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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 March 31, 2019

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 April 17, 2019, 415.2 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 – Divestitures

11

 

 

Note 3 – Derivative Financial Instruments

11

 

 

Note 4 – Share-Based Compensation

14

 

 

Note 5 – Restructuring and Transaction Costs

15

 

 

Note 6 – Other Expenses

15

 

 

Note 7 – Income Taxes

16

 

 

Note 8 – Net Loss Per Share From Continuing Operations

17

 

 

Note 9 – Other Comprehensive Earnings

17

 

 

Note 10 – Supplemental Information to Statements of Cash Flows

18

 

 

Note 11 – Accounts Receivable

18

 

 

Note 12 – Property, Plant and Equipment

18

 

 

Note 13 – Other Current Liabilities

19

 

 

Note 14 – Debt and Related Expenses

19

 

 

Note 15 – Leases

20

 

 

Note 16 – Asset Retirement Obligations

22

 

 

Note 17 – Retirement Plans

22

 

 

Note 18 – Stockholders’ Equity

23

 

 

Note 19 – Discontinued Operations and Assets Held For Sale

23

 

 

Note 20 – Commitments and Contingencies

24

 

 

Note 21 – Fair Value Measurements

25

 

 

Note 22 – Segment Information

26

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. 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.

“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.

“LOE” means lease operating expenses.

“MBbls” means thousand barrels.

“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBoe” means million Boe.

3

 


Table of Contents

“MMBtu” means million Btu.

“MMcf” means million cubic feet.

“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, effective as of October 5, 2018.

“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 and phrases “expects,” “believes,” “will,” “would,” “could,” “continue,” “may,” “aims,” “likely to be,” “intends,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this report that address activities, events or developments that Devon expects, believes or anticipates will or may occur in the future are forward-looking statements. 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 our operations, including as a result of employee misconduct;

 

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

 

risks related to regulatory, social and market efforts to address climate change;

 

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 assets, 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 2018 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,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

Upstream revenues

 

$

710

 

 

$

1,319

 

Marketing revenues

 

 

791

 

 

 

879

 

Total revenues

 

 

1,501

 

 

 

2,198

 

Production expenses

 

 

506

 

 

 

543

 

Exploration expenses

 

 

13

 

 

 

33

 

Marketing expenses

 

 

759

 

 

 

873

 

Depreciation, depletion and amortization

 

 

459

 

 

 

399

 

Asset dispositions

 

 

(44

)

 

 

(12

)

General and administrative expenses

 

 

153

 

 

 

199

 

Financing costs, net

 

 

73

 

 

 

387

 

Restructuring and transaction costs

 

 

54

 

 

 

 

Other expenses

 

 

(45

)

 

 

21

 

Total expenses

 

 

1,928

 

 

 

2,443

 

Loss from continuing operations before income taxes

 

 

(427

)

 

 

(245

)

Income tax benefit

 

 

(110

)

 

 

(34

)

Net loss from continuing operations

 

 

(317

)

 

 

(211

)

Net earnings from discontinued operations, net of income tax expense

 

 

 

 

 

58

 

Net loss

 

 

(317

)

 

 

(153

)

Net earnings attributable to noncontrolling interests

 

 

 

 

 

44

 

Net loss attributable to Devon

 

$

(317

)

 

$

(197

)

Basic net loss per share:

 

 

 

 

 

 

 

 

Basic loss from continuing operations per share

 

$

(0.74

)

 

$

(0.41

)

Basic earnings from discontinued operations per share

 

 

 

 

 

0.03

 

Basic net loss per share

 

$

(0.74

)

 

$

(0.38

)

Diluted net loss per share:

 

 

 

 

 

 

 

 

Diluted loss from continuing operations per share

 

$

(0.74

)

 

$

(0.41

)

Diluted earnings from discontinued operations per share

 

 

 

 

 

0.03

 

Diluted net loss per share

 

$

(0.74

)

 

$

(0.38

)

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(317

)

 

$

(153

)

Other comprehensive earnings (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

35

 

 

 

(48

)

Pension and postretirement plans

 

 

2

 

 

 

4

 

Other comprehensive earnings (loss), net of tax

 

 

37

 

 

 

(44

)

Comprehensive loss

 

 

(280

)

 

 

(197

)

Comprehensive earnings attributable to noncontrolling interests

 

 

 

 

 

44

 

Comprehensive loss attributable to Devon

 

$

(280

)

 

$

(241

)

 

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,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(317

)

 

$

(153

)

Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

 

 

 

 

Net earnings from discontinued operations, net of income tax expense

 

 

 

 

 

(58

)

Depreciation, depletion and amortization

 

 

459

 

 

 

399

 

Leasehold impairments

 

 

1

 

 

 

8

 

Accretion on discounted liabilities

 

 

17

 

 

 

16

 

Total losses on commodity derivatives

 

 

709

 

 

 

41

 

Cash settlements on commodity derivatives

 

 

(43

)

 

 

11

 

Gains on asset dispositions

 

 

(44

)

 

 

(12

)

Deferred income tax benefit

 

 

(107

)

 

 

(38

)

Share-based compensation

 

 

48

 

 

 

38

 

Early retirement of debt

 

 

 

 

 

312

 

Total (gains) losses on foreign exchange

 

 

(34

)

 

 

50

 

Other

 

 

(10

)

 

 

(29

)

Changes in assets and liabilities, net

 

 

(302

)

 

 

25

 

Net cash from operating activities - continuing operations

 

 

377

 

 

 

610

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(548

)

 

 

(651

)

Acquisitions of property and equipment

 

 

(11

)

 

 

(6

)

Divestitures of property and equipment

 

 

311

 

 

 

47

 

Net cash from investing activities - continuing operations

 

 

(248

)

 

 

(610

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt principal

 

 

(162

)

 

 

(807

)

Early retirement of debt

 

 

 

 

 

(304

)

Repurchases of common stock

 

 

(999

)

 

 

(71

)

Dividends paid on common stock

 

 

(34

)

 

 

(32

)

Shares exchanged for tax withholdings

 

 

(26

)

 

 

(38

)

Net cash from financing activities - continuing operations

 

 

(1,221

)

 

 

(1,252

)

Effect of exchange rate changes on cash - continuing operations

 

 

1

 

 

 

(15

)

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

 

 

(1,091

)

 

 

(1,267

)

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

194

 

Investing activities

 

 

 

 

 

(180

)

Financing activities

 

 

 

 

 

39

 

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

 

 

 

 

 

53

 

Net change in cash, cash equivalents and restricted cash

 

 

(1,091

)

 

 

(1,214

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

2,446

 

 

 

2,684

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,355

 

 

$

1,470

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,327

 

 

$

1,407

 

Restricted cash included in other current assets

 

 

28

 

 

 

46

 

Cash and cash equivalents included in current assets held for sale

 

 

 

 

 

17

 

Total cash, cash equivalents and restricted cash

 

$

1,355

 

 

$

1,470

 

 

See accompanying notes to consolidated financial statements

7

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,327

 

 

$

2,414

 

Accounts receivable

 

 

1,038

 

 

 

885

 

Current assets held for sale

 

 

 

 

 

197

 

Other current assets

 

 

338

 

 

 

941

 

Total current assets

 

 

2,703

 

 

 

4,437

 

Oil and gas property and equipment, based on successful efforts

   accounting, net

 

 

12,766

 

 

 

12,813

 

Other property and equipment, net

 

 

1,098

 

 

 

1,122

 

Total property and equipment, net

 

 

13,864

 

 

 

13,935

 

Goodwill

 

 

841

 

 

 

841

 

Right-of-use assets

 

 

365

 

 

 

 

Other long-term assets

 

 

304

 

 

 

353

 

Total assets

 

$

18,077

 

 

$

19,566

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

603

 

 

$

662

 

Revenues and royalties payable

 

 

850

 

 

 

898

 

Short-term debt

 

 

 

 

 

162

 

Current liabilities held for sale

 

 

 

 

 

69

 

Other current liabilities

 

 

515

 

 

 

435

 

Total current liabilities

 

 

1,968

 

 

 

2,226

 

Long-term debt

 

 

5,786

 

 

 

5,785

 

Lease liabilities

 

 

298

 

 

 

 

Asset retirement obligations

 

 

938

 

 

 

1,030

 

Other long-term liabilities

 

 

458

 

 

 

462

 

Deferred income taxes

 

 

772

 

 

 

877

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   417 million and 450 million shares in 2019 and 2018, respectively

 

 

42

 

 

 

45

 

Additional paid-in capital

 

 

3,518

 

 

 

4,486

 

Retained earnings

 

 

3,280

 

 

 

3,650

 

Accumulated other comprehensive earnings

 

 

1,064

 

 

 

1,027

 

Treasury stock, at cost, 1.5 million and 1.0 million shares in 2019 and 2018,

   respectively

 

 

(47

)

 

 

(22

)

Total stockholders’ equity

 

 

7,857

 

 

 

9,186

 

Total liabilities and stockholders' equity

 

$

18,077

 

 

$

19,566

 

 

See accompanying notes to consolidated financial statements

 

 

 

 


8

 


Table of Contents

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Earnings

 

 

Stock

 

 

Interests

 

 

Equity

 

 

 

(Unaudited)

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

 

450

 

 

$

45

 

 

$

4,486

 

 

$

3,650

 

 

$

1,027

 

 

$

(22

)

 

$

 

 

$

9,186

 

Effect of adoption of lease accounting

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

 

 

 

 

 

 

(19

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(317

)

 

 

 

 

 

 

 

 

 

 

 

(317

)

Other comprehensive earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Restricted stock grants, net of cancellations

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,042

)

 

 

 

 

 

(1,042

)

Common stock retired

 

 

(36

)

 

 

(3

)

 

 

(1,014

)

 

 

 

 

 

 

 

 

1,017

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

(34

)

Share-based compensation

 

 

 

 

 

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46

 

Balance as of March 31, 2019

 

 

417

 

 

$

42

 

 

$

3,518

 

 

$

3,280

 

 

$

1,064

 

 

$

(47

)

 

$

 

 

$

7,857

 

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