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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 June 30, 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: (405235-3611

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.10 per share

DVN

The New York Stock Exchange

 

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 July 24, 2019, 404.2 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

12

 

 

Note 4 – Share-Based Compensation

14

 

 

Note 5 – Asset Impairments

15

 

 

Note 6 – Restructuring and Transaction Costs

15

 

 

Note 7 – Income Taxes

16

 

 

Note 8 – Net Earnings (Loss) Per Share From Continuing Operations

17

 

 

Note 9 – Other Comprehensive Earnings (Loss)

18

 

 

Note 10 – Supplemental Information to Statements of Cash Flows

18

 

 

Note 11 – Accounts Receivable

19

 

 

Note 12 – Property, Plant and Equipment

19

 

 

Note 13 – Debt and Related Expenses

19

 

 

Note 14 – Leases

20

 

 

Note 15 – Asset Retirement Obligations

22

 

 

Note 16 – Retirement Plans

23

 

 

Note 17 – Stockholders’ Equity

23

 

 

Note 18 – Discontinued Operations and Assets Held For Sale

24

 

 

Note 19 – Commitments and Contingencies

27

 

 

Note 20 – Fair Value Measurements

28

Item 2.

 

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

29

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.

 

Controls and Procedures

45

 

 

 

 

Part II. Other Information

 

Item 1.

 

Legal Proceedings

46

Item 1A.

 

Risk Factors

46

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3.

 

Defaults Upon Senior Securities

46

Item 4.

 

Mine Safety Disclosures

46

Item 5.

 

Other Information

46

Item 6.

 

Exhibits

47

 

 

 

 

Signatures

 

 

48

 

 

 

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. 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. On June 27, 2019, all of Devon’s Canadian operating assets and operations were divested. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.

“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.

“MMBtu” means million Btu.

3

 


Table of Contents

“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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

Upstream revenues

 

$

1,191

 

 

$

766

 

 

$

1,654

 

 

$

1,783

 

Marketing revenues

 

 

730

 

 

 

1,156

 

 

 

1,495

 

 

 

2,018

 

Total revenues

 

 

1,921

 

 

 

1,922

 

 

 

3,149

 

 

 

3,801

 

Production expenses

 

 

371

 

 

 

406

 

 

 

736

 

 

 

801

 

Exploration expenses

 

 

7

 

 

 

62

 

 

 

11

 

 

 

83

 

Marketing expenses

 

 

713

 

 

 

1,149

 

 

 

1,463

 

 

 

2,015

 

Depreciation, depletion and amortization

 

 

394

 

 

 

342

 

 

 

774

 

 

 

647

 

Asset impairments

 

 

 

 

 

154

 

 

 

 

 

 

154

 

Asset dispositions

 

 

(1

)

 

 

23

 

 

 

(45

)

 

 

11

 

General and administrative expenses

 

 

114

 

 

 

135

 

 

 

249

 

 

 

310

 

Financing costs, net

 

 

66

 

 

 

64

 

 

 

126

 

 

 

453

 

Restructuring and transaction costs

 

 

12

 

 

 

85

 

 

 

63

 

 

 

85

 

Other expenses

 

 

8

 

 

 

(15

)

 

 

(9

)

 

 

(64

)

Total expenses

 

 

1,684

 

 

 

2,405

 

 

 

3,368

 

 

 

4,495

 

Earnings (loss) from continuing operations before income taxes

 

 

237

 

 

 

(483

)

 

 

(219

)

 

 

(694

)

Income tax expense (benefit)

 

 

71

 

 

 

13

 

 

 

(39

)

 

 

10

 

Net earnings (loss) from continuing operations

 

 

166

 

 

 

(496

)

 

 

(180

)

 

 

(704

)

Net earnings from discontinued operations, net of income tax expense

 

 

329

 

 

 

161

 

 

 

358

 

 

 

216

 

Net earnings (loss)

 

 

495

 

 

 

(335

)

 

 

178

 

 

 

(488

)

Net earnings attributable to noncontrolling interests

 

 

 

 

 

90

 

 

 

 

 

 

134

 

Net earnings (loss) attributable to Devon

 

$

495

 

 

$

(425

)

 

$

178

 

 

$

(622

)

Basic net earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) from continuing operations per share

 

$

0.40

 

 

$

(0.97

)

 

$

(0.43

)

 

$

(1.36

)

Basic earnings from discontinued operations per share

 

 

0.80

 

 

 

0.14

 

 

 

0.85

 

 

 

0.16

 

Basic net earnings (loss) per share

 

$

1.20

 

 

$

(0.83

)

 

$

0.42

 

 

$

(1.20

)

Diluted net earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) from continuing operations per share

 

$

0.40

 

 

$

(0.97

)

 

$

(0.43

)

 

$

(1.36

)

Diluted earnings from discontinued operations per share

 

 

0.79

 

 

 

0.14

 

 

 

0.85

 

 

 

0.16

 

Diluted net earnings (loss) per share

 

$

1.19

 

 

$

(0.83

)

 

$

0.42

 

 

$

(1.20

)

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

495

 

 

$

(335

)

 

$

178

 

 

$

(488

)

Other comprehensive earnings (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation, discontinued operations

 

 

43

 

 

 

(34

)

 

 

78

 

 

 

(82

)

Release of Canadian cumulative translation adjustment,

   discontinued operations

 

 

(1,237

)

 

 

 

 

 

(1,237

)

 

 

 

Pension and postretirement plans

 

 

13

 

 

 

3

 

 

 

15

 

 

 

7

 

Other comprehensive loss, net of tax

 

 

(1,181

)

 

 

(31

)

 

 

(1,144

)

 

 

(75

)

Comprehensive loss

 

$

(686

)

 

$

(366

)

 

$

(966

)

 

$

(563

)

Comprehensive earnings attributable to noncontrolling interests

 

 

 

 

 

90

 

 

 

 

 

 

134

 

Comprehensive loss attributable to Devon

 

$

(686

)

 

$

(456

)

 

$

(966

)

 

$

(697

)

 

See accompanying notes to consolidated financial statements

 

6

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

495

 

 

$

(335

)

 

$

178

 

 

$

(488

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from discontinued operations, net of income tax expense

 

 

(329

)

 

 

(161

)

 

 

(358

)

 

 

(216

)

Depreciation, depletion and amortization

 

 

394

 

 

 

342

 

 

 

774

 

 

 

647

 

Asset impairments

 

 

 

 

 

154

 

 

 

 

 

 

154

 

Leasehold impairments

 

 

1

 

 

 

53

 

 

 

2

 

 

 

61

 

Accretion on discounted liabilities

 

 

10

 

 

 

9

 

 

 

20

 

 

 

18

 

Total (gains) losses on commodity derivatives

 

 

(140

)

 

 

487

 

 

 

465

 

 

 

600

 

Cash settlements on commodity derivatives

 

 

23

 

 

 

(144

)

 

 

54

 

 

 

(229

)

(Gains) losses on asset dispositions

 

 

(1

)

 

 

23

 

 

 

(45

)

 

 

11

 

Deferred income tax expense (benefit)

 

 

69

 

 

 

 

 

 

(38

)

 

 

(4

)

Share-based compensation

 

 

23

 

 

 

53

 

 

 

69

 

 

 

87

 

Early retirement of debt

 

 

 

 

 

 

 

 

 

 

 

312

 

Other

 

 

2

 

 

 

(20

)

 

 

(12

)

 

 

(65

)

Changes in assets and liabilities, net

 

 

(59

)

 

 

65

 

 

 

(143

)

 

 

71

 

Net cash from operating activities - continuing operations

 

 

488

 

 

 

526

 

 

 

966

 

 

 

959

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(494

)

 

 

(543

)

 

 

(996

)

 

 

(1,105

)

Acquisitions of property and equipment

 

 

(13

)

 

 

(10

)

 

 

(23

)

 

 

(16

)

Divestitures of property and equipment

 

 

28

 

 

 

560

 

 

 

339

 

 

 

607

 

Net cash from investing activities - continuing operations

 

 

(479

)

 

 

7

 

 

 

(680

)

 

 

(514

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt principal

 

 

 

 

 

 

 

 

(162

)

 

 

(807

)

Early retirement of debt

 

 

 

 

 

 

 

 

 

 

 

(304

)

Repurchases of common stock

 

 

(187

)

 

 

(428

)

 

 

(1,185

)

 

 

(499

)

Dividends paid on common stock

 

 

(37

)

 

 

(42

)

 

 

(71

)

 

 

(74

)

Shares exchanged for tax withholdings

 

 

(3

)

 

 

(6

)

 

 

(22

)

 

 

(35

)

Net cash from financing activities - continuing operations

 

 

(227

)

 

 

(476

)

 

 

(1,440

)

 

 

(1,719

)

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

 

 

(218

)

 

 

57

 

 

 

(1,154

)

 

 

(1,274

)

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

135

 

 

 

(21

)

 

 

33

 

 

 

350

 

Investing activities

 

 

2,544

 

 

 

(281

)

 

 

2,497

 

 

 

(550

)

Financing activities

 

 

 

 

 

73

 

 

 

(8

)

 

 

103

 

Effect of exchange rate changes on cash

 

 

37

 

 

 

227

 

 

 

39

 

 

 

212

 

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

 

 

2,716

 

 

 

(2

)

 

 

2,561

 

 

 

115

 

Net change in cash, cash equivalents and restricted cash

 

 

2,498

 

 

 

55

 

 

 

1,407

 

 

 

(1,159

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

1,355

 

 

 

1,470

 

 

 

2,446

 

 

 

2,684

 

Cash, cash equivalents and restricted cash at end of period

 

$

3,853

 

 

$

1,525

 

 

$

3,853

 

 

$

1,525

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,470

 

 

$

1,460

 

 

$

3,470

 

 

$

1,460

 

Cash restricted for discontinued operations

 

 

370

 

 

 

 

 

 

370

 

 

 

 

Restricted cash included in other current assets

 

 

13

 

 

 

28

 

 

 

13

 

 

 

28

 

Cash and cash equivalents included in current assets associated with

   discontinued operations

 

 

 

 

 

37

 

 

 

 

 

 

37

 

Total cash, cash equivalents and restricted cash

 

$

3,853

 

 

$

1,525

 

 

$

3,853

 

 

$

1,525

 

 

See accompanying notes to consolidated financial statements

7

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,470

 

 

$

2,414

 

Cash restricted for discontinued operations

 

 

370

 

 

 

 

Accounts receivable

 

 

842

 

 

 

855

 

Current assets associated with discontinued operations

 

 

131

 

 

 

283

 

Other current assets

 

 

354

 

 

 

885

 

Total current assets

 

 

5,167

 

 

 

4,437

 

Oil and gas property and equipment, based on successful efforts

   accounting, net

 

 

8,987

 

 

 

8,982

 

Other property and equipment, net

 

 

1,050

 

 

 

1,044

 

Total property and equipment, net

 

 

10,037

 

 

 

10,026

 

Goodwill

 

 

841

 

 

 

841

 

Right-of-use assets

 

 

273

 

 

 

 

Other long-term assets

 

 

232

 

 

 

276

 

Long-term assets associated with discontinued operations

 

 

99

 

 

 

3,986

 

Total assets

 

$

16,649

 

 

$

19,566

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

522