Edgar Filing: DEVON ENERGY CORP/DE

dvn-10q_20180630.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 June 30, 2018

☐	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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

On July 18, 2018, 508.8 million shares of common stock were outstanding.

Table of Contents

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 Equity	9
	Notes to Consolidated Financial Statements	10
	Note 1 – Summary of Significant Accounting Policies	10
	Note 2 – Revenue Recognition	11
	Note 3 – Divestitures	14
	Note 4 – Derivative Financial Instruments	14
	Note 5 – Share-Based Compensation	17
	Note 6 – Asset Impairments	18
	Note 7 – Restructuring and Transaction Costs and Other Expenses	18
	Note 8 – Income Taxes	19
	Note 9 – Net Earnings (Loss) Per Share From Continuing Operations	20
	Note 10 – Other Comprehensive Earnings	20
	Note 11 – Supplemental Information to Statements of Cash Flows	21
	Note 12 – Accounts Receivable	21
	Note 13 – Property, Plant and Equipment	21
	Note 14 – Other Current Liabilities	22
	Note 15 – Debt and Related Expenses	22
	Note 16 – Asset Retirement Obligations	23
	Note 17 – Retirement Plans	23
	Note 18 – Stockholders’ Equity	24
	Note 19 – Discontinued Operations	24
	Note 20 – Commitments and Contingencies	25
	Note 21 – Fair Value Measurements	26
	Note 22 – Segment Information	27
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

Part II. Other Information
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

Signatures		47

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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. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“ASC” means Accounting Standards Codification.

“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, and, unless the context otherwise indicates, EnLink Midstream Manager, LLC, the managing member of EnLink Midstream, LLC.

“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.

“MMBtu” means million Btu.

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“MMcf” means million cubic feet.

“M&M operations” means marketing revenues minus marketing expenses.

“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.

“Tax Reform Legislation” means Tax Cuts and Jobs Act.

“TSR” means total shareholder return.

“Upstream operations” means upstream revenues minus production expenses.

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

“WTI” means West Texas Intermediate.

“/Bbl” means per barrel.

“/d” means per day.

“/MMBtu” means per MMBtu.

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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, 2017 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 oil and gas operations;

•

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

•

risks related to our hedging activities;

•

counterparty credit risks;

•

risks relating to our indebtedness;

•

cyberattack risks;

•

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

•

midstream capacity constraints and potential interruptions in production;

•

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

•

competition for leases, materials, people and capital;

•

our ability to successfully complete mergers, acquisitions and divestitures; and

•

any of the other risks and uncertainties discussed in this report, our 2017 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.

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Part I. Financial Information

Item 1. Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(Unaudited)
Upstream revenues	$	1,069		$	1,332		$	2,388		$	2,873
Marketing revenues		1,180			833			2,059			1,692
Total revenues		2,249			2,165			4,447			4,565
Production expenses		572			455			1,115			912
Exploration expenses		68			57			101			152
Marketing expenses		1,160			849			2,033			1,728
Depreciation, depletion and amortization		420			369			819			769
Asset impairments		154			—			154			—
Asset dispositions		23			(22	)		11			(30	)
General and administrative expenses		153			181			352			376
Financing costs, net		62			77			449			160
Restructuring and transaction costs		94			—			94			—
Other expenses		24			(8	)		45			(22	)
Total expenses		2,730			1,958			5,173			4,045
Earnings (loss) from continuing operations before income taxes		(481	)		207			(726	)		520
Income tax benefit		(7	)		(5	)		(41	)		—
Net earnings (loss) from continuing operations		(474	)		212			(685	)		520
Net earnings from discontinued operations, net of income tax expense		139			33			197			42
Net earnings (loss)		(335	)		245			(488	)		562
Net earnings attributable to noncontrolling interests		90			26			134			40
Net earnings (loss) attributable to Devon	$	(425	)	$	219		$	(622	)	$	522
Basic net earnings (loss) per share:
Basic earnings (loss) from continuing operations per share	$	(0.92	)	$	0.40		$	(1.33	)	$	0.99
Basic earnings from discontinued operations per share		0.09			0.01			0.13			—
Basic net earnings (loss) per share	$	(0.83	)	$	0.41		$	(1.20	)	$	0.99
Diluted net earnings (loss) per share:
Diluted earnings (loss) from continuing operations per share	$	(0.92	)	$	0.40		$	(1.33	)	$	0.99
Diluted earnings from discontinued operations per share		0.09			0.01			0.13			—
Diluted net earnings (loss) per share	$	(0.83	)	$	0.41		$	(1.20	)	$	0.99
Comprehensive earnings (loss):
Net earnings (loss)	$	(335	)	$	245		$	(488	)	$	562
Other comprehensive earnings (loss), net of tax:
Foreign currency translation		(34	)		28			(82	)		36
Pension and postretirement plans		3			4			7			9
Other comprehensive earnings (loss), net of tax		(31	)		32			(75	)		45
Comprehensive earnings (loss)		(366	)		277			(563	)		607
Comprehensive earnings attributable to noncontrolling interests		90			26			134			40
Comprehensive earnings (loss) attributable to Devon	$	(456	)	$	251		$	(697	)	$	567

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(Unaudited)
Cash flows from operating activities:
Net earnings (loss)	$	(335	)	$	245		$	(488	)	$	562
Adjustments to reconcile net earnings to net cash from operating activities:
Earnings from discontinued operations, net of tax		(139	)		(33	)		(197	)		(42	)
Depreciation, depletion and amortization		420			369			819			769
Asset impairments		154			—			154			—
Leasehold impairments		53			22			61			64
Accretion on discounted liabilities		15			15			31			32
Total (gains) losses on commodity derivatives		497			(126	)		538			(358	)
Cash settlements on commodity derivatives		(131	)		11			(120	)		19
(Gains) losses on asset dispositions		23			(22	)		11			(30	)
Deferred income tax expense (benefit)		20			(17	)		(18	)		(32	)
Share-based compensation		58			45			96			81
Early retirement of debt		—			—			312			—
Total (gains) losses on foreign exchange		31			(49	)		81			(64	)
Settlements of intercompany foreign denominated assets/liabilities		(244	)		1			(243	)		10
Other		(20	)		23			(50	)		11
Changes in assets and liabilities, net		(133	)		102			(108	)		133
Net cash from operating activities - continuing operations		269			586			879			1,155
Cash flows from investing activities:
Capital expenditures		(602	)		(434	)		(1,253	)		(831	)
Acquisitions of property and equipment		(10	)		(13	)		(16	)		(33	)
Divestitures of property and equipment		560			75			607			107
Net cash from investing activities - continuing operations		(52	)		(372	)		(662	)		(757	)
Cash flows from financing activities:
Repayments of long-term debt principal		—			—			(807	)		—
Early retirement of debt		—			—			(304	)		—
Repurchases of common stock		(428	)		—			(499	)		—
Dividends paid on common stock		(42	)		(33	)		(74	)		(65	)
Shares exchanged for tax withholdings		(6	)		(3	)		(44	)		(56	)
Net cash from financing activities - continuing operations		(476	)		(36	)		(1,728	)		(121	)
Effect of exchange rate changes on cash:
Settlements of intercompany foreign denominated assets/liabilities		244			(1	)		243			(10	)
Other		(17	)		9			(31	)		10
Total effect of exchange rate changes on cash - continuing operations		227			8			212			—
Net change in cash, cash equivalents and restricted cash of continuing operations		(32	)		186			(1,299	)		277
Cash flows from discontinued operations:
Operating activities		236			151			430			328
Investing activities		(222	)		(215	)		(402	)		(284	)
Financing activities		73			128			112			89
Net change in cash, cash equivalents and restricted cash of discontinued operations		87			64			140			133
Net change in cash, cash equivalents and restricted cash		55			250			(1,159	)		410
Cash, cash equivalents and restricted cash at beginning of period		1,470			2,119			2,684			1,959
Cash, cash equivalents and restricted cash at end of period	$	1,525		$	2,369		$	1,525		$	2,369

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	1,460		$	2,358		$	1,460		$	2,358
Restricted cash included in other current assets		28			—			28			—
Cash and cash equivalents included in current assets held for sale		37			11			37			11
Total cash, cash equivalents and restricted cash	$	1,525		$	2,369		$	1,525		$	2,369

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,460		$	2,642
Accounts receivable		1,141			989
Current assets held for sale		10,764			760
Other current assets		455			400
Total current assets		13,820			4,791
Oil and gas property and equipment, based on successful efforts accounting, net		12,957			13,318
Other property and equipment, net		1,164			1,266
Total property and equipment, net		14,121			14,584
Goodwill		841			841
Other long-term assets		377			296
Long-term assets held for sale		—			9,729
Total assets	$	29,159		$	30,241
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	771		$	633
Revenues and royalties payable		959			748
Short-term debt		277			115
Current liabilities held for sale		5,291			991
Other current liabilities		1,079			828
Total current liabilities		8,377			3,315
Long-term debt		5,790			6,749
Asset retirement obligations		1,088			1,099
Other long-term liabilities		624			549
Long-term liabilities held for sale		—			3,936
Deferred income taxes		432			489
Equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 515 million and 525 million shares in 2018 and 2017, respectively		51			53
Additional paid-in capital		6,888			7,333
Retained earnings		6			702
Accumulated other comprehensive earnings		1,091			1,166
Treasury stock, at cost, 0.5 million shares in 2018		(22	)		—
Total stockholders’ equity attributable to Devon		8,014			9,254
Noncontrolling interests		4,834			4,850
Total equity		12,848			14,104
Total liabilities and equity	$	29,159		$	30,241

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

										Retained			Accumulated
							Additional			Earnings			Other
	Common Stock						Paid-In			(Accumulated			Comprehensive			Treasury			Noncontrolling		Total
	Shares			Amount			Capital			Deficit)			Earnings			Stock			Interests		Equity
	(Unaudited)
Six Months Ended June 30, 2018
Balance as of December 31, 2017		525		$	53		$	7,333		$	702		$	1,166		$	—		$	4,850	$	14,104
Net earnings (loss)		—			—			—			(622	)		—			—			134		(488	)
Other comprehensive loss, net of tax		—			—			—			—			(75	)		—			—		(75	)
Restricted stock grants, net of cancellations		3			—			—			—			—			—			—		—
Common stock repurchased		—			(1	)		—			—			—			(555	)		—		(556	)
Common stock retired		(14	)		(1	)		(532	)		—			—			533			—		—
Common stock dividends		—			—			—			(74	)		—			—			—		(74	)
Share-based compensation		1			—			89			—			—			—			—		89
Subsidiary equity transactions		—			—			(2	)		—			—			—			69		67
Distributions to noncontrolling interests		—			—			—			—			—			—