Devon Energy Corporation — 2017 Form 10-K
Business context and reporting period. Devon is an independent North American oil and gas producer and controls EnLink, a publicly traded midstream partnership. This annual report covers the fiscal year ended December 31, 2017; quarterly figures below identify the fourth quarter where relevant. Amounts are in millions of U.S. dollars unless stated otherwise. Prior-period financial statements were recast after Devon changed from full-cost to successful-efforts accounting.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $13,949 | $10,304 |
| Upstream revenue | $5,307 | $3,981 |
| Marketing and midstream revenue | $8,642 | $6,323 |
| Net earnings (loss) attributable to Devon | $898 | $(1,056) |
| Diluted earnings (loss) per share | $1.70 | $(2.09) |
| Operating cash flow | $2,909 | $1,500 |
| Capital expenditures | $2,759 | $2,047 |
| Cash and cash equivalents at year-end | $2,673 | $1,959 |
| Total debt | $10,406 | $10,154 |
| Total proved reserves | 2,152 MMBoe | 2,058 MMBoe |
- Fourth-quarter 2017 revenue was $3,983 million and net earnings attributable to Devon were $183 million, or $0.35 per diluted share.
- Management’s non-GAAP core earnings were $427 million, or $0.81 per diluted share, versus a core loss of $367 million, or $0.73 per share, in 2016. Core earnings exclude specified items and are not a GAAP measure.
- Operating cash flow increased 94%, primarily reflecting higher commodity prices. Capital expenditures were below operating cash flow, before acquisitions, dividends, debt activity and other cash uses.
- Consolidated debt includes $3.5 billion of EnLink and General Partner debt that is non-recourse to Devon. Devon’s own debt was approximately $6.9 billion. Cash at year-end included $732 million held by foreign subsidiaries.
- Devon reported a $182 million income tax benefit despite $896 million of pretax earnings, including provisional Tax Cuts and Jobs Act effects and valuation-allowance and restructuring items.
Material changes versus the prior period
- Total revenue rose 35%, while earnings swung from a $1.056 billion attributable loss to $898 million of attributable income. Higher realized commodity prices were the main earnings and cash-flow drivers.
- Realized price excluding hedges increased 39% to $25.96 per Boe; realized price including hedges was $26.23 per Boe. Total North American production declined 11% to 543 MBoe/d, while production from retained assets fell 4% to 541 MBoe/d. Divestitures and declines in the Barnett and Eagle Ford contributed to lower volumes; STACK activity partly offset the decreases.
- Production expenses increased 1% to $1.823 billion. Lease operating expense fell, but gathering and transportation expense rose 17%, partly due to Access Pipeline tolls. EnLink’s marketing and midstream margin increased 14% to $960 million; Devon’s related margin remained negative at $48 million.
- Net impairments fell to $17 million from $1.310 billion in 2016; 2017 asset dispositions generated a $217 million gain. Financing costs declined to $498 million from $907 million, principally because 2016 included debt-retirement costs.
- Proved reserves increased 5%. U.S. proved-reserve additions from the drill bit replaced approximately 150% of 2017 U.S. production, according to the company.
- The successful-efforts accounting change was applied retrospectively. It materially changes reported expense and earnings comparisons; Devon stated it better reflects operating performance and improves peer comparability.
Outlook, risks, and unusual items
- For 2018, Devon forecast exploration and development spending of $2.2–$2.4 billion, approximately 10% higher investment and about 25% more wells drilled and completed. It targeted retained-asset production growth of 6%–9%, with investment concentrated in the STACK and Delaware Basin, and expected to fund activity from operating cash flow.
- Management said approximately 40% of expected 2018 oil production and 50% of expected gas production was hedged. It targeted reducing debt by approximately $1 billion in its outlook discussion; a separate liquidity discussion says the target was up to $1.5 billion. Investors should clarify the intended target.
- Devon expected to complete the remaining divestitures from its approximately $1 billion asset-sale program in 2018; approximately $415 million had closed by year-end 2017. The remaining sales included select Barnett Shale properties.
- Commodity-price volatility, reserve-estimation uncertainty, operational and cost risks, access to midstream capacity, counterparty and hedging risks, substantial debt, regulation, environmental exposure, cyberattacks and third-party-operated assets could affect results and liquidity. Management cautioned that oil-price forecasts remained uncertain and volatility was expected to continue.
- Tax Reform accounting was provisional and subject to further analysis and guidance. Devon expected the lower U.S. corporate tax rate to benefit future after-tax earnings, absent unexpected effects.
- Devon disclosed negotiations with the EPA over alleged Clean Air Act leak-detection and repair noncompliance at its Beaver Creek Gas Plant; a fine or penalty could exceed $100,000. The company also cited defense of third-party lawsuits alleging Oklahoma induced seismic activity. Management reported no other material pending legal proceedings to its knowledge.
- Other notable commitments include $1.152 billion of recorded asset-retirement obligations and substantial transportation, processing, condensate-purchase and drilling commitments. The filing also identifies approximately $200 million of exploratory well costs suspended for more than one year, largely related to the unsanctioned Pike heavy-oil project.
Important facts for investors to verify
- Reconcile the 2018 debt-reduction targets of approximately $1 billion and up to $1.5 billion, and assess the funding assumptions behind the capital and production targets.
- Review debt maturity dates, credit-facility availability and the distinction between Devon-recourse debt and EnLink non-recourse debt; confirm how much reported cash is readily available to Devon.
- Evaluate whether higher commodity prices, hedge coverage and regional price differentials support projected cash flow, and how hedges limit upside or protect against downside.
- Track execution and proceeds from remaining asset sales, production trends in the STACK and Delaware Basin, and declines in mature or divested assets.
- Assess the effects of the successful-efforts accounting change and provisional tax-reform estimates when comparing reported and core earnings across periods.
- Monitor EnLink’s margins, distributions and financing needs, as well as the EPA matter, seismic litigation exposure and obligations for asset retirement and minimum-volume commitments.