Edgar Filing: DEVON ENERGY CORP/DE

dvn-10q_20180930.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, 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 every Interactive Data File required to be submitted 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 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 October 17, 2018, 468.2 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	12
	Note 3 – Divestitures	14
	Note 4 – Derivative Financial Instruments	15
	Note 5 – Share-Based Compensation	18
	Note 6 – Asset Impairments	19
	Note 7 – Restructuring and Transaction Costs	19
	Note 8 – Other Expenses	19
	Note 9 – Income Taxes	20
	Note 10 – Net Earnings (Loss) Per Share From Continuing Operations	21
	Note 11 – Other Comprehensive Earnings	21
	Note 12 – Supplemental Information to Statements of Cash Flows	22
	Note 13 – Accounts Receivable	22
	Note 14 – Property, Plant and Equipment	22
	Note 15 – Other Current Liabilities	23
	Note 16 – Debt and Related Expenses	23
	Note 17 – Asset Retirement Obligations	24
	Note 18 – Retirement Plans	24
	Note 19 – Stockholders’ Equity	25
	Note 20 – Discontinued Operations	26
	Note 21 – Commitments and Contingencies	28
	Note 22 – Fair Value Measurements	29
	Note 23 – Segment Information	29
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

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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:

“2012 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 24, 2012.

“2018 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.

“ASC” means Accounting Standards Codification.

“ASR” means an accelerated share-repurchase transaction with a financial institution to repurchase Devon’s common stock.

“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.

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“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBtu” means million Btu.

“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.

“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.

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Unaudited)
Upstream revenues	$	1,332		$	1,101		$	3,720		$	3,974
Marketing revenues		1,247			832			3,306			2,524
Total revenues		2,579			1,933			7,026			6,498
Production expenses		554			448			1,669			1,360
Exploration expenses		32			57			133			209
Marketing expenses		1,217			843			3,250			2,571
Depreciation, depletion and amortization		416			370			1,235			1,139
Asset impairments		2			—			156			—
Asset dispositions		(6	)		(170	)		5			(200	)
General and administrative expenses		147			170			499			546
Financing costs, net		75			78			524			238
Restructuring and transaction costs		11			—			105			—
Other expenses		(31	)		(70	)		14			(92	)
Total expenses		2,417			1,726			7,590			5,771
Earnings (loss) from continuing operations before income taxes		162			207			(564	)		727
Income tax expense (benefit)		(138	)		13			(179	)		13
Net earnings (loss) from continuing operations		300			194			(385	)		714
Net earnings from discontinued operations, net of income tax expense		2,263			18			2,460			60
Net earnings		2,563			212			2,075			774
Net earnings attributable to noncontrolling interests		26			19			160			59
Net earnings attributable to Devon	$	2,537		$	193		$	1,915		$	715
Basic net earnings (loss) per share:
Basic earnings (loss) from continuing operations per share	$	0.61		$	0.37		$	(0.76	)	$	1.36
Basic earnings from discontinued operations per share		4.56			—			4.50			—
Basic net earnings per share	$	5.17		$	0.37		$	3.74		$	1.36
Diluted net earnings (loss) per share:
Diluted earnings (loss) from continuing operations per share	$	0.61		$	0.37		$	(0.76	)	$	1.35
Diluted earnings from discontinued operations per share		4.53			—			4.47			—
Diluted net earnings per share	$	5.14		$	0.37		$	3.71		$	1.35
Comprehensive earnings (loss):
Net earnings	$	2,563		$	212		$	2,075		$	774
Other comprehensive earnings (loss), net of tax:
Foreign currency translation		35			42			(47	)		78
Pension and postretirement plans		36			5			43			14
Other comprehensive earnings (loss), net of tax		71			47			(4	)		92
Comprehensive earnings	$	2,634		$	259		$	2,071		$	866
Comprehensive earnings attributable to noncontrolling interests		26			19			160			59
Comprehensive earnings attributable to Devon	$	2,608		$	240		$	1,911		$	807

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Unaudited)
Cash flows from operating activities:
Net earnings	$	2,563		$	212		$	2,075		$	774
Adjustments to reconcile net earnings to net cash from operating activities:
Earnings from discontinued operations, net of tax		(2,263	)		(18	)		(2,460	)		(60	)
Depreciation, depletion and amortization		416			370			1,235			1,139
Asset impairments		2			—			156			—
Leasehold impairments		15			16			76			80
Accretion on discounted liabilities		15			15			46			47
Total (gains) losses on commodity derivatives		276			144			814			(214	)
Cash settlements on commodity derivatives		(91	)		24			(211	)		43
(Gains) losses on asset dispositions		(6	)		(170	)		5			(200	)
Deferred income tax benefit		(114	)		(25	)		(132	)		(57	)
Share-based compensation		31			33			127			114
Early retirement of debt		—			—			312			—
Total (gains) losses on foreign exchange		(28	)		(74	)		53			(138	)
Settlements of intercompany foreign denominated assets/liabilities		—			—			(243	)		10
Other		42			(14	)		(8	)		(3	)
Changes in assets and liabilities, net		(51	)		(12	)		(159	)		121
Net cash from operating activities - continuing operations		807			501			1,686			1,656
Cash flows from investing activities:
Capital expenditures		(598	)		(467	)		(1,851	)		(1,298	)
Acquisitions of property and equipment		(19	)		(6	)		(35	)		(39	)
Divestitures of property and equipment		89			280			696			387
Net cash from investing activities - continuing operations		(528	)		(193	)		(1,190	)		(950	)
Cash flows from financing activities:
Repayments of long-term debt principal		(21	)		—			(828	)		—
Early retirement of debt		—			—			(304	)		—
Repurchases of common stock		(1,698	)		—			(2,197	)		—
Dividends paid on common stock		(38	)		(30	)		(112	)		(95	)
Shares exchanged for tax withholdings		(3	)		(1	)		(47	)		(57	)
Net cash from financing activities - continuing operations		(1,760	)		(31	)		(3,488	)		(152	)
Effect of exchange rate changes on cash:
Settlements of intercompany foreign denominated assets/liabilities		—			—			243			(10	)
Other		10			12			(21	)		22
Total effect of exchange rate changes on cash - continuing operations		10			12			222			12
Net change in cash, cash equivalents and restricted cash of continuing operations		(1,471	)		289			(2,770	)		566
Cash flows from discontinued operations:
Operating activities		46			200			476			528
Investing activities		2,950			(191	)		2,548			(475	)
Financing activities		71			187			183			276
Net change in cash, cash equivalents and restricted cash of discontinued operations		3,067			196			3,207			329
Net change in cash, cash equivalents and restricted cash		1,596			485			437			895
Cash, cash equivalents and restricted cash at beginning of period		1,525			2,369			2,684			1,959
Cash, cash equivalents and restricted cash at end of period	$	3,121		$	2,854		$	3,121		$	2,854

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	3,102		$	2,639		$	3,102		$	2,639
Restricted cash included in other current assets		19			73			19			73
Cash and cash equivalents included in current assets held for sale		—			142			—			142
Total cash, cash equivalents and restricted cash	$	3,121		$	2,854		$	3,121		$	2,854

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2018		December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,102	$	2,642
Accounts receivable		1,226		989
Current assets held for sale