DEVON ENERGY CORP/DE, 10-Q filed on 8/3/2016
Quarterly Report
Document And Entity Information
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2016
Jul. 20, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2016 
 
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
2016 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q2 
 
Entity Common Stock, Shares Outstanding
 
523.6 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Income Statement [Abstract]
 
 
 
 
Oil, gas and NGL sales
$ 1,085 
$ 1,587 
$ 1,910 
$ 2,926 
Oil, gas and NGL derivatives
(142)
(282)
(109)
12 
Marketing and midstream revenues
1,545 
2,088 
2,813 
3,720 
Total operating revenues
2,488 
3,393 
4,614 
6,658 
Lease operating expenses
416 
562 
860 
1,115 
Marketing and midstream operating expenses
1,338 
1,863 
2,404 
3,302 
General and administrative expenses
147 
212 
341 
463 
Production and property taxes
75 
116 
153 
224 
Depreciation, depletion and amortization
484 
814 
1,026 
1,744 
Asset impairments
1,497 
4,168 
4,532 
9,628 
Restructuring and transaction costs
24 
 
271 
 
Other operating items
21 
24 
40 
Total operating expenses
3,985 
7,756 
9,611 
16,516 
Operating loss
(1,497)
(4,363)
(4,997)
(9,858)
Net financing costs
163 
125 
327 
242 
Other nonoperating items
85 
(9)
106 
Loss before income taxes
(1,745)
(4,479)
(5,430)
(10,103)
Income tax benefit
(182)
(1,686)
(399)
(3,721)
Net loss
(1,563)
(2,793)
(5,031)
(6,382)
Net earnings (loss) attributable to noncontrolling interests
23 
(405)
33 
Net loss attributable to Devon
(1,570)
(2,816)
(4,626)
(6,415)
Net loss per share attributable to Devon:
 
 
 
 
Basic
$ (3.04)
$ (6.94)
$ (9.33)
$ (15.81)
Diluted
$ (3.04)
$ (6.94)
$ (9.33)
$ (15.81)
Comprehensive loss:
 
 
 
 
Net loss
(1,563)
(2,793)
(5,031)
(6,382)
Other comprehensive earnings (loss), net of tax:
 
 
 
 
Foreign currency translation
44 
26 
(258)
Pension and postretirement plans
Other comprehensive earnings (loss), net of tax
47 
35 
(251)
Comprehensive loss
(1,555)
(2,746)
(4,996)
(6,633)
Comprehensive earnings (loss) attributable to noncontrolling interests
23 
(405)
33 
Comprehensive loss attributable to Devon
$ (1,562)
$ (2,769)
$ (4,591)
$ (6,666)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Cash flows from operating activities:
 
 
 
 
Net loss
$ (1,563)
$ (2,793)
$ (5,031)
$ (6,382)
Adjustments to reconcile net loss to net cash from operating activities:
 
 
 
 
Depreciation, depletion and amortization
484 
814 
1,026 
1,744 
Asset impairments
1,497 
4,168 
4,532 
9,628 
Deferred income tax benefit
(179)
(1,593)
(386)
(3,640)
Derivatives and other financial instruments
223 
305 
417 
(125)
Cash settlements on derivatives and financial instruments
(44)
464 
(148)
1,183 
Other noncash charges
88 
41 
21 
266 
Net change in working capital
(153)
(189)
45 
26 
Change in long-term other assets
(40)
18 
13 
159 
Change in long-term other liabilities
22 
(134)
(5)
(110)
Net cash from operating activities
335 
1,101 
484 
2,749 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
(489)
(1,432)
(1,238)
(3,149)
Acquisitions of property, equipment and businesses
(11)
(13)
(1,638)
(417)
Divestitures of property and equipment
191 
209 
Other
(26)
(8)
(27)
(5)
Net cash from investing activities
(335)
(1,447)
(2,694)
(3,563)
Cash flows from financing activities:
 
 
 
 
Borrowings of long-term debt, net of issuance costs
450 
2,094 
846 
3,051 
Repayments of long-term debt
(290)
(1,034)
(549)
(1,521)
Net short-term debt repayments
 
(778)
(626)
(763)
Issuance of common stock
 
 
1,469 
 
Sale of subsidiary units
 
85 
 
654 
Issuance of subsidiary units
49 
776 
Dividends paid on common stock
(33)
(98)
(158)
(197)
Distributions to noncontrolling interests
(74)
(65)
(147)
(118)
Other
(2)
(2)
(8)
Net cash from financing activities
100 
210 
1,609 
1,102 
Effect of exchange rate changes on cash
(12)
14 
(43)
Net change in cash and cash equivalents
88 
(133)
(587)
245 
Cash and cash equivalents at beginning of period
1,635 
1,858 
2,310 
1,480 
Cash and cash equivalents at end of period
$ 1,723 
$ 1,725 
$ 1,723 
$ 1,725 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 1,723 
$ 2,310 
Accounts receivable
1,167 
1,105 
Assets held for sale
728 
 
Other current assets
364 
606 
Total current assets
3,982 
4,021 
Oil and gas, based on full cost accounting:
 
 
Subject to amortization
80,066 
78,190 
Not subject to amortization
3,798 
2,584 
Total oil and gas
83,864 
80,774 
Midstream and other
10,243 
10,380 
Total property and equipment, at cost
94,107 
91,154 
Less accumulated depreciation, depletion and amortization
(77,292)
(72,086)
Property and equipment, net
16,815 
19,068 
Goodwill
4,159 
5,032 
Other long-term assets
2,288 
1,330 
Total assets
27,244 
29,451 
Current liabilities:
 
 
Accounts payable
545 
906 
Revenues and royalties payable
819 
763 
Short-term debt
350 1
976 1
Liabilities held for sale
205 
 
Other current liabilities
1,010 
650 
Total current liabilities
2,929 
3,295 
Long-term debt
12,357 
12,056 
Asset retirement obligations
1,473 
1,370 
Other long-term liabilities
1,011 
853 
Deferred income taxes
555 
888 
Stockholders’ equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 524 million and 418 million shares in 2016 and 2015, respectively
52 
42 
Additional paid-in capital
7,500 
4,996 
Retained earnings (accumulated deficit)
(2,970)
1,781 
Accumulated other comprehensive earnings
265 
230 
Total stockholders’ equity attributable to Devon
4,847 
7,049 
Noncontrolling interests
4,072 
3,940 
Total stockholders’ equity
8,919 
10,989 
Commitments and contingencies (Note 19)
   
   
Total liabilities and stockholders’ equity
$ 27,244 
$ 29,451 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Common stock, par value (in dollars per share)
$ 0.10 
$ 0.10 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
524,000,000 
418,000,000 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings (Accumulated Deficit) [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Noncontrolling Interests [Member]
Balance, at Dec. 31, 2014
$ 26,341 
$ 41 
$ 4,088 
$ 16,631 
$ 779 
 
$ 4,802 
Balance, shares, at Dec. 31, 2014
 
409 
 
 
 
 
 
Net earnings (loss)
(6,382)
 
 
(6,415)
 
 
33 
Other comprehensive earnings (loss), net of tax
(251)
 
 
 
(251)
 
 
Stock option exercises
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(23)
 
 
 
 
(23)
 
Common stock retired
 
 
(23)
 
 
23 
 
Common stock dividends
(197)
 
 
(197)
 
 
 
Share-based compensation
89 
 
89 
 
 
 
 
Subsidiary equity transactions
689 
 
578 
 
 
 
111 
Distributions to noncontrolling interests
(118)
 
 
 
 
 
(118)
Other
(1)
 
 
(1)
 
 
 
Balance, at Jun. 30, 2015
20,151 
41 
4,736 
10,018 
528 
 
4,828 
Balance, shares, at Jun. 30, 2015
 
411 
 
 
 
 
 
Balance, at Dec. 31, 2015
10,989 
42 
4,996 
1,781 
230 
 
3,940 
Balance, shares, at Dec. 31, 2015
 
418 
 
 
 
 
 
Net earnings (loss)
(5,031)
 
 
(4,626)
 
 
(405)
Other comprehensive earnings (loss), net of tax
35 
 
 
 
35 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
(21)
 
 
 
 
(21)
 
Common stock retired
 
 
(21)
 
 
21 
 
Common stock dividends
(158)
 
(33)
(125)
 
 
 
Common stock issued
2,127 
10 
2,117 
 
 
 
 
Common stock issued, shares
 
103 
 
 
 
 
 
Share-based compensation
123 
 
123 
 
 
 
 
Subsidiary equity transactions
1,002 
 
318 
 
 
 
684 
Distributions to noncontrolling interests
(147)
 
 
 
 
 
(147)
Balance, at Jun. 30, 2016
$ 8,919 
$ 52 
$ 7,500 
$ (2,970)
$ 265 
 
$ 4,072 
Balance, shares, at Jun. 30, 2016
 
524 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.

Summary of Significant Accounting Policies

The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2015 Annual Report on Form 10-K.

The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2016 and 2015 and Devon’s financial position as of June 30, 2016.

Recently Issued Accounting Standards

The FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Its objective is to simplify several aspects of the accounting for share-based payments, including accounting for income taxes when awards vest or are settled, statutory withholding and accounting for forfeitures. Classification of these aspects on the statement of cash flows is also addressed. This ASU is effective for Devon beginning January 1, 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 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition and industry-specific guidance in Subtopic 932-605, Extractive Activities – Oil and Gas – Revenue Recognition. This ASU provides guidance concerning the recognition and measurement of revenue from contracts with customers. Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues. The effective date for ASU 2014-09 was delayed through the issuance of ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, to annual and interim periods beginning in 2018, with early adoption permitted in 2017. The ASU is required to be adopted using either the retrospective transition method, which requires restating previously reported results or the cumulative effect (modified retrospective) transition method, which utilizes a cumulative-effect adjustment to retained earnings in the period of adoption to account for prior period effects rather than restating previously reported results. Devon intends to use the cumulative effect transition method and is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures. Devon does not plan on early adopting.

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU will supersede the lease requirements in Topic 840, Leases. Its objective is to increase transparency and comparability among organizations. This ASU provides guidance requiring lessees to recognize most leases on their balance sheet. Lessor accounting does not significantly change from Topic 840, except for some changes made to align with Topic 606. This ASU is effective for Devon beginning January 1, 2019 and will be applied using a modified retrospective transition method, which requires applying the new guidance to leases that exist or are entered into after the beginning of the earliest period in the financial statements. Early adoption is permitted. Devon is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures and does not plan on early adopting.

 

Acquisitions And Divestitures
Acquisitions And Divestitures

 

2.

Acquisitions and Divestitures

Devon Acquisitions

On January 7, 2016, Devon acquired approximately 80,000 net acres and assets in the STACK play for approximately $1.5 billion, subject to certain adjustments. Devon funded the acquisition with $847 million of cash and $659 million of common equity shares. The allocation of the purchase price at June 30, 2016 was approximately $1.3 billion to unproved properties and approximately $200 million to proved properties.

 

 

 

EnLink Acquisitions

On January 7, 2016, EnLink acquired Anadarko Basin gathering and processing midstream assets, along with dedicated acreage service rights and service contracts, for approximately $1.5 billion, subject to certain adjustments. EnLink funded the acquisition with approximately $215 million of General Partner common units and approximately $800 million of cash, primarily funded with the issuance of EnLink preferred units. The remaining $500 million of the purchase price is to be paid within one year with the option to defer $250 million of the final payment 24 months from the close date. The first $250 million of undiscounted future installment payment is reported in other current liabilities in the accompanying consolidated balance sheets with the remaining $250 million payment reported in other long-term liabilities. The accretion of the discount is reported within net financing costs in the accompanying consolidated comprehensive statement of earnings. A preliminary allocation of the purchase price at June 30, 2016 was $1.0 billion to intangible assets and $420 million to property and equipment.

On August 1, 2016, EnLink formed a joint venture to operate and expand its midstream assets in the Delaware Basin. The joint venture is initially owned 50.1% by EnLink and 49.9% by the joint venture partner. EnLink contributed approximately $230 million of existing assets to the joint venture and committed an additional $285 million in capital to fund potential future development projects and potential acquisitions. The joint venture partner committed an aggregate of approximately $400 million of capital, including an initial contribution of approximately $115 million, and granted to EnLink call rights beginning in 2021 to acquire increasing portions of the joint venture partner’s interest.

Devon Asset Divestitures

In December 2015, Devon announced its intent to divest certain non-core upstream assets in the U.S. and its interest in the Access Pipeline in Canada. Proceeds from these divestitures are expected to be used primarily for debt repayment and to support capital investment in Devon’s core resource plays.

On June 30, 2016, Devon sold its Mississippian assets for $200 million, subject to certain adjustments. Estimated proved reserves associated with these assets were approximately 11 MMBoe, or less than 1% of total U.S. proved reserves. Under full cost accounting rules, sales or dispositions of oil and gas properties are generally accounted for as adjustments to capitalized costs, with no recognition of a gain or loss. No gain or loss was recognized on the sale of the Mississippian assets.

During the second quarter of 2016, Devon entered into definitive agreements to divest approximately $1.8 billion of non-core assets located primarily in east Texas, the Anadarko Basin and the Midland Basin to five separate purchasers. Through August 3, 2016, Devon has closed approximately $1.2 billion of the announced asset divestitures. Devon expects to close the remaining transactions in the third quarter of 2016. Devon is evaluating whether the impact of these divestitures will result in an adjustment to its capitalized costs or in the recognition of a gain in the consolidated statement of earnings.  

As of June 30, 2016, Devon held approximately $95 million in cash related to the pending transactions. The cash deposits are restricted until the closing of the transactions. As a result, Devon has classified these amounts in other current assets and other current liabilities in the accompanying consolidated balance sheet.

Assets held for sale

In July 2016, Devon reached an agreement to sell its interest in the Access Pipeline for $1.1 billion ($1.4 billion Canadian dollars). The transaction is expected to close in the third quarter of 2016. As of June 30, 2016, Devon’s Access Pipeline assets and liabilities were classified as held for sale. Upon this classification change, Devon ceased recording depreciation on Access Pipeline. Based on the contracted sales price, no fair value adjustment to the carrying value of these assets and liabilities was warranted at June 30, 2016, and Devon expects to recognize a gain of approximately $400 million to $600 million upon the closing of the sale. Under the terms of the related transportation agreement, Devon’s Canadian thermal-oil acreage is dedicated to Access Pipeline for an initial term of 25 years. A market-based toll will be applied to production from Devon’s thermal-oil projects.

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. As of June 30, 2016, Devon did not have any open foreign exchange contracts.

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

As of December 31, 2015, Devon’s other current assets in the accompanying consolidated balance sheet included $236 million of accrued settlements that it received in January 2016.

Counterparty Credit Risk

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

As of December 31, 2015, Devon held $75 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 consolidated balance sheets.

Commodity Derivatives

As of June 30, 2016, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

 

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)

 

Q3 2016

 

 

33,000

 

 

$

48.37

 

 

 

65,000

 

 

$

40.37

 

 

$

46.91

 

 

 

18,500

 

 

$

55.00

 

Q4 2016

 

 

30,000

 

 

$

48.58

 

 

 

20,000

 

 

$

40.85

 

 

$

50.85

 

 

 

18,500

 

 

$

55.00

 

Q1-Q4 2017

 

 

2,623

 

 

$

51.79

 

 

 

7,248

 

 

$

47.21

 

 

$

57.21

 

 

 

 

 

$

 

 

 

 

Oil Basis Swaps

 

Period

 

Index

 

Volume (Bbls/d)

 

 

Weighted Average

Differential to WTI

($/Bbl)

 

Q3-Q4 2016

 

Western Canadian Select

 

 

41,500

 

 

$

(13.43

)

Q3-Q4 2016

 

West Texas Sour

 

 

5,000

 

 

$

(0.53

)

Q3-Q4 2016

 

Midland Sweet

 

 

13,000

 

 

$

0.25

 

 

As of June 30, 2016, 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)

 

Q3 2016

 

 

140,000

 

 

$

2.78

 

 

 

105,000

 

 

$

2.57

 

 

$

2.85

 

 

 

400,000

 

 

$

2.80

 

Q4 2016

 

 

155,000

 

 

$

2.83

 

 

 

275,000

 

 

$

2.70

 

 

$

2.90

 

 

 

400,000

 

 

$

2.80

 

Q1-Q4 2017

 

 

79,397

 

 

$

3.00

 

 

 

42,411

 

 

$

2.96

 

 

$

3.26

 

 

 

 

 

$

 

 

 

 

Natural Gas Basis Swaps

 

Period

 

Index

 

Volume

(MMBtu/d)

 

 

Weighted Average

Differential to

Henry Hub

($/MMBtu)

 

Q3-Q4 2016

 

Panhandle Eastern Pipe Line

 

 

175,000

 

 

$

(0.34

)

Q3-Q4 2016

 

El Paso Natural Gas

 

 

125,000

 

 

$

(0.12

)

Q3-Q4 2016

 

Houston Ship Channel

 

 

30,000

 

 

$

0.11

 

Q3-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

 

 

80,000

 

 

$

(0.13

)

Q1-Q4 2017

 

Houston Ship Channel

 

 

35,000

 

 

$

0.06

 

Q1-Q4 2017

 

Transco Zone 4

 

 

205,000

 

 

$

0.03

 

 

As of June 30, 2016, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.

 

 

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Product

 

Volume

(Bbls/d)

 

 

Weighted

Average Price

($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Floor

Price ($/Bbl)

 

 

Weighted

Average

Ceiling Price

($/Bbl)

 

Q3-Q4 2016

 

Ethane

 

 

6,000

 

 

$

9.34

 

 

 

10,500

 

 

$

8.20

 

 

$

9.46

 

Q3-Q4 2016

 

Propane

 

 

 

 

$

 

 

 

5,000

 

 

$

19.61

 

 

$

21.71

 

 

As of June 30, 2016, 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 derivatives settle against the Henry Hub Gas Daily index.

 

Period

 

Product

 

Volume (Total)

 

Weighted Average

Price Paid

 

Weighted Average

Price Received

Q3 2016-Q4 2016

 

Ethane

 

 

273

 

MBbls

 

$0.29/gal

 

Index

Q3 2016-Q2 2017

 

Propane

 

 

557

 

MBbls

 

Index

 

$0.72/gal

Q3 2016-Q2 2017

 

Normal Butane

 

 

122

 

MBbls

 

Index

 

$0.58/gal

Q3 2016-Q2 2017

 

Natural Gasoline

 

 

66

 

MBbls

 

Index

 

$0.95/gal

Q3 2016-Q2 2017

 

Natural Gas

 

 

7,082

 

MMBtu/d

 

Index

 

$2.86/MMbtu

Q4 2016

 

Condensate

 

 

50

 

MBbls

 

Index

 

$40.20/bbl

 

Interest Rate Derivatives

As of June 30, 2016, Devon had the following open interest rate derivative positions:

 

Notional

 

 

Rate Received

 

 

Rate Paid

 

 

Expiration

(Millions)

 

 

 

 

 

 

 

 

 

 

 

$

100

 

 

Three Month LIBOR

 

 

 

0.92%

 

 

December 2016

$

750

 

 

Three Month LIBOR

 

 

 

2.98%

 

 

December 2048 (1)

$

100

 

 

 

1.76%

 

 

Three Month LIBOR

 

 

January 2019

 

(1)

Mandatory settlement in December 2018.

 

Financial Statement Presentation

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

 

 

 

Three Months

Ended June 30,

 

 

Six Months

Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Millions)

 

Commodity derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil, gas and NGL derivatives

 

$

(142

)

 

$

(282

)

 

$

(109

)

 

$

12

 

Marketing and midstream revenues

 

 

(6

)

 

 

 

 

 

(6

)

 

 

2

 

Interest rate derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(71

)

 

 

1

 

 

 

(143

)

 

 

2

 

Foreign currency derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other nonoperating items

 

 

(4

)

 

 

(24

)

 

 

(159

)

 

 

109

 

Net gains (losses) recognized

 

$

(223

)

 

$

(305

)

 

$

(417

)

 

$

125

 

 

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

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

(Millions)

 

Commodity derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

$

14

 

 

$

34

 

Other long-term assets

 

 

2

 

 

 

1

 

Interest rate derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

1

 

 

 

1

 

Other long-term assets

 

 

2

 

 

 

1

 

Foreign currency derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

8

 

Total derivative assets

 

$

19

 

 

$

45

 

 

 

 

 

 

 

 

 

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

$

104

 

 

$

14

 

Other long-term liabilities

 

 

7

 

 

 

4

 

Interest rate derivative liabilities:

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

166

 

 

 

22

 

Foreign currency derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

8

 

Total derivative liabilities

 

$

277

 

 

$

48

 

 

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. Gross G&A expense for the first six months of 2016 and 2015 includes $12 million and $18 million, respectively, of unit-based compensation related to grants made under EnLink’s long-term incentive plans.

The vesting for certain share-based awards was accelerated in 2016 in conjunction with the reduction of workforce described in Note 6. For the six months ended June 30, 2016, approximately $67 million of associated expense for these accelerated awards is included in restructuring and transaction costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

 

(Millions)

 

Gross G&A for share-based compensation

 

$

80

 

 

$

127

 

Share-based compensation expense capitalized

   pursuant to the full cost method of accounting

   for oil and gas properties

 

$

21

 

 

$

31

 

Related income tax benefit

 

$

2

 

 

$

26

 

 

 

 

 

 

 

 

 

 

 

Under its approved long-term incentive plan, Devon granted share-based awards to certain employees in the first six months of 2016. The following table presents a summary of Devon’s unvested restricted stock awards and units, performance-based restricted stock awards and performance share units granted under the plan.

 

 

 

Restricted Stock

 

 

Performance-Based

 

 

Performance

 

 

 

Awards and Units

 

 

Restricted Stock Awards

 

 

Share Units

 

 

 

Awards and

Units

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Awards

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Units

 

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

 

(Thousands, except fair value data)

 

Unvested at 12/31/15

 

 

4,738

 

 

$

62.49

 

 

 

434

 

 

$

60.48

 

 

 

1,859

 

 

 

$

76.17

 

Granted

 

 

4,299

 

 

$

19.46

 

 

 

330

 

 

$

19.22

 

 

 

1,388

 

 

 

$

10.41

 

Vested

 

 

(2,051

)

 

$

62.50

 

 

 

(102

)

 

$

62.55

 

 

 

(602

)

 

 

$

63.37

 

Forfeited

 

 

(121

)

 

$

50.58

 

 

 

 

 

$

 

 

 

(7

)

 

 

$

81.67

 

Unvested at 6/30/16

 

 

6,865

 

 

$

35.74

 

 

 

662

 

 

$

39.57

 

 

 

2,638

(1)

 

 

$

46.52

 

 

(1)

A maximum of 5.3 million common shares could be awarded based upon Devon’s final TSR ranking relative to Devon’s peer group established under applicable award agreements.

The following table presents the assumptions related to the performance share units granted in 2016, as indicated in the previous summary table.

 

 

 

2016

 

Grant-date fair value

 

$

9.24

 

 

 

 

 

$

10.61

 

Risk-free interest rate

 

 

 

 

 

 

 

 

 

 

0.94

%

Volatility factor

 

 

 

 

 

 

 

 

 

 

37.7

%

Contractual term (years)

 

 

 

 

 

 

 

 

 

 

2.83

 

 

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of June 30, 2016.

 

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

 

 

Restricted Stock

 

 

Restricted Stock

 

 

Performance

 

 

 

Awards and Units

 

 

Awards

 

 

Share Units

 

Unrecognized compensation cost (millions)

 

$

170

 

 

$

8

 

 

$

34

 

Weighted average period for recognition (years)

 

 

2.6

 

 

 

2.5

 

 

 

1.8

 

 

EnLink Share-Based Awards

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with the General Partner’s and EnLink’s unvested restricted incentive units and performance units as of June 30, 2016.

 

 

 

General Partner

 

 

EnLink

 

 

 

Restricted

 

 

Performance

 

 

Restricted

 

 

Performance

 

 

 

Incentive Units

 

 

Units

 

 

Incentive Units

 

 

Units

 

Unrecognized compensation cost (millions)

 

$

19

 

 

$

4

 

 

$

19

 

 

$

4

 

Weighted average period for recognition (years)

 

1.7

 

 

 

2.0

 

 

1.8

 

 

 

2.0

 

 

Asset Impairments
Asset Impairments

5.

Asset Impairments

The following table presents the components of asset impairments recognized by Devon.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Millions)

 

U.S. oil and gas assets

 

$

885

 

 

$

4,167

 

 

$

2,493

 

 

$

9,625

 

Canada oil and gas assets

 

 

612

 

 

 

 

 

 

1,166

 

 

 

 

EnLink goodwill

 

 

 

 

 

 

 

 

873

 

 

 

 

Other assets

 

 

 

 

 

1

 

 

 

 

 

 

3

 

Total asset impairments

 

$

1,497

 

 

$

4,168

 

 

$

4,532

 

 

$

9,628

 

 

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 Impairments

In the first quarter of 2016, Devon recognized goodwill impairments related to EnLink’s business. Additional information regarding the impairments is discussed in Note 13.

 

Restructuring And Transaction Costs
Restructuring And Transaction Costs

6.

Restructuring and Transaction Costs

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

 

 

 

June 30, 2016

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

(Millions)

 

2016 reduction in workforce:

 

 

 

 

 

 

 

 

Employee-related costs

 

$

2

 

 

$

236

 

Lease obligations

 

 

17

 

 

 

17

 

Asset impairments

 

 

3

 

 

 

3

 

Transaction costs

 

 

2

 

 

 

15

 

Restructuring and transaction costs

 

$

24

 

 

$

271

 

 

The following table summarizes Devon’s restructuring liabilities.

 

 

 

Other

 

 

Other

 

 

 

 

 

 

 

Current

 

 

Long-term

 

 

 

 

 

 

 

Liabilities

 

 

Liabilities

 

 

Total

 

 

 

(Millions)

 

Balance as of December 31, 2015

 

$

13

 

 

$

63

 

 

$

76

 

Changes due to 2016 workforce reductions

 

 

107

 

 

 

13

 

 

 

120

 

Changes related to prior years' restructurings

 

 

3

 

 

 

(6

)

 

 

(3

)

Balance as June 30, 2016

 

$

123

 

 

$

70

 

 

$

193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2014

 

$

13

 

 

$

7

 

 

$

20

 

Changes related to prior years' restructurings

 

 

(3

)

 

 

(2

)

 

 

(5

)

Balance as of June 30, 2015

 

$

10

 

 

$

5

 

 

$

15

 

 

Reduction in Workforce

In the first six months of 2016, Devon recognized $236 million in employee-related costs associated with a reduction in workforce that was made in response to the depressed commodity price environment. Of these employee-related costs, approximately $67 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, approximately $30 million resulted from estimated defined benefit settlements. These cash and noncash charges included estimates for employees released from service during the first six months of 2016, as well as amounts based on the number of employees expected to be impacted by certain of its non-core asset divestitures. Devon expects to complete these pending divestitures in the third quarter of 2016.

As a result of the reduction in workforce and asset divestitures, Devon ceased using certain office space that was subject to non-cancellable operating lease arrangements. Consequently, Devon recognized $17 million of restructuring costs that represent the present value of its future obligations under the leases. Additionally, Devon recognized $3 million of asset impairment charges for leasehold improvements and furniture associated with the office space it ceased using.

Transaction Costs

In the first six months of 2016, Devon and EnLink recognized transaction costs primarily associated with the closing of the acquisitions discussed in Note 2.

Income Taxes
Income Taxes

7.

Income Taxes

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Total income tax benefit (millions)

 

$

(182

)

 

$

(1,686

)

 

$

(399

)

 

$

(3,721

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

(35

%)

 

 

(35

%)

 

 

(35

%)

 

 

(35

%)

Deferred tax asset valuation allowance

 

 

27

%

 

 

0

%

 

 

24

%

 

 

0

%

Non-deductible goodwill impairment

 

 

0

%

 

 

0

%

 

 

6

%

 

 

0

%

Taxation on Canadian operations

 

 

3

%

 

 

1

%

 

 

2

%

 

 

1

%

State income taxes

 

 

(2

%)

 

 

(2

%)

 

 

(1

%)

 

 

(2

%)

Other

 

 

(3

%)

 

 

(2

%)

 

 

(3

%)

 

 

(1

%)

Effective income tax rate

 

 

(10

%)

 

 

(38

%)

 

 

(7

%)

 

 

(37

%)

 

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.

At December 31, 2015, Devon recorded a 100%, or $967 million, valuation allowance against the U.S. deferred tax assets that largely resulted from the full cost impairments recognized during 2015. Through the first six months of 2016, Devon provided an additional $1.3 billion valuation allowance against the U.S. deferred tax assets due to its continued financial losses incurred largely by the additional full cost impairments.

In the first quarter of 2016, EnLink recorded a goodwill impairment of approximately $873 million. This impairment is not deductible for purposes of calculating income tax and therefore has an impact on the effective tax rate.

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.

 

Net Loss Per Share Attributable To Devon
Net Loss Per Share Attributable To Devon

8.

Net Loss Per Share Attributable to Devon

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Millions, except per share amounts)

 

Net loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Devon

 

$

(1,570

)

 

$

(2,816

)

 

$

(4,626