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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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

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

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

On October 17, 2018, 468.2 million shares of common stock were outstanding.

 


Table of Contents

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Part I. Financial Information

 

Item 1.

 

Financial Statements

6

 

 

Consolidated Comprehensive Statements of Earnings

6

 

 

Consolidated Statements of Cash Flows

7

 

 

Consolidated Balance Sheets

8

 

 

Consolidated Statements of Equity

9

 

 

Notes to Consolidated Financial Statements

10

 

 

Note 1 – Summary of Significant Accounting Policies

10

 

 

Note 2 – Revenue Recognition

12

 

 

Note 3 – Divestitures

14

 

 

Note 4 – Derivative Financial Instruments

15

 

 

Note 5 – Share-Based Compensation

18

 

 

Note 6 – Asset Impairments

19

 

 

Note 7 – Restructuring and Transaction Costs

19

 

 

Note 8 – Other Expenses

19

 

 

Note 9 – Income Taxes

20

 

 

Note 10 – Net Earnings (Loss) Per Share From Continuing Operations

21

 

 

Note 11 – Other Comprehensive Earnings

21

 

 

Note 12 – Supplemental Information to Statements of Cash Flows

22

 

 

Note 13 – Accounts Receivable

22

 

 

Note 14 – Property, Plant and Equipment

22

 

 

Note 15 – Other Current Liabilities

23

 

 

Note 16 – Debt and Related Expenses

23

 

 

Note 17 – Asset Retirement Obligations

24

 

 

Note 18 – Retirement Plans

24

 

 

Note 19 – Stockholders’ Equity

25

 

 

Note 20 – Discontinued Operations

26

 

 

Note 21 – Commitments and Contingencies

28

 

 

Note 22 – Fair Value Measurements

29

 

 

Note 23 – Segment Information

29

Item 2.

 

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

31

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

 

Controls and Procedures

46

 

 

 

 

Part II. Other Information

 

Item 1.

 

Legal Proceedings

47

Item 1A.

 

Risk Factors

47

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

 

Defaults Upon Senior Securities

47

Item 4.

 

Mine Safety Disclosures

47

Item 5.

 

Other Information

47

Item 6.

 

Exhibits

48

 

 

 

 

Signatures

 

 

49

 

 

 

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:

“2012 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 24, 2012.

“2018 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.

“ASC” means Accounting Standards Codification.

“ASR” means an accelerated share-repurchase transaction with a financial institution to repurchase Devon’s common stock.

“ASU” means Accounting Standards Update.

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

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

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

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

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

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

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

“E&P” means exploration and production activities.

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

“FASB” means Financial Accounting Standards Board.

“G&A” means general and administrative expenses.

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

“General Partner” means EnLink Midstream, LLC, the indirect general partner of EnLink, and, unless the context otherwise indicates, EnLink Midstream Manager, LLC, the managing member of EnLink Midstream, LLC.

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

“LIBOR” means London Interbank Offered Rate.

“LOE” means lease operating expenses.

“MBbls” means thousand barrels.

3

 


Table of Contents

“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBtu” means million Btu.

“MMcf” means million cubic feet.

“M&M operations” means marketing revenues minus marketing 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.

“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.

“/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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Upstream revenues

 

$

1,332

 

 

$

1,101

 

 

$

3,720

 

 

$

3,974

 

Marketing revenues

 

 

1,247

 

 

 

832

 

 

 

3,306

 

 

 

2,524

 

Total revenues

 

 

2,579

 

 

 

1,933

 

 

 

7,026

 

 

 

6,498

 

Production expenses

 

 

554

 

 

 

448

 

 

 

1,669

 

 

 

1,360

 

Exploration expenses

 

 

32

 

 

 

57

 

 

 

133

 

 

 

209

 

Marketing expenses

 

 

1,217

 

 

 

843

 

 

 

3,250

 

 

 

2,571

 

Depreciation, depletion and amortization

 

 

416

 

 

 

370

 

 

 

1,235

 

 

 

1,139

 

Asset impairments

 

 

2

 

 

 

 

 

 

156

 

 

 

 

Asset dispositions

 

 

(6

)

 

 

(170

)

 

 

5

 

 

 

(200

)

General and administrative expenses

 

 

147

 

 

 

170

 

 

 

499

 

 

 

546

 

Financing costs, net

 

 

75

 

 

 

78

 

 

 

524

 

 

 

238

 

Restructuring and transaction costs

 

 

11

 

 

 

 

 

 

105

 

 

 

 

Other expenses

 

 

(31

)

 

 

(70

)

 

 

14

 

 

 

(92

)

Total expenses

 

 

2,417

 

 

 

1,726

 

 

 

7,590

 

 

 

5,771

 

Earnings (loss) from continuing operations before income taxes

 

 

162

 

 

 

207

 

 

 

(564

)

 

 

727

 

Income tax expense (benefit)

 

 

(138

)

 

 

13

 

 

 

(179

)

 

 

13

 

Net earnings (loss) from continuing operations

 

 

300

 

 

 

194

 

 

 

(385

)

 

 

714

 

Net earnings from discontinued operations, net of income tax expense

 

 

2,263

 

 

 

18

 

 

 

2,460

 

 

 

60

 

Net earnings

 

 

2,563

 

 

 

212

 

 

 

2,075

 

 

 

774

 

Net earnings attributable to noncontrolling interests

 

 

26

 

 

 

19

 

 

 

160

 

 

 

59

 

Net earnings attributable to Devon

 

$

2,537

 

 

$

193

 

 

$

1,915

 

 

$

715

 

Basic net earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) from continuing operations per share

 

$

0.61

 

 

$

0.37

 

 

$

(0.76

)

 

$

1.36

 

Basic earnings from discontinued operations per share

 

 

4.56

 

 

 

 

 

 

4.50

 

 

 

 

Basic net earnings per share

 

$

5.17

 

 

$

0.37

 

 

$

3.74

 

 

$

1.36

 

Diluted net earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) from continuing operations per share

 

$

0.61

 

 

$

0.37

 

 

$

(0.76

)

 

$

1.35

 

Diluted earnings from discontinued operations per share

 

 

4.53

 

 

 

 

 

 

4.47

 

 

 

 

Diluted net earnings per share

 

$

5.14

 

 

$

0.37

 

 

$

3.71

 

 

$

1.35

 

Comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

2,563

 

 

$

212

 

 

$

2,075

 

 

$

774

 

Other comprehensive earnings (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

35

 

 

 

42

 

 

 

(47

)

 

 

78

 

Pension and postretirement plans

 

 

36

 

 

 

5

 

 

 

43

 

 

 

14

 

Other comprehensive earnings (loss), net of tax

 

 

71

 

 

 

47

 

 

 

(4

)

 

 

92

 

Comprehensive earnings

 

$

2,634

 

 

$

259

 

 

$

2,071

 

 

$

866

 

Comprehensive earnings attributable to

   noncontrolling interests

 

 

26

 

 

 

19

 

 

 

160

 

 

 

59

 

Comprehensive earnings attributable to Devon

 

$

2,608

 

 

$

240

 

 

$

1,911

 

 

$

807

 

 

See accompanying notes to consolidated financial statements

 

6

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

2,563

 

 

$

212

 

 

$

2,075

 

 

$

774

 

Adjustments to reconcile net earnings to net cash

   from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

 

(2,263

)

 

 

(18

)

 

 

(2,460

)

 

 

(60

)

Depreciation, depletion and amortization

 

 

416

 

 

 

370

 

 

 

1,235

 

 

 

1,139

 

Asset impairments

 

 

2

 

 

 

 

 

 

156

 

 

 

 

Leasehold impairments

 

 

15

 

 

 

16

 

 

 

76

 

 

 

80

 

Accretion on discounted liabilities

 

 

15

 

 

 

15

 

 

 

46

 

 

 

47

 

Total (gains) losses on commodity derivatives

 

 

276

 

 

 

144

 

 

 

814

 

 

 

(214

)

Cash settlements on commodity derivatives

 

 

(91

)

 

 

24

 

 

 

(211

)

 

 

43

 

(Gains) losses on asset dispositions

 

 

(6

)

 

 

(170

)

 

 

5

 

 

 

(200

)

Deferred income tax benefit

 

 

(114

)

 

 

(25

)

 

 

(132

)

 

 

(57

)

Share-based compensation

 

 

31

 

 

 

33

 

 

 

127

 

 

 

114

 

Early retirement of debt

 

 

 

 

 

 

 

 

312

 

 

 

 

Total (gains) losses on foreign exchange

 

 

(28

)

 

 

(74

)

 

 

53

 

 

 

(138

)

Settlements of intercompany foreign denominated assets/liabilities

 

 

 

 

 

 

 

 

(243

)

 

 

10

 

Other

 

 

42

 

 

 

(14

)

 

 

(8

)

 

 

(3

)

Changes in assets and liabilities, net

 

 

(51

)

 

 

(12

)

 

 

(159

)

 

 

121

 

Net cash from operating activities - continuing operations

 

 

807

 

 

 

501

 

 

 

1,686

 

 

 

1,656

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(598

)

 

 

(467

)

 

 

(1,851

)

 

 

(1,298

)

Acquisitions of property and equipment

 

 

(19

)

 

 

(6

)

 

 

(35

)

 

 

(39

)

Divestitures of property and equipment

 

 

89

 

 

 

280

 

 

 

696

 

 

 

387

 

Net cash from investing activities - continuing operations

 

 

(528

)

 

 

(193

)

 

 

(1,190

)

 

 

(950

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt principal

 

 

(21

)

 

 

 

 

 

(828

)

 

 

 

Early retirement of debt

 

 

 

 

 

 

 

 

(304

)

 

 

 

Repurchases of common stock

 

 

(1,698

)

 

 

 

 

 

(2,197

)

 

 

 

Dividends paid on common stock

 

 

(38

)

 

 

(30

)

 

 

(112

)

 

 

(95

)

Shares exchanged for tax withholdings

 

 

(3

)

 

 

(1

)

 

 

(47

)

 

 

(57

)

Net cash from financing activities - continuing operations

 

 

(1,760

)

 

 

(31

)

 

 

(3,488

)

 

 

(152

)

Effect of exchange rate changes on cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlements of intercompany foreign denominated assets/liabilities

 

 

 

 

 

 

 

 

243

 

 

 

(10

)

Other

 

 

10

 

 

 

12

 

 

 

(21

)

 

 

22

 

Total effect of exchange rate changes on cash - continuing operations

 

 

10

 

 

 

12

 

 

 

222

 

 

 

12

 

Net change in cash, cash equivalents and restricted cash of continuing operations

 

 

(1,471

)

 

 

289

 

 

 

(2,770

)

 

 

566

 

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

46

 

 

 

200

 

 

 

476

 

 

 

528

 

Investing activities

 

 

2,950

 

 

 

(191

)

 

 

2,548

 

 

 

(475

)

Financing activities

 

 

71

 

 

 

187

 

 

 

183

 

 

 

276

 

Net change in cash, cash equivalents and restricted cash of discontinued operations

 

 

3,067

 

 

 

196

 

 

 

3,207

 

 

 

329

 

Net change in cash, cash equivalents and restricted cash

 

 

1,596

 

 

 

485

 

 

 

437

 

 

 

895

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

1,525

 

 

 

2,369

 

 

 

2,684

 

 

 

1,959

 

Cash, cash equivalents and restricted cash at end of period

 

$

3,121

 

 

$

2,854

 

 

$

3,121

 

 

$

2,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,102

 

 

$

2,639

 

 

$

3,102

 

 

$

2,639

 

Restricted cash included in other current assets

 

 

19

 

 

 

73

 

 

 

19

 

 

 

73

 

Cash and cash equivalents included in current assets held for sale

 

 

 

 

 

142

 

 

 

 

 

 

142

 

Total cash, cash equivalents and restricted cash

 

$

3,121

 

 

$

2,854

 

 

$

3,121

 

 

$

2,854

 

 

See accompanying notes to consolidated financial statements

7

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,102

 

 

$

2,642

 

Accounts receivable

 

 

1,226

 

 

 

989

 

Current assets held for sale