10-Q 1 dvn-10q_20170331.htm FORM 10-Q dvn-10q_20170331.htm

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

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 or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

identification No.)

 

 

333 West Sheridan Avenue, Oklahoma City, Oklahoma

 

73102-5015

(Address of principal executive offices)

 

(Zip code)

Registrant’s telephone number, including area code: (405) 235-3611

Former name, address and former fiscal year, if changed from last report: Not applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Emerging growth company

 

Smaller reporting company

 

 

 

 

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

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

On April 19, 2017, 525.7 million shares of common stock were outstanding.

 

 


Table of Contents

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Part I. Financial Information

 

Item 1.

 

Financial Statements

6

 

 

Consolidated Comprehensive Statements of Earnings

6

 

 

Consolidated Statements of Cash Flows

7

 

 

Consolidated Balance Sheets

8

 

 

Consolidated Statements of Stockholders’ Equity

9

 

 

Notes to Consolidated Financial Statements

10

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

 

Controls and Procedures

40

 

 

 

 

Part II. Other Information

 

Item 1.

 

Legal Proceedings

41

Item 1A.

 

Risk Factors

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

 

Defaults Upon Senior Securities

41

Item 4.

 

Mine Safety Disclosures

41

Item 5.

 

Other Information

41

Item 6.

 

Exhibits

42

 

 

 

 

Signatures

 

 

43

 

 

 

2

 


Table of Contents

DEFINITIONS

Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Devon” and the “Company” refer to Devon Energy Corporation and its consolidated subsidiaries. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“ASU” means Accounting Standards Update.

“Bbl” or “Bbls” means barrel or barrels.

“Boe” means barrel of oil equivalent. Gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. Bitumen and NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.

“Btu” means British thermal units, a measure of heating value.

“Canada” means the division of Devon encompassing oil and gas properties located in Canada. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.

“Canadian Plan” means Devon Canada Corporation Incentive Savings Plan.

“DD&A” means depreciation, depletion and amortization expenses.

“Devon Plan” means Devon Energy Corporation Incentive Savings Plan.

“E&P” means exploration and production activities.

“EnLink” means EnLink Midstream Partners, LP, a master limited partnership.

“FASB” means Financial Accounting Standards Board.

“G&A” means general and administrative expenses.

“GAAP” means U.S. generally accepted accounting principles.

“General Partner” means EnLink Midstream, LLC, the indirect general partner of EnLink.

“Inside FERC” refers to the publication Inside FERC’s Gas Market Report.

“LIBOR” means London Interbank Offered Rate.

“LOE” means lease operating expenses.

“MBbls” means thousand barrels.

“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBtu” means million Btu.

“MMcf” means million cubic feet.

“N/M” means not meaningful.

3

 


Table of Contents

“NGL” or “NGLs” means natural gas liquids.

“NYMEX” means New York Mercantile Exchange.

“OPIS” means Oil Price Information Service.

“SEC” means United States Securities and Exchange Commission.

“Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit.

“TSR” means total shareholder return.

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

“WTI” means West Texas Intermediate.

“/d” means per day.

“/Bbl” means per barrel.

“/MMBtu” means per MMBtu.

4

 


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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words “expects,” “believes,” “will,” “would,” “could,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2016 reserve reports and other data in our possession or available from third parties. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, including, but not limited to:

 

the volatility of oil, gas and NGL prices;

 

uncertainties inherent in estimating oil, gas and NGL reserves;

 

the extent to which we are successful in acquiring and discovering additional reserves;

 

the uncertainties, costs and risks involved in exploration and development activities;

 

risks related to our hedging activities;

 

counterparty credit risks;

 

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

 

risks relating to our indebtedness;

 

our ability to successfully complete mergers, acquisitions and divestitures;

 

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

 

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

 

midstream capacity constraints and potential interruptions in production;

 

competition for leases, materials, people and capital;

 

cyberattacks targeting our systems and infrastructure; and

 

any of the other risks and uncertainties discussed in this report, our 2016 Annual Report on Form 10-K and our other filings with the SEC.

All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.

 

 

5

 


Table of Contents

Part I.  Financial Information

Item 1.  Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

 

 

 

Three Months

 

 

 

Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

(Millions, except per share amounts)

 

Oil, gas and NGL sales

 

$

1,309

 

 

$

825

 

Oil, gas and NGL derivatives

 

 

232

 

 

 

33

 

Marketing and midstream revenues

 

 

2,010

 

 

 

1,268

 

Asset dispositions and other

 

 

(4

)

 

 

 

Total revenues and other

 

 

3,547

 

 

 

2,126

 

Lease operating expenses

 

 

386

 

 

 

444

 

Marketing and midstream operating expenses

 

 

1,803

 

 

 

1,066

 

General and administrative expenses

 

 

181

 

 

 

194

 

Production and property taxes

 

 

85

 

 

 

78

 

Depreciation, depletion and amortization

 

 

381

 

 

 

542

 

Asset impairments

 

 

7

 

 

 

3,035

 

Restructuring and transaction costs

 

 

 

 

 

247

 

Other operating items

 

 

(2

)

 

 

20

 

Total operating expenses

 

 

2,841

 

 

 

5,626

 

Operating income (loss)

 

 

706

 

 

 

(3,500

)

Net financing costs

 

 

127

 

 

 

164

 

Other nonoperating items

 

 

(19

)

 

 

21

 

Earnings (loss) before income taxes

 

 

598

 

 

 

(3,685

)

Income tax expense (benefit)

 

 

19

 

 

 

(217

)

Net earnings (loss)

 

 

579

 

 

 

(3,468

)

Net earnings (loss) attributable to noncontrolling interests

 

 

14

 

 

 

(412

)

Net earnings (loss) attributable to Devon

 

$

565

 

 

$

(3,056

)

Net earnings (loss) per share attributable to Devon:

 

 

 

 

 

 

 

 

Basic

 

$

1.08

 

 

$

(6.44

)

Diluted

 

$

1.07

 

 

$

(6.44

)

Comprehensive earnings (loss):

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

579

 

 

$

(3,468

)

Other comprehensive earnings, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(2

)

 

 

23

 

Pension and postretirement plans

 

 

5

 

 

 

4

 

Other comprehensive earnings, net of tax

 

 

3

 

 

 

27

 

Comprehensive earnings (loss)

 

 

582

 

 

 

(3,441

)

Comprehensive earnings (loss) attributable to noncontrolling interests

 

 

14

 

 

 

(412

)

Comprehensive earnings (loss) attributable to Devon

 

$

568

 

 

$

(3,029

)

 

See accompanying notes to consolidated financial statements.

 

6

 


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three Months

 

 

 

Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

(Millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

579

 

 

$

(3,468

)

Adjustments to reconcile net earnings (loss) to net cash

   from operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

381

 

 

 

542

 

Asset impairments

 

 

7

 

 

 

3,035

 

Gains and losses on asset sales

 

 

4

 

 

 

 

Deferred income tax benefit

 

 

(1

)

 

 

(207

)

Commodity derivatives

 

 

(232

)

 

 

(33

)

Cash settlements on commodity derivatives

 

 

8

 

 

 

19

 

Other derivatives and financial instruments

 

 

(9

)

 

 

227

 

Cash settlements on other derivatives and financial instruments

 

 

(2

)

 

 

(123

)

Asset retirement obligation accretion

 

 

17

 

 

 

19

 

Amortization of stock-based compensation

 

 

46

 

 

 

108

 

Other

 

 

 

 

 

(194

)

Net change in working capital

 

 

15

 

 

 

214

 

Change in long-term other assets

 

 

1

 

 

 

53

 

Change in long-term other liabilities

 

 

20

 

 

 

(27

)

Net cash from operating activities

 

 

834

 

 

 

165

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(747

)

 

 

(749

)

Acquisitions of property, equipment and businesses

 

 

(20

)

 

 

(1,627

)

Proceeds from sale of investment

 

 

190

 

 

 

 

Divestitures of property and equipment

 

 

38

 

 

 

18

 

Other

 

 

(3

)

 

 

(1

)

Net cash from investing activities

 

 

(542

)

 

 

(2,359

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings of long-term debt, net of issuance costs

 

 

813

 

 

 

396

 

Repayments of long-term debt

 

 

(587

)

 

 

(259

)

Payment of installment payable

 

 

(250

)

 

 

 

Net short-term debt repayments

 

 

 

 

 

(626

)

Issuance of common stock

 

 

 

 

 

1,469

 

Issuance of subsidiary units

 

 

55

 

 

 

727

 

Dividends paid on common stock

 

 

(32

)

 

 

(125

)

Contributions from noncontrolling interests

 

 

21

 

 

 

3

 

Distributions to noncontrolling interests

 

 

(81

)

 

 

(73

)

Taxes for share-based compensation

 

 

(61

)

 

 

(18

)

Other

 

 

(2

)

 

 

(1

)

Net cash from financing activities

 

 

(124

)

 

 

1,493

 

Effect of exchange rate changes on cash

 

 

(8

)

 

 

26

 

Net change in cash and cash equivalents

 

 

160

 

 

 

(675

)

Cash and cash equivalents at beginning of period

 

 

1,959

 

 

 

2,310

 

Cash and cash equivalents at end of period

 

$

2,119

 

 

$

1,635

 

 

See accompanying notes to consolidated financial statements.

 

 

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

 

 

(Millions, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,119

 

 

$

1,959

 

Accounts receivable

 

 

1,320

 

 

 

1,356

 

Assets held for sale

 

 

 

 

 

193

 

Other current assets

 

 

336

 

 

 

264

 

Total current assets

 

 

3,775

 

 

 

3,772

 

Property and equipment, at cost:

 

 

 

 

 

 

 

 

Oil and gas, based on full cost accounting:

 

 

 

 

 

 

 

 

Subject to amortization

 

 

76,421

 

 

 

75,648

 

Not subject to amortization

 

 

3,096

 

 

 

3,437

 

Total oil and gas

 

 

79,517

 

 

 

79,085

 

Midstream and other

 

 

10,701

 

 

 

10,455

 

Total property and equipment, at cost

 

 

90,218

 

 

 

89,540

 

Less accumulated depreciation, depletion and amortization

 

 

(73,797

)

 

 

(73,350

)

Property and equipment, net

 

 

16,421

 

 

 

16,190

 

Goodwill

 

 

3,964

 

 

 

3,964

 

Other long-term assets

 

 

1,974

 

 

 

1,987

 

Total assets

 

$

26,134

 

 

$

25,913

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

638

 

 

$

642

 

Revenues and royalties payable

 

 

991

 

 

 

908

 

Other current liabilities

 

 

841

 

 

 

1,066

 

Total current liabilities

 

 

2,470

 

 

 

2,616

 

Long-term debt

 

 

10,381

 

 

 

10,154

 

Asset retirement obligations

 

 

1,067

 

 

 

1,226

 

Other long-term liabilities

 

 

643

 

 

 

894

 

Deferred income taxes

 

 

651

 

 

 

648

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 526 million and

   523 million shares in 2017 and 2016, respectively

 

 

53

 

 

 

52

 

Additional paid-in capital

 

 

7,207

 

 

 

7,237

 

Accumulated deficit

 

 

(1,081

)

 

 

(1,646

)

Accumulated other comprehensive earnings

 

 

287

 

 

 

284

 

Total stockholders’ equity attributable to Devon

 

 

6,466

 

 

 

5,927

 

Noncontrolling interests

 

 

4,456

 

 

 

4,448

 

Total stockholders’ equity

 

 

10,922

 

 

 

10,375

 

Total liabilities and stockholders’ equity

 

$

26,134

 

 

$

25,913

 

 

See accompanying notes to consolidated financial statements.

 

 

8

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Retained

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Earnings

 

 

Comprehensive

 

 

Treasury

 

 

Noncontrolling

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Accumulated Deficit)

 

 

Earnings

 

 

Stock

 

 

Interests

 

 

Equity

 

 

 

(Unaudited)

 

 

 

(Millions)

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

 

523

 

 

$

52

 

 

$

7,237

 

 

$

(1,646

)

 

$

284

 

 

$

 

 

$

4,448

 

 

$

10,375

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

565

 

 

 

 

 

 

 

 

 

14

 

 

 

579

 

Other comprehensive earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Restricted stock grants, net of cancellations

 

 

2

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

(38

)

Common stock retired

 

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

 

 

 

38

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

Share-based compensation

 

 

1

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

Subsidiary equity transactions

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

85

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

(81

)

Balance as of March 31, 2017

 

 

526

 

 

$

53

 

 

$

7,207

 

 

$

(1,081

)

 

$

287

 

 

$

 

 

$

4,456

 

 

$

10,922

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

 

418

 

 

$

42

 

 

$

4,996

 

 

$

1,781

 

 

$

230

 

 

$

 

 

$

3,940

 

 

$

10,989

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,056

)

 

 

 

 

 

 

 

 

(412

)

 

 

(3,468

)

Other comprehensive earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Restricted stock grants, net of cancellations

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Common stock retired

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(125

)

 

 

 

 

 

 

 

 

 

 

 

(125

)

Common stock issued

 

 

103

 

 

 

10

 

 

 

2,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,127

 

Share-based compensation

 

 

 

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99

 

Subsidiary equity transactions

 

 

 

 

 

 

 

 

301

 

 

 

 

 

 

 

 

 

 

 

 

643

 

 

 

944

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(73

)

 

 

(73

)

Balance as of March 31, 2016

 

 

524

 

 

$

52

 

 

$

7,501

 

 

$

(1,400

)

 

$

257

 

 

$

 

 

$

4,098

 

 

$

10,508

 

 

 

See accompanying notes to consolidated financial statements.

 

 

9

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

1.Summary of Significant Accounting Policies

The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2016 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 periods ended March 31, 2017 and 2016 and Devon’s financial position as of March 31, 2017.

Recently Adopted Accounting Standards

In January 2017, Devon adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Its objective is to simplify several aspects of the accounting for share-based payments, including income taxes when awards vest or are settled, statutory withholding and forfeitures. As the result of adoption, Devon made certain income tax presentation changes, most notably prospectively presenting excess tax benefits and deficiencies in the consolidated comprehensive statements of earnings and as operating cash flows in the consolidated statements of cash flows. Devon also retrospectively applied the new cash flow statement guidance dictating the presentation of shares traded for tax-withholding purposes as a financing activity. The adoption of the new guidance did not materially impact the consolidated financial statements for the three months ended March 31, 2017 or previously reported financial information but could have a more material future impact.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill And Other (Topic 350)Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. In January 2017, Devon elected to early adopt ASU 2017-04, and the adoption had no impact on the consolidated financial statements. Devon will perform future goodwill impairment tests according to ASU 2017-04.

Recently Issued Accounting Standards

The FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition and industry-specific guidance in Subtopic 932-605, Extractive Activities – Oil and Gas – Revenue Recognition. This ASU 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 effective date for ASU 2014-09 was delayed through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual and interim periods beginning in 2018, with early adoption permitted in 2017. Devon does not plan on early adopting this ASU. The ASU is required to be adopted using either the retrospective transition method, which requires restating previously reported results or the cumulative effect (modified retrospective) transition method, which utilizes a cumulative-effect adjustment to retained earnings in the period of adoption to account for prior period effects rather than restating previously reported results. Devon intends to use the cumulative effect transition method and does not anticipate this ASU will have a material impact on its balance sheet or related consolidated statement of earnings, stockholders’ equity or cash flows. Devon continues to evaluate the impact of the disclosures required by this ASU. Devon does not expect its

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

annual disclosures will materially change upon adopting this ASU. However, Devon’s quarterly disclosures will materially expand upon adoption of this ASU. Devon is implementing a process to gather and provide the quarterly disclosures required by the ASU.

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU will supersede the lease requirements in Topic 840, Leases. Its objective is to increase transparency and comparability among organizations. This ASU provides guidance requiring lessees to recognize most leases on their balance sheet. Lessor accounting does not significantly change, except for some changes made to align with new revenue recognition requirements. This ASU is effective for Devon beginning January 1, 2019 and will be applied using a modified retrospective transition method, which requires applying the new guidance to leases that exist or are entered into after the beginning of the earliest period in the financial statements. Early adoption is permitted, but Devon does not plan to early adopt. Devon has begun the process of evaluating contracts and gathering the necessary terms and data elements for purposes of determining the impact this ASU will have on its consolidated financial statements and related disclosures. Based on initial research, Devon estimates more than 7,500 contracts and a large number of data elements must be gathered and reviewed to ensure proper accounting of these contracts once this ASU is effective. Furthermore, Devon anticipates complying with this standard will significantly impact its systems, processes and controls and is evaluating technology requirements and solutions needed to comply with the requirements of this ASU.

The FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU will require entities to present the service cost component of net periodic benefit cost in the same line item as other employee compensation costs and present the other components of net periodic benefit cost outside of operating income in the income statement. Only the service cost component of net periodic benefit cost is eligible for capitalization. This ASU is effective for Devon beginning January 1, 2018, and income statement presentation changes will be applied retrospectively, while service cost component capitalization will be applied prospectively. Upon adoption of this ASU, Devon will reclassify $7 million, $14 million and $16 million of non-service cost components of net periodic benefit costs for 2017, 2016 and 2015, respectively, as other nonoperating items. Such amounts are currently classified in Devon’s G&A. No other changes upon adopting this ASU are expected to be material.  

 

2.

Acquisitions and Divestitures

Devon Acquisitions

On January 7, 2016, Devon acquired approximately 80,000 net acres (unaudited) and assets in the STACK play for approximately $1.5 billion. Devon funded the acquisition with $849 million of cash, after adjustments, and $659 million of common equity shares. The purchase price allocation was approximately $1.3 billion to unproved properties and approximately $200 million to proved properties.

 

 

EnLink Acquisitions

On January 7, 2016, EnLink acquired Anadarko Basin gathering and processing midstream assets, along with dedicated acreage service rights and service contracts, for approximately $1.4 billion. The purchase price allocation was $1.0 billion to intangible assets and approximately $400 million to property and equipment. EnLink funded the acquisition with approximately $215 million of General Partner common units and approximately $800 million of cash, primarily funded with the issuance of EnLink preferred units. The remaining $500 million of the purchase price was to be paid within one year with the option to defer $250 million of the final payment 24 months from the close date. The first installment payment of $250 million was paid in January 2017. The remaining $250 million payment is reported in other current liabilities in the accompanying consolidated balance sheets. The accretion of the discount is reported within net financing costs in the accompanying consolidated comprehensive statement of earnings.

EnLink Asset Divestitures

During the first quarter of 2017, EnLink divested its ownership interest in Howard Energy Partners for approximately $190 million.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Devon Upstream Asset Divestitures

 

In May 2017, Devon announced its intent to divest approximately $1 billion of upstream assets. The non-core assets identified for monetization include select portions of the Barnett Shale focused primarily around Johnson County and other properties located principally within Devon’s U.S. resource base. Devon expects the divestiture process will take up to 12 to 18 months to complete. Devon plans to deploy divestiture proceeds toward its U.S. resource plays and to further strengthen its investment-grade financial position. The non-core divestiture plan is also expected to accelerate Devon’s transition to higher-margin production.

 

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 to hedge future prices received. Additionally, Devon and EnLink periodically enter into derivative financial instruments with respect to a portion of their oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps and costless price collars. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility and foreign exchange forward contracts to manage its exposure to fluctuations in the U.S. and Canadian dollar exchange rates. As of March 31, 2017, Devon did not have any open foreign exchange contracts.

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 generally contain provisions that provide for collateral payments, if Devon’s or its counterparty’s credit rating falls below certain credit rating levels.

As of March 31, 2017, Devon held $13 million of cash collateral, which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines and is reported in other current liabilities in the accompanying consolidated balance sheets. As of December 31, 2016, Devon held no collateral from counterparties.

Commodity Derivatives

As of March 31, 2017, 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 WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume

(Bbls/d)

 

 

Weighted

Average

Price ($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Floor

Price ($/Bbl)

 

 

Weighted

Average

Ceiling Price

($/Bbl)

 

Q2-Q4 2017

 

 

73,945

 

 

$

54.34

 

 

 

61,665

 

 

$

45.53

 

 

$

57.96

 

Q1-Q4 2018

 

 

5,592

 

 

$

53.38

 

 

 

12,921

 

 

$

46.69

 

 

$

56.69

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

 

 

Oil Basis Swaps

 

Period

 

Index

 

Volume (Bbls/d)

 

 

Weighted Average

Differential to WTI

($/Bbl)

 

Q2-Q4 2017

 

Western Canadian Select

 

 

63,244

 

 

$

(14.83

)

Q2-Q4 2017

 

Midland Sweet

 

 

20,000

 

 

$

(0.41

)

 

As of March 31, 2017, 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 respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume (MMBtu/d)

 

 

Weighted Average Price ($/MMBtu)

 

 

Volume (MMBtu/d)

 

 

Weighted Average Floor Price ($/MMBtu)

 

 

Weighted Average

Ceiling Price ($/MMBtu)

 

Q2-Q4 2017

 

 

193,218

 

 

$

3.17

 

 

 

411,418

 

 

$

2.98

 

 

$

3.38

 

Q1-Q4 2018

 

 

68,890

 

 

$

3.17

 

 

 

36,986

 

 

$

3.29

 

 

$

3.63

 

 

 

 

Natural Gas Basis Swaps

 

Period

 

Index

 

Volume

(MMBtu/d)

 

 

Weighted Average

Differential to

Henry Hub

($/MMBtu)

 

Q2-Q4 2017

 

Panhandle Eastern Pipe Line

 

 

150,000

 

 

$

(0.34

)

Q2-Q4 2017

 

El Paso Natural Gas

 

 

80,000

 

 

$

(0.13

)

Q2-Q4 2017

 

Houston Ship Channel

 

 

35,000

 

 

$

0.06

 

Q2-Q4 2017

 

Transco Zone 4

 

 

205,000

 

 

$

0.03

 

Q1-Q4 2018

 

Panhandle Eastern Pipe Line

 

 

50,000

 

 

$

(0.29

)

 

As of March 31, 2017, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.

 

 

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Product

 

Volume (Bbls/d)

 

 

Weighted Average Price ($/Bbl)

 

 

Volume (Bbls/d)

 

 

Weighted Average Floor Price ($/Bbl)

 

 

Weighted Average Ceiling Price ($/Bbl)

 

Q2-Q4 2017

 

Propane

 

 

1,662

 

 

$

27.24

 

 

 

1,662

 

 

$

26.30

 

 

$

28.40

 

 

Interest Rate Derivatives

As of March 31, 2017, Devon had the following open interest rate derivative positions:

 

Notional

 

 

Rate Received

 

 

Rate Paid

 

 

Expiration

(Millions)

 

 

 

 

 

 

 

 

 

 

 

$

750

 

 

Three Month LIBOR

 

 

 

2.98%

 

 

December 2048 (1)

$

100

 

 

 

1.76%