DEVON ENERGY CORP/DE, 10-K filed on 2/20/2015
Annual Report
Document And Entity Information (USD $)
In Billions, except Share data in Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Feb. 11, 2015
Jun. 30, 2014
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Amendment Flag
false 
 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
 
Entity Central Index Key
0001090012 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Fiscal Year Focus
2014 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Public Float
 
 
$ 32.3 
Entity Common Stock, Shares Outstanding
 
411.1 
 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Comprehensive Statements Of Earnings [Abstract]
 
 
 
Oil, gas and NGL sales
$ 9,910 
$ 8,522 
$ 7,153 
Oil, gas and NGL derivatives
1,989 
(191)
693 
Marketing and midstream revenues
7,667 
2,066 
1,655 
Total operating revenues
19,566 
10,397 
9,501 
Lease operating expenses
2,332 
2,268 
2,074 
Marketing and midstream operating expenses
6,815 
1,553 
1,246 
General and administrative expenses
847 
617 
692 
Production and property taxes
535 
461 
414 
Depreciation, depletion and amortization
3,319 
2,780 
2,811 
Asset impairments
1,953 
1,976 
2,024 
Restructuring costs
46 
54 
74 
Gains and losses on asset sales
(1,072)
(13)
Other operating items
93 
112 
105 
Total operating expenses
14,868 
9,830 
9,427 
Operating income
4,698 
567 
74 
Net financing costs
526 
417 
370 
Other nonoperating items
113 
21 
Earnings (loss) from continuing operations before income taxes
4,059 
149 
(317)
Income tax expense (benefit)
2,368 
169 
(132)
Earnings (loss) from continuing operations
1,691 
(20)
(185)
Earnings (loss) from discontinued operations, net of tax
 
 
(21)
Net earnings (loss)
1,691 
(20)
(206)
Net earnings attributable to noncontrolling interests
84 
 
 
Net earnings (loss) attributable to Devon
1,607 
(20)
(206)
Net earnings (loss) per share attributable to Devon:
 
 
 
Basic earnings (loss) from continuing operations per share
$ 3.93 
$ (0.06)
$ (0.47)
Basic earnings (loss) from discontinued operations per share
   
   
$ (0.05)
Basic net earnings (loss) per share
$ 3.93 
$ (0.06)
$ (0.52)
Diluted earnings (loss) from continuing operations per share
$ 3.91 
$ (0.06)
$ (0.47)
Diluted earnings (loss) from discontinued operations per share
   
   
$ (0.05)
Diluted net earnings (loss) per share
$ 3.91 
$ (0.06)
$ (0.52)
Comprehensive earnings (loss):
 
 
 
Net earnings (loss)
1,691 
(20)
(206)
Other comprehensive earnings (loss), net of tax:
 
 
 
Foreign currency translation
(465)
(548)
194 
Pension and postretirement plans
(24)
45 
Other comprehensive earnings (loss), net of tax
(489)
(503)
196 
Comprehensive earnings (loss)
1,202 
(523)
(10)
Comprehensive earnings attributable to noncontrolling interests
84 
 
 
Comprehensive earnings (loss) attributable to Devon
$ 1,118 
$ (523)
$ (10)
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$ 1,691 
$ (20)
$ (206)
Earnings (loss) from discontinued operations, net of tax
 
 
21 
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
3,319 
2,780 
2,811 
Asset impairments
1,953 
1,976 
2,024 
Gains and losses on asset sales
(1,072)
(13)
Deferred income tax expense (benefit)
1,891 
97 
(184)
Derivatives and other financial instruments
(2,070)
135 
(660)
Cash settlements on derivatives and financial instruments
104 
277 
865 
Other noncash charges
457 
309 
253 
Net change in working capital
50 
(298)
(50)
Change in long-term other assets
(421)
10 
(36)
Change in long-term other liabilities
79 
161 
105 
Cash from operating activities - continuing operations
5,981 
5,436 
4,930 
Cash from operating activities - discontinued operations
 
 
26 
Net cash from operating activities
5,981 
5,436 
4,956 
Cash flows from investing activities:
 
 
 
Capital expenditures
(6,988)
(6,758)
(8,225)
Acquisitions of property, equipment and businesses
(6,462)
 
 
Proceeds from property and equipment divestitures
5,120 
419 
1,468 
Purchases of short-term investments
 
(1,076)
(4,106)
Redemptions of short-term investments
 
3,419 
3,266 
Redemptions of long-term investments
57 
 
 
Other
89 
(3)
14 
Cash from investing activities - continuing operations
(8,184)
(3,999)
(7,583)
Cash from investing activities - discontinued operations
 
 
57 
Net cash from investing activities
(8,184)
(3,999)
(7,526)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings of long-term debt, net of issuance costs
5,340 
2,233 
3,208 
Net short-term debt repayments
(385)
(1,872)
(537)
Long-term debt repayments
(7,189)
 
(750)
Proceeds from stock option exercises
93 
27 
Proceeds from issuance of subsidiary units
410 
 
 
Dividends paid on common stock
(386)
(348)
(324)
Distributions to noncontrolling interests
(235)
 
 
Other
(2)
Net cash from financing activities
(2,354)
20 
1,629 
Effect of exchange rate changes on cash
(29)
(28)
23 
Net change in cash and cash equivalents
(4,586)
1,429 
(918)
Cash and cash equivalents at beginning of period
6,066 
4,637 
5,555 
Cash and cash equivalents at end of period
$ 1,480 
$ 6,066 
$ 4,637 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 1,480 
$ 6,066 
Accounts receivable
1,959 
1,520 
Derivatives, at fair value
1,993 
75 
Income taxes receivable
522 
89 
Other current assets
544 
255 
Total current assets
6,498 
8,005 
Oil and gas, based on full-cost accounting:
 
 
Subject to amortization
75,738 
73,995 
Not subject to amortization
2,752 
2,791 
Total oil and gas
78,490 
76,786 
Midstream and other
9,695 
6,195 
Total property and equipment, at cost
88,185 
82,981 
Less accumulated depreciation, depletion and amortization
(51,889)
(54,534)
Property and equipment, net
36,296 
28,447 
Goodwill
6,303 
5,858 
Other long-term assets
1,540 
567 
Total assets
50,637 
42,877 
Current liabilities:
 
 
Accounts payable
1,400 
1,229 
Revenues and royalties payable
1,193 
786 
Short-term debt
1,432 1
4,066 1
Deferred income taxes
730 
19 
Other current liabilities
1,180 
555 
Total current liabilities
5,935 
6,655 
Long-term debt
9,830 
7,956 
Asset retirement obligations
1,339 
2,140 
Other long-term liabilities
948 
834 
Deferred income taxes
6,244 
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
4,088 
3,780 
Retained earnings
16,631 
15,410 
Accumulated other comprehensive earnings
779 
1,268 
Total stockholders' equity attributable to Devon
21,539 
20,499 
Noncontrolling interests
4,802 
 
Total stockholders' equity
26,341 
20,499 
Commitments and contingencies (Note 18)
   
   
Total liabilities and stockholders' equity
$ 50,637 
$ 42,877 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 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, except Share data
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Noncontrolling Interests [Member]
Total
Balance, at Dec. 31, 2011
$ 40 
$ 3,507 
$ 16,308 
$ 1,575 
 
 
$ 21,430 
Balance, shares, at Dec. 31, 2011
404,000,000 
 
 
 
 
 
 
Net earnings (loss)
 
 
(206)
 
 
 
(206)
Other comprehensive earnings (loss), net of tax
 
 
 
196 
 
 
196 
Stock option exercises
49 
 
 
(23)
 
27 
Stock option exercises, shares
1,000,000 
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
1,000,000 
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(29)
 
(29)
Common stock retired
 
(52)
 
 
52 
 
 
Common stock dividends
 
 
(324)
 
 
 
(324)
Share-based compensation
 
179 
 
 
 
 
179 
Share-based compensation tax benefits
 
 
 
 
 
Balance, at Dec. 31, 2012
41 
3,688 
15,778 
1,771 
 
 
21,278 
Balance, shares, at Dec. 31, 2012
406,000,000 
 
 
 
 
 
 
Net earnings (loss)
 
 
(20)
 
 
 
(20)
Other comprehensive earnings (loss), net of tax
 
 
 
(503)
 
 
(503)
Stock option exercises
 
 
 
 
 
Common stock repurchased
 
 
 
 
(36)
 
(36)
Common stock retired
 
(36)
 
 
36 
 
 
Common stock dividends
 
 
(348)
 
 
 
(348)
Share-based compensation
 
121 
 
 
 
 
121 
Share-based compensation tax benefits
 
 
 
 
 
Balance, at Dec. 31, 2013
41 
3,780 
15,410 
1,268 
 
 
20,499 
Balance, shares, at Dec. 31, 2013
406,000,000 
 
 
 
 
 
 
Net earnings (loss)
 
 
1,607 
 
 
84 
1,691 
Other comprehensive earnings (loss), net of tax
 
 
 
(489)
 
 
(489)
Stock option exercises
 
93 
 
 
 
 
93 
Stock option exercises, shares
1,000,000 
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
2,000,000 
 
 
 
 
 
 
Common stock repurchased
 
 
 
 
(27)
 
(27)
Common stock retired
 
(27)
 
 
27 
 
 
Common stock dividends
 
 
(386)
 
 
 
(386)
Share-based compensation
 
151 
 
 
 
 
151 
Share-based compensation tax benefits
 
(3)
 
 
 
 
(3)
Acquistion of noncontrolling interests
 
 
 
 
 
4,670 
4,670 
Subsidiary equity transactions
 
93 
 
 
 
277 
370 
Distributions to noncontrolling interests
 
 
 
 
 
(235)
(235)
Other
 
 
 
 
Balance, at Dec. 31, 2014
$ 41 
$ 4,088 
$ 16,631 
$ 779 
 
$ 4,802 
$ 26,341 
Balance, shares, at Dec. 31, 2014
409,000,000 
 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

 

1.Summary of Significant Accounting Policies

 

Devon Energy Corporation (“Devon”) is a leading independent energy company engaged primarily in the exploration, development and production of oil, natural gas and NGLs. Devon’s operations are concentrated in various North American onshore areas in the U.S. and Canada. Devon also owns natural gas pipelines, plants and treatment facilities through its ownership in EnLink Midstream Partners, LP, a publicly traded MLP.

 

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

 

Principles of Consolidation

 

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

    As discussed more fully in Note 2, on March 7, 2014, Devon completed a business combination whereby Devon controls both EnLink Midstream Partners, LP (EnLink”) and its general partner entity, EnLink Midstream, LLC (the “General Partner”). Devon controls both the General Partner’s and EnLink’s operations; therefore, the General Partner’s and EnLink’s accounts are included in Devon’s accompanying consolidated financial statements subsequent to the completion of the transaction. The portions of the General Partner’s and EnLink’s net earnings and stockholders’ equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated comprehensive statements of earnings and consolidated balance sheets.

 

Use of Estimates

 

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

 

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

• the carrying value of oil and gas properties and midstream assets;

• derivative financial instruments;

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

• the fair value of intangible assets other than goodwill;

• income taxes;

• asset retirement obligations;

 

 

 

 

• obligations related to employee pension and postretirement benefits; and

• legal and environmental risks and exposures.

 

Revenue Recognition and Gas Balancing

 

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

 

Devon follows the sales method of accounting for gas production imbalances. The volumes of gas sold may differ from the volumes to which Devon is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the underproduced owner to recoup its entitled share through production. The liability is measured based on current market prices. No receivables are recorded for those wells where Devon has taken less than its share of production unless all revenue recognition criteria are met. If an imbalance exists at the time the wells' reserves are depleted, settlements are made among the joint interest owners under a variety of arrangements.

 

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

 

During 2014, 2013 and 2012, no purchaser accounted for more than 10 percent of Devon’s operating revenues from continuing operations.

 

Derivative Financial Instruments

 

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

 

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

 

Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates.

 

All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheet. Changes in the fair value of these derivative financial instruments are recorded in earnings unless specific hedge accounting criteria are met. For derivative financial instruments held during the three-year period ended December 31, 2014, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. Cash settlements with counterparties on Devon's derivative financial instruments are also recorded in earnings.

 

By using derivative financial instruments to hedge exposures to changes in commodity prices, interest rates and foreign currency rates, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon's policy to enter into derivative contracts only with investment-grade-rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon's derivative contracts generally require cash collateral to be posted if either its or the counterparty's credit rating falls below certain credit rating levels. The mark-to-market exposure threshold, above which collateral must be posted, decreases as the debt rating falls further below such credit levels. As of December 31, 2014, Devon held $524 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 sheet.

 

General and Administrative Expenses

 

General and administrative expenses are reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Devon and net of amounts capitalized pursuant to the full cost method of accounting.

 

Share-Based Compensation

 

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

 

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

 

Income Taxes

 

Devon is subject to current income taxes assessed by the federal and various state jurisdictions in the U.S. and by other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. If the future utilization of some portion of carryforwards is determined to be unlikely, a valuation allowance is provided to reduce the recorded tax benefits from such assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

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

 

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

 

Net Earnings (Loss) Per Share Attributable to Devon

 

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

 

Cash and Cash Equivalents  

 

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

 

Investments

 

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

 

Devon reports its investments and other marketable securities at fair value, except for debt securities in which management has the ability and intent to hold until maturity. At December 31, 2013, such debt securities totaled $62 million and are included in other long-term assets in the accompanying consolidated balance sheet. Devon redeemed all these securities in the first quarter of 2014.

 

Property and Equipment

 

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

 

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

 

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

 

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves in a particular country.

 

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. The estimated future net revenues exclude future cash outflows associated with settling asset retirement obligations included in the net book value of oil and gas properties.

 

Estimated future net cash flows are calculated using end-of-period costs and an unweighted arithmetic average of commodity prices in effect on the first day of each of the previous 12 months. Prices are held constant indefinitely and are not changed except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts, including derivative contracts in place that qualify for hedge accounting treatment. None of Devon's derivative contracts held during the three-year period ended December 31, 2014 qualified for hedge accounting treatment.

 

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

 

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

 

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

 

Goodwill 

 

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

 

Devon performed annual impairment tests of goodwill in the fourth quarters of 2014, 2013 and 2012. No impairment of goodwill was required in 2012 and 2013. However, based on the 2014 assessment, Devon’s Canadian reporting unit goodwill was deemed impaired. See Note 12 for further discussion.

 

 

Intangible Assets

 

Unamortized capitalized intangible assets, consisting of EnLink customer relationships, are presented in other long-term assets in the accompanying consolidated balance sheets. These assets are amortized on a straight-line basis over the expected periods of benefits, which range from 10-20 years.

 

Commitments and Contingencies

 

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

 

Fair Value Measurements

 

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

 

·

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

·

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

·

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

 

Discontinued Operations

 

All amounts related to Devon's International operations that were sold in 2012 are classified as discontinued operations.

 

Foreign Currency Translation Adjustments

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

 

 

Noncontrolling Interests

 

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

 

 

Recently Issued Accounting Standards Not Yet Adopted

 

In May 2014, the Financial Accounting Standards Board 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 transaction 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 General Partner and EnLink, which are both publicly traded

 

In exchange for a controlling interest in both EnLink and the General Partner, Devon contributed its equity interest in a newly formed Devon subsidiary, EnLink Midstream Holdings, LP (“EnLink Holdings”) and $100 million in cash. EnLink Holdings owns midstream assets in the Barnett Shale in north Texas and the Cana- and Arkoma-Woodford Shales in Oklahoma, as well as an economic interest in Gulf Coast Fractionators in Mont Belvieu, Texas. As of December 31, 2014, the General Partner and EnLink each own 50% of EnLink Holdings.

 

As of December 31, 2014, the ownership of the General Partner is approximately:

 

 

 

 

 

 

70% - Devon

 

 

 

 

 

 

30% - Public unitholders

 

As of December 31, 2014, the ownership of EnLink is approximately:

 

 

 

 

 

 

 

49% - Devon

 

 

 

 

 

 

43% - Public unitholders

 

 

 

 

 

 

8% - General Partner

 

    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 General Partner 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 General Partner and EnLink in the business combination, as well as the General Partner’s noncontrolling interest in EnLink, were recorded at their fair values which were measured as of the acquisition date, March 7, 2014. The excess of the purchase price over the estimated fair values of Crosstex’s net assets acquired was recorded as goodwill.

 

    The following table summarizes the purchase price (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 interest in E2 (2)

 

 

18 

 

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

 

$

1,841 

 

Crosstex Energy, LP outstanding units:

 

 

 

 

Common units held by public unitholders

 

 

75.1 

 

Preferred units held by third party (3)

 

 

17.1 

 

Restricted units

 

 

0.4 

 

Total

 

 

92.6 

 

Crosstex Energy, LP common unit price (4)

 

$

30.51 

 

Crosstex Energy, LP common units value

 

$

2,825 

 

Crosstex Energy, LP outstanding unit options value

 

$

 

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

 

 

2,829 

 

Total consideration and fair value of noncontrolling interests

 

$

4,670 

 

__________________________

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

(2) Represents the value of noncontrolling interests related to the General Partner’s equity investment in E2 Energy Services, LLC and E2 Appalachian Compression, LLC (collectively “E2”).

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

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

 

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

 

 

 

 

 

 

Assets acquired:

 

 

 

Current assets

 

$

437 

Property, plant and equipment, net

 

 

2,438 

Intangible assets

 

 

569 

Equity investment

 

 

222 

Goodwill (1)

 

 

3,283 

Other long-term assets

 

 

Liabilities assumed:

 

 

 

Current liabilities

 

 

(515)

Long-term debt

 

 

(1,454)

Deferred income taxes

 

 

(210)

Other long-term liabilities

 

 

(101)

Total consideration and fair value of noncontrolling interests

 

$

4,670 

__________________________

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

 

EnLink Acquisitions and Dropdowns

 

On October 22, 2014, EnLink acquired equity interests in E2 Appalachian Compression, LLC and E2 Energy Services, LLC (together “E2”) from the General Partner. The total consideration for the transaction was approximately $194 million, including a $163 million cash payment and 1.0 million EnLink units valued at $31.2 million based on the fair value of the EnLink units as of the closing date of the transaction. Furthermore, on November 1, 2014, EnLink acquired Gulf Coast natural gas pipeline assets predominantly located in southern Louisiana for $234 million, subject to certain adjustments.

 

GeoSouthern Energy Acquisition

 

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

 

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

 

 

 

 

 

 

Cash and cash equivalents

 

$

95 

Other current assets

 

 

256 

Proved properties

 

 

5,026 

Unproved properties

 

 

1,007 

Midstream assets

 

 

86 

Current liabilities

 

 

(434)

Long-term liabilities

 

 

(6)

Net assets acquired

 

$

6,030 

 

EnLink and GeoSouthern Operating Results

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2014

 

 

 

GeoSouthern

 

EnLink

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Total operating revenues

 

$

1,873 

 

$

2,509 

 

Total operating expenses

 

 

960 

 

 

2,464 

 

Operating income

 

$

913 

 

$

45 

 

 

Pro Forma Financial Information

 

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

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

(In millions)

Total operating revenues

 

$

20,213 

 

$

12,979 

 

 

 

 

 

 

 

Net earnings

 

$

1,716 

 

$

35 

Noncontrolling interests

 

$

97 

 

$

45 

Net earnings (loss) attributable to Devon

 

$

1,619 

 

$

(10)

Net earnings (loss) per common share attributable to Devon

 

$

3.94 

 

$

(0.02)

 

 

Asset Divestitures

 

    In November 2013, Devon announced plans to divest certain 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 a 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. 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 exchange 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 certain U.S. assets to LINN Energy for $2.2 billion ($2.0 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. These proceeds were used towards the early retirement of $1.9 billion in senior notes in November 2014 as discussed in Note 13.

 

Derivative Financial Instruments
Derivative Financial Instruments

3.Derivative Financial Instruments

 

Commodity Derivatives

 

As of December 31, 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, West Texas Sour and Midland Sweet indices.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

Q1-Q4 2015

 

107,203

 

$

91.07

 

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)

Q1-Q4 2015 

 

Western Canadian Select

 

22,514

 

$

(18.35)

Q1-Q4 2015 

 

West Texas Sour

 

8,000

 

$

(3.68)

Q1-Q4 2015 

 

Midland Sweet

 

14,247

 

$

(2.92)

 

As of December 31, 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 Panhandle Eastern Pipe Line, El Paso Natural Gas and Houston Ship Channel 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)

Q1-Q4 2015

 

250,000

 

$

4.32

 

328,452

 

$

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)

Q1-Q4 2015

 

Panhandle Eastern Pipe Line

 

100,000

 

$

(0.28)

Q1-Q4 2015

 

El Paso Natural Gas

 

70,000

 

$

(0.11)

Q1-Q4 2015

 

Houston Ship Channel

 

200,000

 

$

0.01

Q1-Q4 2016

 

Panhandle Eastern Pipe Line

 

30,000

 

$

(0.33)

Q1-Q4 2016

 

El Paso Natural Gas

 

15,000

 

$

(0.13)

Q1-Q4 2016

 

Houston Ship Channel

 

30,000

 

$

0.11

 

 

 

 

 

    As of December 31, 2014, the following were open derivative positions associated with gas processing and fractionation at EnLink. EnLink’s NGL positions settle by purity product against the average of the prompt month OPIS Mont Belvieu, Texas index.  EnLink’s natural gas positions settle against the Henry Hub Gas Daily index as defined by the pricing dates in the derivative contracts.

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Product

 

Volume

 

 

Weighted Average Price Paid

 

 

Weighted Average Price Received

Q1 2015-Q4 2016

 

Ethane

 

1,168

MBbls

 

 

Index

 

$

0.29/gal

Q1 2015-Q4 2016

 

Propane

 

1,171

MBbls

 

 

Index

 

$

1.01/gal

Q1-Q4 2015

 

Normal Butane

 

53

MBbls

 

 

Index

 

$

1.14/gal

Q1-Q4 2015

 

Natural Gasoline

 

44

MBbls

 

 

Index

 

$

1.81/gal

Q1-Q4 2015

 

Natural Gas

 

1,225

MMBtu/d

 

$

4.08/MMBtu

 

 

Index

 

Interest Rate Derivatives

 

    As of December 31, 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 December 31, 2014, Devon had the following open foreign currency derivative position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Contract

Currency

 

Contract Type

 

CAD Notional

 

Weighted Average Fixed Rate Received

 

Expiration

 

 

 

 

(In millions)

 

(CAD-USD)

 

 

Canadian Dollar

 

Sell

 

$

1,884 

 

0.864

 

March 2015

 

Financial Statement Presentation

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Statements of

 

Year Ended
December 31,

 

 

Earnings Caption

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

Oil, gas and NGL commodity derivatives

 

Oil, gas and NGL derivatives

 

$

1,989 

 

$

(191)

 

$

693 

Midstream commodity derivatives

 

Marketing and midstream revenues

 

 

22 

 

 

 -

 

 

 -

Interest rate derivatives

 

Other nonoperating items

 

 

(1)

 

 

 -

 

 

(15)

Foreign currency derivatives

 

Other nonoperating items

 

 

60 

 

 

56 

 

 

(18)

Net gains (losses) recognized in comprehensive statements of earnings

 

$

2,070 

 

$

(135)

 

$

660 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Balance Sheet Caption

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

Asset derivatives:

 

 

 

 

 

 

 

 

Oil, gas and NGL commodity derivatives

 

Derivatives, at fair value

 

$

1,967 

 

$

75 

Oil, gas and NGL commodity derivatives

 

Other long-term assets

 

 

 

 

28 

Midstream commodity derivatives

 

Derivatives, at fair value

 

 

17 

 

 

 -

Midstream commodity derivatives

 

Other long-term assets

 

 

10 

 

 

 -

Interest rate derivatives

 

Derivatives, at fair value

 

 

 

 

 -

Foreign currency derivatives

 

Derivatives, at fair value

 

 

 

 

 -

Total asset derivatives

 

 

 

$

2,004 

 

$

103 

Liability derivatives:

 

 

 

 

 

 

 

 

Oil, gas and NGL commodity derivatives

 

Other current liabilities

 

$

25 

 

$

58 

Oil, gas and NGL commodity derivatives

 

Other long-term liabilities

 

 

26 

 

 

62 

Midstream commodity derivatives

 

Other current liabilities

 

 

 

 

 -

Midstream commodity derivatives

 

Other long-term liabilities

 

 

 

 

 -

Interest rate derivatives

 

Other current liabilities

 

 

 

 

 -

Foreign currency derivatives

 

Other current liabilities

 

 

 -

 

 

Total liability derivatives

 

 

 

$

57 

 

$

121 

 

Share-Based Compensation
Share-Based Compensation

4.Share-Based Compensation 

 

On June 3, 2009, Devon's stockholders adopted the 2009 Long-Term Incentive Plan, which expires on June 2, 2019. This 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, performance restricted stock awards, restricted stock units, performance share units, stock appreciation rights and cash-out rights to eligible employees. The plan also authorizes the grant of nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to directors.

 

In the second quarter of 2012, Devon’s stockholders adopted an amendment to the 2009 Long-Term Incentive Plan, which also expires June 2, 2019. This amendment increases the number of shares authorized for issuance from 21.5 million shares to 47.0 million shares. To calculate shares issued under the 2009 Long-Term Incentive Plan subsequent to this amendment, options and stock appreciation rights represent one share and other awards represent 2.38 shares.

 

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

 

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

 

The following table presents the effects of share-based compensation included in Devon's accompanying consolidated comprehensive statements of earnings. Devon’s gross general and administrative expense for the year ended December 31, 2014 includes $17 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 as part of Devon’s restructuring as discussed in Note 6. The associated expense for these accelerated awards is included in restructuring costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

Gross general and administrative expense

 

$

199 

 

$

157 

 

$

179 

Share-based compensation expense capitalized pursuant to the

 

 

 

 

 

 

 

 

 

 full cost method of accounting for oil and gas properties

 

$

53 

 

$

60 

 

$

56 

Related income tax benefit

 

$

30 

 

$

23 

 

$

34 

 

Stock Options

 

In accordance with Devon’s incentive plans, the exercise price of stock options granted may not be less than the market value of the stock at the date of grant. In addition, options granted are exercisable during a period established for each grant, which may not exceed eight years from the date of grant. The recipient must pay the exercise price in cash or in common stock, or a combination thereof, at the time that the option is exercised. Generally, the service requirement for vesting ranges from zero to four years.

 

The fair value of stock options on the date of grant is expensed over the applicable vesting period. Devon estimates the fair values of stock options granted using a Black-Scholes option valuation model, which requires Devon to make several assumptions. The volatility of Devon's common stock is based on the historical volatility of the market price of Devon's common stock over a period of time equal to the expected term of the option and ending on the grant date. The dividend yield is based on Devon’s historical and current yield in effect at the date of grant. The risk-free interest rate is based on the zero-coupon United States Treasury yield for the expected term of the option at the date of grant. The expected term of the options is based on historical exercise and termination experience for various groups of employees and directors. Each group is determined based on the similarity of their historical exercise and termination behavior. The following table presents a summary of the grant-date fair values of stock options granted and the related assumptions for 2012. All such amounts represent the weighted-average amounts for the year. No stock options were granted in 2014 and 2013.

 

 

 

 

 

 

 

2012

Grant-date fair value

 

$

22.20 

Volatility factor

 

 

42.5% 

Dividend yield

 

 

1.2% 

Risk-free interest rate

 

 

1.1% 

Expected term (in years)

 

 

6.0 

 

The following table presents a summary of Devon's outstanding stock options.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Options

 

Exercise Price

 

 

Remaining Term

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

(In years)

 

(In millions)

Outstanding at December 31, 2013

 

 

6,446 

 

$

69.35 

 

 

 

 

 

 

 Granted

 

 

 -

 

$

 -

 

 

 

 

 

 

 Exercised

 

 

(1,417)

 

$

65.55 

 

 

 

 

 

 

 Expired

 

 

(528)

 

$

70.64 

 

 

 

 

 

 

 Forfeited

 

 

(283)

 

$

67.86 

 

 

 

 

 

 

Outstanding at December 31, 2014

 

 

4,218 

 

$

70.56 

 

 

3.11 

 

$

Vested and expected to vest at December 31, 2014

 

 

4,201 

 

$

70.57 

 

 

3.10 

 

$

Exercisable at December 31, 2014

 

 

3,969 

 

$

70.80 

 

 

3.00 

 

$

 

The aggregate intrinsic value of stock options that were exercised during 2014, 2013 and 2012 was $9 million, $0.3 million and $34 million, respectively. As of December 31, 2014, Devon's unrecognized compensation cost related to unvested stock options was $3 million. Such cost is expected to be recognized over a weighted-average period of 1.0 years.

 

Restricted Stock Awards and Units

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Awards & Units

 

Weighted Average Grant-Date Fair Value

 

 

 

(In thousands)

 

 

 

Unvested at December 31, 2013

 

 

3,292 

 

$

59.76 

 Granted

 

 

3,487 

 

$

62.75 

 Vested

 

 

(1,767)

 

$

60.23 

 Forfeited

 

 

(708)

 

$

60.47 

Unvested at December 31, 2014

 

 

4,304 

 

$

60.85 

 

 

 

 

 

 

 

 

The aggregate fair value of restricted stock awards and units that vested during 2014, 2013 and 2012 was $112 million, $141 million and $112 million, respectively. As of December 31, 2014, Devon's unrecognized compensation cost related to unvested restricted stock awards and units was $194 million. Such cost is expected to be recognized over a weighted-average period of 2.5 years.

 

Performance-Based Restricted Stock Awards

 

Performance-based restricted stock awards are granted to certain members of Devon’s senior management. Vesting of the awards is dependent on Devon meeting certain internal performance targets and the recipient meeting certain service requirements. Generally, the service requirement for vesting ranges from zero to four years. If Devon meets or exceeds the performance target, the awards vest after the recipient meets the related requisite service period. If the performance target and service period requirement are not met, the award does not vest. Once vested, recipients are entitled to dividends on the awards. Devon estimates the fair values of the awards as the closing price of Devon's common stock on the grant date of the award, which is expensed over the applicable vesting period. The following table presents a summary of Devon's performance-based restricted stock awards.

 

 

 

 

 

 

 

 

 

 

 

Performance Restricted Stock Awards

 

Weighted Average Grant-Date Fair Value