DEVON ENERGY CORP/DE, 10-Q filed on 5/3/2017
Quarterly Report
Document And Entity Information
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Apr. 19, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Amendment Flag
false 
 
Trading Symbol
DVN 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
Entity Central Index Key
0001090012 
 
Current Fiscal Year End Date
--12-31 
 
Document Fiscal Year Focus
2017 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q1 
 
Entity Common Stock, Shares Outstanding
 
525.7 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Income Statement [Abstract]
 
 
Oil, gas and NGL sales
$ 1,309 
$ 825 
Oil, gas and NGL derivatives
232 
33 
Marketing and midstream revenues
2,010 
1,268 
Asset dispositions and other
(4)
 
Total revenues and other
3,547 
2,126 
Lease operating expenses
386 
444 
Marketing and midstream operating expenses
1,803 
1,066 
General and administrative expenses
181 
194 
Production and property taxes
85 
78 
Depreciation, depletion and amortization
381 
542 
Asset impairments
3,035 
Restructuring and transaction costs
 
247 
Other operating items
(2)
20 
Total operating expenses
2,841 
5,626 
Operating income (loss)
706 
(3,500)
Net financing costs
127 
164 
Other nonoperating items
(19)
21 
Earnings (loss) before income taxes
598 
(3,685)
Income tax expense (benefit)
19 
(217)
Net earnings (loss)
579 
(3,468)
Net earnings (loss) attributable to noncontrolling interests
14 
(412)
Net earnings (loss) attributable to Devon
565 
(3,056)
Net earnings (loss) per share attributable to Devon:
 
 
Basic
$ 1.08 
$ (6.44)
Diluted
$ 1.07 
$ (6.44)
Comprehensive earnings (loss):
 
 
Net earnings (loss)
579 
(3,468)
Other comprehensive earnings, net of tax:
 
 
Foreign currency translation
(2)
23 
Pension and postretirement plans
Other comprehensive earnings, net of tax
27 
Comprehensive earnings (loss)
582 
(3,441)
Comprehensive earnings (loss) attributable to noncontrolling interests
14 
(412)
Comprehensive earnings (loss) attributable to Devon
$ 568 
$ (3,029)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities:
 
 
Net earnings (loss)
$ 579 
$ (3,468)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
Depreciation, depletion and amortization
381 
542 
Asset impairments
3,035 
Gains and losses on asset sales
 
Deferred income tax benefit
(1)
(207)
Commodity derivatives
(232)
(33)
Cash settlements on commodity derivatives
19 
Other derivatives and financial instruments
(9)
227 
Cash settlements on other derivatives and financial instruments
(2)
(123)
Asset retirement obligation accretion
17 
19 
Amortization of stock-based compensation
46 
108 
Other
 
(194)
Net change in working capital
15 
214 
Change in long-term other assets
53 
Change in long-term other liabilities
20 
(27)
Net cash from operating activities
834 
165 
Cash flows from investing activities:
 
 
Capital expenditures
(747)
(749)
Acquisitions of property, equipment and businesses
(20)
(1,627)
Proceeds from sale of investment
190 
 
Divestitures of property and equipment
38 
18 
Other
(3)
(1)
Net cash from investing activities
(542)
(2,359)
Cash flows from financing activities:
 
 
Borrowings of long-term debt, net of issuance costs
813 
396 
Repayments of long-term debt
(587)
(259)
Payment of installment payable
(250)
 
Net short-term debt repayments
 
(626)
Issuance of common stock
 
1,469 
Issuance of subsidiary units
55 
727 
Dividends paid on common stock
(32)
(125)
Contributions from noncontrolling interests
21 
Distributions to noncontrolling interests
(81)
(73)
Taxes for share-based compensation
(61)
(18)
Other
(2)
(1)
Net cash from financing activities
(124)
1,493 
Effect of exchange rate changes on cash
(8)
26 
Net change in cash and cash equivalents
160 
(675)
Cash and cash equivalents at beginning of period
1,959 
2,310 
Cash and cash equivalents at end of period
$ 2,119 
$ 1,635 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 2,119 
$ 1,959 
Accounts receivable
1,320 
1,356 
Assets held for sale
 
193 
Other current assets
336 
264 
Total current assets
3,775 
3,772 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
76,421 
75,648 
Not subject to amortization
3,096 
3,437 
Total oil and gas
79,517 
79,085 
Midstream and other
10,701 
10,455 
Total property and equipment, at cost
90,218 
89,540 
Less accumulated depreciation, depletion and amortization
(73,797)
(73,350)
Property and equipment, net
16,421 
16,190 
Goodwill
3,964 
3,964 
Other long-term assets
1,974 
1,987 
Total assets
26,134 
25,913 
Current liabilities:
 
 
Accounts payable
638 
642 
Revenues and royalties payable
991 
908 
Other current liabilities
841 
1,066 
Total current liabilities
2,470 
2,616 
Long-term debt
10,381 
10,154 
Asset retirement obligations
1,067 
1,226 
Other long-term liabilities
643 
894 
Deferred income taxes
651 
648 
Stockholders’ equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 526 million and 523 million shares in 2017 and 2016, respectively
53 
52 
Additional paid-in capital
7,207 
7,237 
Accumulated deficit
(1,081)
(1,646)
Accumulated other comprehensive earnings
287 
284 
Total stockholders’ equity attributable to Devon
6,466 
5,927 
Noncontrolling interests
4,456 
4,448 
Total stockholders’ equity
10,922 
10,375 
Total liabilities and stockholders’ equity
$ 26,134 
$ 25,913 
Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Common stock, par value (in dollars per share)
$ 0.10 
$ 0.10 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
526,000,000 
523,000,000 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Noncontrolling Interests [Member]
Balance at Dec. 31, 2015
$ 10,989 
$ 42 
$ 4,996 
$ 1,781 
$ 230 
 
$ 3,940 
Balance, shares at Dec. 31, 2015
 
418 
 
 
 
 
 
Net earnings (loss)
(3,468)
 
 
(3,056)
 
 
(412)
Other comprehensive earnings, net of tax
27 
 
 
 
27 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(12)
 
 
 
 
(12)
 
Common stock retired
 
 
(12)
 
 
12 
 
Common stock dividends
(125)
 
 
(125)
 
 
 
Common stock issued
2,127 
10 
2,117 
 
 
 
 
Common stock issued, shares
 
103 
 
 
 
 
 
Share-based compensation
99 
 
99 
 
 
 
 
Subsidiary equity transactions
944 
 
301 
 
 
 
643 
Distributions to noncontrolling interests
(73)
 
 
 
 
 
(73)
Balance at Mar. 31, 2016
10,508 
52 
7,501 
(1,400)
257 
 
4,098 
Balance, shares at Mar. 31, 2016
 
524 
 
 
 
 
 
Balance at Dec. 31, 2016
10,375 
52 
7,237 
(1,646)
284 
 
4,448 
Balance, shares at Dec. 31, 2016
 
523 
 
 
 
 
 
Net earnings (loss)
579 
 
 
565 
 
 
14 
Other comprehensive earnings, net of tax
 
 
 
 
 
Restricted stock grants, net of cancellations, value
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(38)
 
 
 
 
(38)
 
Common stock retired
 
 
(38)
 
 
38 
 
Common stock dividends
(32)
 
(32)
 
 
 
 
Share-based compensation
30 
 
30 
 
 
 
 
Share-based compensation, shares
 
 
 
 
 
 
Subsidiary equity transactions
85 
 
10 
 
 
 
75 
Distributions to noncontrolling interests
(81)
 
 
 
 
 
(81)
Balance at Mar. 31, 2017
$ 10,922 
$ 53 
$ 7,207 
$ (1,081)
$ 287 
 
$ 4,456 
Balance, shares at Mar. 31, 2017
 
526 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.Summary of Significant Accounting Policies

The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2016 Annual Report on Form 10-K.

The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month periods ended March 31, 2017 and 2016 and Devon’s financial position as of March 31, 2017.

Recently Adopted Accounting Standards

In January 2017, Devon adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Its objective is to simplify several aspects of the accounting for share-based payments, including income taxes when awards vest or are settled, statutory withholding and forfeitures. As the result of adoption, Devon made certain income tax presentation changes, most notably prospectively presenting excess tax benefits and deficiencies in the consolidated comprehensive statements of earnings and as operating cash flows in the consolidated statements of cash flows. Devon also retrospectively applied the new cash flow statement guidance dictating the presentation of shares traded for tax-withholding purposes as a financing activity. The adoption of the new guidance did not materially impact the consolidated financial statements for the three months ended March 31, 2017 or previously reported financial information but could have a more material future impact.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill And Other (Topic 350)Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. In January 2017, Devon elected to early adopt ASU 2017-04, and the adoption had no impact on the consolidated financial statements. Devon will perform future goodwill impairment tests according to ASU 2017-04.

Recently Issued Accounting Standards

The FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition and industry-specific guidance in Subtopic 932-605, Extractive Activities – Oil and Gas – Revenue Recognition. This ASU provides guidance concerning the recognition and measurement of revenue from contracts with customers. Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues. The effective date for ASU 2014-09 was delayed through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual and interim periods beginning in 2018, with early adoption permitted in 2017. Devon does not plan on early adopting this ASU. The ASU is required to be adopted using either the retrospective transition method, which requires restating previously reported results or the cumulative effect (modified retrospective) transition method, which utilizes a cumulative-effect adjustment to retained earnings in the period of adoption to account for prior period effects rather than restating previously reported results. Devon intends to use the cumulative effect transition method and does not anticipate this ASU will have a material impact on its balance sheet or related consolidated statement of earnings, stockholders’ equity or cash flows. Devon continues to evaluate the impact of the disclosures required by this ASU. Devon does not expect its annual disclosures will materially change upon adopting this ASU. However, Devon’s quarterly disclosures will materially expand upon adoption of this ASU. Devon is implementing a process to gather and provide the quarterly disclosures required by the ASU.

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU will supersede the lease requirements in Topic 840, Leases. Its objective is to increase transparency and comparability among organizations. This ASU provides guidance requiring lessees to recognize most leases on their balance sheet. Lessor accounting does not significantly change, except for some changes made to align with new revenue recognition requirements. This ASU is effective for Devon beginning January 1, 2019 and will be applied using a modified retrospective transition method, which requires applying the new guidance to leases that exist or are entered into after the beginning of the earliest period in the financial statements. Early adoption is permitted, but Devon does not plan to early adopt. Devon has begun the process of evaluating contracts and gathering the necessary terms and data elements for purposes of determining the impact this ASU will have on its consolidated financial statements and related disclosures. Based on initial research, Devon estimates more than 7,500 contracts and a large number of data elements must be gathered and reviewed to ensure proper accounting of these contracts once this ASU is effective. Furthermore, Devon anticipates complying with this standard will significantly impact its systems, processes and controls and is evaluating technology requirements and solutions needed to comply with the requirements of this ASU.

The FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU will require entities to present the service cost component of net periodic benefit cost in the same line item as other employee compensation costs and present the other components of net periodic benefit cost outside of operating income in the income statement. Only the service cost component of net periodic benefit cost is eligible for capitalization. This ASU is effective for Devon beginning January 1, 2018, and income statement presentation changes will be applied retrospectively, while service cost component capitalization will be applied prospectively. Upon adoption of this ASU, Devon will reclassify $7 million, $14 million and $16 million of non-service cost components of net periodic benefit costs for 2017, 2016 and 2015, respectively, as other nonoperating items. Such amounts are currently classified in Devon’s G&A. No other changes upon adopting this ASU are expected to be material.  

Acquisitions And Divestitures
Acquisitions and Divestitures

2.

Acquisitions and Divestitures

Devon Acquisitions

On January 7, 2016, Devon acquired approximately 80,000 net acres (unaudited) and assets in the STACK play for approximately $1.5 billion. Devon funded the acquisition with $849 million of cash, after adjustments, and $659 million of common equity shares. The purchase price allocation was approximately $1.3 billion to unproved properties and approximately $200 million to proved properties.

 

 

EnLink Acquisitions

On January 7, 2016, EnLink acquired Anadarko Basin gathering and processing midstream assets, along with dedicated acreage service rights and service contracts, for approximately $1.4 billion. The purchase price allocation was $1.0 billion to intangible assets and approximately $400 million to property and equipment. EnLink funded the acquisition with approximately $215 million of General Partner common units and approximately $800 million of cash, primarily funded with the issuance of EnLink preferred units. The remaining $500 million of the purchase price was to be paid within one year with the option to defer $250 million of the final payment 24 months from the close date. The first installment payment of $250 million was paid in January 2017. The remaining $250 million payment is reported in other current liabilities in the accompanying consolidated balance sheets. The accretion of the discount is reported within net financing costs in the accompanying consolidated comprehensive statement of earnings.

EnLink Asset Divestitures

During the first quarter of 2017, EnLink divested its ownership interest in Howard Energy Partners for approximately $190 million.


Devon Upstream Asset Divestitures

 

In May 2017, Devon announced its intent to divest approximately $1 billion of upstream assets. The non-core assets identified for monetization include select portions of the Barnett Shale focused primarily around Johnson County and other properties located principally within Devon’s U.S. resource base. Devon expects the divestiture process will take up to 12 to 18 months to complete. Devon plans to deploy divestiture proceeds toward its U.S. resource plays and to further strengthen its investment-grade financial position. The non-core divestiture plan is also expected to accelerate Devon’s transition to higher-margin production.

Derivative Financial Instruments
Derivative Financial Instruments

3.

Derivative Financial Instruments

Objectives and Strategies

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon and EnLink periodically enter into derivative financial instruments with respect to a portion of their oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps and costless price collars. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility and foreign exchange forward contracts to manage its exposure to fluctuations in the U.S. and Canadian dollar exchange rates. As of March 31, 2017, Devon did not have any open foreign exchange contracts.

Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

Counterparty Credit Risk

By using derivative financial instruments, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment-grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally contain provisions that provide for collateral payments, if Devon’s or its counterparty’s credit rating falls below certain credit rating levels.

As of March 31, 2017, Devon held $13 million of cash collateral, which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines and is reported in other current liabilities in the accompanying consolidated balance sheets. As of December 31, 2016, Devon held no collateral from counterparties.

Commodity Derivatives

As of March 31, 2017, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume

(Bbls/d)

 

 

Weighted

Average

Price ($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Floor

Price ($/Bbl)

 

 

Weighted

Average

Ceiling Price

($/Bbl)

 

Q2-Q4 2017

 

 

73,945

 

 

$

54.34

 

 

 

61,665

 

 

$

45.53

 

 

$

57.96

 

Q1-Q4 2018

 

 

5,592

 

 

$

53.38

 

 

 

12,921

 

 

$

46.69

 

 

$

56.69

 

 

 

 

Oil Basis Swaps

 

Period

 

Index

 

Volume (Bbls/d)

 

 

Weighted Average

Differential to WTI

($/Bbl)

 

Q2-Q4 2017

 

Western Canadian Select

 

 

63,244

 

 

$

(14.83

)

Q2-Q4 2017

 

Midland Sweet

 

 

20,000

 

 

$

(0.41

)

 

As of March 31, 2017, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume (MMBtu/d)

 

 

Weighted Average Price ($/MMBtu)

 

 

Volume (MMBtu/d)

 

 

Weighted Average Floor Price ($/MMBtu)

 

 

Weighted Average

Ceiling Price ($/MMBtu)

 

Q2-Q4 2017

 

 

193,218

 

 

$

3.17

 

 

 

411,418

 

 

$

2.98

 

 

$

3.38

 

Q1-Q4 2018

 

 

68,890

 

 

$

3.17

 

 

 

36,986

 

 

$

3.29

 

 

$

3.63

 

 

 

 

Natural Gas Basis Swaps

 

Period

 

Index

 

Volume

(MMBtu/d)

 

 

Weighted Average

Differential to

Henry Hub

($/MMBtu)

 

Q2-Q4 2017

 

Panhandle Eastern Pipe Line

 

 

150,000

 

 

$

(0.34

)

Q2-Q4 2017

 

El Paso Natural Gas

 

 

80,000

 

 

$

(0.13

)

Q2-Q4 2017

 

Houston Ship Channel

 

 

35,000

 

 

$

0.06

 

Q2-Q4 2017

 

Transco Zone 4

 

 

205,000

 

 

$

0.03

 

Q1-Q4 2018

 

Panhandle Eastern Pipe Line

 

 

50,000

 

 

$

(0.29

)

 

As of March 31, 2017, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.

 

 

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Product

 

Volume (Bbls/d)

 

 

Weighted Average Price ($/Bbl)

 

 

Volume (Bbls/d)

 

 

Weighted Average Floor Price ($/Bbl)

 

 

Weighted Average Ceiling Price ($/Bbl)

 

Q2-Q4 2017

 

Propane

 

 

1,662

 

 

$

27.24

 

 

 

1,662

 

 

$

26.30

 

 

$

28.40

 

 

Interest Rate Derivatives

As of March 31, 2017, Devon had the following open interest rate derivative positions:

 

Notional

 

 

Rate Received

 

 

Rate Paid

 

 

Expiration

(Millions)

 

 

 

 

 

 

 

 

 

 

 

$

750

 

 

Three Month LIBOR

 

 

 

2.98%

 

 

December 2048 (1)

$

100

 

 

 

1.76%

 

 

Three Month LIBOR

 

 

January 2019

 

(1)

Mandatory settlement in December 2018.

 

Financial Statement Presentation

The following table presents the net gains and losses by derivative financial instrument type followed by the corresponding individual consolidated comprehensive statements of earnings caption.

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Commodity derivatives:

 

 

 

 

 

 

 

 

Oil, gas and NGL derivatives

 

$

232

 

 

$

33

 

Marketing and midstream revenues

 

 

4

 

 

 

 

Interest rate derivatives:

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

5

 

 

 

(72

)

Foreign currency derivatives:

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

 

 

 

(155

)

Net gains (losses) recognized

 

$

241

 

 

$

(194

)

 

The following table presents the derivative fair values by derivative financial instrument type followed by the corresponding individual consolidated balance sheet caption.

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Millions)

 

Commodity derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

$

79

 

 

$

9

 

Other long-term assets

 

 

5

 

 

 

1

 

Interest rate derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

1

 

 

 

1

 

Total derivative assets

 

$

85

 

 

$

11

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

$

46

 

 

$

187

 

Other long-term liabilities

 

 

 

 

 

16

 

Interest rate derivative liabilities:

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

36

 

 

 

41

 

Total derivative liabilities

 

$

82

 

 

$

244

 

 

Share-Based Compensation
Share-Based Compensation

4.

Share-Based Compensation

The following table presents the effects of share-based compensation included in Devon’s accompanying consolidated comprehensive statements of earnings. Gross G&A expense for the first three months of 2017 and 2016 includes $14 million and $6 million, respectively, of unit-based compensation related to grants made under EnLink’s long-term incentive plans.

The vesting for certain share-based awards was accelerated in 2016 in conjunction with the reduction of workforce described in Note 6. For the three months ended March 31, 2016, approximately $67 million of associated expense for these accelerated awards is included in restructuring and transaction costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Gross G&A for share-based compensation

 

$

50

 

 

$

45

 

Share-based compensation expense capitalized pursuant to

   the full cost method of accounting for oil and gas properties

 

$

9

 

 

$

12

 

Related income tax benefit

 

$

1

 

 

$

9

 

 

Under its approved long-term incentive plan, Devon granted share-based awards to certain employees in the first three months of 2017. The following table presents a summary of Devon’s unvested restricted stock awards and units, performance-based restricted stock awards and performance share units granted under the plan.

 

 

 

Restricted Stock

 

 

Performance-Based

 

 

Performance

 

 

 

Awards and Units

 

 

Restricted Stock Awards

 

 

Share Units

 

 

 

Awards and

Units

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Awards

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Units

 

 

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

 

(Thousands, except fair value data)

 

Unvested at 12/31/16

 

 

6,407

 

 

$

34.40

 

 

 

585

 

 

$

37.60

 

 

 

2,604

 

 

 

 

$

46.66

 

Granted

 

 

2,571

 

 

$

45.41

 

 

 

205

 

 

$

45.41

 

 

 

1,010

 

 

 

 

$

52.58

 

Vested

 

 

(2,001

)

 

$

38.33

 

 

 

(178

)

 

$

42.43

 

 

 

(832

)

 

 

 

$

78.19

 

Forfeited

 

 

(59

)

 

$

36.06

 

 

 

 

 

$

 

 

 

 

 

 

 

$

 

Unvested at 3/31/17

 

 

6,918

 

 

$

37.34

 

 

 

612

 

 

$

38.81

 

 

 

2,782

 

 

(1

)

$

41.21

 

 

(1)

A maximum of 5.6 million common shares could be awarded based upon Devon’s final TSR ranking relative to Devon’s peer group established under applicable award agreements.

The following table presents the assumptions related to the performance share units granted in 2017, as indicated in the previous summary table.

 

 

 

2017

 

Grant-date fair value

 

$

51.05

 

 

 

$

53.12

 

Risk-free interest rate

 

1.50%

 

Volatility factor

 

45.8%

 

Contractual term (years)

 

2.89

 

 

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of March 31, 2017.

 

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

 

 

Restricted Stock

 

 

Restricted Stock

 

 

Performance

 

 

 

Awards and Units

 

 

Awards

 

 

Share Units

 

Unrecognized compensation cost (millions)

 

$

209

 

 

$

11

 

 

$

54

 

Weighted average period for recognition (years)

 

 

2.9

 

 

 

2.3

 

 

 

2.3

 

EnLink Share-Based Awards

In March 2017, the General Partner and EnLink issued restricted incentive units as bonus payments to officers and certain employees. The combined grant fair value was $10 million, and the total cost was recognized in the first quarter of 2017 due to the awards vesting immediately.

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with the General Partner’s and EnLink’s unvested restricted incentive units and performance units as of March 31, 2017.

 

 

 

General Partner

 

 

EnLink

 

 

 

Restricted

 

 

Performance

 

 

Restricted

 

 

Performance

 

 

 

Incentive Units

 

 

Units

 

 

Incentive Units

 

 

Units

 

Unrecognized compensation cost (millions)

 

$

20

 

 

$

8

 

 

$

21

 

 

$

8

 

Weighted average period for recognition (years)

 

 

2.0

 

 

 

2.3

 

 

 

2.0

 

 

 

2.3

 

 

Asset Impairments
Asset Impairments

5.

Asset Impairments

Oil and Gas Impairments

Under the full cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the full cost “ceiling” at the end of each quarter. The ceiling is calculated separately for each country and is based on the present value of estimated future net cash flows from proved oil and gas reserves, discounted at 10% per annum, net of related tax effects. Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months.

In the first quarter of 2016, Devon recognized $1.6 billion and $554 million in oil and gas asset impairments for its U.S. and Canadian operations, respectively. The oil and gas impairments resulted from declines in the U.S. and Canada full cost ceilings. The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for oil, bitumen, gas and NGLs, which significantly reduced proved reserves values and, to a lesser degree, proved reserves.

EnLink Goodwill Impairments

In the first quarter of 2016, EnLink recognized $873 million in goodwill impairments. See Note 12 for additional details.

Restructuring And Transaction Costs
Restructuring And Transaction Costs

6.      Restructuring and Transaction Costs

Reduction in Workforce

In the first quarter of 2016, Devon recognized $234 million in employee-related costs associated with a reduction in workforce. Of these employee-related costs, approximately $67 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, approximately $30 million resulted from estimated defined benefit settlements.

Transaction Costs

In the first quarter of 2016, Devon and EnLink recognized $13 million in transaction costs primarily associated with the closing of the acquisitions discussed in Note 2.

The following table summarizes Devon’s restructuring liabilities.

 

 

 

Other

 

 

Other

 

 

 

 

 

 

 

Current

 

 

Long-term

 

 

 

 

 

 

 

Liabilities

 

 

Liabilities

 

 

Total

 

 

 

(Millions)

 

Balance as of December 31, 2016

 

$

48

 

 

$

62

 

 

$

110

 

Changes due to 2016 workforce reductions

 

 

(18

)

 

 

 

 

 

(18

)

Changes related to prior years' restructurings

 

 

3

 

 

 

(5

)

 

 

(2

)

Balance as of March 31, 2017

 

$

33

 

 

$

57

 

 

$

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

 

13

 

 

 

63

 

 

 

76

 

Changes due to 2016 workforce reductions

 

 

149

 

 

 

 

 

 

149

 

Changes related to prior years' restructurings

 

 

2

 

 

 

(2

)

 

 

 

Balance as of March 31, 2016

 

$

164

 

 

$

61

 

 

$

225

 

 

Income Taxes
Income Taxes

7.

Income Taxes

The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Current income tax expense (benefit)

 

$

20

 

 

$

(10

)

Deferred income tax benefit

 

 

(1

)

 

 

(207

)

Total income tax expense (benefit)

 

$

19

 

 

$

(217

)

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

35

%

 

 

35

%

Deferred tax asset valuation allowance

 

 

(32

%)

 

 

(22

%)

Non-deductible goodwill impairments

 

 

0

%

 

 

(8

%)

Taxation on Canadian operations

 

 

0

%

 

 

(2

%)

State income taxes

 

 

1

%

 

 

1

%

Other

 

 

(1

%)

 

 

2

%

Effective income tax rate

 

 

3

%

 

 

6

%

 

Devon estimates its annual effective income tax rate in recording its quarterly provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the quarter in which they occur.

Throughout 2016 and into the first quarter of 2017, Devon continued to maintain a 100% valuation allowance against its U.S. deferred tax assets resulting from prior year cumulative financial losses largely due to full cost impairments. Furthermore, a partial allowance continues to be held against certain Canadian segment deferred tax assets. Devon provided an additional $808 million and a reduction of $192 million to the U.S. segment valuation allowance in the first quarters of 2016 and 2017, respectively, based on the financial loss and income recorded during those periods.     

In the first quarter of 2016, EnLink recorded goodwill impairments totaling $873 million. These impairments are not deductible for purposes of calculating income tax and, therefore, have an impact on the effective tax rate.

Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business. The timing of resolution of income tax examinations is uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. Devon believes that within the next 12 months, it is reasonably possible that certain tax examinations will be resolved by settlement with the taxing authorities.

 

Net Earnings (Loss) Per Share Attributable to Devon
Net Earnings (Loss) Per Share Attributable to Devon

8.

Net Earnings (Loss) Per Share Attributable to Devon

The following table reconciles net earnings (loss) attributable to Devon and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings (loss) per share.

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Millions, except per share amounts)

 

Net earnings (loss):

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Devon

 

$

565

 

 

$

(3,056

)

Attributable to participating securities

 

 

(6

)

 

 

 

Basic and diluted earnings (loss)

 

$

559

 

 

$

(3,056

)

Common shares:

 

 

 

 

 

 

 

 

Common shares outstanding - total

 

 

525

 

 

 

479

 

Attributable to participating securities

 

 

(6

)

 

 

(5

)

Common shares outstanding - basic

 

 

519

 

 

 

474

 

Dilutive effect of potential common shares issuable

 

 

3

 

 

 

 

Common shares outstanding - diluted

 

 

522

 

 

 

474

 

Net earnings (loss) per share attributable to Devon:

 

 

 

 

 

 

 

 

Basic

 

$

1.08

 

 

$

(6.44

)

Diluted

 

$

1.07

 

 

$

(6.44

)

Antidilutive options (1)

 

 

2

 

 

 

3

 

 

(1)

Amounts represent options to purchase shares of Devon’s common stock that are excluded from the diluted net earnings (loss) per share calculations because the options are antidilutive.

Other Comprehensive Earnings
Other Comprehensive Earnings

9.

Other Comprehensive Earnings

Components of other comprehensive earnings consist of the following:

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Foreign currency translation:

 

 

 

 

 

 

 

 

Beginning accumulated foreign currency translation

 

$

456

 

 

$

424

 

Change in cumulative translation adjustment

 

 

1

 

 

 

51

 

Income tax expense

 

 

(3

)

 

 

(28

)

Ending accumulated foreign currency translation

 

 

454

 

 

 

447

 

Pension and postretirement benefit plans:

 

 

 

 

 

 

 

 

Beginning accumulated pension and postretirement benefits

 

 

(172

)

 

 

(194

)

Recognition of net actuarial loss and prior service cost in earnings (1)

 

 

5

 

 

 

6

 

Income tax expense

 

 

 

 

 

(2

)

Ending accumulated pension and postretirement benefits

 

 

(167

)

 

 

(190

)

Accumulated other comprehensive earnings, net of tax

 

$

287

 

 

$

257

 

 

(1)

These accumulated other comprehensive earnings components are included in the computation of net periodic benefit cost, which is a component of G&A on the accompanying consolidated comprehensive statements of earnings. See Note 16 for additional details.

Supplemental Information To Statements Of Cash Flows
Supplemental Information To Statements Of Cash Flows

10.

Supplemental Information to Statements of Cash Flows

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Net change in working capital accounts, net of assets and liabilities assumed:

 

 

 

 

 

 

 

 

Accounts receivable

 

$

48

 

 

$

146

 

Income taxes receivable

 

 

1

 

 

 

115

 

Other current assets

 

 

(22

)

 

 

251

 

Accounts payable

 

 

4

 

 

 

(121

)

Revenues and royalties payable

 

 

73

 

 

 

(101

)

Other current liabilities

 

 

(89

)

 

 

(76

)

Net change in working capital

 

$

15

 

 

$

214

 

Interest paid (net of capitalized interest)

 

$

92

 

 

$

115

 

Income taxes paid (received)

 

$

3

 

 

$

(128

)

 

Devon’s acquisition of certain STACK assets during the first three months of 2016 included the noncash issuance of Devon common stock. See Note 2 for additional details.

EnLink’s acquisition of Anadarko Basin gathering and processing midstream assets during the first three months of 2016 included noncash issuance of General Partner common units. See Note 2 for additional details.

 

Accounts Receivable
Accounts Receivable

11.

Accounts Receivable

Components of accounts receivable include the following:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Millions)

 

Oil, gas and NGL sales

 

$

495

 

 

$

487

 

Joint interest billings

 

 

104

 

 

 

110

 

Marketing and midstream revenues

 

 

672

 

 

 

708

 

Other

 

 

67

 

 

 

69

 

Gross accounts receivable

 

 

1,338

 

 

 

1,374

 

Allowance for doubtful accounts

 

 

(18

)

 

 

(18

)

Net accounts receivable

 

$

1,320

 

 

$

1,356

 

 

Goodwill And Other Intangible Assets
Goodwill And Other Intangible Assets

12.

Goodwill and Other Intangible Assets

Goodwill

Devon performs an annual impairment test of goodwill at October 31, or more frequently if events or changes in circumstances indicate that the carrying value of a reporting unit may not be recoverable. Sustained weakness in the overall energy sector driven by low commodity prices, together with a decline in EnLink’s unit price, caused a noncash goodwill impairment of $873 million in the first quarter of 2016. This consisted of a full impairment charge of $93 million related to EnLink’s Crude and Condensate reporting unit and partial impairment to EnLink’s Texas and General Partner reporting units of $473 million and $307 million, respectively.

Other Intangible Assets

The following table presents other intangible assets reported in other long-term assets in the accompanying consolidated balance sheets.

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Millions)

 

Customer relationships

 

$

1,796

 

 

$

1,796

 

Accumulated amortization

 

 

(201

)

 

 

(172

)

Net intangibles

 

$

1,595

 

 

$

1,624

 

 

The weighted-average amortization period for other intangible assets is 14 years. Amortization expense for intangibles was approximately $29 million and $28 million for the three months ended March 31, 2017 and 2016, respectively. The remaining amortization expense is estimated to be $118 million for each of the next five years.

Other Current Liabilities
Other Current Liabilities

13.

Other Current Liabilities

Components of other current liabilities include the following:

 

 

March 31, 2017

 

 

December 31, 2016

 

 

(Millions)

 

Installment payment - see Note 2

$

230

 

 

$

249

 

Derivative liabilities

 

46

 

 

 

187

 

Accrued interest payable

 

156

 

 

 

130

 

Restructuring liabilities

 

33

 

 

 

48

 

Other

 

376

 

 

 

452

 

Other current liabilities

$

841

 

 

$

1,066

 

 

Asset Retirement Obligations
Asset Retirement Obligations

15.

Asset Retirement Obligations

The following table presents the changes in Devon’s asset retirement obligations.

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

Asset retirement obligations as of beginning of period

 

$

1,272

 

 

$

1,414

 

Liabilities incurred and assumed through acquisitions

 

 

10

 

 

 

12

 

Liabilities settled and divested

 

 

(13

)

 

 

(17

)

Revision of estimated obligation

 

 

(184

)

 

 

77

 

Accretion expense on discounted obligation

 

 

17

 

 

 

19

 

Foreign currency translation adjustment