DEVON ENERGY CORP/DE, 10-Q filed on 8/5/2015
Quarterly Report
Document And Entity Information
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jul. 22, 2015
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2015 
 
Amendment Flag
false 
 
Entity Registrant Name
DEVON ENERGY CORP/DE 
 
Entity Central Index Key
0001090012 
 
Current Fiscal Year End Date
--12-31 
 
Document Fiscal Year Focus
2015 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Fiscal Period Focus
Q2 
 
Entity Common Stock, Shares Outstanding
 
411.0 
Consolidated Comprehensive Statements Of Earnings (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Consolidated Comprehensive Statements Of Earnings [Abstract]
 
 
 
 
Oil, gas and NGL sales
$ 1,587 
$ 2,679 
$ 2,926 
$ 5,236 
Oil, gas and NGL derivatives
(282)
(399)
12 
(719)
Marketing and midstream revenues
2,088 
2,230 
3,720 
3,718 
Total operating revenues
3,393 
4,510 
6,658 
8,235 
Lease operating expenses
562 
582 
1,115 
1,180 
Marketing and midstream operating expenses
1,863 
2,006 
3,302 
3,311 
General and administrative expenses
212 
189 
463 
400 
Production and property taxes
116 
150 
224 
287 
Depreciation, depletion and amortization
814 
828 
1,744 
1,567 
Asset impairments
4,168 
   
9,628 
   
Restructuring costs
 
 
42 
Gains and losses on asset sales
(1)
(1,057)
(1)
(1,072)
Other operating items
22 
33 
41 
56 
Total operating expenses
7,756 
2,736 
16,516 
5,771 
Operating income (loss)
(4,363)
1,774 
(9,858)
2,464 
Net financing costs
125 
131 
242 
243 
Other nonoperating items
(9)
89 
107 
Earnings (loss) before income taxes
(4,479)
1,554 
(10,103)
2,114 
Income tax expense (benefit)
(1,686)
854 
(3,721)
1,085 
Net earnings (loss)
(2,793)
700 
(6,382)
1,029 
Net earnings attributable to noncontrolling interests
23 
25 
33 
30 
Net earnings (loss) attributable to Devon
(2,816)
675 
(6,415)
999 
Net earnings (loss) per share attributable to Devon:
 
 
 
 
Basic
$ (6.94)
$ 1.65 
$ (15.81)
$ 2.45 
Diluted
$ (6.94)
$ 1.64 
$ (15.81)
$ 2.44 
Comprehensive earnings (loss):
 
 
 
 
Net earnings (loss)
(2,793)
700 
(6,382)
1,029 
Other comprehensive earnings (loss), net of tax:
 
 
 
 
Foreign currency translation
44 
292 
(258)
(6)
Pension and postretirement plans
Other comprehensive earnings (loss), net of tax
47 
297 
(251)
Comprehensive earnings (loss)
(2,746)
997 
(6,633)
1,031 
Comprehensive earnings attributable to noncontrolling interests
23 
25 
33 
30 
Comprehensive earnings (loss) attributable to Devon
$ (2,769)
$ 972 
$ (6,666)
$ 1,001 
Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Cash flows from operating activities:
 
 
Net earnings (loss)
$ (6,382)
$ 1,029 
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
 
 
Depreciation, depletion and amortization
1,744 
1,567 
Asset impairments
9,628 
   
Gains and losses on asset sales
(1)
(1,072)
Deferred income tax expense (benefit)
(3,640)
777 
Derivatives and other financial instruments
(125)
761 
Cash settlements on derivatives and financial instruments
1,183 
(245)
Other noncash charges
267 
229 
Net change in working capital
26 
470 
Change in long-term other assets
159 
(77)
Change in long-term other liabilities
(110)
20 
Net cash from operating activities
2,749 
3,459 
Cash flows from investing activities:
 
 
Capital expenditures
(3,149)
(3,341)
Acquisitions of property, equipment and businesses
(417)
(6,224)
Divestitures of property and equipment
2,942 
Redemptions of long-term investments
 
57 
Other
(5)
84 
Net cash from investing activities
(3,563)
(6,482)
Cash flows from financing activities:
 
 
Borrowings of long-term debt, net of issuance costs
3,051 
3,720 
Net short-term debt repayments
(763)
(862)
Repayments of long-term debt
(1,521)
(3,990)
Stock option exercises
83 
Sale of subsidiary units
654 
   
Issuance of subsidiary units
20 
Dividends paid on common stock
(197)
(189)
Distributions to noncontrolling interests
(118)
(141)
Other
(12)
Net cash from financing activities
1,102 
(1,350)
Effect of exchange rate changes on cash
(43)
13 
Net change in cash and cash equivalents
245 
(4,360)
Cash and cash equivalents at beginning of period
1,480 
6,066 
Cash and cash equivalents at end of period
$ 1,725 
$ 1,706 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 1,725 
$ 1,480 
Accounts receivable
1,602 
1,959 
Derivatives, at fair value
924 
1,993 
Income taxes receivable
522 
Other current assets
470 
544 
Total current assets
4,730 
6,498 
Oil and gas, based on full-cost accounting:
 
 
Subject to amortization
77,191 
75,738 
Not subject to amortization
2,685 
2,752 
Total oil and gas
79,876 
78,490 
Midstream and other
10,354 
9,695 
Total property and equipment, at cost
90,230 
88,185 
Less accumulated depreciation, depletion and amortization
(62,406)
(51,889)
Property and equipment, net
27,824 
36,296 
Goodwill
6,349 
6,303 
Other long-term assets
1,703 
1,540 
Total assets
40,606 
50,637 
Current liabilities:
 
 
Accounts payable
1,035 
1,400 
Revenues and royalties payable
1,095 
1,193 
Short-term debt
670 1
1,432 1
Deferred income taxes
346 
730 
Other current liabilities
852 
1,180 
Total current liabilities
3,998 
5,935 
Long-term debt
11,375 
9,830 
Asset retirement obligations
1,391 
1,339 
Other long-term liabilities
782 
948 
Deferred income taxes
2,909 
6,244 
Stockholders' equity:
 
 
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 411 million and 409 million shares in 2015 and 2014, respectively
41 
41 
Additional paid-in capital
4,736 
4,088 
Retained earnings
10,018 
16,631 
Accumulated other comprehensive earnings
528 
779 
Total stockholders' equity attributable to Devon
15,323 
21,539 
Noncontrolling interests
4,828 
4,802 
Total stockholders' equity
20,151 
26,341 
Commitments and contingencies (Note 17)
   
   
Total liabilities and stockholders' equity
$ 40,606 
$ 50,637 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2015
Dec. 31, 2014
Consolidated Balance Sheets [Abstract]
 
 
Common stock, par value (in dollars per share)
$ 0.10 
$ 0.10 
Common stock, shares authorized (in shares)
1,000,000,000 
1,000,000,000 
Common stock, shares issued (in shares)
411,000,000 
409,000,000 
Consolidated Statements Of Stockholders' Equity (USD $)
In Millions
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Earnings [Member]
Treasury Stock [Member]
Noncontrolling Interests [Member]
Total
Balance, at Dec. 31, 2013
$ 41 
$ 3,780 
$ 15,410 
$ 1,268 
 
 
$ 20,499 
Balance, shares, at Dec. 31, 2013
406 
 
 
 
 
 
 
Net earnings (loss)
 
 
999 
 
 
30 
1,029 
Other comprehensive earnings (loss), net of tax
 
 
 
 
 
Stock option exercises
 
83 
 
 
 
 
83 
Stock option exercises, shares
 
 
 
 
 
 
Restricted stock grants, net of cancellations, shares
 
 
 
 
 
 
Common stock repurchased
   
 
 
 
(5)
 
(5)
Common stock retired
 
(5)
 
 
 
 
Common stock dividends
 
 
(189)
 
 
 
(189)
Share-based compensation
 
84 
 
 
 
 
84 
Share-based compensation tax benefits
 
 
 
 
 
Subsidiary equity transactions
 
 
 
 
 
27 
27 
Acquisition of noncontrolling interests
 
 
 
 
 
4,664 
4,664 
Distributions to noncontrolling interests
 
 
 
 
 
(141)
(141)
Other
 
 
 
 
 
Balance, at Jun. 30, 2014
41 
3,943 
16,220 
1,270 
 
4,585 
26,059 
Balance, shares, at Jun. 30, 2014
409 
 
 
 
 
 
 
Balance, at Dec. 31, 2014
41 
4,088 
16,631 
779 
 
4,802 
26,341 
Balance, shares, at Dec. 31, 2014
409 
 
 
 
 
 
 
Net earnings (loss)
 
 
(6,415)
 
 
33 
(6,382)
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
 
578 
 
 
 
111 
689 
Distributions to noncontrolling interests
 
 
 
 
 
(118)
(118)
Other
 
 
(1)
 
 
 
(1)
Balance, at Jun. 30, 2015
$ 41 
$ 4,736 
$ 10,018 
$ 528 
 
$ 4,828 
$ 20,151 
Balance, shares, at Jun. 30, 2015
411 
 
 
 
 
 
 
Summary Of Significant Accounting Policies
Summary Of Significant Accounting Policies

1.     Summary of Significant Accounting Policies 

 

The accompanying unaudited interim financial statements and notes of Devon Energy Corporation (“Devon”, “we”, “us” or “our”) have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2014 Annual Report on Form 10-K.  

 

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

 

Recently Issued Accounting Standards not yet Adopted

 

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606).  This ASU 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. This ASU is effective for annual and interim periods beginning in 2018 and is required to be adopted using either the retrospective or cumulative effect transition method, with early adoption permitted in 2017. Devon has not yet selected a transition method and is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

 

The FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis.  This ASU provides additional guidance to reporting entities in evaluating whether certain legal entities, such as limited partnerships, limited liability corporations and securitization structures, should be consolidated. The ASU is considered to be an improvement on current accounting requirements as it reduces the number of existing consolidation models. The ASU is effective for annual and interim periods beginning in 2016 and is required to be adopted using a retrospective or modified retrospective approach, with early adoption permitted. Devon is evaluating the impact this ASU will have on its consolidated financial statements and related disclosures.

 

The FASB issued ASU 2015-03, Interest – Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance CostsThis ASU requires debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an assetThis ASU is effective for annual and interim periods beginning in 2016 and is required to be applied retrospectively, with early adoption permitted. Devon does not expect the adoption to have a material impact on its consolidated financial statements. 

 

Acquisitions And Divestitures
Acquisitions And Divestitures

2.    Acquisitions and Divestitures

 

Acquisition of GeoSouthern and Formation of EnLink 

 

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

 

The following unaudited pro forma financial information was prepared assuming both the GeoSouthern acquisition and the formation of EnLink and the General Partner occurred on January 1, 2014. The pro forma information has been included for comparative purposes only and is not intended to reflect the actual results of operations that would have occurred if the business combination and acquisition had been completed at the date indicated. In addition, it does not project Devon’s results of operations for any future period.

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

(Millions)

 

Total operating revenues

 

$

8,882 

 

 

 

 

 

 

Net earnings

 

$

1,043 

 

Noncontrolling interests

 

$

43 

 

Net earnings attributable to Devon

 

$

1,000 

 

Net earnings per common share attributable to Devon

 

$

2.45 

 

 

EnLink Acquisitions

 

    The following table summarizes EnLink’s acquisition activity for the first six months of 2015:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Price
(Millions)

 

Allocation
(Millions)

Date

 

Acquiree

 

Cash

 

EnLink Units

 

PP&E

 

Goodwill

 

Intangibles

 

Other

January 31

 

LPC Crude Oil Marketing LLC

 

$100

 

-

 

$30

 

$30

 

$43

 

($3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 16

 

Coronado Midstream Holdings LLC (“Coronado”)

 

$242

 

$360

 

$302

 

$17

 

$281

 

$2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EnLink Dropdowns

 

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

 

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

 

Asset Divestitures

 

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

 

 

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

 

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

 

Counterparty Credit Risk

 

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

 

As of June 30, 2015 and December 31, 2014, Devon held $189 million and $524 million, respectively, of cash collateral which represented the estimated fair value of certain derivative positions in excess of Devon’s credit guidelines. The collateral is reported in other current liabilities in the accompanying consolidated balance sheets.

 

Commodity Derivatives

 

As of June 30, 2015, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX West Texas Intermediate (“WTI”) futures price. The second table presents Devon’s oil derivatives that settle against the 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)

Q3-Q4 2015

 

106,000

 

$

90.85

 

42,000

 

$

82.40

 

$

89.78

 

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)

Q3-Q4 2015 

 

Western Canadian Select

 

40,000

 

$

(15.79)

Q3-Q4 2015 

 

West Texas Sour

 

8,000

 

$

(3.68)

Q3-Q4 2015 

 

Midland Sweet

 

16,000

 

$

(2.86)

Q1-Q4 2016 

 

West Texas Sour

 

2,000

 

$

(1.45)

 

As of June 30, 2015, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the Panhandle Eastern Pipe Line, El Paso Natural Gas, Houston Ship Channel and Transco Zone 4 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)

Q3-Q4 2015

 

250,000

 

$

4.32

 

462,500

 

$

3.55

 

$

3.85

 

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)

Q3-Q4 2015

 

Panhandle Eastern Pipe Line

 

100,000

 

$

(0.28)

Q3-Q4 2015

 

El Paso Natural Gas

 

70,000

 

$

(0.11)

Q3-Q4 2015

 

Houston Ship Channel

 

200,000

 

$

0.01

Q1-Q4 2016

 

Panhandle Eastern Pipe Line

 

125,000

 

$

(0.34)

Q1-Q4 2016

 

El Paso Natural Gas

 

15,000

 

$

(0.13)

Q1-Q4 2016

 

Houston Ship Channel

 

30,000

 

$

0.11

Q1-Q4 2016

 

Transco Zone 4

 

30,000

 

$

0.01

Q1-Q4 2017

 

El Paso Natural Gas

 

30,000

 

$

(0.14)

Q1-Q4 2017

 

Houston Ship Channel

 

35,000

 

$

0.06

Q1-Q4 2017

 

Transco Zone 4

 

75,000

 

$

0.04

 

 

    As of June 30, 2015, 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 derivatives settle against the Henry Hub Gas Daily index.

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Product

 

Volume (Total)

 

 

Weighted Average Price Paid

 

 

Weighted Average Price Received

Q3 2015-Q4 2016

 

Ethane

 

974

MBbls

 

$

0.28/gal

 

 

Index

Q3 2015-Q4 2016

 

Propane

 

1,094

MBbls

 

 

Index

 

$

0.90/gal

Q3 2015-Q2 2016

 

Normal Butane

 

132

MBbls

 

 

Index

 

$

0.72/gal

Q3 2015-Q2 2016

 

Natural Gasoline

 

93

MBbls

 

 

Index

 

$

1.30/gal

Q3 2015-Q2 2016

 

Natural Gas

 

4,017

MMBtu/d

 

$

3.27/MMBtu

 

 

Index

 

 

Interest Rate Derivatives

 

    As of June 30, 2015, Devon had the following open interest rate derivative positions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

Rate Received

 

Rate Paid

 

Expiration

(Millions)

 

 

 

 

 

 

$

100

 

Three Month LIBOR

 

0.92%

 

December 2016

$

100

 

1.76%

 

Three Month LIBOR

 

January 2019

 

 

Foreign Currency Derivatives

 

As of June 30, 2015, Devon had the following open foreign currency derivative position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Contract

Currency

 

Contract Type

 

CAD Notional

 

Weighted Average Fixed Rate Received

 

Expiration

 

 

 

 

(Millions)

 

(CAD-USD)

 

 

Canadian Dollar

 

Sell

 

$

1,884 

 

0.808

 

September 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

 

Three Months

Ended June 30,

 

Six Months
Ended June 30,

 

 

Earnings Caption

 

2015

 

2014

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

Oil, gas and NGL commodity derivatives

 

Oil, gas and NGL derivatives

 

$

(282)

 

$

(399)

 

$

12 

 

$

(719)

 

Midstream commodity derivatives

 

Marketing and midstream revenues

 

 

 -

 

 

(2)

 

 

 

 

(3)

 

Interest rate derivatives

 

Other nonoperating items

 

 

 

 

 

 

 

 

 

Foreign currency derivatives

 

Other nonoperating items

 

 

(24)

 

 

(54)

 

 

109 

 

 

(40)

 

Net gains (losses) recognized in comprehensive statements of earnings

 

$

(305)

 

$

(454)

 

$

125 

 

$

(761)

 

 

 

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

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Caption

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

Asset derivatives:

 

 

 

 

 

 

 

 

Oil, gas and NGL commodity derivatives

 

Derivatives, at fair value

 

$

892 

 

$

1,967 

Oil, gas and NGL commodity derivatives

 

Other long-term assets

 

 

 

 

Midstream commodity derivatives

 

Derivatives, at fair value

 

 

14 

 

 

17 

Midstream commodity derivatives

 

Other long-term assets

 

 

 

 

10 

Interest rate derivatives

 

Derivatives, at fair value

 

 

 

 

Interest rate derivatives

 

Other long-term assets

 

 

 

 

 -

Foreign currency derivatives

 

Derivatives, at fair value

 

 

17 

 

 

Total asset derivatives

 

 

 

$

932 

 

$

2,004 

Liability derivatives:

 

 

 

 

 

 

 

 

Oil, gas and NGL commodity derivatives

 

Other current liabilities

 

$

31 

 

$

25 

Oil, gas and NGL commodity derivatives

 

Other long-term liabilities

 

 

 

 

26 

Midstream commodity derivatives

 

Other current liabilities

 

 

 

 

Midstream commodity derivatives

 

Other long-term liabilities

 

 

 

 

Interest rate derivatives

 

Other current liabilities

 

 

 

 

Total liability derivatives

 

 

 

$

42 

 

$

57 

 

 

Share-Based Compensation
Share-Based Compensation

4.     Share-Based Compensation

 

The following table presents the effects of share-based compensation included in Devon’s accompanying consolidated comprehensive statements of earnings. Devon’s gross general and administrative expense for the first six months of 2015 and 2014 includes $18 million and $6 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 the first quarter of 2014 in conjunction with the divestiture of Devon’s Canadian conventional assets. For the six months ended June 30, 2014, approximately $15 million of associated expense for these accelerated awards is included in restructuring costs in the accompanying consolidated comprehensive statements of earnings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

(Millions)

Gross general and administrative expense

 

$

127 

 

$

106 

 

Share-based compensation expense capitalized pursuant to the

 

 

 

 

 

 

 

 full cost method of accounting for oil and gas properties

 

$

31 

 

$

27 

 

Related income tax benefit

 

$

26 

 

$

24 

 

 

Under its 2009 Long-Term Incentive Plan, as amended (the “2009 Plan”), and its 2015 Long-Term Incentive Plan (the “2015 Plan”), Devon granted share-based awards to certain employees and directors in the first six months of 2015. The following sections include information related to these awards.

 

Restricted Stock Awards and Units

 

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

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Awards & Units

 

Weighted Average Grant-Date Fair Value

 

 

 

(Thousands)

 

 

 

Unvested at December 31, 2014

 

 

4,304 

 

$

60.85 

 Granted

 

 

2,701 

 

$

63.97 

 Vested

 

 

(975)

 

$

62.45 

 Forfeited

 

 

(205)

 

$

61.47 

Unvested at June 30, 2015

 

 

5,825 

 

$

62.00 

 

 

 

 

 

 

 

 

As of June 30, 2015, Devon’s unrecognized compensation cost related to unvested awards and units was $267 million. Such cost is expected to be recognized over a weighted-average period of 2.8 years.

 

Performance-Based Restricted Stock Awards

 

The following table presents a summary of Devon’s unvested performance-based restricted stock awards.

 

 

 

 

 

 

 

 

 

 

 

Performance Restricted Stock Awards

 

Weighted Average Grant-Date Fair Value

 

 

 

(Thousands)

 

 

 

Unvested at December 31, 2014

 

 

380 

 

$

59.41 

 Granted

 

 

205 

 

$

64.18 

 Vested

 

 

(59)

 

$

61.33 

Unvested at June 30, 2015

 

 

526 

 

$

61.06 

 

As of June 30, 2015, Devon’s unrecognized compensation cost related to unvested awards was $8 million. Such cost is expected to be recognized over a weighted-average period of 3.2 years.

 

Performance Share Units

 

The following table presents a summary of the grant-date fair values of performance share units granted in 2015 and the related assumptions.

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

Grant-date fair value

$

81.99 

-

$

85.05 

Risk-free interest rate

1.06% 

Volatility factor

26.2% 

Contractual term (in years)

2.89 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Performance Share Units

 

Weighted Average Grant-Date Fair Value

 

 

 

(Thousands)

 

 

 

Unvested at December 31, 2014

 

 

1,477 

 

$

70.90 

 Granted

 

 

786 

 

$

84.14 

 Vested

 

 

(337)

 

$

66.00 

 Forfeited

 

 

(28)

 

$

76.12 

Unvested at June 30, 2015 (1)

 

 

1,898 

 

$

76.27 

____________________________

(1)

A maximum of 3.8 million common shares could be awarded based upon Devon’s final total shareholder return ranking.

 

As of June 30, 2015, Devon’s unrecognized compensation cost related to unvested units was $64 million. Such cost is expected to be recognized over a weighted-average period of 2.2 years.

 

2015 Long-Term Incentive Plan

 

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

 

EnLink Share-Based Awards 

 

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

 

    As of June 30, 2015, the General Partner and EnLink both had unrecognized compensation cost related to unvested restricted incentive units of  $24 million. Such cost is expected to be recognized for the General Partner and EnLink over a weighted-average period of 1.9 and 2.0 years, respectively. Additionally, the General Partner and EnLink both had unrecognized compensation cost related to unvested performance units of $4 million. Such cost is expected to be recognized over a weighted-average period of 2.5 years for both the General Partner and EnLink.

 

 

Asset Impairments
Asset Impairments

5.     Asset Impairments

 

In the first six months of 2015, Devon recognized asset impairments as presented below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

Six Months Ended June 30, 2015

 

 

Gross

 

Net of Taxes

 

Gross

 

Net of Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions)

U.S. oil and gas assets

 

$

4,167 

 

$

2,645 

 

$

9,625 

 

$

6,111 

Other assets

 

 

 

 

 

 

 

 

Total asset impairments

 

$

4,168 

 

$

2,646 

 

$

9,628 

 

$

6,113 

 

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 a decline in the U.S. full cost ceiling. This lower ceiling value resulted from decreases in the 12-month average trailing prices for oil, gas and NGLs, which reduced proved reserves and proved reserves values.

 

 

 

Income Taxes
Income Taxes

6.     Income Taxes

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income tax expense (benefit) (millions)

 

$

(1,686)

 

$

854 

 

$

(3,721)

 

$

1,085 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

(35)%

 

 

35% 

 

 

(35)%

 

 

35% 

 

Taxation on Canadian operations

 

 

1% 

 

 

4% 

 

 

1% 

 

 

2% 

 

State income taxes

 

 

(2)%

 

 

0% 

 

 

(2)%

 

 

1% 

 

Repatriations

 

 

0% 

 

 

16% 

 

 

0% 

 

 

12% 

 

Taxes on General Partner formation

 

 

0% 

 

 

0% 

 

 

0% 

 

 

2% 

 

Other

 

 

(2)%

 

 

0% 

 

 

(1)%

 

 

(1)%

 

Effective income tax rate

 

 

(38)%

 

 

55% 

 

 

(37)%

 

 

51% 

 

 

 

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

 

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

 

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

 

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

 

In the first quarter of 2014, Devon recorded a $48 million deferred tax liability in conjunction with the formation of the General Partner, which impacted the effective tax rate as reflected in the table above.

 

 

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

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Common

 

Earnings (loss)

 

 

Earnings (loss)

 

Shares

 

per  Share

 

 

 

 

 

 

 

 

 

 

 

  

(Millions, except per share amounts)

Three Months Ended June 30, 2015:

  

 

 

 

 

 

 

 

 

Net loss attributable to Devon

  

$

(2,816)

 

 

411 

 

 

 

Attributable to participating securities

  

 

(1)

 

 

(5)

 

 

 

Basic net loss per share

  

 

(2,817)

 

 

406 

 

$

(6.94)

Dilutive effect of potential common shares issuable

  

 

 -

 

 

 -

 

 

 

Diluted net loss per share

  

$

(2,817)

 

 

406 

 

$

(6.94)

 

  

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2014:

  

 

 

 

 

 

 

 

 

Net earnings attributable to Devon

  

$

675 

 

 

408 

 

 

 

Attributable to participating securities

  

 

(8)

 

 

(4)

 

 

 

Basic net earnings per share

  

 

667 

 

 

404 

 

$

1.65 

Dilutive effect of potential common shares issuable

  

 

 -

 

 

 

 

 

Diluted net earnings per share

  

$

667 

 

 

406 

 

$

1.64 

 

  

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015:

  

 

 

 

 

 

 

 

 

Net loss attributable to Devon

  

$

(6,415)

 

 

411 

 

 

 

Attributable to participating securities

  

 

(2)

 

 

(5)

 

 

 

Basic loss earnings per share

  

 

(6,417)

 

 

406 

 

$

(15.81)

Dilutive effect of potential common shares issuable

  

 

 -

 

 

 -

 

 

 

Diluted net loss per share

  

$

(6,417)

 

 

406 

 

$

(15.81)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2014: