DEVON ENERGY CORP/DE, 10-Q filed on 8/2/2017
Quarterly Report
Document And Entity Information
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jul. 19, 2017
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2017 
 
Amendment Flag
false 
 
Trading Symbol
DVN 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
Entity Central Index Key
0001090012 
 
Current Fiscal Year End Date
--12-31 
 
Document Fiscal Year Focus
2017 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q2 
 
Entity Common Stock, Shares Outstanding
 
525.6 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Income Statement [Abstract]
 
 
 
 
Oil, gas and NGL sales
$ 1,206 
$ 1,085 
$ 2,515 
$ 1,910 
Oil, gas and NGL derivatives
126 
(142)
358 
(109)
Marketing and midstream revenues
1,927 
1,545 
3,937 
2,813 
Asset dispositions and other
14 
 
10 
 
Total revenues and other
3,273 
2,488 
6,820 
4,614 
Lease operating expenses
399 
416 
785 
860 
Marketing and midstream operating expenses
1,703 
1,338 
3,506 
2,404 
General and administrative expenses
164 
147 
345 
341 
Production and property taxes
71 
75 
156 
153 
Depreciation, depletion and amortization
381 
484 
762 
1,026 
Asset impairments
 
1,497 
4,532 
Restructuring and transaction costs
 
24 
 
271 
Other operating items
13 
11 
24 
Total operating expenses
2,731 
3,985 
5,572 
9,611 
Operating income (loss)
542 
(1,497)
1,248 
(4,997)
Net financing costs
116 
163 
243 
327 
Other nonoperating items
(32)
85 
(51)
106 
Earnings (loss) before income taxes
458 
(1,745)
1,056 
(5,430)
Income tax expense (benefit)
(182)
26 
(399)
Net earnings (loss)
451 
(1,563)
1,030 
(5,031)
Net earnings (loss) attributable to noncontrolling interests
26 
40 
(405)
Net earnings (loss) attributable to Devon
425 
(1,570)
990 
(4,626)
Net earnings (loss) per share attributable to Devon:
 
 
 
 
Basic
$ 0.81 
$ (3.04)
$ 1.88 
$ (9.33)
Diluted
$ 0.80 
$ (3.04)
$ 1.87 
$ (9.33)
Comprehensive earnings (loss):
 
 
 
 
Net earnings (loss)
451 
(1,563)
1,030 
(5,031)
Other comprehensive earnings, net of tax:
 
 
 
 
Foreign currency translation
 
26 
Pension and postretirement plans
Other
(2)
 
(2)
 
Other comprehensive earnings, net of tax
35 
Comprehensive earnings (loss)
455 
(1,555)
1,037 
(4,996)
Comprehensive earnings (loss) attributable to noncontrolling interests
26 
40 
(405)
Comprehensive earnings (loss) attributable to Devon
$ 429 
$ (1,562)
$ 997 
$ (4,591)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Cash flows from operating activities:
 
 
 
 
Net earnings (loss)
$ 451 
$ (1,563)
$ 1,030 
$ (5,031)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
 
 
Depreciation, depletion and amortization
381 
484 
762 
1,026 
Asset impairments
 
1,497 
4,532 
Gains on asset sales
(11)
 
(7)
 
Deferred income tax benefit
(5)
(179)
(6)
(386)
Commodity derivatives
(126)
142 
(358)
109 
Cash settlements on commodity derivatives
11 
(16)
19 
Other derivatives and financial instruments
16 
81 
308 
Cash settlements on other derivatives and financial instruments
(28)
 
(151)
Asset retirement obligation accretion
14 
20 
31 
39 
Share-based compensation
43 
32 
89 
140 
Other
(49)
36 
(49)
(158)
Net change in working capital
72 
(143)
87 
71 
Change in long-term other assets
(40)
10 
13 
Change in long-term other liabilities
22 
22 
(5)
Net cash from operating activities
810 
345 
1,644 
510 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
(721)
(489)
(1,468)
(1,238)
Acquisitions of property, equipment and businesses
(13)
(11)
(33)
(1,638)
Proceeds from sale of investment
 
 
190 
 
Divestitures of property and equipment
76 
191 
114 
209 
Other
(1)
(26)
(4)
(27)
Net cash from investing activities
(659)
(335)
(1,201)
(2,694)
Cash flows from financing activities:
 
 
 
 
Borrowings of long-term debt, net of issuance costs
982 
450 
1,795 
846 
Repayments of long-term debt
(798)
(290)
(1,385)
(549)
Payment of installment payable
 
 
(250)
 
Net short-term debt repayments
 
 
 
(626)
Issuance of common stock
 
 
 
1,469 
Issuance of subsidiary units
17 
49 
72 
776 
Dividends paid on common stock
(33)
(33)
(65)
(158)
Contributions from noncontrolling interests
29 
Distributions to noncontrolling interests
(82)
(74)
(163)
(147)
Shares traded for tax withholdings
(3)
(10)
(64)
(28)
Other
 
(5)
(2)
(6)
Net cash from financing activities
91 
90 
(33)
1,583 
Effect of exchange rate changes on cash
(12)
 
14 
Net change in cash and cash equivalents
250 
88 
410 
(587)
Cash and cash equivalents at beginning of period
2,119 
1,635 
1,959 
2,310 
Cash and cash equivalents at end of period
$ 2,369 
$ 1,723 
$ 2,369 
$ 1,723 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 2,369 
$ 1,959 
Accounts receivable
1,248 
1,356 
Assets held for sale
 
193 
Other current assets
469 
264 
Total current assets
4,086 
3,772 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
77,326 
75,648 
Not subject to amortization
3,048 
3,437 
Total oil and gas
80,374 
79,085 
Midstream and other
10,908 
10,455 
Total property and equipment, at cost
91,282 
89,540 
Less accumulated depreciation, depletion and amortization
(74,460)
(73,350)
Property and equipment, net
16,822 
16,190 
Goodwill
3,964 
3,964 
Other long-term assets
1,942 
1,987 
Total assets
26,814 
25,913 
Current liabilities:
 
 
Accounts payable
692 
642 
Revenues and royalties payable
949 
908 
Other current liabilities
891 
1,066 
Total current liabilities
2,532 
2,616 
Long-term debt
10,558 
10,154 
Asset retirement obligations
1,078 
1,226 
Other long-term liabilities
657 
894 
Deferred income taxes
659 
648 
Stockholders’ equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 526 million and 523 million shares in 2017 and 2016, respectively
53 
52 
Additional paid-in capital
7,211 
7,237 
Accumulated deficit
(656)
(1,646)
Accumulated other comprehensive earnings
291 
284 
Total stockholders’ equity attributable to Devon
6,899 
5,927 
Noncontrolling interests
4,431 
4,448 
Total stockholders’ equity
11,330 
10,375 
Total liabilities and stockholders’ equity
$ 26,814 
$ 25,913 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Common stock, par value (in dollars per share)
$ 0.10 
$ 0.10 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
526,000,000 
523,000,000 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Noncontrolling Interests [Member]
Balance at Dec. 31, 2015
$ 10,989 
$ 42 
$ 4,996 
$ 1,781 
$ 230 
 
$ 3,940 
Balance, shares at Dec. 31, 2015
 
418 
 
 
 
 
 
Net earnings (loss)
(5,031)
 
 
(4,626)
 
 
(405)
Other comprehensive earnings, net of tax
35 
 
 
 
35 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(21)
 
 
 
 
(21)
 
Common stock retired
 
 
(21)
 
 
21 
 
Common stock dividends
(158)
 
(33)
(125)
 
 
 
Common stock issued
2,127 
10 
2,117 
 
 
 
 
Common stock issued, shares
 
103 
 
 
 
 
 
Share-based compensation
123 
 
123 
 
 
 
 
Subsidiary equity transactions
1,002 
 
318 
 
 
 
684 
Distributions to noncontrolling interests
(147)
 
 
 
 
 
(147)
Balance at Jun. 30, 2016
8,919 
52 
7,500 
(2,970)
265 
 
4,072 
Balance, shares at Jun. 30, 2016
 
524 
 
 
 
 
 
Balance at Dec. 31, 2016
10,375 
52 
7,237 
(1,646)
284 
 
4,448 
Balance, shares at Dec. 31, 2016
 
523 
 
 
 
 
 
Net earnings (loss)
1,030 
 
 
990 
 
 
40 
Other comprehensive earnings, net of tax
 
 
 
 
 
Restricted stock grants, net of cancellations, value
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(41)
 
 
 
 
(41)
 
Common stock retired
 
 
(41)
 
 
41 
 
Common stock dividends
(65)
 
(65)
 
 
 
 
Share-based compensation
69 
 
69 
 
 
 
 
Share-based compensation, shares
 
 
 
 
 
 
Subsidiary equity transactions
117 
 
11 
 
 
 
106 
Distributions to noncontrolling interests
(163)
 
 
 
 
 
(163)
Balance at Jun. 30, 2017
$ 11,330 
$ 53 
$ 7,211 
$ (656)
$ 291 
 
$ 4,431 
Balance, shares at Jun. 30, 2017
 
526 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.Summary of Significant Accounting Policies

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

The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2017 and 2016 and Devon’s financial position as of June 30, 2017.

Recently Adopted Accounting Standards

In January 2017, Devon adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Its objective is to simplify several aspects of the accounting for share-based payments, including income taxes when awards vest or are settled, statutory withholding and forfeitures. As the result of adoption, Devon made certain income tax presentation changes, most notably prospectively presenting excess tax benefits and deficiencies in the consolidated comprehensive statements of earnings and as operating cash flows in the consolidated statements of cash flows. Devon also retrospectively applied the new cash flow statement guidance dictating the presentation of shares traded for tax-withholding purposes as a financing activity. The adoption of the new guidance did not materially impact the consolidated financial statements for the six months ended June 30, 2017 or previously reported financial information but could have a more material future impact.

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

Issued Accounting Standards Not Yet Adopted

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

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU will supersede the lease requirements in Topic 840, Leases. Its objective is to increase transparency and comparability among organizations. This ASU provides guidance requiring lessees to recognize most leases on their balance sheet. Lessor accounting does not significantly change, except for some changes made to align with new revenue recognition requirements. This ASU is effective for Devon beginning January 1, 2019 and will be applied using a modified retrospective transition method, which requires applying the new guidance to leases that exist or are entered into after the beginning of the earliest period in the financial statements. Early adoption is permitted, but Devon does not plan to early adopt. Devon has begun the process of evaluating contracts and gathering the necessary terms and data elements for purposes of determining the impact this ASU will have on its consolidated financial statements and related disclosures. Based on continuing research, Devon estimates at least 11,500 contracts and a large number of data elements must be gathered and reviewed to ensure proper accounting of these contracts once this ASU is effective. Recently, several companies, including certain upstream oil and gas companies, met with the FASB to discuss whether contracts for easements and rights-of-way are subject to the scope of ASU 2016-02 or other existing accounting standards. For Devon, these contracts represent a relatively small percentage of the aggregate value of contracts being evaluated but represent approximately 80% of the number of contracts. Therefore, this scoping decision could have a significant impact on the amount of effort required for Devon to adopt this ASU. Regardless, Devon anticipates the adoption of this standard will significantly impact its systems, processes and controls and is evaluating technology requirements and solutions needed to comply with the requirements of this ASU.

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

Acquisitions And Divestitures
Acquisitions and Divestitures

2.

Acquisitions and Divestitures

Devon Acquisitions

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

 

Devon Asset Divestitures

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

Subsequent to June 30, 2017, Devon reached an agreement to sell its non-core Eagle Ford assets in Lavaca County for $205 million, subject to certain adjustments. The transaction is expected to close in the second half of 2017. No gain or loss is expected to be recognized under the full cost method of accounting.

In June 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. Under full cost accounting rules, sales or dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of a gain or loss. No gain or loss was recognized on the sale of the Mississippian assets.

EnLink Acquisitions

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

EnLink Asset Divestitures

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

Derivative Financial Instruments
Derivative Financial Instruments

3.

Derivative Financial Instruments

Objectives and Strategies

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon and EnLink periodically enter into derivative financial instruments with respect to a portion of their oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps and costless price collars. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility and foreign exchange forward contracts to manage its exposure to fluctuations in the U.S. and Canadian dollar exchange rates. As of June 30, 2017, Devon did not have any open foreign exchange contracts.

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

Counterparty Credit Risk

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

As of June 30, 2017, Devon held $34 million of cash collateral, which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines and is reported in other current liabilities in the accompanying consolidated balance sheets. As of December 31, 2016, Devon held no collateral from counterparties.

Commodity Derivatives

As of June 30, 2017, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume

(Bbls/d)

 

 

Weighted

Average

Price ($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Floor

Price ($/Bbl)

 

 

Weighted

Average

Ceiling Price

($/Bbl)

 

Q3-Q4 2017

 

 

76,380

 

 

$

54.22

 

 

 

66,500

 

 

$

45.76

 

 

$

58.01

 

Q1-Q4 2018

 

 

11,592

 

 

$

52.15

 

 

 

17,921

 

 

$

46.77

 

 

$

56.77

 

 

 

 

Oil Basis Swaps

 

Period

 

Index

 

Volume (Bbls/d)

 

 

Weighted Average

Differential to WTI

($/Bbl)

 

Q3-Q4 2017

 

Midland Sweet

 

 

20,000

 

 

$

(0.41

)

Q3-Q4 2017

 

Western Canadian Select

 

 

81,745

 

 

$

(14.47

)

Q1-Q4 2018

 

Western Canadian Select

 

 

32,748

 

 

$

(15.29

)

 

As of June 30, 2017, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume (MMBtu/d)

 

 

Weighted Average Price ($/MMBtu)

 

 

Volume (MMBtu/d)

 

 

Weighted Average Floor Price ($/MMBtu)

 

 

Weighted Average

Ceiling Price ($/MMBtu)

 

Q3-Q4 2017

 

 

235,000

 

 

$

3.25

 

 

 

435,000

 

 

$

3.03

 

 

$

3.42

 

Q1-Q4 2018

 

 

115,107

 

 

$

3.13

 

 

 

66,433

 

 

$

3.19

 

 

$

3.52

 

 

 

 

Natural Gas Basis Swaps

 

Period

 

Index

 

Volume

(MMBtu/d)

 

 

Weighted Average

Differential to

Henry Hub

($/MMBtu)

 

Q3-Q4 2017

 

Panhandle Eastern Pipe Line

 

 

150,000

 

 

$

(0.34

)

Q3-Q4 2017

 

El Paso Natural Gas

 

 

80,000

 

 

$

(0.13

)

Q3-Q4 2017

 

Houston Ship Channel

 

 

35,000

 

 

$

0.06

 

Q3-Q4 2017

 

Transco Zone 4

 

 

205,000

 

 

$

0.03

 

Q1-Q4 2018

 

Panhandle Eastern Pipe Line

 

 

50,000

 

 

$

(0.29

)

 

As of June 30, 2017, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.

 

 

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Product

 

Volume (Bbls/d)

 

 

Weighted Average Price ($/Bbl)

 

 

Volume (Bbls/d)

 

 

Weighted Average Floor Price ($/Bbl)

 

 

Weighted Average Ceiling Price ($/Bbl)

 

Q3-Q4 2017

 

Propane

 

 

1,000

 

 

$

29.61

 

 

 

1,000

 

 

$

27.83

 

 

$

29.93

 

Interest Rate Derivatives

As of June 30, 2017, Devon had the following open interest rate derivative positions:

 

Notional

 

 

Rate Received

 

 

Rate Paid

 

 

Expiration

(Millions)

 

 

 

 

 

 

 

 

 

 

 

$

750

 

 

Three Month LIBOR

 

 

 

2.98%

 

 

December 2048 (1)

$

100

 

 

 

1.76%

 

 

Three Month LIBOR

 

 

January 2019

 

(1)

Mandatory settlement in December 2018.

 

Financial Statement Presentation

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

 

 

 

Three Months

Ended June 30,

 

 

Six Months

Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Commodity derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil, gas and NGL derivatives

 

$

126

 

 

$

(142

)

 

$

358

 

 

$

(109

)

Marketing and midstream revenues

 

 

4

 

 

 

(6

)

 

 

8

 

 

 

(6

)

Interest rate derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(20

)

 

 

(71

)

 

 

(15

)

 

 

(143

)

Foreign currency derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

 

 

 

(4

)

 

 

 

 

 

(159

)

Net gains (losses) recognized

 

$

110

 

 

$

(223

)

 

$

351

 

 

$

(417

)

 

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

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

(Millions)

 

Commodity derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

$

189

 

 

$

9

 

Other long-term assets

 

 

14

 

 

 

1

 

Interest rate derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

1

 

 

 

1

 

Other long-term assets

 

 

1

 

 

 

 

Total derivative assets

 

$

205

 

 

$

11

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

$

47

 

 

$

187

 

Other long-term liabilities

 

 

1

 

 

 

16

 

Interest rate derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

 

1

 

 

 

 

Other long-term liabilities

 

 

57

 

 

 

41

 

Total derivative liabilities

 

$

106

 

 

$

244

 

 

Share-Based Compensation
Share-Based Compensation

4.

Share-Based Compensation

In the second quarter of 2017, Devon’s stockholders approved the 2017 Plan. The 2017 Plan replaces the 2015 Plan. From the effective date of the 2017 Plan, no further awards may be made under the 2015 Plan, and awards previously granted will continue to be governed by the terms of the respective award documents. Subject to the terms of the 2017 Plan, awards may be made for a total of 33.5 million shares of Devon common stock, plus the number of shares available for issuance under the 2015 Plan (including shares subject to outstanding awards under the 2015 Plan that are transferred to the 2017 Plan in accordance with its terms). The 2017 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 units and stock appreciation rights to eligible employees. The 2017 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 2017 Plan, options and stock appreciation rights represent one share and other awards represent 2.3 shares.

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 six months of 2017 and 2016 includes $21 million and $12 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 six months ended June 30, 2016, approximately $67 million of associated expense for these accelerated awards is included in restructuring and transaction costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Gross G&A for share-based compensation

 

$

100

 

 

$

80

 

Share-based compensation expense capitalized pursuant to

   the full cost method of accounting for oil and gas properties

 

$

20

 

 

$

21

 

Related income tax benefit

 

$

2

 

 

$

2

 

 

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

 

 

 

Restricted Stock

 

 

Performance-Based

 

 

Performance

 

 

 

Awards and Units

 

 

Restricted Stock Awards

 

 

Share Units

 

 

 

Awards and

Units

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Awards

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Units

 

 

 

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

 

(Thousands, except fair value data)

 

Unvested at 12/31/16

 

 

6,407

 

 

$

34.40

 

 

 

585

 

 

$

37.60

 

 

 

2,604

 

 

 

 

 

$

46.66

 

Granted

 

 

2,683

 

 

$

44.90

 

 

 

223

 

 

$

44.85

 

 

 

1,010

 

 

 

 

 

$

52.58

 

Vested

 

 

(2,168

)

 

$

39.38

 

 

 

(225

)

 

$

41.04

 

 

 

(832

)

 

 

 

 

$

78.19

 

Forfeited

 

 

(149

)

 

$

35.91

 

 

 

 

 

$

 

 

 

(7

)

 

 

 

 

$

37.41

 

Unvested at 6/30/17

 

 

6,773

 

 

$

36.94

 

 

 

583

 

 

$

39.04

 

 

 

2,775

 

 

(1

)

 

$

41.22

 

 

(1)

A maximum of 5.5 million common shares could be awarded based upon Devon’s final TSR ranking relative to Devon’s peer group established under applicable award agreements.

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

 

 

 

2017

 

Grant-date fair value

 

$

51.05

 

 

 

$

53.12

 

Risk-free interest rate

 

1.50%

 

Volatility factor

 

45.8%

 

Contractual term (years)

 

2.89

 

 

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of June 30, 2017.

 

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

 

 

Restricted Stock

 

 

Restricted Stock

 

 

Performance

 

 

 

Awards and Units

 

 

Awards

 

 

Share Units

 

Unrecognized compensation cost (millions)

 

$

185

 

 

$

8

 

 

$

42

 

Weighted average period for recognition (years)

 

 

2.7

 

 

 

2.0

 

 

 

2.1

 

EnLink Share-Based Awards

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

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with the General Partner’s and EnLink’s unvested restricted incentive units and performance units as of June 30, 2017.

 

 

 

General Partner

 

 

EnLink

 

 

 

Restricted

 

 

Performance

 

 

Restricted

 

 

Performance

 

 

 

Incentive Units

 

 

Units

 

 

Incentive Units

 

 

Units

 

Unrecognized compensation cost (millions)

 

$

17

 

 

$

7

 

 

$

18

 

 

$

7

 

Weighted average period for recognition (years)

 

 

1.9

 

 

 

2.1

 

 

 

1.9

 

 

 

2.1

 

 

Asset Impairments
Asset Impairments

5.

Asset Impairments

Oil and Gas Impairments

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

Devon recognized $885 million and $2.5 billion in oil and gas asset impairments for its U.S. operations and $612 million and $1.2 billion for its Canadian operations for the three months ended and six months ended June 30, 2016, respectively. The oil and gas impairments resulted from declines in the U.S. and Canada full cost ceilings. The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for oil, bitumen, gas and NGLs, which significantly reduced proved reserves values and, to a lesser degree, proved reserves.

EnLink Goodwill Impairments

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

Restructuring And Transaction Costs
Restructuring And Transaction Costs

6.      Restructuring and Transaction Costs

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

 

 

June 30, 2016

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

(Millions)

 

2016 reduction in workforce:

 

 

 

 

 

 

 

 

Employee related costs

 

$

2

 

 

$

236

 

Lease obligations

 

 

17

 

 

 

17

 

Asset impairments

 

 

3

 

 

 

3

 

Transaction costs

 

 

2

 

 

 

15

 

Restructuring and transaction costs

 

$

24

 

 

$

271

 

The following table summarizes Devon’s restructuring liabilities.

 

 

Other

 

 

Other

 

 

 

 

 

 

 

Current

 

 

Long-term

 

 

 

 

 

 

 

Liabilities

 

 

Liabilities

 

 

Total

 

 

 

(Millions)

 

Balance as of December 31, 2016

 

$

48

 

 

$

62

 

 

$

110

 

Changes due to 2016 workforce reductions

 

 

(24

)

 

 

 

 

 

(24

)

Changes related to prior years' restructurings

 

 

7

 

 

 

(12

)

 

 

(5

)

Balance as June 30, 2017

 

$

31

 

 

$

50

 

 

$

81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

13

 

 

$

63

 

 

$

76

 

Changes due to 2016 workforce reductions

 

 

107

 

 

 

13

 

 

 

120

 

Changes related to prior years' restructurings

 

 

3

 

 

 

(6

)

 

 

(3

)

Balance as of June 30, 2016

 

$

123

 

 

$

70

 

 

$

193

 

Reduction in Workforce

In the first six months of 2016, Devon recognized $236 million in employee-related costs associated with a reduction in workforce. Of these employee-related costs, approximately $67 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, approximately $30 million resulted from estimated settlements of defined retirement benefits.

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

Transaction Costs

In the first six 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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Current income tax expense (benefit)

 

$

12

 

 

$

(3

)

 

$

32

 

 

$

(13

)

Deferred income tax benefit

 

 

(5

)

 

 

(179

)

 

 

(6

)

 

 

(386

)

Total income tax expense (benefit)

 

$

7

 

 

$

(182

)

 

$

26

 

 

$

(399

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

35

%

 

 

35

%

 

 

35

%

 

 

35

%

Deferred tax asset valuation allowance

 

 

(27

%)

 

 

(27

%)

 

 

(29

%)

 

 

(24

%)

Non-deductible goodwill impairments

 

 

0

%

 

 

0

%

 

 

0

%

 

 

(6

%)

Taxation on Canadian operations

 

 

0

%

 

 

(3

%)

 

 

0

%

 

 

(2

%)

State income taxes

 

 

0

%

 

 

2

%

 

 

0

%

 

 

1

%

Other

 

 

(6

%)

 

 

3

%

 

 

(4

%)

 

 

3

%

Effective income tax rate

 

 

2

%

 

 

10

%

 

 

2

%

 

 

7

%

 

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

Throughout 2016 and through the first six months of 2017, Devon continued to maintain a 100% valuation allowance against its U.S. deferred tax assets resulting from prior year cumulative financial losses largely due to full cost impairments. Devon provided an additional $1.3 billion to the U.S. segment valuation allowance in the first six months of 2016 based on the financial loss recorded during the period. Devon reduced its U.S. segment valuation allowance by $320 million in the first six months of 2017 based on the financial income recorded during the period. Furthermore, a partial allowance continues to be held against certain Canadian segment deferred tax assets.

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

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

 

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

8.

Net Earnings (Loss) Per Share Attributable to Devon

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Millions, except per share amounts)

 

Net earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Devon

 

$

425

 

 

$

(1,570

)

 

$

990

 

 

$

(4,626

)

Attributable to participating securities

 

 

(5

)

 

 

(1

)

 

 

(11

)

 

 

(1

)

Basic and diluted earnings (loss)

 

$

420

 

 

$

(1,571

)

 

$

979

 

 

$

(4,627

)

Common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding - total

 

 

526

 

 

 

524

 

 

 

525

 

 

 

502

 

Attributable to participating securities

 

 

(6

)

 

 

(6

)

 

 

(6

)

 

 

(6

)

Common shares outstanding - basic

 

 

520

 

 

 

518

 

 

 

519

 

 

 

496

 

Dilutive effect of potential common shares issuable

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Common shares outstanding - diluted

 

 

523

 

 

 

518

 

 

 

522

 

 

 

496

 

Net earnings (loss) per share attributable to Devon:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.81

 

 

$

(3.04

)

 

$

1.88

 

 

$

(9.33

)

Diluted

 

$

0.80

 

 

$

(3.04

)

 

$

1.87

 

 

$

(9.33

)

Antidilutive options (1)

 

 

2

 

 

 

3

 

 

 

2

 

 

 

3

 

 

(1)

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

Other Comprehensive Earnings
Other Comprehensive Earnings

9.

Other Comprehensive Earnings

Components of other comprehensive earnings consist of the following:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Millions)

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning accumulated foreign currency translation

 

$

454

 

 

$

447

 

 

$

456

 

 

$

424

 

Change in cumulative translation adjustment

 

 

13

 

 

 

2

 

 

 

14

 

 

 

53

 

Income tax benefit (expense)

 

 

(11

)

 

 

1

 

 

 

(14

)

 

 

(27

)

Ending accumulated foreign currency translation

 

 

456

 

 

 

450

 

 

 

456

 

 

 

450

 

Pension and postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning accumulated pension and postretirement benefits

 

 

(167

)

 

 

(190

)