DEVON ENERGY CORP/DE, 10-K filed on 2/15/2017
Annual Report
Document And Entity Information (USD $)
In Billions, except Share data in Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Feb. 8, 2017
Jun. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Amendment Flag
false 
 
 
Trading Symbol
DVN 
 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
 
Entity Central Index Key
0001090012 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Fiscal Year Focus
2016 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Public Float
 
 
$ 18.9 
Entity Common Stock, Shares Outstanding
 
524.6 
 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Oil, gas and NGL sales
$ 4,182 
$ 5,382 
$ 9,910 
Oil, gas and NGL derivatives
(201)
503 
1,989 
Marketing and midstream revenues
6,323 
7,260 
7,667 
Asset dispositions and other
1,893 
 
1,072 
Total revenues and other
12,197 
13,145 
20,638 
Lease operating expenses
1,582 
2,104 
2,332 
Marketing and midstream operating expenses
5,492 
6,420 
6,815 
General and administrative expenses
645 
855 
847 
Production and property taxes
275 
388 
535 
Depreciation, depletion and amortization
1,792 
3,129 
3,319 
Asset impairments
4,975 
20,820 
1,953 
Restructuring and transaction costs
267 
78 
46 
Other operating items
64 
78 
93 
Total operating expenses
15,092 
33,872 
15,940 
Operating income (loss)
(2,895)
(20,727)
4,698 
Net financing costs
904 
517 
526 
Other nonoperating items
78 
24 
113 
Earnings (loss) before income taxes
(3,877)
(21,268)
4,059 
Income tax expense (benefit)
(173)
(6,065)
2,368 
Net earnings (loss)
(3,704)
(15,203)
1,691 
Net earnings (loss) attributable to noncontrolling interests
(402)
(749)
84 
Net earnings (loss) attributable to Devon
(3,302)
(14,454)
1,607 
Net earnings (loss) per share attributable to Devon:
 
 
 
Basic
$ (6.52)
$ (35.55)
$ 3.93 
Diluted
$ (6.52)
$ (35.55)
$ 3.91 
Comprehensive earnings (loss):
 
 
 
Net earnings (loss)
(3,704)
(15,203)
1,691 
Other comprehensive earnings (loss), net of tax:
 
 
 
Foreign currency translation
32 
(559)
(465)
Pension and postretirement plans
22 
10 
(24)
Other comprehensive earnings (loss), net of tax
54 
(549)
(489)
Comprehensive earnings (loss)
(3,650)
(15,752)
1,202 
Comprehensive earnings (loss) attributable to noncontrolling interests
(402)
(749)
84 
Comprehensive earnings (loss) attributable to Devon
$ (3,248)
$ (15,003)
$ 1,118 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$ (3,704)
$ (15,203)
$ 1,691 
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
1,792 
3,129 
3,319 
Asset impairments
4,975 
20,820 
1,953 
Gains and losses on asset sales
(1,887)
 
(1,072)
Deferred income tax expense (benefit)
(273)
(5,828)
1,891 
Derivatives and other financial instruments
386 
(738)
(2,070)
Cash settlements on derivatives and financial instruments
(142)
2,688 
104 
Asset retirement obligation accretion
75 
75 
89 
Amortization of stock-based compensation
194 
181 
163 
Other
303 
281 
245 
Net change in working capital
(8)
(311)
50 
Change in long-term other assets
36 
285 
(421)
Change in long-term other liabilities
(1)
(6)
79 
Net cash from operating activities
1,746 
5,373 
6,021 
Cash flows from investing activities:
 
 
 
Capital expenditures
(2,330)
(5,308)
(6,988)
Acquisitions of property, equipment and businesses
(1,641)
(1,107)
(6,462)
Divestitures of property and equipment
3,118 
107 
5,120 
Redemptions of long-term investments
 
 
57 
Other
(19)
(16)
89 
Net cash from investing activities
(872)
(6,324)
(8,184)
Cash flows from financing activities:
 
 
 
Borrowings of long-term debt, net of issuance costs
2,145 
4,772 
5,340 
Repayments of long-term debt
(4,409)
(2,634)
(7,178)
Net short-term debt repayments
(626)
(307)
(385)
Early retirement of debt
(265)
 
(51)
Issuance of common stock
1,469 
 
 
Sale of subsidiary units
 
654 
 
Issuance of subsidiary units
892 
25 
410 
Dividends paid on common stock
(221)
(396)
(386)
Contributions from noncontrolling interests
168 
16 
Distributions to noncontrolling interests
(304)
(254)
(235)
Other
(13)
(18)
85 
Net cash from financing activities
(1,164)
1,858 
(2,394)
Effect of exchange rate changes on cash
(61)
(77)
(29)
Net change in cash and cash equivalents
(351)
830 
(4,586)
Cash and cash equivalents at beginning of period
2,310 
1,480 
6,066 
Cash and cash equivalents at end of period
$ 1,959 
$ 2,310 
$ 1,480 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 1,959 
$ 2,310 
Accounts receivable
1,356 
1,105 
Assets held for sale
193 
 
Other current assets
264 
606 
Total current assets
3,772 
4,021 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
75,648 
78,190 
Not subject to amortization
3,437 
2,584 
Total oil and gas
79,085 
80,774 
Midstream and other
10,455 
10,380 
Total property and equipment, at cost
89,540 
91,154 
Less accumulated depreciation, depletion and amortization
(73,350)
(72,086)
Property and equipment, net
16,190 
19,068 
Goodwill
3,964 
5,032 
Other long-term assets
1,987 
1,330 
Total assets
25,913 
29,451 
Current liabilities:
 
 
Accounts payable
642 
906 
Revenues and royalties payable
908 
763 
Short-term debt
 
976 1
Other current liabilities
1,066 
650 
Total current liabilities
2,616 
3,295 
Long-term debt
10,154 
12,056 
Asset retirement obligations
1,226 
1,370 
Other long-term liabilities
894 
853 
Deferred income taxes
648 
888 
Stockholders’ equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 523 million and 418 million shares in 2016 and 2015, respectively
52 
42 
Additional paid-in capital
7,237 
4,996 
Retained earnings (accumulated deficit)
(1,646)
1,781 
Accumulated other comprehensive earnings
284 
230 
Total stockholders’ equity attributable to Devon
5,927 
7,049 
Noncontrolling interests
4,448 
3,940 
Total stockholders’ equity
10,375 
10,989 
Total liabilities and stockholders’ equity
$ 25,913 
$ 29,451 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 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)
523,000,000 
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, 2013
$ 20,499 
$ 41 
$ 3,780 
$ 15,410 
$ 1,268 
 
 
Balance, shares at Dec. 31, 2013
 
406.0 
 
 
 
 
 
Net earnings (loss)
1,691 
 
 
1,607 
 
 
84 
Other comprehensive earnings (loss), net of tax
(489)
 
 
 
(489)
 
 
Stock option exercises
93 
 
93 
 
 
 
 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(27)
 
 
 
 
(27)
 
Common stock retired
 
 
(27)
 
 
27 
 
Common stock dividends
(386)
 
 
(386)
 
 
 
Share-based compensation
151 
 
151 
 
 
 
 
Share-based compensation tax expense
(3)
 
(3)
 
 
 
 
Acquisition of noncontrolling interests
4,670 
 
 
 
 
 
4,670 
Subsidiary equity transactions
370 
 
93 
 
 
 
277 
Distributions to noncontrolling interests
(235)
 
 
 
 
 
(235)
Other
 
 
 
 
Balance at Dec. 31, 2014
26,341 
41 
4,088 
16,631 
779 
 
4,802 
Balance, shares at Dec. 31, 2014
 
409.0 
 
 
 
 
 
Net earnings (loss)
(15,203)
 
 
(14,454)
 
 
(749)
Other comprehensive earnings (loss), net of tax
(549)
 
 
 
(549)
 
 
Stock option exercises
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(35)
 
 
 
 
(35)
 
Common stock retired
 
 
(35)
 
 
35 
 
Common stock dividends
(396)
 
 
(396)
 
 
 
Common stock issued
199 
198 
 
 
 
 
Common stock issued, shares
 
 
 
 
 
 
Share-based compensation
165 
 
165 
 
 
 
 
Share-based compensation tax expense
(9)
 
(9)
 
 
 
 
Subsidiary equity transactions
726 
 
585 
 
 
 
141 
Distributions to noncontrolling interests
(254)
 
 
 
 
 
(254)
Balance at Dec. 31, 2015
10,989 
42 
4,996 
1,781 
230 
 
3,940 
Balance, shares at Dec. 31, 2015
 
418.0 
 
 
 
 
 
Net earnings (loss)
(3,704)
 
 
(3,302)
 
 
(402)
Other comprehensive earnings (loss), net of tax
54 
 
 
 
54 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(28)
 
 
 
 
(28)
 
Common stock retired
 
 
(28)
 
 
28 
 
Common stock dividends
(221)
 
(96)
(125)
 
 
 
Common stock issued
2,127 
10 
2,117 
 
 
 
 
Common stock issued, shares
 
103 
 
 
 
 
 
Share-based compensation
168 
 
168 
 
 
 
 
Subsidiary equity transactions
1,294 
 
80 
 
 
 
1,214 
Distributions to noncontrolling interests
(304)
 
 
 
 
 
(304)
Balance at Dec. 31, 2016
$ 10,375 
$ 52 
$ 7,237 
$ (1,646)
$ 284 
 
$ 4,448 
Balance, shares at Dec. 31, 2016
 
523.0 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.

Summary of Significant Accounting Policies

Devon is a leading independent energy company engaged primarily in the exploration, development and production of oil, natural gas and NGLs. Devon’s operations are concentrated in various North American onshore areas in the U.S. and Canada. Devon also owns natural gas pipelines, plants and treatment facilities through its ownership in EnLink and the General Partner.

Accounting policies used by Devon and its subsidiaries conform to accounting principles generally accepted in the U.S. and reflect industry practices. The more significant of such policies are discussed below.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Devon and entities in which it holds a controlling interest. All intercompany transactions have been eliminated. Undivided interests in oil and natural gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in non-controlled entities, over which Devon has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost and subsequently adjusted for Devon’s proportionate share of earnings, losses and distributions. Investments accounted for using the equity method and cost method are reported as a component of other long-term assets.

As discussed more fully in Note 2, Devon completed a business combination in 2014 whereby Devon controls both EnLink and the General Partner. Devon controls both the General Partner’s and EnLink’s operations; therefore, the General Partner’s and EnLink’s accounts are included in Devon’s accompanying consolidated financial statements subsequent to the completion of the transaction. The portions of the General Partner’s and EnLink’s net earnings and stockholders’ equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated comprehensive statements of earnings and consolidated balance sheets.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include the following:

 

proved reserves and related present value of future net revenues;

 

the carrying value of oil and gas properties, midstream assets and product and equipment inventories;

 

derivative financial instruments;

 

the fair value of reporting units and related assessment of goodwill for impairment;

 

the fair value of intangible assets other than goodwill;

 

income taxes;

 

asset retirement obligations;

 

obligations related to employee pension and postretirement benefits;

 

legal and environmental risks and exposures; and

 

general credit risk associated with receivables and other assets.

Revenue Recognition

Oil, gas and NGL sales are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, title has transferred and collectability of the revenue is probable. Delivery occurs and title typically is transferred when production has been delivered to a pipeline, railcar or truck. Cash received relating to future production is deferred and recognized when all revenue recognition criteria are met. Taxes assessed by governmental authorities on oil, gas and NGL sales are presented separately from such revenues in the accompanying consolidated comprehensive statements of earnings.

Marketing and midstream revenues are recorded at the time products are sold or services are provided to third parties at a fixed or determinable price, delivery or performance has occurred, title has transferred and collectability of the revenue is probable. Revenues and expenses attributable to oil, gas and NGL purchases, transportation and processing contracts are reported on a gross basis when Devon takes title to the products and has risks and rewards of ownership.

During 2016, 2015 and 2014, no purchaser accounted for more than 10% of Devon’s consolidated sales revenue.

Derivative Financial Instruments

Devon is exposed to certain risks relating to its ongoing business operations, including risks related to commodity prices, interest rates and Canadian to U.S. dollar exchange rates. As discussed more fully below, Devon uses derivative instruments primarily to manage commodity price risk, interest rate risk and foreign exchange risk. Devon does not intend to issue or hold derivative financial instruments for speculative trading purposes.

Devon 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 instruments are used to manage the inherent uncertainty of future revenues resulting from commodity price volatility. Devon’s derivative financial instruments typically include financial price swaps, basis swaps, costless price collars and call options. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional index prices and pays a variable differential on the same two index prices to the contract counterparty. The price collars set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty to the collars. The call options give counterparties the right to purchase production at a predetermined price.

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 December 31, 2016, Devon did not have any open foreign exchange contracts.

All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheet. Changes in the fair value of these derivative financial instruments are recorded in earnings unless specific hedge accounting criteria are met. For derivative financial instruments held during the three-year period ended December 31, 2016, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. Cash settlements with counterparties on Devon’s derivative financial instruments are also recorded in earnings. Cash settlements that Devon is entitled to are accrued for in other current assets in the accompanying consolidated balance sheets. As of December 31, 2015, Devon accrued $236 million that it received in January 2016 related to cash settlements.

By using derivative financial instruments to hedge exposures to changes in commodity prices, interest rates and foreign currency rates, 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 require cash collateral to be posted if either its or the counterparty’s credit rating falls below certain credit rating levels. As of December 31, 2016, Devon held no collateral from counterparties. 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. As a result of ratings downgrades for Devon during 2016, we were required to post $17 million of cash collateral under certain of our derivative contracts. The collateral is reported in other current assets in the accompanying December 31, 2016 consolidated balance sheet. In January 2017, this collateral was deemed to be no longer required and was returned to Devon. As of the date of this report, Devon has no cash collateral held by its counterparties.

General and Administrative Expenses

G&A is reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Devon and net of amounts capitalized pursuant to the full cost method of accounting.

Share-Based Compensation

Independent of EnLink, Devon grants share-based awards to members of its Board of Directors and select employees. EnLink and the General Partner also grant share-based awards to members of its Board of Directors and select employees. All such awards are measured at fair value on the date of grant and are generally recognized as a component of G&A in the accompanying consolidated comprehensive statements of earnings over the applicable requisite service periods. As a result of Devon’s restructuring activity discussed in Note 6, certain share-based awards were accelerated and recognized as a component of restructuring costs in the accompanying consolidated comprehensive statements of earnings.

Generally, Devon uses new shares from approved incentive programs to grant share-based awards and to issue shares upon stock option exercises. Shares repurchased under approved programs are available to be issued as part of Devon’s share-based awards. However, Devon has historically canceled these shares upon repurchase.

Income Taxes

Devon is subject to current income taxes assessed by the federal and various state jurisdictions in the U.S. and by other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. If the future utilization of some portion of the deferred tax assets is determined to be unlikely, a valuation allowance is provided to reduce the recorded tax benefits from such assets. Devon periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence, such as cumulative losses in recent years. See Note 7 for further discussion.

Devon does not recognize U.S. deferred income taxes on the unremitted earnings of its foreign subsidiaries that are deemed to be indefinitely reinvested. When such earnings are no longer deemed indefinitely reinvested, Devon recognizes the appropriate deferred, or even current, income tax liabilities.

Devon recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in other current liabilities. Interest and penalties related to unrecognized tax benefits are included in current income tax expense.

Devon estimates its annual effective income tax rate in recording its 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 period in which they occur.

Net Earnings (Loss) Per Share Attributable to Devon

Devon’s basic earnings per share amounts have been computed based on the average number of shares of common stock outstanding for the period. Basic earnings per share includes the effect of participating securities, which primarily consist of Devon’s outstanding restricted stock awards, as well as performance-based restricted stock awards that have met the requisite performance targets. Diluted earnings per share is calculated using the treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities. Such securities primarily consist of outstanding stock options.

Cash and Cash Equivalents

Devon considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents.

Accounts Receivable

Devon’s accounts receivable balance primarily consists of oil and gas sales receivables, marketing and midstream revenue receivables and joint interest receivables for which Devon does not require collateral security. Devon has established an allowance for bad debts equal to the estimable portions of accounts receivable for which failure to collect is considered probable. When a portion of the receivable is deemed uncollectible, the write-off is made against the allowance.

Property and Equipment

Devon follows the full cost method of accounting for its oil and gas properties. Accordingly, all costs incidental to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Internal costs incurred that are directly identified with acquisition, exploration and development activities undertaken by Devon for its own account, and that are not related to production, general corporate overhead or similar activities, are also capitalized. Interest costs incurred and attributable to unproved oil and gas properties under current evaluation and major development projects of oil and gas properties are also capitalized. All costs related to production activities, including workover costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred.

Capitalized costs are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six Mcf of gas to one Bbl of oil. Depletion is calculated using the capitalized costs, including estimated asset retirement costs, plus the estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Devon assesses its unproved properties for impairment quarterly. Significant unproved properties are assessed individually. Costs of insignificant unproved properties are transferred into the depletion calculation over their respective holding periods generally ranging from three to four years.

Sales or dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs with no gain or loss recognized. However, if a disposition or series of dispositions occurring in a quarterly reporting period significantly alters the relationship between capitalized costs and proved reserves in a particular country, a gain or loss is recognized. As discussed more fully in Note 2, the 2014 and 2016 divestitures of certain Canadian and U.S. non-core upstream assets significantly altered such relationship, and Devon recognized gains on these transactions. These gains are classified as asset dispositions and other in the accompanying consolidated statements of earnings. Furthermore, upon recognizing the gain on the 2016 divestitures and to be more consistent with industry practice, Devon began presenting gains on asset sales in the total revenues and other section of the accompanying consolidated statements of earnings, and has reclassified the 2014 gain on asset sales of $1.1 billion from operating expenses to total revenues and other to reflect consistent financial statement presentation.

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. The estimated future net revenues exclude future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties.

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. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including derivative contracts in place that qualify for hedge accounting treatment. None of Devon’s derivative contracts held during the three-year period ended December 31, 2016 qualified for hedge accounting treatment.

Any excess of the net book value, less related deferred taxes, over the ceiling is written off as an expense. An expense recorded in one period may not be reversed in a subsequent period even though higher commodity prices may have increased the ceiling applicable to the subsequent period.

Costs for midstream assets that are in use are depreciated over the assets’ estimated useful lives, using either the unit-of-production or straight-line method. Depreciation and amortization of other property and equipment, including corporate and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to 60 years. Interest costs incurred and attributable to major midstream and corporate construction projects are also capitalized.

Devon recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites and midstream pipelines and processing plants when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. Devon’s asset retirement obligations include estimated environmental remediation costs which arise from normal operations and are associated with the retirement of such long-lived assets. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.

Goodwill

Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of goodwill may not be recoverable. Such test includes an assessment of qualitative and quantitative factors. The impairment test requires allocating goodwill and all other assets and liabilities to assigned reporting units. The fair value of each reporting unit is estimated and compared to the net book value of the reporting unit. If the estimated fair value of the reporting unit is less than the net book value, including goodwill, then the goodwill is written down to the implied fair value of the goodwill through a charge to expense. Because quoted market prices are not available for Devon’s reporting units, the fair values of the reporting units are estimated based upon several valuation analyses, including comparable companies, comparable transactions and premiums paid.

Devon and EnLink performed annual impairment tests of goodwill in the fourth quarters of 2016, 2015 and 2014. No impairment write-down was required as a result of the annual tests in 2016; however, sustained weakness in the overall energy sector driven by low commodity prices, together with a decline in the EnLink unit price, caused a change in circumstances warranting an interim impairment test and write-down for certain of EnLink’s reporting units in the first quarter of 2016. Write-downs were also required in 2015 for certain EnLink reporting units and in 2014 for Devon’s Canadian reporting unit based on interim and annual impairment tests. See Note 12 for further discussion.

Intangible Assets

Unamortized capitalized intangible assets, consisting of EnLink customer relationships, are presented in other long-term assets in the accompanying consolidated balance sheets. These assets are amortized on a straight-line basis over the expected periods of benefits, which range from 10-20 years. During 2016 and 2015, EnLink’s customer relationships were also evaluated for impairment, and in 2015, a portion of these intangible assets was considered impaired. See Note 12 for further discussion.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities for environmental remediation or restoration claims resulting from improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with Devon’s accounting policy for property and equipment.

Fair Value Measurements

Certain of Devon’s assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price.” Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels:

 

Level 1 – Inputs consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. When available, Devon measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

 

Level 2 – Inputs consist of quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active.

 

Level 3 – Inputs are not observable from objective sources and have the lowest priority. The most common Level 3 fair value measurement is an internally developed cash flow model.

Foreign Currency Translation Adjustments

The U.S. dollar is the functional currency for Devon’s consolidated operations except its Canadian subsidiaries, which use the Canadian dollar as the functional currency. Assets and liabilities of the Canadian subsidiaries are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenues, expenses and cash flow are translated using an average exchange rate during the reporting period. Translation adjustments have no effect on net income and are included in accumulated other comprehensive earnings in stockholders’ equity.

Noncontrolling Interests

Noncontrolling interests represent third-party ownership in the net assets of Devon’s consolidated subsidiaries and are presented as a component of equity. Changes in Devon’s ownership interests in subsidiaries that do not result in deconsolidation are recognized in equity.

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. Devon early adopted this ASU as of September 30, 2016 using a retrospective transition method. As a result of the adoption, Devon has classified $265 million of debt retirement payments as cash flows from financing activities in the accompanying 2016 consolidated statement of cash flows and has reclassified $40 million of debt retirement payments previously classified as cash flows from operating activities to cash flows from financing activities in the accompanying 2014 consolidated statement of cash flows.

The FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Its objective is to provide guidance about management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern. Certain disclosures are required should substantial doubt exist. This evaluation is performed each annual and interim reporting period to assess conditions or events within one year after the date that the financial statements are issued. This ASU was effective for Devon beginning December 31, 2016; however, no additional disclosures as contemplated by this ASU were warranted.

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. 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. Based on current evaluations to-date, Devon 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 is continuing to evaluate the disclosure requirements of this ASU and has begun transitioning to the implementation phase of the adoption. Devon does not plan on early adopting this 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. 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.

 

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, and associated income taxes, statutory withholding and forfeitures. Classification of these aspects on the statement of cash flows is also addressed. Devon adopted this ASU as of January 1, 2017. For recording periods following adoption, Devon will make certain income tax presentation changes, most notably prospectively presenting excess tax benefits as income tax expense in the consolidated comprehensive statements of earnings and as operating cash flows in the consolidated statements of cash flows. While Devon does not expect that these changes will materially impact its consolidated financial statements and related disclosures, the adoption of this ASU could result in increased volatility in income tax expense and net earnings in Devon’s financial statements.

 

The FASB issued ASU No. 2016-13, Credit Losses, Measurement of Credit Losses on Financial Instruments. This ASU changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s incurred loss approach with an expected loss model for instruments measured at amortized cost. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This ASU is effective for Devon beginning January 1, 2020, with early adoption permitted. Devon is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

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 and $659 million of equity. The allocation of the purchase price at December 31, 2016 was approximately $1.3 billion to unproved properties and approximately $200 million to proved properties.

On December 17, 2015, Devon acquired approximately 253,000 net acres (unaudited) and assets in the Powder River Basin for approximately $499 million. Devon funded the acquisition with $300 million of cash and $199 million of equity. The allocation of the purchase price was $393 million to unproved properties and $106 million to proved properties and gathering systems.

On February 28, 2014, Devon acquired approximately 82,000 net acres (unaudited) and assets located in DeWitt and Lavaca counties in south Texas from GeoSouthern for approximately $6.0 billion. Devon funded the acquisition with cash on hand and debt financing. The allocation of the purchase price was approximately $5.0 billion to proved properties and approximately $1.0 billion to unproved properties.

Devon Asset Divestitures

During 2016, Devon divested certain non-core upstream assets in the U.S. and its 50% interest in the Access Pipeline in Canada. Proceeds from the transactions have been utilized primarily for debt repayment and to support future capital investment in Devon’s core resource plays.

 

Upstream Assets

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.

Absent gain recognition, the divestiture transactions that closed in the third quarter of 2016 would have significantly altered the costs and reserves relationship of Devon’s U.S cost center. 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

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. Devon is committed to use less than 90% of the potential pipeline capacity. In addition, Devon is entitled to an incremental payment of approximately $150 million Canadian dollars following sanctioning and committing to the requisite volume increase in respect of a new thermal-oil project on Devon’s Pike lease in Alberta, with such incremental payment being received prior to tolls being payable on such volumes.

Prior Year Divestitures

During 2014, Devon divested certain upstream properties located throughout Canada and the U.S. as part of its asset portfolio transformation for approximately $5 billion. A gain of $1.1 billion was recognized with the sale of the Canadian conventional assets. This gain is included as a separate item in the accompanying consolidated comprehensive statements of earnings. Devon repatriated the Canadian asset proceeds to the U.S. Between collecting the divestiture proceeds and repatriating the funds to the U.S., Devon recognized an $84 million foreign currency exchange loss and a $29 million foreign exchange currency derivative loss. These losses are included in other nonoperating items in the accompanying consolidated comprehensive statements of earnings. The proceeds were used to repay debt.

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. The first installment payment of $250 million was paid in January 2017 and was funded using divestiture proceeds, proceeds from equity issuances and borrowings under EnLink’s credit facility. The allocation of the purchase price at December 31, 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 December 31, 2016, EnLink contributed approximately $251 million of existing non-monetary assets and cash to the joint venture and had committed an additional $285 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 $144 million, and granted EnLink call rights beginning in 2021 to acquire increasing portions of the joint venture partner’s interest.

On November 9, 2016, EnLink entered into a gathering and compression joint venture with a commitment of approximately $40 million to expand its midstream assets in the STACK. The joint venture is initially owned 30% by EnLink and 70% by the joint venture partner. As of December 31, 2016, EnLink contributed approximately $29 million in cash for new infrastructure build. After the initial capital commitment, EnLink and the joint venture partner will be responsible for their proportionate share of capital expenses.

The following table presents a summary of EnLink’s acquisition activity for 2015.

 

 

 

 

 

Purchase Price

(Millions)

 

 

Allocation

(Millions)

 

Date

 

Acquiree

 

Cash

 

 

EnLink

Units

 

 

PP&E

 

 

Goodwill

 

 

Intangibles

 

 

Other

 

January 2015

 

LPC

 

$

108

 

 

 

 

 

$

30

 

 

$

30

 

 

$

43

 

 

$

5

 

March 2015

 

Coronado

 

$

240

 

 

$

360

 

 

$

302

 

 

$

18

 

 

$

281

 

 

$

(1

)

October 2015

 

Matador

 

$

141

 

 

 

 

 

$

36

 

 

$

11

 

 

$

99

 

 

$

(5)

 

EnLink Asset Divestitures and Dropdowns

In December 2016, EnLink entered into definitive agreements to divest approximately $278 million of certain non-core midstream assets. Certain of these transactions are expected to close during the first quarter of 2017. As of December 31, 2016, these assets were classified as held for sale.

In February 2015, EnLink acquired a 25% equity interest in EMH from the General Partner in exchange for units valued at approximately $925 million. In May 2015, EnLink acquired the remaining 25% equity interest in EMH from the General Partner in exchange for units valued at approximately $900 million.

In April 2015, EnLink acquired VEX from Devon for approximately $176 million in cash and equity. EnLink also assumed approximately $35 million in certain future construction costs to expand the system to full capacity. Because Devon controls EnLink and the General Partner, the acquisition of VEX by EnLink from Devon was accounted for as a transfer of net assets between entities under common control.

Formation of EnLink and the General Partner

On March 7, 2014, Devon and Crosstex completed a transaction to combine substantially all of Devon’s U.S. midstream assets with Crosstex’s assets to form a midstream business that consists of the General Partner and EnLink, which are both publicly traded.

In exchange for a controlling interest in both EnLink and the General Partner, Devon contributed its equity interest in a newly formed Devon subsidiary, EMH, and $100 million in cash. EMH owned midstream assets in the Barnett Shale in north Texas and the Cana- and Arkoma-Woodford Shales in Oklahoma, as well as an economic interest in Gulf Coast Fractionators in Mont Belvieu, Texas.

This business combination was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, EMH was the accounting acquirer because its parent company, Devon, obtained control of EnLink and the General Partner as a result of the business combination. Consequently, EMH’s assets and liabilities retained their carrying values. Additionally, the Crosstex assets acquired and liabilities assumed by the General Partner and EnLink in the business combination, as well as the General Partner’s noncontrolling interest in EnLink, were recorded at their fair values which were measured as of the acquisition date, March 7, 2014. The excess of the purchase price over the estimated fair values of Crosstex’s net assets acquired was recorded as goodwill.

The following table summarizes the purchase price (millions, except unit price).

 

Crosstex Energy, Inc. outstanding common shares:

 

 

 

 

 

Held by public shareholders

 

 

48.0

 

 

Restricted shares

 

 

0.4

 

 

Total subject to conversion

 

 

48.4

 

 

Exchange ratio

 

 

1.0

 

x

Converted shares

 

 

48.4

 

 

Crosstex Energy, Inc. common share price (1)

 

$

37.60

 

 

Crosstex Energy, Inc. consideration

 

$

1,823

 

 

Fair value of noncontrolling interest in E2 (2)

 

 

18

 

 

Total Crosstex Energy, Inc. consideration and

   fair value of noncontrolling interests

 

$

1,841

 

 

Crosstex Energy, LP outstanding units:

 

 

 

 

 

Common units held by public unitholders

 

 

75.1

 

 

Preferred units held by third party (3)

 

 

17.1

 

 

Restricted units

 

 

0.4

 

 

Total

 

 

92.6

 

 

Crosstex Energy, LP common unit price (4)

 

$

30.51

 

 

Crosstex Energy, LP common units value

 

$

2,825

 

 

Crosstex Energy, LP outstanding unit options value

 

 

4

 

 

Total fair value of noncontrolling interests

   in the Crosstex Energy, LP (4)

 

 

2,829

 

 

Total consideration and fair value of

   noncontrolling interests

 

$

4,670

 

 

 

(1)

The final purchase price is based on the fair value of Crosstex Energy, Inc.’s common shares as of the closing date, March 7, 2014.

(2)

Represents the value of noncontrolling interests related to the General Partner’s equity investment in E2.

(3)

Crosstex Energy, LP converted the preferred units to common units in February 2014.

(4)

The final purchase price is based on the fair value of Crosstex Energy, LP’s common units as of the closing date, March 7, 2014.

The allocation of the purchase price is as follows (millions):

 

Assets acquired:

 

 

 

 

Current assets

 

$

437

 

Property, plant and equipment

 

 

2,438

 

Intangible assets

 

 

569

 

Equity investment

 

 

222

 

Goodwill (1)

 

 

3,283

 

Other long-term assets

 

 

1

 

Liabilities assumed:

 

 

 

 

Current liabilities

 

 

(515

)

Long-term debt

 

 

(1,454

)

Deferred income taxes

 

 

(210

)

Other long-term liabilities

 

 

(101

)

Total purchase price

 

$

4,670

 

 

(1)

Goodwill is the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized and is not deductible for tax purposes.

Pro Forma Financial Information

The following unaudited pro forma financial information has been prepared assuming both the EnLink formation and the GeoSouthern acquisition occurred on January 1, 2014. The pro forma information is not intended to reflect the actual results of operations that would have occurred if the business combination and acquisition had been completed at the dates indicated. In addition, they do not project Devon’s results of operations for any future period.  

 

 

 

Year Ended December 31, 2014

 

 

 

(Millions)

 

Total operating revenues

 

$

20,213

 

Net earnings

 

$

1,716

 

Noncontrolling interests

 

$

97

 

Net earnings attributable to Devon

 

$

1,619

 

Net earnings per common share attributable to Devon

 

$

3.94

 

 

 

Derivative Financial Instruments
Derivative Financial Instruments

3.

Derivative Financial Instruments

Commodity Derivatives

As of December 31, 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

 

Period

 

Volume

(Bbls/d)

 

 

Weighted

Average

Price ($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Floor

Price ($/Bbl)

 

 

Weighted

Average

Ceiling Price

($/Bbl)

 

Q1-Q4 2017

 

 

72,527

 

 

$

54.32

 

 

 

53,245

 

 

$

45.16

 

 

$

57.97

 

Q1-Q4 2018

 

 

2,600

 

 

$

53.38

 

 

 

6,189

 

 

$

46.97

 

 

$

56.97

 

 

 

 

Oil Basis Swaps

 

Period

 

Index

 

Volume (Bbls/d)

 

 

Weighted Average

Differential to WTI

($/Bbl)

 

Q1-Q4 2017

 

Midland Sweet

 

 

10,000

 

 

$

(0.43

)

 

As of December 31, 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

 

Period

 

Volume (MMBtu/d)

 

 

Weighted Average Price ($/MMBtu)

 

 

Volume (MMBtu/d)

 

 

Weighted Average Floor Price ($/MMBtu)

 

 

Weighted Average

Ceiling Price ($/MMBtu)

 

Q1-Q4 2017

 

 

189,753

 

 

$

3.13

 

 

 

335,274

 

 

$

2.97

 

 

$

3.38

 

Q1-Q4 2018

 

 

29,705

 

 

$

3.17

 

 

 

19,110

 

 

$

3.20

 

 

$

3.50

 

 

 

 

Natural Gas Basis Swaps

 

Period

 

Index

 

Volume

(MMBtu/d)

 

 

Weighted Average

Differential to

Henry Hub

($/MMBtu)

 

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

 

Q1 2018

 

Panhandle Eastern Pipe Line

 

 

50,000

 

 

$

(0.29

)

 

As of December 31, 2016, EnLink had the following open derivative positions associated with gas processing and fractionation. EnLink’s NGL positions settle by purity product against the average of the prompt month OPIS Mont Belvieu, Texas index. EnLink’s natural gas positions settle against the Henry Hub Gas Daily index.

 

Period

 

Product

 

Volume (Total)

 

Weighted Average Price Paid

 

Weighted Average Price Received

Q1 2017-Q4 2017

 

Propane

 

 

434

 

MBbls

 

Index

 

$0.55/gal

Q1 2017-Q4 2017

 

Normal Butane

 

 

161

 

MBbls

 

Index

 

$0.70/gal

Q1 2017-Q4 2017

 

Natural Gas

 

 

21,685

 

MMBtu/d

 

Index

 

$3.14/MMbtu

 

Interest Rate Derivatives

As of December 31, 2016, 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.

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Commodity derivatives:

 

(Millions)

 

Oil, gas and NGL derivatives

 

$

(201

)

 

$

503

 

 

$

1,989

 

Marketing and midstream revenues

 

 

(13

)

 

 

9

 

 

 

22

 

Interest rate derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(19

)

 

 

(20

)

 

 

(1

)

Foreign currency derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(153

)

 

 

246

 

 

 

60

 

Net gains (losses) recognized

 

$

(386

)

 

$

738

 

 

$

2,070

 

 

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

 

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

(Millions)

 

Commodity derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

$

9

 

 

$

34

 

Other long-term assets

 

 

1

 

 

 

1

 

Interest rate derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

1

 

 

 

1

 

Other long-term assets

 

 

 

 

 

1

 

Foreign currency derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

8

 

Total derivative assets

 

$

11

 

 

$

45

 

 

 

 

 

 

 

 

 

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

$

187

 

 

$

14

 

Other long-term liabilities

 

 

16

 

 

 

4

 

Interest rate derivative liabilities:

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

41

 

 

 

22

 

Foreign currency derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

8

 

Total derivative liabilities

 

$

244

 

 

$

48

 

 

Share-Based Compensation
Share-Based Compensation

4.

Share-Based Compensation

In the second quarter of 2015, Devon’s stockholders approved the 2015 Long-Term Incentive Plan. The 2015 Plan replaces the 2009 Long-Term Incentive Plan, as amended. From the effective date of the 2015 Plan, no further awards may be made under the 2009 Plan, and awards previously granted will continue to be governed by the terms of the 2009 Plan. Subject to the terms of the 2015 Plan, awards may be made under the 2015 Plan for a total of 28 million shares of Devon common stock, plus the number of shares available for issuance under the 2009 Plan (including shares subject to outstanding awards under the 2009 Plan that are subsequently forfeited, canceled or expire). The 2015 Plan authorizes the Compensation Committee, which consists of independent, non-management members of Devon’s Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards or units, Canadian restricted stock units, performance awards or units and stock appreciation rights to eligible employees. The 2015 Plan also authorizes the grant of nonqualified stock options, restricted stock awards or units and stock appreciation rights to non-employee directors. To calculate the number of shares that may be granted in awards under the 2015 Plan, options and stock appreciation rights represent one share and other awards represent three shares.

Devon also has a stock option plan that was adopted in 2005 under which stock options were issued to certain employees. Options granted under this plan remain exercisable by the employees owning such options, but no new options or restricted stock awards will be granted under this plan.

The table below presents the effects of share-based compensation included in Devon’s accompanying consolidated comprehensive statements of earnings. Gross G&A in 2016, 2015 and 2014 includes $24 million, $31 million and $17 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. 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. In 2014, vesting of certain share-based awards was accelerated in conjunction with the divestiture of Devon’s Canadian conventional assets. Approximately $15 million of associated expense for these accelerated awards is included in restructuring and transaction costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Millions)

 

Gross G&A for share-based compensation

 

$

154

 

 

$

225

 

 

$

199

 

Share-based compensation expense capitalized pursuant to

   the full cost method of accounting for oil and gas properties

 

$

39

 

 

$

63

 

 

$

53

 

Related income tax benefit

 

$

4

 

 

$

45

 

 

$

42

 

 

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 plans.

 

 

 

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

 

 

4,390

 

 

$

19.91

 

 

 

330

 

 

$

19.22

 

 

 

1,388

 

 

 

 

$

10.41

 

Vested

 

 

(2,473

)

 

$

61.44

 

 

 

(179

)

 

$

59.10

 

 

 

(602

)

 

 

 

$

63.37

 

Forfeited

 

 

(248

)

 

$

44.38

 

 

 

 

 

$

 

 

 

(41

)

 

 

 

$

43.88

 

Unvested at 12/31/16

 

 

6,407

 

 

$

34.40

 

 

 

585

 

 

$

37.60

 

 

 

2,604

 

 

(1

)

$

46.66

 

 

(1)

A maximum of 5.2 million common shares could be awarded based upon Devon’s final TSR ranking.

The following table presents the aggregate fair value of awards and units that vested during the indicated period.

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Millions)

 

Restricted Stock Awards and Units

 

$

73

 

 

$

101

 

 

$

112

 

Performance-Based Restricted Stock Awards

 

$

5

 

 

$

8

 

 

$

10

 

Performance Share Units

 

$

13

 

 

$

22

 

 

$

 

 

The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of December 31, 2016.

 

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

 

 

Restricted Stock

 

 

Restricted Stock

 

 

Performance

 

 

 

Awards and Units

 

 

Awards

 

 

Share Units

 

Unrecognized compensation cost (millions)

 

$

131

 

 

$

5

 

 

$

21

 

Weighted average period for recognition (years)

 

 

2.3

 

 

 

2.2

 

 

 

1.6

 

 

Restricted Stock Awards and Units

Restricted stock awards and units are subject to the terms, conditions, restrictions and limitations, if any, that the Compensation Committee deems appropriate, including restrictions on continued employment. Generally, the service requirement for vesting ranges from one to four years. During the vesting period, recipients of restricted stock awards receive dividends that are not subject to restrictions or other limitations. Devon estimates the fair values of restricted stock awards and units as the closing price of Devon’s common stock on the grant date of the award or unit, which is expensed over the applicable vesting period.

Performance-Based Restricted Stock Awards

Performance-based restricted stock awards are granted to certain members of Devon’s senior management. Vesting of the awards is dependent on Devon meeting certain internal performance targets and the recipient meeting certain service requirements. Generally, the service requirement for vesting ranges from one to four years. In order for awards to vest, the performance target must be met in the first year, and if met, recipients are entitled to dividends on the awards over the remaining service vesting period. If the performance target and service period requirements are not met, the award does not vest. Devon estimates the fair values of the awards as the closing price of Devon’s common stock on the grant date of the award, which is expensed over the applicable vesting period.

Performance Share Units

Performance share units are granted to certain members of Devon’s management and senior employees. Each unit that vests entitles the recipient to one share of Devon common stock. The vesting of these units is based on comparing Devon’s TSR to the TSR of a predetermined group of fourteen peer companies over the specified three-year performance period. The vesting of units may be between zero and 200% of the units granted depending on Devon’s TSR as compared to the peer group on the vesting date.

At the end of the vesting period, recipients receive dividend equivalents with respect to the number of units vested. The fair value of each performance share unit is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all grants made under the plan: (i) a risk-free interest rate based on U.S. Treasury rates as of the grant date; (ii) a volatility assumption based on the historical realized price volatility of Devon and the designated peer group; and (iii) an estimated ranking of Devon among the designated peer group. The fair value of the unit on the date of grant is expensed over the applicable vesting period. The following table presents the assumptions related to performance share units granted.

 

 

 

2016

 

 

2015

 

 

2014

 

Grant-date fair value

 

$

9.24

 

 

 

$

10.61

 

 

$

81.99

 

 

 

$

85.05

 

 

$

70.18

 

 

 

$

81.05

 

Risk-free interest rate

 

0.94%

 

 

1.06%

 

 

0.54%

 

Volatility factor

 

37.7%

 

 

26.2%

 

 

28.8%

 

Contractual term (years)

 

2.83

 

 

2.89

 

 

2.89

 

 

Stock Options

In accordance with Devon’s incentive plans, the exercise price of stock options granted may not be less than the market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which may not exceed eight years from the date of grant. The recipient must pay the exercise price in cash or in common stock, or a combination thereof, at the time that the option is exercised. Generally, the service requirement for vesting ranges from one to four years. The fair value of stock options on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires Devon to make several assumptions, including a volatility factor, dividend yield rate, risk-free interest rate and expected term. No stock options were granted in 2016, 2015 and 2014. The following table presents a summary of Devon’s outstanding stock options.

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Options

 

 

Exercise Price

 

 

Remaining Term

 

 

Intrinsic Value

 

 

 

(Thousands)

 

 

 

 

 

 

(Years)

 

 

(Millions)

 

Outstanding at December 31, 2015

 

 

3,448

 

 

$

67.98

 

 

 

 

 

 

 

 

 

Expired

 

 

(916

)

 

$

67.75

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2016

 

 

2,532

 

 

$

68.06

 

 

 

1.87

 

 

$

 

Vested and expected to vest at December 31, 2016

 

 

2,532

 

 

$

68.06

 

 

 

1.87

 

 

$

 

Exercisable at December 31, 2016

 

 

2,532

 

 

$

68.06

 

 

 

1.87

 

 

$

 

 

The aggregate intrinsic value of stock options that were exercised during 2015 and 2014 was $0.2 million and $9 million, respectively. As of December 31, 2016, Devon had no unrecognized compensation cost related to unvested stock options.

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 December 31, 2016.

 

 

 

General Partner

 

 

EnLink

 

 

 

Restricted

 

 

Performance

 

 

Restricted

 

 

Performance

 

 

 

Incentive Units

 

 

Units

 

 

Incentive Units

 

 

Units

 

Unrecognized compensation cost (millions)

 

$

14

 

 

$

4

 

 

$

14

 

 

$

4

 

Weighted average period for recognition (years)

 

1.6

 

 

 

1.8

 

 

1.7

 

 

 

1.8

 

 

Asset Impairments
Asset Impairments

5.

Asset Impairments

The following table presents the asset impairments recognized in 2016, 2015 and 2014.

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015