Devon Energy Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited; dollar amounts are in millions unless stated otherwise. Devon completed its all-stock merger with WPX Energy on January 7, 2021, making year-over-year comparisons materially affected by the addition of WPX operations.
Business context and operating results
Devon is a U.S. oil and gas producer, with the Delaware Basin its largest operating area. Management described a disciplined, returns-focused strategy emphasizing free cash flow, low leverage, cost and operational synergies, and fixed-plus-variable shareholder returns.
- Q3 production averaged 608 thousand Boe per day, including 303 thousand barrels of oil per day; combined production was up 7% from Q2.
- Management said Q3 oil production exceeded plan by 3%. Delaware Basin and Eagle Ford new-well activity contributed to sequential volume growth.
- Q3 unhedged realized price was $47.08/Boe, up 13% sequentially; realized price after hedge settlements was $40.48/Boe.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $3,466 | $1,067 | $7,933 | $3,548 |
| Net earnings (loss) attributable to Devon | $838 | $(92) | $1,307 | $(2,578) |
| Diluted earnings (loss) per share | $1.24 | $(0.25) | $1.95 | $(6.85) |
| Operating cash flow, continuing operations | $1,598 | $427 | $3,283 | $1,106 |
| Capital expenditures | $474 | $204 | $1,477 | $936 |
- Q3 non-GAAP EBITDAX was $1,634; field-level cash margin was $2,080, or $37.17/Boe. These company-defined measures are not GAAP measures.
- At September 30, cash, cash equivalents and restricted cash totaled $2,321, including $177 of restricted cash. Long-term debt was $6,492. Devon reported $3.0 billion of available credit and total liquidity of approximately $5.3 billion; there were no revolver or commercial-paper borrowings.
- Devon reported compliance with its credit-facility covenant, with a 25.1% debt-to-capitalization ratio versus a 65% maximum. No debt maturities were due before August 2023.
- Q3 dividends paid were $329; dividends paid in the first nine months totaled $761. Net cash increased $782 in Q3 to $2,321, including restricted cash.
Material changes and unusual items
- Revenue and earnings increased substantially against 2020, reflecting stronger commodity prices and WPX consolidation; the 2020 period also included $2,666 of asset impairments. The comparisons are therefore not like-for-like.
- For the first nine months, higher realized prices contributed an estimated $3.1 billion to earnings and higher production volumes contributed $1.5 billion, according to management. Commodity hedge cash settlements were a $969 outflow in 2021, versus $343 of gains in 2020.
- Q3 included a $35 noncash derivative valuation gain; nine-month results included a $597 noncash derivative valuation loss. Derivative fair values can make reported earnings volatile and do not equal period cash settlements.
- Merger-related restructuring and transaction costs were $230 for the first nine months, including $182 of restructuring costs and $48 of transaction costs. Devon reported $30 of gains on early debt retirement and a $119 gain on asset dispositions for the period.
- The merger consideration was approximately $5.4 billion in Devon shares. The preliminary purchase-price allocation remained subject to change for up to one year after closing.
Outlook, capital returns and risks
- Management expected approximately $600 million of annualized merger-related cost savings by year-end 2021 and said it was on pace to achieve that target. It described a maintenance-capital approach for the foreseeable future and no growth projects until market fundamentals improve.
- Q4 2021 exploration and development capital spending was expected to range from approximately $440 to $490. Management said the capital program was designed to operate within operating cash flow.
- In November 2021, after quarter-end, Devon announced a $0.84-per-share Q4 dividend, comprising $0.11 fixed and $0.73 variable, and authorized a share-repurchase program of up to $1.0 billion through December 31, 2022. These are subsequent announcements, not Q3 cash payments or repurchases.
- Commodity-price volatility, hedging outcomes, COVID-19 effects, reserve estimates, environmental and climate regulation, midstream constraints, counterparty risk, cybersecurity, and merger integration are identified risks. A 10% change in commodity derivative forward curves would have changed net derivative positions by approximately $280.
- Devon disclosed royalty litigation, climate-related claims, Louisiana environmental proceedings, and a government order concerning California offshore platform decommissioning. Management disputed the claims and said it could not predict certain outcomes; it did not believe current matters were likely to be material after recorded accruals. Potential exposure in the Williams-related gas-price-index litigation could not be reasonably estimated; WPX had an indemnity from Williams.
Most important facts for investors to verify
- How much of reported earnings and cash generation is sustainable at commodity prices different from Q3 levels, considering realized hedge settlements and noncash derivative marks.
- Whether Devon achieved the stated $600 million annualized synergy target and maintained capital spending within operating cash flow.
- Debt reduction, liquidity and cash available after accounting for restricted cash, upcoming obligations and planned shareholder returns.
- The final WPX purchase-price allocation and resulting effects on depreciation, depletion and amortization, taxes, and future earnings.
- Any developments in the disclosed environmental, climate, royalty and offshore decommissioning matters, including potential costs or indemnity recovery.