Devon Energy Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in millions of dollars unless otherwise stated. Devon is an independent oil and gas producer; Canadian operations are reported as discontinued operations, and the Barnett Shale assets were classified as held for sale.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $394 | $1,806 | $2,481 | $2,885 |
| Net earnings (loss) attributable to Devon | $(670) | $495 | $(2,486) | $178 |
| Operating cash flow, continuing operations | $150 | $432 | $679 | $868 |
| Capital expenditures | $307 | $486 | $732 | $976 |
- Q2 loss from continuing operations was $677 million, or $1.80 per diluted share; discontinued operations contributed $9 million of earnings.
- Q2 oil, gas and NGL sales were $424 million, while derivative results were a loss of $361 million, largely reflecting noncash fair-value changes. Cash settlements on commodity hedges were positive $232 million.
- Q2 EBITDAX, a company-defined non-GAAP measure, was $325 million, versus $588 million a year earlier. Field-level cash margin was $161 million, or $5.45 per Boe, versus $641 million, or $21.78 per Boe.
- At June 30, cash and cash equivalents were $1.474 billion, plus $195 million restricted for discontinued operations. Devon reported $4.7 billion of liquidity, including approximately $3.0 billion of available revolving credit.
- Long-term debt was $4.296 billion. No credit-facility borrowings were outstanding; Devon reported covenant compliance and a debt-to-capitalization ratio of 19.3%. Debt maturities do not begin until the end of 2025. All debt was fixed-rate, averaging 6.0%.
Material changes and drivers
- Q2 revenue and earnings were sharply lower year over year amid the pandemic-driven commodity-price collapse. WTI averaged $28.42/Bbl, down 53% year over year; unhedged realized prices also fell for oil, gas and NGLs.
- Q2 production averaged 325 MBoe/d, essentially unchanged from Q2 2019 but down 7% from Q1 2020. Oil output was 153 MBbl/d. Devon said some marginal wells were shut in during Q2 and most shut-in production had been restored by quarter-end.
- First-half results included $2.666 billion of continuing-operations asset impairments, primarily proved properties in the Anadarko Basin and Rockies, plus $113 million of unproved impairments. The impairments followed lower commodity-price expectations and a 45% reduction in planned 2020 capital investment.
- Operating cash flow from continuing operations declined to $679 million from $868 million in the first half. Capital spending fell to $732 million from $976 million. Continuing-operations cash flow less capital expenditures was negative $53 million for the first half.
- Total assets declined to $10.357 billion from $13.717 billion at year-end 2019, principally reflecting impairments and changes in discontinued-operation balances. Stockholders’ equity attributable to Devon decreased to $3.227 billion from $5.802 billion.
Outlook, management commentary and risks
- Management reduced the 2020 capital outlook by approximately $800 million, or 45%, from the original budget. Exploration and development spending for the remainder of 2020 was expected to be $350–$400 million.
- Devon expected Q3 production of approximately 301–318 MBoe/d, with volumes declining in the second half before improving in Q4 as completions were timed. Management said Q2 capital spending was 10% below its already-reduced plan.
- The company targeted $300 million of sustainable annualized cash-cost reductions by year-end 2020, including production and administrative savings. A separate debt-repurchase authorization of up to $1.5 billion was expected to generate $75 million of annualized financing-cost savings, subject to market conditions.
- For the remainder of 2020, management reported approximately 95% of expected oil production hedged at an average floor of $41/Bbl and approximately 45% of expected gas production hedged at an average floor of $2.20/Mcf. Derivative fair values remain sensitive to commodity forward curves.
- The Barnett Shale sale to BKV was scheduled to close October 1, 2020 for $570 million before purchase-price adjustments. Devon had received a $170 million deposit and expected approximately $300 million at closing, net of adjustments; contingent earnouts could total up to $260 million over four years.
- After quarter-end, the board approved a $0.26-per-share special dividend, approximately $100 million in total, payable October 1, 2020. Devon had temporarily suspended its share-repurchase program to preserve liquidity. The regular quarterly dividend had increased to $0.11 per share in Q2.
- COVID-19, commodity-price and demand volatility, potential production shut-ins or takeaway constraints, counterparty and credit risks, and capital-market access were identified as significant uncertainties. Credit ratings included S&P BBB- with a negative outlook, Fitch BBB stable and Moody’s Ba1 stable.
- Devon remained subject to royalty lawsuits, Louisiana coastal-damage litigation and climate-related proceedings. Management said it did not expect the ordinary-course legal matters or environmental exposures to be material, but outcomes remain uncertain.
Most important facts to verify
- Whether the Barnett Shale transaction closed on schedule and the final proceeds, adjustments and any earnout valuation.
- Actual production, realized prices, hedge settlements and capital spending versus the stated second-half expectations.
- Progress toward the $300 million cost-reduction target and the planned debt-repurchase program, including actual purchases and financing savings.
- Cash available for general use after excluding restricted cash, and the sustainability of operating cash flow relative to capital spending, dividends and debt obligations.
- Whether commodity-price assumptions, deferred-tax-asset valuation allowances or goodwill and field valuations change materially in subsequent filings.