10-Q 1 d620405d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2013

or

 

¨ 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 of 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  þ    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  þ    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   þ    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

On October 22, 2013, 406 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

     3   

Consolidated Comprehensive Statements of Earnings

     3   

Consolidated Statements of Cash Flows

     4   

Consolidated Balance Sheets

     5   

Consolidated Statements of Stockholders’ Equity

     6   

Notes to Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 4. Controls and Procedures

     34   
Part II. Other Information   

Item 1. Legal Proceedings

     36   

Item 1A. Risk Factors

     36   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     36   

Item 3. Defaults Upon Senior Securities

     36   

Item 4. Mine Safety Disclosures

     36   

Item 5. Other Information

     36   

Item 6. Exhibits

     37   

Signatures

     38   

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements regarding our expectations and plans, as well as future events or conditions. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2012 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, such as changes in the supply of and demand for oil, natural gas and NGLs and related products and services; exploration or drilling programs; political or regulatory events; general economic and financial market conditions; and other factors discussed in this report.

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.

 

2


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,
 
     2013     2012     2013     2012  
     (Unaudited)
(In millions, except per share amounts)
 

Revenues:

        

Oil, gas and NGL sales

   $ 2,341     $ 1,738     $ 6,367     $ 5,270  

Oil, gas and NGL derivatives

     (141     (295     (95     515  

Marketing and midstream revenues

     520       422       1,511       1,136  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,720       1,865       7,783       6,921  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses and other, net:

        

Lease operating expenses

     600       513       1,684       1,540  

Marketing and midstream operating costs and expenses

     383       313       1,128       847  

Depreciation, depletion and amortization

     691       716       2,069       2,080  

General and administrative expenses

     143       150       460       494  

Taxes other than income taxes

     115       104       353       306  

Interest expense

     104       110       322       296  

Restructuring costs

     4       —          50       —     

Asset impairments

     7       1,128       1,960       1,128  

Other, net

     34       (8     83       46  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses and other, net

     2,081       3,026       8,109       6,737  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     639       (1,161     (326     184  

Current income tax expense (benefit)

     (50     (41     82       8  

Deferred income tax expense (benefit)

     260       (401     (181     4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations

     429       (719     (227     172  

Loss from discontinued operations, net of tax

     —          —          —          (21
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 429     $ (719   $ (227   $ 151  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net earnings (loss) per share:

        

Basic earnings (loss) from continuing operations per share

   $ 1.06     $ (1.80   $ (0.57   $ 0.42  

Basic loss from discontinued operations per share

     —          —          —          (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net earnings (loss) per share

   $ 1.06     $ (1.80   $ (0.57   $ 0.37  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net earnings (loss) per share:

        

Diluted earnings (loss) from continuing operations per share

   $ 1.05     $ (1.80   $ (0.57   $ 0.42  

Diluted loss from discontinued operations per share

     —          —          —          (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net earnings (loss) per share

   $ 1.05     $ (1.80   $ (0.57   $ 0.37  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings (loss):

        

Net earnings (loss)

   $ 429     $ (719   $ (227   $ 151  

Other comprehensive earnings (loss), net of tax:

        

Foreign currency translation

     173       311       (281     292  

Pension and postretirement plans

     3       3       12       12  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive earnings (loss), net of tax

     176       314       (269     304  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings (loss)

   $ 605     $ (405   $ (496   $ 455  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine Months
Ended September 30,
 
     2013     2012  
     (Unaudited)  
     (In millions)  

Cash flows from operating activities:

    

Net earnings (loss)

   $ (227   $ 151  

Loss from discontinued operations, net of tax

     —          21  

Adjustments to reconcile earnings (loss) from continuing operations to net cash from operating activities:

    

Depreciation, depletion and amortization

     2,069       2,080  

Asset impairments

     1,960       1,128  

Deferred income tax expense (benefit)

     (181     4  

Unrealized change in fair value of financial instruments

     212       173  

Other noncash charges

     206       136  

Net change in working capital

     (104     48  

Change in long-term other assets

     (28     (22

Change in long-term other liabilities

     92       68  
  

 

 

   

 

 

 

Cash from operating activities – continuing operations

     3,999       3,787  

Cash from operating activities – discontinued operations

     —          26  
  

 

 

   

 

 

 

Net cash from operating activities

     3,999       3,813  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Capital expenditures

     (5,219     (6,228

Proceeds from property and equipment divestitures

     316       1,397  

Purchases of short-term investments

     (1,076     (2,969

Redemptions of short-term investments

     3,419       2,308  

Other

     83       18  
  

 

 

   

 

 

 

Cash from investing activities – continuing operations

     (2,477     (5,474

Cash from investing activities – discontinued operations

     —          58  
  

 

 

   

 

 

 

Net cash from investing activities

     (2,477     (5,416
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from borrowings of long-term debt, net of issuance costs

     —          2,465  

Net short-term debt repayments

     (1,577     (898

Credit facility borrowings

     —          750  

Credit facility repayments

     —          (750

Proceeds from stock option exercises

     1       25  

Dividends paid on common stock

     (259     (242

Excess tax benefits related to share-based compensation

     5       5  
  

 

 

   

 

 

 

Net cash from financing activities

     (1,830     1,355  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (9     31  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (317     (217

Cash and cash equivalents at beginning of period

     4,637       5,555  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 4,320     $ 5,338  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     September 30,     December 31,  
     2013     2012  
     (Unaudited)        
     (In millions, except share data)  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 4,320     $ 4,637  

Short-term investments

     —          2,343  

Accounts receivable

     1,520       1,245  

Other current assets

     475       746  
  

 

 

   

 

 

 

Total current assets

     6,315       8,971  
  

 

 

   

 

 

 

Property and equipment, at cost:

    

Oil and gas, based on full cost accounting:

    

Subject to amortization

     73,009       69,410  

Not subject to amortization

     3,319       3,308  
  

 

 

   

 

 

 

Total oil and gas

     76,328       72,718  

Other

     6,050       5,630  
  

 

 

   

 

 

 

Total property and equipment, at cost

     82,378       78,348  

Less accumulated depreciation, depletion and amortization

     (54,416     (51,032
  

 

 

   

 

 

 

Property and equipment, net

     27,962       27,316  
  

 

 

   

 

 

 

Goodwill

     5,954       6,079  

Other long-term assets

     615       960  
  

 

 

   

 

 

 

Total assets

   $ 40,846     $ 43,326  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 1,269     $ 1,451  

Revenues and royalties payable

     807       750  

Short-term debt

     2,112       3,189  

Other current liabilities

     594       613  
  

 

 

   

 

 

 

Total current liabilities

     4,782       6,003  
  

 

 

   

 

 

 

Long-term debt

     7,956       8,455  

Asset retirement obligations

     2,161       1,996  

Other long-term liabilities

     830       901  

Deferred income taxes

     4,505       4,693  

Stockholders’ equity:

    

Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 406 million shares in 2013 and 2012, respectively

     41       41  

Additional paid-in capital

     3,777       3,688  

Retained earnings

     15,292       15,778  

Accumulated other comprehensive earnings

     1,502       1,771  
  

 

 

   

 

 

 

Total stockholders’ equity

     20,612       21,278  
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

Total liabilities and stockholders’ equity

   $ 40,846     $ 43,326  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

                  

Additional

Paid-In

          Accumulated
Other
          Total  
     Common Stock        Retained     Comprehensive     Treasury     Stockholders’  
     Shares      Amount      Capital     Earnings     Earnings     Stock     Equity  
     (Unaudited)  
     (In millions)  

Nine Months Ended September 30, 2013

                

Balance as of December 31, 2012

     406      $ 41      $ 3,688     $ 15,778     $ 1,771     $ —        $ 21,278  

Net loss

     —           —           —          (227     —          —          (227

Other comprehensive loss, net of tax

     —           —           —          —          (269     —          (269

Stock option exercises

     —           —           1       —          —          —          1  

Common stock repurchased

     —           —           —          —          —          (9     (9

Common stock retired

     —           —           (9     —          —          9       —     

Common stock dividends

     —           —           —          (259     —          —          (259

Share-based compensation

     —           —           92       —          —          —          92  

Share-based compensation tax benefits

     —           —           5       —          —          —          5  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

     406      $ 41      $ 3,777     $ 15,292     $ 1,502     $ —        $ 20,612  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2012

                

Balance as of December 31, 2011

     404      $ 40      $ 3,507     $ 16,308     $ 1,575     $ —        $ 21,430  

Net earnings

     —           —           —          151       —          —          151  

Other comprehensive earnings, net of tax

     —           —           —          —          304       —          304  

Stock option exercises

     1        1        27       —          —          (2     26  

Common stock repurchased

     —           —           —          —          —          (4     (4

Common stock retired

     —           —           (6     —          —          6       —     

Common stock dividends

     —           —           —          (242     —          —          (242

Share-based compensation

     —           —           111       —          —          —          111  

Share-based compensation tax benefits

     —           —           5       —          —          —          5  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

     405      $ 41      $ 3,644     $ 16,217     $ 1,879     $ —        $ 21,781  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

The accompanying unaudited financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2012 Annual Report on Form 10-K.

The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2013 and 2012 and Devon’s financial position as of September 30, 2013.

2. Derivative Financial Instruments

Objectives and Strategies

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production. These instruments are used to manage the inherent uncertainty of future revenues due to commodity price volatility and typically include financial price swaps, basis swaps, costless price collars and call options.

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates.

Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

Counterparty Credit Risk

By using derivative financial instruments, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts contain provisions that provide for collateral payments, depending on levels of exposure and the credit rating of the counterparty.

As of September 30, 2013, Devon held $43 million of cash collateral. Such amount represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying balance sheet.

Commodity Derivatives

As of September 30, 2013, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX West Texas Intermediate futures price. The second table presents Devon’s oil derivatives that settle against the Western Canadian Select index.

 

     Price Swaps      Price Collars      Call Options Sold  

Period

   Volume
(Bbls/d)
     Weighted
Average Price
($/Bbl)
     Volume
(Bbls/d)
     Weighted
Average Floor Price
($/Bbl)
     Weighted
Average Ceiling Price
($/Bbl)
     Volume
(Bbls/d)
     Weighted
Average Price
($/Bbl)
 

Q4 2013

     70,000       $ 100.26         72,000       $ 90.60       $ 111.14         10,000       $ 120.00   

Q1-Q4 2014

     49,000       $ 94.77         43,969       $ 89.01       $ 102.48         42,000       $ 116.43   

Q1-Q4 2015

     500       $ 91.00         —         $ —         $ —           22,000       $ 115.45   

 

7


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Basis Swaps  

Period

   Index    Volume
(Bbls/d)
     Weighted Average
Differential to WTI
($/Bbl)
 

Q4 2013

   Western Canadian Select      40,000       $ (22.47

As of September 30, 2013, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The next two tables present Devon’s natural gas derivatives that settle against the AECO index.

 

     Price Swaps      Price Collars      Call Options Sold  

Period

   Volume
(MMBtu/d)
     Weighted
Average Price
($/MMBtu)
     Volume
(MMBtu/d)
     Weighted
Average Floor Price
($/MMBtu)
     Weighted
Average Ceiling Price
($/MMBtu)
     Volume
(MMBtu/d)
     Weighted
Average Price
($/MMBtu)
 

Q4 2013

     987,500       $ 4.09         650,000       $ 3.61       $ 4.28         —         $ —     

Q1-Q4 2014

     800,000       $ 4.42         210,000       $ 4.01       $ 4.71         500,000       $ 5.00   

Q1-Q4 2015

     —         $ —           —         $ —         $ —           550,000       $ 5.09   

 

     Price Swaps  

Period

   Volume
(MMBtu/d)
     Weighted
Average Price
($/MMBtu)
 

Q4 2013

     28,435       $ 3.54   

 

     Basis Swaps  

Period

   Index      Volume
(MMBtu/d)
     Weighted Average Differential
to Henry Hub ($/MMBtu)
 

Q4 2013

     AECO         62,843       $ (0.44

Q1-Q4 2014

     AECO         94,781       $ (0.52

As of September 30, 2013, Devon had the following open NGL derivative positions. Devon’s NGL derivatives settle against the average of the prompt month OPIS Mont Belvieu, Texas index.

 

     Price Swaps  

Period

   Product      Volume
(Bbls/d)
     Weighted
Average Price
($/Bbl)
 

Q4 2013

     Ethane         1,957       $ 15.36   

Q4 2013

     Propane         3,985       $ 41.73   

 

     Basis Swaps  

Period

   Pay      Volume
(Bbls/d)
     Weighted Average
Differential to WTI
($/Bbl)
 

Q4 2013

     Natural Gasoline         1,000       $ (9.58

Q1-Q4 2014

     Natural Gasoline         329       $ (10.85

 

8


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Foreign Currency Derivatives

As of September 30, 2013, Devon had the following open foreign currency derivative position:

 

Forward Contract

 

Currency

   Contract
Type
     CAD
Notional
     Weighted Average
Fixed Rate Received
   Expiration  
            (In millions)      (CAD-USD)       

Canadian Dollar

     Sell       $ 1,261       0.969      December 2013   

Financial Statement Presentation

The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying comprehensive statements of earnings associated with derivative financial instruments. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s commodity derivatives are presented in oil, gas and NGL derivatives in the accompanying comprehensive statements of earnings. Cash settlements and unrealized gains and losses on fair value changes associated with Devon’s interest rate and foreign currency derivatives are presented in other, net in the accompanying comprehensive statements of earnings.

 

     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2013     2012     2013     2012  
     (In millions)  

Cash settlements:

        

Commodity derivatives

   $ (7   $ 243      $ 93      $ 668   

Interest rate derivatives

     10        10        24        9   

Foreign currency derivatives

     (5     (38     30        (29
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash settlements

     (2     215        147        648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses):

        

Commodity derivatives

     (134     (538     (188     (153

Interest rate derivatives

     (9     (9     (23     (24

Foreign currency derivatives

     (23     12        (1     4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains (losses)

     (166     (535     (212     (173
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) recognized on comprehensive statements of earnings

   $ (168   $ (320   $ (65   $ 475   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table presents the derivative fair values included in the accompanying balance sheets.

 

     Balance Sheet Caption    September 30, 2013      December 31, 2012  
          (In millions)  

Asset derivatives:

        

Commodity derivatives

   Other current assets    $ 224       $ 379   

Commodity derivatives

   Other long-term assets      58         22   

Interest rate derivatives

   Other current assets      —           23   

Foreign currency derivatives

   Other current assets      —           1   
     

 

 

    

 

 

 

Total asset derivatives

      $ 282       $ 425   
     

 

 

    

 

 

 

Liability derivatives:

        

Commodity derivatives

   Other current liabilities    $ 50       $ 3   

Commodity derivatives

   Other long-term liabilities      51         29   
     

 

 

    

 

 

 

Total liability derivatives

      $ 101       $ 32   
     

 

 

    

 

 

 

3. Restructuring Costs

Office Consolidation

In October 2012, Devon announced plans to consolidate its U.S. personnel into a single operations group centrally located at the company’s headquarters in Oklahoma City. As of September 30, 2013, Devon had substantially completed this initiative and incurred $130 million of restructuring costs associated with the office consolidation. The $130 million includes $50 million incurred during the nine months ended September 30, 2013, which largely relates to office space that is subject to non-cancellable operating lease agreements that Devon ceased using.

Divestiture of Offshore Assets

In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. Devon completed this divestiture program in 2012, having incurred $196 million of cumulative restructuring costs associated with the divestitures.

Financial Statement Presentation

The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings related to the office consolidation. There were no costs related to the offshore divestitures in the nine-month periods ended September 30, 2013 and 2012.

 

     Three Months
Ended  September 30,
     Nine Months
Ended  September 30,
 
     2013      2012      2013      2012  
     (In millions)  

Lease obligations and other

   $ 4       $ —         $ 44       $ —     

Asset impairments

     —           —           6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring costs

   $ 4       $ —         $ 50       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The schedule below summarizes Devon’s restructuring liabilities.

 

     Other
Current
Liabilities
    Other
Long-Term
Liabilities
    Total  
     (In millions)  

Balance as of December 31, 2012

   $ 52      $ 9      $ 61   

Lease obligations and other—Office consolidation

     18        11        29   

Employee severance—Office consolidation

     (34     —          (34

Lease obligations—Offshore

     (2     (1     (3
  

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

   $ 34      $ 19      $ 53   
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 29      $ 16      $ 45   

Lease obligations—Offshore

     (9     (3     (12

Employee severance—Offshore

     (7     —          (7
  

 

 

   

 

 

   

 

 

 

Balance as September 30, 2012

   $ 13      $ 13      $ 26   
  

 

 

   

 

 

   

 

 

 

4. Other, net

The components of other, net in the accompanying comprehensive statements of earnings include the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (In millions)  

Accretion of asset retirement obligations

   $ 29      $ 27      $ 86      $ 82   

Interest rate derivatives

     (1     (1     (1     15   

Foreign currency derivatives

     28        26        (29     25   

Foreign exchange loss (gain)

     (27     (28     34        (26

Interest income

     (4     (8     (16     (24

Other

     9        (24     9        (26
  

 

 

   

 

 

   

 

 

   

 

 

 

Other, net

   $ 34      $ (8   $ 83      $ 46   
  

 

 

   

 

 

   

 

 

   

 

 

 

5. Income Taxes

In the second quarter of 2013, Devon repatriated to the United States $2.0 billion of cash from its foreign subsidiaries. In conjunction with the repatriation, Devon recognized approximately $100 million of current income tax expense. The current expense was entirely offset by the recognition of deferred income tax benefits, which included the reduction of the deferred tax liability previously recognized for unremitted foreign earnings deemed not to be indefinitely reinvested.

As of September 30, 2013, Devon’s unremitted foreign earnings totaled approximately $6.0 billion. Of this amount, approximately $4.8 billion was deemed to be indefinitely reinvested into the development and growth of Devon’s Canadian business. Therefore, Devon has not recognized a deferred tax liability for U.S. income taxes associated with such earnings. If such earnings were to be repatriated to the U.S., Devon may be subject to U.S. income taxes and foreign withholding taxes. However, it is not practical to estimate the amount of such additional taxes that may be payable due to the inter-relationship of the various factors involved in making such an estimate.

 

11


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Devon has deemed the remaining $1.2 billion of unremitted foreign earnings not to be indefinitely reinvested. Consequently, Devon has recognized a deferred tax liability of approximately $550 million associated with such unremitted earnings as of September 30, 2013.

The following table presents our total income tax expense (benefit) and a reconciliation of our effective income tax rate to the U.S. statutory income tax rate.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Total income tax expense (benefit) (in millions)

   $ 210      $ (442   $ (99   $ 12   
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. statutory income tax rate

     35     (35 %)      (35 %)      35

State income taxes

     1     (1 %)      (3 %)      (1 %) 

Taxation on Canadian operations

     (5 %)      (1 %)      9     (14 %) 

Other

     2     (1 %)      (1 %)      (13 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     33     (38 %)      (30 %)      7
  

 

 

   

 

 

   

 

 

   

 

 

 

6. Earnings (Loss) Per Share

The following table reconciles earnings (loss) from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share.

 

           Common     Earnings (loss)  
     Earnings (loss)     Shares     per Share  
     (In millions, except per share amounts)  

Three Months Ended September 30, 2013:

      

Earnings from continuing operations

   $ 429        406     

Attributable to participating securities

     (4     (4  
  

 

 

   

 

 

   

Basic earnings per share

     425        402      $ 1.06   

Dilutive effect of potential common shares issuable

     —          1     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 425        403      $ 1.05   
  

 

 

   

 

 

   

Three Months Ended September 30, 2012:

      

Loss from continuing operations

   $ (719     405     

Attributable to participating securities

     (1     (5  
  

 

 

   

 

 

   

Basic earnings per share

     (720     400      $ (1.80

Dilutive effect of potential common shares issuable

     —          —       
  

 

 

   

 

 

   

Diluted earnings per share

   $ (720     400      $ (1.80
  

 

 

   

 

 

   

Nine Months Ended September 30, 2013:

      

Loss from continuing operations

   $ (227     406     

Attributable to participating securities

     (2     (4  
  

 

 

   

 

 

   

Basic earnings per share

     (229     402      $ (0.57

Dilutive effect of potential common shares issuable

     —          —       
  

 

 

   

 

 

   

Diluted earnings per share

   $ (229     402      $ (0.57
  

 

 

   

 

 

   

 

12


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

           Common     Earnings (loss)  
     Earnings (loss)     Shares     per Share  
     (In millions, except per share amounts)  

Nine Months Ended September 30, 2012:

      

Earnings from continuing operations

   $ 172        404     

Attributable to participating securities

     (2     (4  
  

 

 

   

 

 

   

Basic earnings per share

     170        400      $ 0.42   

Dilutive effect of potential common shares issuable

     —          1     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 170        401      $ 0.42   
  

 

 

   

 

 

   

Certain options to purchase shares of Devon’s common stock are excluded from the dilution calculation because the options are antidilutive. During the three-month and nine-month periods ended September 30, 2013, 7.5 million shares and 7.6 million shares, respectively, were excluded from the diluted earnings per share calculations. During the three-month and nine-month periods ended September 30, 2012, 9.0 million shares and 8.9 million shares, respectively, were excluded from the diluted earnings per share calculations.

7. Other Comprehensive Earnings

Components of other comprehensive earnings consist of the following:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (In millions)  

Foreign currency translation:

        

Beginning accumulated foreign currency translation

   $ 1,542      $ 1,783      $ 1,996      $ 1,802   

Change in cumulative translation adjustment

     182        325        (294     305   

Income tax benefit (expense)

     (9     (14     13        (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated foreign currency translation

     1,715        2,094        1,715        2,094   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and postretirement benefit plans:

        

Beginning accumulated pension and postretirement benefits

     (216     (218     (225     (227

Recognition of net actuarial loss and prior service cost in earnings (1)

     6        6        18        19   

Income tax expense

     (3     (3     (6     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated pension and postretirement benefits

     (213     (215     (213     (215
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive earnings, net of tax

   $ 1,502      $ 1,879      $ 1,502      $ 1,879   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) These accumulated other comprehensive earnings components are included in the computation of net periodic benefit cost, which is a component of general and administrative expenses on the accompanying comprehensive statements of earnings (see “Retirement Plans” note for additional details).

 

13


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

8. Supplemental Information to Statements of Cash Flows

 

     Nine Months Ended
September 30,
 
     2013     2012  
     (In millions)  

Net change in working capital accounts:

    

Accounts receivable

   $ (287   $ 275   

Other current assets

     72        (234

Accounts payable

     127        77   

Revenues and royalties payable

     56        (34

Other current liabilities

     (72     (36
  

 

 

   

 

 

 

Net change in working capital

   $ (104   $ 48   
  

 

 

   

 

 

 

Interest paid (net of capitalized interest)

   $ 342      $ 260   

Income taxes paid (received)

   $ (2   $ 88   

9. Short-Term Investments

The components of short-term investments include the following:

 

     September 30, 2013      December 31, 2012  
     (In millions)  

Canadian treasury, agency and provincial securities

   $ —         $ 1,865   

U.S. treasuries

     —           429   

Other

     —           49   
  

 

 

    

 

 

 

Short-term investments

   $ —         $ 2,343   
  

 

 

    

 

 

 

10. Accounts Receivable

The components of accounts receivable include the following:

 

     September 30, 2013     December 31, 2012  
     (In millions)  

Oil, gas and NGL sales

   $ 942      $ 752   

Joint interest billings

     389        270   

Marketing and midstream revenues

     147        161   

Other

     53        72   
  

 

 

   

 

 

 

Gross accounts receivable

     1,531        1,255   

Allowance for doubtful accounts

     (11     (10
  

 

 

   

 

 

 

Net accounts receivable

   $ 1,520      $ 1,245   
  

 

 

   

 

 

 

 

14


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

11. Property and Equipment

Asset Impairments

In the first nine months of 2013 and 2012, Devon recognized asset impairments related to its oil and gas property and equipment and its U.S. midstream assets as presented below.

 

     Nine Months Ended September 30, 2013      Nine Months Ended September 30, 2012  
     Gross      Net of Taxes      Gross      Net of Taxes  
     (In millions)  

U.S. oil and gas assets

   $ 1,110       $ 707       $ 1,106       $ 705   

Canada oil and gas assets

     843         632         —           —     

Midstream assets

     7         4         22         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total asset impairments

   $ 1,960       $ 1,343       $ 1,128       $ 719   
  

 

 

    

 

 

    

 

 

    

 

 

 

Oil and Gas Impairments

Under the full-cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the full cost “ceiling” at the end of each quarter. The ceiling is calculated separately for each country and is based on the present value of estimated future net cash flows from proved oil and gas reserves, discounted at 10 percent per annum, net of related tax effects. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months.

The oil and gas impairments resulted primarily from declines in the U.S. and Canada full cost ceilings. The lower ceiling values resulted primarily from decreases in the 12-month average trailing prices for oil, bitumen and NGLs, which have reduced proved reserve values.

If estimated future cash flows decline due to price decreases or other factors, Devon could incur additional full cost ceiling impairments related to its oil and gas property and equipment.

Midstream Impairments

In the third quarter of 2013 and 2012, Devon determined that the carrying amounts of certain midstream facilities located in south and east Texas were not recoverable from estimated future cash flows due to declining dry natural gas production. Consequently, the assets were written down to their estimated fair values, which were determined using discounted cash flow models. The fair value of Devon’s midstream assets is considered a Level 3 fair value measurement.

12. Goodwill

During the first nine months of 2013, Devon’s Canadian goodwill decreased $99 million entirely due to foreign currency translation. Additionally, Devon’s U.S. goodwill decreased $26 million due to the sale of certain midstream assets.

13. Debt

Commercial Paper

During the second quarter of 2013, Devon repatriated $2.0 billion of foreign earnings to the United States and repaid $2.0 billion of commercial paper borrowings. As of September 30, 2013, Devon had $1.6 billion of outstanding commercial paper at an average rate of 0.27 percent.

 

15


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Credit Lines

Devon has a $3.0 billion syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). During the third quarter of 2013, the lenders agreed, effective October 24, 2013, to extend the maturity date of the Senior Credit Facility to October 24, 2018. As of September 30, 2013 there were no borrowings under the Senior Credit Facility. The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be no greater than 65 percent. As of September 30, 2013, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 22.4 percent.

14. Asset Retirement Obligations

The schedule below summarizes changes in Devon’s asset retirement obligations.

 

     Nine Months Ended September 30,  
     2013     2012  
     (In millions)  

Asset retirement obligations as of beginning of period

   $ 2,095      $ 1,563   

Liabilities incurred

     88        60   

Liabilities settled

     (46     (57

Revision of estimated obligation

     104        411   

Liabilities assumed by others

     (15     (18

Accretion expense on discounted obligation

     86        82   

Foreign currency translation adjustment

     (44     35   
  

 

 

   

 

 

 

Asset retirement obligations as of end of period

     2,268        2,076   

Less current portion

     107        67   
  

 

 

   

 

 

 

Asset retirement obligations, long-term

   $ 2,161      $ 2,009   
  

 

 

   

 

 

 

15. Retirement Plans

The following table presents the components of net periodic benefit cost for Devon’s pension and postretirement benefit plans.

 

     Pension Benefits     Postretirement Benefits  
     Three Months Ended     Nine Months Ended     Three Months Ended     Nine Months Ended  
     September 30,     September 30,     September 30,     September 30,  
     2013     2012     2013     2012     2013      2012     2013     2012  
     (In millions)  

Service cost

   $ 9      $ 11      $ 27      $ 32      $ —         $ 1      $ —        $ 1   

Interest cost

     13        15        39        45        —           —          1        1   

Expected return on plan assets

     (16     (16     (47     (48     —           —          —          —     

Amortization of prior service cost (1)

     1        1        3        3        —           —          —          (1

Net actuarial loss (gain) (1)

     5        6        16        18        —           (1     (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (2)

   $ 12      $ 17      $ 38      $ 50      $ —         $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) These net periodic benefit costs were reclassified out of other comprehensive earnings in the current period.
(2) Net periodic benefit cost is a component of general and administrative expenses on the accompanying comprehensive statements of earnings.

 

16


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

16. Stockholders’ Equity

Dividends

Devon paid common stock dividends of $259 million and $242 million in the first nine months of 2013 and 2012, respectively. The quarterly cash dividend was $0.20 per share in the first nine months of 2012 and in the first quarter of 2013. Devon increased the dividend rate to $0.22 per share in the second quarter of 2013.

17. Commitments and Contingencies

Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. Actual amounts could differ materially from management’s estimates.

Royalty Matters

Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. The suits allege that the producers and related parties used below-market prices, made improper deductions, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold. Devon’s largest exposure for such matters relates to royalties in New Mexico. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

Environmental Matters

Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured remediation costs. Devon’s monetary exposure for environmental matters is not expected to be material.

Chief Redemption Matters

In 2006, Devon acquired Chief Holdings LLC (“Chief”) from the owners of Chief, including Trevor Rees-Jones, the majority owner of Chief. In 2008, a former owner of Chief filed a petition against Rees-Jones, as the former majority owner of Chief, and Devon, as Chief’s successor pursuant to the 2006 acquisition. The petition claimed, among other things, violations of the Texas Securities Act, fraud and breaches of Rees-Jones’ fiduciary responsibility to the former owner in connection with Chief’s 2004 redemption of the owner’s minority ownership stake in Chief.

On June 20, 2011, a court issued a judgment against Rees-Jones for $196 million, of which $133 million of the judgment was also issued against Devon. Devon did not have a legal right of set off with respect to the judgment. Therefore, Devon had recorded a $133 million long-term liability relating to the judgment with an offsetting $133 million long-term receivable relating to its right to be indemnified by Rees-Jones and certain other parties pursuant to the indemnification agreement.

The plaintiffs and Rees-Jones have settled all claims related to the 2004 redemption. Under the terms of the settlement, Rees-Jones and Devon received full releases for all of the plaintiffs’ claims with Rees-Jones funding all settlement payments. Consequently, Devon reversed the previously recorded liability and asset in the first quarter of 2013.

Other Matters

Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject.

 

17


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

18. Fair Value Measurements

The following tables provide carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other current payables and accrued expenses included in the accompanying balance sheets approximated fair value at September 30, 2013 and December 31, 2012. Therefore, such financial assets and liabilities are not presented in the following tables.

 

                 Fair Value Measurements Using:  
     Carrying     Total Fair     Level 1      Level 2     Level 3  
     Amount     Value     Inputs      Inputs     Inputs  
     (In millions)  

September 30, 2013 assets (liabilities):

           

Cash equivalents

   $ 3,592      $ 3,592      $ 13       $ 3,579      $ —     

Long-term investments

   $ 62      $ 62      $ —         $      $ 62   

Commodity derivatives

   $ 282      $ 282      $ —         $ 282      $ —     

Commodity derivatives

   $ (101   $ (101   $ —         $ (101   $ —     

Debt

   $ (10,068   $ (10,926   $ —         $ (10,926   $ —     

December 31, 2012 assets (liabilities):

           

Cash equivalents

   $ 4,149      $ 4,149      $ 32       $ 4,117      $ —     

Short-term investments

   $ 2,343      $ 2,343      $ 429       $ 1,914      $ —     

Long-term investments

   $ 64      $ 64      $ —         $      $ 64   

Commodity derivatives

   $ 401      $ 401      $ —         $ 401      $ —     

Commodity derivatives

   $ (32   $ (32   $ —         $ (32   $ —     

Interest rate derivatives

   $ 23      $ 23      $ —         $ 23      $ —     

Foreign currency derivatives

   $ 1      $ 1      $ —         $ 1      $ —     

Debt

   $ (11,644   $ (13,435   $ —         $ (13,435   $ —     

The following methods and assumptions were used to estimate the fair values in the tables above.

Level 1 Fair Value Measurements

Cash equivalents and short-term investments — Amounts consist primarily of U.S. and Canadian treasury securities and money market investments. The fair value approximates the carrying value.

Level 2 Fair Value Measurements

Cash equivalents and short-term investments — Amounts consist primarily of Canadian agency and provincial securities and commercial paper investments. The fair value approximates the carrying value.

Commodity, interest rate and foreign currency derivatives — The fair values of commodity, interest rate and foreign currency derivatives are estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.

Debt — Devon’s debt instruments do not actively trade in an established market. The fair values of its fixed-rate debt are estimated based on rates available for debt with similar terms and maturity. The fair value of Devon’s variable-rate commercial paper is the carrying value.

Level 3 Fair Value Measurements

Long-term investments — Devon’s long-term investments presented in the tables above consisted entirely of auction rate securities. Due to an inactive market for Devon’s auction rate securities, quoted market prices for these securities were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair values of its long-

 

18


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

term auction rate securities. These inputs were based on continued receipts of principal at par, the collection of all accrued interest to date, the probability of full repayment of the securities considering the U.S. government guarantees substantially all of the underlying student loans, and the AAA credit rating of the securities. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of September 30, 2013 and December 31, 2012.

Included below is a summary of the changes in Devon’s Level 3 fair value measurements during the first nine months of 2013 and 2012.

 

     Nine Months Ended September 30,  
     2013     2012  
     (In millions)  

Long-term investments balance at beginning of period

   $ 64      $ 84   

Redemptions of principal

     (2     (20
  

 

 

   

 

 

 

Long-term investments balance at end of period

   $ 62      $ 64   
  

 

 

   

 

 

 

19. Segment Information

Devon manages its operations through distinct operating segments, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its U.S. operating segments into one reporting segment due to the similar nature of the businesses. However, Devon’s Canadian operating segment is reported as a separate reporting segment primarily due to the significant differences between the U.S. and Canadian regulatory environments. Devon’s segments are all primarily engaged in oil and gas producing activities. Revenues are all from external customers.

 

     U.S.     Canada     Total  
     (In millions)  

Three Months Ended September 30, 2013:

      

Oil, gas and NGL sales

   $ 1,573      $ 768      $ 2,341   

Oil, gas and NGL derivatives

   $ (153   $ 12      $ (141

Marketing and midstream revenues

   $ 509      $ 11      $ 520   

Depreciation, depletion and amortization

   $ 492      $ 199      $ 691   

Interest expense

   $ 94      $ 10      $ 104   

Asset impairments

   $ 7      $ —        $ 7   

Earnings from continuing operations before income taxes

   $ 410      $ 229      $ 639   

Income tax expense

   $ 160      $ 50      $ 210   

Earnings from continuing operations

   $ 250      $ 179      $ 429   

Capital expenditures

   $ 1,256      $ 437      $ 1,693   

Three Months Ended September 30, 2012:

      

Oil, gas and NGL sales

   $ 1,144      $ 594      $ 1,738   

Oil, gas and NGL derivatives

   $ (290   $ (5   $ (295

Marketing and midstream revenues

   $ 415      $ 7      $ 422   

Depreciation, depletion and amortization

   $ 478      $ 238      $ 716   

Interest expense

   $ 94      $ 16      $ 110   

Asset impairments

   $ 1,128      $ —        $ 1,128   

Earnings (loss) from continuing operations before income taxes

   $ (1,169   $ 8      $ (1,161

Income tax benefit

   $ (438   $ (4   $ (442

Earnings (loss) from continuing operations

   $ (731   $ 12      $ (719

Capital expenditures

   $ 1,586      $ 382      $ 1,968   

 

19


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     U.S.     Canada     Total  
     (In millions)  

Nine Months Ended September 30, 2013:

      

Oil, gas and NGL sales

   $ 4,377      $ 1,990      $ 6,367   

Oil, gas and NGL derivatives

   $ (82   $ (13   $ (95

Marketing and midstream revenues

   $ 1,436      $ 75      $ 1,511   

Depreciation, depletion and amortization

   $ 1,426      $ 643      $ 2,069   

Interest expense

   $ 284      $ 38      $ 322   

Asset impairments

   $ 1,117      $ 843      $ 1,960   

Earnings (loss) from continuing operations before income taxes

   $ 208      $ (534   $ (326

Income tax expense (benefit)

   $ 59      $ (158   $ (99

Earnings (loss) from continuing operations

   $ 149      $ (376   $ (227

Property and equipment, net

   $ 19,462      $ 8,500      $ 27,962   

Total assets

   $ 24,668      $ 16,178      $ 40,846   

Capital expenditures

   $ 3,650      $ 1,377      $ 5,027   

Nine Months Ended September 30, 2012:

      

Oil, gas and NGL sales

   $ 3,394      $ 1,876      $ 5,270   

Oil, gas and NGL derivatives

   $ 520      $ (5   $ 515   

Marketing and midstream revenues

   $ 1,064      $ 72      $ 1,136   

Depreciation, depletion and amortization

   $ 1,348      $ 732      $ 2,080   

Interest expense

   $ 249      $ 47      $ 296   

Asset impairments

   $ 1,128      $ —        $ 1,128   

Earnings from continuing operations before income taxes

   $ 91      $ 93      $ 184   

Income tax expense

   $ 6      $ 6      $ 12   

Earnings from continuing operations

   $ 85      $ 87      $ 172   

Property and equipment, net

   $ 18,306      $ 8,840      $ 27,146   

Total assets

   $ 24,425      $ 19,123      $ 43,548   

Capital expenditures

   $ 5,007      $ 1,276      $ 6,283   

20. Subsequent Event

On October 21, 2013, Devon, Crosstex Energy, Inc. and Crosstex Energy, L.P. (collectively “Crosstex”) announced plans to combine substantially all of Devon’s U.S. midstream assets with Crosstex’s assets to form a new midstream business. The new business will consist of a master limited partnership and a general partner entity (the “Master Limited Partnership” and the “General Partner”), which will both be publicly traded entities.

In exchange for a controlling interest in both the General Partner and the Master Limited Partnership, Devon will contribute its equity interest in a newly formed Devon subsidiary (“Devon Holdings”) and $100 million in cash. Devon Holdings will own Devon’s midstream assets in the Barnett Shale in North Texas and the Cana and Arkoma Woodford Shales in Oklahoma, as well as Devon’s interest in Gulf Coast Fractionators in Mt. Belvieu, Texas. The Master Limited Partnership and the General Partner will each own 50% of Devon Holdings. The completion of these transactions is subject to Crosstex Energy, Inc. shareholder approval.

Upon closing of the transactions, the pro forma ownership of the General Partner will be approximately:

 

   

70% - Devon Energy Corporation

 

   

30% - Current Crosstex Energy, Inc. public stockholders

 

20


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Upon closing of the transactions, the pro forma ownership of the Master Limited Partnership will be approximately:

 

   

53% - Devon Energy Corporation

 

   

40% - Current Crosstex Energy, L.P. public unitholders

 

   

7% - the General Partner

 

21


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis addresses material changes in our results of operations and capital resources and uses for the three-month and nine-month periods ended September 30, 2013, compared to the three-month and nine-month periods ended September 30, 2012, and in our financial condition and liquidity since December 31, 2012. For information regarding our critical accounting policies and estimates, see our 2012 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview of 2013 Results

Key components of our financial performance are summarized below, which exclude amounts from our discontinued operations.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013      2012     Change     2013     2012      Change  
     ($ in millions, except per share amounts)  

Net earnings (loss)

   $ 429       $ (719     +160 %   $ (227   $ 172         -232 %

Adjusted earnings (1)

   $ 526       $ 355        +48   $ 1,287      $ 1,005         +28

Earnings (loss) per share

   $ 1.05       $ (1.80     +159   $ (0.57   $ 0.42         -234 %

Adjusted earnings per share (1)

   $ 1.29       $ 0.88        +47   $ 3.16      $ 2.48         +27

Production (MBoe/d)

     690.8         678.2        +2     691.8        683.5         +1

Realized price per Boe

   $   36.84       $   27.85        +32   $ 33.71      $ 28.14         +20

Operating margin per Boe (2)

   $ 23.74       $ 19.44        +22   $ 21.31      $ 19.17         +11

Operating cash flow

   $ 1,601       $ 1,361        +18   $ 3,999      $ 3,787         +6

Adjusted operating cash flow (1)

   $ 1,583       $ 1,281        +24   $   4,137      $   3,693         +12

Capitalized costs

   $ 1,693       $ 1,968        -14 %   $ 5,027      $ 6,283         -20 %

Shareholder distributions

   $ 89       $ 80        +10   $ 259      $ 242         +7

 

 

(1) Adjusted earnings, adjusted earnings per share and adjusted operating cash flow are financial measures not prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). For a description of adjusted earnings, adjusted earnings per share and adjusted operating cash flow as well as reconciliations to the comparable GAAP measures, see “Non-GAAP Measures” in this Item 2.
(2) Computed as revenues from commodity sales, commodity derivatives settlements, and marketing and midstream operations, less expenses for lease operations, marketing and midstream operations, general and administration, taxes other than income taxes and interest, with the result divided by total production.

During the three-month and nine-month periods ended September 30, 2013, our adjusted earnings, adjusted earnings per share and operating margin per Boe all increased compared to the 2012 periods. The improved 2013 results were driven primarily by increases in gas prices, oil volumes and oil realizations. These factors also contributed to higher adjusted operating cash flow, which when combined with a reduction in capitalized costs, caused our cash flow deficit to narrow considerably in 2013.

During the first nine months of 2013, we recognized noncash asset impairments totaling $2.0 billion ($1.3 billion after tax).

 

22


Table of Contents

Results of Operations

Production, Prices and Revenues

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013      2012      Change     2013      2012      Change  

Oil (MBbls/d)

                

U.S.

     81.4         58.9         +38     75.1         56.6         +33

Canada

     37.9         39.3         -4 %     39.4         40.7         -3 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     119.3         98.2         +21     114.5         97.3         +18
  

 

 

    

 

 

      

 

 

    

 

 

    

Bitumen (MBbls/d)

                

Canada

     45.6         44.3         +3     51.0         47.1         +8
  

 

 

    

 

 

      

 

 

    

 

 

    

Gas (MMcf/d)

                

U.S.

     1,934.8         2,067.1         -6 %     1,957.6         2,063.0         -5 %

Canada

     448.0         487.2         -8 %     457.9         520.8         -12 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     2,382.8         2,554.3         -7 %     2,415.5         2,583.8         -7 %
  

 

 

    

 

 

      

 

 

    

 

 

    

NGLs (MBbls/d)

                

U.S.

     118.7         100.8         +18     113.8         97.7         +17

Canada

     10.0         9.2         +8     9.9         10.8         -9 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     128.7         110.0         +17     123.7         108.5         +14
  

 

 

    

 

 

      

 

 

    

 

 

    

Combined (MBoe/d)

                

U.S.

     522.6         504.2         +4     515.2         498.1         +3

Canada

     168.2         174.0         -3 %     176.6         185.4         -5 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     690.8         678.2         +2     691.8         683.5         +1
  

 

 

    

 

 

      

 

 

    

 

 

    
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013 (1)      2012 (1)      Change     2013 (1)      2012 (1)      Change  

Oil (per Bbl)

                

U.S.

   $ 101.40       $ 84.84         +20   $ 93.94       $ 90.79         +3

Canada

   $ 87.25       $ 67.53         +29   $ 72.07       $ 69.34         +4

Total

   $ 96.90       $ 77.91         +24   $ 86.41       $ 81.82         +6

Bitumen (per Bbl)

                

Canada

   $ 73.74       $ 50.94         +45   $ 50.93       $ 49.26         +3

Gas (per Mcf)

                

U.S.

   $ 3.08       $ 2.37         +30   $ 3.13       $ 2.12         +47

Canada

   $ 2.67       $ 2.31         +16   $ 3.05       $ 2.26         +35

Total

   $ 3.00       $ 2.36         +27   $ 3.11       $ 2.15         +45

NGLs (per Bbl)

                

U.S.

   $ 24.36       $ 25.07         -3 %   $ 25.12       $ 29.31         -14 %

Canada

   $ 48.48       $ 46.41         +4   $ 46.54       $ 48.92         -5 %

Total

   $ 26.23       $ 26.86         -2 %   $ 26.83       $ 31.27         -14 %

Combined (per Boe)

                

U.S.

   $ 32.72       $ 24.64         +33   $ 31.12       $ 24.86         +25

Canada

   $ 49.65       $ 37.14         +34   $ 41.29       $ 36.93         +12

Total

   $ 36.84       $ 27.85         +32   $ 33.71       $ 28.14         +20

 

(1) The prices presented exclude any effects due to oil, gas and NGL derivatives.

 

23


Table of Contents

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the three months ended September 30, 2013 and 2012.

 

     Three Months Ended September 30,  
     Oil      Bitumen      Gas     NGLs     Total  
     (In millions)  

2012 sales

   $ 705       $ 207       $ 554      $ 272      $ 1,738   

Change due to volumes

     151         6         (37     46        166   

Change due to prices

     208         96         141        (8     437   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2013 sales

   $ 1,064       $ 309       $ 658      $ 310      $ 2,341   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Upstream sales increased $166 million in the third quarter of 2013 due to a 16 percent increase in our liquids production, partially offset by a 7 percent decline in our gas production. As a result of continued development of our oil properties, primarily in the Permian Basin, oil sales increased $151 million. Bitumen sales increased $6 million due to development of our Jackfish thermal heavy oil projects in Canada. Additionally, our NGL sales increased $46 million primarily as a result of continued drilling in the liquids-rich gas portions of the Cana-Woodford and Barnett Shales, as well as the Permian Basin. These increases were partially offset by decreases in our dry gas production, which resulted in a $37 million decline in sales.

Production information for our key properties is summarized below:

 

   

Permian Basin production increased 26 percent compared to the third quarter of 2012 and 7 percent compared to the second quarter of 2013. Oil production accounted for 60 percent of our 82,000 Boe per day produced in the Permian Basin during the third quarter of 2013. The year-over-year increase in total production was driven by a 29 percent increase in oil production.

 

   

Barnett Shale production decreased 3 percent compared to the third quarter of 2012 and 1 percent compared to the second quarter of 2013. Although total production decreased in both periods, liquids production increased 15 percent compared to the third quarter of 2012 and 4 percent compared to the second quarter of 2013. Liquids production accounted for 26 percent of our 1.4 Bcfe per day produced in the Barnett Shale during the third quarter of 2013.

 

   

Cana-Woodford Shale production increased 21 percent compared to the third quarter of 2012 and 6 percent compared to the second quarter of 2013. Liquids production accounted for 37 percent of our 342 MMcfe per day produced in Cana during the third quarter of 2013. The year-over-year increase in total production was driven by a 58 percent increase in liquids production.

 

   

Jackfish production increased 3 percent compared to the third quarter of 2012 and decreased 14 percent compared to the second quarter of 2013. Jackfish production for the third quarter of 2013 was impacted by both a higher royalty rate and a turnaround conducted at Jackfish 2. In June 2013, our Jackfish 1 project reached payout status. Consequently, our Jackfish 1 production is burdened with a higher Canadian provincial government royalty rate that decreases our production net of royalties. Bitumen production accounted for all of our 46,000 Boe per day produced at Jackfish during the third quarter of 2013.

 

   

Granite Wash production increased 14 percent compared to the third quarter of 2012 and decreased 3 percent compared to the second quarter of 2013. Liquids production accounted for 52 percent of our 21,000 Boe per day produced in the Granite Wash during the third quarter of 2013.

 

   

Mississippian-Woodford Trend production increased 65 percent compared to the second quarter of 2013 to 9,000 Boe per day. Oil production accounted for 61 percent of our total production in the Mississippian-Woodford Trend during the third quarter of 2013.

 

   

Rocky Mountain production decreased 5 percent compared to the third quarter of 2012. Although total production was down, oil production increased 34 percent compared to the third quarter of 2012. Liquids production accounted for 33 percent of our 326 MMcfe per day produced in the Rocky Mountains during the third quarter of 2013.

 

   

Gulf Coast/East Texas production decreased 13 percent compared to the third quarter of 2012. Liquids production accounted for 27 percent of our 317 MMcfe per day produced in Gulf Coast/East Texas during the third quarter of 2013.

 

   

Lloydminster production decreased 11 percent compared to the third quarter of 2012. Oil production accounted for 94 percent of our 29,000 Boe per day produced at Lloydminster during the third quarter of 2013.

 

24


Table of Contents

Upstream sales increased $437 million in the third quarter of 2013 primarily due to a 32 percent increase in our realized price without hedges. Oil and bitumen sales were the most significantly impacted with a combined $304 million increase due to prices and realizations. Gas sales increased $141 million largely due to higher North American regional index prices upon which our gas sales are based. NGL sales decreased $8 million as a result of a 2 percent decline in our realized price without hedges. The largest contributors to the higher liquids prices were an increase in the average NYMEX West Texas Intermediate index price and tighter bitumen and heavy oil differentials partially offset by lower NGL prices at the Mont Belvieu, Texas index.

The volume and price changes in the preceding tables caused the following changes to our oil, gas and NGL sales between the nine months ended September 30, 2013 and 2012.

 

     Nine Months Ended September 30,  
     Oil      Bitumen      Gas     NGLs     Total  
     (In millions)  

2012 sales

   $ 2,181       $ 636       $ 1,523      $ 930      $ 5,270   

Change due to volumes

     376         50         (104     126        448   

Change due to prices

     143         23         633        (150     649   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

2013 sales

   $ 2,700       $ 709       $ 2,052      $ 906      $ 6,367   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Upstream sales increased $448 million in the first nine months of 2013 due to a 14 percent increase in our liquids production, partially offset by a 7 percent decline in our gas production. As a result of continued development of our oil properties, primarily in the Permian Basin, oil sales increased $376 million. Bitumen sales increased $50 million due to development of our Jackfish thermal heavy oil projects in Canada. Additionally, our NGL sales increased $126 million primarily as a result of continued drilling in the liquids-rich gas portions of the Cana-Woodford and Barnett Shales, as well as the Permian Basin. These increases were partially offset by decreases in our dry gas production, which resulted in a $104 million decline in sales.

Upstream sales increased $649 million during the first nine months of 2013 due to a 20 percent increase in our realized price without hedges. Our gas sales increased $633 million due to prices. The change in our gas price was largely due to higher North American regional index prices upon which our gas sales are based. Our liquids sales had a slight increase of $16 million due to higher oil and bitumen sales partially offset by lower NGL sales. The largest contributors to the higher liquids prices were an increase in the average NYMEX West Texas Intermediate index price and tighter bitumen and heavy oil differentials partially offset by lower NGL prices at the Mont Belvieu, Texas index.

Oil, Gas and NGL Derivatives

A summary of our open commodity derivative positions is included in Note 2 to the financial statements included in “Item 1. Consolidated Financial Statements” of this report. The following tables provide financial information associated with our commodity derivatives. The first table presents the cash settlements and unrealized gains and losses that are recognized as components of our revenues. The subsequent tables present our oil, bitumen, gas and NGL prices with, and without, the effects of the cash settlements. The prices do not include the effects of unrealized gains and losses.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  
     (In millions)  

Cash settlements:

        

Gas derivatives

   $ 53      $ 156      $ 89      $ 530   

Oil derivatives

     (60     86        1        137   

NGL derivatives

     —          1        3        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cash settlements

     (7     243        93        668   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on fair value changes:

        

Gas derivatives

     (18     (207     34        (391

Oil derivatives

     (113     (331     (217     239   

NGL derivatives

     (3     —          (5     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized losses on fair value changes

     (134     (538     (188     (153
  

 

 

   

 

 

   

 

 

   

 

 

 

Oil, gas and NGL derivatives

   $ (141   $ (295   $ (95   $ 515   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents
     Three Months Ended September 30, 2013  
     Oil
(Per Bbl)
    Bitumen
(Per Bbl)
     Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 96.90      $ 73.74       $ 3.00       $ 26.23       $ 36.84   

Cash settlements of hedges(1)

     (5.51     —           0.24         0.02         (0.12
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 91.39      $ 73.74       $ 3.24       $ 26.25       $ 36.72   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended September 30, 2012  
     Oil
(Per Bbl)
    Bitumen
(Per Bbl)
     Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 77.91      $ 50.94       $ 2.36       $ 26.86       $ 27.85   

Cash settlements of hedges

     9.54        —           0.66         0.03         3.89   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 87.45      $ 50.94       $ 3.02       $ 26.89       $ 31.74   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2013  
     Oil
(Per Bbl)
    Bitumen
(Per Bbl)
     Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 86.41      $ 50.93       $ 3.11       $ 26.83       $ 33.71   

Cash settlements of hedges(1)

     0.04        —           0.14         0.08         0.50   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 86.45      $ 50.93       $ 3.25       $ 26.91       $ 34.21   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     Nine Months Ended September 30, 2012  
     Oil
(Per Bbl)
    Bitumen
(Per Bbl)
     Gas
(Per Mcf)
     NGLs
(Per Bbl)
     Boe
(Per Boe)
 

Realized price without hedges

   $ 81.82      $ 49.26       $ 2.15       $ 31.27       $ 28.14   

Cash settlements of hedges

     5.14        —           0.75         0.02         3.56   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Realized price, including cash settlements

   $ 86.96      $ 49.26       $ 2.90       $ 31.29       $ 31.70   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Cash settlements of oil hedges include settlements from our Western Canadian Select basis swaps presented in Note 2 to the financial statements included in “Item 1. Consolidated Financial Statements” of this report.

Cash settlements presented in the tables above represent realized gains or losses related to various commodity derivatives. In addition to cash settlements, we also recognize unrealized changes in the fair values of our commodity derivatives in each reporting period. The changes in fair value result from new positions and settlements that occur during each period, as well as the relationships between contract prices and the associated forward curves. Including the cash settlements discussed above, our commodity derivatives incurred a net loss of $141 million and $295 million in the third quarter of 2013 and 2012, respectively. Including the cash settlements discussed above, our commodity derivatives incurred a net loss of $95 million and generated a net gain of $515 million in the first nine months of 2013 and 2012, respectively.

Marketing and Midstream Revenues and Operating Costs and Expenses

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013      2012      Change     2013      2012      Change  
     ($ in millions)  

Revenues

   $ 520       $ 422         +23   $ 1,511       $ 1,136         +33

Operating costs and expenses

     383         313         +22     1,128         847         +33
  

 

 

    

 

 

      

 

 

    

 

 

    

Operating profit

   $ 137       $ 109         +25   $ 383       $ 289         +32
  

 

 

    

 

 

      

 

 

    

 

 

    

During the third quarter and first nine months of 2013, marketing and midstream operating profit increased $28 million and $94 million, respectively, primarily due to higher NGL production and natural gas prices, as well as higher utilization at the fractionator facility in Mont Belvieu, Texas.

 

26


Table of Contents

Lease Operating Expenses (“LOE”)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013      2012      Change     2013      2012      Change  

LOE ($ in millions):

                

U.S.

   $ 333       $ 263         +27   $ 928       $ 774         +20

Canada

     267         250         +7     756         766         -1 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 600       $ 513         +17   $ 1,684       $ 1,540         +9
  

 

 

    

 

 

      

 

 

    

 

 

    

LOE per Boe:

                

U.S.

   $ 6.91       $ 5.65         +22   $ 6.60       $ 5.67         +16

Canada

   $ 17.32       $ 15.65         +11   $ 15.70       $ 15.08         +4

Total

   $ 9.45       $ 8.22         +15   $ 8.92       $ 8.22         +8

LOE increased $1.23 per Boe and $0.70 per Boe during the third quarter and first nine months of 2013, respectively. The largest contributor to the higher unit cost is related to our liquids production growth, particularly in the Permian Basin and Mississippian in the U.S. Such projects generally require a higher cost to produce per unit than our gas projects. Additionally, we conducted a turnaround at Jackfish 2 in the third quarter of 2013, contributing to higher absolute and unit costs for the quarter. We experienced upward pressures on costs in certain operating areas, which also contributed to the higher LOE per Boe.

Depreciation, Depletion and Amortization (“DD&A”)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013      2012      Change     2013      2012      Change  

DD&A ($ in millions):

                

Oil & gas properties

   $ 611       $ 642         -5 %   $ 1,833       $ 1,870         -2 %

Other properties

     80         74         +8     236         210         +12
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 691       $ 716         -3 %   $ 2,069       $ 2,080         -1 %
  

 

 

    

 

 

      

 

 

    

 

 

    

DD&A per Boe:

                

Oil & gas properties

   $ 9.62       $ 10.29         -6 %   $ 9.70       $ 9.98         -3 %

Other properties

     1.25         1.17         +6     1.25         1.12         +11
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 10.87       $ 11.46         -5 %   $ 10.95       $ 11.10         -1 %
  

 

 

    

 

 

      

 

 

    

 

 

    

DD&A from our oil and gas properties decreased in both 2013 periods largely as a result of the asset impairment charges recognized in 2012 and 2013. DD&A from our other properties increased in both 2013 periods largely from the construction of our new headquarters in Oklahoma City and natural gas pipeline development in the Cana-Woodford Shale.

General and Administrative Expenses (“G&A”)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     Change     2013     2012     Change  
     ($ in millions)  

Gross G&A

   $ 266      $ 281        -5 %   $ 836      $ 865        -3 %

Capitalized G&A

     (88     (99     -11 %     (271     (282     -4 %

Reimbursed G&A

     (35     (32     +11     (105     (89     +18
  

 

 

   

 

 

     

 

 

   

 

 

   

Net G&A

   $ 143      $ 150        -5 %   $ 460      $ 494        -7 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Net G&A per Boe

   $ 2.25      $ 2.40        -6 %   $ 2.44      $ 2.64        -8 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Net G&A and net G&A per Boe decreased in both 2013 periods largely due to lower administrative expenses, as well as higher reimbursements due to increased well counts and reimbursement rates.

 

27


Table of Contents

Taxes Other Than Income Taxes

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     Change     2013     2012     Change  
     ($ in millions)  

Production

   $ 70      $ 60        +16   $ 201      $ 164        +22

Ad valorem and other

     45        44        +4     152        142        +7
  

 

 

   

 

 

     

 

 

   

 

 

   

Taxes other than income taxes

   $ 115      $ 104        +11   $ 353      $ 306        +15
  

 

 

   

 

 

     

 

 

   

 

 

   

Percentage of oil, gas and NGL revenue:

            

Production

     2.96     3.45     -14 %     3.15     3.12     +1

Ad valorem and other

     1.93     2.50     -23 %     2.39     2.68     -11 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Total

     4.89     5.95     -18 %     5.54     5.80     -4 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Taxes other than income taxes as a percentage of oil, gas and NGL revenue decreased during the third quarter of 2013 and first nine months of 2013 primarily due to ad valorem and other taxes that do not change in direct correlation with oil, gas and NGL revenues as well as higher Canadian revenues with no associated production taxes.

Interest Expense

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     Change     2013     2012     Change  
     ($ in millions)  

Interest based on debt outstanding

   $ 116      $ 117        -1 %   $ 350      $ 324        +8

Capitalized interest

     (15     (9     +67     (38     (38     +0

Other

     3        2        +38     10        10        -2 %
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest expense

   $ 104      $ 110        -6 %   $ 322      $ 296        +9
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest expense decreased in the third quarter of 2013 primarily due to higher capitalized interest. Interest expense increased in the first nine months of 2013 primarily due to higher average debt borrowings, partially offset by lower weighted average interest rates. Borrowings were primarily used to fund capital expenditures in excess of our operating cash flow.

Restructuring Costs

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  
     (In millions)  

Lease obligations and other

   $ 4       $ —         $ 44       $ —     

Asset impairments

     —           —           6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring costs

   $ 4       $ —         $ 50       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

In the nine months ended September 30, 2013, we incurred $50 million of restructuring costs associated with the consolidation of our U.S. personnel into one location in Oklahoma City. This amount includes $25 million related to office space that is subject to non-cancellable operating lease agreements that we ceased using as a part of the office consolidation. We also recognized $6 million of asset impairment charges for leasehold improvements and furniture associated with the office consolidation.

 

28


Table of Contents

Asset Impairments

 

     Nine Months Ended September 30, 2013      Nine Months Ended September 30, 2012  
     Gross      Net of Taxes      Gross      Net of Taxes  
     (In millions)  

U.S. oil and gas assets

   $ 1,110       $ 707       $ 1,106       $ 705   

Canada oil and gas assets

     843         632         —           —     

Midstream assets

     7         4         22         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total asset impairments

   $ 1,960       $ 1,343       $ 1,128       $ 719   
  

 

 

    

 

 

    

 

 

    

 

 

 

Oil and Gas Impairments

Under the full-cost method of accounting, capitalized costs of oil and gas properties are subject to a quarterly full cost ceiling test, which is discussed in Note 11 to the financial statements under “Item 1. Consolidated Financial Statements” of this report.

The oil and gas impairments resulted primarily from declines in the U.S. and Canada full cost ceilings. The lower ceiling values resulted primarily from decreases in the 12-month average trailing prices for oil, bitumen and NGLs, which have reduced proved reserve values.

If estimated future cash flows decline due to price decreases or other factors, Devon could incur additional full cost ceiling impairments related to its oil and gas property and equipment.

Midstream Impairments

In the third quarter of 2013 and 2012, we determined that the carrying amounts of certain of our midstream facilities located in south and east Texas were not recoverable from estimated future cash flows due to declining dry natural gas production. Consequently, the assets were written down to their estimated fair values, which were determined using discounted cash flow models.

Income Taxes

The following table presents our total income tax expense (benefit) and a reconciliation of our effective income tax rate to the U.S. statutory income tax rate.

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Total income tax expense (benefit) (in millions)

   $ 210      $ (442   $ (99   $ 12   
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. statutory income tax rate

     35     (35 %)      (35 %)      35

State income taxes

     1     (1 %)      (3 %)      (1 %) 

Taxation on Canadian operations

     (5 %)      (1 %)      9     (14 %) 

Other

     2     (1 %)      (1 %)      (13 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     33     (38 %)      (30 %)      7
  

 

 

   

 

 

   

 

 

   

 

 

 

In the second quarter of 2013, we repatriated to the United States $2.0 billion of cash from our foreign subsidiaries. In conjunction with the repatriation, we recognized approximately $100 million of current income tax expense. The current expense was entirely offset by the recognition of deferred income tax benefits, which included the reduction of the deferred tax liability previously recognized for unremitted foreign earnings deemed not to be indefinitely reinvested.

 

29


Table of Contents

Capital Resources, Uses and Liquidity

Sources and Uses of Cash

The following table presents the major changes in our cash and short-term investments.

 

     Nine Months Ended September 30,  
     2013     2012  
     (In millions)  

Operating cash flow – continuing operations

   $ 3,999      $ 3,787   

Capital expenditures

     (5,219     (6,228

Debt activity, net

     (1,577     1,567   

Shareholder distributions

     (259     (242

Divestitures of property and equipment

     316        1,468   

Other

     80        92   
  

 

 

   

 

 

 

Net change in cash and short-term investments

   $ (2,660   $ 444   
  

 

 

   

 

 

 

Cash and short-term investments at end of period

   $ 4,320