DEVON ENERGY CORP quarterly report, Q1 FY2022

Devon Energy Corporation — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; comparisons are primarily with Q1 2021 unless noted. Amounts are in millions of dollars except per-share and operating data. Devon is a U.S. oil and gas producer with a major position in the Delaware Basin.

Financial and operating highlights

MetricQ1 2022Comparable period
Total revenue$3,812$2,050 in Q1 2021
Net earnings attributable to Devon$989; diluted EPS $1.48$213; diluted EPS $0.32 in Q1 2021
Operating cash flow$1,837$592 in Q1 2021
Capital expenditures$537$499 in Q1 2021
EBITDAX (non-GAAP)$2,135$959 in Q1 2021
Field-level cash margin (non-GAAP)$2,557, or $49.45/Boe$1,299, or $28.95/Boe in Q1 2021
Production575 MBoe/d; oil 288 MBbl/d499 MBoe/d; oil 268 MBbl/d in Q1 2021

Oil, gas and NGL sales were $3,175 million, offset by $683 million of oil, gas and NGL derivative losses; marketing and midstream revenue was $1,320 million. The reported total revenue includes derivative losses. No conventional operating-margin percentage is presented in the filing.

Cash and restricted cash were $2,625 million at quarter-end. Devon reported $5.6 billion of liquidity, including $3.0 billion available under its revolving credit facility. Long-term debt was $6,471 million, with no facility borrowings and no debt maturities until August 2023. The debt-to-capitalization covenant ratio was 24.7%, against a 65% maximum. Current assets were $4,973 million and current liabilities $3,754 million.

Material changes versus prior periods

  • Year over year, earnings, cash flow and production rose substantially, driven principally by higher commodity prices and increased volumes. Unhedged combined realized price increased 57% to $61.40/Boe; cash settlements on commodity hedges were a $344 million outflow versus $232 million in Q1 2021.
  • Production expenses rose 35% to $618 million, mainly reflecting higher volumes and production taxes associated with higher commodity prices. G&A fell 12% to $94 million, which Devon attributed primarily to merger synergies. Merger-related restructuring and transaction costs were zero, versus $189 million in Q1 2021.
  • Quarter over quarter, net earnings declined from $1.5 billion in Q4 2021 to $995 million. Devon cited non-cash hedge valuation changes, lower sold volumes from natural declines and winter weather downtime, and lower gas prices. Volumes fell 6% to 575 MBoe/d; higher realized prices partly offset these effects.
  • Net cash increased $354 million during the quarter. Cash uses included $537 million of capital expenditures, $667 million of dividends and $211 million of common-stock repurchases.

Outlook, management commentary and risks

  • Management emphasized capital discipline, moderated production growth, capital efficiency, low leverage and shareholder returns. It cited commodity-price backwardation, supply-chain constraints and geopolitical uncertainty as reasons to prioritize economic value over volume growth.
  • The remaining 2022 exploration and development budget was expected to be approximately $1.4 billion to $1.7 billion. The filing says total 2022 capital expenditures represented approximately 30% of operating cash flow.
  • Devon reported approximately 25% of anticipated 2022 oil production and 35% of anticipated 2022 gas production hedged. A 10% change in relevant forward curves would have changed the net derivative position by approximately $225 million. Derivative fair value was a net liability of $908 million.
  • The fixed quarterly dividend was raised 45% to $0.16 per share. Q1 dividends totaled $1.00 per share, including a variable dividend. In May, Devon declared a Q2 dividend of $1.27 per share, approximately $838 million, subject to the Board’s dividend policy and discretion.
  • The share-repurchase authorization was expanded to $2.0 billion in May 2022 and extended to May 4, 2023. Through March 31, $819 million had been repurchased under the program; through April 29, the company reported $891 million executed.
  • Unusual items included a $96 million benefit from revising a performance-guarantee obligation, a $20 million humanitarian pledge for Ukraine and surrounding countries, and $65 million of Barnett asset-sale contingent earnout receipts. The guarantee benefit reflects improved market conditions and reduced estimated future exposure.
  • Risks include commodity-price volatility, hedging outcomes, supply-chain disruption and operating interruptions, counterparty credit, regulatory and climate-related matters, and litigation. Devon had accrued approximately $30 million for royalty matters. It is contesting Louisiana coastal-damage claims, climate-related proceedings and a federal order concerning decommissioning California offshore facilities; outcomes are uncertain.

Important facts for investors to verify

  • How much of earnings and cash generation is sustainable at future commodity prices, considering hedge settlements and non-cash derivative revaluations?
  • Whether production, capital spending and supply-chain conditions track management’s stated 2022 priorities and remaining budget.
  • The pace and price of repurchases, and whether variable dividends remain affordable under the company’s cash-flow and capital-allocation framework.
  • Changes in liquidity, debt maturities, covenant headroom and the potential effect of commodity-price or credit-rating changes.
  • Developments in royalty, environmental, climate and offshore decommissioning matters, including exposure beyond recorded accruals.
  • The filing reports effective disclosure controls as of March 31, 2022 and no material changes to internal control over financial reporting during the quarter.