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1. Summary of Significant Accounting Policies
The accompanying unaudited financial statements and notes of Devon Energy Corporation ("Devon") have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Devon's 2011 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 to a fair statement of Devon's results of operations and cash flows for the three-month periods ended March 31, 2012 and 2011 and Devon's financial position as of March 31, 2012.
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2. 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 that hedge the future prices received. 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.
Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon's interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount.
Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates.
Devon does not 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 minimal 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. As of March 31, 2012, the credit ratings of all Devon's counterparties were within established guidelines.
Commodity Derivatives
As of March 31, 2012, Devon had the following open oil derivative positions. Devon's oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.
Price Swaps | Price Collars | Call Options Sold | |||||||||
Weighted | Weighted | Weighted | Weighted | ||||||||
Volume | Average Price | Volume | Average Floor Price | Average Ceiling Price | Volume | Average Price | |||||
Period | (Bbls/d) | ($/Bbl) | (Bbls/d) | ($/Bbl) | ($/Bbl) | (Bbls/d) | ($/Bbl) | ||||
Q2-Q4 2012 | 22,000 | $ | 107.17 | 67,382 | $ | 88.66 | $ | 123.98 | 19,500 | $ | 95.00 |
Q1-Q4 2013 | 25,000 | $ | 104.29 | 32,000 | $ | 90.00 | $ | 118.42 | 6,000 | $ | 120.00 |
Q1-Q4 2014 | 4,000 | $ | 100.49 | 2,000 | $ | 90.00 | $ | 111.13 | 6,000 | $ | 120.00 |
Price Swaps | Price Collars | Call Options Sold | |||||||||
Weighted | Weighted | Weighted | Weighted | ||||||||
Volume | Average Price | Volume | Average Floor Price | Average Ceiling Price | Volume | Average Price | |||||
Period | (MMBtu/d) | ($/MMBtu) | (MMBtu/d) | ($/MMBtu) | ($/MMBtu) | (MMBtu/d) | ($/MMBtu) | ||||
Q2-Q4 2012 | 389,527 | $ | 4.71 | 504,891 | $ | 4.69 | $ | 5.50 | 487,500 | $ | 6.00 |
Q1-Q4 2013 | 150,000 | $ | 4.50 | — | — | — | — | — | |||
Q1-Q4 2014 | — | — | — | — | — | 150,000 | $ | 5.00 |
Interest Rate Derivatives
As of March 31, 2012, Devon had the following open interest rate derivative positions:
Fixed Rate | Variable | ||||
Notional | Received | Rate Paid | Expiration | ||
(In millions) | |||||
$ | 100 | 1.90 | % | Federal funds rate | August 2012 |
750 | 3.88 | % | Federal funds rate | July 2013 | |
$ | 850 | 3.65 | % |
Foreign Exchange Derivatives
As of March 31, 2012, Devon had the following open foreign exchange rate derivative positions:
Forward Contract | |||||
Contract | CAD | Fixed Rate | |||
Currency | Type | Notional | Received | Expiration | |
(In millions) | (CAD-USD) | ||||
Canadian Dollar | Sell | $ | 75 | 0.9980 | April 2012 |
Canadian Dollar | Sell | $ | 100 | 1.0121 | May 2012 |
Canadian Dollar | Sell | $ | 580 | 0.9992 | June 2012 |
Financial Statement Presentation
The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying comprehensive statements of earnings associated with derivative financial instruments.
Three Months Ended March 31, | |||||||
Comprehensive Statement of Earnings Caption | 2012 | 2011 | |||||
(In millions) | |||||||
Cash settlements: | |||||||
Commodity derivatives | Oil, gas and NGL derivatives | $ | 158 | $ | 86 | ||
Interest rate derivatives | Other, net | 10 | 16 | ||||
Foreign exchange derivatives | Other, net | (11 | ) | — | |||
Total cash settlements | 157 | 102 | |||||
Unrealized gains (losses): | |||||||
Commodity derivatives | Oil, gas and NGL derivatives | (13 | ) | (254 | ) | ||
Interest rate derivatives | Other, net | (10 | ) | 1 | |||
Foreign exchange derivatives | Other, net | 1 | — | ||||
Total unrealized losses | (22 | ) | (253 | ) | |||
Net gain (loss) recognized in comprehensive statements of earnings | $ | 135 | $ | (151 | ) |
The following table presents the derivative fair values included in the accompanying consolidated balance sheets.
Balance Sheet Caption | March 31, 2012 | December 31, 2011 | |||
(In millions) | |||||
Asset derivatives: | |||||
Commodity derivatives | Other current assets | $ | 585 | $ | 611 |
Commodity derivatives | Other long-term assets | 58 | 17 | ||
Interest rate derivatives | Other current assets | 29 | 30 | ||
Interest rate derivatives | Other long-term assets | 13 | 22 | ||
Foreign exchange derivatives | Other current assets | 1 | — | ||
Total asset derivatives | $ | 686 | $ | 680 | |
Liability derivatives: | |||||
Commodity derivatives | Other current liabilities | $ | 71 | $ | 82 |
Commodity derivatives | Other long-term liabilities | 39 | — | ||
Total liability derivatives | $ | 110 | $ | 82 |
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3. Restructuring Costs
In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of March 31, 2012, Devon had divested all of its U.S. Offshore and International assets. Since inception of the plan, Devon had incurred $202 million of restructuring costs associated with these divestitures.
The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings. Restructuring costs related to Devon's discontinued operations totaled $6 million in the three months ended March 31, 2011. These costs primarily related to cash severance and share-based awards and are not included in the schedule below. There were no costs related to discontinued operations in the three months ended March 31, 2012.
Three Months Ended March 31, | |||||
2012 | 2011 | ||||
(In millions) | |||||
Lease obligations | $ | — | $ | (4 | ) |
Share-based awards | — | (1 | ) | ||
Total | $ | — | $ | (5 | ) |
The schedule below summarizes Devon's restructuring liabilities. Devon's restructuring liabilities for cash severance related to its discontinued operations totaled $21 million at March 31, 2011 and are not included in the schedule below.
Other | Other | ||||||||
Current | Long-Term | ||||||||
Liabilities | Liabilities | Total | |||||||
(In millions) | |||||||||
Balance as of December 31, 2011 | $ | 29 | $ | 16 | $ | 45 | |||
Lease obligations settled | (2 | ) | (1 | ) | (3 | ) | |||
Cash severance settled | (2 | ) | — | (2 | ) | ||||
Balance as of March 31, 2012 | $ | 25 | $ | 15 | $ | 40 | |||
Balance as of December 31, 2010 | $ | 31 | $ | 51 | $ | 82 | |||
Lease obligations settled | (3 | ) | (4 | ) | (7 | ) | |||
Cash severance settled | (8 | ) | — | (8 | ) | ||||
Lease obligations revision | (3 | ) | (1 | ) | (4 | ) | |||
Balance as of March 31, 2011 | $ | 17 | $ | 46 | $ | 63 |
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4. Other, net
The components of other, net in the accompanying comprehensive statements of earnings include the following:
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Accretion of asset retirement obligations | $ | 27 | $ | 23 | ||
Interest rate swaps – unrealized fair value changes | 10 | (1) | ||||
Interest rate swaps – cash settlements | (10) | (16) | ||||
Other | (17) | (16) | ||||
Other, net | $ | 10 | $ | (10) |
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6. Other Comprehensive Earnings
Components of other comprehensive earnings consist of the following:
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
Foreign currency translation: | (In millions) | |||||
Beginning accumulated foreign currency translation | $ | 1,802 | $ | 1,993 | ||
Change in cumulative translation adjustment | 159 | 195 | ||||
Income tax expense | (7 | ) | (10 | ) | ||
Ending accumulated foreign currency translation | 1,954 | 2,178 | ||||
Pension and postretirement benefit plans: | ||||||
Beginning accumulated pension and postretirement benefits | (227 | ) | (233 | ) | ||
Recognition of net actuarial loss and prior service cost in earnings | 7 | 9 | ||||
Income tax expense | (3 | ) | (3 | ) | ||
Ending accumulated pension and postretirement benefits | (223 | ) | (227 | ) | ||
Accumulated other comprehensive earnings, net of tax | $ | 1,731 | $ | 1,951 |
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7. Supplemental Information to Statements of Cash Flows
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Net change in working capital: | ||||||
Decrease (increase) in accounts receivable | $ | 280 | $ | (60 | ) | |
Increase in other current assets | (53 | ) | (110 | ) | ||
(Decrease) increase in accounts payable | (226 | ) | 45 | |||
(Decrease) increase in revenues and royalties payable | (169 | ) | 100 | |||
(Decrease) increase in income taxes payable | (16 | ) | 10 | |||
Decrease in other current liabilities | (137 | ) | (156 | ) | ||
Net increase in working capital | $ | (321 | ) | $ | (171 | ) |
Supplementary cash flow data – total operations: | ||||||
Interest paid (net of capitalized interest) | $ | 136 | $ | 137 | ||
Income taxes paid | $ | 33 | $ | 9 |
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8. Short-Term Investments
The components of short-term investments include the following:
March 31, 2012 | December 31, 2011 | |||
(In millions) | ||||
U.S. Treasuries | $ | 958 | $ | 201 |
Canadian Treasuries | 249 | 142 | ||
Commercial paper | — | 1,013 | ||
Other | 75 | 147 | ||
Short-term investments | $ | 1,282 | $ | 1,503 |
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9. Accounts Receivable
The components of accounts receivable include the following:
March 31, 2012 | December 31, 2011 | |||||
(In millions) | ||||||
Oil, gas and NGL sales | $ | 761 | $ | 928 | ||
Joint interest billings | 203 | 247 | ||||
Marketing and midstream revenues | 116 | 174 | ||||
Other | 36 | 39 | ||||
Gross accounts receivable | 1,116 | 1,388 | ||||
Allowance for doubtful accounts | (9 | ) | (9 | ) | ||
Net accounts receivable | $ | 1,107 | $ | 1,379 |
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10. Other current assets
The components of other current assets include the following:
March 31, 2012 | December 31, 2011 | |||
(In millions) | ||||
Derivative financial instruments | $ | 615 | $ | 641 |
Inventories | 123 | 102 | ||
Income taxes receivable | 44 | 35 | ||
Current assets held for sale | — | 21 | ||
Other | 79 | 69 | ||
Other current assets | $ | 861 | $ | 868 |
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11. Goodwill
During the first three months of 2012, Devon's Canadian goodwill increased $54 million entirely due to foreign currency translation.
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12. Debt
Commercial Paper
As of March 31, 2012, Devon had $4.1 billion of outstanding commercial paper at an average rate of 0.43 percent.
Credit Lines
Devon has a $2.65 billion syndicated, unsecured revolving line of credit (the "Senior Credit Facility"). As of March 31, 2012, Devon had $750 million of borrowings under the Senior Credit Facility at an average borrowing rate of 0.47 percent. On April 7, 2012, $0.46 billion of Devon's Senior Credit Facility matured and $150 million of borrowings were repaid on that date.
The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon's ratio of total funded debt to total capitalization, as defined in the credit agreement, to be less than 65 percent. As of March 31, 2012, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 24.4 percent.
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13. Asset Retirement Obligations
The schedule below summarizes changes in Devon's asset retirement obligations.
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Asset retirement obligations as of beginning of period | $ | 1,563 | $ | 1,497 | ||
Liabilities incurred | 21 | 11 | ||||
Liabilities settled | (16 | ) | (18 | ) | ||
Revision of estimated obligation | 399 | 3 | ||||
Accretion expense on discounted obligation | 27 | 23 | ||||
Foreign currency translation adjustment | 14 | 21 | ||||
Asset retirement obligations as of end of period | 2,008 | 1,537 | ||||
Less current portion | 64 | 69 | ||||
Asset retirement obligations, long-term | $ | 1,944 | $ | 1,468 |
During the first quarter of 2012, Devon recognized revisions to its asset retirement obligations totaling $399 million. The primary factor contributing to this revision was an overall increase in abandonment cost estimates for certain of its production operations facilities.
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14. Retirement Plans
The following table presents the components of net periodic benefit cost for Devon's pension and postretirement benefit plans.
Pension Benefits | Postretirement Benefits | ||||||||||
Three Months | Three Months | ||||||||||
Ended March 31, | Ended March 31, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
(In millions) | |||||||||||
Net periodic benefit cost: | |||||||||||
Service cost | $ | 11 | $ | 9 | $ | — | $ | — | |||
Interest cost | 15 | 15 | 1 | 1 | |||||||
Expected return on plan assets | (16 | ) | (10 | ) | — | — | |||||
Amortization of prior service cost | 1 | 1 | (1 | ) | — | ||||||
Net actuarial loss | 6 | 8 | — | — | |||||||
Net periodic benefit cost | $ | 17 | $ | 23 | $ | — | $ | 1 |
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15. Stockholders' Equity
Dividends
Devon paid common stock dividends of $80 million (or $0.20 per share) and $68 million (or $0.16 per share) in the first quarter of 2012 and 2011, respectively.
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16. Commitments and Contingencies
Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon's estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the actions are believed by management to involve future amounts that would be material to Devon's financial position or results of operations after consideration of recorded accruals. Actual amounts could differ materially from management's estimates.
Royalty Matters
Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.
Environmental Matters
Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured remediation costs. Devon's monetary exposure for environmental matters is not expected to be material.
Chief Redemption Matters
In 2006, Devon acquired Chief Holdings LLC ("Chief") from the owners of Chief, including Trevor Rees-Jones, the majority owner of Chief. In 2008, a former owner of Chief filed a petition against Rees-Jones, as the former majority owner of Chief, and Devon, as Chief's successor pursuant to the 2006 acquisition. The petition claimed, among other things, violations of the Texas Securities Act, fraud and breaches of Rees-Jones' fiduciary responsibility to the former owner in connection with Chief's 2004 redemption of the owner's minority ownership stake in Chief.
On June 20, 2011, a court issued a judgment against Rees-Jones for $196 million, of which $133 million of the judgment was also issued against Devon. Both Rees-Jones and Devon are appealing the judgment. If the appeal is unsuccessful, Devon can and will seek full payment of the judgment and any related interest, costs and expenses from Rees-Jones pursuant to an existing indemnification agreement between Rees-Jones, certain other parties and Devon. Devon does not expect to have any net exposure as a result of the judgment. However, because Devon does not have a legal right of set off with respect to the judgment, Devon has recorded in the accompanying March 31, 2012 and December 31, 2011, balance sheets both a $133 million liability relating to the judgment with an offsetting $133 million receivable relating to its right to be indemnified by Rees-Jones and certain other parties pursuant to the indemnification agreement.
Other Matters
Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon's knowledge, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject.
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17. Fair Value Measurements
The following tables provide carrying value and fair value measurement information for certain of Devon's financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other payables and accrued expenses included in the accompanying balance sheets approximated fair value at March 31, 2012 and December 31, 2011. Therefore, such financial assets and liabilities are not presented in the following table.
Fair Value Measurements Using: | ||||||||||||||
Carrying | Total Fair | Level 1 | Level 2 | Level 3 | ||||||||||
Amount | Value | Inputs | Inputs | Inputs | ||||||||||
(In millions) | ||||||||||||||
March 31, 2012 assets (liabilities): | ||||||||||||||
Cash equivalents | $ | 5,155 | $ | 5,155 | $ | 2,202 | $ | 2,953 | $ | — | ||||
Short-term investments | $ | 1,282 | $ | 1,282 | $ | 1,282 | $ | — | $ | — | ||||
Long-term investments | $ | 84 | $ | 84 | $ | — | $ | — | $ | 84 | ||||
Commodity derivatives | $ | 643 | $ | 643 | $ | — | $ | 643 | $ | — | ||||
Commodity derivatives | $ | (110 | ) | $ | (110 | ) | $ | — | $ | (110 | ) | $ | — | |
Interest rate derivatives | $ | 42 | $ | 42 | $ | — | $ | 42 | $ | — | ||||
Foreign exchange derivatives | $ | 1 | $ | 1 | $ | — | $ | 1 | $ | — | ||||
Debt | $ | (10,839 | ) | $ | (12,222 | ) | $ | — | $ | (12,185 | ) | $ | (37 | ) |
December 31, 2011 assets (liabilities): | ||||||||||||||
Cash equivalents | $ | 5,123 | $ | 5,123 | $ | 1,369 | $ | 3,754 | $ | — | ||||
Short-term investments | $ | 1,503 | $ | 1,503 | $ | 490 | $ | 1,013 | $ | — | ||||
Long-term investments | $ | 84 | $ | 84 | $ | — | $ | — | $ | 84 | ||||
Commodity derivatives | $ | 628 | $ | 628 | $ | — | $ | 628 | $ | — | ||||
Commodity derivatives | $ | (82 | ) | $ | (82 | ) | $ | — | $ | (82 | ) | $ | — | |
Interest rate derivatives | $ | 52 | $ | 52 | $ | — | $ | 52 | $ | — | ||||
Debt | $ | (9,780 | ) | $ | (11,380 | ) | $ | — | $ | (11,295 | ) | $ | (85 | ) |
The following methods and assumptions were used to estimate the fair values in the tables above.
Level 1 Fair Value Measurements
Cash equivalents and short-term investments — Amounts consist primarily of U.S. and Canadian Treasury securities and money market investments. The fair value approximates the carrying value.
Level 2 Fair Value Measurements
Cash equivalents and short-term investments — Amounts consist primarily of commercial paper investments. The fair value is based upon quotes from brokers, which approximate the carrying value.
Commodity, interest rate and foreign exchange derivatives — The fair values of commodity and interest rate derivatives are estimated using internal discounted cash flow calculations based upon forward curves and quotes obtained from brokers for contracts with similar terms or quotes obtained from counterparties to the agreements.
Debt — Devon's debt instruments do not actively trade in an established market. The fair values of its fixed-rate debt are estimated based on rates available for debt with similar terms and maturity. The fair values of Devon's variable-rate commercial paper and credit facility borrowings are the carrying values.
Level 3 Fair Value Measurements
Long-term investments — Devon's long-term investments presented in the tables above consisted entirely of auction rate securities. Due to auction failures and the lack of an active market for Devon's auction rate securities, quoted market prices for these securities were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair values of its long-term auction rate securities. These inputs were based on the AAA credit rating of the securities, the probability of full repayment of the securities considering the U.S. government guarantees substantially all of the underlying student loans, the collection of all accrued interest to date and continued receipts of principal at par. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of March 31, 2012 and December 31, 2011. There were no changes in the fair value of these instruments in the three month periods ended March 31, 2012 and 2011, respectively.
Debt — Devon's Level 3 debt consisted of a non-interest bearing promissory note. Due to the lack of an active market, quoted marked prices for this note, or similar notes, were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair value of its promissory note. The fair value of this debt is estimated using internal discounted cash flow calculations based upon estimated future payment schedules and a 3.125% interest rate.
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Debt balance at beginning of period | $ | (85 | ) | $ | (144 | ) |
Foreign exchange translation adjustment | (2 | ) | (3 | ) | ||
Accretion of promissory note | — | (1 | ) | |||
Redemptions of principal | 50 | 29 | ||||
Debt balance at end of period | $ | (37 | ) | $ | (119 | ) |
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18. Discontinued Operations
In March 2012, Devon received $71 million upon closing the divestiture of its operations in Angola, which completed Devon's offshore divestiture program that was announced in November 2009. In aggregate, Devon's U.S. and International offshore divestitures have generated total proceeds of $10.1 billion, or approximately $8 billion after-tax, assuming repatriation of a substantial portion of the foreign proceeds under current U.S. tax law.
Revenues related to Devon's discontinued operations totaled $43 million in the three months ended March 31, 2011. Devon did not have revenues related to its discontinued operations during the first three months of 2012. Earnings (loss) from discontinued operations before income taxes totaled $(16) million and $30 million in the three months ended March 31, 2012 and March 31, 2011, respectively.
The following table presents the main classes of assets and liabilities associated with Devon's discontinued operations at December 31, 2011. Devon did not have assets or liabilities held for sale at March 31, 2012.
Balance Sheet Caption | December 31, 2011 | ||
(In millions) | |||
Other current assets | Other current assets | $ | 21 |
Property and equipment, net | Other long-term assets | $ | 132 |
Accounts payable | Other current liabilities | $ | 20 |
Other current liabilities | Other current liabilities | $ | 28 |
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19. Segment Information
Devon manages its operations through distinct operating segments, or divisions, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its U.S. divisions into one reporting segment due to the similar nature of the businesses. However, Devon's Canadian division is reported as separate reporting segment primarily due to the significant differences between the U.S. and Canadian regulatory environments. Devon's segments are all primarily engaged in oil and gas producing activities. Revenues are all from external customers.
U.S. | Canada | Total | ||||||
(In millions) | ||||||||
Three Months Ended March 31, 2012: | ||||||||
Oil, gas and NGL sales | $ | 1,236 | $ | 679 | $ | 1,915 | ||
Oil, gas and NGL derivatives | $ | 145 | $ | — | $ | 145 | ||
Marketing and midstream revenues | $ | 399 | $ | 38 | $ | 437 | ||
Interest expense | $ | 71 | $ | 16 | $ | 87 | ||
Depreciation, depletion and amortization | $ | 431 | $ | 249 | $ | 680 | ||
Earnings from continuing operations before income taxes | $ | 533 | $ | 78 | $ | 611 | ||
Income tax expense | $ | 185 | $ | 12 | $ | 197 | ||
Earnings from continuing operations | $ | 348 | $ | 66 | $ | 414 | ||
Property and equipment, net | $ | 18,103 | $ | 8,458 | $ | 26,561 | ||
Total assets (1) | $ | 23,842 | $ | 18,763 | $ | 42,605 | ||
Capital expenditures (2) | $ | 1,546 | $ | 799 | $ | 2,345 | ||
Three Months Ended March 31, 2011: | ||||||||
Oil, gas and NGL sales | $ | 1,212 | $ | 648 | $ | 1,860 | ||
Oil, gas and NGL derivatives | $ | (168 | ) | $ | — | $ | (168 | ) |
Marketing and midstream revenues | $ | 423 | $ | 32 | $ | 455 | ||
Interest expense | $ | 37 | $ | 44 | $ | 81 | ||
Depreciation, depletion and amortization | $ | 318 | $ | 188 | $ | 506 | ||
Earnings from continuing operations before income taxes | $ | 438 | $ | 142 | $ | 580 | ||
Income tax expense | $ | 155 | $ | 36 | $ | 191 | ||
Earnings from continuing operations | $ | 283 | $ | 106 | $ | 389 | ||
Property and equipment, net | $ | 13,314 | $ | 7,767 | $ | 21,081 | ||
Total continuing assets (1) | $ | 19,432 | $ | 13,672 | $ | 33,104 | ||
Capital expenditures | $ | 1,239 | $ | 546 | $ | 1,785 |
(1)
(2) Capital expenditures for the first three months of 2012 presented above include the $399 million revision to Devon's asset retirement obligations presented in Note 13. Of the $399 million, $110 million relates to the U.S. and $289 million relates to Canada.
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20. Subsequent Event
In April 2012, Devon closed its previously announced $2.5 billion joint venture transaction with Sinopec International Petroleum Exploration & Production Corporation. Pursuant to the agreement, Sinopec invested approximately $900 million in cash and received a 33.3% interest in five of Devon's new ventures exploration plays in the U.S. at closing of the transaction. Additionally, Sinopec is required to fund approximately $1.6 billion of Devon's share of future exploration, development and drilling costs associated with these plays.
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Three Months Ended March 31, | |||||||
Comprehensive Statement of Earnings Caption | 2012 | 2011 | |||||
(In millions) | |||||||
Cash settlements: | |||||||
Commodity derivatives | Oil, gas and NGL derivatives | $ | 158 | $ | 86 | ||
Interest rate derivatives | Other, net | 10 | 16 | ||||
Foreign exchange derivatives | Other, net | (11 | ) | — | |||
Total cash settlements | 157 | 102 | |||||
Unrealized gains (losses): | |||||||
Commodity derivatives | Oil, gas and NGL derivatives | (13 | ) | (254 | ) | ||
Interest rate derivatives | Other, net | (10 | ) | 1 | |||
Foreign exchange derivatives | Other, net | 1 | — | ||||
Total unrealized losses | (22 | ) | (253 | ) | |||
Net gain (loss) recognized in comprehensive statements of earnings | $ | 135 | $ | (151 | ) |
Balance Sheet Caption | March 31, 2012 | December 31, 2011 | |||
(In millions) | |||||
Asset derivatives: | |||||
Commodity derivatives | Other current assets | $ | 585 | $ | 611 |
Commodity derivatives | Other long-term assets | 58 | 17 | ||
Interest rate derivatives | Other current assets | 29 | 30 | ||
Interest rate derivatives | Other long-term assets | 13 | 22 | ||
Foreign exchange derivatives | Other current assets | 1 | — | ||
Total asset derivatives | $ | 686 | $ | 680 | |
Liability derivatives: | |||||
Commodity derivatives | Other current liabilities | $ | 71 | $ | 82 |
Commodity derivatives | Other long-term liabilities | 39 | — | ||
Total liability derivatives | $ | 110 | $ | 82 |
Forward Contract | |||||
Contract | CAD | Fixed Rate | |||
Currency | Type | Notional | Received | Expiration | |
(In millions) | (CAD-USD) | ||||
Canadian Dollar | Sell | $ | 75 | 0.9980 | April 2012 |
Canadian Dollar | Sell | $ | 100 | 1.0121 | May 2012 |
Canadian Dollar | Sell | $ | 580 | 0.9992 | June 2012 |
Fixed Rate | Variable | ||||
Notional | Received | Rate Paid | Expiration | ||
(In millions) | |||||
$ | 100 | 1.90 | % | Federal funds rate | August 2012 |
750 | 3.88 | % | Federal funds rate | July 2013 | |
$ | 850 | 3.65 | % |
As of March 31, 2012, Devon had the following open oil derivative positions. Devon's oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.
Price Swaps | Price Collars | Call Options Sold | |||||||||
Weighted | Weighted | Weighted | Weighted | ||||||||
Volume | Average Price | Volume | Average Floor Price | Average Ceiling Price | Volume | Average Price | |||||
Period | (Bbls/d) | ($/Bbl) | (Bbls/d) | ($/Bbl) | ($/Bbl) | (Bbls/d) | ($/Bbl) | ||||
Q2-Q4 2012 | 22,000 | $ | 107.17 | 67,382 | $ | 88.66 | $ | 123.98 | 19,500 | $ | 95.00 |
Q1-Q4 2013 | 25,000 | $ | 104.29 | 32,000 | $ | 90.00 | $ | 118.42 | 6,000 | $ | 120.00 |
Q1-Q4 2014 | 4,000 | $ | 100.49 | 2,000 | $ | 90.00 | $ | 111.13 | 6,000 | $ | 120.00 |
Price Swaps | Price Collars | Call Options Sold | |||||||||
Weighted | Weighted | Weighted | Weighted | ||||||||
Volume | Average Price | Volume | Average Floor Price | Average Ceiling Price | Volume | Average Price | |||||
Period | (MMBtu/d) | ($/MMBtu) | (MMBtu/d) | ($/MMBtu) | ($/MMBtu) | (MMBtu/d) | ($/MMBtu) | ||||
Q2-Q4 2012 | 389,527 | $ | 4.71 | 504,891 | $ | 4.69 | $ | 5.50 | 487,500 | $ | 6.00 |
Q1-Q4 2013 | 150,000 | $ | 4.50 | — | — | — | — | — | |||
Q1-Q4 2014 | — | — | — | — | — | 150,000 | $ | 5.00 |
|
Three Months Ended March 31, | |||||
2012 | 2011 | ||||
(In millions) | |||||
Lease obligations | $ | — | $ | (4 | ) |
Share-based awards | — | (1 | ) | ||
Total | $ | — | $ | (5 | ) |
Other | Other | ||||||||
Current | Long-Term | ||||||||
Liabilities | Liabilities | Total | |||||||
(In millions) | |||||||||
Balance as of December 31, 2011 | $ | 29 | $ | 16 | $ | 45 | |||
Lease obligations settled | (2 | ) | (1 | ) | (3 | ) | |||
Cash severance settled | (2 | ) | — | (2 | ) | ||||
Balance as of March 31, 2012 | $ | 25 | $ | 15 | $ | 40 | |||
Balance as of December 31, 2010 | $ | 31 | $ | 51 | $ | 82 | |||
Lease obligations settled | (3 | ) | (4 | ) | (7 | ) | |||
Cash severance settled | (8 | ) | — | (8 | ) | ||||
Lease obligations revision | (3 | ) | (1 | ) | (4 | ) | |||
Balance as of March 31, 2011 | $ | 17 | $ | 46 | $ | 63 |
|
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Accretion of asset retirement obligations | $ | 27 | $ | 23 | ||
Interest rate swaps – unrealized fair value changes | 10 | (1) | ||||
Interest rate swaps – cash settlements | (10) | (16) | ||||
Other | (17) | (16) | ||||
Other, net | $ | 10 | $ | (10) |
|
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
Foreign currency translation: | (In millions) | |||||
Beginning accumulated foreign currency translation | $ | 1,802 | $ | 1,993 | ||
Change in cumulative translation adjustment | 159 | 195 | ||||
Income tax expense | (7 | ) | (10 | ) | ||
Ending accumulated foreign currency translation | 1,954 | 2,178 | ||||
Pension and postretirement benefit plans: | ||||||
Beginning accumulated pension and postretirement benefits | (227 | ) | (233 | ) | ||
Recognition of net actuarial loss and prior service cost in earnings | 7 | 9 | ||||
Income tax expense | (3 | ) | (3 | ) | ||
Ending accumulated pension and postretirement benefits | (223 | ) | (227 | ) | ||
Accumulated other comprehensive earnings, net of tax | $ | 1,731 | $ | 1,951 |
|
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Net change in working capital: | ||||||
Decrease (increase) in accounts receivable | $ | 280 | $ | (60 | ) | |
Increase in other current assets | (53 | ) | (110 | ) | ||
(Decrease) increase in accounts payable | (226 | ) | 45 | |||
(Decrease) increase in revenues and royalties payable | (169 | ) | 100 | |||
(Decrease) increase in income taxes payable | (16 | ) | 10 | |||
Decrease in other current liabilities | (137 | ) | (156 | ) | ||
Net increase in working capital | $ | (321 | ) | $ | (171 | ) |
Supplementary cash flow data – total operations: | ||||||
Interest paid (net of capitalized interest) | $ | 136 | $ | 137 | ||
Income taxes paid | $ | 33 | $ | 9 |
|
March 31, 2012 | December 31, 2011 | |||
(In millions) | ||||
U.S. Treasuries | $ | 958 | $ | 201 |
Canadian Treasuries | 249 | 142 | ||
Commercial paper | — | 1,013 | ||
Other | 75 | 147 | ||
Short-term investments | $ | 1,282 | $ | 1,503 |
|
March 31, 2012 | December 31, 2011 | |||||
(In millions) | ||||||
Oil, gas and NGL sales | $ | 761 | $ | 928 | ||
Joint interest billings | 203 | 247 | ||||
Marketing and midstream revenues | 116 | 174 | ||||
Other | 36 | 39 | ||||
Gross accounts receivable | 1,116 | 1,388 | ||||
Allowance for doubtful accounts | (9 | ) | (9 | ) | ||
Net accounts receivable | $ | 1,107 | $ | 1,379 |
|
March 31, 2012 | December 31, 2011 | |||
(In millions) | ||||
Derivative financial instruments | $ | 615 | $ | 641 |
Inventories | 123 | 102 | ||
Income taxes receivable | 44 | 35 | ||
Current assets held for sale | — | 21 | ||
Other | 79 | 69 | ||
Other current assets | $ | 861 | $ | 868 |
|
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Asset retirement obligations as of beginning of period | $ | 1,563 | $ | 1,497 | ||
Liabilities incurred | 21 | 11 | ||||
Liabilities settled | (16 | ) | (18 | ) | ||
Revision of estimated obligation | 399 | 3 | ||||
Accretion expense on discounted obligation | 27 | 23 | ||||
Foreign currency translation adjustment | 14 | 21 | ||||
Asset retirement obligations as of end of period | 2,008 | 1,537 | ||||
Less current portion | 64 | 69 | ||||
Asset retirement obligations, long-term | $ | 1,944 | $ | 1,468 |
|
Pension Benefits | Postretirement Benefits | ||||||||||
Three Months | Three Months | ||||||||||
Ended March 31, | Ended March 31, | ||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||
(In millions) | |||||||||||
Net periodic benefit cost: | |||||||||||
Service cost | $ | 11 | $ | 9 | $ | — | $ | — | |||
Interest cost | 15 | 15 | 1 | 1 | |||||||
Expected return on plan assets | (16 | ) | (10 | ) | — | — | |||||
Amortization of prior service cost | 1 | 1 | (1 | ) | — | ||||||
Net actuarial loss | 6 | 8 | — | — | |||||||
Net periodic benefit cost | $ | 17 | $ | 23 | $ | — | $ | 1 |
|
Fair Value Measurements Using: | ||||||||||||||
Carrying | Total Fair | Level 1 | Level 2 | Level 3 | ||||||||||
Amount | Value | Inputs | Inputs | Inputs | ||||||||||
(In millions) | ||||||||||||||
March 31, 2012 assets (liabilities): | ||||||||||||||
Cash equivalents | $ | 5,155 | $ | 5,155 | $ | 2,202 | $ | 2,953 | $ | — | ||||
Short-term investments | $ | 1,282 | $ | 1,282 | $ | 1,282 | $ | — | $ | — | ||||
Long-term investments | $ | 84 | $ | 84 | $ | — | $ | — | $ | 84 | ||||
Commodity derivatives | $ | 643 | $ | 643 | $ | — | $ | 643 | $ | — | ||||
Commodity derivatives | $ | (110 | ) | $ | (110 | ) | $ | — | $ | (110 | ) | $ | — | |
Interest rate derivatives | $ | 42 | $ | 42 | $ | — | $ | 42 | $ | — | ||||
Foreign exchange derivatives | $ | 1 | $ | 1 | $ | — | $ | 1 | $ | — | ||||
Debt | $ | (10,839 | ) | $ | (12,222 | ) | $ | — | $ | (12,185 | ) | $ | (37 | ) |
December 31, 2011 assets (liabilities): | ||||||||||||||
Cash equivalents | $ | 5,123 | $ | 5,123 | $ | 1,369 | $ | 3,754 | $ | — | ||||
Short-term investments | $ | 1,503 | $ | 1,503 | $ | 490 | $ | 1,013 | $ | — | ||||
Long-term investments | $ | 84 | $ | 84 | $ | — | $ | — | $ | 84 | ||||
Commodity derivatives | $ | 628 | $ | 628 | $ | — | $ | 628 | $ | — | ||||
Commodity derivatives | $ | (82 | ) | $ | (82 | ) | $ | — | $ | (82 | ) | $ | — | |
Interest rate derivatives | $ | 52 | $ | 52 | $ | — | $ | 52 | $ | — | ||||
Debt | $ | (9,780 | ) | $ | (11,380 | ) | $ | — | $ | (11,295 | ) | $ | (85 | ) |
Three Months Ended March 31, | ||||||
2012 | 2011 | |||||
(In millions) | ||||||
Debt balance at beginning of period | $ | (85 | ) | $ | (144 | ) |
Foreign exchange translation adjustment | (2 | ) | (3 | ) | ||
Accretion of promissory note | — | (1 | ) | |||
Redemptions of principal | 50 | 29 | ||||
Debt balance at end of period | $ | (37 | ) | $ | (119 | ) |
|
Balance Sheet Caption | December 31, 2011 | ||
(In millions) | |||
Other current assets | Other current assets | $ | 21 |
Property and equipment, net | Other long-term assets | $ | 132 |
Accounts payable | Other current liabilities | $ | 20 |
Other current liabilities | Other current liabilities | $ | 28 |
|
U.S. | Canada | Total | ||||||
(In millions) | ||||||||
Three Months Ended March 31, 2012: | ||||||||
Oil, gas and NGL sales | $ | 1,236 | $ | 679 | $ | 1,915 | ||
Oil, gas and NGL derivatives | $ | 145 | $ | — | $ | 145 | ||
Marketing and midstream revenues | $ | 399 | $ | 38 | $ | 437 | ||
Interest expense | $ | 71 | $ | 16 | $ | 87 | ||
Depreciation, depletion and amortization | $ | 431 | $ | 249 | $ | 680 | ||
Earnings from continuing operations before income taxes | $ | 533 | $ | 78 | $ | 611 | ||
Income tax expense | $ | 185 | $ | 12 | $ | 197 | ||
Earnings from continuing operations | $ | 348 | $ | 66 | $ | 414 | ||
Property and equipment, net | $ | 18,103 | $ | 8,458 | $ | 26,561 | ||
Total assets (1) | $ | 23,842 | $ | 18,763 | $ | 42,605 | ||
Capital expenditures (2) | $ | 1,546 | $ | 799 | $ | 2,345 | ||
Three Months Ended March 31, 2011: | ||||||||
Oil, gas and NGL sales | $ | 1,212 | $ | 648 | $ | 1,860 | ||
Oil, gas and NGL derivatives | $ | (168 | ) | $ | — | $ | (168 | ) |
Marketing and midstream revenues | $ | 423 | $ | 32 | $ | 455 | ||
Interest expense | $ | 37 | $ | 44 | $ | 81 | ||
Depreciation, depletion and amortization | $ | 318 | $ | 188 | $ | 506 | ||
Earnings from continuing operations before income taxes | $ | 438 | $ | 142 | $ | 580 | ||
Income tax expense | $ | 155 | $ | 36 | $ | 191 | ||
Earnings from continuing operations | $ | 283 | $ | 106 | $ | 389 | ||
Property and equipment, net | $ | 13,314 | $ | 7,767 | $ | 21,081 | ||
Total continuing assets (1) | $ | 19,432 | $ | 13,672 | $ | 33,104 | ||
Capital expenditures | $ | 1,239 | $ | 546 | $ | 1,785 |
(1)
(2) Capital expenditures for the first three months of 2012 presented above include the $399 million revision to Devon's asset retirement obligations presented in Note 13. Of the $399 million, $110 million relates to the U.S. and $289 million relates to Canada.
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