DEVON ENERGY CORP/DE, 10-Q filed on 11/2/2016
Quarterly Report
Document And Entity Information
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Oct. 19, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2016 
 
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
2016 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q3 
 
Entity Common Stock, Shares Outstanding
 
523.6 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Income Statement [Abstract]
 
 
 
 
Oil, gas and NGL sales
$ 1,113 
$ 1,338 
$ 3,023 
$ 4,264 
Oil, gas and NGL derivatives
79 
414 
(30)
426 
Marketing and midstream revenues
1,690 
1,849 
4,503 
5,569 
Gains on asset sales
1,351 
 
1,351 
 
Total revenues and other
4,233 
3,601 
8,847 
10,259 
Lease operating expenses
355 
510 
1,215 
1,625 
Marketing and midstream operating expenses
1,480 
1,637 
3,884 
4,939 
General and administrative expenses
141 
198 
482 
661 
Production and property taxes
67 
91 
220 
315 
Depreciation, depletion and amortization
394 
744 
1,420 
2,488 
Asset impairments
319 
5,851 
4,851 
15,479 
Restructuring and transaction costs
(5)
 
266 
 
Other operating items
17 
14 
41 
54 
Total operating expenses
2,768 
9,045 
12,379 
25,561 
Operating income (loss)
1,465 
(5,444)
(3,532)
(15,302)
Net financing costs
243 
136 
570 
378 
Other nonoperating items
44 
43 
150 
46 
Earnings (loss) before income taxes
1,178 
(5,623)
(4,252)
(15,726)
Income tax expense (benefit)
171 
(1,714)
(228)
(5,435)
Net earnings (loss)
1,007 
(3,909)
(4,024)
(10,291)
Net earnings (loss) attributable to noncontrolling interests
14 
(402)
(391)
(369)
Net earnings (loss) attributable to Devon
993 
(3,507)
(3,633)
(9,922)
Net earnings (loss) per share attributable to Devon:
 
 
 
 
Basic
$ 1.90 
$ (8.64)
$ (7.22)
$ (24.45)
Diluted
$ 1.89 
$ (8.64)
$ (7.22)
$ (24.45)
Comprehensive earnings (loss):
 
 
 
 
Net earnings (loss)
1,007 
(3,909)
(4,024)
(10,291)
Other comprehensive earnings (loss), net of tax:
 
 
 
 
Foreign currency translation
(212)
28 
(470)
Pension and postretirement plans
11 
20 
12 
Other comprehensive earnings (loss), net of tax
13 
(207)
48 
(458)
Comprehensive earnings (loss)
1,020 
(4,116)
(3,976)
(10,749)
Comprehensive earnings (loss) attributable to noncontrolling interests
14 
(402)
(391)
(369)
Comprehensive earnings (loss) attributable to Devon
$ 1,006 
$ (3,714)
$ (3,585)
$ (10,380)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Cash flows from operating activities:
 
 
 
 
Net earnings (loss)
$ 1,007 
$ (3,909)
$ (4,024)
$ (10,291)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
 
 
Depreciation, depletion and amortization
394 
744 
1,420 
2,488 
Asset impairments
319 
5,851 
4,851 
15,479 
Gains on asset sales
(1,351)
 
(1,351)
 
Deferred income tax expense (benefit)
86 
(1,708)
(300)
(5,348)
Derivatives and other financial instruments
(58)
(481)
359 
(606)
Cash settlements on derivatives and financial instruments
15 
730 
(133)
1,913 
Other
169 
171 
190 
437 
Net change in working capital
136 
67 
181 
93 
Change in long-term other assets
(3)
52 
10 
211 
Change in long-term other liabilities
12 
36 
(74)
Net cash from operating activities
726 
1,553 
1,210 
4,302 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
(421)
(1,080)
(1,659)
(4,229)
Acquisitions of property, equipment and businesses
(3)
(113)
(1,641)
(530)
Divestitures of property and equipment
1,680 
27 
1,889 
35 
Other
34 
(3)
(8)
Net cash from investing activities
1,290 
(1,169)
(1,404)
(4,732)
Cash flows from financing activities:
 
 
 
 
Borrowings of long-term debt, net of issuance costs
816 
277 
1,662 
3,328 
Repayments of long-term debt
(2,173)
(252)
(2,722)
(1,773)
Net short-term debt repayments
 
(169)
(626)
(932)
Early retirement of debt
(82)
 
(82)
 
Issuance of common stock
 
 
1,469 
 
Sale of subsidiary units
 
 
 
654 
Issuance of subsidiary units
59 
835 
13 
Dividends paid on common stock
(32)
(99)
(190)
(296)
Contributions from noncontrolling interests
146 
151 
12 
Distributions to noncontrolling interests
(77)
(68)
(224)
(186)
Other
(2)
(3)
(9)
(18)
Net cash from financing activities
(1,345)
(300)
264 
802 
Effect of exchange rate changes on cash
(9)
(22)
(65)
Net change in cash and cash equivalents
662 
62 
75 
307 
Cash and cash equivalents at beginning of period
1,723 
1,725 
2,310 
1,480 
Cash and cash equivalents at end of period
$ 2,385 
$ 1,787 
$ 2,385 
$ 1,787 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 2,385 
$ 2,310 
Accounts receivable
1,092 
1,105 
Assets held for sale
717 
 
Other current assets
257 
606 
Total current assets
4,451 
4,021 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
75,431 
78,190 
Not subject to amortization
3,637 
2,584 
Total oil and gas
79,068 
80,774 
Midstream and other
10,320 
10,380 
Total property and equipment, at cost
89,388 
91,154 
Less accumulated depreciation, depletion and amortization
(73,219)
(72,086)
Property and equipment, net
16,169 
19,068 
Goodwill
3,963 
5,032 
Other long-term assets
2,230 
1,330 
Total assets
26,813 
29,451 
Current liabilities:
 
 
Accounts payable
529 
906 
Revenues and royalties payable
860 
763 
Short-term debt
350 1
976 1
Liabilities held for sale
202 
 
Other current liabilities
910 
650 
Total current liabilities
2,851 
3,295 
Long-term debt
11,004 
12,056 
Asset retirement obligations
1,230 
1,370 
Other long-term liabilities
1,036 
853 
Deferred income taxes
631 
888 
Stockholders’ equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 524 million and 418 million shares in 2016 and 2015, respectively
52 
42 
Additional paid-in capital
7,487 
4,996 
Retained earnings (accumulated deficit)
(1,977)
1,781 
Accumulated other comprehensive earnings
278 
230 
Total stockholders’ equity attributable to Devon
5,840 
7,049 
Noncontrolling interests
4,221 
3,940 
Total stockholders’ equity
10,061 
10,989 
Total liabilities and stockholders’ equity
$ 26,813 
$ 29,451 
Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2016
Dec. 31, 2015
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)
524,000,000 
418,000,000 
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, 2014
$ 26,341 
$ 41 
$ 4,088 
$ 16,631 
$ 779 
 
$ 4,802 
Balance, shares, at Dec. 31, 2014
 
409 
 
 
 
 
 
Net loss
(10,291)
 
 
(9,922)
 
 
(369)
Other comprehensive earnings (loss), net of tax
(458)
 
 
 
(458)
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(23)
 
 
 
 
(23)
 
Common stock retired
 
 
(23)
 
 
23 
 
Common stock dividends
(296)
 
 
(296)
 
 
 
Share-based compensation
129 
 
129 
 
 
 
 
Subsidiary equity transactions
704 
 
577 
 
 
 
127 
Distributions to noncontrolling interests
(186)
 
 
 
 
 
(186)
Other
 
 
 
 
 
Balance, at Sep. 30, 2015
15,922 
41 
4,773 
6,413 
321 
 
4,374 
Balance, shares, at Sep. 30, 2015
 
411 
 
 
 
 
 
Balance, at Dec. 31, 2015
10,989 
42 
4,996 
1,781 
230 
 
3,940 
Balance, shares, at Dec. 31, 2015
 
418 
 
 
 
 
 
Net loss
(4,024)
 
 
(3,633)
 
 
(391)
Other comprehensive earnings (loss), net of tax
48 
 
 
 
48 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(23)
 
 
 
 
(23)
 
Common stock retired
 
 
(23)
 
 
23 
 
Common stock dividends
(190)
 
(65)
(125)
 
 
 
Common stock issued
2,127 
10 
2,117 
 
 
 
 
Common stock issued, shares
 
103 
 
 
 
 
 
Share-based compensation
142 
 
142 
 
 
 
 
Subsidiary equity transactions
1,216 
 
320 
 
 
 
896 
Distributions to noncontrolling interests
(224)
 
 
 
 
 
(224)
Balance, at Sep. 30, 2016
$ 10,061 
$ 52 
$ 7,487 
$ (1,977)
$ 278 
 
$ 4,221 
Balance, shares, at Sep. 30, 2016
 
524 
 
 
 
 
 
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 2015 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 and nine-month periods ended September 30, 2016 and 2015 and Devon’s financial position as of September 30, 2016.

Recently Adopted Accounting Standards

In January 2016, Devon adopted ASU 2015-03, Interest – Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. As a result of the adoption, Devon reclassified unamortized debt issuance costs of $81 million as of December 31, 2015 from other long-term assets to a reduction of long-term debt on the consolidated balance sheets.

The FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Its objective is to clarify guidance and eliminate diversity in practice of classification on certain cash receipts and payments in the statement of cash flows. This ASU is effective for Devon beginning January 1, 2018, with early adoption permitted. Devon early adopted this ASU as of September 30, 2016 using a retrospective transition method. As a result of the adoption, Devon has classified $82 million of debt retirement payments as cash flows from financing activities on the accompanying 2016 consolidated statements of cash flows. No other periods presented in the consolidated statements of cash flows were impacted by the adoption of this standard.

Recently Issued Accounting Standards

The FASB issued 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 accounting for income taxes when awards vest or are settled, statutory withholding and accounting for forfeitures. Classification of these aspects on the statement of cash flows is also addressed. This ASU is effective for Devon beginning January 1, 2017. Devon does not expect that this ASU will have a material impact on its consolidated financial statements and related disclosures.

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. 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 is continuing to evaluate the impact this ASU will have on its consolidated financial statements and related disclosures. Devon does not plan on early adopting.

 

 

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 from Topic 840, except for some changes made to align with Topic 606. 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. Devon is continuing to evaluate the impact this ASU will have on its consolidated financial statements and related disclosures and does not plan on early adopting.

 

Acquisitions And Divestitures
Acquisitions And Divestitures

2.

Acquisitions and Divestitures

Devon Acquisitions

On January 7, 2016, Devon acquired approximately 80,000 net acres and assets in the STACK play for approximately $1.5 billion. Devon funded the acquisition with $849 million of cash and $659 million of common equity shares. The allocation of the purchase price at September 30, 2016 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 $1.5 billion, subject to certain adjustments. 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 is 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 $250 million of undiscounted future installment payment is reported in other current liabilities in the accompanying consolidated balance sheets with the remaining $250 million payment reported in other long-term liabilities. The accretion of the discount is reported within net financing costs in the accompanying consolidated comprehensive statement of earnings. A preliminary allocation of the purchase price at September 30, 2016 was $1.0 billion to intangible assets and approximately $400 million to property and equipment.

On August 1, 2016, EnLink formed a joint venture to operate and expand its midstream assets in the Delaware Basin. The joint venture is initially owned 50.1% by EnLink and 49.9% by the joint venture partner. As of September 30, 2016, EnLink contributed approximately $244 million of existing non-monetary assets to the joint venture and had committed an additional $262 million in capital to fund potential future development projects and potential acquisitions. The joint venture partner committed an aggregate of approximately $400 million of capital, including cash contributions of approximately $138 million, and granted EnLink call rights beginning in 2021 to acquire increasing portions of the joint venture partner’s interest.

Devon Asset Divestitures

In the first nine months of 2016, Devon divested certain non-core upstream assets in the U.S., and subsequent to quarter-end, completed the divestiture of its 50% interest in the Access Pipeline in Canada.

Upstream Asset Sales

In the second quarter of 2016, Devon divested its non-core Mississippian assets for approximately $200 million. Estimated proved reserves associated with these assets were approximately 11 MMBoe, or less than 1% of total U.S. proved reserves.

During the third quarter of 2016, in several separate transactions with different purchasers, Devon divested non-core upstream assets located in east Texas, the Anadarko Basin and the Midland Basin for approximately $1.7 billion. Estimated proved reserves associated with these assets were approximately 146 MMBoe, or approximately 9% of total U.S. proved reserves.

Proceeds from the transactions have been utilized primarily for debt repayment and to support future capital investment in Devon’s core resource plays.

Under full cost accounting rules, sales or other dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of gain or loss. However, if not recognizing a gain or loss on the disposition would otherwise significantly alter the relationship between a cost center’s capitalized costs and proved reserves, then a gain or loss must be recognized. Absent gain recognition, the divestiture transactions that closed in the third quarter of 2016 would have significantly altered the costs and reserves relationship. Therefore, Devon recognized a $1.4 billion gain in the third quarter of 2016 associated with these divestitures. A summary of the gain computation follows.

 

 

Three Months Ended September 30, 2016

 

 

 

(Millions)

 

Proceeds received, net of purchase price adjustments and selling costs

 

$

1,653

 

Asset retirement obligation assumed by purchasers

 

 

250

 

   Total consideration received

 

 

1,903

 

 

 

 

 

 

Allocated oil and gas property basis sold

 

 

355

 

Allocated goodwill

 

 

197

 

   Total assets sold

 

 

552

 

 

 

 

 

 

Gains on asset sales

 

$

1,351

 

Access Pipeline Divestiture

As of September 30, 2016, the Access Pipeline assets and liabilities were classified as held for sale in the accompanying consolidated balance sheet.

In October 2016, Devon divested Access Pipeline for $1.1 billion ($1.4 billion Canadian dollars) and recognized a gain of approximately $540 million on the transaction. In conjunction with the divestiture, Devon entered into a transportation agreement whereby Devon’s Canadian thermal-oil acreage is dedicated to Access Pipeline for an initial term of 25 years. Devon will be charged a market-based toll on its thermal-oil production over this term. In addition, Devon will receive an incremental payment of approximately $120 million upon the sanctioning and development of a new thermal-oil project on Devon’s Pike lease in Alberta.

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, costless price collars and call options. 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 September 30, 2016, 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.

As of December 31, 2015, Devon’s other current assets in the accompanying consolidated balance sheet included $236 million of accrued settlements that it received in January 2016.

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 December 31, 2015, Devon held $75 million of cash collateral which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying consolidated balance sheets.

Commodity Derivatives

As of September 30, 2016, 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

 

 

Call Options Sold

 

Period

 

Volume

(Bbls/d)

 

 

Weighted

Average

Price ($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Floor

Price ($/Bbl)

 

 

Weighted

Average

Ceiling Price

($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Price

($/Bbl)

 

Q4 2016

 

 

40,848

 

 

$

49.00

 

 

 

20,000

 

 

$

40.85

 

 

$

50.85

 

 

 

18,500

 

 

$

55.00

 

Q1-Q4 2017

 

 

10,452

 

 

$

50.57

 

 

 

32,496

 

 

$

44.60

 

 

$

57.37

 

 

 

 

 

$

 

Q1-Q4 2018

 

 

616

 

 

$

50.61

 

 

 

1,726

 

 

$

45.51

 

 

$

55.51

 

 

 

 

 

$

 

 

 

 

Oil Basis Swaps

 

Period

 

Index

 

Volume (Bbls/d)

 

 

Weighted Average

Differential to WTI

($/Bbl)

 

Q4 2016

 

Western Canadian Select

 

 

33,000

 

 

$

(13.40

)

Q4 2016

 

West Texas Sour

 

 

5,000

 

 

$

(0.53

)

Q4 2016

 

Midland Sweet

 

 

13,000

 

 

$

0.25

 

 

As of September 30, 2016, 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

 

 

Call Options Sold

 

Period

 

Volume (MMBtu/d)

 

 

Weighted Average Price ($/MMBtu)

 

 

Volume (MMBtu/d)

 

 

Weighted Average Floor Price ($/MMBtu)

 

 

Weighted Average

Ceiling Price ($/MMBtu)

 

 

Volume (MMBtu/d)

 

 

Weighted Average Price ($/MMBtu)

 

Q4 2016

 

 

155,000

 

 

$

2.83

 

 

 

385,000

 

 

$

2.74

 

 

$

2.97

 

 

 

400,000

 

 

$

2.80

 

Q1-Q4 2017

 

 

145,384

 

 

$

3.06

 

 

 

230,904

 

 

$

2.91

 

 

$

3.31

 

 

 

 

 

$

 

Q1-Q4 2018

 

 

8,630

 

 

$

3.30

 

 

 

8,630

 

 

$

3.18

 

 

$

3.48

 

 

 

 

 

$

 

 

 

 

Natural Gas Basis Swaps

 

Period

 

Index

 

Volume

(MMBtu/d)

 

 

Weighted Average

Differential to

Henry Hub

($/MMBtu)

 

Q4 2016

 

Panhandle Eastern Pipe Line

 

 

175,000

 

 

$

(0.34

)

Q4 2016

 

El Paso Natural Gas

 

 

125,000

 

 

$

(0.12

)

Q4 2016

 

Houston Ship Channel

 

 

30,000

 

 

$

0.11

 

Q4 2016

 

Transco Zone 4

 

 

70,000

 

 

$

0.01

 

Q1-Q4 2017

 

Panhandle Eastern Pipe Line

 

 

150,000

 

 

$

(0.34

)

Q1-Q4 2017

 

El Paso Natural Gas

 

 

80,000

 

 

$

(0.13

)

Q1-Q4 2017

 

Houston Ship Channel

 

 

35,000

 

 

$

0.06

 

Q1-Q4 2017

 

Transco Zone 4

 

 

205,000

 

 

$

0.03

 

 

As of September 30, 2016, 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)

 

Q4 2016

 

Ethane

 

 

6,000

 

 

$

9.71

 

 

 

10,000

 

 

$

8.34

 

 

$

9.60

 

Q4 2016

 

Propane

 

 

1,000

 

 

$

21.53

 

 

 

6,000

 

 

$

19.88

 

 

$

21.98

 

 

As of September 30, 2016, EnLink had the following open derivative positions associated with gas processing and fractionation. EnLink’s NGL derivative positions settle by purity product against the average of the prompt month OPIS Mont Belvieu, Texas index. EnLink’s natural gas derivatives settle against the Henry Hub Gas Daily index.

 

Period

 

Product

 

Volume (Total)

 

Weighted Average Price Paid

 

Weighted Average Price Received

Q4 2016

 

Ethane

 

 

170

 

MBbls

 

$0.28/gal

 

Index

Q4 2016-Q3 2017

 

Propane

 

 

405

 

MBbls

 

Index

 

$0.65/gal

Q4 2016-Q3 2017

 

Normal Butane

 

 

109

 

MBbls

 

Index

 

$0.60/gal

Q4 2016-Q3 2017

 

Natural Gasoline

 

 

113

 

MBbls

 

Index

 

$0.98/gal

Q4 2016-Q3 2017

 

Natural Gas

 

 

17,438

 

MMBtu/d

 

Index

 

$2.94/MMbtu

Q4 2016

 

Condensate

 

 

50

 

MBbls

 

Index

 

$40.20/bbl

 

Interest Rate Derivatives

As of September 30, 2016, Devon had the following open interest rate derivative positions:

 

Notional

 

 

Rate Received

 

 

Rate Paid

 

 

Expiration

(Millions)

 

 

 

 

 

 

 

 

 

 

 

$

100

 

 

Three Month LIBOR

 

 

 

0.92%

 

 

December 2016

$

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Commodity derivatives:

 

(Millions)

 

Oil, gas and NGL derivatives

 

$

79

 

 

$

414

 

 

$

(30

)

 

$

426

 

Marketing and midstream revenues

 

 

(1

)

 

 

6

 

 

 

(7

)

 

 

8

 

Interest rate derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(20

)

 

 

(30

)

 

 

(163

)

 

 

(28

)

Foreign currency derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

 

 

 

91

 

 

 

(159

)

 

 

200

 

Net gains (losses) recognized

 

$

58

 

 

$

481

 

 

$

(359

)

 

$

606

 

 

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

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

(Millions)

 

Commodity derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

$

12

 

 

$

34

 

Other long-term assets

 

 

1

 

 

 

1

 

Interest rate derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

1

 

 

 

1

 

Other long-term assets

 

 

1

 

 

 

1

 

Foreign currency derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

8

 

Total derivative assets

 

$

15

 

 

$

45

 

 

 

 

 

 

 

 

 

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

$

40

 

 

$

14

 

Other long-term liabilities

 

 

6

 

 

 

4

 

Interest rate derivative liabilities:

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

185

 

 

 

22

 

Foreign currency derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

8

 

Total derivative liabilities

 

$

231

 

 

$

48

 

 

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 nine months of 2016 and 2015 includes $18 million and $25 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 nine months ended September 30, 2016, approximately $60 million of associated expense for these accelerated awards is included in restructuring and transaction costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

 

(Millions)

 

Gross G&A for share-based compensation

 

$

117

 

 

$

182

 

Share-based compensation expense capitalized pursuant to the full cost

   method of accounting for oil and gas properties

 

$

30

 

 

$

48

 

Related income tax benefit

 

$

3

 

 

$

37

 

 

 

 

 

 

 

 

 

 

Under its approved long-term incentive plan, Devon granted share-based awards to certain employees in the first nine months of 2016. 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 12/31/15

 

 

4,738

 

 

$

62.49

 

 

 

434

 

 

$

60.48

 

 

 

1,859

 

 

 

 

$

76.17

 

Granted

 

 

4,375

 

 

$

19.83

 

 

 

330

 

 

$

19.22

 

 

 

1,388

 

 

 

 

$

10.41

 

Vested

 

 

(2,150

)

 

$

62.35

 

 

 

(132

)

 

$

61.39

 

 

 

(602

)

 

 

 

$

63.37

 

Forfeited

 

 

(185

)

 

$

46.67

 

 

 

 

 

$

 

 

 

(13

)

 

 

 

$

64.23

 

Unvested at 9/30/16

 

 

6,778

 

 

$

35.42

 

 

 

632

 

 

$

38.71

 

 

 

2,632

 

(1)

 

 

$

46.53

 

 

(1)

A maximum of 5.3 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 2016, as indicated in the previous summary table.

 

 

 

2016

 

Grant-date fair value

 

$

9.24

 

 

 

 

 

$

10.61

 

Risk-free interest rate

 

 

 

 

 

 

 

 

 

 

0.94

%

Volatility factor

 

 

 

 

 

 

 

 

 

 

37.7

%

Contractual term (years)

 

 

 

 

 

 

 

 

 

 

2.83

 

 

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 September 30, 2016.

 

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

 

 

Restricted Stock

 

 

Restricted Stock

 

 

Performance

 

 

 

Awards and Units

 

 

Awards

 

 

Share Units

 

Unrecognized compensation cost (millions)

 

$

153

 

 

$

6

 

 

$

28

 

Weighted average period for recognition (years)

 

 

2.5

 

 

 

2.4

 

 

 

1.7

 

 

EnLink Share-Based Awards

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 September 30, 2016.

 

 

 

General Partner

 

 

EnLink

 

 

 

Restricted

 

 

Performance

 

 

Restricted

 

 

Performance

 

 

 

Incentive Units

 

 

Units

 

 

Incentive Units

 

 

Units

 

Unrecognized compensation cost (millions)

 

$

15

 

 

$

4

 

 

$

16

 

 

$

4

 

Weighted average period for recognition (years)

 

1.6

 

 

 

1.8

 

 

1.6

 

 

 

1.8

 

 

Asset Impairments
Asset Impairments

5.

Asset Impairments

The following table presents the components of asset impairments.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Millions)

 

U.S. oil and gas assets

 

$

317

 

 

$

4,715

 

 

$

2,810

 

 

$

14,340

 

Canada oil and gas assets

 

 

 

 

 

336

 

 

 

1,166

 

 

 

336

 

EnLink goodwill

 

 

 

 

 

576

 

 

 

873

 

 

 

576

 

EnLink other intangible assets

 

 

 

 

 

223

 

 

 

 

 

 

223

 

Other assets

 

 

2

 

 

 

1

 

 

 

2

 

 

 

4

 

Total asset impairments

 

$

319

 

 

$

5,851

 

 

$

4,851

 

 

$

15,479

 

 

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.

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 and Other Intangible Assets Impairments

In the first quarter of 2016 and the third quarter of 2015, Devon recognized goodwill and other intangible assets impairments related to EnLink’s business. Additional information regarding the impairments is discussed in Note 12.

 

Restructuring And Transaction Costs
Restructuring And Transaction Costs

6.

Restructuring and Transaction Costs

The following table summarizes restructuring and transaction costs presented in the accompanying consolidated comprehensive statement of earnings.

 

 

 

September 30, 2016

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

(Millions)

 

2016 reduction in workforce:

 

 

 

 

 

 

 

 

Employee related costs

 

$

(7

)

 

$

229

 

Lease obligations

 

 

 

 

 

17

 

Asset impairments

 

 

 

 

 

3

 

Transaction costs

 

 

2

 

 

 

17

 

Restructuring and transaction costs

 

$

(5

)

 

$

266

 

 

The following table summarizes Devon’s restructuring liabilities.

 

 

 

Other

 

 

Other

 

 

 

 

 

 

 

Current

 

 

Long-term

 

 

 

 

 

 

 

Liabilities

 

 

Liabilities

 

 

Total

 

 

 

(Millions)

 

Balance as of December 31, 2015

 

$

13

 

 

$

63

 

 

$

76

 

Changes due to 2016 workforce reductions

 

 

58

 

 

 

13

 

 

 

71

 

Changes related to prior years' restructurings

 

 

5

 

 

 

(8

)

 

 

(3

)

Balance as September 30, 2016

 

$

76

 

 

$

68

 

 

$

144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

$

13

 

 

$

7

 

 

$

20

 

Changes related to prior years' restructurings

 

 

(5

)

 

 

(2

)

 

 

(7

)

Balance as of September 30, 2015

 

$

8

 

 

$

5

 

 

$

13

 

 

Reduction in Workforce

In the first nine months of 2016, Devon recognized $229 million in employee-related costs associated with a reduction in workforce that was made in response to the depressed commodity price environment. Of these employee-related costs, approximately $60 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, approximately $30 million resulted from estimated defined benefit settlements. These cash and noncash charges included estimates for employees released from service during the first nine months of 2016, as well as amounts based on the number of employees expected to be impacted by certain of its non-core asset divestitures.

As a result of the reduction in workforce and asset divestitures, Devon ceased using certain office space that was subject to non-cancellable operating lease arrangements. Consequently, Devon recognized $17 million of restructuring costs that represent the present value of its future obligations under the leases. Additionally, Devon recognized $3 million of asset impairment charges for leasehold improvements and furniture associated with the office space it ceased using.

Transaction Costs

In the first nine months of 2016, Devon and EnLink recognized transaction costs primarily associated with the closing of the acquisitions discussed in Note 2.

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Millions)

 

Current income tax expense (benefit)

 

$

85

 

 

$

(6

)

 

$

72

 

 

$

(87

)

Deferred income tax expense (benefit)

 

 

86

 

 

 

(1,708

)

 

 

(300

)

 

 

(5,348

)

Total income tax expense (benefit)

 

$

171

 

 

$

(1,714

)

 

$

(228

)

 

$

(5,435

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

35

%

 

 

35

%

 

 

35

%

 

 

35

%

Deferred tax asset valuation allowance

 

 

(35

%)

 

 

0

%

 

 

(20

%)

 

 

0

%

Non-deductible goodwill and intangible impairment

 

 

6

%

 

 

(5

%)

 

 

(9

%)

 

 

(2

%)

Change in unrecognized tax benefits

 

 

7

%

 

 

0

%

 

 

(2

%)

 

 

0

%

Taxation on Canadian operations

 

 

0

%