Devon Energy Corporation — 2010 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2010; the filing also reports fourth-quarter results. Devon is an independent oil and gas exploration and production company with North American onshore operations and marketing and midstream businesses. It is repositioning toward North American onshore assets and was awaiting government approvals to sell its remaining offshore operations in Brazil and Angola. International operations are generally presented as discontinued operations; U.S. Offshore results remain in continuing operations where applicable.
Financial and operating highlights
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $9.940 billion | $8.015 billion |
| Earnings from continuing operations | $2.333 billion; $5.29 diluted EPS | Loss of $2.753 billion; loss of $6.20 diluted EPS |
| Net earnings | $4.550 billion; $10.31 diluted EPS | Loss of $2.479 billion; loss of $5.58 diluted EPS |
| Operating cash flow, continuing operations | $5.022 billion | $4.232 billion |
| Cash and cash equivalents at year-end | $3.290 billion including cash associated with discontinued operations; balance sheet cash was $2.866 billion | $1.011 billion |
| Total debt | $5.630 billion | $7.279 billion |
| Capital expenditures, cash basis | $6.476 billion | $4.879 billion |
| Production | 228 MMBoe, down 2% overall; North American onshore production rose 1% | 233 MMBoe |
- Continuing-operations revenue increased 24%. Oil, gas and NGL sales were $7.262 billion, up from $6.097 billion; derivative gains were $811 million, versus $384 million.
- Realized combined commodity price, excluding derivatives, rose 22% to $31.91 per Boe. Oil and NGL prices increased 27% and 32%, respectively; gas prices rose 16% to $3.84 per Mcf.
- Operating cash flow from continuing operations increased 19%. Cash capital expenditures were $6.476 billion, so operating cash flow did not fully fund the year’s cash investment spending.
- North American onshore proved reserves reached a record 2,873 MMBoe. Oil and NGL production in those operations grew 6%; gas production declined 1%. The company reported a 99% drilling success rate.
- Year-end total assets were $32.927 billion and stockholders’ equity was $19.253 billion. Reported current assets were $5.555 billion and current liabilities $4.583 billion.
- Continuing-operations earnings margin was approximately 23.5% of reported revenue. This is a simple ratio, not a company-reported margin measure.
Material changes and unusual items
- Net earnings included $2.217 billion from discontinued operations, principally reflecting after-tax divestiture gains. Devon reported $1.732 billion of after-tax gains on 2010 sales, chiefly Azerbaijan ($1.524 billion) and China-Panyu ($235 million).
- The company received $5.649 billion in after-tax proceeds from 2010 divestitures. It used proceeds to reduce debt, repurchase shares and invest in North American onshore assets, including $500 million for a 50% interest in the Pike oil sands leases.
- Devon repurchased $1.201 billion of shares under its $3.5 billion program during 2010. The quarterly dividend remained $0.16 per share, or $0.64 for the year.
- 2010 continuing-operations results included $57 million of restructuring costs, including $70 million of lease obligations and $11 million of asset impairment, partly offset by severance estimate reversals. A $19 million net charge related to early debt retirement was included in interest expense.
- In contrast to 2010’s recovery, 2009 and 2008 continuing results included noncash oil and gas property write-downs of $6.408 billion and $9.891 billion, respectively, caused by full-cost ceiling limits.
- Fourth-quarter 2010 revenue was $2.135 billion, continuing-operations earnings were $478 million, discontinued-operations earnings were $84 million and net earnings were $562 million. Fourth-quarter 2009 revenue was $2.445 billion and net loss was $2.479 billion for the full year.
Outlook, risks and contingencies
- Management targeted 2011 North American onshore production of 236–240 MMBoe, including oil growth of at least 16%, and planned capital expenditures of $5.4–$6.0 billion. It expected to direct most drilling toward oil and liquids-rich opportunities amid challenged natural gas prices.
- Management expected 2011 operating cash flow to remain the primary liquidity source and said available cash, credit and anticipated divestiture proceeds were expected to fund planned capital spending and other uses. The remaining Brazil sale was valued at $3.2 billion; the Angola sale was $70 million plus contingent consideration, subject to approvals.
- At December 31, 2010, debt was $5.630 billion, including $1.750 billion of notes due in September 2011. The $2.650 billion revolving credit facility had $2.612 billion available at year-end; the company reported compliance with its debt-to-capitalization covenant.
- Key exposures include volatile commodity prices, reserve-estimate uncertainty, drilling and production risks, pipeline and processing interruptions, hedging and counterparty risk, environmental and regulatory costs (including hydraulic fracturing and greenhouse-gas rules), and the execution and approval of asset sales. Devon cautioned that derivatives can limit participation in price increases and introduce earnings volatility.
- Devon reported $94 million of auction-rate securities classified as long-term because auctions had failed; management did not consider them impaired but acknowledged liquidity and valuation risk. Pension plans were underfunded by $492 million at year-end.
- Routine legal and royalty matters were disclosed; management did not believe the identified matters would create material exposure. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of reported 2010 earnings and cash generation reflects recurring operations versus divestiture gains, derivative settlements and discontinued operations.
- Whether Brazil and Angola sales close on the expected terms and timing, and how proceeds are allocated among debt reduction, repurchases and investment.
- The company’s ability to fund its 2011 capital program and near-term debt maturities while delivering its production targets.
- Whether commodity prices, hedge positions and regional differentials support the forecast cash flows; confirm the volume and price terms of outstanding hedges.
- The development schedule and economics of proved undeveloped reserves, particularly Jackfish, which accounts for a substantial portion of those reserves and has a development schedule extending beyond five years.