Devon Energy Corporation — Q2 2013 Form 10-Q
Business context and reporting period. Devon is an oil and gas producer with U.S. and Canadian operations, reported as of and for the quarter and six months ended June 30, 2013. Unless otherwise noted, financial amounts below are in millions of dollars. The filing was signed August 7, 2013.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $3,091 | $2,559 | $5,063 | $5,056 |
| Net earnings (loss) | $683 | $477 | $(656) | $870 |
| Adjusted earnings (non-GAAP) | $491 | $224 | $761 | $650 |
| Diluted earnings (loss) per share | $1.68 | $1.18 | $(1.63) | $2.20 |
| Operating cash flow | $1,396 | $1,426 | $2,398 | $2,426 |
| Capital expenditures | $1,496 | $2,369 | $3,569 | $4,267 |
- Q2 production averaged 697.6 thousand Boe per day, up 3%; realized price was $35.00 per Boe, up 34%. Management attributed improved adjusted earnings and operating margin principally to higher gas prices and oil volumes.
- Operating margin was $22.03 per Boe in Q2, up 28%, and $20.07 per Boe for the first half, up 5%. Lease operating expense per Boe increased 6% in Q2 to $8.80.
- First-half operating cash flow less capital expenditures was approximately negative $1.17 billion. The company said operating cash flow funded about 70% of first-half capital spending; cash balances and short-term borrowing funded the remainder.
- At June 30, cash and cash equivalents were $3.363 billion and short-term investments $869 million. Total current assets were $6.357 billion versus current liabilities of $4.865 billion.
- Debt totaled approximately $10.2 billion: $2.194 billion short-term and $7.956 billion long-term. Commercial paper outstanding was $1.7 billion at an average 0.36% rate. The company had $2.9 billion of available revolving-credit capacity and no borrowings under its $3 billion senior credit facility. Its debt-to-capitalization ratio was 22.8%, below the 65% covenant limit.
Material changes versus prior periods
- Q2 revenue increased 21% year over year, while first-half revenue was essentially unchanged. Q2 oil, gas and NGL sales rose to $2.222 billion from $1.617 billion; the largest reported driver was a $383 million increase in gas sales attributable to prices.
- First-half GAAP results shifted to a $656 million loss from $870 million of earnings, principally reflecting $1.953 billion of noncash oil and gas asset impairments ($1.339 billion after tax). Adjusted first-half earnings, a non-GAAP measure, increased 17% to $761 million.
- Oil production growth, particularly in the Permian Basin, contributed to higher liquids volumes; total gas production fell 6% for the first half. Q2 U.S. oil production rose 36% year over year, while total gas production declined 5%.
- First-half capital expenditures fell 16% to $3.569 billion; oil and gas exploration and development spending declined, while midstream spending increased. The company repaid $1.5 billion of net short-term debt in the first half.
- Cash and short-term investments decreased to $4.232 billion from $6.980 billion at year-end 2012. The company repatriated $2.0 billion from foreign subsidiaries in Q2 and used it to repay commercial paper.
Outlook, commentary, and risks
- No specific production, earnings, or capital-spending guidance is provided in the supplied filing text. Management said it expected operating cash flow to remain its primary liquidity source and believed available liquidity sources would be adequate for future capital spending, debt repayments, and other commitments.
- Management said additional cash might be repatriated tax-efficiently in the second half of 2013 or in 2014, with repatriated funds expected to reduce debt. Approximately $4.4 billion of foreign earnings was considered indefinitely reinvested; further repatriation could trigger U.S. and foreign taxes.
- The full-cost ceiling test impairment resulted primarily from lower trailing average oil, bitumen, and NGL prices. Further price declines or other factors could result in additional impairments.
- Commodity prices are a key operating-cash-flow risk. Derivatives generated Q2 gains of $366 million, including $352 million of unrealized gains, compared with $665 million of gains in Q2 2012. Derivative valuations are sensitive to forward prices; the filing reports substantial sensitivity to a 10% change in oil and gas forward curves.
- Devon was consolidating U.S. personnel at its Oklahoma City headquarters and recorded $46 million of restructuring costs in the first half. Jackfish 1 reached payout in June, triggering a higher provincial royalty rate and reducing production net of royalties.
- Management said it did not expect material exposure from the disclosed royalty or environmental matters. A Chief-related legal settlement released Devon from claims, with settlement payments funded by the other party; Devon reversed a previously recorded $133 million liability and matching receivable in Q1.
Important facts for investors to verify
- Review the impairment assumptions and sensitivity of the full-cost ceiling test to commodity prices, including the possibility of further charges.
- Reconcile GAAP earnings with adjusted earnings and assess the effect of unrealized derivative gains and losses on reported results.
- Check the composition, maturity, and refinancing needs of short-term debt and commercial paper, alongside cash location and access to foreign-held funds.
- Assess whether operating cash flow can support planned capital spending, debt service, and dividends; first-half capital spending exceeded operating cash flow.
- Monitor production trends, unit operating costs, and the Jackfish royalty increase, as well as the tax consequences of any additional repatriation.