Edgar Filing: DEVON ENERGY CORP/DE

dvn-10q_20170930.htm

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, 2017

☐	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 October 18, 2017, 525.5 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
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
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

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. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“2015 Plan” means the Devon Energy Corporation 2015 Long-Term Incentive Plan.

“2017 Plan” means the Devon Energy Corporation 2017 Long-Term Incentive Plan.

“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.

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“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.

“TSR” means total shareholder return.

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

“WTI” means West Texas Intermediate.

“/d” means per day.

“/Bbl” means per barrel.

“/MMBtu” means per MMBtu.

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, 2016 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 exploration and development activities;

•

risks related to our hedging activities;

•

counterparty credit risks;

•

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

•

risks relating to our indebtedness;

•

our ability to successfully complete mergers, acquisitions and divestitures;

•

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

•

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

•

midstream capacity constraints and potential interruptions in production;

•

competition for leases, materials, people and capital;

•

cyberattacks targeting our systems and infrastructure; and

•

any of the other risks and uncertainties discussed in this report, our 2016 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.

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,
	2017			2016			2017			2016
	(Unaudited)
	(Millions, except per share amounts)
Oil, gas and NGL sales	$	1,245		$	1,113		$	3,760		$	3,023
Oil, gas and NGL derivatives		(144	)		79			214			(30	)
Marketing and midstream revenues		2,055			1,690			5,992			4,503
Asset dispositions and other		—			1,351			10			1,351
Total revenues and other		3,156			4,233			9,976			8,847
Lease operating expenses		391			355			1,176			1,215
Marketing and midstream operating expenses		1,813			1,480			5,319			3,884
General and administrative expenses		153			141			498			482
Production and property taxes		71			67			227			220
Depreciation, depletion and amortization		400			394			1,162			1,420
Asset impairments		2			319			9			4,851
Restructuring and transaction costs		—			(5	)		—			266
Other operating items		—			17			11			41
Total operating expenses		2,830			2,768			8,402			12,379
Operating income (loss)		326			1,465			1,574			(3,532	)
Net financing costs		127			243			370			570
Other nonoperating items		(73	)		44			(124	)		150
Earnings (loss) before income taxes		272			1,178			1,328			(4,252	)
Income tax expense (benefit)		25			171			51			(228	)
Net earnings (loss)		247			1,007			1,277			(4,024	)
Net earnings (loss) attributable to noncontrolling interests		19			14			59			(391	)
Net earnings (loss) attributable to Devon	$	228		$	993		$	1,218		$	(3,633	)
Net earnings (loss) per share attributable to Devon:
Basic	$	0.43		$	1.90		$	2.32		$	(7.22	)
Diluted	$	0.43		$	1.89		$	2.31		$	(7.22	)
Comprehensive earnings (loss):
Net earnings (loss)	$	247		$	1,007		$	1,277		$	(4,024	)
Other comprehensive earnings, net of tax:
Foreign currency translation		1			2			1			28
Pension and postretirement plans		5			11			14			20
Other		—			—			(2	)		—
Other comprehensive earnings, net of tax		6			13			13			48
Comprehensive earnings (loss)		253			1,020			1,290			(3,976	)
Comprehensive earnings (loss) attributable to noncontrolling interests		19			14			59			(391	)
Comprehensive earnings (loss) attributable to Devon	$	234		$	1,006		$	1,231		$	(3,585	)

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Unaudited)
	(Millions)
Cash flows from operating activities:
Net earnings (loss)	$	247		$	1,007		$	1,277		$	(4,024	)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
Depreciation, depletion and amortization		400			394			1,162			1,420
Asset impairments		2			319			9			4,851
Gains and losses on asset sales		1			(1,351	)		(6	)		(1,351	)
Deferred income tax expense (benefit)		(14	)		86			(20	)		(300	)
Commodity derivatives		144			(79	)		(214	)		30
Cash settlements on commodity derivatives		24			12			43			15
Other derivatives and financial instruments		9			21			16			329
Cash settlements on other derivatives and financial instruments		—			3			—			(148	)
Asset retirement obligation accretion		16			19			47			58
Share-based compensation		33			23			122			163
Other		(85	)		127			(134	)		(31	)
Net change in working capital		7			137			94			208
Change in long-term other assets		2			(3	)		12			10
Change in long-term other liabilities		(10	)		12			12			7
Net cash from operating activities		776			727			2,420			1,237
Cash flows from investing activities:
Capital expenditures		(735	)		(421	)		(2,203	)		(1,659	)
Acquisitions of property, equipment and businesses		(6	)		(3	)		(39	)		(1,641	)
Proceeds from sale of investment		—			—			190			—
Divestitures of property and equipment		209			1,680			323			1,889
Other		(1	)		34			(5	)		7
Net cash from investing activities		(533	)		1,290			(1,734	)		(1,404	)
Cash flows from financing activities:
Borrowings of long-term debt, net of issuance costs		413			816			2,208			1,662
Repayments of long-term debt		(571	)		(2,173	)		(1,950	)		(2,722	)
Payment of installment payable		—			—			(250	)		—
Net short-term debt repayments		—			—			—			(626	)
Early retirement of debt		—			(82	)		(6	)		(82	)
Issuance of common stock		—			—			—			1,469
Issuance of subsidiary units		414			59			486			835
Dividends paid on common stock		(30	)		(32	)		(95	)		(190	)
Contributions from noncontrolling interests		18			146			47			152
Distributions to noncontrolling interests		(84	)		(77	)		(247	)		(224	)
Shares exchanged for tax withholdings		(3	)		(2	)		(67	)		(30	)
Other		—			(1	)		(2	)		(7	)
Net cash from financing activities		157			(1,346	)		124			237
Effect of exchange rate changes on cash		12			(9	)		12			5
Net change in cash and cash equivalents		412			662			822			75
Cash and cash equivalents at beginning of period		2,369			1,723			1,959			2,310
Cash and cash equivalents at end of period	$	2,781		$	2,385		$	2,781		$	2,385

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2017			December 31, 2016
	(Unaudited)
	(Millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	2,781		$	1,959
Accounts receivable		1,462			1,356
Assets held for sale		—			193
Other current assets		379			264
Total current assets		4,622			3,772
Property and equipment, at cost:
Oil and gas, based on full cost accounting:
Subject to amortization		78,470			75,648
Not subject to amortization		2,853			3,437
Total oil and gas		81,323			79,085
Midstream and other		11,097			10,455
Total property and equipment, at cost		92,420			89,540
Less accumulated depreciation, depletion and amortization		(75,338	)		(73,350	)
Property and equipment, net		17,082			16,190
Goodwill		3,964			3,964
Other long-term assets		1,891			1,987
Total assets	$	27,559		$	25,913
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	797		$	642
Revenues and royalties payable		1,012			908
Short-term debt		20			—
Other current liabilities		1,003			1,066
Total current liabilities		2,832			2,616
Long-term debt		10,383			10,154
Asset retirement obligations		1,100			1,226
Other long-term liabilities		645			894
Deferred income taxes		665			648
Equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 525 million and 523 million shares in 2017 and 2016, respectively		53			52
Additional paid-in capital		7,207			7,237
Accumulated deficit		(428	)		(1,646	)
Accumulated other comprehensive earnings		297			284
Total stockholders’ equity attributable to Devon		7,129			5,927
Noncontrolling interests		4,805			4,448
Total equity		11,934			10,375
Total liabilities and equity	$	27,559		$	25,913

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

											Accumulated
					Additional			Retained			Other
	Common Stock				Paid-In			Earnings			Comprehensive		Treasury			Noncontrolling			Total
	Shares		Amount		Capital			(Accumulated Deficit)			Earnings		Stock			Interests			Equity
	(Unaudited)
	(Millions)
Nine Months Ended September 30, 2017
Balance as of December 31, 2016		523	$	52	$	7,237		$	(1,646	)	$	284	$	—		$	4,448		$	10,375
Net earnings		—		—		—			1,218			—		—			59			1,277
Other comprehensive earnings, net of tax		—		—		—			—			13		—			—			13
Restricted stock grants, net of cancellations		1		1		—			—			—		—			—			1
Common stock repurchased		—		—		—			—			—		(43	)		—			(43	)
Common stock retired		—		—		(43	)		—			—		43			—			—
Common stock dividends		—		—		(95	)		—			—		—			—			(95	)
Share-based compensation		1		—		96			—			—		—			—			96
Subsidiary equity transactions		—		—		12			—			—		—			545			557
Distributions to noncontrolling interests		—		—		—			—			—		—			(247	)		(247	)
Balance as of September 30, 2017		525	$	53	$	7,207		$	(428	)	$	297	$	—		$	4,805		$	11,934
Nine Months Ended September 30, 2016
Balance as of December 31, 2015		418	$	42	$	4,996		$	1,781		$	230	$	—		$	3,940		$	10,989
Net loss		—		—		—			(3,633	)		—		—			(391	)		(4,024	)
Other comprehensive earnings, net of tax		—		—		—			—			48		—			—			48
Restricted stock grants, net of cancellations		3		—		—			—			—		—			—			—
Common stock repurchased		—