unusual charge was $20.820 billion of noncash asset impairments, including $19.249 billion on oil and gas assets and $1.328 billion of EnLink goodwill impairments. Non-GAAP core earnings were $1.044 billion, down 48% from $2.017 billion.
- Fourth quarter: Revenue was $2.886 billion and net loss attributable to Devon was $4.532 billion, or $11.12 per share. The comparable 2014 quarter had revenue of $5.995 billion and a $408 million net loss.
- Production and pricing: Total production averaged 680 Mboe/d, up 1%; core production averaged 560 Mboe/d, up 15%. Unhedged realized price was $21.68/Boe, down 46%. Cash hedge settlements added $2.416 billion, lifting realized price including settlements to $31.42/Boe.
- Costs and margins: Lease operating expense was $2.104 billion, down 10%; LOE was $8.48/Boe, down 11%. Net G&A was $855 million. The filing does not provide a single consolidated operating-margin measure.
- Cash flow and investment: Operating cash flow was $5.383 billion, down 10%. Capital expenditures were $5.308 billion and acquisitions totaled $1.107 billion. Operating cash flow funded capital expenditures excluding acquisitions, according to management.
- Liquidity and debt: Year-end cash was $2.310 billion; stated liquidity was $4.7 billion, including $2.4 billion of available Senior Credit Facility capacity. Consolidated debt was $13.113 billion, including $3.090 billion of EnLink debt that is non-recourse to Devon; long-term debt was $12.137 billion. The credit-facility covenant debt-to-capitalization ratio was 23.7%, below its 65% limit. Current assets of $4.026 billion exceeded current liabilities of $3.295 billion.
- Balance sheet and reserves: Total assets were $29.532 billion and total equity was $10.989 billion. Proved reserves fell 21% to 2.182 billion Boe. The standardized measure of discounted future net cash flows was $6.688 billion, versus $20.474 billion in 2014; this measure is not a fair-value estimate.
Material changes and transactions
- Commodity prices weakened sharply: average realized oil price fell 49%, gas 45% and NGLs 63% from 2014. Lower prices drove the impairments, reserve reductions and earnings decline.
- Core oil and liquids assets grew, led by the Eagle Ford, Delaware Basin and heavy oil; total gas production fell 16%. Devon reported record crude oil and bitumen production, representing 41% of total production.
- Devon acquired 253,000 net Powder River Basin acres in December 2015 for approximately $499 million, funded with cash and equity. In January 2016 it acquired 80,000 net STACK acres for approximately $1.5 billion, including cash and equity consideration. EnLink’s January 2016 Tall Oak acquisition was also approximately $1.5 billion and included $500 million of future cash installments.
- Devon sold EnLink units and transferred VEX to EnLink, generating $821 million in total cash inflows. The 2015 capital program was lower than 2014, and total capital expenditures excluding acquisitions declined 24%.
Outlook, risks and contingencies
- Management expected depressed oil and gas prices through much of 2016. It planned $900 million to $1.1 billion of upstream investment, roughly 75% below 2015; total 2016 capital expenditures including the STACK acquisition were estimated at $1.2 billion to $1.4 billion, excluding EnLink.
- Management anticipated relatively flat oil production in 2016, declining gas and NGL production, and a 6% decline in core production. It targeted $2 billion to $3 billion of proceeds from monetizing Access Pipeline and other non-core upstream assets.
- Cost-reduction measures, including a February 2016 workforce reduction, were expected to lower operating and G&A costs by $700 million to $900 million annually. Estimated workforce-restructuring costs were $225 million to $275 million. The quarterly dividend was cut 75% in February 2016, from $0.24 to $0.06 per share.
- Management expected approximately $3 billion of additional first-quarter 2016 full-cost impairments, with no direct cash-flow or liquidity effect. The filing also highlights commodity-price and reserve-estimation risk; debt and credit-rating exposure; hedging and counterparty risk; asset-sale execution risk; environmental, regulatory and seismicity risks; and midstream capacity constraints.
- Contractual obligations totaled $33.624 billion at year-end, including debt, interest, purchase and operational agreements, and asset-retirement obligations. The filing reports routine legal proceedings and royalty matters, but no material pending legal proceeding known to Devon; management did not expect environmental exposure to be material.
Key facts for investors to verify
- Whether planned Access Pipeline and non-core asset sales close on schedule and deliver the targeted $2 billion to $3 billion.
- Actual 2016 commodity-price exposure, hedge coverage and cash flow relative to the reduced capital plan.
- Further impairment charges, reserve revisions and the pace of development of proved undeveloped reserves, particularly at Jackfish.
- Debt, liquidity and covenant headroom after the STACK and other acquisitions, including the distinction between Devon and non-recourse EnLink debt.
- Realized cost savings, restructuring cash costs, production declines, and dilution or resale of acquisition shares.