10-Q 1 d761940d10q.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 June 30, 2014

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 July 23, 2014, 409.1 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

     27   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4. Controls and Procedures

     42   
Part II. Other Information   

Item 1. Legal Proceedings

     44   

Item 1A. Risk Factors

     44   

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

     44   

Item 3. Defaults Upon Senior Securities

     44   

Item 4. Mine Safety Disclosures

     44   

Item 5. Other Information

     44   

Item 6. Exhibits

     45   

Signatures

     46   

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” as defined by the United States Securities and Exchange Commission (“SEC”). Such statements are those concerning strategic plans, our expectations and objectives for future operations, as well as other 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, 2013 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 natural gas liquids (“NGLs”) and related products and services; exploration or drilling programs; our ability to successfully complete mergers, acquisitions and divestitures; political or regulatory events; general economic and financial market conditions; and other risks and factors discussed in this report.

All subsequent written and oral forward-looking statements attributable to Devon Energy Corporation, 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     Six Months  
     Ended June 30,     Ended June 30,  
     2014     2013     2014     2013  
     (Unaudited)  
     (In millions, except per share amounts)  

Oil, gas and NGL sales

   $ 2,679     $ 2,222     $ 5,236     $ 4,026  

Oil, gas and NGL derivatives

     (399     366       (719     46  

Marketing and midstream revenues

     2,230       500       3,718       987  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     4,510       3,088       8,235       5,059  
  

 

 

   

 

 

   

 

 

   

 

 

 

Lease operating expenses

     582       559       1,180       1,084  

Marketing and midstream operating expenses

     2,006       382       3,311       745  

General and administrative expenses

     189       167       400       317  

Production and property taxes

     150       125       287       238  

Depreciation, depletion and amortization

     828       674       1,567       1,378  

Asset impairments

     —          40       —          1,953  

Restructuring costs

     5       8       42       46  

Gains and losses on asset sales

     (1,057     1       (1,072     —     

Other operating items

     33       32       56       55  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,736       1,988       5,771       5,816  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1,774       1,100       2,464       (757

Net financing costs

     131       103       243       206  

Other nonoperating items

     89       —          107       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     1,554       997       2,114       (965

Income tax expense (benefit)

     854       314       1,085       (309
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     700       683       1,029       (656

Net earnings attributable to noncontrolling interests

     25       —          30       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Devon

   $ 675     $ 683     $ 999     $ (656
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per share attributable to Devon:

        

Basic

   $ 1.65     $ 1.69     $ 2.45     $ (1.63

Diluted

   $ 1.64     $ 1.68     $ 2.44     $ (1.63

Comprehensive earnings (loss):

        

Net earnings (loss)

   $ 700     $ 683     $ 1,029     $ (656

Other comprehensive earnings (loss), net of tax:

        

Foreign currency translation

     292       (271     (6     (454

Pension and postretirement plans

     5       5       8       9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive earnings (loss), net of tax

     297       (266     2       (445
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings (loss)

     997       417       1,031       (1,101

Comprehensive earnings attributable to noncontrolling interests

     25        —          30        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive earnings (loss) attributable to Devon

   $ 972      $ 417      $ 1,001      $ (1,101
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months  
     Ended June 30,  
     2014     2013  
     (Unaudited)  
     (In millions)  

Cash flows from operating activities:

    

Net earnings (loss)

   $ 1,029     $ (656

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

    

Depreciation, depletion and amortization

     1,567       1,378  

Gain on asset sales

     (1,072     —     

Asset impairments

     —          1,953  

Deferred income tax expense (benefit)

     777       (441

Derivatives and other financial instruments

     761       (103

Cash settlements on derivatives and financial instruments

     (245     149  

Other noncash charges

     229       176  

Net change in working capital

     470       (128

Change in long-term other assets

     (77     22  

Change in long-term other liabilities

     20       48  
  

 

 

   

 

 

 

Net cash from operating activities

     3,459       2,398  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property, equipment and businesses

     (6,224     —     

Capital expenditures

     (3,341     (3,569

Proceeds from property and equipment divestitures

     2,942       34  

Purchases of short-term investments

     —          (1,076

Redemptions of short-term investments

     —          2,550  

Redemptions of long-term investments

     57       —     

Other

     84       82  
  

 

 

   

 

 

 

Net cash from investing activities

     (6,482     (1,979
  

 

 

   

 

 

 

Cash flows from financing activities:

    

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

     3,720       —     

Net short-term debt repayments

     (862     (1,495

Long-term debt repayments

     (3,990     —     

Proceeds from stock option exercises

     83       1  

Proceeds from issuance of subsidiary units

     20       —     

Dividends paid on common stock

     (189     (170

Distributions to noncontrolling interests

     (141     —     

Other

     9       5   
  

 

 

   

 

 

 

Net cash from financing activities

     (1,350     (1,659
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     13       (34
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (4,360     (1,274

Cash and cash equivalents at beginning of period

     6,066       4,637  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,706     $ 3,363  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June 30,     December 31,  
     2014     2013  
     (Unaudited)        
     (In millions, except share data)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 1,706     $ 6,066  

Accounts receivable

     2,301       1,520  

Other current assets

     385       419  
  

 

 

   

 

 

 

Total current assets

     4,392       8,005  
  

 

 

   

 

 

 

Property and equipment, at cost:

    

Oil and gas, based on full cost accounting:

    

Subject to amortization

     75,242       73,995  

Not subject to amortization

     3,984       2,791  
  

 

 

   

 

 

 

Total oil and gas

     79,226       76,786  

Other

     8,956       6,195  
  

 

 

   

 

 

 

Total property and equipment, at cost

     88,182       82,981  

Less accumulated depreciation, depletion and amortization

     (51,183     (54,534
  

 

 

   

 

 

 

Property and equipment, net

     36,999       28,447  
  

 

 

   

 

 

 

Goodwill

     8,408       5,858  

Other long-term assets

     1,316       567  
  

 

 

   

 

 

 

Total assets

   $ 51,115     $ 42,877  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 1,529     $ 1,229  

Revenues and royalties payable

     1,581       786  

Short-term debt

     475       4,066  

Other current liabilities

     1,094       574  
  

 

 

   

 

 

 

Total current liabilities

     4,679       6,655  
  

 

 

   

 

 

 

Long-term debt

     11,880       7,956  

Asset retirement obligations

     1,541       2,140  

Other long-term liabilities

     1,029       834  

Deferred income taxes

     5,927       4,793  

Stockholders’ equity:

    

Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 409 million and 406 million shares in 2014 and 2013, respectively

     41       41  

Additional paid-in capital

     3,943       3,780  

Retained earnings

     16,220       15,410  

Accumulated other comprehensive earnings

     1,270       1,268  
  

 

 

   

 

 

 

Total stockholders’ equity attributable to Devon

     21,474       20,499  

Noncontrolling interests

     4,585       —     
  

 

 

   

 

 

 

Total stockholders’ equity

     26,059       20,499  
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

Total liabilities and stockholders’ equity

   $ 51,115     $ 42,877  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

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

Six Months Ended June 30, 2014

               

Balance as of December 31, 2013

    406     $ 41     $ 3,780     $ 15,410     $ 1,268     $ —        $ —        $ 20,499  

Net earnings

    —          —          —          999       —          —          30       1,029  

Other comprehensive earnings, net of tax

    —          —          —          —          2       —          —          2  

Stock option exercises

    1       —          83       —          —          —          —          83  

Restricted stock grants, net of cancellations

    2       —          —          —          —          —          —          —     

Common stock repurchased

    —          —          —          —          —          (5     —          (5

Common stock retired

    —          —          (5     —          —          5       —          —     

Common stock dividends

    —          —          —          (189     —          —          —          (189

Share-based compensation

    —          —          84       —          —          —          —          84  

Share-based compensation tax benefits

    —          —          1       —          —          —          —          1  

Subsidiary equity transactions

    —          —          —          —          —          —          27       27  

Acquisition of noncontrolling interests

    —          —          —          —          —          —          4,664       4,664  

Distributions to noncontrolling interests

    —          —          —          —          —          —          (141     (141

Other

    —          —          —          —          —          —          5       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2014

    409     $ 41     $ 3,943     $ 16,220     $ 1,270     $ —        $ 4,585     $ 26,059  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2013

               

Balance as of December 31, 2012

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

Net loss

    —          —          —          (656     —          —          —          (656

Other comprehensive loss, net of tax

    —          —          —          —          (445     —          —          (445

Stock option exercises

    —          —          1       —          —          —          —          1  

Common stock repurchased

    —          —          —          —          —          (9     —          (9

Common stock retired

    —          —          (9     —          —          9       —          —     

Common stock dividends

    —          —          —          (170     —          —          —          (170

Share-based compensation

    —          —          62       —          —          —          —          62  

Share-based compensation tax benefits

    —          —          5       —          —          —          —          5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2013

    406     $ 41     $ 3,747     $ 14,952     $ 1,326     $ —        $ —        $ 20,066  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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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 (“U.S.”) have been omitted. The accompanying financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2013 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 for a fair statement of Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2014 and 2013 and Devon’s financial position as of June 30, 2014.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Devon and entities in which it holds a controlling interest. All intercompany transactions have been eliminated. Undivided interests in oil and natural gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in non-controlled entities, over which Devon has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost, and subsequently adjusted for Devon’s proportionate share of earnings, losses, and distributions. Investments accounted for using the equity method and cost method are reported as a component of other long-term assets.

As discussed more fully in Note 2, on March 7, 2014, Devon completed a business combination whereby Devon controls both EnLink Midstream Partners, LP (the “Partnership”) and its general partner entity, EnLink Midstream, LLC (“EnLink”). Devon controls both the Partnership’s and EnLink’s operations; therefore, the Partnership’s and EnLink’s accounts are included in Devon’s accompanying consolidated financial statements subsequent to the completion of the transaction. The portions of the Partnership’s and EnLink’s net earnings and stockholders’ equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated comprehensive statements of earnings and consolidated balance sheets.

Intangible Assets

EnLink’s long-term assets include intangible assets, consisting of customer relationships. These assets are amortized on a straight-line basis over the expected periods of benefits, which range from ten to twenty years.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The update provides guidance concerning the recognition and measurement of revenue from contracts with customers. Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues. The update is effective for Devon beginning in calendar year 2017. Devon is evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

2. Acquisitions and Divestitures

Formation of EnLink Midstream, LLC and EnLink Midstream Partners, LP

On March 7, 2014, Devon, Crosstex Energy, Inc. and Crosstex Energy, LP (together with Crosstex Energy, Inc., “Crosstex”) completed a business combination to combine substantially all of Devon’s U.S. midstream assets with Crosstex’s assets to form a new midstream business. The new business consists of the Partnership and EnLink, a master limited partnership and a general partner entity, respectively, which are both publicly traded entities.

In exchange for a controlling interest in both EnLink and the Partnership, Devon contributed its equity interest in a newly formed Devon subsidiary, EnLink Midstream Holdings, LP (“EnLink Holdings”) and $100 million in cash. EnLink Holdings owns 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 economic interest in Gulf Coast Fractionators in Mt. Belvieu, Texas. The Partnership and EnLink each own 50 percent of EnLink Holdings.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The ownership of EnLink is approximately:

 

   

70% - Devon

 

   

30% - Public unitholders

The ownership of the Partnership is approximately:

 

   

52% - Devon

 

   

41% - Public unitholders

 

   

7% - EnLink

This business combination was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, EnLink Holdings was the accounting acquirer because its parent company, Devon, obtained control of EnLink and the Partnership as a result of the business combination. Consequently, EnLink Holdings’ assets and liabilities retained their carrying values. Additionally, the Crosstex assets acquired and liabilities assumed by the Partnership and EnLink in the business combination, as well as EnLink’s noncontrolling interest in the Partnership, were recorded at their fair values which were measured as of the acquisition date, March 7, 2014. The excess of the purchase price over the estimated fair values of Crosstex’s net assets acquired was recorded as goodwill.

The following table summarizes the purchase price (in millions, except unit price).

 

Crosstex Energy, Inc. outstanding common shares:

  

Held by public shareholders

     48.0   

Restricted shares

     0.4   
  

 

 

 

Total subject to conversion

     48.4   

Exchange ratio

     1.0  x 
  

 

 

 

Converted shares

     48.4   

Crosstex Energy, Inc. common share price (1)

   $     37.60   
  

 

 

 

Crosstex Energy, Inc. consideration

   $ 1,823   

Fair value of noncontrolling interests in E2 (2)

   $ 12   
  

 

 

 

Total Crosstex Energy, Inc. consideration and fair value of noncontrolling interests

   $ 1,835   
  

 

 

 

Partnership outstanding units:

  

Common units held by public unitholders

     75.1   

Preferred units held by third party (3)

     17.1   

Restricted units

     0.4   
  

 

 

 

Total

     92.6   

Partnership common unit price (4)

   $ 30.51   
  

 

 

 

Partnership common units value

   $ 2,825   

Partnership outstanding unit options value

   $ 4   
  

 

 

 

Total fair value of noncontrolling interests in the Partnership (4)

   $ 2,829   
  

 

 

 

Total consideration and fair value of noncontrolling interests

   $ 4,664   
  

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

(1) The final purchase price is based on the fair value of Crosstex Energy Inc.’s common shares as of the closing date, March 7, 2014.
(2) Represents the value of noncontrolling interests related to EnLink’s equity investment in E2 Energy Services, LLC and E2 Appalachian Compression, LLC (collectively “E2”).
(3) The Partnership converted the preferred units to common units in February 2014.
(4) The final purchase price is based on the fair value of the Partnership’s common shares as of the closing date, March 7, 2014.

The preliminary allocation of the purchase price is as follows (in millions):

 

Assets acquired:

  

Current assets

   $ 438   

Property, plant and equipment, net

     2,438   

Intangible assets

     546   

Equity investment

     222   

Goodwill (1)

     3,292   

Other long term assets

     1   

Liabilities assumed:

  

Current liabilities

     (515

Long-term debt

     (1,454

Deferred income taxes

     (203

Other long-term liabilities

     (101
  

 

 

 

Total consideration and fair value of noncontrolling interests

   $ 4,664   
  

 

 

 

 

(1) Goodwill is the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized and is not deductible for tax purposes.

GeoSouthern Energy Acquisition

On November 20, 2013, Devon entered into a Purchase and Sale Agreement with GeoSouthern Energy Corporation (“GeoSouthern”) and a wholly owned subsidiary of GeoSouthern to acquire GeoSouthern’s interests in certain affiliates (the “Acquired Companies”) that own certain oil and gas properties, leasehold mineral interest and related assets located in the Eagle Ford Shale. On February 28, 2014, the GeoSouthern acquisition closed, and GeoSouthern transferred the Acquired Companies to Devon in exchange for the aggregate purchase price of approximately $6.0 billion. Devon funded the acquisition price with cash on hand and debt financing. In connection with the GeoSouthern acquisition, Devon acquired approximately 82,000 net acres located in DeWitt and Lavaca counties in south Texas. The transaction was accounted for using the acquisition method, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed in the transaction (in millions).

 

Cash and cash equivalents

   $ 95   

Other current assets

     256   

Proved properties

     5,029   

Unproved properties

     1,008   

Midstream assets

     85   

Current liabilities

     (437

Long-term liabilities

     (6
  

 

 

 

Net assets acquired

   $ 6,030   
  

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

EnLink and GeoSouthern Operating Results

The following table presents EnLink’s (acquired Crosstex assets and liabilities) and GeoSouthern’s operating revenues and net earnings included in Devon’s consolidated statements of earnings subsequent to the transactions described above.

 

     Three Months Ended
June  30, 2014
     Six Months Ended
June  30, 2014
 
     GeoSouthern      EnLink      GeoSouthern      EnLink  
     (In millions)      (In millions)  

Total operating revenues

   $ 586       $ 771       $ 740       $ 970   

Total operating expenses

     312         765         386         962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

   $ 274       $ 6       $ 354       $ 8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro Forma Financial Information

The following unaudited pro forma financial information has been prepared assuming both the EnLink formation and the GeoSouthern acquisition occurred on January 1, 2013. The pro forma information is not intended to reflect the actual results of operations that would have occurred if the business combination and acquisition had been completed at the dates indicated. In addition, they do not project Devon’s results of operations for any future period.

 

     Six Months Ended
June 30,
 
     2014      2013  
     (In millions)  

Total operating revenues

   $ 8,882       $ 6,211   

Net earnings (loss)

   $ 1,043       $ (635

Noncontrolling interests

   $ 43       $ 28   

Net earnings (loss) attributable to Devon

   $ 1,000       $ (663

Net earnings (loss) per common share attributable to Devon

   $ 2.45       $ (1.63

Non-Core Asset Divestitures

In November 2013, Devon announced plans to divest certain non-core properties located throughout Canada and the U.S.

Canada

In the first quarter of 2014, Devon completed minor divestiture transactions for $142 million ($155 million Canadian dollars). In the second quarter of 2014, Devon sold conventional assets to Canadian Natural Resources Limited for $2.8 billion ($3.125 billion Canadian dollars).

Under full cost accounting rules, sales or dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of gain or loss. However, if not recognizing a gain or loss on the disposition would otherwise significantly alter the relationship between a cost center’s capitalized costs and proved reserves, then a gain or loss must be recognized. The Canadian divestitures significantly altered such relationship. Therefore, Devon recognized gains totaling $1.1 billion ($0.6 billion after-tax) during the first six months of 2014. These gains are included as a separate item in the accompanying consolidated comprehensive statements of earnings.

Included in the gain calculation noted above were asset retirement obligations of approximately $700 million assumed by the purchaser as well as the derecognition of approximately $700 million of goodwill allocated to the sold assets.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

In conjunction with the divestitures noted above, Devon repatriated approximately $2.8 billion of proceeds to the U.S. in the second quarter of 2014. The proceeds were used to repay $0.7 billion of commercial paper and the $2.0 billion term loans that were drawn in the first quarter of 2014 to fund a portion of the GeoSouthern acquisition. Between collecting the divestiture proceeds and repatriating funds to the U.S., Devon recognized an $84 million foreign currency exchange loss and a $29 million foreign currency derivative loss. These losses are included in other nonoperating items in the accompanying consolidated comprehensive statements of earnings.

U.S.

On June 30, 2014, Devon reached an agreement to sell its U.S. non-core assets for $2.3 billion to Linn Energy. The transaction with Linn Energy is expected to close in the third quarter of 2014. No gain or loss is expected to be recognized on the U.S. non-core asset divestiture.

3. 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. Additionally, EnLink manages its exposure to fluctuations in commodity prices by hedging the impact of market fluctuations.

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 June 30, 2014, Devon did not hold any cash collateral from its counterparties.

Commodity Derivatives

As of June 30, 2014, 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)
 

Q3-Q4 2014

     75,000       $ 94.14         64,750       $ 89.33       $ 100.00         42,000       $ 116.43   

Q1-Q4 2015

     100,492       $ 90.95         27,000       $ 89.14       $ 97.84         28,000       $ 116.43   

Q1-Q4 2016

     —         $ —           —         $ —         $ —           18,500       $ 103.11   

 

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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)
 

Q3 2014

   Western Canadian Select      30,000       $ (18.21

As of June 30, 2014, 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 second table presents 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)
 

Q3-Q4 2014

     800,000       $ 4.42         460,000       $ 4.03       $ 4.51         500,000       $ 5.00   

Q1-Q4 2015

     210,000       $ 4.38         260,000       $ 4.05       $ 4.36         550,000       $ 5.09   

Q1-Q4 2016

     —         $ —           —         $ —         $ —           400,000       $ 5.00   

 

     Basis Swaps  

Period

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

Q3-Q4 2014

     AECO         94,781       $ (0.52

Interest Rate Derivatives

As of June 30, 2014, Devon had the following open interest rate derivative positions:

 

Notional

   Rate Received     Rate Paid     Expiration  
(In millions)                   

$100

     Three Month LIBOR        0.92     December 2016   

$100

     1.76     Three Month LIBOR        January 2019   

Foreign Currency Derivatives

As of June 30, 2014, Devon had the following open foreign currency derivative positions:

 

Forward Contract

 

Currency

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

Canadian Dollar

     Sell       $ 1,312       0.931      September 2014   

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Financial Statement Presentation

The following table presents the net gains and losses recognized in the accompanying comprehensive statements of earnings associated with derivative financial instruments. Net gains and losses associated with Devon’s commodity derivatives are presented in oil, gas and NGL derivatives in the accompanying comprehensive statements of earnings. Net gains and losses associated with EnLink’s midstream commodity derivatives are presented in marketing and midstream revenues in the accompanying comprehensive statements of earnings. Net gains and losses associated with Devon’s interest rate and foreign currency derivatives are presented in other nonoperating items in the accompanying comprehensive statements of earnings.

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2014     2013      2014     2013  
     (In millions)  

Commodity derivatives

   $ (399   $ 366       $ (719   $ 46   

EnLink commodity derivatives

     (2     —           (3     —     

Interest rate derivatives

     1        —           1        —     

Foreign currency derivatives

     (54     42         (40     57   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net gains (losses) recognized in comprehensive statements of earnings

   $ (454   $ 408       $ (761   $ 103   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

     Balance Sheet Caption    June 30,
2014
     December 31,
2013
 
          (In millions)  

Asset derivatives:

        

Commodity derivatives

   Other current assets    $ 6       $ 75   

Commodity derivatives

   Other long-term assets      11         28   

Interest rate derivatives

   Other current assets      1         —     
     

 

 

    

 

 

 

Total asset derivatives

      $ 18       $ 103   
     

 

 

    

 

 

 

Liability derivatives:

        

Commodity derivatives

   Other current liabilities    $ 386       $ 58   

Commodity derivatives

   Other long-term liabilities      157         62   

EnLink commodity derivatives

   Other current liabilities      1         —     

EnLink commodity derivatives

   Other long-term liabilities      1         —     

Foreign currency derivatives

   Other current liabilities      5         1   
     

 

 

    

 

 

 

Total liability derivatives

      $ 550       $ 121   
     

 

 

    

 

 

 

4. Share-Based Compensation

The following table presents the effects of share-based compensation included in Devon’s accompanying comprehensive statements of earnings. Devon’s gross general and administrative expense for the first six months of 2014 includes $6 million of unit-based compensation related to grants made under EnLink’s long-term incentive plans. The vesting for certain share-based awards was accelerated in the first quarter of 2014 in conjunction with the divestiture of Devon’s Canadian conventional assets. The associated expense for these accelerated awards is included in restructuring costs in the accompanying comprehensive statements of earnings. See Note 6 for further details.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Six Months
Ended June 30,
 
     2014      2013  
     (In millions)  

Gross general and administrative expense

   $ 106       $ 79   

Share-based compensation expense capitalized pursuant to the full cost method of accounting for oil and gas properties

   $ 27       $ 30   

Related income tax benefit

   $ 13       $ 12   

Under its 2009 Long-Term Incentive Plan, as amended, Devon granted share-based awards to certain employees in the first six months of 2014. The following sections include information related to these awards.

Restricted Stock Awards and Units

The following table presents a summary of Devon’s unvested restricted stock awards and units.

 

     Restricted Stock
Award & Units
    Weighted Average
Grant-Date Fair Value
 
     (In thousands)        

Unvested at December 31, 2013

     3,292      $ 59.76   

Granted

     3,343      $ 63.18   

Vested

     (505   $ 60.87   

Forfeited

     (521   $ 60.62   
  

 

 

   

Unvested at June 30, 2014

     5,609      $ 61.50   
  

 

 

   

As of June 30, 2014, Devon’s unrecognized compensation cost related to unvested restricted stock awards and units was $255 million. Such cost is expected to be recognized over a weighted-average period of 2.6 years.

Performance Based Restricted Stock Awards

The following table presents a summary of Devon’s performance based restricted stock awards.

 

     Performance
Restricted Stock
Awards
    Weighted Average
Grant-Date Fair Value
 
     (In thousands)        

Unvested at December 31, 2013

     316      $ 56.25   

Granted

     234      $ 61.33   

Vested

     (75   $ 53.45   
  

 

 

   

Unvested at June 30, 2014

     475      $ 59.20   
  

 

 

   

As of June 30, 2014, Devon’s unrecognized compensation cost related to these awards was $10 million. Such cost is expected to be recognized over a weighted-average period of 1.7 years.

Performance Share Units

The following table presents a summary of the grant-date fair values of performance share units granted in 2014 and the related assumptions.

 

     2014  

Grant-date fair value

   $ 70.18         —         $ 81.05   

Risk-free interest rate

           0.54

Volatility factor

           28.8

Contractual term (in years)

           2.89   

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table presents a summary of Devon’s performance share units.

 

     Performance Share
Units
    Weighted Average
Grant-Date Fair Value
 
     (In thousands)        

Unvested at December 31, 2013

     925      $ 66.64   

Granted

     708      $ 77.77   

Forfeited

     (137   $ 79.74   
  

 

 

   

Unvested at June 30, 2014 (1)

     1,496      $ 70.90   
  

 

 

   

 

(1) A maximum of 3.0 million common shares could be awarded based upon Devon’s final total shareholder return ranking.

As of June 30, 2014, Devon’s unrecognized compensation cost related to unvested units was $48 million. Such cost is expected to be recognized over a weighted-average period of 1.8 years.

5. Asset Impairments

In the first six months of 2013, Devon recognized asset impairments related to its oil and gas property and equipment as presented below.

 

     Six Months Ended
June 30, 2013
 
     Gross      Net of Taxes  
     (In millions)  

U.S. oil and gas assets

   $ 1,110       $ 707   

Canada oil and gas assets

     843         632   
  

 

 

    

 

 

 

Total asset impairments

   $ 1,953       $ 1,339   
  

 

 

    

 

 

 

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 reduced proved reserve values.

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

6. Restructuring Costs

Canadian Divestitures

In the first six months of 2014, Devon recognized $42 million of employee related costs associated with its Canadian non-core asset divestitures. Approximately $15 million of the employee related costs resulted from accelerated vesting of share-based grants, which are non-cash charges.

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 December 31, 2013, Devon had completed this initiative and incurred $134 million of restructuring costs associated with the office consolidation.

Financial Statement Presentation

The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings related to the Canadian divestitures and office consolidation.

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2014      2013      2014      2013  
     (In millions)  

Canada divestitures:

           

Employee related costs

   $ 5       $ —         $ 42       $ —     

Office consolidation:

           

Lease obligations and other

     —           8         —           46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Restructuring costs

   $ 5       $ 8       $ 42       $ 46   
  

 

 

    

 

 

    

 

 

    

 

 

 

The schedule below summarizes Devon’s restructuring liabilities.

 

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

Balance as of December 31, 2013

   $ 27      $ 18      $ 45   

Changes due to Canadian divestitures

     5        2        7   

Changes due to office consolidation

     (20     (1     (21

Changes due to offshore divestiture

     (1     (1     (2
  

 

 

   

 

 

   

 

 

 

Balance as June 30, 2014

   $ 11      $ 18      $ 29   
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2012

   $ 52      $ 9      $ 61   

Changes due to office consolidation

     (7     11        4   

Changes due to offshore divestiture

     (1     (1     (2
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2013

   $ 44      $ 19      $ 63   
  

 

 

   

 

 

   

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

7. Income Taxes

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Total income tax expense (benefit) (in millions)

   $ 854      $ 314      $ 1,085      $ (309
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. statutory income tax rate

     35     35     35     (35 %) 

Repatriations

     16     —          12     —     

State income taxes

     —          1     1     (1 %) 

Taxation on Canadian operations

     4     (2 %)      2     6

Taxes on EnLink formation

     —          —          2     —     

Other

     —          (2 %)      (1 %)      (2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     55     32     51     (32 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

In the second quarter of 2014, Devon recognized $247 million of additional income tax expense related to the $2.8 billion of repatriations to the U.S. Prior to the repatriation, Devon had recognized a $143 million deferred income tax liability associated with the planned repatriation. When the repatriation was made, Devon retained a larger property basis in Canada than was previously estimated, resulting in the incremental tax in the second quarter.

In the first quarter of 2014, Devon recorded a $48 million deferred tax liability in conjunction with the formation of EnLink, which impacted the effective tax rate as reflected in the table above.

In the second quarter of 2013, Devon repatriated to the U.S. $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.

8. Earnings (Loss) Per Share Attributable to Devon

The following table reconciles net earnings (loss) attributable to Devon 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 June 30, 2014:

      

Net earnings attributable to Devon

   $ 675        408     

Attributable to participating securities

     (8     (4  
  

 

 

   

 

 

   

Basic earnings per share

     667        404      $ 1.65   

Dilutive effect of potential common shares issuable

     —          2     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 667        406      $ 1.64   
  

 

 

   

 

 

   

Three Months Ended June 30, 2013:

      

Net earnings attributable to Devon

   $ 683        406     

Attributable to participating securities

     (5     (4  
  

 

 

   

 

 

   

Basic earnings per share

     678        402      $ 1.69   

Dilutive effect of potential common shares issuable

     —          1     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 678        403      $ 1.68   
  

 

 

   

 

 

   

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Six Months Ended June 30, 2014:

      

Net earnings attributable to Devon

   $ 999        408     

Attributable to participating securities

     (10     (4  
  

 

 

   

 

 

   

Basic earnings per share

     989        404      $ 2.45   

Dilutive effect of potential common shares issuable

     —          2     
  

 

 

   

 

 

   

Diluted earnings per share

   $ 989        406      $ 2.44   
  

 

 

   

 

 

   

Six Months Ended June 30, 2013:

      

Net loss attributable to Devon

   $ (656     406     

Attributable to participating securities

     (1     (4  
  

 

 

   

 

 

   

Basic loss per share

     (657     402      $ (1.63

Dilutive effect of potential common shares issuable

     —          —       
  

 

 

   

 

 

   

Diluted loss per share

   $ (657     402      $ (1.63
  

 

 

   

 

 

   

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 six-month periods ended June 30, 2014, 2.6 million shares and 3.4 million shares, respectively, were excluded from the diluted earnings per share calculations. During the three-month and six-month periods ended June 30, 2013, 7.6 million shares were excluded from the diluted earnings per share calculations.

9. Other Comprehensive Earnings

Components of other comprehensive earnings consist of the following:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (In millions)   

Foreign currency translation:

        

Beginning accumulated foreign currency translation

   $ 1,150      $ 1,813      $ 1,448      $ 1,996   

Change in cumulative translation adjustment

     306        (284     (7     (475

Income tax benefit (expense)

     (14     13        1        21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated foreign currency translation

     1,442        1,542        1,442        1,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and postretirement benefit plans:

        

Beginning accumulated pension and postretirement benefits

     (177     (221     (180     (225

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

     6        6        11        12   

Income tax expense

     (1     (1     (3     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending accumulated pension and postretirement benefits

     (172     (216     (172     (216
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive earnings, net of tax

   $ 1,270      $ 1,326      $ 1,270      $ 1,326   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 Note 15 for additional details).

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

10. Supplemental Information to Statements of Cash Flows

 

     Six Months Ended
June 30,
 
     2014     2013  
     (In millions)  

Net change in working capital accounts:

    

Accounts receivable

   $ (234   $ (300

Other current assets

     (30     72   

Accounts payable

     45        56   

Revenues and royalties payable

     508        82   

Other current liabilities

     181        (38
  

 

 

   

 

 

 

Net change in working capital

   $ 470      $ (128
  

 

 

   

 

 

 

Interest paid (net of capitalized interest)

   $ 235      $ 208   

Income taxes paid (received)

   $ 113      $ (2

On March 7, 2014, Devon completed a business combination to form EnLink. With the exception of a $100 million cash payment to noncontrolling interests, the business combination was a non-monetary transaction. See Note 2 for additional details.

11. Accounts Receivable

The components of accounts receivable include the following:

 

     June 30, 2014     December 31, 2013  
     (In millions)  

Oil, gas and NGL sales

   $ 1,022      $ 851   

Joint interest billings

     468        447   

Marketing and midstream revenues

     773        172   

Other

     49        61   
  

 

 

   

 

 

 

Gross accounts receivable

     2,312        1,531   

Allowance for doubtful accounts

     (11     (11
  

 

 

   

 

 

 

Net accounts receivable

   $ 2,301      $ 1,520   
  

 

 

   

 

 

 

12. Goodwill

The table below provides a summary of Devon’s goodwill, by assigned reporting unit.

 

     June 30, 2014      December 31, 2013  
     (In millions)  

U.S.

   $ 2,618       $ 2,618   

Canada

     2,096         2,838   

EnLink

     3,694         402   
  

 

 

    

 

 

 

Total

   $ 8,408       $ 5,858   
  

 

 

    

 

 

 

 

19


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The changes to Devon’s goodwill during the first six months of 2014 relate to both EnLink and Canada. Included in the assets Devon contributed to EnLink Holdings was $402 million of goodwill. The additional EnLink goodwill of $3.3 billion represents the goodwill recognized on the EnLink transaction described in Note 2.

The decrease in Devon’s Canadian goodwill was primarily due to goodwill that was derecognized upon the asset divestitures described in Note 2.

13. Debt

 

     June 30, 2014     December 31, 2013  
     (In millions)  

Devon debt

    

Commercial paper

   $ 456      $ 1,317   

5.625% due January 15, 2014

     —          500   

Floating rate due December 15, 2015

     500        500   

2.40% due July 15, 2016

     500        500   

Floating rate due December 15, 2016

     350        350   

1.20% due December 15, 2016

     650        650   

1.875% due May 15, 2017

     750        750   

8.25% due July 1, 2018

     125        125   

2.25% due December 15, 2018

     750        750   

6.30% due January 15, 2019

     700        700   

4.00% due July 15, 2021

     500        500   

3.25% due May 15, 2022

     1,000        1,000   

7.50% due September 15, 2027

     150        150   

7.875% due September 30, 2031

     1,250        1,250   

7.95% due April 15, 2032

     1,000        1,000   

5.60% due July 15, 2041

     1,250        1,250   

4.75% due May 15, 2042

     750        750   

Net discount on debentures and notes

     (20     (20
  

 

 

   

 

 

 

Total Devon debt

     10,661        12,022   
  

 

 

   

 

 

 

EnLink debt

    

Credit facilities

     255        —     

Other borrowings

     24        —     

2.70% due April 1, 2019

     400        —     

7.125% due June 1, 2022

     197        —     

4.40% due April 1, 2024

     450        —     

5.60% due April 1, 2044

     350        —     

Net premium on debentures and notes

     18        —     
  

 

 

   

 

 

 

Total EnLink debt

     1,694        —     
  

 

 

   

 

 

 

Total debt

     12,355        12,022   

Less amount classified as short-term debt (1)

     475        4,066   
  

 

 

   

 

 

 

Total long-term debt

   $ 11,880      $ 7,956   
  

 

 

   

 

 

 

 

(1) Short-term debt as of June 30, 2014 consists of $456 million of commercial paper and $19 million of EnLink’s 2022 senior notes, which were redeemed on July 20, 2014. Short-term debt as of December 31, 2013 consists of $2.25 billion of senior notes issued in conjunction with the GeoSouthern acquisition, $1.3 billion of commercial paper and $500 million of senior notes due January 15, 2014. Subsequent to the close of the GeoSouthern acquisition the $2.25 billion of senior notes were reclassified to long-term debt.

 

20


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Commercial Paper

As of June 30, 2014, Devon had $456 million of outstanding commercial paper at an average rate of 0.24 percent.

Credit Lines

Devon has a $3.0 billion syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). As of June 30, 2014, 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 June 30, 2014, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 23.4 percent.

Term Loans

In December 2013, in conjunction with the GeoSouthern acquisition, Devon entered into a term loan agreement with a group of major financial institutions. In February 2014, Devon drew $2.0 billion of term loans to finance, in part, the GeoSouthern acquisition and to pay transaction costs. The term loans were repaid on June 30, 2014 with the Canadian divestiture proceeds that were repatriated to the U.S. in June 2014.

EnLink Debt

The table below summarizes the fair value of EnLink’s debt as of March 7, 2014, the formation date of EnLink. The premiums are being amortized using the effective interest method. EnLink’s debt is non-recourse to Devon.

 

    March 7, 2014
Fair  Value

of Debt
    Effective
Rate of  Debt
 
    (In millions)        

8.875% due February 15, 2018 (principal of $725 million) (1)

  $ 760        7.7

7.125% due June 1, 2022 (principal of $197 million)

    226        5.3

Credit facilities

    468     
 

 

 

   

Total long-term debt

  $ 1,454     
 

 

 

   

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

(1) The 2018 senior notes were redeemed on April 18, 2014.

The Partnership has a $1.0 billion unsecured revolving credit facility, which includes a $500 million letter of credit subfacility. As of June 30, 2014, there were $14.1 million in outstanding letters of credit and $160.0 million outstanding borrowings under the $1.0 billion credit facility, leaving $825.9 million available for future borrowing.

The $1.0 billion credit facility will mature on the fifth anniversary of the initial funding date, which was March 7, 2014, unless EnLink requests, and the requisite lenders agree, to extend it pursuant to its terms. The credit facility contains certain financial, operational and legal covenants. Among other things, these covenants include maintaining a ratio of consolidated indebtedness to EnLink’s consolidated EBITDA (as defined in the credit facility, which definition includes projected EnLink EBITDA from certain capital expansion projects) of no more than 5.0 to 1.0. If EnLink consummates one or more acquisitions in which the aggregate purchase price is $50 million or more, the maximum allowed ratio of consolidated indebtedness to EnLink’s consolidated EBITDA will increase to 5.5 to 1.0 for the quarter of the acquisition and the three following quarters.

EnLink also has a $250 million revolving credit facility, which includes a $125 million letter of credit subfacility, as well as an additional credit agreement in association with E2 Energy Services LLC under which EnLink can borrow up to $20 million. On April 9, 2014, the credit agreement was amended to increase the borrowing capacity to $30 million. As of June 30, 2014, EnLink’s outstanding borrowings under the $250 million credit facility were $95 million and $23 million in association with the E2 Energy Services LLC credit agreement. Additionally, as of June 30, 2014, E2 Services had certain promissory notes outstanding related to its vehicle fleet in the amount of $0.5 million due in increments through July 2017.

The $250 million credit facility will mature on March 7, 2019. The credit facility contains certain financial, operational and legal covenants. The financial covenants will be tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter, and include (i) maintaining a maximum consolidated leverage ratio (as defined in the credit facility, but generally computed as the ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) of 4.00 to 1.00, provided that the maximum consolidated leverage ratio is 4.50 to 1.00 during an acquisition period (as defined in the credit facility) and (ii) maintaining a minimum consolidated interest coverage ratio (as defined in the credit facility, but generally computed as the ratio of consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges to consolidated interest charges) of 2.50 to 1.00 at all times prior to the occurrence of an investment grade event (as defined in the credit facility).

14. Asset Retirement Obligations

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

 

     Six Months Ended June 30,  
     2014     2013  
     (In millions)  

Asset retirement obligations as of beginning of period

   $ 2,228      $ 2,095   

Liabilities incurred

     64        67   

Liabilities settled

     (22     (40

Revision of estimated obligation

     69        105   

Liabilities assumed by others

     (731     (4

Accretion expense on discounted obligation

     50        57   

Foreign currency translation adjustment

     (26     (72
  

 

 

   

 

 

 

Asset retirement obligations as of end of period

     1,632        2,208   

Less current portion

     91        87   
  

 

 

   

 

 

 

Asset retirement obligations, long-term

   $ 1,541      $ 2,121   
  

 

 

   

 

 

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

During the first six months of 2014, Devon reduced its asset retirement obligations approximately $700 million for those obligations that were assumed by the purchasers of Devon’s Canadian oil and gas properties.

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     Six Months Ended     Three Months Ended     Six Months Ended  
     June 30,     June 30,     June 30,     June 30,  
     2014     2013     2014     2013     2014     2013     2014     2013  
     (In millions)  

Service cost

   $ 8      $ 9      $ 15      $ 18      $ —        $ —        $ —        $ —     

Interest cost

     13        13        27        26        —          1        —          1   

Expected return on plan assets

     (14     (16     (27     (31     —          —          —          —     

Amortization of prior service cost (1)

     1        1        2        2        —          —          —          —     

Net actuarial loss (gain) (1)

     6        6        10        11        (1     (1     (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (2)

   $ 14      $ 13      $ 27      $ 26      $ (1   $ —        $ (1   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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. Stockholders’ Equity

Dividends

Devon paid common stock dividends of $189 million and $170 million in the first six months of 2014 and 2013, respectively. The quarterly cash dividend was $0.20 per share in the first quarter of 2013. Devon increased the dividend rate to $0.22 per share in the second quarter of 2013 and to $0.24 per share in the second quarter of 2014.

Distributions to noncontrolling interests

In conjunction with the formation of EnLink in the first quarter of 2014, Devon made a payment of $100 million to noncontrolling interests. Further, EnLink distributed $41 million to its non-Devon unitholders during the first six months of 2014.

Issuance of subsidiary units

In May 2014, the Partnership entered into an Equity Distribution Agreement (the “EDA”) with BMO Capital Markets Corp. (“BMOCM”). Pursuant to the terms of the EDA, the Partnership may from time to time through BMOCM, as its sales agent, sell common units representing limited partner interests having an aggregate offering price of up to $75 million.

Through June 30, 2014, the Partnership sold an aggregate of 0.6 million common units under the EDA, generating proceeds of approximately $20 million. The Partnership used the net proceeds for general partnership purposes, including working capital, capital expenditures and repayments of indebtedness.

 

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 oil and 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 oil, natural gas and NGLs produced and sold. 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.

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.

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 June 30, 2014 and December 31, 2013. Therefore, such financial assets and liabilities are not presented in the following tables.

 

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

June 30, 2014 assets (liabilities):

           

Cash equivalents

   $ 1,201      $ 1,201      $ 59       $ 1,142      $ —     

Commodity derivatives

   $ 17      $ 17      $ —         $ 17      $ —     

Commodity derivatives

   $ (543   $ (543   $ —         $ (543   $ —     

EnLink commodity derivatives

   $ (2   $ (2   $ —         $ (2   $ —     

Interest rate derivatives

   $ 1      $ 1      $ —         $ 1      $ —     

Foreign currency derivatives

   $ (5   $ (5   $ —         $ (5   $ —     

Debt

   $ (12,355   $ (13,885   $ —         $ (13,885   $ —     

Capital lease obligations

   $ 22      $ 22      $ —         $ 22      $ —     

December 31, 2013 assets (liabilities):

           

Cash equivalents

   $ 5,305      $ 5,305      $ 4,191       $ 1,114      $ —     

Long-term investments

   $ 62      $ 62      $ —         $ —        $ 62   

 

24


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Commodity derivatives

   $ 103      $ 103      $  —         $ 103      $  —     

Commodity derivatives

   $ (120   $ (120   $ —         $ (120   $ —     

Foreign currency derivatives

   $ (1   $ (1   $ —         $ (1   $ —     

Debt

   $ (12,022   $ (12,908   $ —         $ (12,908   $ —     

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

Level 1 Fair Value Measurements

Cash equivalents — 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 — 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 debt are estimated based on rates available for debt with similar terms and maturity. The fair value of Devon’s commercial paper and EnLink’s credit facility is the carrying value.

Capital lease obligations — The fair value was calculated using inputs from third-party banks.

Level 3 Fair Value Measurements

Long-term investments — Devon’s long-term investments as of December 31, 2013 consisted entirely of auction rate securities. In the first quarter of 2014, Devon redeemed all these securities for approximately $57 million, or $5 million below their carrying value.

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 U.S. and Canadian segments are all primarily engaged in oil and gas exploration and production activities.

With the formation of EnLink in the first quarter of 2014, Devon considers EnLink to be an operating segment that is distinct from its existing operating segments. EnLink’s operations consist of midstream assets and operations located across the U.S. Additionally, EnLink has a management team that is primarily responsible for capital and resource allocation decisions. Therefore, EnLink is presented as a separate reporting segment. For the reporting periods prior to the formation of EnLink, Devon has reclassified, from its U.S. segment to the EnLink segment, all asset-level amounts related to the midstream assets that it contributed to EnLink Holdings.

 

25


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     U.S.     Canada     EnLink      Eliminations     Total  
     (In millions)  

Three Months Ended June 30, 2014:

           

Revenues from external customers

   $ 3,252      $ 506      $ 752       $ —        $ 4,510   

Intersegment revenues

   $ —        $ —        $ 175       $ (175   $ —     

Depreciation, depletion and amortization

   $ 642      $ 112      $ 74       $ —        $ 828   

Interest expense

   $ 108      $ 22      $ 14       $ (11   $ 133   

Earnings before income taxes

   $ 362      $ 1,109      $ 83       $ —        $ 1,554   

Income tax expense

   $ 378      $ 458      $ 18       $ —        $ 854   

Net earnings (loss)

   $ (16   $ 651      $ 65       $ —        $ 700   

Noncontrolling interests

   $ 1      $ —        $ 24       $ —        $ 25   

Net earnings (loss) attributable to Devon

   $ (17   $ 651      $ 41       $ —        $ 675   

Capital expenditures

   $ 1,432      $ 278      $ 216       $ —        $ 1,926   

Three Months Ended June 30, 2013:

           

Revenues from external customers

   $ 2,127      $ 722      $ 239       $ —        $ 3,088   

Intersegment revenues

   $ —        $ —        $ 349       $ (349   $ —     

Depreciation, depletion and amortization

   $ 419      $ 209      $ 46       $ —        $ 674   

Interest expense

   $ 94      $ 23      $ —         $ (9   $ 108   

Asset impairments

   $ —        $ 40      $ —         $ —        $ 40   

Earnings before income taxes

   $ 849      $ 102      $ 46       $ —        $ 997   

Income tax expense

   $ 277      $ 20      $ 17       $ —        $ 314   

Net earnings

   $ 572      $ 82      $ 29       $ —        $ 683   

Capital expenditures

   $ 1,087      $ 356      $ 53       $ —        $ 1,496   

Six Months Ended June 30, 2014:

           

Revenues from external customers

   $ 5,868      $ 1,190      $ 1,177       $ —        $ 8,235   

Intersegment revenues

   $ —        $ —        $ 473       $ (473   $ —     

Depreciation, depletion and amortization

   $ 1,139      $ 306      $ 122       $ —        $ 1,567   

Interest expense

   $ 208      $ 41      $ 19       $ (20   $ 248   

Earnings before income taxes

   $ 758      $ 1,201      $ 155       $ —        $ 2,114   

Income tax expense

   $ 564      $ 479      $ 42       $ —        $ 1,085   

Net earnings

   $ 194      $ 722      $ 113       $ —        $ 1,029   

Net earnings attributable to noncontrolling interests

   $ 1      $ —        $ 29       $ —        $ 30   

Net earnings attributable to Devon

   $ 193      $ 722      $ 84       $ —        $ 999   

Property and equipment, net

   $ 25,606      $ 7,009      $ 4,384       $ —        $ 36,999   

Total assets

   $ 30,631      $ 11,224      $ 9,379       $ (119   $ 51,115   

Capital expenditures

   $ 8,535      $ 720      $ 284       $ —        $ 9,539   

Six Months Ended June 30, 2013:

           

Revenues from external customers

   $ 3,346      $ 1,261      $ 452       $ —        $ 5,059   

Intersegment revenues

   $ —        $ —        $ 663       $ (663   $ —     

Depreciation, depletion and amortization

   $ 843      $ 444      $ 91       $ —        $ 1,378   

Interest expense

   $ 190      $ 42      $ —         $ (14   $ 218   

Asset impairments

   $ 1,110      $ 843      $ —         $ —        $ 1,953   

Earnings (loss) before income taxes

   $ (270   $ (778   $ 83       $ —        $ (965

Income tax expense (benefit)

   $ (131   $ (208   $ 30       $ —        $ (309

Net earnings (loss)

   $ (139   $ (570   $ 53       $ —        $ (656

Capital expenditures

   $ 2,258      $ 940      $ 136       $ —        $ 3,334   

December 31, 2013:

           

Property and equipment, net

   $ 18,201      $ 8,478      $ 1,768       $ —        $ 28,447   

Total assets

   $ 27,080      $ 13,560      $ 2,237       $ —        $ 42,877   

 

26


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 six-month periods ended June 30, 2014, compared to the three-month and six-month periods ended June 30, 2013, and in our financial condition and liquidity since December 31, 2013. For information regarding our critical accounting policies and estimates, see our 2013 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview of 2014 Results

Key components of our financial performance are summarized below.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014      2013      Change     2014      2013     Change  
     ($ in millions, except per share amounts)  

Net earnings (loss) attributable to Devon

   $ 675       $ 683         -1 %   $ 999       $ (656     +252

Adjusted earnings attributable to Devon(1)

   $ 574       $ 491         +17   $ 1,121       $ 761        +47

Earnings (loss) per share attributable to Devon

   $ 1.64       $ 1.68         -2 %   $ 2.44       $ (1.63     +249

Adjusted earnings per share attributable to Devon (1)

   $ 1.40       $ 1.21         +16   $ 2.74       $ 1.87        +46

Production (MBoe/d)

     667         698         -4 %     679         692        -2 %

Realized price per Boe

   $ 44.12       $ 35.00         +26   $ 42.61       $ 32.13        +33

Adjusted operating income per Boe (2)

   $ 28.69       $ 22.05         +30   $ 27.05       $ 20.13        +34

Operating cash flow

   $ 2,049       $ 1,396         +47   $ 3,459       $ 2,398        +44

Capitalized costs

   $ 1,926       $ 1,496         +29   $ 9,539       $ 3,334        +186

Shareholder distributions

   $ 99       $ 88         +11   $ 189       $ 170        +11

 

(1) Adjusted earnings and adjusted earnings per share attributable to Devon are financial measures not prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). For a description of adjusted earnings and adjusted earnings per share attributable to Devon, 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 administrative, production and property taxes and net financing costs, with the result divided by total production.

During the three-month and six-month periods ended June 30, 2014, our adjusted earnings, adjusted earnings per share and adjusted operating income per Boe all increased compared to the same periods in 2013. The improved 2014 results were driven primarily by increases in oil and gas prices, liquids volumes and oil and gas realizations. These factors also contributed to higher operating cash flow which caused our cash flow deficit to narrow considerably in 2014.

During the first six months of 2014, we made significant progress toward three strategic initiatives that are focused on building value per share. On February 28, 2014, we closed the GeoSouthern acquisition and acquired GeoSouthern’s Eagle Ford Shale assets and operations in south Texas for approximately $6.0 billion. This acquisition included approximately 250 MMBoe of proved reserves. Additionally, since closing the transaction, we have produced over 7 MMBoe from our Eagle Ford development, with oil accounting for over 60% of our production from the play.

On March 7, 2014, we, Crosstex Energy, Inc. and Crosstex Energy, L.P. (collectively “Crosstex”) completed a transaction to combine substantially all of our U.S. midstream assets with Crosstex’s assets to form a new midstream business referred to as EnLink. This transaction, including Devon’s controlling ownership of EnLink, is described more fully in “Part I. Financial Information – Item 1. Financial Statements – Note 2” in this report. The results of operations from our assets contributed to EnLink are included in our consolidated financial statements for all periods presented. Additionally, the results of operations for all assets contributed to EnLink are included in our consolidated financial statements subsequent to the completion of the transaction. The portions of EnLink’s net earnings and stockholders’ equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in our consolidated comprehensive statements of earnings and consolidated balance sheets.

 

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Finally, we are nearing completion of our non-core divestiture program. On April 1, 2014, we sold Canadian conventional assets to Canadian Natural Resources Limited for $2.8 billion ($3.125 billion Canadian dollars). This divestiture included approximately 170 MMBoe of proved reserves. Production associated with the divested properties was approximately 79 MBoe/d, including 357 MMcf/d of natural gas in the first quarter of 2014. Additionally, on June 30, 2014, we reached an agreement with Linn Energy to sell our U.S. non-core assets for $2.3 billion. This transaction is expected to close in the third quarter of 2014.

In the second quarter, we repatriated $2.8 billion to the U.S. from the Canadian divestiture. We used those proceeds, cash on hand and free cash flow generated during the quarter to reduce debt balances by $3.2 billion.

 

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Results of Operations

Oil, Gas and NGL Production

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014      2013      Change     2014      2013      Change  

Oil (MBbls/d)

                

Anadarko Basin

     11         9         +24     10         9         +17

Barnett Shale

     2         2         -13 %     2         2         +5

Eagle Ford

     40         —           N/M        25         —           N/M   

Mississippian-Woodford Trend

     9         3         +162     9         3         +240

Permian Basin

     55         46         +21     55         43         +28

Rockies

     8         8         -0 %     8         7         +8

Other

     3         3         +0     3         3         +0
  

 

 

    

 

 

      

 

 

    

 

 

    

U.S. core and emerging properties

     128         71         +79     112         67         +68

Canada

     25         29         -9 %     26         28         -8 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total core and emerging properties

     153         100         +54     138         95         +45

Non-core properties

     4         16         -73 %     10         17         -42 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     157         116         +36     148         112         +32
  

 

 

    

 

 

      

 

 

    

 

 

    

Bitumen (MBbls/d)

                

Canada

     52         53         -3 %     52         54         -4 %

Gas (MMcf/d)

                

Anadarko Basin

     309         281         +10     295         275         +7

Barnett Shale

     932         1,040         -10 %     931         1,049         -11 %

Eagle Ford

     86         —           N/M        54         —           N/M   

Mississippian-Woodford Trend

     28         8         +239     28         7         +320

Permian Basin

     134         106         +26     128         97         +31

Rockies

     67         79         -15 %     68         77         -11 %

Other

     135         164         -18 %     137         162         -15 %
  

 

 

    

 

 

      

 

 

    

 

 

    

U.S. core and emerging properties

     1,691         1,678         +1     1,641         1,667         -2 %

Canada

     23         32         -26 %     23         35         -37 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total core and emerging properties

     1,714         1,710         +0     1,664         1,702         -2 %

Non-core properties

     217         730         -70 %     397         730         -46 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     1,931         2,440         -21 %     2,061         2,432         -15 %
  

 

 

    

 

 

      

 

 

    

 

 

    

NGLs (MBbls/d)

                

Anadarko Basin

     31         24         +26     30         24         +23

Barnett Shale

     55         54         +3     55         53         +3

Eagle Ford

     10         —           N/M        7         —           N/M   

Mississippian-Woodford Trend

     5         1         +553     5         1         +893

Permian Basin

     18         13         +37     17         13         +33

Rockies

     1         2         -59 %     1         1         -24 %

Other

     10         11         -9 %     10         11         -9 %
  

 

 

    

 

 

      

 

 

    

 

 

    

U.S. core and emerging properties

     130         105         +24     125         103         +21

Non-core properties

     6         17         -63 %     11         18         -38 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     136         122         +12     136         121         +12
  

 

 

    

 

 

      

 

 

    

 

 

    

Combined (MBoe/d)

                

Anadarko Basin

     93         80         +16     89         79         +13

Barnett Shale

     212         230         -7 %     212         230         -8 %

Eagle Ford

     65         —           N/M        41         —           N/M   

Mississippian-Woodford Trend

     18         5         +236     19         4         +335

Permian Basin

     95         76         +25     93         72         +30

Rockies

     21         24         -14 %     21         22         -5 %

Other

     35         41         -15 %     36         41         -12 %
  

 

 

    

 

 

      

 

 

    

 

 

    

U.S. core and emerging properties

     539         456         +18     511         448         +14

Canada

     81         87         -6 %     81         88         -8 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total core and emerging properties

     620         543         +14     592         536         +10

Non-core properties

     47         155         -70 %     87         156         -44 %
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

     667         698         -4 %     679         692         -2 %
  

 

 

    

 

 

      

 

 

    

 

 

    

 

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Table of Contents

Oil, Gas and NGL Pricing

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014 (1)      2013 (1)      Change     2014 (1)      2013 (1)      Change  

Oil (per Bbl)

                

U.S.

   $ 95.71       $ 91.56         +5   $ 93.96       $ 89.64         +5

Canada

   $ 76.60       $ 72.47         +6   $ 73.48       $ 64.76         +13

Total

   $ 92.59       $ 85.02         +9   $ 89.64       $ 80.73         +11

Bitumen (per Bbl)

                

Canada

   $ 65.88       $ 53.90         +22   $ 60.47       $ 41.10         +47

Gas (per Mcf)

                

U.S.

   $ 4.19       $ 3.49         +20   $ 4.26       $ 3.15         +35

Canada (2)

   $ 1.56       $ 3.44         -55 %   $ 3.97       $ 3.24         +23

Total

   $ 4.15       $ 3.48         +19   $ 4.23       $ 3.17         +34

NGLs (per Bbl)

                

U.S.

   $ 25.22       $ 24.80         +2   $ 27.34       $ 25.53         +7

Canada

   $ —         $ 43.68         N/M      $ 50.17       $ 45.54         +10

Total

   $ 25.13       $ 26.29         -4 %   $ 28.11       $ 27.16         +4

Combined (per Boe)

                

U.S.

   $ 41.06       $ 32.19         +28   $ 40.30       $ 30.29         +33

Canada

   $ 65.96       $ 43.02         +53   $ 53.26       $ 37.34         +43

Total

   $ 44.12       $ 35.00         +26   $ 42.61       $ 32.13         +33

 

(1) The prices presented exclude any effects due to oil, gas and NGL derivatives.
(2) The reported Canadian gas volumes include 19 and 27 MMcf per day for the second quarter of 2014 and 2013, respectively, and 29 and 28 MMcf per day for the first six months of 2014 and 2013, respectively, that are produced from certain of our leases and then transported to our Jackfish operations where the gas is used as fuel. However, the revenues and expenses related to this consumed gas are eliminated in our consolidated financial results. With the sale of the vast majority of the Canadian gas business in the second quarter of 2014, the impact of the eliminated gas revenues more significantly impacts our gas price.

 

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Commodity Sales

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 June 30, 2014 and 2013.

 

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

2013 sales

   $ 897       $ 260      $ 773      $ 292      $ 2,222   

Change due to volumes

     323         (8     (161     33        187   

Change due to prices

     108         57        119        (14     270   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2014 sales

   $ 1,328       $ 309      $ 731      $ 311      $ 2,679   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Upstream sales increased $187 million due to volumes in the second quarter of 2014. The primary driver of the increase results from a 79% increase in our U.S. core and emerging oil production. Such growth results from our recently acquired Eagle Ford Shale properties and the continued development of our Permian Basin and Mississippian-Woodford Trend properties. In addition, we continue to grow our NGL production from these plays, which resulted in $33 million of additional sales. These production additions were partially offset by the impacts of our Canadian divestitures, which were the primary driver of our 21% decrease in gas production. Bitumen sales decreased due to volumes as a result of higher royalties on our Jackfish heavy oil project in Canada.

Upstream sales increased $270 million due to prices in the second quarter of 2014, primarily due to a 26% increase in our realized price without hedges. Oil and bitumen sales were the most significantly impacted with an increase of $166 million, largely due to higher prices and realizations resulting from a higher average NYMEX West Texas Intermediate index price and tighter bitumen and heavy oil differentials. Gas sales increased $119 million largely due to higher North American regional index prices upon which our gas sales are based. NGL sales decreased $14 million as a result of lower NGL prices at Mont Belvieu, Texas.

The volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales between the six months ended June 30, 2014 and 2013.

 

     Six Months Ended June 30,  
     Oil      Bitumen     Gas     NGLs      Total  
     (In millions)  

2013 sales

   $ 1,636       $ 400      $ 1,394      $ 596       $ 4,026   

Change due to volumes

     528         (16     (213     71         370   

Change due to prices

     239         181        396        24         840   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

2014 sales

   $ 2,403       $ 565      $ 1,577      $ 691       $ 5,236   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Upstream sales increased $370 million due to volumes during the first six months of 2014. The primary driver of the increase results from a 68% increase in our U.S. core and emerging oil production. Such growth results from our recently acquired Eagle Ford Shale properties and the continued development of our Permian Basin and Mississippian-Woodford Trend properties. In addition, we continue to grow our NGL production from these plays, which resulted in $71 million of additional sales. These production additions were partially offset by the impacts of our Canadian divestitures, which were the primary driver of our 15% decrease in gas production. Bitumen sales decreased due to volumes as a result of higher royalties on our Jackfish heavy oil project in Canada.

Upstream sales increased $840 million due to prices during the first six months of 2014, primarily due to a 33% increase in our realized price without hedges. Oil and bitumen sales were the most significantly impacted with an increase of $420 million,