Business context and reporting period
Devon Energy Corporation’s Form 10-K covers the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. Devon is an independent oil and gas producer. During 2019 it completed the sale of substantially all Canadian operations for $2.6 billion and agreed to sell its Barnett Shale assets for approximately $770 million, completing its planned shift toward four U.S. oil plays: the Delaware Basin, STACK, Powder River Basin and Eagle Ford. Barnett results are classified as discontinued operations; the sale was expected to close in the second quarter of 2020.
Key financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $6.220 billion | $8.896 billion |
| Upstream revenue | $3.355 billion | $4.542 billion |
| Net earnings (loss) from continuing operations | $(79) million | $714 million |
| Net earnings (loss) attributable to Devon, including discontinued operations | $(355) million | $3.064 billion |
| Operating cash flow, continuing operations | $2.043 billion | $1.583 billion |
| Capital expenditures | $1.910 billion | $2.116 billion |
| Field-level cash margin, non-GAAP | $2.612 billion; $21.90/Boe | $2.932 billion; $27.19/Boe |
| Debt at year-end | $4.294 billion | $4.454 billion |
| Cash and restricted cash | $1.844 billion, including $380 million restricted for discontinued-operation obligations | $2.446 billion |
Continuing-operations production averaged 327 MBoe/d, up 11%; the retained “New Devon” portfolio averaged 323 MBoe/d, up 16%. Retained-portfolio oil production increased 21%. 2019 realized prices including hedge settlements were $56.44/Bbl oil, $1.93/Mcf gas and $16.82/Bbl NGLs. Devon reported non-GAAP core earnings attributable to Devon of $570 million, or $1.39 per diluted share; this measure excludes specified items and is not GAAP earnings.
Material changes versus the prior period
- Revenue and GAAP earnings fell from 2018, when reported results included a $2.2 billion after-tax gain from selling EnLink and its general partner. Comparisons also reflect divestitures and the classification of Canadian and Barnett operations as discontinued operations.
- Lower commodity prices reduced earnings by approximately $686 million year over year. WTI averaged $57.02/Bbl versus $64.79/Bbl in 2018; Henry Hub gas averaged $2.63/MMBtu versus $3.09; and NGL benchmark prices also declined. Hedge cash settlements were a $170 million gain in 2019 versus a $420 million loss in 2018.
- Production growth and cost control partly offset price pressure. Capital expenditures declined about 10%, while retained-portfolio production increased 16%. General and administrative expense fell 17% to $475 million, and Devon cited approximately $240 million of annualized G&A savings.
- Devon repurchased 68.6 million shares for $1.8 billion in 2019 and raised its quarterly dividend 12.5% to $0.09 per share beginning in the second quarter. The 2019 repurchases reduced share count; the company reported 382.9 million shares outstanding on February 5, 2020.
Outlook, risks and unusual items
- 2020 plan: Management forecast capital spending of $1.7–$1.85 billion and retained-asset U.S. oil production growth of approximately 7.5%–9.0%. The Delaware Basin was expected to receive more than half of planned spending. Management also described the program as targeting high-single-digit oil growth, free cash flow and per-share cash-flow growth.
- Commodity exposure: Management cited near-term oil-demand pressure related to the coronavirus outbreak, as well as trade and economic uncertainty. At year-end, approximately 40% of anticipated 2020 oil volumes and 25% of anticipated gas volumes were hedged. Management said a sustained WTI price near $45/Bbl would prompt greater focus on preserving financial strength.
- Liquidity and debt: Devon had $1.464 billion of cash and cash equivalents, plus $380 million designated for discontinued-operation obligations, and $3.0 billion of available capacity under its revolving credit facility. There were no commercial-paper borrowings, and management reported no debt maturities before 2025. The debt-to-capitalization covenant ratio was 19.1% against a 65% maximum.
- Impairments and reserve sensitivity: Devon recorded a $748 million pre-tax Barnett Shale impairment in the fourth quarter in connection with the announced sale. Management said the STACK asset’s undiscounted cash flows exceeded carrying value by less than 10%; lower prices or reduced development plans could result in a material impairment. The filing identifies reserve estimates and commodity-price assumptions as significant judgments.
- Reserves: Year-end proved reserves were 757 MMBoe for the continuing portfolio, excluding discontinued operations. Proved undeveloped reserves fell 25% to 168 MMBoe. The Barnett assets represented approximately 45% of total U.S. proved reserves before their planned divestiture; the filing excludes 612 MMBoe associated with Barnett from the continuing-operations reserve presentation.
- Other notable items and risks: The Canadian sale generated $2.6 billion of proceeds and a reported $425 million after-tax gain, while $380 million of cash remained designated for certain retained obligations. Risks include commodity-price volatility, reserve uncertainty, environmental and climate-related regulation and litigation, induced-seismicity claims, midstream constraints, hedging and counterparty risk, and debt-market access. The filing reported no material pending legal proceedings known to Devon; it disclosed royalty, Louisiana environmental and climate-related claims. Separate EPA and Wyoming environmental settlements included penalties of $150,000 each.
- KPMG issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Its critical audit matters included reserve estimates used in the STACK impairment assessment and depletion calculations.
Important facts for investors to verify
- Whether the Barnett sale closed on the expected terms and timing, and how its proceeds, retained obligations and discontinued-operation accounting were ultimately reported.
- Whether 2020 production-growth and capital-spending targets were achieved, especially under changing commodity prices and demand conditions.
- The sensitivity of STACK carrying value and reserve estimates to commodity prices, costs, differentials and planned development.
- How much of reported cash was available for general corporate use versus designated for discontinued-operation obligations, and whether debt, liquidity and credit ratings changed.
- Whether shareholder returns, including the new repurchase authorization and announced dividend increase to $0.11 per quarter beginning in the second quarter of 2020, were implemented as described.