Devon Energy Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared primarily with Q1 2019 and, for operating trends, Q4 2019. Amounts are in millions of U.S. dollars unless stated otherwise. Devon is an oil and gas producer operating mainly in the Delaware, Anadarko, Powder River and Eagle Ford basins.
Financial and operating results
| Metric | Q1 2020 | Comparison |
|---|---|---|
| Total revenue | $2,087 | $1,079 in Q1 2019 |
| Net loss from continuing operations | $1,690 | $378 in Q1 2019 |
| Net loss attributable to Devon | $1,816; $4.82 per diluted share | $317 loss; $0.74 per diluted share in Q1 2019 |
| Operating cash flow, continuing operations | $529 | $437 in Q1 2019 |
| Capital expenditures | $425 | $490 in Q1 2019 |
| EBITDAX, non-GAAP | $490 | $572 in Q1 2019 |
| Field-level cash margin, non-GAAP | $489; $15.41 per Boe | $635; $22.54 per Boe in Q1 2019 |
| Production | 348 MBoe/d | Up 11% year over year |
- Total revenue included a $720 million gain from commodity derivatives; oil, gas and NGL sales to customers were $807 million. Revenue comparisons are therefore materially affected by derivative valuation changes.
- Reported expenses included $2.666 billion of continuing-operations asset impairments; an additional $110 million of unproved-property impairments was recorded in exploration expense. Barnett Shale assets, classified as discontinued operations, had a separate $179 million impairment.
- Unhedged realized combined price was $25.43 per Boe, down 22% year over year; hedges raised it to $28.63. WTI, Henry Hub gas and blended NGL benchmark prices were down 15%, 38% and 37%, respectively, year over year.
- Cash and cash equivalents were $1.527 billion, plus $200 million restricted for discontinued operations. Available credit under the $3.0 billion revolving facility was approximately $3.0 billion; total reported liquidity was $4.7 billion including restricted cash.
- Long-term debt was $4.295 billion, essentially unchanged from year-end 2019. No revolving-facility borrowings were outstanding; Devon reported covenant compliance and an 18.8% debt-to-capitalization ratio under the credit agreement. No debt maturities were due before the end of 2025.
Material changes versus prior periods
- Net loss widened year over year, principally reflecting the large impairment charge and lower realized commodity prices. Q1 2020 continuing-operations results also included a $619 million commodity hedge valuation gain, compared with a $639 million valuation loss in Q1 2019; these fair-value movements are not the same as cash settlements.
- Production grew 11% year over year, led by the Delaware and Powder River basins, while total production was approximately flat versus Q4 2019. Field-level cash margin fell from $22.54 to $15.41 per Boe year over year.
- General and administrative expense declined 24% year over year to $102 million. Production expense rose 12% to $318 million, largely with increased activity; management reported production and administrative costs down 4% compared with 2019 in its operating overview.
- Cash from continuing operations covered Q1 capital expenditures and dividends. Cash, cash equivalents and restricted cash ended the quarter at $1.727 billion, down $117 million from the beginning of the period; discontinued-operations cash flows included $153 million of Canadian tax payments.
Outlook, management commentary and risks
- Management cut the 2020 capital-expenditure outlook by approximately $800 million, or 45%, from the original budget, and expected to fund the revised program within operating cash flow even at then-current depressed prices. Exploration and development spending for the remainder of 2020 was expected to be $0.6–$0.7 billion.
- Devon forecast Q2 production of 302–328 MBoe/d and expected production to continue decreasing in the second half of 2020. It anticipated lower lease operating and gathering, processing and transportation costs during the remainder of the year; DD&A was expected to decline approximately 25% following impairments and lower production.
- For the remainder of 2020, approximately 90% of expected oil production was hedged at an average floor of $42/Bbl and approximately 45% of expected gas production at $2.15/Mcf. Management said it was building 2021 hedge positions at market prices.
- Devon temporarily suspended its share-repurchase program to preserve liquidity. It had repurchased $38 million under the $1.0 billion authorization through March 31 and did not expect to repurchase more than $200 million before the program expired. The company announced a quarterly dividend increase to $0.11 per share beginning in Q2; the Q1 dividend paid was $0.09 per share.
- The Barnett Shale sale agreement was amended in April 2020, after quarter-end: $570 million cash at closing, before purchase-price adjustments, plus contingent payments of up to $260 million tied to future commodity prices; closing was extended to December 31, 2020. Devon received a $170 million deposit in April.
- COVID-19, the demand shock and supply uncertainty drove severe commodity-price volatility, storage and takeaway constraints, and shut-ins or delayed development. Devon cited risks to realized prices, capital-market access, credit ratings, counterparties, supply chains and operations. WTI fell below $20/Bbl in April, according to the filing.
- Devon recorded a 100% valuation allowance against net deferred tax assets as of March 31. The CARES Act generated a $96 million Q1 tax benefit from planned loss carrybacks; management expected a further $9 million benefit by year-end. The filing also reported a $108 million increase in the valuation allowance.
- Management said Eagle Ford undiscounted cash flows exceeded carrying value by less than 10%, leaving the asset exposed to further price declines or lower planned investment. A Q1 goodwill test found no impairment, but management warned sustained depressed prices could lead to future impairment.
- Management did not expect recorded legal matters, including royalty and environmental claims, to be material to financial position or results after accruals; outcomes remain uncertain. Credit ratings were S&P BBB- (negative outlook), Fitch BBB (stable) and Moody’s Ba1 (stable).
Important facts for investors to verify
- Whether commodity prices, basis differentials, takeaway capacity and production shut-ins evolve in line with the assumptions underlying Devon’s capital and production outlook.
- Cash realizations from hedges, future hedge coverage and the distinction between derivative cash settlements and noncash fair-value changes.
- Completion, closing proceeds and any earnout from the amended Barnett Shale sale, including the conditions on the $170 million deposit.
- Liquidity available for general corporate purposes, covenant headroom, ratings changes and the effect of restricted discontinued-operations cash.
- Whether further price or investment changes trigger additional impairments, particularly for Eagle Ford, and whether deferred tax assets remain subject to a full valuation allowance.
- Actual capital spending, production, operating costs and shareholder distributions compared with management’s stated plans.