Edgar Filing: DEVON ENERGY CORP/DE

dvn-10q_20190331.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 March 31, 2019

☐	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 April 17, 2019, 415.2 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 – Divestitures	11
	Note 3 – Derivative Financial Instruments	11
	Note 4 – Share-Based Compensation	14
	Note 5 – Restructuring and Transaction Costs	15
	Note 6 – Other Expenses	15
	Note 7 – Income Taxes	16
	Note 8 – Net Loss Per Share From Continuing Operations	17
	Note 9 – Other Comprehensive Earnings	17
	Note 10 – Supplemental Information to Statements of Cash Flows	18
	Note 11 – Accounts Receivable	18
	Note 12 – Property, Plant and Equipment	18
	Note 13 – Other Current Liabilities	19
	Note 14 – Debt and Related Expenses	19
	Note 15 – Leases	20
	Note 16 – Asset Retirement Obligations	22
	Note 17 – Retirement Plans	22
	Note 18 – Stockholders’ Equity	23
	Note 19 – Discontinued Operations and Assets Held For Sale	23
	Note 20 – Commitments and Contingencies	24
	Note 21 – Fair Value Measurements	25
	Note 22 – Segment Information	26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40

Part II. Other Information
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42

Signatures		43

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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.

“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.

“LOE” means lease operating expenses.

“MBbls” means thousand barrels.

“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBoe” means million Boe.

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“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, effective as of October 5, 2018.

“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 and phrases “expects,” “believes,” “will,” “would,” “could,” “continue,” “may,” “aims,” “likely to be,” “intends,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this report that address activities, events or developments that Devon expects, believes or anticipates will or may occur in the future are forward-looking statements. 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 our operations, including as a result of employee misconduct;

•

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

•

risks related to regulatory, social and market efforts to address climate change;

•

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 assets, 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 2018 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 March 31,
	2019			2018
	(Unaudited)
Upstream revenues	$	710		$	1,319
Marketing revenues		791			879
Total revenues		1,501			2,198
Production expenses		506			543
Exploration expenses		13			33
Marketing expenses		759			873
Depreciation, depletion and amortization		459			399
Asset dispositions		(44	)		(12	)
General and administrative expenses		153			199
Financing costs, net		73			387
Restructuring and transaction costs		54			—
Other expenses		(45	)		21
Total expenses		1,928			2,443
Loss from continuing operations before income taxes		(427	)		(245	)
Income tax benefit		(110	)		(34	)
Net loss from continuing operations		(317	)		(211	)
Net earnings from discontinued operations, net of income tax expense		—			58
Net loss		(317	)		(153	)
Net earnings attributable to noncontrolling interests		—			44
Net loss attributable to Devon	$	(317	)	$	(197	)
Basic net loss per share:
Basic loss from continuing operations per share	$	(0.74	)	$	(0.41	)
Basic earnings from discontinued operations per share		—			0.03
Basic net loss per share	$	(0.74	)	$	(0.38	)
Diluted net loss per share:
Diluted loss from continuing operations per share	$	(0.74	)	$	(0.41	)
Diluted earnings from discontinued operations per share		—			0.03
Diluted net loss per share	$	(0.74	)	$	(0.38	)
Comprehensive loss:
Net loss	$	(317	)	$	(153	)
Other comprehensive earnings (loss), net of tax:
Foreign currency translation		35			(48	)
Pension and postretirement plans		2			4
Other comprehensive earnings (loss), net of tax		37			(44	)
Comprehensive loss		(280	)		(197	)
Comprehensive earnings attributable to noncontrolling interests		—			44
Comprehensive loss attributable to Devon	$	(280	)	$	(241	)

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2019			2018
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(317	)	$	(153	)
Adjustments to reconcile net loss to net cash from operating activities:
Net earnings from discontinued operations, net of income tax expense		—			(58	)
Depreciation, depletion and amortization		459			399
Leasehold impairments		1			8
Accretion on discounted liabilities		17			16
Total losses on commodity derivatives		709			41
Cash settlements on commodity derivatives		(43	)		11
Gains on asset dispositions		(44	)		(12	)
Deferred income tax benefit		(107	)		(38	)
Share-based compensation		48			38
Early retirement of debt		—			312
Total (gains) losses on foreign exchange		(34	)		50
Other		(10	)		(29	)
Changes in assets and liabilities, net		(302	)		25
Net cash from operating activities - continuing operations		377			610
Cash flows from investing activities:
Capital expenditures		(548	)		(651	)
Acquisitions of property and equipment		(11	)		(6	)
Divestitures of property and equipment		311			47
Net cash from investing activities - continuing operations		(248	)		(610	)
Cash flows from financing activities:
Repayments of long-term debt principal		(162	)		(807	)
Early retirement of debt		—			(304	)
Repurchases of common stock		(999	)		(71	)
Dividends paid on common stock		(34	)		(32	)
Shares exchanged for tax withholdings		(26	)		(38	)
Net cash from financing activities - continuing operations		(1,221	)		(1,252	)
Effect of exchange rate changes on cash - continuing operations		1			(15	)
Net change in cash, cash equivalents and restricted cash of continuing operations		(1,091	)		(1,267	)
Cash flows from discontinued operations:
Operating activities		—			194
Investing activities		—			(180	)
Financing activities		—			39
Net change in cash, cash equivalents and restricted cash of discontinued operations		—			53
Net change in cash, cash equivalents and restricted cash		(1,091	)		(1,214	)
Cash, cash equivalents and restricted cash at beginning of period		2,446			2,684
Cash, cash equivalents and restricted cash at end of period	$	1,355		$	1,470

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	1,327		$	1,407
Restricted cash included in other current assets		28			46
Cash and cash equivalents included in current assets held for sale		—			17
Total cash, cash equivalents and restricted cash	$	1,355		$	1,470

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,327		$	2,414
Accounts receivable		1,038			885
Current assets held for sale		—			197
Other current assets		338			941
Total current assets		2,703			4,437
Oil and gas property and equipment, based on successful efforts accounting, net		12,766			12,813
Other property and equipment, net		1,098			1,122
Total property and equipment, net		13,864			13,935
Goodwill		841			841
Right-of-use assets		365			—
Other long-term assets		304			353
Total assets	$	18,077		$	19,566
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	603		$	662
Revenues and royalties payable		850			898
Short-term debt		—			162
Current liabilities held for sale		—			69
Other current liabilities		515			435
Total current liabilities		1,968			2,226
Long-term debt		5,786			5,785
Lease liabilities		298			—
Asset retirement obligations		938			1,030
Other long-term liabilities		458			462
Deferred income taxes		772			877
Stockholders' equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 417 million and 450 million shares in 2019 and 2018, respectively		42			45
Additional paid-in capital		3,518			4,486
Retained earnings		3,280			3,650
Accumulated other comprehensive earnings		1,064			1,027
Treasury stock, at cost, 1.5 million and 1.0 million shares in 2019 and 2018, respectively		(47	)		(22	)
Total stockholders’ equity		7,857			9,186
Total liabilities and stockholders' equity	$	18,077		$	19,566

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

													Accumulated
							Additional						Other
	Common Stock						Paid-In			Retained			Comprehensive			Treasury			Noncontrolling		Total
	Shares			Amount			Capital			Earnings			Earnings			Stock			Interests		Equity
	(Unaudited)
Three Months Ended March 31, 2019
Balance as of December 31, 2018		450		$	45		$	4,486		$	3,650		$	1,027		$	(22	)	$	—	$	9,186
Effect of adoption of lease accounting		—			—			—			(19	)		—			—			—		(19	)
Net loss		—			—			—			(317	)		—			—			—		(317	)
Other comprehensive earnings, net of tax		—			—			—			—			37			—			—		37
Restricted stock grants, net of cancellations		3			—			—			—			—			—			—		—
Common stock repurchased		—			—			—			—			—			(1,042	)		—		(1,042	)
Common stock retired		(36	)		(3	)		(1,014	)		—			—			1,017			—		—
Common stock dividends		—			—			—			(34	)		—			—			—		(34	)
Share-based compensation		—			—			46			—			—			—			—		46
Balance as of March 31, 2019		417		$	42		$	3,518		$	3,280		$	1,064		$	(47	)	$	—	$	7,857
Three Months Ended March 31, 2018
Balance as of December 31, 2017		525		$	53		$	7,333		$	702		$	1,166		$	—		$	4,850	$	14,104
Net earnings (loss)		—			—			—			(197	)		—			—			44		(153	)
Other comprehensive loss, net of tax		—			—			—			—			(44	)		—			—		(44	)
Restricted stock grants, net of cancellations		3			—			—			—			—			—			—		—
Common stock repurchased		—			—