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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, 2020

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 April 22, 2020, 382.7 million shares of common stock were outstanding.

 

 


Table of Contents

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Part I. Financial Information

 

Item 1.

 

Financial Statements

6

 

 

Consolidated Statements of Comprehensive 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 – 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)

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 – Debt and Related Expenses

19

 

 

Note 14 – Leases

19

 

 

Note 15 – Asset Retirement Obligations

20

 

 

Note 16 – Stockholders’ Equity

20

 

 

Note 17 – Discontinued Operations and Assets Held For Sale

21

 

 

Note 18 – Commitments and Contingencies

23

 

 

Note 19 – Fair Value Measurements

24

Item 2.

 

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

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

 

Controls and Procedures

42

 

 

 

 

Part II. Other Information

 

Item 1.

 

Legal Proceedings

43

Item 1A.

 

Risk Factors

43

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,” the “Company” and “Registrant” 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.

“BKV” means Banpu Kalnin Ventures.

“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.

“FASB” means Financial Accounting Standards Board.

“G&A” means general and administrative expenses.

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

“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.

“MMcf” means million cubic feet.

3

 


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“N/M” means not meaningful.

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

“NYMEX” means New York Mercantile Exchange.

“OPEC” means Organization of the Petroleum Exporting Countries.

“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.

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

“VIE” means variable interest entity.

“WTI” means West Texas Intermediate.

“/Bbl” means per barrel.

“/d” means per day.

“/MMBtu” means per MMBtu.

4

 


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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words 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 those, identified below.

 

The COVID-19 pandemic and its related repercussions have created significant volatility, uncertainty and turmoil in the global economy and our industry. This turmoil has included an unprecedented supply-and-demand imbalance for oil and other commodities, resulting in a swift and material decline in commodity prices in early 2020. Our future actual results could differ materially from the forward-looking statements in this report due to the COVID-19 pandemic and related impacts, including, among other things: contributing to a sustained or further deterioration in commodity prices; causing takeaway capacity constraints for production, resulting in production shut-ins and additional downward pressure on impacted regional pricing differentials; limiting our ability to access sources of capital due to disruptions in financial markets; increasing the risk of a downgrade from credit rating agencies; exacerbating counterparty credit risks and the risk of supply chain interruptions; and increasing the risk of operational disruptions due to social distancing measures and other changes to business practices.

In addition to the risks associated with the COVID-19 pandemic and its related impacts, our actual future results could differ materially from our expectations due to other factors, including, among other things:

 

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;

 

risks related to investors attempting to effect change;

 

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

 

any of the other risks and uncertainties discussed in this report, our 2019 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 STATEMENTS OF COMPREHENSIVE EARNINGS

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

Upstream revenues

 

$

1,527

 

 

$

314

 

Marketing and midstream revenues

 

 

560

 

 

 

765

 

Total revenues

 

 

2,087

 

 

 

1,079

 

Production expenses

 

 

318

 

 

 

283

 

Exploration expenses

 

 

112

 

 

 

4

 

Marketing and midstream expenses

 

 

578

 

 

 

750

 

Depreciation, depletion and amortization

 

 

401

 

 

 

360

 

Asset impairments

 

 

2,666

 

 

 

 

Asset dispositions

 

 

 

 

 

(45

)

General and administrative expenses

 

 

102

 

 

 

135

 

Financing costs, net

 

 

65

 

 

 

60

 

Restructuring and transaction costs

 

 

 

 

 

51

 

Other expenses

 

 

(48

)

 

 

(22

)

Total expenses

 

 

4,194

 

 

 

1,576

 

Loss from continuing operations before income taxes

 

 

(2,107

)

 

 

(497

)

Income tax benefit

 

 

(417

)

 

 

(119

)

Net loss from continuing operations

 

 

(1,690

)

 

 

(378

)

Net earnings (loss) from discontinued operations, net of income taxes

 

 

(125

)

 

 

61

 

Net loss

 

 

(1,815

)

 

 

(317

)

Net earnings attributable to noncontrolling interests

 

 

1

 

 

 

 

Net loss attributable to Devon

 

$

(1,816

)

 

$

(317

)

Basic net earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic loss from continuing operations per share

 

$

(4.48

)

 

$

(0.89

)

Basic earnings (loss) from discontinued operations per share

 

 

(0.34

)

 

 

0.15

 

Basic net loss per share

 

$

(4.82

)

 

$

(0.74

)

Diluted net earnings (loss) per share:

 

 

 

 

 

 

 

 

Diluted loss from continuing operations per share

 

$

(4.48

)

 

$

(0.89

)

Diluted earnings (loss) from discontinued operations per share

 

 

(0.34

)

 

 

0.15

 

Diluted net loss per share

 

$

(4.82

)

 

$

(0.74

)

Comprehensive earnings (loss):

 

 

 

 

 

 

 

 

Net loss

 

$

(1,815

)

 

$

(317

)

Other comprehensive earnings, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation, discontinued operations

 

 

 

 

 

35

 

Pension and postretirement plans

 

 

1

 

 

 

2

 

Other comprehensive earnings, net of tax

 

 

1

 

 

 

37

 

Comprehensive loss:

 

 

(1,814

)

 

 

(280

)

Comprehensive earnings attributable to noncontrolling interests

 

 

1

 

 

 

 

Comprehensive loss attributable to Devon

 

$

(1,815

)

 

$

(280

)

 

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,815

)

 

$

(317

)

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

 

 

 

 

 

 

 

 

Net (earnings) loss from discontinued operations, net of income taxes

 

 

125

 

 

 

(61

)

Depreciation, depletion and amortization

 

 

401

 

 

 

360

 

Asset impairments

 

 

2,666

 

 

 

 

Leasehold impairments

 

 

110

 

 

 

1

 

Accretion on discounted liabilities

 

 

8

 

 

 

9

 

Total (gains) losses on commodity derivatives

 

 

(720

)

 

 

605

 

Cash settlements on commodity derivatives

 

 

101

 

 

 

31

 

Gains on asset dispositions

 

 

 

 

 

(45

)

Deferred income tax benefit

 

 

(311

)

 

 

(115

)

Share-based compensation

 

 

20

 

 

 

44

 

Other

 

 

 

 

 

(14

)

Changes in assets and liabilities, net

 

 

(56

)

 

 

(61

)

Net cash from operating activities - continuing operations

 

 

529

 

 

 

437

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(425

)

 

 

(490

)

Acquisitions of property and equipment

 

 

(4

)

 

 

(10

)

Divestitures of property and equipment

 

 

25

 

 

 

310

 

Net cash from investing activities - continuing operations

 

 

(404

)

 

 

(190

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

 

 

 

(162

)

Repurchases of common stock

 

 

(38

)

 

 

(999

)

Dividends paid on common stock

 

 

(34

)

 

 

(34

)

Contributions from noncontrolling interests

 

 

5

 

 

 

 

Distributions to noncontrolling interests

 

 

(3

)

 

 

 

Shares exchanged for tax withholdings

 

 

(17

)

 

 

(19

)

Net cash from financing activities - continuing operations

 

 

(87

)

 

 

(1,214

)

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

 

 

38

 

 

 

(967

)

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

Operating activities

 

 

(131

)

 

 

(59

)

Investing activities

 

 

(1

)

 

 

(59

)

Financing activities

 

 

 

 

 

(7

)

Effect of exchange rate changes on cash

 

 

(23

)

 

 

1

 

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

 

 

(155

)

 

 

(124

)

Net change in cash, cash equivalents and restricted cash

 

 

(117

)

 

 

(1,091

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

1,844

 

 

 

2,446

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,727

 

 

$

1,355

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,527

 

 

$

1,327

 

Cash restricted for discontinued operations

 

 

200

 

 

 

 

Restricted cash included in other current assets

 

 

 

 

 

28

 

Total cash, cash equivalents and restricted cash

 

$

1,727

 

 

$

1,355

 

 

See accompanying notes to consolidated financial statements

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,527

 

 

$

1,464

 

Cash restricted for discontinued operations

 

 

200

 

 

 

380

 

Accounts receivable

 

 

594

 

 

 

832

 

Current assets associated with discontinued operations

 

 

736

 

 

 

896

 

Other current assets

 

 

998

 

 

 

279

 

Total current assets

 

 

4,055

 

 

 

3,851

 

Oil and gas property and equipment, based on successful efforts

   accounting, net

 

 

4,756

 

 

 

7,558

 

Other property and equipment, net ($89 and $80 million related to CDM in 2020 and 2019, respectively)

 

 

1,024

 

 

 

1,035

 

Total property and equipment, net

 

 

5,780

 

 

 

8,593

 

Goodwill

 

 

753

 

 

 

753

 

Right-of-use assets

 

 

237

 

 

 

243

 

Other long-term assets

 

 

245

 

 

 

196

 

Long-term assets associated with discontinued operations

 

 

74

 

 

 

81

 

Total assets

 

$

11,144

 

 

$

13,717

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

444

 

 

$

428

 

Revenues and royalties payable

 

 

617

 

 

 

730

 

Current liabilities associated with discontinued operations

 

 

294

 

 

 

459

 

Other current liabilities

 

 

199

 

 

 

310

 

Total current liabilities

 

 

1,554

 

 

 

1,927

 

Long-term debt

 

 

4,295

 

 

 

4,294

 

Lease liabilities

 

 

245

 

 

 

244

 

Asset retirement obligations

 

 

386

 

 

 

380

 

Other long-term liabilities

 

 

461

 

 

 

426

 

Long-term liabilities associated with discontinued operations

 

 

163

 

 

 

185

 

Deferred income taxes

 

 

 

 

 

341

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   383 million and 382 million shares in 2020 and 2019, respectively

 

 

38

 

 

 

38

 

Additional paid-in capital

 

 

2,701

 

 

 

2,735

 

Retained earnings

 

 

1,298

 

 

 

3,148

 

Accumulated other comprehensive loss

 

 

(118

)

 

 

(119

)

Total stockholders’ equity attributable to Devon

 

 

3,919

 

 

 

5,802

 

Noncontrolling interests

 

 

121

 

 

 

118

 

Total equity

 

 

4,040

 

 

 

5,920

 

Total liabilities and equity

 

$

11,144

 

 

$

13,717

 

 

See accompanying notes to consolidated financial statements

 

 

 

 


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Table of Contents

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

(Accumulated

 

 

Earnings

 

 

Treasury

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit)

 

 

(Loss)

 

 

Stock

 

 

Interests

 

 

Equity

 

 

 

(Unaudited)

 

Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2019

 

 

382

 

 

$

38

 

 

$

2,735

 

 

$

3,148

 

 

$

(119

)

 

$

 

 

$

118

 

 

$

5,920

 

Net earnings (loss)

 

 

 

 

 

 

 

 

 

 

 

(1,816

)

 

 

 

 

 

 

 

 

1

 

 

 

(1,815

)

Other comprehensive earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Restricted stock grants, net of cancellations

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54

)

 

 

 

 

 

(54

)

Common stock retired

 

 

(3

)

 

 

 

 

 

(54

)

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

(34

)

Share-based compensation

 

 

1

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

Balance as of March 31, 2020

 

 

383

 

 

$

38

 

 

$

2,701

 

 

$

1,298

 

 

$

(118

)

 

$

 

 

$

121

 

 

$

4,040

 

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