DEVON ENERGY CORP/DE, 10-Q filed on 11/5/2014
Quarterly Report
Document And Entity Information
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Oct. 22, 2014
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2014 
 
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
2014 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q3 
 
Entity Common Stock, Shares Outstanding
 
409.1 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Consolidated Comprehensive Statements Of Earnings [Abstract]
 
 
 
 
Oil, gas and NGL sales
$ 2,588 
$ 2,341 
$ 7,824 
$ 6,367 
Oil, gas and NGL derivatives
748 
(141)
29 
(95)
Marketing and midstream revenues
2,000 
514 
5,718 
1,501 
Total operating revenues
5,336 
2,714 
13,571 
7,773 
Lease operating expenses
584 
600 
1,764 
1,684 
Marketing and midstream operating expenses
1,781 
383 
5,092 
1,128 
General and administrative expenses
195 
143 
595 
460 
Production and property taxes
140 
115 
427 
353 
Depreciation, depletion and amortization
842 
691 
2,409 
2,069 
Asset impairments
 
 
1,960 
Restructuring costs
44 
50 
Gains and losses on asset sales
 
11 
(1,072)
11 
Other operating items
18 
27 
74 
82 
Total operating expenses
3,562 
1,981 
9,333 
7,797 
Operating income (loss)
1,774 
733 
4,238 
(24)
Net financing costs
116 
100 
359 
306 
Other nonoperating items
(6)
111 
(4)
Earnings (loss) before income taxes
1,654 
639 
3,768 
(326)
Income tax expense (benefit)
613 
210 
1,698 
(99)
Net earnings (loss)
1,041 
429 
2,070 
(227)
Net earnings attributable to noncontrolling interests
25 
 
55 
 
Net earnings (loss) attributable to Devon
1,016 
429 
2,015 
(227)
Net earnings (loss) per share attributable to Devon:
 
 
 
 
Basic
$ 2.48 
$ 1.06 
$ 4.94 
$ (0.57)
Diluted
$ 2.47 
$ 1.05 
$ 4.91 
$ (0.57)
Comprehensive earnings (loss):
 
 
 
 
Net earnings (loss)
1,041 
429 
2,070 
(227)
Other comprehensive earnings (loss), net of tax:
 
 
 
 
Foreign currency translation
(279)
173 
(285)
(281)
Pension and postretirement plans
10 
12 
Other comprehensive earnings (loss), net of tax
(277)
176 
(275)
(269)
Comprehensive earnings (loss)
764 
605 
1,795 
(496)
Comprehensive earnings attributable to noncontrolling interests
25 
 
55 
 
Comprehensive earnings (loss) attributable to Devon
$ 739 
$ 605 
$ 1,740 
$ (496)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities:
 
 
Net earnings (loss)
$ 2,070 
$ (227)
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
Depreciation, depletion and amortization
2,409 
2,069 
Gains and losses on asset sales
(1,072)
11 
Asset impairments
 
1,960 
Deferred income tax expense (benefit)
800 
(181)
Derivatives and other financial instruments
(43)
65 
Cash settlements on derivatives and financial instruments
(201)
147 
Other noncash charges
357 
195 
Net change in working capital
766 
(104)
Change in long-term other assets
(115)
(28)
Change in long-term other liabilities
47 
92 
Net cash from operating activities
5,018 
3,999 
Cash flows from investing activities:
 
 
Acquisitions of property, equipment and businesses
(6,255)
 
Capital expenditures
(5,013)
(5,219)
Proceeds from property and equipment divestitures
5,202 
316 
Purchases of short-term investments
 
(1,076)
Redemptions of short-term investments
 
3,419 
Redemptions of long-term investments
57 
 
Other
87 
83 
Net cash from investing activities
(5,922)
(2,477)
Cash flows from financing activities:
 
 
Proceeds from borrowings of long-term debt, net of issuance costs
4,158 
 
Net short-term debt repayments
(1,318)
(1,577)
Long-term debt repayments
(4,265)
 
Proceeds from stock option exercises
92 
Proceeds from issuance of subsidiary units
72 
 
Dividends paid on common stock
(287)
(259)
Distributions to noncontrolling interests
(187)
 
Other
(4)
Net cash from financing activities
(1,739)
(1,830)
Effect of exchange rate changes on cash
(15)
(9)
Net change in cash and cash equivalents
(2,658)
(317)
Cash and cash equivalents at beginning of period
6,066 
4,637 
Cash and cash equivalents at end of period
$ 3,408 
$ 4,320 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 3,408 
$ 6,066 
Accounts receivable
2,009 
1,520 
Other current assets
556 
419 
Total current assets
5,973 
8,005 
Oil and gas, based on full-cost accounting:
 
 
Subject to amortization
73,733 
73,995 
Not subject to amortization
3,642 
2,791 
Total oil and gas
77,375 
76,786 
Other
9,204 
6,195 
Total property and equipment, at cost
86,579 
82,981 
Less accumulated depreciation, depletion and amortization
(51,410)
(54,534)
Property and equipment, net
35,169 
28,447 
Goodwill
8,310 
5,858 
Other long-term assets
1,387 
567 
Total assets
50,839 
42,877 
Current liabilities:
 
 
Accounts payable
1,344 
1,229 
Revenues and royalties payable
1,455 
786 
Short-term debt
1,898 1
4,066 1
Income taxes payable
651 
Other current liabilities
646 
573 
Total current liabilities
5,994 
6,655 
Long-term debt
10,161 
7,956 
Asset retirement obligations
1,348 
2,140 
Other long-term liabilities
926 
834 
Deferred income taxes
5,642 
4,793 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 409 million and 406 million shares in 2014 and 2013, respectively
41 
41 
Additional paid-in capital
4,004 
3,780 
Retained earnings
17,138 
15,410 
Accumulated other comprehensive earnings
993 
1,268 
Total stockholders' equity attributable to Devon
22,176 
20,499 
Noncontrolling interests
4,592 
 
Total stockholders' equity
26,768 
20,499 
Commitments and contingencies (Note 17)
   
   
Total liabilities and stockholders' equity
$ 50,839 
$ 42,877 
[1] Short-term debt as of September 30, 2014 consists of $1.9 billion of senior notes that Devon intends to redeem in the fourth quarter of 2014 prior to their scheduled maturity date. The redemption includes the 2.4% $500 million senior note due 2016, the 1.2% $650 million senior note due 2016 and the 1.875% $750 million senior note due 2017 plus unpaid interest and a make-whole premium. The debt will be repaid with funds received as part of the divestiture program discussed in Note 2.Short-term debt as of December 31, 2013 consists of $2.25 billion of senior notes issued in conjunction with the GeoSouthern acquisition, $1.3 billion of commercial paper and $500 million of senior notes due January 15, 2014. Subsequent to the close of the GeoSouthern acquisition the $2.25 billion of senior notes were reclassified to long-term debt.
Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2014
Dec. 31, 2013
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)
409,000,000 
406,000,000 
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, 2012
$ 41 
$ 3,688 
$ 15,778 
$ 1,771 
 
 
$ 21,278 
Balance, shares, at Dec. 31, 2012
406.0 
 
 
 
 
 
 
Net earnings (loss)
 
 
(227)
 
 
 
(227)
Other comprehensive loss, net of tax
 
 
 
(269)
 
 
(269)
Stock option exercises
 
 
 
 
 
Common stock repurchased
 
 
 
 
(9)
 
(9)
Common stock retired
 
(9)
 
 
 
 
Common stock dividends
 
 
(259)
 
 
 
(259)
Share-based compensation
 
92 
 
 
 
 
92 
Share-based compensation tax benefits
 
 
 
 
 
Balance, at Sep. 30, 2013
41 
3,777 
15,292 
1,502 
 
 
20,612 
Balance, shares, at Sep. 30, 2013
406.0 
 
 
 
 
 
 
Balance, at Dec. 31, 2013
41 
3,780 
15,410 
1,268 
 
 
20,499 
Balance, shares, at Dec. 31, 2013
406.0 
 
 
 
 
 
 
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
 
 
 
 
 
Acquistion of noncontrolling interests
 
 
 
 
 
4,664 
4,664 
Subsidiary equity transactions
 
17 
 
 
 
55 
72 
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
409.0 
 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.     Summary of Significant Accounting Policies 

 

The accompanying unaudited financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. 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 financial statements and notes should be read in conjunction with the financial statements and notes included in Devon's 2013 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, 2014 and 2013 and Devon's financial position as of September 30, 2014.

 

Basis of Presentation

 

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, on March 7, 2014, Devon completed a business combination whereby Devon controls both EnLink Midstream Partners, LP (the “Partnership”) and its general partner entity, EnLink Midstream, LLC (“EnLink”). Devon controls both the Partnership’s and EnLink’s operations; therefore, the Partnership’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 Partnership’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.

 

Intangible Assets

 

EnLink’s long-term assets include intangible assets, consisting of customer relationships. These assets are amortized on a straight-line basis over the expected periods of benefits, which range from ten to twenty years.

 

Recently Issued Accounting Standards Not Yet Adopted

 

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The update 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 update is effective for Devon beginning on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. Devon has not yet selected a transition method and is evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

 

Acquisitions And Divestitures
Acquisitions And Divestitures

2.    Acquisitions and Divestitures

 

Formation of EnLink Midstream, LLC and EnLink Midstream Partners, LP

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 the Partnership and EnLink, a master limited partnership and a general partner entity, respectively, which are both publicly traded entities. 

 

In exchange for a controlling interest in both EnLink and the Partnership, Devon contributed its equity interest in a newly formed Devon subsidiary, EnLink Midstream Holdings, LP (“EnLink Holdings”) and $100 million in cash. EnLink Holdings owns Devon’s midstream assets in the Barnett Shale in north Texas and the Cana and Arkoma Woodford Shales in Oklahoma, as well as Devon’s economic interest in Gulf Coast Fractionators in Mt. Belvieu, Texas. The Partnership and EnLink each own 50 percent of EnLink Holdings.

 

The ownership of EnLink is approximately:

 

 

 

 

 

 

 

70% - Devon

 

 

 

 

 

 

 

30% - Public unitholders

The ownership of the Partnership is approximately:

 

 

 

 

 

 

 

52% - Devon

 

 

 

 

 

 

 

41% - Public unitholders

 

 

 

 

 

 

 

7% - EnLink

 

This business combination was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, EnLink Holdings was the accounting acquirer because its parent company, Devon, obtained control of EnLink and the Partnership as a result of the business combination. Consequently, EnLink Holdings’ assets and liabilities retained their carrying values. Additionally, the Crosstex assets acquired and liabilities assumed by the Partnership and EnLink in the business combination, as well as EnLink’s noncontrolling interest in the Partnership, 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 (in 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) 

 

$

12 

 

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

 

$

1,835 

 

Partnership 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 

 

Partnership common unit price (4)

 

$

30.51 

 

Partnership common units value

 

$

2,825 

 

Partnership outstanding unit options value

 

$

 

Total fair value of noncontrolling interests in the Partnership (4)

 

$

2,829 

 

Total consideration and fair value of noncontrolling interests

 

$

4,664 

 

__________________________

 

(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 EnLink’s equity investment in E2 Energy Services, LLC and E2 Appalachian Compression, LLC (collectively “E2”).

(3) The Partnership converted the preferred units to common units in February 2014.

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

 

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

 

 

 

 

 

 

Assets acquired:

 

 

 

Current assets

 

$

438 

Property, plant and equipment, net

 

 

2,438 

Intangible assets

 

 

547 

Equity investment

 

 

222 

Goodwill (1)

 

 

3,292 

Other long term assets

 

 

Liabilities assumed:

 

 

 

Current liabilities

 

 

(516)

Long-term debt

 

 

(1,454)

Deferred income taxes

 

 

(203)

Other long-term liabilities

 

 

(101)

Total consideration and fair value of noncontrolling interests

 

$

4,664 

__________________________

(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. 

 

GeoSouthern Energy Acquisition

 

On November 20, 2013, Devon entered into a Purchase and Sale Agreement with GeoSouthern Energy Corporation (“GeoSouthern”) and a wholly owned subsidiary of GeoSouthern to acquire GeoSouthern’s interests in certain affiliates (the “Acquired Companies”) that own certain oil and gas properties, leasehold mineral interest and related assets located in the Eagle Ford Shale. On February 28, 2014, the GeoSouthern acquisition closed, and GeoSouthern transferred the Acquired Companies to Devon in exchange for the aggregate purchase price of approximately $6.0 billion. Devon funded the acquisition price with cash on hand and debt financing. In connection with the GeoSouthern acquisition, Devon acquired approximately 82,000 net acres 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 following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed in the transaction (in millions).

 

 

 

 

 

 

Cash and cash equivalents

 

$

95 

Other current assets

 

 

256 

Proved properties

 

 

5,029 

Unproved properties

 

 

1,008 

Midstream assets

 

 

85 

Current liabilities

 

 

(437)

Long-term liabilities

 

 

(6)

Net assets acquired

 

$

6,030 

 

EnLink and GeoSouthern Operating Results

 

The following table presents EnLink’s (acquired Crosstex operations) and GeoSouthern’s operating revenues and net earnings included in Devon’s consolidated statements of earnings subsequent to the transactions described above.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2014

 

Nine Months Ended September 30, 2014

 

 

GeoSouthern

 

EnLink

 

GeoSouthern

 

EnLink

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

(In millions)

Total operating revenues

 

$

634 

 

$

700 

 

$

1,374 

 

$

1,670 

Total operating expenses

 

 

322 

 

 

692 

 

 

708 

 

 

1,654 

Operating income

 

$

312 

 

$

 

$

666 

 

$

16 

 

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.

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

(In millions)

Total operating revenues

 

$

14,218 

 

$

9,603 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

2,109 

 

$

(192)

Noncontrolling interests

 

$

68 

 

$

32 

Net earnings (loss) attributable to Devon

 

$

2,041 

 

$

(224)

Net earnings (loss) per common share attributable to Devon

 

$

4.98 

 

$

(0.55)

 

Partnership Acquisitions and Dropdowns 

 

Effective November 1, 2014, the Partnership acquired Gulf Coast natural pipeline assets predominantly located in southern Louisiana for $235 million, subject to certain adjustments. Furthermore, in October 2014, the Partnership acquired equity interests in E2 Appalachian Compression, LLC and E2 Energy Services, LLC (together “E2”) from EnLink. The total consideration for the transaction was approximately $193 million, including a $163 million cash payment and 1.0 million Partnership units valued at $30 million based on the fair value of the Partnership’s units as of the closing date of the transaction.

 

Non-Core Asset Divestitures

 

In November 2013, Devon announced plans to divest certain non-core properties located throughout Canada and the U.S.

 

Canada

 

In the first quarter of 2014, Devon completed minor divestiture transactions for $142 million ($155 million Canadian dollars). In the second quarter of 2014, Devon sold conventional assets to Canadian Natural Resources Limited for $2.8 billion ($3.125 billion Canadian dollars).

 

Under full-cost accounting rules, sales or dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of gain or loss. However, if not recognizing a gain or loss on the disposition would otherwise significantly alter the relationship between a cost center’s capitalized costs and proved reserves, then a gain or loss must be recognized. The Canadian divestitures significantly altered such relationship. Therefore, Devon recognized gains totaling $1.1 billion ($0.6 billion after-tax) in 2014 associated with these transactions.  These gains are included as a separate item in the accompanying consolidated comprehensive statements of earnings.

 

Included in the gain calculation noted above 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 divestitures noted above, Devon repatriated approximately $2.8 billion of proceeds to the U.S. in the second quarter of 2014.  The proceeds were used to repay $0.7 billion of commercial paper and the $2.0 billion term loans that were drawn in the first quarter of 2014 to fund a portion of the GeoSouthern acquisition. 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.

 

U.S.

 

On August 29, 2014, Devon sold its U.S. non-core assets to LINN Energy for $2.3 billion ($1.7 billion after-tax proceeds). Additionally, approximately $200 million of asset retirement obligations were assumed by LINN Energy. 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. These instruments are used to manage the inherent uncertainty of future revenues due to commodity price volatility and typically 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. Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates. Additionally, EnLink manages its exposure to fluctuations in commodity prices by hedging the impact of market fluctuations.

 

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, 2014, Devon held $31 million of cash collateral which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying balance sheet.

 

Commodity Derivatives

 

As of September 30, 2014, 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 futures price. The second table presents Devon’s oil derivatives that settle against the Western Canadian Select index.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2014 

 

75,000

 

$

94.14

 

64,750

 

$

89.33

 

$

100.00

 

42,000

 

$

116.43

Q1-Q4 2015

 

106,736

 

$

91.22

 

31,500

 

$

89.67

 

$

97.84

 

28,000

 

$

116.43

Q1-Q4 2016

 

 

$

 

 

$

 

$

 

18,500

 

$

103.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil Basis Swaps

Period

 

Index

 

Volume (Bbls/d)

 

Weighted Average Differential to WTI ($/Bbl)

Q4 2014

 

Western Canadian Select

 

50,000

 

$

(17.40)

Q1-Q4 2015 

 

Western Canadian Select

 

14,890

 

$

(18.92)

 

As of September 30, 2014, 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 AECO and PEPL indices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2014 

 

800,000

 

$

4.42

 

460,000

 

$

4.03

 

$

4.51

 

500,000

 

$

5.00

Q1-Q4 2015

 

210,000

 

$

4.38

 

260,000

 

$

4.05

 

$

4.36

 

550,000

 

$

5.09

Q1-Q4 2016

 

 

$

 

 

$

 

$

 

400,000

 

$

5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas Basis Swaps

Period

 

Index

 

Volume (MMBtu/d)

 

Weighted Average Differential to Henry Hub ($/MMBtu)

Q4 2014

 

AECO

 

94,781

 

$

(0.52)

Q1-Q4 2015

 

PEPL

 

100,000

 

$

(0.28)

 

 

Interest Rate Derivatives

 

    As of September 30, 2014, Devon had the following open interest rate derivative positions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

Rate Received

 

Rate Paid

 

Expiration

(In millions)

 

 

 

 

 

 

$

100

 

Three Month LIBOR

 

0.92%

 

December 2016

$

100

 

1.76%

 

Three Month LIBOR

 

January 2019

 

 

Foreign Currency Derivatives

 

As of September 30, 2014, Devon had the following open foreign currency derivative positions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Contract

Currency

 

Contract Type

 

CAD Notional

 

Weighted Average Fixed Rate Received

 

Expiration

 

 

 

 

(In millions)

 

(CAD-USD)

 

 

Canadian Dollar

 

Sell

 

$

1,312 

 

0.899

 

December 2014

 

Financial Statement Presentation

 

The following table presents the net gains and losses recognized in the accompanying comprehensive statements of earnings associated with derivative financial instruments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Statements of

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

Earnings Caption

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

Commodity derivatives

 

Oil, gas and NGL derivatives

 

$

748 

 

$

(141)

 

$

29 

 

$

(95)

EnLink commodity derivatives

 

Marketing and midstream revenues

 

 

 

 

 —

 

 

(2)

 

 

 —

Interest rate derivatives

 

Other nonoperating items

 

 

 —

 

 

 

 

 

 

Foreign currency derivatives

 

Other nonoperating items

 

 

55 

 

 

(28)

 

 

15 

 

 

29 

Net gains (losses) recognized in comprehensive statements of earnings

 

$

804 

 

$

(168)

 

$

43 

 

$

(65)

 

 

The following table presents the derivative fair values included in the accompanying balance sheets.

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Caption

 

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

Asset derivatives:

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current assets

 

$

231 

 

$

75 

Commodity derivatives

 

Other long-term assets

 

 

66 

 

 

28 

EnLink commodity derivatives

 

Other current assets

 

 

 

 

 —

Interest rate derivatives

 

Other current assets

 

 

 

 

 —

Foreign currency derivatives

 

Other current assets

 

 

11 

 

 

 —

Total asset derivatives

 

 

 

$

310 

 

$

103 

Liability derivatives:

 

 

 

 

 

 

 

 

Commodity derivatives

 

Other current liabilities

 

$

30 

 

$

58 

Commodity derivatives

 

Other long-term liabilities

 

 

50 

 

 

62 

EnLink commodity derivatives

 

Other current liabilities

 

 

 

 

 —

EnLink commodity derivatives

 

Other long-term liabilities

 

 

 

 

 —

Interest rate derivatives

 

Other current liabilities

 

 

 

 

 —

Interest rate derivatives

 

Other long-term liabilities

 

 

 

 

 —

Foreign currency derivatives

 

Other current liabilities

 

 

 —

 

 

Total liability derivatives

 

 

 

$

84 

 

$

121 

 

 

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 comprehensive statements of earnings. Devon’s gross general and administrative expense for the first nine months of 2014 includes $11 million 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 the first quarter of 2014 in conjunction with the divestiture of Devon’s Canadian conventional assets. The associated expense for these accelerated awards is included in restructuring costs in the accompanying comprehensive statements of earnings. See Note 6 for further details.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

(In millions)

Gross general and administrative expense

 

$

155 

 

$

118 

Share-based compensation expense capitalized pursuant to the

 

 

 

 

 

 

 full-cost method of accounting for oil and gas properties

 

$

40 

 

$

44 

Related income tax benefit

 

$

20 

 

$

17 

 

Under its 2009 Long-Term Incentive Plan, as amended, Devon granted share-based awards to certain employees in the first nine months of 2014. The following sections include information related to these awards.

 

Restricted Stock Awards and Units

 

The following table presents a summary of Devon's unvested restricted stock awards and units.

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Award & Units

 

Weighted Average Grant-Date Fair Value

 

 

 

(In thousands)

 

 

 

Unvested at December 31, 2013

 

 

3,292 

 

$

59.76 

 Granted

 

 

3,412 

 

$

63.53 

 Vested

 

 

(558)

 

$

60.65 

 Forfeited

 

 

(607)

 

$

60.96 

Unvested at September 30, 2014

 

 

5,539 

 

$

61.73 

 

 

 

 

 

 

 

 

As of September 30, 2014, Devon's unrecognized compensation cost related to unvested restricted stock awards and units was $225 million. Such cost is expected to be recognized over a weighted-average period of 2.4 years.

 

Performance Based Restricted Stock Awards

 

The following table presents a summary of Devon's performance based restricted stock awards.

 

 

 

 

 

 

 

 

 

 

 

Performance Restricted Stock Awards

 

Weighted Average Grant-Date Fair Value

 

 

 

(In thousands)

 

 

 

Unvested at December 31, 2013

 

 

316 

 

$

56.25 

 Granted

 

 

234 

 

$

61.33 

 Vested

 

 

(75)

 

$

53.45 

Unvested at September 30, 2014

 

 

475 

 

$

59.20 

 

As of September 30, 2014, Devon's unrecognized compensation cost related to these awards was $7 million. Such cost is expected to be recognized over a weighted-average period of 1.4 years.

 

Performance Share Units  

 

The following table presents a summary of the grant-date fair values of performance share units granted in 2014 and the related assumptions.

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

Grant-date fair value

$

70.18 

-

$

81.05 

 

Risk-free interest rate

 

 

 

 

0.54% 

 

Volatility factor

 

 

 

 

28.8% 

 

Contractual term (in years)

 

 

 

 

2.89 

 

 

 

 

The following table presents a summary of Devon’s performance share units.

 

 

 

 

 

 

 

 

 

 

 

Performance Share Units

 

Weighted Average Grant-Date Fair Value

 

 

 

(In thousands)

 

 

 

Unvested at December 31, 2013

 

 

925 

 

$

66.64 

 Granted

 

 

708 

 

$

77.77 

 Forfeited

 

 

(147)

 

$

77.25 

Unvested at September 30, 2014 (1)

 

 

1,486 

 

$

70.89 

____________________________

(1)

A maximum of 3.0 million common shares could be awarded based upon Devon’s final total shareholder return ranking.

 

As of September 30, 2014, Devon's unrecognized compensation cost related to unvested units was $40 million. Such cost is expected to be recognized over a weighted-average period of 1.6 years.

 

Asset Impairments
Asset Impairments

5.     Asset Impairments

 

In the first nine months of 2013, Devon recognized asset impairments related to its oil and gas property and equipment as presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2013

 

Gross

 

Net of Taxes

 

 

 

 

 

 

 

 

(In millions)

U.S. oil and gas assets

$

1,110 

 

$

707 

Canada oil and gas assets

 

843 

 

 

632 

Midstream assets

 

 

 

Total asset impairments

$

1,960 

 

$

1,343 

 

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 percent 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 primarily from declines in the U.S. and Canada full-cost ceilings. The lower ceiling values resulted primarily from decreases in the 12-month average trailing prices for oil, bitumen and NGLs, which reduced proved reserve values.

 

Midstream Impairments 

 

 In the third quarter of 2013, Devon determined that the carrying amounts of certain midstream facilities located in south and east Texas were not recoverable from estimated future cash flows due to declining natural gas production. Consequently, the assets were written down to their estimated fair values, which were determined using discounted cash flow models. The fair value of Devon’s midstream assets is considered a Level 3 fair value measurement.

 

Restructuring Costs
Restructuring Costs

6.     Restructuring Costs

 

Canadian Divestitures

 

In the first nine months of 2014, Devon recognized $44 million of employee related and other costs associated with its Canadian non-core asset divestitures. Approximately $15 million of the employee related costs resulted from accelerated vesting of share-based grants, which are non-cash charges.

 

Office Consolidation

 

In October 2012, Devon announced plans to consolidate its U.S. personnel into a single operations group centrally located at the company’s headquarters in Oklahoma City. As of December 31, 2013, Devon had completed this initiative and incurred $134 million of restructuring costs associated with the office consolidation.

 

Financial Statement Presentation

 

The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings related to the Canadian divestitures and office consolidation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

Ended September 30,

 

Ended September 30,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

Canada divestitures:

 

 

 

 

 

 

 

 

 

 

 

Employee related and other costs

$

 

$

 —

 

$

44 

 

$

 —

Office consolidation:

 

 

 

 

 

 

 

 

 

 

 

Lease obligations and other

 

 —

  

 

  

 

 —

  

 

50 

Restructuring costs

$

  

$

  

$

44 

  

$

50 

 

 

The schedule below summarizes Devon’s restructuring liabilities. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Other

 

 

 

 

 

Current

 

Long-Term

 

 

 

 

 

Liabilities

 

Liabilities

 

Total

 

 

 

 

 

 

 

 

 

 

 

  

(In millions)

Balance as of December 31, 2013

  

$

27 

 

$

18 

 

$

45 

Changes due to Canadian divestitures

  

 

 

 

 

 

Changes due to office consolidation

  

 

(22)

 

 

(1)

 

 

(23)

Changes due to offshore divestiture

 

 

(2)

 

 

(1)

 

 

(3)

Balance as September 30, 2014

 

$

 

$

18 

 

$

23 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

  

$

52 

 

$

 

$

61 

Changes due to office consolidation

 

 

(16)

 

 

11 

 

 

(5)

Changes due to offshore divestiture

  

 

(2)

 

 

(1)

 

 

(3)

Balance as of September 30, 2013

  

$

34 

  

$

19 

  

$

53 

 

Income Taxes
Income Taxes

7.     Income Taxes

 

The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income tax expense (benefit) (in millions)

 

$

613 

 

$

210 

 

$

1,698 

 

$

(99)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

35% 

 

 

35% 

 

 

35% 

 

 

(35%)

 

Repatriations

 

 

 —

 

 

 —

 

 

7% 

 

 

 —

 

State income taxes

 

 

2% 

 

 

1% 

 

 

1% 

 

 

(3%)

 

Taxation on Canadian operations

 

 

 —

 

 

(5%)

 

 

1% 

 

 

9%