UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-32318
DEVON ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
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73-1567067 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer identification No.) |
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333 West Sheridan Avenue, Oklahoma City, Oklahoma |
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73102-5015 |
(Address of principal executive offices) |
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(Zip code) |
Registrant’s telephone number, including area code: (405) 235-3611
Former name, address and former fiscal year, if changed from last report: Not applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
Common Stock, par value $0.10 per share |
DVN |
The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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☑ |
Accelerated filer |
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☐ |
Non-accelerated filer |
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☐ |
Smaller reporting company |
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☐ |
Emerging growth company |
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☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
On October 19, 2022, 653.7 million shares of common stock were outstanding.
DEVON ENERGY CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information |
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Item 1. |
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Note 10 – Supplemental Information to Statements of Cash Flows |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
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23 |
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25 |
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33 |
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36 |
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36 |
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Item 3. |
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39 |
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Item 4. |
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39 |
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Part II. Other Information |
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Item 1. |
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40 |
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Item 1A. |
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40 |
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Item 2. |
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40 |
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Item 3. |
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40 |
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Item 4. |
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40 |
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Item 5. |
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40 |
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Item 6. |
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42 |
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43 |
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2
DEFINITIONS
Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Devon,” the “Company” and “Registrant” refer to Devon Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:
"2017 Plan" means the Devon Energy Corporation 2017 Long-Term Incentive Plan.
"2022 Plan" means the Devon Energy Corporation 2022 Long-Term Incentive Plan.
“Bbl” or “Bbls” means barrel or barrels.
“Boe” means barrel of oil equivalent. Gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.
“Btu” means British thermal units, a measure of heating value.
“Canada” means the division of Devon encompassing oil and gas properties located in Canada. On June 27, 2019, all of Devon’s Canadian operating assets and operations were divested. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.
“Catalyst” means Catalyst Midstream Partners, LLC.
“CDM” means Cotton Draw Midstream, L.L.C.
“DD&A” means depreciation, depletion and amortization expenses.
“ESG” means environmental, social and governance.
“G&A” means general and administrative expenses.
“GAAP” means U.S. generally accepted accounting principles.
“Inside FERC” refers to the publication Inside FERC’s Gas Market Report.
“LOE” means lease operating expenses.
“MBbls” means thousand barrels.
“MBoe” means thousand Boe.
“Mcf” means thousand cubic feet.
“Merger” means the merger of Merger Sub with and into WPX, with WPX continuing as the surviving corporation and a wholly-owned subsidiary of the Company, pursuant to the terms of the Merger Agreement.
“Merger Agreement” means that certain Agreement and Plan of Merger, dated September 26, 2020, by and among the Company, Merger Sub and WPX.
“Merger Sub” means East Merger Sub, Inc., a wholly-owned subsidiary of the Company.
“MMBoe” means million Boe.
“MMBtu” means million Btu.
3
“MMcf” means million cubic feet.
“N/M” means not meaningful.
"NCI" means noncontrolling interests.
“NGL” or “NGLs” means natural gas liquids.
“NYMEX” means New York Mercantile Exchange.
“OPEC” means Organization of the Petroleum Exporting Countries.
“SEC” means United States Securities and Exchange Commission.
“Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.
“TSR” means total shareholder return.
“U.S.” means United States of America.
“VIE” means variable interest entity.
“WPX” means WPX Energy, Inc.
“WTI” means West Texas Intermediate.
“/Bbl” means per barrel.
“/d” means per day.
“/MMBtu” means per MMBtu.
4
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words and phrases “expects,” “believes,” “will,” “would,” “could,” “continue,” “may,” “aims,” “likely to be,” “intends,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this report that address activities, events or developments that Devon expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially and adversely from our expectations due to a number of factors, including, but not limited to:
All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.
5
Part I. Financial Information
Item 1. Financial Statements
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
|
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Three Months Ended September 30, |
|
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Nine Months Ended September 30, |
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2022 |
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2021 |
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2022 |
|
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2021 |
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||||
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(Unaudited) |
|
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Oil, gas and NGL sales |
|
$ |
3,668 |
|
|
$ |
2,635 |
|
|
$ |
10,943 |
|
|
$ |
6,546 |
|
Oil, gas and NGL derivatives |
|
|
248 |
|
|
|
(335 |
) |
|
|
(605 |
) |
|
|
(1,566 |
) |
Marketing and midstream revenues |
|
|
1,516 |
|
|
|
1,166 |
|
|
|
4,532 |
|
|
|
2,953 |
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Total revenues |
|
|
5,432 |
|
|
|
3,466 |
|
|
|
14,870 |
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|
|
7,933 |
|
Production expenses |
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|
735 |
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|
|
555 |
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|
|
2,082 |
|
|
|
1,526 |
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Exploration expenses |
|
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4 |
|
|
|
3 |
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|
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16 |
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|
|
9 |
|
Marketing and midstream expenses |
|
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1,525 |
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|
|
1,165 |
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|
|
4,549 |
|
|
|
2,972 |
|
Depreciation, depletion and amortization |
|
|
581 |
|
|
|
578 |
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|
|
1,598 |
|
|
|
1,581 |
|
Asset dispositions |
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|
— |
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|
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— |
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|
|
(15 |
) |
|
|
(119 |
) |
General and administrative expenses |
|
|
95 |
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|
95 |
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|
273 |
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296 |
|
Financing costs, net |
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67 |
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|
86 |
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|
|
236 |
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243 |
|
Restructuring and transaction costs |
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— |
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18 |
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— |
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230 |
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Other, net |
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(40 |
) |
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2 |
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(91 |
) |
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(41 |
) |
Total expenses |
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2,967 |
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2,502 |
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8,648 |
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6,697 |
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Earnings before income taxes |
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2,465 |
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964 |
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6,222 |
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1,236 |
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Income tax expense (benefit) |
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565 |
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120 |
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1,389 |
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(85 |
) |
Net earnings |
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1,900 |
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844 |
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4,833 |
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1,321 |
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Net earnings attributable to noncontrolling interests |
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7 |
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6 |
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19 |
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14 |
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Net earnings attributable to Devon |
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$ |
1,893 |
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$ |
838 |
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$ |
4,814 |
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$ |
1,307 |
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Net earnings per share: |
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Basic net earnings per share: |
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$ |
2.89 |
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$ |
1.24 |
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$ |
7.30 |
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$ |
1.95 |
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Diluted net earnings per share: |
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$ |
2.88 |
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$ |
1.24 |
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$ |
7.28 |
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$ |
1.95 |
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Comprehensive earnings: |
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Net earnings |
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$ |
1,900 |
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$ |
844 |
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$ |
4,833 |
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$ |
1,321 |
|
Other comprehensive earnings, net of tax: |
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Pension and postretirement plans |
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1 |
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1 |
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3 |
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27 |
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Other comprehensive earnings, net of tax |
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1 |
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1 |
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3 |
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27 |
|
Comprehensive earnings: |
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1,901 |
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|
845 |
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4,836 |
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|
1,348 |
|
Comprehensive earnings attributable to noncontrolling interests |
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7 |
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6 |
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19 |
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14 |
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Comprehensive earnings attributable to Devon |
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$ |
1,894 |
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$ |
839 |
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$ |
4,817 |
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$ |
1,334 |
|
See accompanying notes to consolidated financial statements
6
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
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Three Months Ended September 30, |
|
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Nine Months Ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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(Unaudited) |
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Cash flows from operating activities: |
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Net earnings |
|
|
$ |
1,900 |
|
|
$ |
844 |
|
|
$ |
4,833 |
|
|
$ |
1,321 |
|
Adjustments to reconcile net earnings to net cash from operating activities: |
|
|
|
|
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Depreciation, depletion and amortization |
|
|
|
581 |
|
|
|
578 |
|
|
|
1,598 |
|
|
|
1,581 |
|
Leasehold impairments |
|
|
|
2 |
|
|
|
1 |
|
|
|
10 |
|
|
|
3 |
|
Amortization of liabilities |
|
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(23 |
) |
|
|
(21 |
) |
Total (gains) losses on commodity derivatives |
|
|
|
(248 |
) |
|
|
335 |
|
|
|
605 |
|
|
|
1,566 |
|
Cash settlements on commodity derivatives |
|
|
|
(363 |
) |
|
|
(370 |
) |
|
|
(1,179 |
) |
|
|
(969 |
) |
Gains on asset dispositions |
|
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
(119 |
) |
Deferred income tax expense (benefit) |
|
|
|
445 |
|
|
|
119 |
|
|
|
914 |
|
|
|
(100 |
) |
Share-based compensation |
|
|
|
22 |
|
|
|
19 |
|
|
|
65 |
|
|
|
80 |
|
Early retirement of debt |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30 |
) |
Other |
|
|
|
8 |
|
|
|
11 |
|
|
|
(9 |
) |
|
|
13 |
|
Changes in assets and liabilities, net |
|
|
|
(235 |
) |
|
|
68 |
|
|
|
(180 |
) |
|
|
(42 |
) |
Net cash from operating activities |
|
|
|
2,104 |
|
|
|
1,598 |
|
|
|
6,619 |
|
|
|
3,283 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capital expenditures |
|
|
|
(628 |
) |
|
|
(474 |
) |
|
|
(1,738 |
) |
|
|
(1,477 |
) |
Acquisitions of property and equipment |
|
|
|
(2,465 |
) |
|
|
(10 |
) |
|
|
(2,566 |
) |
|
|
(15 |
) |
Divestitures of property and equipment |
|
|
|
4 |
|
|
|
1 |
|
|
|
39 |
|
|
|
65 |
|
WPX acquired cash |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
344 |
|
Distributions from investments |
|
|
|
7 |
|
|
|
9 |
|
|
|
30 |
|
|
|
27 |
|
Contributions to investments |
|
|
|
(16 |
) |
|
|
— |
|
|
|
(59 |
) |
|
|
— |
|
Net cash from investing activities |
|
|
|
(3,098 |
) |
|
|
(474 |
) |
|
|
(4,294 |
) |
|
|
(1,056 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Repayments of long-term debt |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,243 |
) |
Early retirement of debt |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(59 |
) |
Repurchases of common stock |
|
|
|
(126 |
) |
|
|
— |
|
|
|
(661 |
) |
|
|
— |
|
Dividends paid on common stock |
|
|
|
(1,007 |
) |
|
|
(329 |
) |
|
|
(2,504 |
) |
|
|
(761 |
) |
Contributions from noncontrolling interests |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
4 |
|
Distributions to noncontrolling interests |
|
|
|
(9 |
) |
|
|
(6 |
) |
|
|
(22 |
) |
|
|
(15 |
) |
Acquisition of noncontrolling interests |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
Shares exchanged for tax withholdings and other |
|
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(86 |
) |
|
|
(45 |
) |
Net cash from financing activities |
|
|
|
(1,143 |
) |
|
|
(337 |
) |
|
|
(3,273 |
) |
|
|
(2,143 |
) |
Effect of exchange rate changes on cash |
|
|
|
(10 |
) |
|
|
(5 |
) |
|
|
(13 |
) |
|
|
— |
|
Net change in cash, cash equivalents and restricted cash |
|
|
|
(2,147 |
) |
|
|
782 |
|
|
|
(961 |
) |
|
|
84 |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
3,457 |
|
|
|
1,539 |
|
|
|
2,271 |
|
|
|
2,237 |
|
Cash, cash equivalents and restricted cash at end of period |
|
|
$ |
1,310 |
|
|
$ |
2,321 |
|
|
$ |
1,310 |
|
|
$ |
2,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Reconciliation of cash, cash equivalents and restricted cash: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
|
$ |
1,166 |
|
|
$ |
2,144 |
|
|
$ |
1,166 |
|
|
$ |
2,144 |
|
Restricted cash |
|
|
|
144 |
|
|
|
177 |
|
|
|
144 |
|
|
|
177 |
|
Total cash, cash equivalents and restricted cash |
|
|
$ |
1,310 |
|
|
$ |
2,321 |
|
|
$ |
1,310 |
|
|
$ |
2,321 |
|
See accompanying notes to consolidated financial statements
7
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
(Unaudited) |
|
|
|
|
|||
ASSETS |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash |
|
$ |
1,310 |
|
|
$ |
2,271 |
|
Accounts receivable |
|
|
2,061 |
|
|
|
1,543 |
|
Other current assets |
|
|
638 |
|
|
|
435 |
|
Total current assets |
|
|
4,009 |
|
|
|
4,249 |
|
Oil and gas property and equipment, based on successful efforts |
|
|
16,258 |
|
|
|
13,536 |
|
Other property and equipment, net ($119 million and $111 million related to CDM in 2022 and 2021, respectively) |
|
|
1,535 |
|
|
|
1,472 |
|
Total property and equipment, net |
|
|
17,793 |
|
|
|
15,008 |
|
Goodwill |
|
|
753 |
|
|
|
753 |
|
Right-of-use assets |
|
|
232 |
|
|
|
235 |
|
Investments |
|
|
431 |
|
|
|
402 |
|
Other long-term assets |
|
|
339 |
|
|
|
378 |
|
Total assets |
|
$ |
23,557 |
|
|
$ |
21,025 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
761 |
|
|
$ |
500 |
|
Revenues and royalties payable |
|
|
1,810 |
|
|
|
1,456 |
|
Short-term debt |
|
|
255 |
|
|
|
— |
|
Other current liabilities |
|
|
634 |
|
|
|
1,131 |
|
Total current liabilities |
|
|
3,460 |
|
|
|
3,087 |
|
Long-term debt |
|
|
6,196 |
|
|
|
6,482 |
|
Lease liabilities |
|
|
259 |
|
|
|
252 |
|
Asset retirement obligations |
|
|
498 |
|
|
|
468 |
|
Other long-term liabilities |
|
|
941 |
|
|
|
1,050 |
|
Deferred income taxes |
|
|
1,196 |
|
|
|
287 |
|
Stockholders' equity: |
|
|
|
|
|
|
||
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued |
|
|
65 |
|
|
|
66 |
|
Additional paid-in capital |
|
|
6,956 |
|
|
|
7,636 |
|
Retained earnings |
|
|
3,981 |
|
|
|
1,692 |
|
Accumulated other comprehensive loss |
|
|
(129 |
) |
|
|
(132 |
) |
Total stockholders’ equity attributable to Devon |
|
|
10,873 |
|
|
|
9,262 |
|
Noncontrolling interests |
|
|
134 |
|
|
|
137 |
|
Total equity |
|
|
11,007 |
|
|
|
9,399 |
|
Total liabilities and equity |
|
$ |
23,557 |
|
|
$ |
21,025 |
|
See accompanying notes to consolidated financial statements
8
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Earnings |
|
|
Treasury |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
(Loss) |
|
|
Stock |
|
|
Interests |
|
|
Equity |
|
||||||||
|
|
(Unaudited) |
|
|||||||||||||||||||||||||||||
Three Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance as of June 30, 2022 |
|
|
656 |
|
|
$ |
66 |
|
|
$ |
7,060 |
|
|
$ |
3,107 |
|
|
$ |
(130 |
) |
|
$ |
(13 |
) |
|
$ |
136 |
|
|
$ |
10,226 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,893 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
1,900 |
|
Other comprehensive earnings, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Restricted stock grants, net of cancellations |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Common stock repurchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(115 |
) |
|
|
— |
|
|
|
(115 |
) |
Common stock retired |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(127 |
) |
|
|
— |
|
|
|
— |
|
|
|
128 |
|
|
|
— |
|
|
|
— |
|
Common stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,019 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,019 |
) |
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
|
(9 |
) |
Balance as of September 30, 2022 |
|
|
654 |
|
|
$ |
65 |
|
|
$ |
6,956 |
|
|
$ |
3,981 |
|
|
$ |
(129 |
) |
|
$ |
— |
|
|
$ |
134 |
|
|
$ |
11,007 |
|
Three Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance as of June 30, 2021 |
|
|
677 |
|
|
$ |
68 |
|
|
$ |
8,189 |
|
|
$ |
243 |
|
|
$ |
(101 |
) |
|
$ |
— |
|
|
$ |
136 |
|
|
$ |
8,535 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
838 |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
844 |
|
Other comprehensive earnings, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Restricted stock grants, net of cancellations |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Common stock repurchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Common stock retired |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
Common stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(331 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(331 |
) |
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
Contributions from noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
|
(6 |
) |
Balance as of September 30, 2021 |
|
|
677 |
|
|
$ |
68 |
|
|
$ |
8,206 |
|
|
$ |
750 |
|
|
$ |
(100 |
) |
|
$ |
— |
|
|
$ |
137 |
|
|
$ |
9,061 |
|
Nine Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance as of December 31, 2021 |
|
|
663 |
|
|
$ |
66 |
|
|
$ |
7,636 |
|
|
$ |
1,692 |
|
|
$ |
(132 |
) |
|
$ |
— |
|
|
$ |
137 |
|
|
$ |
9,399 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,814 |
|
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
4,833 |
|
Other comprehensive earnings, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Restricted stock grants, net of cancellations |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Common stock repurchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(749 |
) |
|
|
— |
|
|
|
(749 |
) |
Common stock retired |
|
|
(12 |
) |
|
|
(2 |
) |
|
|
(747 |
) |
|
|
— |
|
|
|
— |
|
|
|
749 |
|
|
|
— |
|
|
|
— |
|
Common stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,525 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,525 |
) |
Share-based compensation |
|
|
1 |
|
|
|
— |
|
|
|
65 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
65 |
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22 |
) |
|
|
(22 |
) |
Balance as of September 30, 2022 |
|
|
654 |
|
|
$ |
65 |
|
|
$ |
6,956 |
|
|
$ |
3,981 |
|
|
$ |
(129 |
) |
|
$ |
— |
|
|
$ |
134 |
|
|
$ |
11,007 |
|
Nine Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Balance as of December 31, 2020 |
|
|
382 |
|
|
$ |
38 |
|
|
$ |
2,766 |
|
|
$ |
208 |
|
|
$ |
(127 |
) |
|
$ |
— |
|
|
$ |
134 |
|
|
$ |
3,019 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,307 |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
1,321 |
|
Other comprehensive earnings, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
Restricted stock grants, net of cancellations |
|
|
6 |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Common stock repurchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41 |
) |
|
|
— |
|
|
|
(41 |
) |
Common stock retired |
|
|
(2 |
) |
|
|
— |
|
|
|
(41 |
) |
|
|
— |
|
|
|
— |
|
|
|
41 |
|
|
|
— |
|
|
|
— |
|
Common stock dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(765 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(765 |
) |
Common stock issued |
|
|
290 |
|
|
|
29 |
|
|
|
5,403 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,432 |
|
Share-based compensation |
|
|
1 |
|
|
|
— |
|
|
|
80 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
80 |
|
Contributions from noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
3 |
|
Distributions to noncontrolling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14 |
) |
|
|
(14 |
) |
Balance as of September 30, 2021 |
|
|
677 |
|
|
$ |
68 |
|
|
$ |
8,206 |
|
|
$ |
750 |
|
|
$ |
(100 |
) |
|
$ |
— |
|
|
$ |
137 |
|
|
$ |
9,061 |
|
See accompanying notes to consolidated financial statements
9
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 2021 Annual Report on Form 10-K. The accompanying unaudited interim financial statements in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2022 and 2021 and Devon’s financial position as of September 30, 2022.
Devon and WPX completed an all-stock merger of equals on January 7, 2021. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. The transaction has been accounted for using the acquisition method of accounting, with Devon being treated as the accounting acquirer. See Note 2 for further discussion.
Restricted Cash
As of September 30, 2022, Devon classified approximately $125 million of cash as restricted cash on the consolidated balance sheets for obligations retained related to the Barnett Shale assets and the Canadian business. Cash payments for these charges related to the Barnett assets and Canada business total approximately $10 million per quarter.
Variable Interest Entity
Cotton Draw Midstream, L.L.C. (“CDM”) is a joint venture entity formed by Devon and an affiliate of QL Capital Partners, LP. CDM provides gathering, compression and dehydration services for natural gas production in the Cotton Draw area of the Delaware Basin. Devon holds a controlling interest in CDM and the portions of CDM’s net earnings and equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated statements of comprehensive earnings and consolidated balance sheets. CDM is considered a VIE to Devon. The assets of CDM cannot be used by Devon for general corporate purposes and are included in, and disclosed parenthetically, on Devon's consolidated balance sheets. The carrying amount of liabilities related to CDM for which the creditors do not have recourse to Devon's assets are also included in, and disclosed parenthetically, if material, on Devon's consolidated balance sheets.
Investments
The following table presents Devon's investments.
|
|
|
|
Carrying Amount |
|
|||||
Investments |
|
% Interest |
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Catalyst |
|
50% |
|
$ |
347 |
|
|
$ |
368 |
|
Other |
|
Various |
|
|
84 |
|
|
|
34 |
|
Total |
|
|
|
$ |
431 |
|
|
$ |
402 |
|
In conjunction with the Merger, Devon acquired an interest in Catalyst, which is a joint venture established among WPX, an affiliate of Howard Energy Partners, LLC (“HEP”) and certain other investors, to develop oil gathering and natural gas processing infrastructure in the Stateline area of the Delaware Basin. Under the terms of the arrangement, Devon and a holding company owned by the other joint venture investors each have a 50% voting interest in the joint venture legal entity, and HEP serves as the operator. Through 2038, Devon’s production from 50,000 net acres in the Stateline area of the Delaware Basin has been dedicated to Catalyst subject to fixed-fee oil gathering and natural gas processing agreements. The agreements do not include any minimum volume commitments. Devon accounts for the investment in Catalyst as an equity method investment.
Devon's investment in Catalyst is shown within investments on the consolidated balance sheets and Devon's share of Catalyst earnings are reflected as a component of other, net in the accompanying consolidated statements of comprehensive earnings.
10
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Disaggregation of Revenue
The following table presents revenue from contracts with customers that are disaggregated based on the type of good or service.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Oil |
|
$ |
2,515 |
|
|
$ |
1,900 |
|
|
$ |
7,891 |
|
|
$ |
4,917 |
|
Gas |
|
|
666 |
|
|
|
309 |
|
|
|
1,530 |
|
|
|
699 |
|
NGL |
|
|
487 |
|
|
|
426 |
|
|
|
1,522 |
|
|
|
930 |
|
Oil, gas and NGL sales |
|
|
3,668 |
|
|
|
2,635 |
|
|
|
10,943 |
|
|
|
6,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Oil |
|
|
787 |
|
|
|
649 |
|
|
|
2,515 |
|
|
|
1,758 |
|
Gas |
|
|
387 |
|
|
|
196 |
|
|
|
918 |
|
|
|
477 |
|
NGL |
|
|
342 |
|
|
|
321 |
|
|
|
1,099 |
|
|
|
718 |
|
Marketing and midstream revenues |
|
|
1,516 |
|
|
|
1,166 |
|
|
|
4,532 |
|
|
|
2,953 |
|
Total revenues from contracts with customers |
|
$ |
5,184 |
|
|
$ |
3,801 |
|
|
$ |
15,475 |
|
|
$ |
9,499 |
|
2. Acquisitions and Divestitures
WPX Merger
On January 7, 2021, Devon and WPX completed an all-stock merger of equals. WPX was an oil and gas exploration and production company with assets in the Delaware Basin in Texas and New Mexico and the Williston Basin in North Dakota. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. No fractional shares of Devon’s common stock were issued in the Merger, and holders of WPX common stock instead received cash in lieu of fractional shares of Devon common stock, if any. Based on the closing price of Devon’s common stock on January 7, 2021, the total value of Devon common stock issued to holders of WPX common stock as part of this transaction was approximately $5.4 billion. The Merger was structured as a tax-free reorganization for United States federal income tax purposes. The final allocation of the total purchase price of WPX to the identifiable assets acquired and the liabilities assumed was finalized at December 31, 2021.
Acquisitions
In September 2022, Devon completed its acquisition of producing properties and leasehold interests located in the Eagle Ford for cash consideration of approximately $1.7 billion, net of purchase price adjustments. Additionally, in July 2022, Devon completed its acquisition of producing properties and leasehold interests located in the Williston Basin for cash consideration of approximately $830 million, net of purchase price adjustments. The total estimated proved reserves associated with these Eagle Ford and Williston Basin assets is approximately 88 MMBoe and 66 MMBoe, respectively. Both of these acquisitions were accounted for as asset acquisitions as substantially all of the fair value was concentrated in a group of similar assets. Each of the acquisitions resulted in the purchase of producing properties and leasehold interests in a defined geographical and geological area and substantially all of the assets have similar risk characteristics.
Divestitures
In the first quarter of 2021, Devon completed the sale of non-core assets in the Rockies for proceeds of $9 million, net of purchase price adjustments, and recognized a $35 million gain related to the sale. Devon received $4 million in contingent earnout payments related to this transaction in the first quarter of 2022 with the potential for up to an additional $4 million in the future. The total estimated proved reserves associated with these divested assets was approximately 3 MMBoe.
Barnett Contingent Earnout Payments
Devon is entitled to contingent earnout payments associated with the sale of its Barnett Shale assets in 2020 with upside participation beginning at a $2.75 Henry Hub natural gas price or a $50 WTI oil price. The contingent payment period commenced on January 1, 2021 and has a term of four years. Devon received $65 million in contingent earnout payments related to this transaction in the first quarter of 2022 and could receive up to an additional $195 million in contingent earnout payments for the remaining performance periods depending on future commodity prices. The valuation of the future contingent earnout payments included within
11
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
other current assets and other long-term assets in the September 30, 2022 consolidated balance sheet was approximately $65 million and $60 million, respectively. The value was derived utilizing a Monte Carlo valuation model and qualifies as a level 3 fair value measurement.
Objectives and Strategies
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 periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. As of September 30, 2022, Devon did not have any open interest rate swap 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 September 30, 2022, Devon neither held cash collateral of its counterparties nor posted cash collateral to its counterparties. Given Devon's current credit ratings and the terms of the underlying contracts, Devon is not currently required to post collateral to its counterparties with respect to its open derivative positions, and we would not be required to post any such collateral as a result of any change to the amount of Devon's net liability for such positions.
Commodity Derivatives
As of September 30, 2022, 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 |
|
|
Weighted |
|
|
Volume |
|
|
Weighted |
|
|
Weighted |
|
|
|||||
Q4 2022 |
|
|
35,000 |
|
|
$ |
44.61 |
|
|
|
46,500 |
|
|
$ |
63.47 |
|
|
$ |
90.61 |
|
|
Q1-Q4 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
69,947 |
|
|
$ |
69.23 |
|
|
$ |
96.09 |
|
|
|
|
Oil Basis Swaps |
|
|||||||
Period |
|
Index |
|
Volume |
|
|
Weighted Average |
|
||
Q4 2022 |
|
BRENT |
|
|
1,000 |
|
|
$ |
(7.75 |
) |
Q4 2022 |
|
NYMEX Roll |
|
|
29,000 |
|
|
$ |
0.45 |
|
Q1-Q4 2023 |
|
Midland Sweet |
|
|
12,296 |
|
|
$ |
0.52 |
|
12
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
As of September 30, 2022, 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 and the end of month NYMEX index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.
|
|
Price Swaps (1) |
|
|
Price Collars (2) |
|
||||||||||||||
Period |
|
Volume (MMBtu/d) |
|
|
Weighted Average Price ($/MMBtu) |
|
|
Volume (MMBtu/d) |
|
|
Weighted Average Floor Price ($/MMBtu) |
|
|
Weighted Average |
|
|||||
Q4 2022 |
|
|
125,000 |
|
|
$ |
3.34 |
|
|
|
165,000 |
|
|
$ |
3.16 |
|
|
$ |
4.82 |
|
Q1-Q4 2023 |
|
|
8,658 |
|
|
$ |
5.24 |
|
|
|
147,436 |
|
|
$ |
3.67 |
|
|
$ |
8.87 |
|
Q1-Q4 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
12,680 |
|
|
$ |
3.50 |
|
|
$ |
8.93 |
|
|
|
Natural Gas Basis Swaps |
|
|||||||
Period |
|
Index |
|
Volume |
|
|
Weighted Average |
|
||
Q4 2022 |
|
El Paso Natural Gas |
|
|
50,000 |
|
|
$ |
(0.85 |
) |
Q4 2022 |
|
Houston Ship Channel |
|
|
40,000 |
|
|
$ |
(0.15 |
) |
Q4 2022 |
|
WAHA |
|
|
70,000 |
|
|
$ |
(0.57 |
) |
Q1-Q4 2023 |
|
El Paso Natural Gas |
|
|
140,041 |
|
|
$ |
(1.58 |
) |
Q1-Q4 2023 |
|
Houston Ship Channel |
|
|
90,000 |
|
|
$ |
(0.15 |
) |
Q1-Q4 2023 |
|
WAHA |
|
|
70,000 |
|
|
$ |
(0.51 |
) |
Q1-Q4 2024 |
|
WAHA |
|
|
40,000 |
|
|
$ |
(0.51 |
) |
As of September 30, 2022, Devon did not have any open NGL positions.
Financial Statement Presentation
All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the consolidated balance sheets. Amounts related to contracts allowed to be netted upon payment subject to a master netting arrangement with the same counterparty are reported on a net basis in the consolidated balance sheets. The tables below present a summary of these positions as of September 30, 2022 and December 31, 2021.
|
September 30, 2022 |
|
|
December 31, 2021 |
|
|
|
||||||||||||||||||
|
Gross Fair Value |
|
|
Amounts Netted |
|
|
Net Fair Value |
|
|
Gross Fair Value |
|
|
Amounts Netted |
|
|
Net Fair Value |
|
|
Balance Sheet Classification |
||||||
Commodity derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Short-term derivative asset |
$ |
186 |
|
|
$ |
(88 |
) |
|
$ |
98 |
|
|
$ |
6 |
|
|
$ |
(4 |
) |
|
$ |
2 |
|
|
Other current assets |
Long-term derivative asset |
|
63 |
|
|
|
(2 |
) |
|
|
61 |
|
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
|
Other long-term assets |
Short-term derivative liability |
|
(240 |
) |
|
|
88 |
|
|
|
(152 |
) |
|
|
(579 |
) |
|
|
4 |
|
|
|
(575 |
) |
|
Other current liabilities |
Long-term derivative liability |
|
(5 |
) |
|
|
2 |
|
|
|
(3 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
|
Other long-term liabilities |
Total derivative asset (liability) |
$ |
4 |
|
|
$ |
— |
|
|
$ |
4 |
|
|
$ |
(569 |
) |
|
$ |
— |
|
|
$ |
(569 |
) |
|
|
In the second quarter of 2022, Devon's stockholders approved the 2022 Plan. The 2022 Plan replaces the 2017 Plan. From the effective date of the 2022 Plan, no further awards may be made under the 2017 Plan; however, awards previously granted will continue to be governed by the terms of the respective award documents. The 2022 Plan authorizes the grant of nonqualified and incentive stock options, restricted stock awards or units and stock appreciation rights to eligible employees. Restricted stock awards or restricted stock units granted under the 2022 Plan may be subject to performance-based conditions. The 2022 Plan also authorizes the
13
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
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 2022 Plan, options and stock appreciation rights represent one share and other awards represent 1.74 shares.
The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings. The vesting for certain share-based awards was accelerated in 2021 in conjunction with the reduction of workforce described in Note 5 and is included in restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
G&A |
|
$ |
64 |
|
|
$ |
58 |
|
Exploration expenses |
|
|
1 |
|
|
|
1 |
|
Restructuring and transaction costs |
|
|
— |
|
|
|
21 |
|
Total |
|
$ |
65 |
|
|
$ |
80 |
|
Related income tax benefit |
|
$ |
31 |
|
|
$ |
8 |
|
Under its approved long-term incentive plan, Devon grants share-based awards to its employees. The following table presents a summary of Devon’s unvested restricted stock awards and units and performance share units granted under the plan.
|
|
Restricted Stock Awards & Units |
|
|
Performance Share Units |
|
||||||||||
|
|
Awards/Units |
|
|
Weighted |
|
|
Units |
|
|
Weighted |
|
||||
|
|
(Thousands, except fair value data) |
|
|||||||||||||
Unvested at 12/31/21 |
|
|
7,656 |
|
|
$ |
22.15 |
|
|
|
2,076 |
|
|
$ |
24.12 |
|
Granted |
|
|
1,389 |
|
|
$ |
53.43 |
|
|
|
964 |
|
|
$ |
44.05 |
|
Vested |
|
|
(3,182 |
) |
|
$ |
23.10 |
|
|
|
(1,194 |
) |
|
$ |
28.91 |
|
Forfeited |
|
|
(76 |
) |
|
$ |
33.88 |
|
|
|
(5 |
) |
|
$ |
68.68 |
|
Unvested at 9/30/22 |
|
|
5,787 |
|
|
$ |
28.99 |
|
|
|
1,841 |
|
(1) |
$ |
31.33 |
|
The following table presents the assumptions related to the performance share units granted in 2022, as indicated in the previous summary table. The grants in the previous summary table also include the impact of performance share units granted in a prior year that vested higher than 100% of target due to Devon's TSR performance compared to our peers.
|
|
2022 |
|
|
Grant-date fair value |
|
$ |
68.68 |
|
Risk-free interest rate |
|
|
1.81 |
% |
Volatility factor |
|
|
70.1 |
% |
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 September 30, 2022.
|
|
Restricted Stock |
|
|
Performance |
|
||
|
|
Awards/Units |
|
|
Share Units |
|
||
Unrecognized compensation cost |
|
$ |
99 |
|
|
$ |
23 |
|
Weighted average period for recognition (years) |
|
|
2.6 |
|
|
|
1.7 |
|
14
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
5. Restructuring and Transaction Costs
The following table summarizes Devon’s restructuring and transaction costs.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Restructuring costs |
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
— |
|
|
$ |
182 |
|
Transaction costs |
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
48 |
|
Total costs |
|
$ |
— |
|
|
$ |
18 |
|
|
$ |
— |
|
|
$ |
230 |
|
In conjunction with the Merger closing, Devon recognized $182 million of restructuring expenses during the first nine months of 2021 related to employee severance and termination benefits, settlements and curtailments from defined retirement benefits and contract terminations. Of these expenses, $65 million related to non-cash charges which primarily consisted of settlements and curtailments of defined retirement benefits of $40 million and the accelerated vesting of share-based grants of $21 million. Additionally, in conjunction primarily with the Merger closing, Devon recognized $48 million of transaction costs primarily comprised of bank, legal and accounting fees.
The following table summarizes Devon’s restructuring liabilities.
|
|
Other |
|
|
Other |
|
|
|
|
|||
|
|
Current |
|
|
Long-term |
|
|
|
|
|||
|
|
Liabilities |
|
|
Liabilities |
|
|
Total |
|
|||
Balance as of December 31, 2021 |
|
$ |
38 |
|
|
$ |
111 |
|
|
$ |
149 |
|
Changes related to prior years' restructurings |
|
|
(11 |
) |
|
|
(18 |
) |
|
|
(29 |
) |
Balance as of September 30, 2022 |
|
$ |
27 |
|
|
$ |
93 |
|
|
$ |
120 |
|
|
|
|
|
|
|
|
|
|
|
|||
Balance as of December 31, 2020 |
|
$ |
35 |
|
|
$ |
137 |
|
|
$ |
172 |
|
Changes related to prior years' restructurings |
|
|
19 |
|
|
|
(18 |
) |
|
|
1 |
|
Balance as of September 30, 2021 |
|
$ |
54 |
|
|
$ |
119 |
|
|
$ |
173 |
|
6. Other, Net
The following table summarizes Devon's other expenses (income) presented in the accompanying consolidated comprehensive statements of earnings.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Estimated future obligation under a performance guarantee |
|
$ |
(44 |
) |
|
$ |
— |
|
|
$ |
(140 |
) |
|
$ |
(18 |
) |
Ukraine charitable pledge |
|
|
— |
|
|
|
— |
|
|
|
20 |
|
|
|
— |
|
Asset retirement obligation accretion |
|
|
5 |
|
|
|
7 |
|
|
|
18 |
|
|
|
21 |
|
Severance and other non-income tax refunds |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
(39 |
) |
Other |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
14 |
|
|
|
(5 |
) |
Total |
|
$ |
(40 |
) |
|
$ |
2 |
|
|
$ |
(91 |
) |
|
$ |
(41 |
) |
The first nine months of 2022 includes an approximately $140 million benefit related to the revision of a future obligation under a performance guarantee liability for previously divested assets. Due to improved commodity prices and market conditions, in the third quarter of 2022, the purchaser of these assets reimbursed Devon $44 million for the shortfall payments Devon and WPX previously made on the purchaser's behalf in 2021 and 2020. Additionally, in the first quarter of 2022, the purchaser was able to fully satisfy the $35 million obligation due in 2022. Devon also reduced the estimated future exposure of the performance guarantee by $61 million in 2022 based on probability-weighted cash flows for the remainder of the contract term of four years. The first nine months of 2021 includes an $18 million benefit related to the revision of the future obligation as the purchaser was able to partially satisfy the obligation.
The first nine months of 2022 includes a $20 million pledge for humanitarian relief for the Ukrainian people and surrounding countries supporting refugees.
15
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
During the first nine months of 2021, Devon received severance and other non-income tax refunds of $39 million.
7. Income Taxes
The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Earnings before income taxes |
|
$ |
2,465 |
|
|
$ |
964 |
|
|
$ |
6,222 |
|
|
$ |
1,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current income tax expense |
|
$ |
120 |
|
|
$ |
1 |
|
|
$ |
475 |
|
|
$ |
15 |
|
Deferred income tax expense (benefit) |
|
|
445 |
|
|
|
119 |
|
|
|
914 |
|
|
|
(100 |
) |
Total income tax expense (benefit) |
|
$ |
565 |
|
|
$ |
120 |
|
|
$ |
1,389 |
|
|
$ |
(85 |
) |
U.S. statutory income tax rate |
|
|
21 |
% |
|
|
21 |
% |
|
|
21 |
% |
|
|
21 |
% |
State income taxes |
|
|
2 |
% |
|
|
0 |
% |
|
|
1 |
% |
|
|
0 |
% |
Deferred tax asset valuation allowance |
|
|
0 |
% |
|
|
(9 |
%) |
|
|
0 |
% |
|
|
(33 |
%) |
Other |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
5 |
% |
Effective income tax rate |
|
|
23 |
% |
|
|
12 |
% |
|
|
22 |
% |
|
|
(7 |
%) |
On August 16, 2022 the Inflation Reduction Act was signed into law with an effective date beginning 2023. Devon does not expect any immediate material impacts to its income tax provision but will monitor guidance as released.
Prior to December 31, 2021, Devon maintained a valuation allowance against all U.S. federal deferred tax assets. Devon recognized approximately $250 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon had recognized on its U.S. federal deferred tax assets in the first quarter of 2021.
Due to significant increases in commodity pricing and projections of future income, in the fourth quarter of 2021, Devon reassessed its evaluation of the realizability of deferred tax assets in future years and determined that a U.S. federal valuation allowance was no longer necessary at December 31, 2021.
The following table reconciles net earnings and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings per share.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net earnings |
|
$ |
1,893 |
|
|
$ |
838 |
|
|
$ |
4,814 |
|
|
$ |
1,307 |
|
Attributable to participating securities |
|
|
(17 |
) |
|
|
(6 |
) |
|
|
(50 |
) |
|
|
(11 |
) |
Basic and diluted earnings |
|
$ |
1,876 |
|
|
$ |
832 |
|
|
$ |
4,764 |
|
|
$ |
1,296 |
|
Common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common shares outstanding - total |
|
|
655 |
|
|
|
677 |
|
|
|
658 |
|
|
|
670 |
|
Attributable to participating securities |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(6 |
) |
Common shares outstanding - basic |
|
|
649 |
|
|
|
671 |
|
|
|
652 |
|
|
|
664 |
|
Dilutive effect of potential common shares issuable |
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
Common shares outstanding - diluted |
|
|
651 |
|
|
|
673 |
|
|
|
654 |
|
|
|
666 |
|
Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
2.89 |
|
|
$ |
1.24 |
|
|
$ |
7.30 |
|
|
$ |
1.95 |
|
Diluted |
|
$ |
2.88 |
|
|
$ |
1.24 |
|
|
$ |
7.28 |
|
|
$ |
1.95 |
|
16
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
9. Other Comprehensive Earnings (Loss)
Components of other comprehensive earnings (loss) consist of the following:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Pension and postretirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Beginning accumulated pension and postretirement benefits |
|
$ |
(130 |
) |
|
$ |
(101 |
) |
|
$ |
(132 |
) |
|
$ |
(127 |
) |
Recognition of net actuarial loss and prior service cost in earnings (1) |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
Settlement of pension benefits (2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
Other (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
Accumulated other comprehensive loss, net of tax |
|
$ |
(129 |
) |
|
$ |
(100 |
) |
|
$ |
(129 |
) |
|
$ |
(100 |
) |
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Changes in assets and liabilities, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accounts receivable |
|
$ |
364 |
|
|
$ |
(332 |
) |
|
$ |
(439 |
) |
|
$ |
(495 |
) |
Other current assets |
|
|
(84 |
) |
|
|
(19 |
) |
|
|
(105 |
) |
|
|
58 |
|
Other long-term assets |
|
|
9 |
|
|
|
14 |
|
|
|
84 |
|
|
|
(9 |
) |
Accounts payable and revenues and royalties payable |
|
|
(313 |
) |
|
|
469 |
|
|
|
474 |
|
|
|
557 |
|
Other current liabilities |
|
|
(208 |
) |
|
|
(49 |
) |
|
|
(107 |
) |
|
|
(30 |
) |
Other long-term liabilities |
|
|
(3 |
) |
|
|
(15 |
) |
|
|
(87 |
) |
|
|
(123 |
) |
Total |
|
$ |
(235 |
) |
|
$ |
68 |
|
|
$ |
(180 |
) |
|
$ |
(42 |
) |
Supplementary cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest paid |
|
$ |
100 |
|
|
$ |
100 |
|
|
$ |
285 |
|
|
$ |
319 |
|
Income taxes paid (refunded) |
|
$ |
253 |
|
|
$ |
(4 |
) |
|
$ |
363 |
|
|
$ |
(116 |
) |
Components of accounts receivable include the following:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Oil, gas and NGL sales |
|
$ |
1,376 |
|
|
$ |
984 |
|
Joint interest billings |
|
|
173 |
|
|
|
158 |
|
Marketing and midstream revenues |
|
|
473 |
|
|
|
370 |
|
Other |
|
|
46 |
|
|
|
38 |
|
Gross accounts receivable |
|
|
2,068 |
|
|
|
1,550 |
|
Allowance for doubtful accounts |
|
|
(7 |
) |
|
|
(7 |
) |
Net accounts receivable |
|
$ |
2,061 |
|
|
$ |
1,543 |
|
17
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
12. Property, Plant and Equipment
The following table presents the aggregate capitalized costs related to Devon’s oil and gas and non-oil and gas activities.
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Property and equipment: |
|
|
|
|
|
|
||
Proved |
|
$ |
41,803 |
|
|
$ |
38,051 |
|
Unproved and properties under development |
|
|
1,579 |
|
|
|
1,081 |
|
Total oil and gas |
|
|
43,382 |
|
|
|
39,132 |
|
Less accumulated DD&A |
|
|
(27,124 |
) |
|
|
(25,596 |
) |
Oil and gas property and equipment, net |
|
|
16,258 |
|
|
|
13,536 |
|
Other property and equipment |
|
|
2,248 |
|
|
|
2,139 |
|
Less accumulated DD&A |
|
|
(713 |
) |
|
|
(667 |
) |
Other property and equipment, net (1) |
|
|
1,535 |
|
|
|
1,472 |
|
Property and equipment, net |
|
$ |
17,793 |
|
|
$ |
15,008 |
|
See below for a summary of debt instruments and balances. The notes and debentures are senior, unsecured obligations of Devon.
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
8.25% due August 1, 2023 |
|
$ |
242 |
|
|
$ |
242 |
|
5.25% due September 15, 2024 |
|
|
472 |
|
|
|
472 |
|
5.85% due December 15, 2025 |
|
|
485 |
|
|
|
485 |
|
7.50% due September 15, 2027 |
|
|
73 |
|
|
|
73 |
|
5.25% due October 15, 2027 |
|
|
390 |
|
|
|
390 |
|
5.875% due June 15, 2028 |
|
|
325 |
|
|
|
325 |
|
4.50% due January 15, 2030 |
|
|
585 |
|
|
|
585 |
|
7.875% due September 30, 2031 |
|
|
675 |
|
|
|
675 |
|
7.95% due April 15, 2032 |
|
|
366 |
|
|
|
366 |
|
5.60% due July 15, 2041 |
|
|
1,250 |
|
|
|
1,250 |
|
4.75% due May 15, 2042 |
|
|
750 |
|
|
|
750 |
|
5.00% due June 15, 2045 |
|
|
750 |
|
|
|
750 |
|
Net premium on debentures and notes |
|
|
115 |
|
|
|
149 |
|
Debt issuance costs |
|
|
(27 |
) |
|
|
(30 |
) |
Total debt |
|
$ |
6,451 |
|
|
$ |
6,482 |
|
Less amount classified as short-term debt |
|
|
255 |
|
|
|
— |
|
Total long-term debt |
|
$ |
6,196 |
|
|
$ |
6,482 |
|
Retirement of Senior Notes
In the first nine months of 2021, Devon redeemed $43 million of the 6.00% senior notes due 2022, $175 million of the 5.875% senior notes due 2028, $315 million of the 4.50% senior notes due 2030, $210 million of the 5.25% senior notes due 2027 and $500 million of the 5.75% senior notes due 2026. In the first nine months of 2021, Devon recognized $30 million of gains on early retirement of debt, consisting of $89 million of non-cash premium accelerations, partially offset by $59 million of cash retirement costs. The gain on early retirement is included in net financing costs in the consolidated comprehensive statements of earnings.
Credit Lines
Devon has a $3.0 billion Senior Credit Facility. As of September 30, 2022, Devon had no outstanding borrowings under the Senior Credit Facility and had issued $2 million in outstanding letters of credit under this facility. The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be no greater than 65%. Under the terms of the credit agreement, total capitalization is adjusted to add back
18
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
non-cash financial write-downs such as impairments. As of September 30, 2022, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 23.3%.
Net Financing Costs
The following schedule includes the components of net financing costs.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Interest based on debt outstanding |
|
$ |
92 |
|
|
$ |
93 |
|
|
$ |
277 |
|
|
$ |
296 |
|
Gain on early retirement of debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30 |
) |
Interest income |
|
|
(19 |
) |
|
|
(1 |
) |
|
|
(22 |
) |
|
|
(2 |
) |
Other |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(19 |
) |
|
|
(21 |
) |
Total net financing costs |
|
$ |
67 |
|
|
$ |
86 |
|
|
$ |
236 |
|
|
$ |
243 |
|
Interest income has increased from 2021 to 2022 primarily due to higher average cash balances and interest rates. Additionally, in the third quarter of 2022, Devon received approximately $7 million of interest income associated with reimbursements of performance guarantee obligations Devon and WPX paid in 2021 and 2020 on behalf of the purchaser of previously divested assets.
14. Leases
The following table presents Devon’s right-of-use assets and lease liabilities as of September 30, 2022 and December 31, 2021.
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
|
|
Finance |
|
|
Operating |
|
|
Total |
|
|
Finance |
|
|
Operating |
|
|
Total |
|
||||||
Right-of-use assets |
|
$ |
205 |
|
|
$ |
27 |
|
|
$ |
232 |
|
|
$ |
211 |
|
|
$ |
24 |
|
|
$ |
235 |
|
Lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Current lease liabilities (1) |
|
$ |
8 |
|
|
$ |
17 |
|
|
$ |
25 |
|
|
$ |
8 |
|
|
$ |
18 |
|
|
$ |
26 |
|
Long-term lease liabilities |
|
|
249 |
|
|
|
10 |
|
|
|
259 |
|
|
|
247 |
|
|
|
5 |
|
|
|
252 |
|
Total lease liabilities |
|
$ |
257 |
|
|
$ |
27 |
|
|
$ |
284 |
|
|
$ |
255 |
|
|
$ |
23 |
|
|
$ |
278 |
|
(1) Current lease liabilities are included in other current liabilities on the consolidated balance sheets.
Devon’s right-of-use operating lease assets are for certain leases related to real estate, drilling rigs and other equipment related to the exploration, development and production of oil and gas. Devon’s right-of-use financing lease assets are related to real estate.
The following table presents the changes in Devon’s asset retirement obligations.
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Asset retirement obligations as of beginning of period |
|
$ |
485 |
|
|
$ |
369 |
|
Liabilities incurred and assumed through acquisitions |
|
|
62 |
|
|
|
126 |
|
Liabilities settled and divested |
|
|
(13 |
) |
|
|
(52 |
) |
Revision of estimated obligation |
|
|
(35 |
) |
|
|
11 |
|
Accretion expense on discounted obligation |
|
|
18 |
|
|
|
21 |
|
Asset retirement obligations as of end of period |
|
|
517 |
|
|
|
475 |
|
Less current portion |
|
|
19 |
|
|
|
13 |
|
Asset retirement obligations, long-term |
|
$ |
498 |
|
|
$ |
462 |
|
During the first nine months of 2022, Devon increased its asset retirement obligations by approximately $38 million due to asset acquisitions in the Eagle Ford and Williston Basin. During this same time period Devon reduced its asset retirement obligations by $35 million primarily due to extended retirement dates for oil and gas assets, partially offset by inflation-driven increases to current settlement costs. During the first nine months of 2021, Devon assumed $98 million of WPX asset retirement obligations.
19
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Share Repurchases
In November 2021, Devon authorized a share repurchase program of $1.0 billion with a December 31, 2022 expiration date. In February 2022, the Board of Directors authorized an expansion of the share repurchase program to $1.6 billion, and in , authorized a further expansion to $2.0 billion and extended the expiration date to May 4, 2023. The table below provides information regarding purchases of Devon’s common stock under the $2.0 billion share repurchase program (shares in thousands).
|
|
Total Number of |
|
|
Dollar Value of |
|
|
Average Price Paid |
|
|||
2021: |
|
|
|
|
|
|
|
|
|
|||
Fourth quarter |
|
|
13,983 |
|
|
$ |
589 |
|
|
$ |
42.15 |
|
2022: |
|
|
|
|
|
|
|
|
|
|||
First quarter |
|
|
3,979 |
|
|
$ |
230 |
|
|
$ |
57.74 |
|
Second quarter |
|
|
5,052 |
|
|
|
318 |
|
|
$ |
63.07 |
|
Third quarter |
|
|
1,875 |
|
|
|
113 |
|
|
$ |
59.99 |
|
Total plan |
|
|
24,889 |
|
|
$ |
1,250 |
|
|
$ |
50.23 |
|
Dividends
Upon completion of the Merger, Devon continued its commitment to pay a quarterly dividend at a fixed rate and instituted a variable quarterly dividend, which is dependent on quarterly cash flows, among other factors. Devon raised its fixed quarterly dividend by 45%, to $0.16 per share, beginning in the first quarter of 2022, and again by 13%, to $0.18 per share, beginning in the third quarter of 2022. The following table summarizes Devon’s fixed and variable dividends for the first nine months of 2022 and 2021, respectively.
|
Fixed |
|
|
Variable |
|
|
Total |
|
|
Rate Per Share |
|
||||
2022: |
|
|
|
|
|
|
|
|
|
|
|
||||
First quarter |
$ |
109 |
|
|
$ |
558 |
|
|
$ |
667 |
|
|
$ |
1.00 |
|
Second quarter |
|
105 |
|
|
|
725 |
|
|
|
830 |
|
|
$ |
1.27 |
|
Third quarter |
|
117 |
|
|
|
890 |
|
|
|
1,007 |
|
|
$ |
1.55 |
|
Total year-to-date |
$ |
331 |
|
|
$ |
2,173 |
|
|
$ |
2,504 |
|
|
|
|
|
2021: |
|
|
|
|
|
|
|
|
|
|
|
||||
First quarter |
$ |
76 |
|
|
$ |
127 |
|
|
$ |
203 |
|
|
$ |
0.30 |
|
Second quarter |
|
75 |
|
|
|
154 |
|
|
|
229 |
|
|
$ |
0.34 |
|
Third quarter |
|
74 |
|
|
|
255 |
|
|
|
329 |
|
|
$ |
0.49 |
|
Total year-to-date |
$ |
225 |
|
|
$ |
536 |
|
|
$ |
761 |
|
|
|
|
|
In November 2022, Devon announced a cash dividend in the amount of $1.35 per share payable in the fourth quarter of 2022. The dividend consists of an $0.18 per share fixed quarterly dividend and a $1.17 per share variable quarterly dividend and will total approximately $880 million.
Noncontrolling Interests
The noncontrolling interests’ share of CDM’s net earnings and the contributions from and distributions to the noncontrolling interests are presented as components of equity.
Devon is party to various legal actions arising in connection with its business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to likely involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. Actual amounts could differ materially from management’s estimates.
20
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Royalty Matters
Numerous oil and natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. Devon is currently named as a defendant in a number of such lawsuits, including some lawsuits in which the plaintiffs seek to certify classes of similarly situated plaintiffs. Among the allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, paid royalty proceeds in an untimely manner without including required interest, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with oil, natural gas and NGLs produced and sold. Devon is also involved in governmental agency proceedings and royalty audits and is subject to related contracts and regulatory controls in the ordinary course of business, some that may lead to additional royalty claims.
Environmental and Climate Change Matters
Devon’s business is subject to numerous federal, state, tribal and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties, as well as remediation costs. Although Devon believes that it is in substantial compliance with applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on its business, there can be no assurance that this will continue in the future.
Beginning in 2013, various parishes in Louisiana filed suit against numerous oil and gas companies, including Devon, alleging that the companies’ operations and activities in certain fields violated the State and Local Coastal Resource Management Act of 1978, as amended, and caused substantial environmental contamination, subsidence and other environmental damages to land and water bodies located in the coastal zone of Louisiana. The plaintiffs’ claims against Devon relate primarily to the operations of several of Devon’s corporate predecessors. The plaintiffs seek, among other things, payment of the costs necessary to clear, re-vegetate and otherwise restore the allegedly impacted areas. Although Devon cannot predict the ultimate outcome of these matters, Devon intends to vigorously defend against these claims.
The State of Delaware and various municipalities and other governmental and private parties in California have filed legal proceedings against numerous oil and gas companies, including Devon, seeking relief to abate alleged impacts of climate change. These proceedings include far-reaching claims for monetary damages and injunctive relief. Although Devon cannot predict the ultimate outcome of these matters, Devon intends to vigorously defend against the proceedings.
Other Indemnifications and Legacy Matters
Pursuant to various sale agreements relating to divested businesses and assets, Devon has indemnified various purchasers against liabilities that they may incur with respect to the businesses and assets acquired from Devon. Additionally, federal, state and other laws in areas of former operations may require previous operators (including corporate successors of previous operators) to perform or make payments in certain circumstances where the current operator may no longer be able to satisfy the applicable obligation. Such obligations may include plugging and abandoning wells, removing production facilities or performing requirements under surface agreements in existence at the time of disposition.
In November 2020, the Department of the Interior, Bureau of Safety and Environmental Enforcement ordered several oil and gas operators, including Devon, to perform decommissioning and reclamation activities related to two California offshore oil and gas production platforms and related facilities. The current operator and owner of the platforms contends that it does not have the financial ability to perform these obligations and relinquished the related federal lease in October 2020. In response to the apparent insolvency of the current operator, the government has ordered the former operators and alleged former lease record title owners to decommission the platforms and related facilities. The government contends that an alleged corporate predecessor of Devon owned a partial interest in the subject lease and platforms. Although Devon cannot predict the ultimate outcome of this matter, Devon denies any obligation to decommission the subject platforms, has appealed the order, and believes any decommissioning obligation related to the subject platforms should be assumed by others.
21
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table provides carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other current payables, accrued expenses and lease liabilities included in the accompanying consolidated balance sheets approximated fair value at September 30, 2022 and December 31, 2021, as applicable. Therefore, such financial assets and liabilities are not presented in the following table.
The following methods and assumptions were used to estimate the fair values in the table above.
Level 1 Fair Value Measurements
Cash equivalents – Amounts consist primarily of money market investments and the fair value approximates the carrying value.
Level 2 Fair Value Measurements
Commodity derivatives – The fair value of commodity derivatives is estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.
Debt – Devon’s debt instruments do not consistently trade actively in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity when active trading is not available.
Level 3 Fair Value Measurements
Contingent Earnout Payments – Devon has the right to receive contingent consideration related to the Barnett and non-core Rockies asset divestitures based on future oil and gas prices. These values were derived using a Monte Carlo valuation model and qualify as a level 3 fair value measurement. For additional information, see Note 2.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis addresses material changes in our results of operations for the three-month and nine-month periods ended September 30, 2022 compared to previous periods, and in our financial condition and liquidity since December 31, 2021. For information regarding our critical accounting policies and estimates, see our 2021 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Executive Overview
Looking across our 2021 and 2022 performance, the Merger has helped us become a leading unconventional oil producer in the U.S., with an asset base underpinned by premium acreage in the economic core of the Delaware Basin. This strategic combination accelerated our transition to a cash-return business model, including the implementation of a fixed plus variable dividend strategy. In the third quarter of 2022, we acquired additional producing properties and leasehold interests in both the Williston Basin and Eagle Ford that are complementary to our existing acreage, offer operational synergies and add high-quality inventory. And, our diverse portfolio balances exposure to oil and natural gas prices with access to premium markets to improve realized pricing.
We remain focused on building economic value by executing on our strategic priorities of moderating production growth, emphasizing capital and operational efficiencies, optimizing reinvestment rates to maximize free cash flow, maintaining low leverage, delivering cash returns to our shareholders and pursuing ESG excellence. Our recent performance highlights for these priorities include the following items:
We remain committed to capital discipline and delivering the objectives that underpin our current plan. Those objectives prioritize value creation through moderated capital investment and production growth, particularly with a view of the backwardation in commodity prices, supply chain constraints and the economic uncertainty arising from recent geopolitical events.
Commodity prices strengthened throughout 2021 and oil prices have continued to remain high in the first nine months of 2022, which has significantly improved our earnings and cash flow generation. The increase in commodity prices during 2021 was primarily driven by increased demand resulting from the initial recovery from the COVID-19 pandemic. The military conflict between Russia and Ukraine and related economic sanctions imposed on Russia, as well as OPEC+ restraining production growth, have further exacerbated supply shortages, causing oil prices to increase even more during the first nine months of 2022.
23
Trends of our quarterly earnings, operating cash flow, EBITDAX and capital expenditures are shown below. “Core earnings” and “EBITDAX” are financial measures not prepared in accordance with GAAP. For a description of these measures, including reconciliations to the comparable GAAP measures, see “Non-GAAP Measures” in this Item 2.
Our earnings remained relatively flat from the second quarter of 2022 to the third quarter of 2022. Lower oil prices were offset by an increase in gas prices and improvements to the valuation of our commodity hedge positions.
Our net earnings in recent quarters have been significantly impacted by non-cash adjustments to the value of our commodity hedges. Net earnings in the fourth quarter of 2021, second quarter of 2022 and third quarter of 2022 each included a hedge valuation gain, net of tax of $0.4 billion, $0.2 billion and $0.5 billion, respectively. Net earnings in the first quarter of 2022 included a hedge valuation loss, net of tax of $0.3 billion. Excluding these amounts, our core earnings have consistently risen over recent quarters, but decreased in the third quarter of 2022 due to a drop in crude oil prices and continue to trend upward while remaining sensitive to volatile commodity prices.
Like earnings, our operating cash flow is sensitive to volatile commodity prices. We have continued to deliver strong cash flow and EBITDAX results primarily due to improved commodity prices and overall market conditions as well as strong operating performance.
24
We exited the third quarter of 2022 with $4.3 billion of liquidity, comprised of $1.3 billion of cash and $3.0 billion of available credit under our Senior Credit Facility. We currently have $6.5 billion of debt outstanding with no maturities until August 2023. We currently have approximately 30% of both our anticipated remaining 2022 oil and gas production hedged and approximately 25% and 15% of our anticipated 2023 oil and gas production hedged, respectively. These contracts consist of collars and swaps based off the WTI oil benchmark and the Henry Hub and NYMEX last day natural gas indices. Additionally, we have entered into regional basis swaps in an effort to protect price realizations across our portfolio.
As commodity prices and our operating performance strengthen and bolster our financial condition, we have authorized opportunistic repurchases of up to $2.0 billion of our common shares with an expiration date of May 4, 2023. We repurchased approximately 1.9 million shares in the third quarter of 2022 for approximately $113 million, or $59.99 per share. As of September 30, 2022, we have repurchased approximately 25 million shares for approximately $1.3 billion, or $50.23 per share, since the inception of the program. Additionally, we continue funding our fixed plus variable dividends, which totaled $2.5 billion in the first nine months of 2022. We recently declared a dividend payable in the fourth quarter of 2022 for $880 million and increased our fixed dividend by 13% beginning in the third quarter of 2022.
Results of Operations
The following graphs, discussion and analysis are intended to provide an understanding of our results of operations and current financial condition. To facilitate the review, these numbers are being presented before consideration of noncontrolling interests.
Q3 2022 vs. Q2 2022
Our third quarter and second quarter net earnings were each $1.9 billion. The graph below shows the change in net earnings from the second quarter of 2022 to the third quarter of 2022. The material changes are further discussed by category on the following pages.
Production Volumes
|
|
Q3 2022 |
|
|
% of Total |
|
|
Q2 2022 |
|
|
Change |
|
||||
Oil (MBbls/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
210 |
|
|
|
71 |
% |
|
|
222 |
|
|
|
-6 |
% |
Anadarko Basin |
|
|
13 |
|
|
|
5 |
% |
|
|
14 |
|
|
|
-3 |
% |
Williston Basin |
|
|
35 |
|
|
|
12 |
% |
|
|
27 |
|
|
|
30 |
% |
Eagle Ford |
|
|
19 |
|
|
|
7 |
% |
|
|
19 |
|
|
|
2 |
% |
Powder River Basin |
|
|
13 |
|
|
|
4 |
% |
|
|
14 |
|
|
|
-7 |
% |
Other |
|
|
4 |
|
|
|
1 |
% |
|
|
4 |
|
|
|
-5 |
% |
Total |
|
|
294 |
|
|
|
100 |
% |
|
|
300 |
|
|
|
-2 |
% |
|
|
Q3 2022 |
|
|
% of Total |
|
|
Q2 2022 |
|
|
Change |
|
||||
Gas (MMcf/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
623 |
|
|
|
62 |
% |
|
|
618 |
|
|
|
1 |
% |
Anadarko Basin |
|
|
224 |
|
|
|
23 |
% |
|
|
212 |
|
|
|
5 |
% |
Williston Basin |
|
|
71 |
|
|
|
7 |
% |
|
|
52 |
|
|
|
37 |
% |
Eagle Ford |
|
|
63 |
|
|
|
6 |
% |
|
|
60 |
|
|
|
4 |
% |
Powder River Basin |
|
|
18 |
|
|
|
2 |
% |
|
|
18 |
|
|
|
-1 |
% |
Other |
|
|
1 |
|
|
|
0 |
% |
|
|
1 |
|
|
|
0 |
% |
Total |
|
|
1,000 |
|
|
|
100 |
% |
|
|
961 |
|
|
|
4 |
% |
25
|
|
Q3 2022 |
|
|
% of Total |
|
|
Q2 2022 |
|
|
Change |
|
||||
NGLs (MBbls/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
108 |
|
|
|
70 |
% |
|
|
111 |
|
|
|
-3 |
% |
Anadarko Basin |
|
|
27 |
|
|
|
17 |
% |
|
|
25 |
|
|
|
7 |
% |
Williston Basin |
|
|
8 |
|
|
|
5 |
% |
|
|
9 |
|
|
|
-17 |
% |
Eagle Ford |
|
|
9 |
|
|
|
6 |
% |
|
|
9 |
|
|
|
-1 |
% |
Powder River Basin |
|
|
2 |
|
|
|
2 |
% |
|
|
2 |
|
|
|
0 |
% |
Other |
|
|
— |
|
|
|
0 |
% |
|
|
— |
|
|
N/M |
|
|
Total |
|
|
154 |
|
|
|
100 |
% |
|
|
156 |
|
|
|
-1 |
% |
|
|
Q3 2022 |
|
|
% of Total |
|
|
Q2 2022 |
|
|
Change |
|
||||
Combined (MBoe/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
421 |
|
|
|
68 |
% |
|
|
436 |
|
|
|
-3 |
% |
Anadarko Basin |
|
|
77 |
|
|
|
13 |
% |
|
|
74 |
|
|
|
4 |
% |
Williston Basin |
|
|
55 |
|
|
|
9 |
% |
|
|
45 |
|
|
|
22 |
% |
Eagle Ford |
|
|
39 |
|
|
|
6 |
% |
|
|
38 |
|
|
|
2 |
% |
Powder River Basin |
|
|
18 |
|
|
|
3 |
% |
|
|
19 |
|
|
|
-5 |
% |
Other |
|
|
4 |
|
|
|
1 |
% |
|
|
4 |
|
|
|
3 |
% |
Total |
|
|
614 |
|
|
|
100 |
% |
|
|
616 |
|
|
|
0 |
% |
From the second quarter of 2022 to the third quarter of 2022, the change in volumes had a negligible impact to earnings. The slight decrease in volumes was primarily due to downtime in the Delaware Basin during the third quarter which was partially offset by increased volumes in the Williston Basin due to the acquisition that closed in July 2022. We expect Eagle Ford volumes to increase approximately 35 MBoe/d in the fourth quarter due to the acquisition which closed in September 2022.
Realized Prices
|
|
Q3 2022 |
|
|
Realization |
|
Q2 2022 |
|
|
Change |
|
|||
Oil (per Bbl) |
|
|
|
|
|
|
|
|
|
|
|
|||
WTI index |
|
$ |
91.87 |
|
|
|
|
$ |
108.70 |
|
|
|
-15 |
% |
Realized price, unhedged |
|
$ |
92.98 |
|
|
101% |
|
$ |
108.93 |
|
|
|
-15 |
% |
Cash settlements |
|
$ |
(8.60 |
) |
|
|
|
$ |
(13.13 |
) |
|
|
|
|
Realized price, with hedges |
|
$ |
84.38 |
|
|
92% |
|
$ |
95.80 |
|
|
|
-12 |
% |
|
|
Q3 2022 |
|
|
Realization |
|
Q2 2022 |
|
|
Change |
|
|||
Gas (per Mcf) |
|
|
|
|
|
|
|
|
|
|
|
|||
Henry Hub index |
|
$ |
8.20 |
|
|
|
|
$ |
7.17 |
|
|
|
14 |
% |
Realized price, unhedged |
|
$ |
7.25 |
|
|
88% |
|
$ |
6.37 |
|
|
|
14 |
% |
Cash settlements |
|
$ |
(1.42 |
) |
|
|
|
$ |
(1.31 |
) |
|
|
|
|
Realized price, with hedges |
|
$ |
5.83 |
|
|
71% |
|
$ |
5.06 |
|
|
|
15 |
% |
|
|
Q3 2022 |
|
|
Realization |
|
Q2 2022 |
|
|
Change |
|
|||
NGLs (per Bbl) |
|
|
|
|
|
|
|
|
|
|
|
|||
WTI index |
|
$ |
91.87 |
|
|
|
|
$ |
108.70 |
|
|
|
-15 |
% |
Realized price, unhedged |
|
$ |
34.44 |
|
|
37% |
|
$ |
40.28 |
|
|
|
-14 |
% |
Cash settlements |
|
$ |
— |
|
|
|
|
$ |
— |
|
|
|
|
|
Realized price, with hedges |
|
$ |
34.44 |
|
|
37% |
|
$ |
40.28 |
|
|
|
-14 |
% |
|
|
Q3 2022 |
|
|
Q2 2022 |
|
|
Change |
|
|||
Combined (per Boe) |
|
|
|
|
|
|
|
|
|
|||
Realized price, unhedged |
|
$ |
64.89 |
|
|
$ |
73.13 |
|
|
|
-11 |
% |
Cash settlements |
|
$ |
(6.41 |
) |
|
$ |
(8.43 |
) |
|
|
|
|
Realized price, with hedges |
|
$ |
58.48 |
|
|
$ |
64.70 |
|
|
|
-10 |
% |
From the second quarter of 2022 to the third quarter of 2022, realized prices contributed to a $435 million decrease in earnings. Unhedged realized oil and NGL prices decreased primarily due to lower WTI and Mont Belvieu index prices. These decreases were partially offset by an increase in unhedged realized gas prices which was primarily due to a higher Henry Hub index price. Combined realized prices were also negatively impacted by hedge cash settlements related to oil and gas commodities.
26
We currently have approximately 30% of both our anticipated remaining 2022 oil and gas production hedged and approximately 25% and 15% of our anticipated 2023 oil and gas production hedged, respectively.
Hedge Settlements
|
|
Q3 2022 |
|
|
Q2 2022 |
|
|
Change |
|
|||
|
|
Q |
|
|
|
|
|
|
|
|||
Oil |
|
$ |
(233 |
) |
|
$ |
(358 |
) |
|
|
35 |
% |
Natural gas |
|
|
(130 |
) |
|
|
(114 |
) |
|
|
-14 |
% |
Total cash settlements (1) |
|
$ |
(363 |
) |
|
$ |
(472 |
) |
|
|
23 |
% |
Cash settlements as presented in the tables above represent realized gains or losses related to the instruments described in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Production Expenses
|
|
Q3 2022 |
|
|
Q2 2022 |
|
|
Change |
|
|||
LOE |
|
$ |
284 |
|
|
$ |
255 |
|
|
|
11 |
% |
Gathering, processing & transportation |
|
|
177 |
|
|
|
177 |
|
|
|
0 |
% |
Production taxes |
|
|
252 |
|
|
|
278 |
|
|
|
-9 |
% |
Property taxes |
|
|
22 |
|
|
|
19 |
|
|
|
16 |
% |
Total |
|
$ |
735 |
|
|
$ |
729 |
|
|
|
1 |
% |
Per Boe: |
|
|
|
|
|
|
|
|
|
|||
LOE |
|
$ |
5.02 |
|
|
$ |
4.56 |
|
|
|
10 |
% |
Gathering, processing & transportation |
|
$ |
3.13 |
|
|
$ |
3.15 |
|
|
|
-1 |
% |
Percent of oil, gas and NGL sales: |
|
|
|
|
|
|
|
|
|
|||
Production taxes |
|
|
6.9 |
% |
|
|
6.8 |
% |
|
|
1 |
% |
LOE increased from the second quarter to the third quarter of 2022 primarily due to rising costs resulting from inflation. This increase was partially offset by a decrease in production taxes resulting from lower commodity prices.
Field-Level Cash Margin
The table below presents the field-level cash margin for each of our operating areas. Field-level cash margin is computed as oil, gas and NGL sales less production expenses and is not a measure defined by GAAP. A reconciliation to the comparable GAAP measures is found in “Non-GAAP Measures” in this Item 2. The changes in production volumes, realized prices and production expenses, shown above, had the following impact on our field-level cash margins by asset.
|
|
Q3 2022 |
|
|
$ per BOE |
|
|
Q2 2022 |
|
|
$ per BOE |
|
||||
Field-level cash margin (Non-GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
$ |
2,100 |
|
|
$ |
54.20 |
|
|
$ |
2,511 |
|
|
$ |
63.32 |
|
Anadarko Basin |
|
|
284 |
|
|
$ |
40.09 |
|
|
|
277 |
|
|
$ |
41.15 |
|
Williston Basin |
|
|
242 |
|
|
$ |
47.95 |
|
|
|
224 |
|
|
$ |
54.56 |
|
Eagle Ford |
|
|
185 |
|
|
$ |
51.82 |
|
|
|
206 |
|
|
$ |
59.71 |
|
Powder River Basin |
|
|
97 |
|
|
$ |
58.81 |
|
|
|
119 |
|
|
$ |
68.41 |
|
Other |
|
|
25 |
|
|
N/M |
|
|
|
34 |
|
|
N/M |
|
||
Total |
|
$ |
2,933 |
|
|
$ |
51.90 |
|
|
$ |
3,371 |
|
|
$ |
60.12 |
|
DD&A
|
|
Q3 2022 |
|
|
Q2 2022 |
|
|
Change |
|
|||
Oil and gas per Boe |
|
$ |
9.89 |
|
|
$ |
9.02 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Oil and gas |
|
$ |
559 |
|
|
$ |
506 |
|
|
|
10 |
% |
Other property and equipment |
|
|
22 |
|
|
|
22 |
|
|
|
3 |
% |
Total |
|
$ |
581 |
|
|
$ |
528 |
|
|
|
10 |
% |
27
General and Administrative Expense
|
|
Q3 2022 |
|
|
Q2 2022 |
|
|
Change |
|
|||
G&A per Boe |
|
$ |
1.69 |
|
|
$ |
1.51 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Labor and benefits |
|
$ |
54 |
|
|
$ |
44 |
|
|
|
23 |
% |
Non-labor |
|
|
41 |
|
|
|
40 |
|
|
|
3 |
% |
Total |
|
$ |
95 |
|
|
$ |
84 |
|
|
|
13 |
% |
G&A increased in the third quarter due to an increase in labor and benefit costs.
Other Items
|
|
Q3 2022 |
|
|
Q2 2022 |
|
|
Change in earnings |
|
|||
Commodity hedge valuation changes (1) |
|
$ |
611 |
|
|
$ |
302 |
|
|
$ |
309 |
|
Marketing and midstream operations |
|
|
(9 |
) |
|
|
(4 |
) |
|
|
(5 |
) |
Exploration expenses |
|
|
4 |
|
|
|
10 |
|
|
|
6 |
|
Asset dispositions |
|
|
— |
|
|
|
(14 |
) |
|
|
(14 |
) |
Net financing costs |
|
|
67 |
|
|
|
84 |
|
|
|
17 |
|
Other, net |
|
|
(40 |
) |
|
|
10 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
$ |
363 |
|
||
We recognize fair value changes on our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. For additional information, see Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Net financing costs decreased primarily due to an increase in interest income resulting from an increase in interest rates. Additionally, in the third quarter of 2022, Devon received approximately $7 million of interest income associated with reimbursements of performance guarantee obligations Devon and WPX paid in 2020 and 2021 on behalf of the purchaser of previously divested assets. See Note 6 in “Part I. Financial Information – Item 1. Financial Statements” in this report for additional information regarding this item.
For discussion on other, net, see Note 6 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Income Taxes
|
|
Q3 2022 |
|
|
Q2 2022 |
|
||
Current expense |
|
$ |
120 |
|
|
$ |
252 |
|
Deferred expense |
|
|
445 |
|
|
|
305 |
|
Total expense |
|
$ |
565 |
|
|
$ |
557 |
|
Effective income tax rate |
|
|
23 |
% |
|
|
22 |
% |
For discussion on income taxes, see Note 7 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
28
September 30, YTD 2022 vs. September 30, YTD 2021
Our nine months ended September 30, 2022 net earnings were $4.8 billion, compared to net earnings of $1.3 billion for the first nine months ended September 30, 2021. The graph below shows the change in net earnings from the nine months ended September 30, 2021 to the nine months ended September 30, 2022. The material changes are further discussed by category on the following pages.
Production Volumes
|
|
Nine Months Ended September 30, |
|
|||||||||||||
|
|
2022 |
|
|
% of Total |
|
|
2021 |
|
|
Change |
|
||||
Oil (MBbls/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
214 |
|
|
|
73 |
% |
|
|
192 |
|
|
|
11 |
% |
Anadarko Basin |
|
|
14 |
|
|
|
5 |
% |
|
|
14 |
|
|
|
-5 |
% |
Williston Basin |
|
|
31 |
|
|
|
11 |
% |
|
|
43 |
|
|
|
-27 |
% |
Eagle Ford |
|
|
18 |
|
|
|
6 |
% |
|
|
18 |
|
|
|
1 |
% |
Powder River Basin |
|
|
13 |
|
|
|
4 |
% |
|
|
16 |
|
|
|
-17 |
% |
Other |
|
|
4 |
|
|
|
1 |
% |
|
|
4 |
|
|
|
-8 |
% |
Total |
|
|
294 |
|
|
|
100 |
% |
|
|
287 |
|
|
|
2 |
% |
|
|
Nine Months Ended September 30, |
|
|||||||||||||
|
|
2022 |
|
|
% of Total |
|
|
2021 |
|
|
Change |
|
||||
Gas (MMcf/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
601 |
|
|
|
63 |
% |
|
|
521 |
|
|
|
15 |
% |
Anadarko Basin |
|
|
215 |
|
|
|
23 |
% |
|
|
215 |
|
|
|
0 |
% |
Williston Basin |
|
|
59 |
|
|
|
6 |
% |
|
|
56 |
|
|
|
5 |
% |
Eagle Ford |
|
|
62 |
|
|
|
6 |
% |
|
|
57 |
|
|
|
7 |
% |
Powder River Basin |
|
|
18 |
|
|
|
2 |
% |
|
|
21 |
|
|
|
-11 |
% |
Other |
|
|
1 |
|
|
|
0 |
% |
|
|
2 |
|
|
|
-51 |
% |
Total |
|
|
956 |
|
|
|
100 |
% |
|
|
872 |
|
|
|
10 |
% |
|
|
Nine Months Ended September 30, |
|
|||||||||||||
|
|
2022 |
|
|
% of Total |
|
|
2021 |
|
|
Change |
|
||||
NGLs (MBbls/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
104 |
|
|
|
70 |
% |
|
|
81 |
|
|
|
28 |
% |
Anadarko Basin |
|
|
26 |
|
|
|
17 |
% |
|
|
24 |
|
|
|
7 |
% |
Williston Basin |
|
|
8 |
|
|
|
6 |
% |
|
|
9 |
|
|
|
-8 |
% |
Eagle Ford |
|
|
9 |
|
|
|
6 |
% |
|
|
9 |
|
|
|
3 |
% |
Powder River Basin |
|
|
2 |
|
|
|
1 |
% |
|
|
3 |
|
|
|
-16 |
% |
Other |
|
|
— |
|
|
|
0 |
% |
|
|
— |
|
|
N/M |
|
|
Total |
|
|
149 |
|
|
|
100 |
% |
|
|
126 |
|
|
|
18 |
% |
29
|
|
Nine Months Ended September 30, |
|
|||||||||||||
|
|
2022 |
|
|
% of Total |
|
|
2021 |
|
|
Change |
|
||||
Combined (MBoe/d) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
|
417 |
|
|
|
69 |
% |
|
|
360 |
|
|
|
16 |
% |
Anadarko Basin |
|
|
75 |
|
|
|
13 |
% |
|
|
74 |
|
|
|
1 |
% |
Williston Basin |
|
|
50 |
|
|
|
8 |
% |
|
|
61 |
|
|
|
-19 |
% |
Eagle Ford |
|
|
38 |
|
|
|
6 |
% |
|
|
36 |
|
|
|
3 |
% |
Powder River Basin |
|
|
18 |
|
|
|
3 |
% |
|
|
22 |
|
|
|
-16 |
% |
Other |
|
|
4 |
|
|
|
1 |
% |
|
|
5 |
|
|
|
-16 |
% |
Total |
|
|
602 |
|
|
|
100 |
% |
|
|
558 |
|
|
|
8 |
% |
From the nine months ended 2021 to the nine months ended 2022, the change in volumes contributed to a $348 million increase in earnings. The increase in volumes was primarily due to continued development in the Delaware Basin which was partially offset by natural declines in the Williston Basin and Powder River Basin. Due to the acquisition of additional assets that closed in July 2022, Williston Basin volumes did increase to 55 MBoe/d in the third quarter of 2022 and are expected to continue to increase. Additionally, we expect Eagle Ford volumes to increase approximately 35 MBoe/d in the fourth quarter due to the acquisition which closed in September 2022.
Realized Prices
|
|
Nine Months Ended September 30, |
|
|||||||||||
|
|
2022 |
|
|
Realization |
|
2021 |
|
|
Change |
|
|||
Oil (per Bbl) |
|
|
|
|
|
|
|
|
|
|
|
|||
WTI index |
|
$ |
98.34 |
|
|
|
|
$ |
64.85 |
|
|
|
52 |
% |
Realized price, unhedged |
|
$ |
98.39 |
|
|
100% |
|
$ |
62.69 |
|
|
|
57 |
% |
Cash settlements |
|
$ |
(11.02 |
) |
|
|
|
$ |
(11.06 |
) |
|
|
|
|
Realized price, with hedges |
|
$ |
87.37 |
|
|
89% |
|
$ |
51.63 |
|
|
|
69 |
% |
|
|
Nine Months Ended September 30, |
|
|||||||||||
|
|
2022 |
|
|
Realization |
|
2021 |
|
|
Change |
|
|||
Gas (per Mcf) |
|
|
|
|
|
|
|
|
|
|
|
|||
Henry Hub index |
|
$ |
6.78 |
|
|
|
|
$ |
3.19 |
|
|
|
113 |
% |
Realized price, unhedged |
|
$ |
5.86 |
|
|
86% |
|
$ |
2.93 |
|
|
|
100 |
% |
Cash settlements |
|
$ |
(1.12 |
) |
|
|
|
$ |
(0.38 |
) |
|
|
|
|
Realized price, with hedges |
|
$ |
4.74 |
|
|
70% |
|
$ |
2.55 |
|
|
|
86 |
% |
|
|
Nine Months Ended September 30, |
|
|||||||||||
|
|
2022 |
|
|
Realization |
|
2021 |
|
|
Change |
|
|||
NGLs (per Bbl) |
|
|
|
|
|
|
|
|
|
|
|
|||
WTI index |
|
$ |
98.34 |
|
|
|
|
$ |
64.85 |
|
|
|
52 |
% |
Realized price, unhedged |
|
$ |
37.48 |
|
|
38% |
|
$ |
27.11 |
|
|
|
38 |
% |
Cash settlements |
|
$ |
— |
|
|
|
|
$ |
(0.32 |
) |
|
|
|
|
Realized price, with hedges |
|
$ |
37.48 |
|
|
38% |
|
$ |
26.79 |
|
|
|
40 |
% |
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
Combined (per Boe) |
|
|
|
|
|
|
|
|
|
|||
Realized price, unhedged |
|
$ |
66.60 |
|
|
$ |
42.94 |
|
|
|
55 |
% |
Cash settlements |
|
$ |
(7.17 |
) |
|
$ |
(6.35 |
) |
|
|
|
|
Realized price, with hedges |
|
$ |
59.43 |
|
|
$ |
36.59 |
|
|
|
62 |
% |
From the nine months ended 2021 to the nine months ended 2022, realized prices contributed to a $4.0 billion increase in earnings. Unhedged realized oil, gas and NGL prices increased primarily due to higher WTI, Henry Hub and Mont Belvieu index prices. The increase in index prices was partially offset by hedge cash settlements related to oil and gas commodities.
30
Hedge Settlements
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
Oil |
|
$ |
(884 |
) |
|
$ |
(868 |
) |
|
|
-2 |
% |
Natural gas |
|
|
(295 |
) |
|
|
(90 |
) |
|
|
-228 |
% |
NGL |
|
|
— |
|
|
|
(11 |
) |
|
N/M |
|
|
Total cash settlements (1) |
|
$ |
(1,179 |
) |
|
$ |
(969 |
) |
|
|
-22 |
% |
Cash settlements as presented in the tables above represent realized gains or losses related to the instruments described in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Production Expenses
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
LOE |
|
$ |
763 |
|
|
$ |
624 |
|
|
|
22 |
% |
Gathering, processing & transportation |
|
|
515 |
|
|
|
433 |
|
|
|
19 |
% |
Production taxes |
|
|
744 |
|
|
|
436 |
|
|
|
71 |
% |
Property taxes |
|
|
60 |
|
|
|
33 |
|
|
|
82 |
% |
Total |
|
$ |
2,082 |
|
|
$ |
1,526 |
|
|
|
36 |
% |
Per Boe: |
|
|
|
|
|
|
|
|
|
|||
LOE |
|
$ |
4.65 |
|
|
$ |
4.09 |
|
|
|
13 |
% |
Gathering, processing & transportation |
|
$ |
3.13 |
|
|
$ |
2.84 |
|
|
|
10 |
% |
Percent of oil, gas and NGL sales: |
|
|
|
|
|
|
|
|
|
|||
Production taxes |
|
|
6.8 |
% |
|
|
6.7 |
% |
|
|
2 |
% |
Production expenses increased primarily due to higher volumes and inflation, as well as an increase in production and property taxes resulting from higher commodity prices.
Field-Level Cash Margin
The table below presents the field-level cash margin for each of our operating areas. Field-level cash margin is computed as oil, gas and NGL sales less production expenses and is not a measure defined by GAAP. A reconciliation to the comparable GAAP measures is found in “Non-GAAP Measures” in this Item 2. The changes in production volumes, realized prices and production expenses, shown above, had the following impact on our field-level cash margins by asset.
|
|
Nine Months Ended September 30, |
|
|||||||||||||
|
|
2022 |
|
|
$ per BOE |
|
|
2021 |
|
|
$ per BOE |
|
||||
Field-level cash margin (Non-GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Delaware Basin |
|
$ |
6,488 |
|
|
$ |
57.01 |
|
|
$ |
3,477 |
|
|
$ |
35.41 |
|
Anadarko Basin |
|
|
765 |
|
|
$ |
37.24 |
|
|
|
404 |
|
|
$ |
19.93 |
|
Williston Basin |
|
|
673 |
|
|
$ |
49.87 |
|
|
|
550 |
|
|
$ |
32.91 |
|
Eagle Ford |
|
|
549 |
|
|
$ |
53.56 |
|
|
|
325 |
|
|
$ |
32.74 |
|
Powder River Basin |
|
|
302 |
|
|
$ |
60.65 |
|
|
|
210 |
|
|
$ |
35.53 |
|
Other |
|
|
84 |
|
|
N/M |
|
|
|
54 |
|
|
N/M |
|
||
Total |
|
$ |
8,861 |
|
|
$ |
53.93 |
|
|
$ |
5,020 |
|
|
$ |
32.93 |
|
DD&A
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
Oil and gas per Boe |
|
$ |
9.30 |
|
|
$ |
9.84 |
|
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Oil and gas |
|
$ |
1,528 |
|
|
$ |
1,500 |
|
|
|
2 |
% |
Other property and equipment |
|
|
70 |
|
|
|
81 |
|
|
|
-14 |
% |
Total |
|
$ |
1,598 |
|
|
$ |
1,581 |
|
|
|
1 |
% |
DD&A increased primarily due to higher volumes which was partially offset by lower DD&A rates. The decrease in DD&A
31
rates was primarily due to increases to oil, gas and NGL reserve estimates at December 31, 2021, resulting from higher prices.
General and Administrative Expense
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|||
G&A per Boe |
|
$ |
1.67 |
|
|
$ |
1.94 |
|
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|||
Labor and benefits |
|
$ |
156 |
|
|
$ |
197 |
|
|
|
-21 |
% |
Non-labor |
|
|
117 |
|
|
|
99 |
|
|
|
18 |
% |
Total |
|
$ |
273 |
|
|
$ |
296 |
|
|
|
-8 |
% |
General and administrative expenses have decreased primarily due to synergies resulting from the Merger.
Other Items
|
|
Nine Months Ended September 30, |
|
|||||||||
|
|
2022 |
|
|
2021 |
|
|
Change in earnings |
|
|||
Commodity hedge valuation changes (1) |
|
$ |
574 |
|
|
$ |
(597 |
) |
|
$ |
1,171 |
|
Marketing and midstream operations |
|
|
(17 |
) |
|
|
(19 |
) |
|
|
2 |
|
Exploration expenses |
|
|
16 |
|
|
|
9 |
|
|
|
(7 |
) |
Asset dispositions |
|
|
(15 |
) |
|
|
(119 |
) |
|
|
(104 |
) |
Net financing costs |
|
|
236 |
|
|
|
243 |
|
|
|
7 |
|
Restructuring and transaction costs |
|
|
— |
|
|
|
230 |
|
|
|
230 |
|
Other, net |
|
|
(91 |
) |
|
|
(41 |
) |
|
|
50 |
|
|
|
|
|
|
|
|
|
$ |
1,349 |
|
||
We recognize fair value changes on our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. For additional information, see Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Asset dispositions include $65 million and $35 million in the first nine months of 2021 related to the re-valuation of contingent earnout payments associated with our divested Barnett Shale assets and the sale of non-core assets in the Rockies, respectively. For additional information, see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Restructuring and transaction costs in the first nine months of 2021 reflect workforce reductions in conjunction with the Merger, as well as various transaction costs related to the Merger. For additional information, see Note 5 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
For discussion on other, net, see Note 6 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Income Taxes
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Current expense |
|
$ |
475 |
|
|
$ |
15 |
|
Deferred expense (benefit) |
|
|
914 |
|
|
|
(100 |
) |
Total expense (benefit) |
|
$ |
1,389 |
|
|
$ |
(85 |
) |
Effective income tax rate |
|
|
22 |
% |
|
|
(7 |
%) |
For discussion on income taxes, see Note 7 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
32
Capital Resources, Uses and Liquidity
Sources and Uses of Cash
The following table presents the major changes in cash and cash equivalents for the three and nine months ended September 30, 2022 and 2021.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Operating cash flow |
|
$ |
2,104 |
|
|
$ |
1,598 |
|
|
$ |
6,619 |
|
|
$ |
3,283 |
|
WPX acquired cash |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
344 |
|
Acquisitions of property and equipment |
|
|
(2,465 |
) |
|
|
(10 |
) |
|
|
(2,566 |
) |
|
|
(15 |
) |
Divestitures of property and equipment |
|
|
4 |
|
|
|
1 |
|
|
|
39 |
|
|
|
65 |
|
Capital expenditures |
|
|
(628 |
) |
|
|
(474 |
) |
|
|
(1,738 |
) |
|
|
(1,477 |
) |
Investment activity, net |
|
|
(9 |
) |
|
|
9 |
|
|
|
(29 |
) |
|
|
27 |
|
Debt activity, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,302 |
) |
Repurchases of common stock |
|
|
(126 |
) |
|
|
— |
|
|
|
(661 |
) |
|
|
— |
|
Common stock dividends |
|
|
(1,007 |
) |
|
|
(329 |
) |
|
|
(2,504 |
) |
|
|
(761 |
) |
Noncontrolling interest activity, net |
|
|
(9 |
) |
|
|
(5 |
) |
|
|
(22 |
) |
|
|
(35 |
) |
Other |
|
|
(11 |
) |
|
|
(8 |
) |
|
|
(99 |
) |
|
|
(45 |
) |
Net change in cash, cash equivalents and restricted cash |
|
$ |
(2,147 |
) |
|
$ |
782 |
|
|
$ |
(961 |
) |
|
$ |
84 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
1,310 |
|
|
$ |
2,321 |
|
|
$ |
1,310 |
|
|
$ |
2,321 |
|
Operating Cash Flow
As presented in the table above, net cash provided by operating activities continued to be a significant source of capital and liquidity. Operating cash flow more than doubled during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to significantly increased commodity prices as well as higher volumes for the first nine months of 2022 compared to 2021.
Acquisitions of Property and Equipment
During the first nine months of 2022, we paid $2.6 billion toward acquisitions of producing properties and leasehold interests located in the Eagle Ford and Williston Basin, which were completed in the third quarter of 2022. For additional information, please see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Divestitures of Property and Equipment
During the first nine months of 2022 and 2021, we received contingent earnout payments related to assets previously sold. For additional information, please see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Capital Expenditures
The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.
|
|
Three Months Ended September 30, |
|
|
Nine months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Delaware Basin |
|
$ |
409 |
|
|
$ |
375 |
|
|
$ |
1,216 |
|
|
$ |
1,150 |
|
Anadarko Basin |
|
|
50 |
|
|
|
11 |
|
|
|
92 |
|
|
|
29 |
|
Williston Basin |
|
|
48 |
|
|
|
13 |
|
|
|
87 |
|
|
|
59 |
|
Eagle Ford |
|
|
36 |
|
|
|
45 |
|
|
|
95 |
|
|
|
88 |
|
Powder River Basin |
|
|
52 |
|
|
|
13 |
|
|
|
113 |
|
|
|
53 |
|
Other |
|
|
2 |
|
|
|
1 |
|
|
|
8 |
|
|
|
1 |
|
Total oil and gas |
|
|
597 |
|
|
|
458 |
|
|
|
1,611 |
|
|
|
1,380 |
|
Midstream |
|
|
17 |
|
|
|
5 |
|
|
|
74 |
|
|
|
53 |
|
Other |
|
|
14 |
|
|
|
11 |
|
|
|
53 |
|
|
|
44 |
|
Total capital expenditures |
|
$ |
628 |
|
|
$ |
474 |
|
|
$ |
1,738 |
|
|
$ |
1,477 |
|
33
Capital expenditures consist primarily of amounts related to our oil and gas exploration and development operations, midstream operations and other corporate activities. Our capital investment program is driven by a disciplined allocation process focused on moderating our production growth and maximizing our returns. As such, our capital expenditures for the first nine months of 2022 represent approximately 25% of our operating cash flow.
Investment Activity
During the first nine months of 2022 and 2021, Devon received distributions from our investments of $30 million and $27 million, respectively. Devon contributed $59 million to our investments during the first nine months of 2022.
Debt Activity
Subsequent to the Merger closing, we redeemed $1.2 billion of senior notes in the first nine months of 2021. We also paid $59 million of cash retirement costs related to these redemptions.
Shareholder Distributions and Stock Activity
We repurchased approximately 11 million shares of common stock for $661 million in the first nine months of 2022 under the share repurchase program authorized by our Board of Directors. For additional information, see Note 16 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
The following table summarizes our common stock dividends during the third quarter and first nine months of 2022 and 2021. In February 2022, our Board of Directors increased our fixed dividend rate by 45% to $0.16 per share and again by 13% to $0.18 per share beginning in the third quarter of 2022. In addition to the fixed quarterly dividend, we paid a variable dividend in the first, second and third quarters of 2022 and 2021.
|
Fixed |
|
|
Variable |
|
|
Total |
|
|
Rate Per Share |
|
||||
2022: |
|
|
|
|
|
|
|
|
|
|
|
||||
First quarter |
$ |
109 |
|
|
$ |
558 |
|
|
$ |
667 |
|
|
$ |
1.00 |
|
Second quarter |
|
105 |
|
|
|
725 |
|
|
|
830 |
|
|
$ |
1.27 |
|
Third quarter |
|
117 |
|
|
|
890 |
|
|
|
1,007 |
|
|
$ |
1.55 |
|
Total year-to-date |
$ |
331 |
|
|
$ |
2,173 |
|
|
$ |
2,504 |
|
|
|
|
|
2021: |
|
|
|
|
|
|
|
|
|
|
|
||||
First quarter |
$ |
76 |
|
|
$ |
127 |
|
|
$ |
203 |
|
|
$ |
0.30 |
|
Second quarter |
|
75 |
|
|
|
154 |
|
|
|
229 |
|
|
$ |
0.34 |
|
Third quarter |
|
74 |
|
|
|
255 |
|
|
|
329 |
|
|
$ |
0.49 |
|
Total year-to-date |
$ |
225 |
|
|
$ |
536 |
|
|
$ |
761 |
|
|
|
|
|
Noncontrolling Interest Activity, net
During the first nine months of 2022 and 2021, we distributed $22 million and $15 million, respectively, to our noncontrolling interests in CDM. During the first nine months of 2021, we received contributions of $4 million related to our noncontrolling interests in CDM.
In the first quarter of 2021, we paid $24 million to purchase the noncontrolling interest portion of a partnership that WPX had formed to acquire minerals in the Delaware Basin.
Liquidity
The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, we, like all upstream operators, must continually make capital investments to grow and even sustain production. Generally, our capital investments are focused on drilling and completing new wells and maintaining production from existing wells. At opportunistic times, we also acquire operations and properties from other operators or landowners to enhance our existing portfolio of assets.
Historically, our primary sources of capital funding and liquidity have been our operating cash flow, cash on hand and asset divestiture proceeds. Additionally, we maintain a commercial paper program, supported by our revolving line of credit, which can be accessed as needed to supplement operating cash flow and cash balances. If needed, we can also issue debt and equity securities, including through transactions under our shelf registration statement filed with the SEC. We estimate the combination of our sources
34
of capital will continue to be adequate to fund our planned capital requirements as discussed in this section as well as accelerate our cash-return business model.
Operating Cash Flow
Key inputs into determining our planned capital investment are the amount of cash we hold and operating cash flow we expect to generate over the next one to three or more years. At the end of the third quarter of 2022, we held approximately $1.3 billion of cash. Our operating cash flow forecasts are sensitive to many variables and include a measure of uncertainty as actual results may differ from our expectations.
Commodity Prices – The most uncertain and volatile variables for our operating cash flow are the prices of the oil, gas and NGLs we produce and sell. Prices are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other highly variable factors influence market conditions for these products. These factors, which are difficult to predict, create volatility in prices and are beyond our control.
To mitigate some of the risk inherent in prices, we utilize various derivative financial instruments to protect a portion of our production against downside price risk. The key terms to our oil, gas and NGL derivative financial instruments as of September 30, 2022 are presented in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” of this report.
Further, when considering the current commodity price environment and our current hedge position, we expect to achieve our capital investment priorities. Additionally, we remain committed to capital discipline and focused on delivering the objectives that underpin our capital plan for 2022. We will continue to prioritize economic value over growing volumes, which is driven partially by current commodity price backwardation, supply chain constraints and economic uncertainty arising from recent geopolitical events.
Operating Expenses – Commodity prices can also affect our operating cash flow through an indirect effect on operating expenses. Significant commodity price decreases can lead to a decrease in drilling and development activities. As a result, the demand and cost for people, services, equipment and materials may also decrease, causing a positive impact on our cash flow as the prices paid for services and equipment decline. However, the inverse is also generally true during periods of rising commodity prices, which is what we are currently experiencing in 2022. Furthermore, the COVID-19 pandemic has contributed to disruption and volatility in our supply chain, which has resulted, and may continue to result in labor shortages, increased costs and delays for pipe and other materials needed for our operations.
Credit Losses – Our operating cash flow is also exposed to credit risk in a variety of ways. This includes the credit risk related to customers who purchase our oil, gas and NGL production, the collection of receivables from our joint interest owners for their proportionate share of expenditures made on projects we operate and counterparties to our derivative financial contracts. We utilize a variety of mechanisms to limit our exposure to the credit risks of our customers, partners and counterparties. Such mechanisms include, under certain conditions, requiring letters of credit, prepayments or cash collateral postings.
Credit Availability
As of September 30, 2022, we had approximately $3.0 billion of available borrowing capacity under our Senior Credit Facility. This credit facility supports our $3.0 billion of short-term credit under our commercial paper program. At September 30, 2022, there were no borrowings under our commercial paper program, and we were in compliance with the Senior Credit Facility’s financial covenant.
Debt Ratings
We receive debt ratings from the major ratings agencies in the U.S. In determining our debt ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, commodity pricing levels, our liquidity, asset quality, reserve mix, debt levels, cost structure, planned asset sales and size and scale of our production. Our credit rating from Standard and Poor’s Financial Services is BBB with a stable outlook. Our credit rating from Fitch is BBB+ with a stable outlook. Our credit rating from Moody’s Investor Service is Baa2 with a stable outlook. Any rating downgrades may result in additional letters of credit or cash collateral being posted under certain contractual arrangements.
There are no “rating triggers” in any of our contractual debt obligations that would accelerate scheduled maturities should our debt rating fall below a specified level. However, a downgrade could adversely impact our interest rate on any credit facility borrowings and the ability to economically access debt markets in the future.
35
Fixed Plus Variable Dividend
We are committed to a “fixed plus variable” dividend strategy. Our Board of Directors will consider a number of factors when setting the quarterly dividend, if any, including a general target of paying out approximately 10% of operating cash flow through the fixed dividend. Our Board of Directors increased our quarterly fixed dividend rate by 45% to $0.16 per share in February 2022 and again by 13% to $0.18 per share beginning in August 2022. In addition to the fixed quarterly dividend, we may pay a variable dividend of up to 50% of our excess free cash flow, which is a non-GAAP measure. Each quarter’s excess free cash flow is computed as operating cash flow (a GAAP measure) before balance sheet changes, less capital expenditures and the fixed dividend. The declaration and payment of any future dividend, whether fixed or variable, will remain at the full discretion of our Board of Directors and will depend on our financial results, cash requirements, future prospects and other factors deemed relevant by the Board.
In November 2022, Devon announced a cash dividend in the amount of $1.35 per share payable in the fourth quarter of 2022. The dividend consists of an $0.18 per share fixed quarterly dividend and a $1.17 per share variable quarterly dividend and will total approximately $880 million.
Share Repurchases
In May 2022, our Board of Directors increased our share repurchase program by $0.4 billion to a total authorized amount of $2.0 billion, and extended the expiration date to May 4, 2023. Through October 2022, we had executed $1.3 billion of the authorized program.
Capital Expenditures
Our exploration and development budget for the fourth quarter of 2022 is expected to range from approximately $800 million to $900 million.
Critical Accounting Estimates
Income Taxes
The amount of income taxes recorded requires interpretations of complex rules and regulations of federal, state, provincial and foreign tax jurisdictions. We recognize current tax expense based on estimated taxable income for the current period and the applicable statutory tax rates. We routinely assess potential uncertain tax positions and, if required, estimate and establish accruals for such amounts. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and other tax carryforwards. We routinely assess our deferred tax assets and reduce such assets by a valuation allowance if we deem it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Further, in the event we were to undergo an “ownership change” (as defined in Section 382 of the Internal Revenue Code of 1986, as amended), our ability to use net operating losses and tax credits generated prior to the ownership change may be limited. Generally, an “ownership change” occurs if one or more shareholders, each of whom owns five percent or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50 percent over the lowest percentage of stock owned by those shareholders at any time during the preceding three-year period. Based on currently available information, we do not believe an ownership change has occurred during 2022 for Devon, but the Merger did cause an ownership change for WPX and increased the likelihood Devon could experience an ownership change over the next two years.
For additional information regarding our critical accounting policies and estimates, see our 2021 Annual Report on Form 10-K.
Non-GAAP Measures
We make reference to “core earnings attributable to Devon” and “core earnings per share attributable to Devon” in “Executive Overview” in this Item 2 that are not required by or presented in accordance with GAAP. These non-GAAP measures are not alternatives to GAAP measures and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. Core earnings attributable to Devon, as well as the per share amount, represent net earnings excluding certain non-cash and other items that are typically excluded by securities analysts in their published estimates of our financial results. Our non-GAAP measures are typically used as a quarterly performance measure. Amounts excluded relate to asset dispositions, non-cash asset impairments (including non-cash unproved asset impairments), deferred tax asset valuation allowance, changes in tax legislation, fair
36
value changes in derivative financial instruments, costs associated with early retirement of debt and restructuring and transaction costs associated with the workforce reductions described further in Note 5.
We believe these non-GAAP measures facilitate comparisons of our performance to earnings estimates published by securities analysts. We also believe these non-GAAP measures can facilitate comparisons of our performance between periods and to the performance of our peers.
Below are reconciliations of core earnings and core earnings per share attributable to Devon to comparable GAAP measures.
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
|
Before Tax |
|
|
After Tax |
|
|
After NCI |
|
|
Per Diluted Share |
|
|
Before Tax |
|
|
After Tax |
|
|
After NCI |
|
|
Per Diluted Share |
|
||||||||
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Earnings attributable to Devon (GAAP) |
$ |
2,465 |
|
|
$ |
1,900 |
|
|
$ |
1,893 |
|
|
$ |
2.88 |
|
|
$ |
6,222 |
|
|
$ |
4,833 |
|
|
$ |
4,814 |
|
|
$ |
7.28 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Asset dispositions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
(12 |
) |
|
|
(12 |
) |
|
|
(0.02 |
) |
Asset and exploration impairments |
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
9 |
|
|
|
7 |
|
|
|
7 |
|
|
|
0.01 |
|
Deferred tax asset valuation allowance |
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
15 |
|
|
|
0.02 |
|
Fair value changes in financial instruments |
|
(604 |
) |
|
|
(464 |
) |
|
|
(464 |
) |
|
|
(0.70 |
) |
|
|
(565 |
) |
|
|
(433 |
) |
|
|
(433 |
) |
|
|
(0.65 |
) |
Core earnings attributable to Devon (Non-GAAP) |
$ |
1,862 |
|
|
$ |
1,436 |
|
|
$ |
1,429 |
|
|
$ |
2.18 |
|
|
$ |
5,651 |
|
|
$ |
4,410 |
|
|
$ |
4,391 |
|
|
$ |
6.64 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Earnings attributable to Devon (GAAP) |
$ |
964 |
|
|
$ |
844 |
|
|
$ |
838 |
|
|
$ |
1.24 |
|
|
$ |
1,236 |
|
|
$ |
1,321 |
|
|
$ |
1,307 |
|
|
$ |
1.95 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Asset dispositions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(119 |
) |
|
|
(91 |
) |
|
|
(91 |
) |
|
|
(0.13 |
) |
Asset and exploration impairments |
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
— |
|
Deferred tax asset valuation allowance |
|
— |
|
|
|
(101 |
) |
|
|
(101 |
) |
|
|
(0.15 |
) |
|
|
— |
|
|
|
(479 |
) |
|
|
(479 |
) |
|
|
(0.71 |
) |
Change in tax legislation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62 |
|
|
|
62 |
|
|
|
0.09 |
|
Fair value changes in financial instruments |
|
(31 |
) |
|
|
(23 |
) |
|
|
(23 |
) |
|
|
(0.04 |
) |
|
|
597 |
|
|
|
460 |
|
|
|
460 |
|
|
|
0.68 |
|
Restructuring and transaction costs |
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
|
0.03 |
|
|
|
230 |
|
|
|
201 |
|
|
|
201 |
|
|
|
0.29 |
|
Early retirement of debt |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30 |
) |
|
|
(23 |
) |
|
|
(23 |
) |
|
|
(0.03 |
) |
Core earnings attributable to Devon (Non-GAAP) |
$ |
952 |
|
|
$ |
739 |
|
|
$ |
733 |
|
|
$ |
1.08 |
|
|
$ |
1,917 |
|
|
$ |
1,453 |
|
|
$ |
1,439 |
|
|
$ |
2.14 |
|
EBITDAX and Field-Level Cash Margin
To assess the performance of our assets, we use EBITDAX and Field-Level Cash Margin. We compute EBITDAX as net earnings before income tax expense; financing costs, net; exploration expenses; DD&A; asset impairments; asset disposition gains and losses; non-cash share-based compensation; non-cash valuation changes for derivatives and financial instruments; restructuring and transaction costs; accretion on discounted liabilities; and other items not related to our normal operations. Field-Level Cash Margin is computed as oil, gas and NGL sales less production expenses. Production expenses consist of lease operating, gathering, processing and transportation expenses, as well as production and property taxes.
We exclude financing costs from EBITDAX to assess our operating results without regard to our financing methods or capital structure. Exploration expenses and asset disposition gains and losses are excluded from EBITDAX because they generally are not indicators of operating efficiency for a given reporting period. DD&A and impairments are excluded from EBITDAX because capital expenditures are evaluated at the time capital costs are incurred. We exclude share-based compensation, valuation changes, restructuring and transaction costs, accretion on discounted liabilities and other items from EBITDAX because they are not considered a measure of asset operating performance.
We believe EBITDAX and Field-Level Cash Margin provide information useful in assessing our operating and financial performance across periods. EBITDAX and Field-Level Cash Margin as defined by Devon may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net earnings from operations.
37
Below are reconciliations of net earnings to EBITDAX and a further reconciliation to Field-Level Cash Margin.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Net earnings (GAAP) |
|
$ |
1,900 |
|
|
$ |
844 |
|
|
$ |
4,833 |
|
|
$ |
1,321 |
|
Financing costs, net |
|
|
67 |
|
|
|
86 |
|
|
|
236 |
|
|
|
243 |
|
Income tax expense (benefit) |
|
|
565 |
|
|
|
120 |
|
|
|
1,389 |
|
|
|
(85 |
) |
Exploration expenses |
|
|
4 |
|
|
|
3 |
|
|
|
16 |
|
|
|
9 |
|
Depreciation, depletion and amortization |
|
|
581 |
|
|
|
578 |
|
|
|
1,598 |
|
|
|
1,581 |
|
Asset dispositions |
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
(119 |
) |
Share-based compensation |
|
|
22 |
|
|
|
18 |
|
|
|
64 |
|
|
|
58 |
|
Derivative and financial instrument non-cash valuation changes |
|
|
(613 |
) |
|
|
(35 |
) |
|
|
(576 |
) |
|
|
597 |
|
Restructuring and transaction costs |
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
230 |
|
Accretion on discounted liabilities and other |
|
|
(38 |
) |
|
|
2 |
|
|
|
(89 |
) |
|
|
(41 |
) |
EBITDAX (Non-GAAP) |
|
|
2,488 |
|
|
|
1,634 |
|
|
|
7,456 |
|
|
|
3,794 |
|
Marketing and midstream revenues and expenses, net |
|
|
9 |
|
|
|
(1 |
) |
|
|
17 |
|
|
|
19 |
|
Commodity derivative cash settlements |
|
|
363 |
|
|
|
370 |
|
|
|
1,179 |
|
|
|
969 |
|
General and administrative expenses, cash-based |
|
|
73 |
|
|
|
77 |
|
|
|
209 |
|
|
|
238 |
|
Field-level cash margin (Non-GAAP) |
|
$ |
2,933 |
|
|
$ |
2,080 |
|
|
$ |
8,861 |
|
|
$ |
5,020 |
|
38
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
As of September 30, 2022, we have commodity derivatives that pertain to a portion of our estimated production for the last three months of 2022, as well as for 2023 and 2024. The key terms to our open oil, gas and NGL derivative financial instruments are presented in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
The fair values of our commodity derivatives are largely determined by the forward curves of the relevant price indices. At September 30, 2022, a 10% change in the forward curves associated with our commodity derivative instruments would have changed our net positions by approximately $185 million.
Interest Rate Risk
As of September 30, 2022, we had total debt of $6.5 billion. All of our debt is based on fixed interest rates averaging 5.8%.
Foreign Currency Risk
We had no material foreign currency risk at September 30, 2022.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to Devon, including its consolidated subsidiaries, is made known to the officers who certify Devon’s financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of September 30, 2022 to ensure that the information required to be disclosed by Devon in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information
Item 1. Legal Proceedings
We are involved in various legal proceedings incidental to our business. However, to our knowledge as of the date of this report and subject to the environmental matters noted in Part I, Item 3. Legal Proceedings of our 2021 Annual Report on Form 10-K, there were no material pending legal proceedings to which we are a party or to which any of our property is subject.
As previously disclosed, WPX Energy, Inc., a wholly-owned subsidiary of the Company, received a notice of violation on April 7, 2020 from the EPA relating to specific historical air emission events occurring on the Fort Berthold Indian Reservation in North Dakota. On July 22, 2022, we received an updated notice of violation from the EPA relating to the same underlying events. The Company has been engaging with the EPA to resolve this matter. Although this matter is ongoing and management cannot predict its ultimate outcome, the resolution of this matter may result in a fine or penalty in excess of $0.3 million.
Please see our 2021 Annual Report on Form 10-K and other SEC filings for additional information.
Item 1A. Risk Factors
There have been no material changes to the information included in Item 1A. “Risk Factors” in our 2021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding purchases of our common stock that were made by us during the third quarter of 2022 (shares in thousands).
Period |
|
Total Number of |
|
|
Average Price |
|
|
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (2) |
|
|
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
|
||||
July 1 - July 31 |
|
|
932 |
|
|
$ |
52.51 |
|
|
|
921 |
|
|
$ |
814 |
|
August 1 - August 31 |
|
|
583 |
|
|
$ |
66.46 |
|
|
|
575 |
|
|
$ |
776 |
|
September 1 - September 30 |
|
|
388 |
|
|
$ |
68.13 |
|
|
|
379 |
|
|
$ |
750 |
|
Total |
|
|
1,903 |
|
|
$ |
59.97 |
|
|
|
1,875 |
|
|
|
|
|
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On October, 28, 2022, the Board of Directors (the "Board") of the Registrant amended and restated the Registrant's bylaws (as amended and restated, the "Bylaws"), effective as of October 28, 2022. The Bylaws include revisions that, among other things, (1) clarify or update provisions relating to stockholder meetings, including the applicable voting standard, who may call a special meeting of stockholders, and adjournments; (2) add provisions relating to the universal proxy card rule adopted by the SEC for meetings of stockholders at which directors are to be elected; (3) conform provisions concerning the list of stockholders to recent changes in Delaware law; (4) clarify the manner in which the Registrant may give notice to stockholders and add provisions relating to the effect of attempted delivery by the Registrant of notices to stockholders; and (5) revise the description of the officer positions identified in the Bylaws.
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The foregoing description of the Bylaws does not purport to be complete and is subject to and qualified in its entirety by reference to the Bylaws, a copy of which is attached as Exhibit 3.1 to this report and which is incorporated by reference herein.
41
Item 6. Exhibits
Exhibit Number |
|
Description |
|
|
|
3.1 |
||
|
|
|
31.1 |
||
|
|
|
31.2 |
||
|
|
|
32.1 |
||
|
|
|
32.2 |
||
|
|
|
101.INS |
Inline XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
|
|
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
|
101.LAB |
Inline XBRL Taxonomy Extension Labels Linkbase Document. |
|
|
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
|
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
|
|
|
|
|
|
|
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
DEVON ENERGY CORPORATION |
|
|
|
||
Date: November 2, 2022 |
|
|
|
/s/ Jeremy D. Humphers |
|
|
|
|
Jeremy D. Humphers |
|
|
|
|
Senior Vice President and Chief Accounting Officer |
43