DEVON ENERGY CORP/DE, 10-K filed on 2/17/2016
Annual Report
Document And Entity Information (USD $)
In Billions, except Share data in Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Feb. 10, 2016
Jun. 30, 2015
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2015 
 
 
Amendment Flag
false 
 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
 
Entity Central Index Key
0001090012 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Fiscal Year Focus
2015 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Public Float
 
 
$ 24.3 
Entity Common Stock, Shares Outstanding
 
441.3 
 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Consolidated Comprehensive Statements Of Earnings [Abstract]
 
 
 
Oil, gas and NGL sales
$ 5,382 
$ 9,910 
$ 8,522 
Oil, gas and NGL derivatives
503 
1,989 
(191)
Marketing and midstream revenues
7,260 
7,667 
2,066 
Total operating revenues
13,145 
19,566 
10,397 
Lease operating expenses
2,104 
2,332 
2,268 
Marketing and midstream operating expenses
6,420 
6,815 
1,553 
General and administrative expenses
855 
847 
617 
Production and property taxes
388 
535 
461 
Depreciation, depletion and amortization
3,129 
3,319 
2,780 
Asset impairments
20,820 
1,953 
1,976 
Restructuring costs
78 
46 
54 
Gains and losses on asset sales
 
(1,072)
Other operating items
78 
93 
112 
Total operating expenses
33,872 
14,868 
9,830 
Operating income (loss)
(20,727)
4,698 
567 
Net financing costs
517 
526 
417 
Other nonoperating items
24 
113 
Earnings (loss) before income taxes
(21,268)
4,059 
149 
Income tax expense (benefit)
(6,065)
2,368 
169 
Net earnings (loss)
(15,203)
1,691 
(20)
Net earnings (loss) attributable to noncontrolling interests
(749)
84 
 
Net earnings (loss) attributable to Devon
(14,454)
1,607 
(20)
Net earnings (loss) per share attributable to Devon:
 
 
 
Basic
$ (35.55)
$ 3.93 
$ (0.06)
Diluted
$ (35.55)
$ 3.91 
$ (0.06)
Comprehensive earnings (loss):
 
 
 
Net earnings (loss)
(15,203)
1,691 
(20)
Other comprehensive earnings (loss), net of tax:
 
 
 
Foreign currency translation
(559)
(465)
(548)
Pension and postretirement plans
10 
(24)
45 
Other comprehensive loss, net of tax
(549)
(489)
(503)
Comprehensive earnings (loss)
(15,752)
1,202 
(523)
Comprehensive earnings (loss) attributable to noncontrolling interests
(749)
84 
 
Comprehensive earnings (loss) attributable to Devon
$ (15,003)
$ 1,118 
$ (523)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$ (15,203)
$ 1,691 
$ (20)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
3,129 
3,319 
2,780 
Asset impairments
20,820 
1,953 
1,976 
Gains and losses on asset sales
 
(1,072)
Deferred income tax expense (benefit)
(5,828)
1,891 
97 
Derivatives and other financial instruments
(738)
(2,070)
135 
Cash settlements on derivatives and financial instruments
2,688 
104 
277 
Other noncash charges
537 
457 
309 
Net change in working capital
(301)
50 
(298)
Change in long-term other assets
285 
(421)
10 
Change in long-term other liabilities
(6)
79 
161 
Net cash from operating activities
5,383 
5,981 
5,436 
Cash flows from investing activities:
 
 
 
Capital expenditures
(5,308)
(6,988)
(6,502)
Acquisitions of property, equipment and businesses
(1,107)
(6,462)
(256)
Divestitures of property and equipment
107 
5,120 
419 
Purchases of short-term investments
 
 
(1,076)
Redemptions of short-term investments
 
 
3,419 
Redemptions of long-term investments
 
57 
 
Other
(16)
89 
(3)
Net cash from investing activities
(6,324)
(8,184)
(3,999)
Cash flows from financing activities:
 
 
 
Borrowings of long-term debt, net of issuance costs
4,772 
5,340 
2,233 
Repayments of long-term debt
(2,634)
(7,189)
 
Net short-term debt repayments
(307)
(385)
(1,872)
Stock option exercises
93 
Sale of subsidiary units
654 
 
 
Issuance of subsidiary units
25 
410 
 
Dividends paid on common stock
(396)
(386)
(348)
Distributions to noncontrolling interests
(254)
(235)
 
Other
(16)
(2)
Net cash from financing activities
1,848 
(2,354)
20 
Effect of exchange rate changes on cash
(77)
(29)
(28)
Net change in cash and cash equivalents
830 
(4,586)
1,429 
Cash and cash equivalents at beginning of period
1,480 
6,066 
4,637 
Cash and cash equivalents at end of period
$ 2,310 
$ 1,480 
$ 6,066 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 2,310 
$ 1,480 
Accounts receivable
1,105 
1,959 
Derivatives, at fair value
43 
1,993 
Income taxes receivable
147 
522 
Other current assets
421 
544 
Total current assets
4,026 
6,498 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
78,190 
75,738 
Not subject to amortization
2,584 
2,752 
Total oil and gas
80,774 
78,490 
Midstream and other
10,380 
9,695 
Total property and equipment, at cost
91,154 
88,185 
Less accumulated depreciation, depletion and amortization
(72,086)
(51,889)
Property and equipment, net
19,068 
36,296 
Goodwill
5,032 
6,303 
Other long-term assets
1,406 
1,540 
Total assets
29,532 
50,637 
Current liabilities:
 
 
Accounts payable
906 
1,400 
Revenues and royalties payable
763 
1,193 
Short-term debt
976 1
1,432 1
Deferred income taxes
 
730 
Other current liabilities
650 
1,180 
Total current liabilities
3,295 
5,935 
Long-term debt
12,137 
9,830 
Asset retirement obligations
1,370 
1,339 
Other long-term liabilities
853 
948 
Deferred income taxes
888 
6,244 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 418 million and 409 million shares in 2015 and 2014, respectively
42 
41 
Additional paid-in capital
4,996 
4,088 
Retained earnings
1,781 
16,631 
Accumulated other comprehensive earnings
230 
779 
Total stockholders' equity attributable to Devon
7,049 
21,539 
Noncontrolling interests
3,940 
4,802 
Total stockholders' equity
10,989 
26,341 
Commitments and contingencies (Note 18)
   
   
Total liabilities and stockholders' equity
$ 29,532 
$ 50,637 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2015
Dec. 31, 2014
Consolidated Balance Sheets [Abstract]
 
 
Common stock, par value (in dollars per share)
$ 0.10 
$ 0.10 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
418,000,000 
409,000,000 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions, except Share data
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Noncontrolling Interests [Member]
Total
Balance, at Dec. 31, 2012
$ 41 
$ 3,688 
$ 15,778 
$ 1,771 
 
 
$ 21,278 
Balance, shares, at Dec. 31, 2012
406,000,000 
 
 
 
 
 
 
Net earnings (loss)
 
 
(20)
 
 
 
(20)
Other comprehensive loss, net of tax
 
 
 
(503)
 
 
(503)
Stock option exercises
 
 
 
 
 
Common stock repurchased
 
 
 
 
(36)
 
(36)
Common stock retired
 
(36)
 
 
36 
 
 
Common stock dividends
 
 
(348)
 
 
 
(348)
Share-based compensation
 
121 
 
 
 
 
121 
Share-based compensation tax benefits (expense)
 
 
 
 
 
Balance, at Dec. 31, 2013
41 
3,780 
15,410 
1,268 
 
 
20,499 
Balance, shares, at Dec. 31, 2013
406,000,000 
 
 
 
 
 
 
Net earnings (loss)
 
 
1,607 
 
 
84 
1,691 
Other comprehensive loss, net of tax
 
 
 
(489)
 
 
(489)
Stock option exercises
 
93 
 
 
 
 
93 
Stock option exercises, shares
1,000,000 
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
2,000,000 
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(27)
 
(27)
Common stock retired
 
(27)
 
 
27 
 
 
Common stock dividends
 
 
(386)
 
 
 
(386)
Share-based compensation
 
151 
 
 
 
 
151 
Share-based compensation tax benefits (expense)
 
(3)
 
 
 
 
(3)
Acquisition of noncontrolling interests
 
 
 
 
 
4,670 
4,670 
Subsidiary equity transactions
 
93 
 
 
 
277 
370 
Distributions to noncontrolling interests
 
 
 
 
 
(235)
(235)
Other
 
 
 
 
Balance, at Dec. 31, 2014
41 
4,088 
16,631 
779 
 
4,802 
26,341 
Balance, shares, at Dec. 31, 2014
409,000,000 
 
 
 
 
 
 
Net earnings (loss)
 
 
(14,454)
 
 
(749)
(15,203)
Other comprehensive loss, net of tax
 
 
 
(549)
 
 
(549)
Stock option exercises
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
2,000,000 
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(35)
 
(35)
Common stock retired
 
(35)
 
 
35 
 
 
Common stock dividends
 
 
(396)
 
 
 
(396)
Common stock issued
198 
 
 
 
 
199 
Common stock issued, shares
7,000,000 
 
 
 
 
 
 
Share-based compensation
 
165 
 
 
 
 
165 
Share-based compensation tax benefits (expense)
 
(9)
 
 
 
 
(9)
Subsidiary equity transactions
 
585 
 
 
 
141 
726 
Distributions to noncontrolling interests
 
 
 
 
 
(254)
(254)
Balance, at Dec. 31, 2015
$ 42 
$ 4,996 
$ 1,781 
$ 230 
 
$ 3,940 
$ 10,989 
Balance, shares, at Dec. 31, 2015
418,000,000 
 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.Summary of Significant Accounting Policies

 

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

 

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

 

Principles of Consolidation

 

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

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

 

Use of Estimates

 

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

 

• proved reserves and related present value of future net revenues;

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

• derivative financial instruments;

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

• the fair value of intangible assets other than goodwill;

• income taxes;

• asset retirement obligations;

• obligations related to employee pension and postretirement benefits; 

• legal and environmental risks and exposures; and

general credit risk associated with receivables and other assets.

 

Revenue Recognition

 

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

 

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

 

During 2015, 2014 and 2013,  no purchaser accounted for more than 10% of Devon’s operating revenues.

Derivative Financial Instruments

 

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

 

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

 

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility and foreign exchange forward contracts to manage its exposure to fluctuations in the U.S. and Canadian dollar exchange rates.

 

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

 

By using derivative financial instruments to hedge exposures to changes in commodity prices, interest rates and foreign currency rates, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon's policy to enter into derivative contracts only with investment-grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon's derivative contracts generally require cash collateral to be posted if either its or the counterparty's credit rating falls below certain credit rating levels. As of December 31, 2015 and December 31, 2014, Devon held $75 million and $524 million, respectively, of cash collateral, which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying consolidated balance sheets. 

 

General and Administrative Expenses

 

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

 

Share-Based Compensation

 

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

 

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

 

Income Taxes

 

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

 

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

 

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

 

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

 

Net Earnings (Loss) Per Share Attributable to Devon

 

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

 

Cash and Cash Equivalents  

 

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

 

Accounts Receivable  

 

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

 

Investments

 

Devon periodically invests excess cash in U.S. and Canadian treasury securities and other marketable securities. Devon considers securities with original contractual maturities in excess of three months but less than one year to be short-term investments. Investments with contractual maturities in excess of one year are classified as long-term, unless such investments are classified as trading or available-for-sale. Devon reports its investments and other marketable securities at fair value.

 

Property and Equipment

 

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

 

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

 

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

 

Sales or dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs with no gain or loss recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves in a particular country. As discussed more fully in Note 2, the 2014 divestitures of certain Canadian assets significantly altered such relationship, and Devon recognized a gain, which is included as a separate item in the accompanying consolidated comprehensive statements of earnings.

 

Under the full cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the full cost “ceiling” at the end of each quarter. The ceiling is calculated separately for each country and is based on the present value of estimated future net cash flows from proved oil and gas reserves, discounted at 10% per annum, net of related tax effects. The estimated future net revenues exclude future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties.

 

Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including derivative contracts in place that qualify for hedge accounting treatment. None of Devon's derivative contracts held during the three-year period ended December 31, 2015 qualified for hedge accounting treatment.

 

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

 

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

 

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

 

Goodwill

 

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

 

Devon performed annual impairment tests of goodwill in the fourth quarters of 2015, 2014 and 2013.  No impairment of goodwill was required in 2013. However, write-downs were required in 2015 and 2014 based on the annual impairment test. EnLink’s Texas, Louisiana and Crude and Condensate reporting segment goodwill were deemed impaired in 2015, and Devon’s Canadian reporting unit goodwill was deemed impaired in 2014. See Note 12 for further discussion.

 

 

Intangible Assets

 

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

 

Commitments and Contingencies

 

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

 

Fair Value Measurements

 

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

 

·

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

·

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

·

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

 

Foreign Currency Translation Adjustments

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

 

 

Noncontrolling Interests

 

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

 

 

Recently Issued Accounting Standards

 

The FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and industry-specific guidance in Subtopic 932-605, Extractive Activities – Oil and Gas – Revenue Recognition. This ASU provides guidance concerning the recognition and measurement of revenue from contracts with customers. Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues. The effective date for ASU 2014-09 was delayed through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual and interim periods beginning in 2018 and is required to be adopted using either the retrospective or cumulative effect (modified retrospective) transition method, with early adoption permitted in 2017. Devon is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures and does not plan on early adopting.

 

The FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporations and securitization structures, should be consolidated. The ASU is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models. This ASU is effective for Devon beginning January 1, 2016 and will be applied using the retrospective approach. This ASU will not have a material impact on Devon’s consolidated financial statements and related disclosures. 

 

The FASB issued ASU 2015-03, Interest – Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Interest – Imputation of Interest (Topic 835): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These ASUs require debt issuance costs related to a recognized debt liability, except for those related to revolving credit facilities, to be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. These ASUs are effective for Devon beginning January 1, 2016 and will be applied using the retrospective approach. These ASUs will not have a material impact on Devon’s consolidated financial statements and related disclosures.

 

    The FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This ASU is effective for annual and interim periods beginning in 2017 and can be applied prospectively or retrospectively, with early adoption permitted. This ASU will be early-adopted by Devon, effective January 1, 2016 and will be applied using the retrospective approach. This ASU will not have a material impact on Devon’s consolidated financial statements and related disclosures.

 

 

Acquisitions And Divestitures
Acquisitions And Divestitures

2.Acquisitions and Divestitures

Formation of EnLink and the General Partner

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

 

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

 

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

 

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

 

 

 

 

 

 

 

Crosstex Energy, Inc. outstanding common shares:

 

 

 

 

Held by public shareholders

 

 

48.0 

 

Restricted shares

 

 

0.4 

 

Total subject to conversion

 

 

48.4 

 

Exchange ratio

 

 

1.0 

x

Converted shares

 

 

48.4 

 

Crosstex Energy, Inc. common share price (1)

 

$

37.60 

 

Crosstex Energy, Inc. consideration

 

$

1,823 

 

  Fair value of noncontrolling interests in E2 (2)

 

 

18 

 

Total Crosstex Energy, Inc. consideration and fair value of noncontrolling interests

 

$

1,841 

 

Crosstex Energy, LP outstanding units:

 

 

 

 

Common units held by public unitholders

 

 

75.1 

 

Preferred units held by third party (3)

 

 

17.1 

 

Restricted units

 

 

0.4 

 

Total

 

 

92.6 

 

Crosstex Energy, LP common unit price (4) 

 

$

30.51 

 

Crosstex Energy, LP common units value

 

$

2,825 

 

Crosstex Energy, LP outstanding unit options value

 

 

 

Total fair value of noncontrolling interests in Crosstex Energy, LP (4)

 

 

2,829 

 

Total consideration and fair value of noncontrolling interests

 

$

4,670 

 

__________________________

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

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

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

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

 

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

 

 

 

 

 

 

Assets acquired:

 

 

 

Current assets

 

$

437 

Property, plant and equipment, net

 

 

2,438 

Intangible assets

 

 

569 

Equity investment

 

 

222 

Goodwill (1)

 

 

3,283 

Other long-term assets

 

 

Liabilities assumed:

 

 

 

Current liabilities

 

 

(515)

Long-term debt

 

 

(1,454)

Deferred income taxes

 

 

(210)

Other long-term liabilities

 

 

(101)

Total consideration and fair value of noncontrolling interests

 

$

4,670 

__________________________

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

 

EnLink Acquisitions

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Price
(Millions)

 

Allocation
(Millions)

Date

 

Acquiree

 

Cash

 

EnLink Units

 

PP&E

 

Goodwill

 

Intangibles

 

Other

January 31

 

LPC

 

$108

 

-

 

$30

 

$30

 

$43

 

$5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 16

 

Coronado

 

$240

 

$360

 

$302

 

$18

 

$281

 

$(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 1

 

Matador

 

$145

 

-

 

$36

 

$9

 

$99

 

$1

 

    On January 7, 2016, EnLink also acquired Anadarko Basin gathering and processing midstream assets from Tall Oak for approximately $1.5 billion, subject to certain adjustments. EnLink paid approximately $800 million of cash at the time of closing, primarily funded with the issuance of EnLink preferred units, with another $500 million of cash to be paid within 24 months. The remainder of the purchase price consisted of approximately 15.6 million General Partner common units.

 

EnLink Dropdowns

 

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

 

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

 

Devon Acquisitions

 

On February 28, 2014, Devon completed its acquisition of interests in certain affiliates of GeoSouthern for approximately $6.0 billion. Devon funded the acquisition with cash on hand and debt financing. In connection with the GeoSouthern transaction, Devon acquired approximately 82,000 net acres (unaudited) located in DeWitt and Lavaca counties in south Texas. The transaction was accounted for using the acquisition method, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.

 

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

 

 

 

 

 

 

Cash and cash equivalents

 

$

95 

Other current assets

 

 

256 

Proved properties

 

 

5,026 

Unproved properties

 

 

1,007 

Midstream assets

 

 

86 

Current liabilities

 

 

(434)

Long-term liabilities

 

 

(6)

Net assets acquired

 

$

6,030 

 

    On December 17, 2015, Devon acquired approximately 253,000 net acres (unaudited) and assets in the Powder River Basin for approximately $499 million. Devon funded the acquisition with $300 million of cash and $199 million of equity. A preliminary allocation of the purchase price at December 31, 2015 was $386 million to unproved properties and $113 million to proved properties and gathering systems.    

 

    On January 7, 2016, Devon acquired approximately 80,000 net acres (unaudited) and assets in the STACK play for approximately $1.5 billion. Devon funded the acquisition with $850 million of cash and $659 million of equity.

 

Pro Forma Financial Information

 

    The following unaudited pro forma financial information has been prepared assuming both the EnLink formation and the GeoSouthern acquisition occurred on January 1, 2013. The pro forma information is not intended to reflect the actual results of operations that would have occurred if the business combination and acquisition had been completed at the dates indicated. In addition, they do not project Devon’s results of operations for any future period.

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

(Millions)

Total operating revenues

 

$

20,213 

 

$

12,979 

Net earnings

 

$

1,716 

 

$

35 

Noncontrolling interests

 

$

97 

 

$

45 

Net earnings (loss) attributable to Devon

 

$

1,619 

 

$

(10)

Net earnings (loss) per common share attributable to Devon

 

$

3.94 

 

$

(0.02)

 

 

Asset Divestitures

 

    During 2014, Devon divested certain properties located throughout Canada and the U.S. as part of its asset portfolio transformation.

 

Canada

    In the second quarter of 2014, Devon sold Canadian conventional assets for $2.8 billion ($3.125 billion Canadian dollars) and recognized a gain totaling $1.1 billion ($0.6 billion after-tax). This gain is included as a separate item in the accompanying consolidated comprehensive statements of earnings. Included in the gain calculation were asset retirement obligations of approximately $700 million assumed by the purchaser as well as the derecognition of approximately $700 million of goodwill allocated to the sold assets. In conjunction with the divestiture, Devon repatriated approximately $2.8 billion of proceeds to the U.S. in the second quarter of 2014, which was  utilized to repay commercial paper and term loan balances. Between collecting the divestiture proceeds and repatriating funds to the U.S., Devon recognized an $84 million foreign currency exchange loss and a $29 million foreign exchange currency derivative loss. These losses are included in other nonoperating items in the accompanying consolidated comprehensive statements of earnings.

U.S.

    In the third quarter of 2014, Devon sold certain U.S. assets for $2.2 billion. Additionally, approximately $200 million of asset retirement obligations were assumed by the purchaser.  No gain or loss was recognized on the sale. These proceeds were used toward the early retirement of $1.9 billion in senior notes in November 2014 as discussed in Note 13.

 

Derivative Financial Instruments
Derivative Financial Instruments

3.Derivative Financial Instruments

 

Commodity Derivatives

 

As of December 31, 2015, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Call Options Sold

Period

 

Volume (Bbls/d)

 

Weighted Average Price ($/Bbl)

Q1-Q4 2016

 

18,500

 

$

73.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil Basis Swaps

Period

 

Index

 

Volume (Bbls/d)

 

Weighted Average Differential to WTI ($/Bbl)

Q1-Q4 2016 

 

Western Canadian Select

 

5,249

 

$

(13.67)

Q1-Q4 2016 

 

West Texas Sour

 

5,000

 

$

(0.53)

Q1-Q4 2016 

 

Midland Sweet

 

13,000

 

$

0.25 

 

As of December 31, 2015, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price Swaps

 

Call Options Sold

Period

 

Volume (MMBtu/d)

 

Weighted Average Price ($/MMBtu)

 

Volume (MMBtu/d)

 

Weighted Average Price ($/MMBtu)

Q1-Q4 2016

 

54,650

 

$

3.17

 

400,000

 

$

4.30

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas Basis Swaps

Period

 

Index

 

Volume (MMBtu/d)

 

Weighted Average Differential to Henry Hub ($/MMBtu)

Q1-Q4 2016

 

Panhandle Eastern Pipe Line

 

175,000

 

$

(0.34)

Q1-Q4 2016

 

El Paso Natural Gas

 

125,000

 

$

(0.12)

Q1-Q4 2016

 

Houston Ship Channel

 

30,000

 

$

0.11

Q1-Q4 2016

 

Transco Zone 4

 

70,000

 

$

0.01

Q1-Q4 2017

 

Panhandle Eastern Pipe Line

 

150,000

 

$

(0.34)

Q1-Q4 2017

 

El Paso Natural Gas

 

50,000

 

$

(0.14)

Q1-Q4 2017

 

Houston Ship Channel

 

35,000

 

$

0.06

Q1-Q4 2017

 

Transco Zone 4

 

185,000

 

$

0.03

 

 

 

 

 

    As of December 31, 2015, EnLink had the following open derivative positions associated with gas processing and fractionation.  EnLink’s NGL positions settle by purity product against the average of the prompt month OPIS Mont Belvieu, Texas index.  EnLink’s natural gas positions settle against the Henry Hub Gas Daily index.

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Product

 

Volume (Total)

 

 

Weighted Average Price Paid

 

 

Weighted Average Price Received

Q1 2016-Q4 2016

 

Ethane

 

571

MBbls

 

$

0.29/gal

 

 

Index

Q1 2016-Q4 2016

 

Propane

 

812

MBbls

 

 

Index

 

$

0.81/gal

Q1 2016-Q4 2016

 

Normal Butane

 

113

MBbls

 

 

Index

 

$

0.61/gal

Q1 2016-Q4 2016

 

Natural Gasoline

 

61

MBbls

 

 

Index

 

$

1.02/gal

Q1 2016-Q1 2017

 

Natural Gas

 

13,829

MMBtu/d

 

$

2.65/MMBtu

 

 

Index

 

Interest Rate Derivatives

 

    As of December 31, 2015, Devon had the following open interest rate derivative positions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

Rate Received

 

Rate Paid

 

Expiration

(Millions)

 

 

 

 

 

 

$

100

 

Three Month LIBOR

 

0.92%

 

December 2016

$

100

 

1.76%

 

Three Month LIBOR

 

January 2019

$

750

 

Three Month LIBOR

 

2.98%

 

December 2048 (1)

____________________________

(1) Mandatory settlement in December 2018.

 

Foreign Currency Derivatives

 

As of December 31, 2015, Devon had the following open foreign currency derivative position: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Contract

Currency

 

Contract Type

 

CAD Notional

 

Weighted Average Fixed Rate Received

 

Expiration

 

 

 

 

(Millions)

 

(CAD-USD)

 

 

Canadian Dollar

 

Sell

 

$

3,560 

 

0.723

 

March 2016

 

Financial Statement Presentation

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

Commodity derivatives:

 

(Millions)

Oil, gas and NGL derivatives

 

$

503 

 

$

1,989 

 

$

(191)

Marketing and midstream revenues

 

 

 

 

22 

 

 

 —

Interest rate derivatives:

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(20)

 

 

(1)

 

 

 —

Foreign currency derivatives:

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

246 

 

 

60 

 

 

56 

Net gains (losses) recognized

 

$

738 

 

$

2,070 

 

$

(135)

 

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

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

December 31, 2014

 

 

 

(Millions)

Commodity derivative assets:

 

 

 

 

 

 

 

Derivatives, at fair value

 

 

$

34 

 

$

1,984 

Other long-term assets

 

 

 

 

 

11 

Interest rate derivative assets:

 

 

 

 

 

 

 

Derivatives, at fair value

 

 

 

 

 

Other long-term assets

 

 

 

 

 

 —

Foreign currency derivative assets:

 

 

 

 

 

 

 

Derivatives, at fair value

 

 

 

 

 

Total derivative assets

 

 

$

45 

 

$

2,004 

 

 

 

 

 

 

 

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

Other current liabilities

 

 

$

14 

 

$

28 

Other long-term liabilities

 

 

 

 

 

28 

Interest rate derivative liabilities:

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 —

 

 

Other long-term liabilities

 

 

 

22 

 

 

 —

Foreign currency derivative liabilities:

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

 —

Total derivative liabilities

 

 

$

48 

 

$

57 

 

Share-Based Compensation
Share-Based Compensation

4.Share-Based Compensation

 

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

 

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

 

Devon did not have an annual long-term incentive grant in 2013 due to revisions in the timing of the employee compensation cycle. The annual long-term incentive grant related to 2013 performance was granted in February 2014.

 

The following table presents the effects of share-based compensation included in Devon's accompanying consolidated comprehensive statements of earnings. Gross G&A for the years ended December 31, 2015 and 2014 includes $31 million and $17 million, respectively, of unit-based compensation related to grants made under EnLink’s long-term incentive plans.

 

The vesting for certain share-based awards was accelerated in 2014 in conjunction with the divestiture of Devon’s Canadian conventional assets.  For the year ended December 31, 2014, approximately $15 million of associated expense for these accelerated awards is included in restructuring costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

Gross general and administrative expense for share-based compensation

 

$

225 

 

$

199 

 

$

157 

Share-based compensation expense capitalized pursuant to the

 

 

 

 

 

 

 

 

 

 full cost method of accounting for oil and gas properties

 

$

63 

 

$

53 

 

$

60 

Related income tax benefit

 

$

45 

 

$

42 

 

$

29 

 

 

The following table presents a summary of Devon’s unvested restricted stock awards and units, performance-based restricted stock awards and performance share units granted under the plans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

Performance-Based

 

Performance

 

 

Awards and Units

 

Restricted Stock Awards

 

Share Units

 

 

Awards and Units

 

 

 

Weighted Average Grant-Date Fair Value

 

Awards

 

 

 

Weighted Average Grant-Date Fair Value

 

Units

 

 

 

Weighted Average Grant-Date Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Thousands, except fair value data)

Unvested at 12/31/14

 

4,304 

 

 

$

60.85 

 

380 

 

 

$

59.41 

 

1,477 

 

 

$

70.90 

Granted

 

2,771 

 

 

$

63.57 

 

236 

 

 

$

62.02 

 

786 

 

 

$

84.14 

Vested

 

(1,834)

 

 

$

60.33 

 

(153)

 

 

$

59.49 

 

(337)

 

 

$

66.00 

Forfeited

 

(503)

 

 

$

62.22 

 

(29)

 

 

$

64.18 

 

(67)

 

 

$

79.20 

Unvested at 12/31/15

 

4,738 

 

 

$

62.49 

 

434 

 

 

$

60.48 

 

1,859 

 

(1)

$

76.17 

____________________________

(1)

A maximum of 3.7 million common shares could be awarded based upon Devon’s final TSR ranking.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

Restricted stock awards and units

 

$

101 

 

$

112 

 

$

141 

Performance-based restricted stock awards

 

$

 

$

10 

 

$

Performance share units

 

$

22 

 

$

 -

 

$

 -

 

 

The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

Restricted Stock

 

Restricted Stock

 

Performance

 

 

Awards and Units

 

Awards

 

Share Units

Unrecognized compensation cost (millions)

 

$

198 

 

$

 

$

45 

Weighted average period for recognition (years)

 

 

2.5 

 

 

2.6 

 

 

1.8 

 

 

Restricted Stock Awards and Units

 

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

 

Performance-Based Restricted Stock Awards

 

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

 

 

Performance Share Units  

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant-date fair value

$

81.99 

-

$

85.05 

 

$

70.18 

-

$

81.05 

 

$

61.27 

-

$

63.48 

Risk-free interest rate

1.06%

 

0.54%

 

 

0.26% 

-

 

0.36% 

Volatility factor

26.2%

 

28.8%

 

30.3%

Contractual term (years)

2.89

 

2.89

 

3.0

 

Stock Options 

 

In accordance with Devon’s incentive plans, the exercise price of stock options granted may not be less than the market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which may not exceed eight years from the date of grant. The recipient must pay the exercise price in cash or in common stock, or a combination thereof, at the time that the option is exercised. Generally, the service requirement for vesting ranges from zero to four years. The fair value of stock options on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires Devon to make several assumptions, including a volatility factor, dividend yield rate, risk-free interest rate and expected term.