10-Q 1 dvn-10q_20180331.htm Q1 2018 - 10-Q dvn-10q_20180331.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, 2018

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

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

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

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

On April 18, 2018, 523.4 million shares of common stock were outstanding.

 

 


Table of Contents

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Part I. Financial Information

 

Item 1.

 

Financial Statements

6

 

 

Consolidated Comprehensive Statements of Earnings

6

 

 

Consolidated Statements of Cash Flows

7

 

 

Consolidated Balance Sheets

8

 

 

Consolidated Statements of Equity

9

 

 

Notes to Consolidated Financial Statements

10

 

 

Note 1 – Summary of Significant Accounting Policies

10

 

 

Note 2 – Revenue Recognition

11

 

 

Note 3 – Acquisitions and Divestitures

14

 

 

Note 4 – Derivative Financial Instruments

15

 

 

Note 5 – Share-Based Compensation

18

 

 

Note 6 – Asset Impairments

19

 

 

Note 7 – Other Expenses

19

 

 

Note 8 – Income Taxes

20

 

 

Note 9 – Net Earnings (Loss) Per Share Attributable to Devon

21

 

 

Note 10 – Other Comprehensive Earnings

22

 

 

Note 11 – Supplemental Information to Statements of Cash Flows

22

 

 

Note 12 – Accounts Receivable

22

 

 

Note 13 – Property, Plant and Equipment

23

 

 

Note 14 – Other Intangible Assets

23

 

 

Note 15 – Other Current Liabilities

23

 

 

Note 16 – Debt and Related Expenses

24

 

 

Note 17 – Asset Retirement Obligations

25

 

 

Note 18 – Retirement Plans

26

 

 

Note 19 – Stockholders’ Equity

26

 

 

Note 20 – Noncontrolling Interests

26

 

 

Note 21 – Commitments and Contingencies

26

 

 

Note 22 – Fair Value Measurements

27

 

 

Note 23 – Segment Information

28

Item 2.

 

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

30

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

 

Controls and Procedures

43

 

 

 

 

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

 

 

 

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. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“ASC” means Accounting Standards Codification.

“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.

“MMBoe” means million Boe.

“MMBtu” means million Btu.

3

 


Table of Contents

“MMcf” means million cubic feet.

“M&M operations” means marketing and midstream revenues minus marketing and midstream expenses.

“N/M” means not meaningful.

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

“NYMEX” means New York Mercantile Exchange.

“OPIS” means Oil Price Information Service.

“SEC” means United States Securities and Exchange Commission.

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

“Tax Reform Legislation” means Tax Cuts and Jobs Act.

“TSR” means total shareholder return.

“Upstream operations” means upstream revenues minus production expenses.

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

“WTI” means West Texas Intermediate.

“/Bbl” means per barrel.

“/d” means per day.

“/gal” means per gallon.

“/MMBtu” means per MMBtu.

4

 


Table of Contents

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words “expects,” “believes,” “will,” “would,” “could,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2017 reserve reports and other data in our possession or available from third parties. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, including, but not limited to:

 

the volatility of oil, gas and NGL prices;

 

uncertainties inherent in estimating oil, gas and NGL reserves;

 

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

 

the uncertainties, costs and risks involved in oil and gas operations;

 

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

 

risks related to our hedging activities;

 

counterparty credit risks;

 

risks relating to our indebtedness;

 

cyberattack risks;

 

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

 

midstream capacity constraints and potential interruptions in production;

 

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

 

competition for leases, materials, people and capital;

 

our ability to successfully complete mergers, acquisitions and divestitures; and

 

any of the other risks and uncertainties discussed in this report, our 2017 Annual Report on Form 10-K and our other filings with the SEC.

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

 

 

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,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Upstream revenues

 

$

1,319

 

 

$

1,541

 

Marketing and midstream revenues

 

 

2,491

 

 

 

2,010

 

Total revenues

 

 

3,810

 

 

 

3,551

 

Production expenses

 

 

543

 

 

 

457

 

Exploration expenses

 

 

33

 

 

 

95

 

Marketing and midstream expenses

 

 

2,214

 

 

 

1,814

 

Depreciation, depletion and amortization

 

 

537

 

 

 

528

 

Asset impairments

 

 

 

 

 

7

 

Asset dispositions

 

 

(12

)

 

 

(3

)

General and administrative expenses

 

 

226

 

 

 

231

 

Financing costs, net

 

 

431

 

 

 

128

 

Other expenses

 

 

19

 

 

 

(31

)

Total expenses

 

 

3,991

 

 

 

3,226

 

Earnings (loss) before income taxes

 

 

(181

)

 

 

325

 

Income tax expense (benefit)

 

 

(28

)

 

 

8

 

Net earnings (loss)

 

 

(153

)

 

 

317

 

Net earnings attributable to noncontrolling interests

 

 

44

 

 

 

14

 

Net earnings (loss) attributable to Devon

 

$

(197

)

 

$

303

 

Net earnings (loss) per share attributable to Devon:

 

 

 

 

 

 

 

 

Basic

 

$

(0.38

)

 

$

0.58

 

Diluted

 

$

(0.38

)

 

$

0.58

 

Comprehensive earnings (loss):

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(153

)

 

$

317

 

Other comprehensive earnings, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation and other

 

 

(48

)

 

 

8

 

Pension and postretirement plans

 

 

4

 

 

 

5

 

Other comprehensive earnings, net of tax

 

 

(44

)

 

 

13

 

Comprehensive earnings (loss)

 

 

(197

)

 

 

330

 

Comprehensive earnings attributable to

   noncontrolling interests

 

 

44

 

 

 

14

 

Comprehensive earnings (loss) attributable to Devon

 

$

(241

)

 

$

316

 

 

See accompanying notes to consolidated financial statements

 

6

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(153

)

 

$

317

 

Adjustments to reconcile net earnings to net cash

   from operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

537

 

 

 

528

 

Asset impairments

 

 

 

 

 

7

 

Leasehold impairments

 

 

8

 

 

 

42

 

Accretion on discounted liabilities

 

 

16

 

 

 

24

 

Total (gains) losses on commodity derivatives

 

 

41

 

 

 

(232

)

Cash settlements on commodity derivatives

 

 

11

 

 

 

8

 

Gain on asset dispositions

 

 

(12

)

 

 

(3

)

Deferred income taxes

 

 

(32

)

 

 

(12

)

Share-based compensation

 

 

44

 

 

 

55

 

Early retirement of debt

 

 

312

 

 

 

 

Other

 

 

26

 

 

 

(24

)

Changes in assets and liabilities, net

 

 

6

 

 

 

36

 

Net cash from operating activities

 

 

804

 

 

 

746

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(832

)

 

 

(653

)

Acquisitions of property and equipment

 

 

(6

)

 

 

(20

)

Divestitures of property and equipment

 

 

48

 

 

 

32

 

Proceeds from sale of investment

 

 

 

 

 

190

 

Other

 

 

 

 

 

(3

)

Net cash from investing activities

 

 

(790

)

 

 

(454

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings of long-term debt, net of issuance costs

 

 

801

 

 

 

813

 

Repayments of long-term debt principal

 

 

(1,236

)

 

 

(587

)

Payment of installment payable

 

 

(250

)

 

 

(250

)

Early retirement of debt

 

 

(304

)

 

 

 

Issuance of subsidiary units

 

 

1

 

 

 

55

 

Repurchases of common stock

 

 

(71

)

 

 

 

Dividends paid on common stock

 

 

(32

)

 

 

(32

)

Contributions from noncontrolling interests

 

 

23

 

 

 

21

 

Distributions to noncontrolling interests

 

 

(102

)

 

 

(81

)

Shares exchanged for tax withholdings

 

 

(43

)

 

 

(61

)

Other

 

 

 

 

 

(2

)

Net cash from financing activities

 

 

(1,213

)

 

 

(124

)

Effect of exchange rate changes on cash

 

 

(15

)

 

 

(8

)

Net change in cash, cash equivalents and restricted cash

 

 

(1,214

)

 

 

160

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

2,684

 

 

 

1,959

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,470

 

 

$

2,119

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,424

 

 

$

2,119

 

Restricted cash included in other current assets

 

 

46

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

1,470

 

 

$

2,119

 

 

See accompanying notes to consolidated financial statements

7

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,424

 

 

$

2,673

 

Accounts receivable

 

 

1,695

 

 

 

1,670

 

Other current assets

 

 

516

 

 

 

448

 

Total current assets

 

 

3,635

 

 

 

4,791

 

Oil and gas property and equipment, based on successful efforts

   accounting, net

 

 

13,475

 

 

 

13,318

 

Midstream and other property and equipment, net

 

 

7,908

 

 

 

7,853

 

Total property and equipment, net

 

 

21,383

 

 

 

21,171

 

Goodwill

 

 

2,383

 

 

 

2,383

 

Other long-term assets

 

 

1,915

 

 

 

1,896

 

Total assets

 

$

29,316

 

 

$

30,241

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

862

 

 

$

819

 

Revenues and royalties payable

 

 

1,269

 

 

 

1,180

 

Short-term debt

 

 

354

 

 

 

115

 

Other current liabilities

 

 

997

 

 

 

1,201

 

Total current liabilities

 

 

3,482

 

 

 

3,315

 

Long-term debt

 

 

9,628

 

 

 

10,291

 

Asset retirement obligations

 

 

1,141

 

 

 

1,113

 

Other long-term liabilities

 

 

567

 

 

 

583

 

Deferred income taxes

 

 

773

 

 

 

835

 

Equity:

 

 

 

 

 

 

 

 

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

   526 million and 525 million shares in 2018 and 2017, respectively

 

 

53

 

 

 

53

 

Treasury stock, at cost, 0.4 million shares in 2018

 

 

(12

)

 

 

 

Additional paid-in capital

 

 

7,269

 

 

 

7,333

 

Retained earnings

 

 

473

 

 

 

702

 

Accumulated other comprehensive earnings

 

 

1,122

 

 

 

1,166

 

Total stockholders’ equity attributable to Devon

 

 

8,905

 

 

 

9,254

 

Noncontrolling interests

 

 

4,820

 

 

 

4,850

 

Total equity

 

 

13,725

 

 

 

14,104

 

Total liabilities and equity

 

$

29,316

 

 

$

30,241

 

 

See accompanying notes to consolidated financial statements

 

 

 

 


8

 


Table of Contents

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

(Accumulated

 

 

Comprehensive

 

 

Treasury

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit)

 

 

Earnings

 

 

Stock

 

 

Interests

 

 

Equity

 

 

 

(Unaudited)

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

 

525

 

 

$

53

 

 

$

7,333

 

 

$

702

 

 

$

1,166

 

 

$

 

 

$

4,850

 

 

$

14,104

 

Net earnings (loss)

 

 

 

 

 

 

 

 

 

 

 

(197

)

 

 

 

 

 

 

 

 

44

 

 

 

(153

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44

)

 

 

 

 

 

 

 

 

(44

)

Restricted stock grants, net of

   cancellations

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

 

 

 

(111

)

Common stock retired

 

 

(3

)

 

 

 

 

 

(99

)

 

 

 

 

 

 

 

 

99

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

(32

)

Share-based compensation

 

 

1

 

 

 

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

Subsidiary equity transactions

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

28

 

 

 

27

 

Distributions to noncontrolling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(102

)

 

 

(102

)

Balance as of March 31, 2018

 

 

526

 

 

$

53

 

 

$

7,269

 

 

$

473

 

 

$

1,122

 

 

$

(12

)

 

$

4,820

 

 

$

13,725

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

 

523

 

 

$

52

 

 

$

7,237

 

 

$

(69

)

 

$

1,054

 

 

$

 

 

$

4,448

 

 

$

12,722

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

303

 

 

 

 

 

 

 

 

 

14

 

 

 

317

 

Other comprehensive earnings, net

   of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

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

 

 

$

7,239

 

 

$

202

 

 

$

1,067

 

 

$

 

 

$

4,456

 

 

$

13,017

 

 

 

See accompanying notes to consolidated financial statement

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 2017 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, 2018 and 2017 and Devon’s financial position as of March 31, 2018.

Recently Adopted Accounting Standards

 

In January 2018, Devon adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606), using the modified retrospective method. See Note 2 for further discussion regarding Devon’s adoption of the revenue recognition standard.

 

In January 2018, Devon adopted ASU 2017-07, Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires entities to present the service cost component of net periodic benefit cost in the same line item as other employee compensation costs. Only the service cost component of net periodic benefit cost is eligible for capitalization. As a result of adoption of this ASU, consolidated statement of earnings presentation changes were applied retrospectively, while service cost component capitalization was applied prospectively.

 

In January 2018, Devon adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires an entity to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statement of cash flows and to provide a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. As a result of adoption, Devon made changes to the statement of cash flows to include the required presentation and reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents retrospectively. Other than presentation, adoption of this ASU did not have a material impact on Devon’s consolidated statement of cash flows.

Issued Accounting Standards Not Yet Adopted

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. Early adoption is permitted, but Devon does not plan to early adopt. Currently the guidance would 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. However, the FASB recently issued Proposed ASU No. 2018-200, Leases (Topic 842), Targeted Improvements which would allow entities to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in the consolidated financial statements. The proposed ASU will allow entities to continue to apply the legacy guidance in Topic 840, including its disclosure requirements, in the comparative periods presented in the year the new leases standard is adopted. Entities that elect this option would still adopt the new leases standard using a modified retrospective transition method, but would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. Recently, the FASB issued ASU No. 2018-01, Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842. This ASU would permit an entity not to apply Topic 842 to land easements and rights-of-way that exist or expired before the effective date of Topic 842 and that were not previously assessed under Topic 840. An entity would continue to apply its current accounting policy for accounting for land easements that existed before the effective date of Topic 842. Once an entity adopts Topic 842, it would apply that Topic prospectively to all new (or modified) land easements and rights-of-way to determine whether the arrangement should be accounted for as a lease. For Devon, these easement and right-of-way

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

contracts represent a relatively small percentage of the aggregate value of contracts being evaluated but represent a significant number of contracts.

Devon has preliminarily determined its portfolio of leased assets and is reviewing all related contracts to determine the impact the adoption will have on its consolidated financial statements and related disclosures. Devon anticipates the adoption of this standard will significantly impact its consolidated financial statements, systems, processes and controls. Devon is in the process of designing processes and controls and implementing a technology solution needed to comply with the requirements of this ASU. While Devon cannot currently estimate the quantitative effect that ASU 2016-02 will have on its consolidated financial statements, the adoption will increase asset and liability balances on the consolidated balance sheets due to the required recognition of right-of-use assets and corresponding lease liabilities.

The FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU will expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company's risk management activities. The guidance also eliminates the requirement to separately measure and report hedge ineffectiveness. This ASU only applies to entities that elect hedge accounting, which Devon has not for derivative financial instruments. This ASU is effective for annual and interim periods beginning January 1, 2019, with early adoption permitted in 2018. The ASU is required to be adopted using a 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 is currently evaluating the provisions of this ASU and assessing the impact it may have on its consolidated financial statements if hedge accounting were elected by Devon in the future. 

 

The FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Reform Legislation. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and allows for early adoption in any interim period after issuance of the update. Devon is currently assessing the impact this ASU will have on its consolidated financial statements.

 

2.

Revenue Recognition

 

Impact of ASC 606 Adoption

 

Devon adopted ASC 606 - Revenue from Contracts with Customers (ASC 606) using the modified retrospective method and has applied the standard to all existing contracts. ASC 606 supersedes previous revenue recognition requirements in ASC 605 and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services.

 

The impact of adoption in the current period results is as follows:

 

 

 

Three Months Ended March 31, 2018

 

 

 

Under ASC 606

 

 

Under ASC 605

 

 

Increase/(Decrease)

 

Upstream revenues

 

$

1,319

 

 

$

1,257

 

 

$

62

 

Marketing and midstream revenues

 

 

2,491

 

 

 

2,629

 

 

 

(138

)

Total impacted revenues

 

$

3,810

 

 

$

3,886

 

 

$

(76

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Production expenses

 

$

543

 

 

$

481

 

 

$

62

 

Marketing and midstream expenses

 

 

2,214

 

 

 

2,352

 

 

 

(138

)

Total impacted expenses

 

$

2,757

 

 

$

2,833

 

 

$

(76

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(181

)

 

$

(181

)

 

$

 

Changes to upstream revenues and production expenses are due to the conclusion that Devon represents the principal and controls a promised product before transferring it to the ultimate third party customer in accordance with the control model in ASC

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

606. This is a change from previous conclusions reached for these agreements utilizing the principal versus agent indicators under ASC 605 where the assessment was focused on Devon passing title and not control to the processing entity and Devon ultimately receiving a net price from the third-party end customer. As a result, Devon has changed the presentation of revenues and expenses for these agreements. Revenues related to these agreements are now presented on a gross basis for amounts expected to be received from third-party customers through the marketing process. Gathering, processing and transportation expenses related to these agreements, incurred prior to the transfer of control to the customer at the tailgate of the natural gas processing facilities, are now presented as production expenses.

Changes to marketing and midstream revenues and expenses are due to the determination of when control is transferred. As a result, Devon has changed the classification of certain transactions from marketing and midstream revenues to expenses or from marketing and midstream expenses to revenues.

Upstream Revenues

Upstream revenues include the sale of oil, gas and NGL production. Oil, gas and NGL sales are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. Devon’s performance obligations are satisfied at a point in time. This occurs when control is transferred to the purchaser upon delivery of contract specified production volumes at a specified point. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced by calendar month based on volumes at contractually based rates with payment typically received within 30 days of the end of the production month. Taxes assessed by governmental authorities on oil, gas and NGL sales are presented separately from such revenues in the accompanying consolidated comprehensive statements of earnings.

Natural gas and NGL Sales

Under Devon’s natural gas processing contracts, natural gas is delivered to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds for the resulting sales of NGLs and residue gas. In these scenarios, Devon evaluates whether it is the principal or the agent in the transaction. Devon has concluded it is the principal under these contracts and the ultimate third party is the customer. Revenue is recognized on a gross basis, with gathering, processing and transportation fees presented as a component of production expenses in the consolidated comprehensive statement of earnings.

In certain natural gas processing agreements, Devon may elect to take residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the product is delivered to the ultimate third-party purchaser at a contractually agreed-upon delivery point and Devon receives a specified index price from the purchaser. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as gathering, processing and transportation expense as a component of production expenses in the consolidated comprehensive statement of earnings.

Oil sales

Devon’s oil sales contracts are generally structured in one of two ways. First, production is sold at the wellhead at an agreed-upon index price, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received. Alternatively, production is delivered to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. Under this arrangement, a third party is paid to transport the product and receive a specified index price from the purchaser with no deduction. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. The third-party costs are recorded as gathering, processing and transportation expense as a component of production expenses in the consolidated comprehensive statement of earnings.


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Marketing and Midstream Revenues

Marketing and midstream revenues are generated as a result of performing gathering, transmission, processing, fractionation, storage, condensate stabilization, brine services and marketing, through various contractual arrangements, which include fee-based arrangements or arrangements where Devon purchases and resells commodities in connection with providing the related service and earns a net margin for its fee. Marketing and midstream revenues are recognized when performance obligations are satisfied. This occurs at the time contract specified products are sold or services are provided to third parties at a contractually fixed or determinable price, delivery occurs at a specified point or performance has occurred, control has transferred and collectability of the revenue is probable. Control is transferred from the producer when the midstream processor has discretion on the sale or further processing of the liquids. The transaction price used to recognize revenue and invoice customers is based on a contractually stated fee or on a third party published index price plus or minus a known differential. Devon typically receives payment for invoiced amounts within 30 days. Marketing and midstream revenues and expenses attributable to oil, gas and NGL purchases, transportation and processing contracts are reported on a gross basis when Devon takes control of the products and has risks and rewards of ownership.

For contracts where control of commodities is transferred before the service is performed, Devon generally has no performance obligation for its services, and accordingly, does not consider these revenue-generating service contracts. Based on that determination, all fees or fee-equivalent deductions stated in such contracts reduce the cost to purchase commodities. Alternatively, for contracts where control of commodities is transferred after the service is performed, Devon considers these contracts to contain performance obligations for its services. Accordingly, Devon considers the satisfaction of these performance obligations as revenue-generating and recognizes these fees as midstream services revenue at the time its performance obligations are satisfied. For contracts where control of commodities is never transferred, Devon simply earns a fee for its services and recognizes these fees as midstream services revenue at the time its performance obligations are satisfied.


Satisfaction of Performance Obligations and Revenue Recognitions

Since Devon has a right to consideration from its customers in amounts that correspond directly to the value that the customer receives from the performance completed on each contract, Devon applies the practical expedient in ASC 606 that allows recognition of revenue in the amount to which there is a right to invoice and prevents the need to estimate a transaction price for each contract and allocating that transaction price to the performance obligations within each contract. Devon recognizes revenue for sales or services at the time the natural gas, NGLs, crude oil or condensate are delivered at a fixed or determinable price.

Transaction Price Allocated to Remaining Performance Obligations

Most of Devon’s contracts are short-term in nature with a contract term of one year or less. Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For contracts with terms greater than one year, Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under Devon’s contracts, each unit of product typically represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

 

Contract Balances

 

Cash received relating to future performance obligations are deferred and recognized when all revenue recognition criteria are met. Contract liabilities generated from such deferred revenue are not considered material as of March 31, 2018. Devon’s product sales and marketing and midstream contracts do not give rise to contract assets under ASC 606.


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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Disaggregation of Revenue

 

Revenue from both upstream revenues and marketing and midstream revenues represent revenue from contracts with customers and these revenue line items are reflected in the consolidated comprehensive statements of earnings. The following table presents revenue from contracts with customers that are disaggregated based on the type of good or service. During the quarter ended March 31, 2018, no purchaser accounted for more than 10% of Devon’s consolidated sales revenue.

 

 

 

Three Months Ended March 31, 2018

 

 

 

U.S.

 

 

Canada

 

 

EnLink (1)

 

 

Total

 

Revenues from contracts with customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

$

677

 

 

$

230

 

 

$

 

 

$

907

 

Gas

 

 

255

 

 

 

 

 

 

 

 

 

255

 

NGL

 

 

198

 

 

 

 

 

 

 

 

 

198

 

Oil, gas and NGL sales

 

 

1,130

 

 

 

230

 

 

 

 

 

 

1,360

 

Oil, gas and NGL derivatives

 

 

(113

)

 

 

72

 

 

 

 

 

 

(41

)

Total upstream revenues

 

 

1,017

 

 

 

302

 

 

 

 

 

 

1,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gathering and transportation

 

 

 

 

 

 

 

 

56

 

 

 

56

 

Processing

 

 

 

 

 

 

 

 

15

 

 

 

15

 

NGL services

 

 

 

 

 

 

 

 

16

 

 

 

16

 

Oil services

 

 

 

 

 

 

 

 

6