Devon Energy Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are primarily with Q1 2014. Amounts are in U.S. dollars unless noted. Devon is an oil and gas producer with U.S. and Canadian operations and a separately reported midstream business, EnLink.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Total operating revenues | $3.265 billion | $3.725 billion | Down 12% |
| Operating income (loss) | $(5.495) billion | $690 million | Includes $5.460 billion of impairments |
| Net earnings (loss) attributable to Devon | $(3.599) billion | $324 million | GAAP diluted loss per share was $8.88 |
| Core earnings attributable to Devon (non-GAAP) | $89 million | $547 million | Down 84%; core EPS was $0.22 versus $1.34 |
| Cash from operating activities | $1.648 billion | $1.410 billion | Up 17%; excluding the $425 million income-tax-receivable collection, cash flow declined |
| Cash and cash equivalents | $1.858 billion | $1.480 billion at year-end 2014 | Quarter-end balance |
| Total debt | $11.749 billion | $11.262 billion at year-end 2014 | Includes $9.255 billion Devon debt and $2.494 billion EnLink debt; EnLink debt is non-recourse to Devon |
Oil, gas and NGL sales were $1.339 billion, down from $2.557 billion. Marketing and midstream revenues rose to $1.632 billion from $1.488 billion; operating profit for that business was $193 million versus $183 million. No consolidated operating margin is stated in the filing; the reported operating loss reflects the impairment charge.
Total production was 685 thousand Boe/d, down 1% year over year; production from retained properties rose 22% to 685 thousand Boe/d, while prior-year results included divested production. Realized price per Boe, excluding derivative effects, fell 47% to $21.74. Oil prices fell 53%, gas 43%, and NGLs 70% year over year.
Capital expenditure cash payments were $1.717 billion, with a further $404 million for acquisitions of property, equipment and businesses in the cash-flow statement. MD&A reports total capital expenditures, including EnLink and acquisitions, of $2.121 billion. Operating cash flow funded approximately 96% of capital expenditures, as defined by management.
Material changes versus the prior period
- Devon recorded $5.458 billion of U.S. oil and gas impairments, primarily from lower trailing average commodity prices reducing the full-cost ceiling. Net-of-tax impairment was $3.466 billion.
- Oil and gas sales fell substantially as price declines more than offset volume gains; volume changes added $361 million to sales, while price changes reduced sales by $1.579 billion.
- Retained production growth reflected development in the Eagle Ford and Permian, as well as the late-2014 start-up of Jackfish 3; divestitures reduced reported Canadian gas and other production.
- Devon’s ownership interest in EnLink declined from 49% to 34% after EnLink transactions and Devon’s sale of EnLink units, generating $569 million of net proceeds in Q1. EnLink also acquired assets and increased its credit facility borrowings.
- Net property and equipment fell to $31.455 billion from $36.296 billion at year-end, largely reflecting impairments and depreciation. Total stockholders’ equity declined to $23.019 billion from $26.341 billion.
Outlook, risks and unusual items
- Management expected industry conditions to remain challenged by lower commodity prices, but said Devon was positioned to continue investing prudently. The 2015 capital program was designed to be lower than 2014; first-quarter exploration and development spending was roughly 15% below Q4 2014.
- Management expected additional full-cost write-downs in 2015. The amount was not reasonably estimable, but could be material to net earnings; impairments do not directly affect cash flow or liquidity.
- Management said over half of projected 2015 oil production was hedged at an average price of $91 per barrel and about 40% of projected gas production at an average of $4 per Mcf. These hedges support realized prices but do not eliminate commodity-price exposure.
- Devon had $3.0 billion of capacity under its revolving credit facility, no borrowings under it, and $948 million of commercial paper outstanding. It was in compliance with its debt-to-capitalization covenant, with a reported ratio of 21.6% versus a maximum of 65%.
- After quarter-end, Devon received $85 million from the sale of additional EnLink units; EnLink acquired the VEX pipeline and related assets from Devon for approximately $180 million in cash and equity and assumed about $35 million of expansion costs. Devon said EnLink-unit proceeds were used to pay down commercial paper.
- Other exposures include commodity-price volatility, derivative counterparty risk, foreign-exchange movements, and possible impairment of EnLink goodwill. Management reported no material change in risk factors or legal proceedings; it did not expect royalty or environmental matters to be material after recorded accruals, though actual outcomes could differ from estimates.
- Forward-looking statements are subject to supply-and-demand, operational, acquisition/divestiture, regulatory, economic and market risks. Devon disclaimed a duty to update them.
Key facts for investors to verify
- Whether commodity prices and the full-cost ceiling produce further material impairments during 2015.
- Actual hedge coverage, settlement proceeds and realized prices compared with management’s projected 2015 production and hedge assumptions.
- Capital-spending levels, operating cash flow excluding working-capital and tax-receivable effects, and the company’s ability to fund investment and distributions.
- Debt, commercial-paper balances, covenant headroom and EnLink’s separate borrowing and liquidity position.
- EnLink ownership changes, asset dropdown proceeds and the financial contribution of EnLink acquisitions and operations.