DEVON ENERGY CORP/DE, 10-Q filed on 11/4/2015
Quarterly Report
Document And Entity Information
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Oct. 21, 2015
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2015 
 
Amendment Flag
false 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
Entity Central Index Key
0001090012 
 
Current Fiscal Year End Date
--12-31 
 
Document Fiscal Year Focus
2015 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q3 
 
Entity Common Stock, Shares Outstanding
 
411.0 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Consolidated Comprehensive Statements Of Earnings [Abstract]
 
 
 
 
Oil, gas and NGL sales
$ 1,338 
$ 2,588 
$ 4,264 
$ 7,824 
Oil, gas and NGL derivatives
414 
748 
426 
29 
Marketing and midstream revenues
1,849 
2,000 
5,569 
5,718 
Total operating revenues
3,601 
5,336 
10,259 
13,571 
Lease operating expenses
510 
584 
1,625 
1,764 
Marketing and midstream operating expenses
1,637 
1,781 
4,939 
5,092 
General and administrative expenses
198 
195 
661 
595 
Production and property taxes
91 
140 
315 
427 
Depreciation, depletion and amortization
744 
842 
2,488 
2,409 
Asset impairments
5,851 
   
15,479 
   
Restructuring costs
 
 
44 
Gains and losses on asset sales
 
(1,072)
Other operating items
11 
18 
52 
74 
Total operating expenses
9,045 
3,562 
25,561 
9,333 
Operating income (loss)
(5,444)
1,774 
(15,302)
4,238 
Net financing costs
136 
116 
378 
359 
Other nonoperating items
43 
46 
111 
Earnings (loss) before income taxes
(5,623)
1,654 
(15,726)
3,768 
Income tax expense (benefit)
(1,714)
613 
(5,435)
1,698 
Net earnings (loss)
(3,909)
1,041 
(10,291)
2,070 
Net earnings (loss) attributable to noncontrolling interests
(402)
25 
(369)
55 
Net earnings (loss) attributable to Devon
(3,507)
1,016 
(9,922)
2,015 
Net Earnings (Loss) Per Share Attributable To Devon:
 
 
 
 
Basic
$ (8.64)
$ 2.48 
$ (24.45)
$ 4.94 
Diluted
$ (8.64)
$ 2.47 
$ (24.45)
$ 4.91 
Comprehensive earnings (loss):
 
 
 
 
Net earnings (loss)
(3,909)
1,041 
(10,291)
2,070 
Other comprehensive earnings (loss), net of tax:
 
 
 
 
Foreign currency translation
(212)
(279)
(470)
(285)
Pension and postretirement plans
12 
10 
Other comprehensive earnings (loss), net of tax
(207)
(277)
(458)
(275)
Comprehensive earnings (loss)
(4,116)
764 
(10,749)
1,795 
Comprehensive earnings (loss) attributable to noncontrolling interests
(402)
25 
(369)
55 
Comprehensive earnings (loss) attributable to Devon
$ (3,714)
$ 739 
$ (10,380)
$ 1,740 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Cash flows from operating activities:
 
 
Net earnings (loss)
$ (10,291)
$ 2,070 
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
Depreciation, depletion and amortization
2,488 
2,409 
Asset impairments
15,479 
   
Gains and losses on asset sales
(1,072)
Deferred income tax expense (benefit)
(5,348)
800 
Derivatives and other financial instruments
(606)
(43)
Cash settlements on derivatives and financial instruments
1,913 
(201)
Other noncash charges
435 
357 
Net change in working capital
93 
766 
Change in long-term other assets
211 
(115)
Change in long-term other liabilities
(74)
47 
Net cash from operating activities
4,302 
5,018 
Cash flows from investing activities:
 
 
Capital expenditures
(4,229)
(5,013)
Acquisitions of property, equipment and businesses
(530)
(6,255)
Divestitures of property and equipment
35 
5,202 
Redemptions of long-term investments
 
57 
Other
(8)
87 
Net cash from investing activities
(4,732)
(5,922)
Cash flows from financing activities:
 
 
Borrowings of long-term debt, net of issuance costs
3,328 
4,158 
Repayments of long-term debt
(1,773)
(4,265)
Net short-term debt repayments
(932)
(1,318)
Stock option exercises
92 
Sale of subsidiary units
654 
   
Issuance of subsidiary units
13 
72 
Dividends paid on common stock
(296)
(287)
Distributions to noncontrolling interests
(186)
(187)
Other
(10)
(4)
Net cash from financing activities
802 
(1,739)
Effect of exchange rate changes on cash
(65)
(15)
Net change in cash and cash equivalents
307 
(2,658)
Cash and cash equivalents at beginning of period
1,480 
6,066 
Cash and cash equivalents at end of period
$ 1,787 
$ 3,408 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 1,787 
$ 1,480 
Accounts receivable
1,318 
1,959 
Derivatives, at fair value
690 
1,993 
Income taxes receivable
522 
Other current assets
495 
544 
Total current assets
4,298 
6,498 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
77,093 
75,738 
Not subject to amortization
2,688 
2,752 
Total oil and gas
79,781 
78,490 
Midstream and other
10,410 
9,695 
Total property and equipment, at cost
90,191 
88,185 
Less accumulated depreciation, depletion and amortization
(67,416)
(51,889)
Property and equipment, net
22,775 
36,296 
Goodwill
5,775 
6,303 
Other long-term assets
1,503 
1,540 
Total assets
34,351 
50,637 
Current liabilities:
 
 
Accounts payable
940 
1,400 
Revenues and royalties payable
985 
1,193 
Short-term debt
500 1
1,432 1
Deferred income taxes
261 
730 
Other current liabilities
815 
1,180 
Total current liabilities
3,501 
5,935 
Long-term debt
11,400 
9,830 
Asset retirement obligations
1,377 
1,339 
Other long-term liabilities
818 
948 
Deferred income taxes
1,333 
6,244 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 411 million and 409 million shares in 2015 and 2014, respectively
41 
41 
Additional paid-in capital
4,773 
4,088 
Retained earnings
6,413 
16,631 
Accumulated other comprehensive earnings
321 
779 
Total stockholders' equity attributable to Devon
11,548 
21,539 
Noncontrolling interests
4,374 
4,802 
Total stockholders' equity
15,922 
26,341 
Commitments and contingencies (Note 17)
   
   
Total liabilities and stockholders' equity
$ 34,351 
$ 50,637 
Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 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)
411,000,000 
409,000,000 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions
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, 2013
$ 41 
$ 3,780 
$ 15,410 
$ 1,268 
 
 
$ 20,499 
Balance, shares, at Dec. 31, 2013
406 
 
 
 
 
 
 
Net earnings (loss)
 
 
2,015 
 
 
55 
2,070 
Other comprehensive loss, net of tax
 
 
 
(275)
 
 
(275)
Stock option exercises
 
92 
 
 
 
 
92 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(6)
 
(6)
Common stock retired
 
(6)
 
 
 
 
Common stock dividends
 
 
(287)
 
 
 
(287)
Share-based compensation
 
120 
 
 
 
 
120 
Share-based compensation tax benefits
 
 
 
 
 
Subsidiary equity transactions
 
17 
 
 
 
55 
72 
Acquisition of noncontrolling interests
 
 
 
 
 
4,664 
4,664 
Distributions to noncontrolling interests
 
 
 
 
 
(187)
(187)
Other
 
 
 
 
 
Balance, at Sep. 30, 2014
41 
4,004 
17,138 
993 
 
4,592 
26,768 
Balance, shares, at Sep. 30, 2014
409 
 
 
 
 
 
 
Balance, at Dec. 31, 2014
41 
4,088 
16,631 
779 
 
4,802 
26,341 
Balance, shares, at Dec. 31, 2014
409 
 
 
 
 
 
 
Net earnings (loss)
 
 
(9,922)
 
 
(369)
(10,291)
Other comprehensive loss, net of tax
 
 
 
(458)
 
 
(458)
Stock option exercises
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(23)
 
(23)
Common stock retired
 
(23)
 
 
23 
 
 
Common stock dividends
 
 
(296)
 
 
 
(296)
Share-based compensation
 
129 
 
 
 
 
129 
Subsidiary equity transactions
 
577 
 
 
 
127 
704 
Distributions to noncontrolling interests
 
 
 
 
 
(186)
(186)
Other
 
(2)
 
 
 
 
(2)
Balance, at Sep. 30, 2015
$ 41 
$ 4,773 
$ 6,413 
$ 321 
 
$ 4,374 
$ 15,922 
Balance, shares, at Sep. 30, 2015
411 
 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.     Summary of Significant Accounting Policies 

 

The accompanying unaudited interim financial statements and notes of Devon Energy Corporation (“Devon, “we, “us” or “our”) 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 accounting principles generally accepted in the United States of America (“U.S.”) 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 2014 Annual Report on Form 10-K.  

 

The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2015 and 2014, as applicable, and Devon’s financial position as of September 30, 2015.

 

Recently Issued Accounting Standards not yet Adopted

 

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. Devon is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures and will not early adopt.

 

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 annual and interim periods beginning in 2016 and are required to be applied retrospectively, with early adoption permitted. Devon does not expect the adoption to have a material impact on its consolidated financial statements and related disclosures and will not early adopt.

 

 

Acquisitions And Divestitures
Acquisitions And Divestitures

2.    Acquisitions and Divestitures

 

Acquisition of GeoSouthern and Formation of EnLink 

 

    On February 28, 2014, Devon completed its acquisition of interests in certain affiliates of GeoSouthern Energy Corporation (“GeoSouthern”). On March 7, 2014, Devon, Crosstex Energy, Inc. and Crosstex Energy, LP (together with Crosstex Energy, Inc., “Crosstex”) completed a business combination to combine substantially all of Devon’s U.S. midstream assets with Crosstex’s assets to form a new midstream business. The new business consists of EnLink Midstream, LLC (the General Partner”) and EnLink Midstream Partners, LP (“EnLink”), which are both controlled by Devon and are publicly traded entities. 

 

The following unaudited pro forma financial information was prepared assuming both the GeoSouthern acquisition and the formation of EnLink and the General Partner occurred on January 1, 2014. The pro forma information has been included for comparative purposes only and 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 date indicated. In addition, it does not project Devon’s results of operations for any future period.

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2014

 

 

 

 

 

 

 

 

(Millions)

 

Total operating revenues

 

$

14,218 

 

 

 

 

 

 

Net earnings

 

$

2,109 

 

Noncontrolling interests

 

$

68 

 

Net earnings attributable to Devon

 

$

2,041 

 

Net earnings per common share attributable to Devon

 

$

4.98 

 

 

EnLink Acquisitions

 

    The following table presents a summary of EnLink’s acquisition activity for the first nine months of 2015.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Price
(Millions)

 

Allocation
(Millions)

Date

 

Acquiree

 

Cash

 

EnLink Units

 

PP&E

 

Goodwill

 

Intangibles

 

Other

January 31

 

LPC Crude Oil Marketing LLC

 

$108

 

-

 

$30

 

$30

 

$43

 

$5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 16

 

Coronado Midstream Holdings LLC ("Coronado")

 

$240

 

$360

 

$302

 

$18

 

$281

 

$(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    On October 1, 2015, EnLink acquired Delaware Basin natural gas gathering and processing assets from MRC Energy Company (“Matador”) for approximately $143 million, subject to certain adjustments.

 

EnLink Dropdowns

 

    In February 2015, EnLink acquired a 25% equity interest in EnLink Midstream Holdings, LP (“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 the Victoria Express Pipeline and related truck terminal and storage assets (“VEX”) from Devon for approximately $180 million in cash and equity, subject to certain adjustments. EnLink also assumed approximately $35 million in certain future construction costs to expand the system to full capacity.

 

Asset Divestitures

 

    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 currency derivative loss. These losses are included in other nonoperating items in the accompanying consolidated comprehensive statements of earnings.

 

    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.

 

Derivative Financial Instruments
Derivative Financial Instruments

3.     Derivative Financial Instruments

 

Objectives and Strategies

 

Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon and EnLink periodically enter into derivative financial instruments with respect to a portion of their oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps, costless price collars and call options. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility and foreign exchange forward contracts to manage its exposure to fluctuations in the U.S. and Canadian dollar exchange rates.

 

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 contain provisions that provide for collateral payments, depending on levels of exposure and the credit rating of the counterparty.

 

As of September 30, 2015 and December 31, 2014, Devon held $169 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.

 

Commodity Derivatives

 

As of September 30, 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 West Texas Intermediate (“WTI”) futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price Swaps

 

Price Collars

 

Call Options Sold

Period

 

Volume (Bbls/d)

 

Weighted Average Price ($/Bbl)

 

Volume (Bbls/d)

 

Weighted Average Floor Price ($/Bbl)

 

Weighted Average Ceiling Price ($/Bbl)

 

Volume (Bbls/d)

 

Weighted Average Price ($/Bbl)

Q4 2015

 

107,000

 

$

90.61

 

44,000

 

$

81.36

 

$

88.63

 

28,000

 

$

116.43

Q1-Q4 2016

 

-

 

$

-

 

-

 

$

-

 

$

-

 

18,500

 

$

89.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil Basis Swaps

Period

 

Index

 

Volume (Bbls/d)

 

Weighted Average Differential to WTI ($/Bbl)

Q4 2015 

 

Western Canadian Select

 

40,000

 

$

(15.58)

Q4 2015 

 

West Texas Sour

 

8,000

 

$

(3.68)

Q4 2015 

 

Midland Sweet

 

16,000

 

$

(2.86)

Q1-Q4 2016 

 

West Texas Sour

 

5,000

 

$

(0.53)

Q1-Q4 2016 

 

Midland Sweet

 

13,000

 

$

0.25 

 

As of September 30, 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

 

Price Collars

 

Call Options Sold

Period

 

Volume (MMBtu/d)

 

Weighted Average Price ($/MMBtu)

 

Volume (MMBtu/d)

 

Weighted Average Floor Price ($/MMBtu)

 

Weighted Average Ceiling Price ($/MMBtu)

 

Volume (MMBtu/d)

 

Weighted Average Price ($/MMBtu)

Q4 2015

 

250,000

 

$

4.32

 

480,000

 

$

3.52

 

$

3.83

 

550,000

 

$

5.09

Q1-Q4 2016

 

24,863

 

$

3.17

 

-

 

$

-

 

$

-

 

400,000

 

$

4.73

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas Basis Swaps

Period

 

Index

 

Volume (MMBtu/d)

 

Weighted Average Differential to Henry Hub ($/MMBtu)

Q4 2015

 

Panhandle Eastern Pipe Line

 

100,000

 

$

(0.28)

Q4 2015

 

El Paso Natural Gas

 

70,000

 

$

(0.11)

Q4 2015

 

Houston Ship Channel

 

200,000

 

$

0.01

Q1-Q4 2016

 

Panhandle Eastern Pipe Line

 

175,000

 

$

(0.34)

Q1-Q4 2016

 

El Paso Natural Gas

 

15,000

 

$

(0.13)

Q1-Q4 2016

 

Houston Ship Channel

 

30,000

 

$

0.11

Q1-Q4 2016

 

Transco Zone 4

 

60,000

 

$

0.01

Q1-Q4 2017

 

Panhandle Eastern Pipe Line

 

60,000

 

$

(0.34)

Q1-Q4 2017

 

El Paso Natural Gas

 

30,000

 

$

(0.14)

Q1-Q4 2017

 

Houston Ship Channel

 

35,000

 

$

0.06

Q1-Q4 2017

 

Transco Zone 4

 

85,000

 

$

0.04

 

 

    As of September 30, 2015, EnLink had the following open derivative positions associated with gas processing and fractionation. EnLink’s NGL derivative positions settle by purity product against the average of the prompt month OPIS Mont Belvieu, Texas index. EnLink’s natural gas derivative positions settle against the Henry Hub Gas Daily index.

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Product

 

Volume (Total)

 

 

Weighted Average Price Paid

 

 

Weighted Average Price Received

Q4 2015-Q4 2016

 

Ethane

 

817

MBbls

 

$

0.28/gal

 

 

Index

Q4 2015-Q4 2016

 

Propane

 

908

MBbls

 

 

Index

 

$

0.88/gal

Q4 2015-Q3 2016

 

Normal Butane

 

74

MBbls

 

 

Index

 

$

0.63/gal

Q4 2015-Q3 2016

 

Natural Gasoline

 

63

MBbls

 

 

Index

 

$

1.30/gal

Q4 2015-Q3 2016

 

Natural Gas

 

2,497

MMBtu/d

 

$

3.13/MMBtu

 

 

Index

 

 

Interest Rate Derivatives

 

    As of September 30, 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

 

 

Foreign Currency Derivatives

 

As of September 30, 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

 

$

1,884 

 

0.752

 

December 2015

 

 

Financial Statement Presentation

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives:

 

(Millions)

Oil, gas and NGL derivatives

 

$

414 

 

$

748 

 

$

426 

 

$

29 

Marketing and midstream revenues

 

 

 

 

 

 

 

 

(2)

Interest rate derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(30)

 

 

 —

 

 

(28)

 

 

Foreign currency derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

91 

 

 

55 

 

 

200 

 

 

15 

Net gains recognized

 

$

481 

 

$

804 

 

$

606 

 

$

43 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

(Millions)

Commodity derivative assets:

 

 

 

 

 

 

 

Derivatives, at fair value

 

 

$

687 

 

$

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

 

 

$

695 

 

$

2,004 

 

 

 

 

 

 

 

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

Other current liabilities

 

 

$

19 

 

$

28 

Other long-term liabilities

 

 

 

 

 

28 

Interest rate derivative liabilities:

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Other long-term liabilities

 

 

 

30 

 

 

 —

Total derivative liabilities

 

 

$

55 

 

$

57 

 

 

Share-Based Compensation
Share-Based Compensation

4.     Share-Based Compensation

 

The following table presents the effects of share-based compensation included in Devon’s accompanying consolidated comprehensive statements of earnings. Devon’s gross general and administrative expense for the first nine months of 2015 and 2014 includes $25 million and $11 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 nine months ended September 30, 2014, approximately $15 million of associated expense for these accelerated awards is included in restructuring costs in the accompanying consolidated comprehensive statements of earnings. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

(Millions)

Gross general and administrative expense for share-based compensation

 

$

182 

 

$

155 

 

Share-based compensation expense capitalized pursuant to the

 

 

 

 

 

 

 

 full cost method of accounting for oil and gas properties

 

$

48 

 

$

40 

 

Related income tax benefit

 

$

37 

 

$

34 

 

 

 

Under its 2009 Long-Term Incentive Plan, as amended (the “2009 Plan”), and its 2015 Long-Term Incentive Plan (the “2015 Plan”), Devon granted share-based awards to certain employees and directors in the first nine months of 2015. 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

 

2,764 

 

 

$

63.61 

 

236 

 

 

$

62.02 

 

786 

 

 

$

84.14 

Vested

 

(1,025)

 

 

$

62.59 

 

(58)

 

 

$

61.33 

 

(337)

 

 

$

66.00 

Forfeited

 

(318)

 

 

$

61.72 

 

(29)

 

 

$

64.18 

 

(67)

 

 

$

79.20 

Unvested at 9/30/15

 

5,725 

 

 

$

61.82 

 

529 

 

 

$

60.10 

 

1,859 

 

(1)

$

76.17 

____________________________

(1) A maximum of 3.7 million common shares could be awarded based upon Devon’s final total shareholder return ranking relative to Devon’s peer group established under applicable award agreements.    

 

 

The following table presents the assumptions related to the performance share units granted in 2015, as indicated in the previous summary table.

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

Grant-date fair value

$

81.99 

-

$

85.05 

Risk-free interest rate

1.06% 

Volatility factor

26.2% 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

Performance-Based

 

Performance

 

 

Awards and Units

 

Restricted Stock Awards

 

Share Units

Unrecognized compensation cost (millions)

 

$

234 

 

$

 

$

53 

Weighted average period for recognition (years)

 

 

2.6 

 

 

2.8 

 

 

2.0 

 

 

2015 Long-Term Incentive Plan

 

In the second quarter of 2015, Devon’s stockholders approved the 2015 Plan. The 2015 Plan replaces the 2009 Plan. 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, cancelled 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.

 

EnLink Share-Based Awards 

 

    In March 2015, the General Partner and EnLink issued restricted incentive units as bonus payments to officers and certain employees for 2014. The combined grant fair value was $7 million, and the total cost was recognized in the first quarter of 2015 due to the awards vesting immediately.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Partner

 

EnLink

 

 

Restricted

 

Performance

 

Restricted

 

Performance

 

 

Incentive Units

 

Units

 

Incentive Units

 

Units

Unrecognized compensation cost (millions)

 

$

20 

 

$

 

$

20 

 

$

Weighted average period for recognition (years)

 

 

1.7 

 

 

2.3 

 

 

1.7 

 

 

2.3 

 

 

Asset Impairments
Asset Impairments

5.     Asset Impairments

 

The following table presents the asset impairments recognized by Devon in the first nine months of 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015

 

Nine Months Ended September 30, 2015

 

 

 

Gross

 

Net of Taxes

 

Gross

 

Net of Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

 

U.S. oil and gas assets

 

$

4,715 

 

$

2,994 

 

$

14,340 

 

$

9,105 

 

Canada oil and gas assets

 

 

336 

 

 

248 

 

 

336 

 

 

248 

 

EnLink goodwill

 

 

576 

 

 

576 

 

 

576 

 

 

576 

 

EnLink other intangible assets

 

 

223 

 

 

223 

 

 

223 

 

 

223 

 

Other assets

 

 

 

 

 

 

 

 

 

Total asset impairments

 

$

5,851 

 

$

4,042 

 

$

15,479 

 

$

10,155 

 

 

 

Oil and Gas Impairments 

 

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

 

    The oil and gas impairments resulted from declines in the U.S. and Canada full cost ceilings.  The lower ceiling values resulted primarily from significant decreases in the 12-month average trailing prices for oil, bitumen, gas and NGLs, which significantly reduced proved reserves values and, to a lesser degree, proved reserves.  

 

EnLink Goodwill and Other Intangible Assets Impairments 

 

    In the third quarter of 2015, Devon recognized goodwill and other intangible assets impairments related to EnLink’s business. Additional information regarding the impairments is discussed in Note 11.

 

Income Taxes
Income Taxes

6.     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,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income tax expense (benefit) (millions)

 

$

(1,714)

 

$

613 

 

$

(5,435)

 

$

1,698 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

(35%)

 

 

35% 

 

 

(35%)

 

 

35% 

 

Non-deductible goodwill and intangible impairment

 

 

5% 

 

 

0% 

 

 

2% 

 

 

0% 

 

Taxation on Canadian operations

 

 

0% 

 

 

0% 

 

 

1% 

 

 

1% 

 

State income taxes

 

 

(1%)

 

 

2% 

 

 

(2%)

 

 

1% 

 

Repatriations

 

 

0% 

 

 

0% 

 

 

0% 

 

 

7% 

 

Other

 

 

1% 

 

 

0% 

 

 

(1%)

 

 

1% 

 

Effective income tax rate

 

 

(30%)

 

 

37% 

 

 

(35%)

 

 

45% 

 

 

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

 

    In the third quarter of 2015, EnLink recorded goodwill and intangibles impairments of approximately $799 million. These impairments are not deductible for purposes of calculating income tax and therefore have an impact on the effective tax rate.

 

    In the second quarter of 2015, Devon recognized $57 million of income tax benefits in conjunction with favorable tax settlements. In addition, changes in statutory tax rates in Texas and the province of Alberta, Canada resulted in a net increase to deferred tax expense of $44 million.

 

    Devon and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. Devon’s tax reserves are related to tax years that may be subject to examination by the relevant taxing authority. Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business.

 

    In the third quarter of 2014, Devon completed its U.S. asset divestiture program. In conjunction with the divestiture closing, Devon recognized $543 million of current income tax expense. The current tax expense was entirely offset by the recognition of deferred tax benefits.

 

    In the second quarter of 2014, Devon recognized $247 million of additional income tax expense related to the $2.8 billion of repatriations to the U.S. Prior to the repatriation, Devon had recognized a $143 million deferred income tax liability associated with the planned repatriation. When the repatriation was made, Devon retained a larger property basis in Canada than was previously estimated, resulting in the incremental tax in the second quarter.

 

 

     

 

 

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

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

  

Nine Months Ended

 

  

September 30,

  

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

(Millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Devon

 

$

(3,507)

 

$

1,016 

 

$

(9,922)

 

$

2,015 

Attributable to participating securities

 

 

(1)

 

 

(11)

 

 

(3)

 

 

(20)

Basic and diluted earnings (loss)

 

$

(3,508)

 

$

1,005 

 

$

(9,925)

 

$

1,995 

Common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding - total