Devon Energy Corporation — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. This is an annual filing, not a standalone quarterly report; selected fourth-quarter results are noted below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Devon is an independent oil and gas producer operating primarily in North America, with a consolidated midstream business through EnLink. Its 2014 portfolio changes included the $6.0 billion Eagle Ford acquisition, formation of EnLink with Crosstex, and divestitures generating more than $5 billion in cash proceeds. Management’s stated priority is growth in cash flow per debt-adjusted share while maintaining financial flexibility.
Financial and operating performance
- Revenue: $19.566 billion, up from $10.397 billion in 2013. This includes $7.667 billion of marketing and midstream revenue, much of which is offset by product-purchase costs.
- Earnings: Net earnings attributable to Devon were $1.607 billion, or $3.91 per diluted share, versus a $20 million loss, or $0.06 loss per share, in 2013. Non-GAAP core earnings were $2.017 billion, up 16%, or $4.91 per share, up 15%.
- Margins and costs: Operating income was $4.698 billion. Reported results include material derivative fair-value gains and a divestiture gain, so the operating margin is not a clean measure of recurring performance. Lease operating expense was $9.49 per Boe, up 6%; core operating income was $27.28 per Boe, up 27%.
- Cash flow and investment: Operating cash flow from continuing operations was $5.981 billion, up 10%. Capital expenditures were $13.450 billion, including acquisitions; cash capital expenditures were $6.988 billion. Cash and short-term investments ended the year at $1.480 billion, down from $6.066 billion.
- Debt and liquidity: Total debt was $11.262 billion, including $1.432 billion classified as short-term; long-term debt was $9.830 billion. Cash less total debt was approximately $9.8 billion of net debt. Devon had $932 million of commercial paper outstanding, no borrowings under its $3.0 billion revolving facility, and was within its debt covenant, with a 20.9% debt-to-capitalization ratio under the credit agreement.
- Production and reserves: Total production averaged 673 MBoe/d, down 3%; production from retained properties rose 15% to 622 MBoe/d. Oil production increased 36% to 158 MBbl/d, including Eagle Ford volumes. Year-end proved reserves were 2.754 billion Boe, down 7% from 2013.
- Commodity sales and prices: Oil, gas and NGL sales were $9.910 billion, up from $8.522 billion. Average realized price without hedges was $40.33/Boe, up 20%; oil was $82.47/Bbl, gas $3.90/Mcf, and NGLs $24.89/Bbl.
Material changes versus 2013
- Devon returned to GAAP profitability, while core earnings rose 16%. Results benefited from higher retained-property production, stronger gas and bitumen realizations, and EnLink’s contribution.
- U.S. oil production rose 74%, primarily due to the Eagle Ford acquisition and growth in the Permian Basin and Mississippian-Woodford Trend. Total production nevertheless declined as divestitures reduced volumes.
- Operating revenue more than doubled, reflecting the expanded EnLink business and acquisition activity; midstream operating profit rose 66% to $852 million.
- Reported earnings included a $1.941 billion Canadian goodwill impairment, a $1.077 billion gain on asset sales, and $1.989 billion of oil, gas and NGL derivative gains. Derivative gains included significant fair-value changes that were not equivalent to cash proceeds.
- Income tax expense rose to $2.368 billion, including effects of non-deductible goodwill and repatriation; the effective tax rate was 58%.
Outlook, risks and unusual items
- 2015 outlook: Devon expected oil, gas and NGL prices to be materially lower than in 2014 and projected a 20% reduction in its capital spending. Excluding EnLink, planned spending was $4.7–$5.2 billion, including $4.5–$4.9 billion for oil and gas operations. Management targeted 20–25% growth in oil production, focusing investment on higher-return oily assets.
- Hedges: Management reported hedging approximately 50% of projected 2015 crude production at a $91/Bbl floor and approximately 40% of gas production at $4.17/Mcf. The filing cautions that hedges can limit participation in price increases and carry counterparty risk.
- Impairment outlook: Devon expected material full-cost ceiling write-downs beginning in the first quarter of 2015, based on late-2014 prices and its near-term price outlook. Management said these would reduce earnings but not cash flow or liquidity; the amount was not reasonably estimable.
- Fourth quarter: Devon recorded a $408 million net loss attributable to the company, or $1.01 per diluted share, including the $1.9 billion Canadian goodwill impairment. Full-year earnings therefore mask a loss in the final quarter.
- Other risks: Results and reserves are sensitive to commodity prices, reserve estimates and cost assumptions. Other identified exposures include drilling and operational hazards, midstream access constraints, regulatory and environmental changes, and cyber attacks. The filing reported no material pending legal proceedings known to management.
- Contractual commitments: The filing reported $32.444 billion of contractual obligations, including debt, interest, purchase obligations and operational agreements. Operational agreements include approximately $2.1 billion of minimum-volume commitments between Devon and EnLink.
Key facts investors should verify
- How much of 2014 earnings and revenue reflects recurring operations versus derivative fair-value gains, divestiture gains, impairment charges and tax effects.
- The realized cash benefit and remaining exposure under 2015 commodity hedges, including collars, call options and regional price differentials.
- Whether the 2015 capital budget, oil-production growth target and expected cash flow remain achievable under lower commodity prices.
- Reserve revisions and future development requirements, especially the 689 MMBoe of proved undeveloped reserves and the long development schedule for Jackfish.
- Liquidity and leverage after the cash decline, near-term debt maturities, and funding needs for capital commitments and EnLink growth plans.
- The assumptions behind the expected 2015 full-cost ceiling write-downs and their effect on reported earnings, reserves and asset carrying values.