Edgar Filing: DEVON ENERGY CORP/DE

dvn-10q_20160930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32318

DEVON ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		73-1567067
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)

333 West Sheridan Avenue, Oklahoma City, Oklahoma		73102-5015
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (405) 235-3611

Former name, address and former fiscal year, if changed from last report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

On October 19, 2016, 523.6 million shares of common stock were outstanding.

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. Financial Information
Item 1.	Financial Statements	6
	Consolidated Comprehensive Statements of Earnings	6
	Consolidated Statements of Cash Flows	7
	Consolidated Balance Sheets	8
	Consolidated Statements of Stockholders’ Equity	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46

Part II. Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48

Signatures		49

DEFINITIONS

Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Devon” and the “Company” refer to Devon Energy Corporation and its consolidated subsidiaries. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“ASU” means Accounting Standards Update.

“Bbl” or “Bbls” means barrel or barrels.

“Boe” means barrel of oil equivalent. Gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. Bitumen and NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.

“Btu” means British thermal units, a measure of heating value.

“Canada” means the division of Devon encompassing oil and gas properties located in Canada. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.

“Canadian Plan” means Devon Canada Corporation Incentive Savings Plan.

“DD&A” means depreciation, depletion and amortization expenses.

“Devon Plan” means Devon Energy Corporation Incentive Savings Plan.

“E&P” means exploration and production activities.

“EnLink” means EnLink Midstream Partners, LP, a master limited partnership.

“FASB” means Financial Accounting Standards Board.

“G&A” means general and administrative expenses.

“GAAP” means U.S. generally accepted accounting principles.

“General Partner” means EnLink Midstream, LLC, the indirect general partner of EnLink.

“Inside FERC” refers to the publication Inside FERC’s Gas Market Report.

“LIBOR” means London Interbank Offered Rate.

“LOE” means lease operating expenses.

“MBbls” means thousand barrels.

“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBoe” means million Boe.

“MMBtu” means million Btu.

“MMcf” means million cubic feet.

“N/M” means not meaningful.

“NGL” or “NGLs” means natural gas liquids.

“NYMEX” means New York Mercantile Exchange.

“OPIS” means Oil Price Information Service.

“SEC” means United States Securities and Exchange Commission.

“Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit.

“TSR” means total shareholder return.

“U.S.” means United States of America.

“VEX” means Victoria Express Pipeline and related truck terminal and storage assets.

“WTI” means West Texas Intermediate.

“/d” means per day.

“/gal” means per gallon.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words “expects,” “believes,” “will,” “would,” “could,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2015 reserve reports and other data in our possession or available from third parties. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, including, but not limited to:

•

the volatility of oil, gas and NGL prices;

•

uncertainties inherent in estimating oil, gas and NGL reserves;

•

the extent to which we are successful in acquiring and discovering additional reserves;

•

the uncertainties, costs and risks involved in exploration and development activities;

•

risks related to our hedging activities;

•

counterparty credit risks;

•

regulatory restrictions, compliance costs and other risks relating to governmental regulation, including with respect to environmental matters;

•

risks relating to our indebtedness;

•

our ability to successfully complete mergers, acquisitions and divestitures;

•

the extent to which insurance covers any losses we may experience;

•

our limited control over third parties who operate some of our oil and gas properties;

•

midstream capacity constraints and potential interruptions in production;

•

competition for leases, materials, people and capital;

•

cyberattacks targeting our systems and infrastructure; and

•

any of the other risks and uncertainties discussed in this report, our 2015 Annual Report on Form 10-K and our other filings with the SEC.

All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.

Part I. Financial Information

Item 1. Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2016			2015			2016			2015
	(Unaudited)
	(Millions, except per share amounts)
Oil, gas and NGL sales	$	1,113		$	1,338		$	3,023		$	4,264
Oil, gas and NGL derivatives		79			414			(30	)		426
Marketing and midstream revenues		1,690			1,849			4,503			5,569
Gains on asset sales		1,351			—			1,351			—
Total revenues and other		4,233			3,601			8,847			10,259
Lease operating expenses		355			510			1,215			1,625
Marketing and midstream operating expenses		1,480			1,637			3,884			4,939
General and administrative expenses		141			198			482			661
Production and property taxes		67			91			220			315
Depreciation, depletion and amortization		394			744			1,420			2,488
Asset impairments		319			5,851			4,851			15,479
Restructuring and transaction costs		(5	)		—			266			—
Other operating items		17			14			41			54
Total operating expenses		2,768			9,045			12,379			25,561
Operating income (loss)		1,465			(5,444	)		(3,532	)		(15,302	)
Net financing costs		243			136			570			378
Other nonoperating items		44			43			150			46
Earnings (loss) before income taxes		1,178			(5,623	)		(4,252	)		(15,726	)
Income tax expense (benefit)		171			(1,714	)		(228	)		(5,435	)
Net earnings (loss)		1,007			(3,909	)		(4,024	)		(10,291	)
Net earnings (loss) attributable to noncontrolling interests		14			(402	)		(391	)		(369	)
Net earnings (loss) attributable to Devon	$	993		$	(3,507	)	$	(3,633	)	$	(9,922	)
Net earnings (loss) per share attributable to Devon:
Basic	$	1.90		$	(8.64	)	$	(7.22	)	$	(24.45	)
Diluted	$	1.89		$	(8.64	)	$	(7.22	)	$	(24.45	)
Comprehensive earnings (loss):
Net earnings (loss)	$	1,007		$	(3,909	)	$	(4,024	)	$	(10,291	)
Other comprehensive earnings (loss), net of tax:
Foreign currency translation		2			(212	)		28			(470	)
Pension and postretirement plans		11			5			20			12
Other comprehensive earnings (loss), net of tax		13			(207	)		48			(458	)
Comprehensive earnings (loss)		1,020			(4,116	)		(3,976	)		(10,749	)
Comprehensive earnings (loss) attributable to noncontrolling interests		14			(402	)		(391	)		(369	)
Comprehensive earnings (loss) attributable to Devon	$	1,006		$	(3,714	)	$	(3,585	)	$	(10,380	)

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2016			2015			2016			2015
	(Unaudited)
	(Millions)
Cash flows from operating activities:
Net earnings (loss)	$	1,007		$	(3,909	)	$	(4,024	)	$	(10,291	)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
Depreciation, depletion and amortization		394			744			1,420			2,488
Asset impairments		319			5,851			4,851			15,479
Gains on asset sales		(1,351	)		—			(1,351	)		—
Deferred income tax expense (benefit)		86			(1,708	)		(300	)		(5,348	)
Derivatives and other financial instruments		(58	)		(481	)		359			(606	)
Cash settlements on derivatives and financial instruments		15			730			(133	)		1,913
Other		169			171			190			437
Net change in working capital		136			67			181			93
Change in long-term other assets		(3	)		52			10			211
Change in long-term other liabilities		12			36			7			(74	)
Net cash from operating activities		726			1,553			1,210			4,302
Cash flows from investing activities:
Capital expenditures		(421	)		(1,080	)		(1,659	)		(4,229	)
Acquisitions of property, equipment and businesses		(3	)		(113	)		(1,641	)		(530	)
Divestitures of property and equipment		1,680			27			1,889			35
Other		34			(3	)		7			(8	)
Net cash from investing activities		1,290			(1,169	)		(1,404	)		(4,732	)
Cash flows from financing activities:
Borrowings of long-term debt, net of issuance costs		816			277			1,662			3,328
Repayments of long-term debt		(2,173	)		(252	)		(2,722	)		(1,773	)
Net short-term debt repayments		—			(169	)		(626	)		(932	)
Early retirement of debt		(82	)		—			(82	)		—
Issuance of common stock		—			—			1,469			—
Sale of subsidiary units		—			—			—			654
Issuance of subsidiary units		59			9			835			13
Dividends paid on common stock		(32	)		(99	)		(190	)		(296	)
Contributions from noncontrolling interests		146			5			151			12
Distributions to noncontrolling interests		(77	)		(68	)		(224	)		(186	)
Other		(2	)		(3	)		(9	)		(18	)
Net cash from financing activities		(1,345	)		(300	)		264			802
Effect of exchange rate changes on cash		(9	)		(22	)		5			(65	)
Net change in cash and cash equivalents		662			62			75			307
Cash and cash equivalents at beginning of period		1,723			1,725			2,310			1,480
Cash and cash equivalents at end of period	$	2,385		$	1,787		$	2,385		$	1,787

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2016			December 31, 2015
	(Unaudited)
	(Millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	2,385		$	2,310
Accounts receivable		1,092			1,105
Assets held for sale		717			—
Other current assets		257			606
Total current assets		4,451			4,021
Property and equipment, at cost:
Oil and gas, based on full cost accounting:
Subject to amortization		75,431			78,190
Not subject to amortization		3,637			2,584
Total oil and gas		79,068			80,774
Midstream and other		10,320			10,380
Total property and equipment, at cost		89,388			91,154
Less accumulated depreciation, depletion and amortization		(73,219	)		(72,086	)
Property and equipment, net		16,169			19,068
Goodwill		3,963			5,032
Other long-term assets		2,230			1,330
Total assets	$	26,813		$	29,451
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	529		$	906
Revenues and royalties payable		860			763
Short-term debt		350			976
Liabilities held for sale		202			—
Other current liabilities		910			650
Total current liabilities		2,851			3,295
Long-term debt		11,004			12,056
Asset retirement obligations		1,230			1,370
Other long-term liabilities		1,036			853
Deferred income taxes		631			888
Stockholders’ equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 524 million and 418 million shares in 2016 and 2015, respectively		52			42
Additional paid-in capital		7,487			4,996
Retained earnings (accumulated deficit)		(1,977	)		1,781
Accumulated other comprehensive earnings		278			230
Total stockholders’ equity attributable to Devon		5,840			7,049
Noncontrolling interests		4,221			3,940
Total stockholders’ equity		10,061			10,989
Total liabilities and stockholders’ equity	$	26,813		$	29,451

See accompanying notes to consolidated financial statements.

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

											Accumulated
					Additional			Retained			Other									Total
	Common Stock				Paid-In			Earnings			Comprehensive			Treasury			Noncontrolling			Stockholders’
	Shares		Amount		Capital			(Accumulated Deficit)			Earnings			Stock			Interests			Equity
	(Unaudited)
	(Millions)
Nine Months Ended September 30, 2016
Balance as of December 31, 2015		418	$	42	$	4,996		$	1,781		$	230		$	—		$	3,940		$	10,989
Net loss		—		—		—			(3,633	)		—			—			(391	)		(4,024	)
Other comprehensive earnings, net of tax		—		—		—			—			48			—			—			48
Restricted stock grants, net of cancellations		3		—		—			—			—			—			—			—
Common stock repurchased		—		—		—			—			—			(23	)		—			(23	)
Common stock retired		—		—		(23	)		—			—			23			—			—
Common stock dividends		—		—		(65	)		(125	)		—			—			—			(190	)
Common stock issued		103		10		2,117			—			—			—			—			2,127
Share-based compensation		—		—		142			—			—			—			—			142
Subsidiary equity transactions		—		—		320			—			—			—			896			1,216
Distributions to noncontrolling interests		—		—		—			—			—			—			(224	)		(224	)
Balance as of September 30, 2016		524	$	52	$	7,487		$	(1,977	)	$	278		$	—		$	4,221		$	10,061
Nine Months Ended September 30, 2015
Balance as of December 31, 2014		409	$	41	$	4,088		$	16,631		$	779		$	—		$	4,802		$	26,341
Net loss		—		—		—			(9,922	)		—			—			(369	)		(10,291	)
Other comprehensive loss, net of tax		—		—		—			—			(458	)		—			—			(458	)
Restricted stock grants, net of cancellations		2		—		—			—			—			—			—			—
Common stock repurchased		—		—		—			—			—			(23	)		—			(23	)
Common stock retired		—		—		(23	)		—			—			23			—			—
Common stock dividends		—		—