Devon Energy Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts are U.S. dollars in millions unless stated otherwise. Devon is transitioning to a U.S.-focused exploration and production company; its Canadian operations were sold during the quarter and are reported as discontinued operations. Barnett Shale assets remained under review for separation.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1,921 | $1,922 | $3,149 | $3,801 |
| Continuing-operations earnings (loss) | $166 | ($496) | ($180) | ($704) |
| Net earnings (loss) attributable to Devon | $495 | ($425) | $178 | ($622) |
| Operating cash flow, continuing operations | $488 | $526 | $966 | $959 |
| Capital expenditures | $494 | $543 | $996 | $1,105 |
- Q2 diluted EPS was $1.19, including $0.79 from discontinued operations; continuing-operations diluted EPS was $0.40. Six-month diluted EPS was $0.42, while continuing-operations diluted EPS was a loss of $0.43.
- Q2 GAAP results include material noncash derivative valuation effects. Continuing-operations derivative gains were $140 versus losses of $487 in Q2 2018; six-month derivative results were losses of $465 versus losses of $600.
- Q2 field-level cash margin, a non-GAAP measure, was $680 ($17.63/Boe), versus $847 ($21.60/Boe) a year earlier. New Devon production averaged 321 MBoe/d in Q2, up 15% year over year; its adjusted field-level cash margin was $639 versus $736.
- Q2 total production averaged 424 MBoe/d, down 2% year over year, as growth in retained assets was more than offset by lower output from U.S. divested assets. New Devon realized price was $27.24/Boe before hedges, down 15% year over year; hedged realized price was $27.84/Boe.
- At June 30, cash and cash equivalents were $3,470, plus $370 of cash restricted for discontinued-operation obligations. The $3.0 billion revolving credit facility was undrawn apart from $3 million of letters of credit. Continuing-operations long-term debt was $4,294; the company also reported $1.5 billion of notes in discontinued-operation liabilities that it retired in July. Management said there would be no debt maturities until 2025 following that retirement.
- Current assets were $5,167 and current liabilities $3,467; the latter included $1,894 of discontinued-operation liabilities. The credit agreement debt-to-capitalization ratio was 23.4%, within its 65% covenant limit.
Material changes and notable items
- Devon completed the Canadian asset sale on June 27 for $2.6 billion net of purchase-price adjustments. The assets represented approximately 400 MMBoe, or 21% of total proved reserves. The transaction produced a reported $189 pre-tax gain; discontinued operations reported $329 of Q2 net earnings, reflecting a substantial tax benefit and transaction-related charges.
- The Canadian sale included $273 of restructuring and asset-impairment charges. Devon reported $370 of Canadian cash as restricted for related tax and other obligations. It also released a $1.237 billion cumulative currency translation adjustment from accumulated other comprehensive income; this drove a large negative OCI amount and should not be confused with an operating cash loss.
- In July, Devon used sale proceeds to retire $1.5 billion of senior notes and expected to record $58 of early-retirement costs in Q3, including $52 in cash costs.
- Devon repurchased $1.185 billion of shares in the first half and paid $71 in dividends. Its quarterly dividend rose 12.5% to $0.09 per share in Q2. By July 31, it had executed $4.4 billion of its $5.0 billion repurchase authorization, which expires December 31, 2019.
- Lease accounting adoption added right-of-use assets and lease liabilities; at June 30 these were $273 and $309, respectively. Adoption reduced retained earnings by $19 net of tax.
Outlook, management commentary and risks
- Management’s strategy is to focus on four U.S. oil plays, prioritize high-return investment and free cash flow, maintain target debt levels, and return capital to shareholders. It expected to complete the Barnett Shale separation by year-end 2019, but was evaluating a sale, merger or spin-off and reported no indication of impairment at June 30.
- Expected exploration and development spending for the remainder of 2019 was $0.8–$0.9 billion, excluding Barnett Shale assets. Management said capital spending was designed to operate within or near operating cash flow.
- Management cited a $200 million annualized savings target by the end of 2019 in its results overview, and separately described a broader planned $780 million annualized cost reduction over three years, with roughly 70% expected by year-end. The filing does not clearly reconcile the scopes of these targets.
- Approximately 75% of expected oil and gas production for the rest of 2019 was hedged at June 30. The company noted exposure to commodity-price volatility, basis differentials, counterparty credit, midstream constraints, regulation and environmental/climate-related risks, indebtedness, cyberattacks, and execution of asset sales and other strategic transactions.
- Devon reported royalty-underpayment lawsuits and Louisiana coastal environmental litigation; management said it did not currently believe royalty matters created material exposure and was vigorously defending the Louisiana claims. It stated that other legal and environmental matters were not expected to be material after recorded accruals, though actual outcomes could differ.
Key facts for investors to verify
- Separate recurring continuing-operations performance from the Canadian divestiture, discontinued operations, derivative fair-value movements and the related tax effects; reconcile GAAP earnings with the company’s non-GAAP core earnings.
- Confirm the final use of Canadian sale proceeds, the July debt retirement and its costs, and the treatment and availability of the $370 million restricted cash balance.
- Track Barnett Shale separation timing, proceeds or consideration, potential liabilities, and whether any impairment or further restructuring charges arise.
- Assess delivery and realized value of production growth, capital efficiency, the stated savings targets, and the remaining share-repurchase authorization against cash generation and planned capital spending.
- Monitor hedge coverage, realized prices and regional basis differentials, along with legal, environmental and other contingent exposures.