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DVN Devon Energy

Filed: 5 Aug 20, 12:01pm

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-32318

 

DEVON ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

73-1567067

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

identification No.)

 

 

333 West Sheridan Avenue, Oklahoma City, Oklahoma

 

73102-5015

(Address of principal executive offices)

 

(Zip code)

Registrant’s telephone number, including area code: (405) 235-3611

Former name, address and former fiscal year, if changed from last report: Not applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.10 per share

DVN

The New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

On July 22, 2020, 382.8 million shares of common stock were outstanding.

 

 


Table of Contents

DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Part I. Financial Information

 

Item 1.

 

Financial Statements

6

 

 

Consolidated Statements of Comprehensive Earnings

6

 

 

Consolidated Statements of Cash Flows

7

 

 

Consolidated Balance Sheets

8

 

 

Consolidated Statements of Equity

9

 

 

Notes to Consolidated Financial Statements

10

 

 

Note 1 – Summary of Significant Accounting Policies

10

 

 

Note 2 – Divestitures

11

 

 

Note 3 – Derivative Financial Instruments

11

 

 

Note 4 – Share-Based Compensation

13

 

 

Note 5 – Asset Impairments

14

 

 

Note 6 – Restructuring and Transaction Costs

15

 

 

Note 7 – Income Taxes

16

 

 

Note 8 – Net Earnings (Loss) Per Share From Continuing Operations

17

 

 

Note 9 – Other Comprehensive Earnings (Loss)

17

 

 

Note 10 – Supplemental Information to Statements of Cash Flows

18

 

 

Note 11 – Accounts Receivable

18

 

 

Note 12 – Property, Plant and Equipment

18

 

 

Note 13 – Debt and Related Expenses

19

 

 

Note 14 – Leases

19

 

 

Note 15 – Asset Retirement Obligations

20

 

 

Note 16 – Stockholders’ Equity

20

 

 

Note 17 – Discontinued Operations and Assets Held For Sale

21

 

 

Note 18 – Commitments and Contingencies

23

 

 

Note 19 – Fair Value Measurements

24

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

 

Controls and Procedures

46

 

 

 

 

Part II. Other Information

 

Item 1.

 

Legal Proceedings

47

Item 1A.

 

Risk Factors

47

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

 

Defaults Upon Senior Securities

47

Item 4.

 

Mine Safety Disclosures

47

Item 5.

 

Other Information

47

Item 6.

 

Exhibits

48

 

 

 

 

Signatures

 

 

49

 

 

 

2

 


Table of Contents

DEFINITIONS

Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Devon,” the “Company” and “Registrant” refer to Devon Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“ASU” means Accounting Standards Update.

“Bbl” or “Bbls” means barrel or barrels.

“BKV” means Banpu Kalnin Ventures.

“Boe” means barrel of oil equivalent. Gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.

“Btu” means British thermal units, a measure of heating value.

“Canada” means the division of Devon encompassing oil and gas properties located in Canada. On June 27, 2019, all of Devon’s Canadian operating assets and operations were divested. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.

“DD&A” means depreciation, depletion and amortization expenses.

“Devon Plan” means Devon Energy Corporation Incentive Savings Plan.

“FASB” means Financial Accounting Standards Board.

“G&A” means general and administrative expenses.

“GAAP” means U.S. generally accepted accounting principles.

“Inside FERC” refers to the publication Inside FERC’s Gas Market Report.

“LOE” means lease operating expenses.

“MBbls” means thousand barrels.

“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBoe” means million Boe.

“MMBtu” means million Btu.

“MMcf” means million cubic feet.

“N/M” means not meaningful.

“NGL” or “NGLs” means natural gas liquids.

“NYMEX” means New York Mercantile Exchange.

3

 


Table of Contents

“OPEC” means Organization of the Petroleum Exporting Countries.

“OPIS” means Oil Price Information Service.

“SEC” means United States Securities and Exchange Commission.

“Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.

“TSR” means total shareholder return.

“U.S.” means United States of America.

“VIE” means variable interest entity.

“WTI” means West Texas Intermediate.

“/Bbl” means per barrel.

“/d” means per day.

“/MMBtu” means per MMBtu.

4

 


Table of Contents

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words and phrases “expects,” “believes,” “will,” “would,” “could,” “continue,” “may,” “aims,” “likely to be,” “intends,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this report that address activities, events or developments that Devon expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, including, but not limited to those, identified below.

 

The COVID-19 pandemic and its related repercussions have created significant volatility, uncertainty and turmoil in the global economy and our industry. This turmoil has included an unprecedented supply-and-demand imbalance for oil and other commodities, resulting in a swift and material decline in commodity prices in early 2020. Our future actual results could differ materially from the forward-looking statements in this report due to the COVID-19 pandemic and related impacts, including, among other things: contributing to a sustained or further deterioration in commodity prices; causing takeaway capacity constraints for production, resulting in production shut-ins and additional downward pressure on impacted regional pricing differentials; limiting our ability to access sources of capital due to disruptions in financial markets; increasing the risk of a downgrade from credit rating agencies; exacerbating counterparty credit risks and the risk of supply chain interruptions; and increasing the risk of operational disruptions due to social distancing measures and other changes to business practices.

In addition to the risks associated with the COVID-19 pandemic and its related impacts, our actual future results could differ materially from our expectations due to other factors, including, among other things:

 

the volatility of oil, gas and NGL prices;

 

uncertainties inherent in estimating oil, gas and NGL reserves;

 

the extent to which we are successful in acquiring and discovering additional reserves;

 

the uncertainties, costs and risks involved in our operations, including as a result of employee misconduct;

 

regulatory restrictions, compliance costs and other risks relating to governmental regulation, including with respect to environmental matters;

 

risks related to regulatory, social and market efforts to address climate change;

 

risks related to our hedging activities;

 

counterparty credit risks;

 

risks relating to our indebtedness;

 

cyberattack risks;

 

our limited control over third parties who operate some of our oil and gas properties;

 

midstream capacity constraints and potential interruptions in production;

 

the extent to which insurance covers any losses we may experience;

 

competition for assets, materials, people and capital;

 

risks related to investors attempting to effect change;

 

our ability to successfully complete mergers, acquisitions and divestitures; and

 

any of the other risks and uncertainties discussed in this report, our 2019 Annual Report on Form 10-K and our other filings with the SEC.

All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.

5

 


Table of Contents

Part I.  Financial Information

Item 1.  Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

Oil, gas and NGL sales

 

$

424

 

 

$

936

 

 

$

1,231

 

 

$

1,855

 

Oil, gas and NGL derivatives

 

 

(361

)

 

 

140

 

 

 

359

 

 

 

(465

)

Marketing and midstream revenues

 

 

331

 

 

 

730

 

 

 

891

 

 

 

1,495

 

Total revenues

 

 

394

 

 

 

1,806

 

 

 

2,481

 

 

 

2,885

 

Production expenses

 

 

263

 

 

 

296

 

 

 

581

 

 

 

579

 

Exploration expenses

 

 

12

 

 

 

7

 

 

 

124

 

 

 

11

 

Marketing and midstream expenses

 

 

339

 

 

 

713

 

 

 

917

 

 

 

1,463

 

Depreciation, depletion and amortization

 

 

299

 

 

 

374

 

 

 

700

 

 

 

734

 

Asset impairments

 

 

 

 

 

 

 

 

2,666

 

 

 

 

Asset dispositions

 

 

 

 

 

(2

)

 

 

 

 

 

(47

)

General and administrative expenses

 

 

79

 

 

 

114

 

 

 

181

 

 

 

249

 

Financing costs, net

 

 

69

 

 

 

66

 

 

 

134

 

 

 

126

 

Restructuring and transaction costs

 

 

 

 

 

12

 

 

 

 

 

 

63

 

Other expenses

 

 

13

 

 

 

7

 

 

 

(35

)

 

 

(15

)

Total expenses

 

 

1,074

 

 

 

1,587

 

 

 

5,268

 

 

 

3,163

 

Earnings (loss) from continuing operations before income taxes

 

 

(680

)

 

 

219

 

 

 

(2,787

)

 

 

(278

)

Income tax expense (benefit)

 

 

(3

)

 

 

68

 

 

 

(420

)

 

 

(51

)

Net earnings (loss) from continuing operations

 

 

(677

)

 

 

151

 

 

 

(2,367

)

 

 

(227

)

Net earnings (loss) from discontinued operations, net of income taxes

 

 

9

 

 

 

344

 

 

 

(116

)

 

 

405

 

Net earnings (loss)

 

 

(668

)

 

 

495

 

 

 

(2,483

)

 

 

178

 

Net earnings attributable to noncontrolling interests

 

 

2

 

 

 

 

 

 

3

 

 

 

 

Net earnings (loss) attributable to Devon

 

$

(670

)

 

$

495

 

 

$

(2,486

)

 

$

178

 

Basic net earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) from continuing operations per share

 

$

(1.80

)

 

$

0.37

 

 

$

(6.29

)

 

$

(0.54

)

Basic earnings (loss) from discontinued operations per share

 

 

0.02

 

 

 

0.83

 

 

 

(0.31

)

 

 

0.96

 

Basic net earnings (loss) per share

 

$

(1.78

)

 

$

1.20

 

 

$

(6.60

)

 

$

0.42

 

Diluted net earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) from continuing operations per share

 

$

(1.80

)

 

$

0.37

 

 

$

(6.29

)

 

$

(0.54

)

Diluted earnings (loss) from discontinued operations per share

 

 

0.02

 

 

 

0.82

 

 

 

(0.31

)

 

 

0.96

 

Diluted net earnings (loss) per share

 

$

(1.78

)

 

$

1.19

 

 

$

(6.60

)

 

$

0.42

 

Comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(668

)

 

$

495

 

 

$

(2,483

)

 

$

178

 

Other comprehensive earnings (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation, discontinued operations

 

 

 

 

 

43

 

 

 

 

 

 

78

 

Release of Canadian cumulative translation adjustment,

   discontinued operations

 

 

 

 

 

(1,237

)

 

 

 

 

 

(1,237

)

Pension and postretirement plans

 

 

1

 

 

 

13

 

 

 

2

 

 

 

15

 

Other comprehensive earnings (loss), net of tax

 

 

1

 

 

 

(1,181

)

 

 

2

 

 

 

(1,144

)

Comprehensive loss

 

$

(667

)

 

$

(686

)

 

$

(2,481

)

 

$

(966

)

Comprehensive earnings attributable to noncontrolling interests

 

 

2

 

 

 

 

 

 

3

 

 

 

 

Comprehensive loss attributable to Devon

 

$

(669

)

 

$

(686

)

 

$

(2,484

)

 

$

(966

)

 

See accompanying notes to consolidated financial statements

6

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(668

)

 

$

495

 

 

$

(2,483

)

 

$

178

 

Adjustments to reconcile net earnings (loss) to net cash from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (earnings) loss from discontinued operations, net of income taxes

 

 

(9

)

 

 

(344

)

 

 

116

 

 

 

(405

)

Depreciation, depletion and amortization

 

 

299

 

 

 

374

 

 

 

700

 

 

 

734

 

Asset impairments

 

 

 

 

 

 

 

 

2,666

 

 

 

 

Leasehold impairments

 

 

3

 

 

 

1

 

 

 

113

 

 

 

2

 

Accretion on discounted liabilities

 

 

8

 

 

 

8

 

 

 

16

 

 

 

17

 

Total (gains) losses on commodity derivatives

 

 

361

 

 

 

(140

)

 

 

(359

)

 

 

465

 

Cash settlements on commodity derivatives

 

 

232

 

 

 

23

 

 

 

333

 

 

 

54

 

Gains on asset dispositions

 

 

 

 

 

(2

)

 

 

 

 

 

(47

)

Deferred income tax expense (benefit)

 

 

 

 

 

65

 

 

 

(311

)

 

 

(50

)

Share-based compensation

 

 

19

 

 

 

25

 

 

 

39

 

 

 

69

 

Other

 

 

4

 

 

 

2

 

 

 

4

 

 

 

(13

)

Changes in assets and liabilities, net

 

 

(99

)

 

 

(75

)

 

 

(155

)

 

 

(136

)

Net cash from operating activities - continuing operations

 

 

150

 

 

 

432

 

 

 

679

 

 

 

868

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(307

)

 

 

(486

)

 

 

(732

)

 

 

(976

)

Acquisitions of property and equipment

 

 

(1

)

 

 

(13

)

 

 

(5

)

 

 

(23

)

Divestitures of property and equipment

 

 

3

 

 

 

28

 

 

 

28

 

 

 

338

 

Net cash from investing activities - continuing operations

 

 

(305

)

 

 

(471

)

 

 

(709

)

 

 

(661

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

 

 

 

 

 

 

 

 

 

(162

)

Repurchases of common stock

 

 

 

 

 

(187

)

 

 

(38

)

 

 

(1,185

)

Dividends paid on common stock

 

 

(42

)

 

 

(37

)

 

 

(76

)

 

 

(71

)

Contributions from noncontrolling interests

 

 

6

 

 

 

 

 

 

11

 

 

 

 

Distributions to noncontrolling interests

 

 

(3

)

 

 

 

 

 

(6

)

 

 

 

Shares exchanged for tax withholdings and other

 

 

 

 

 

(3

)

 

 

(17

)

 

 

(23

)

Net cash from financing activities - continuing operations

 

 

(39

)

 

 

(227

)

 

 

(126

)

 

 

(1,441

)

Net change in cash, cash equivalents and restricted cash of continuing operations

 

 

(194

)

 

 

(266

)

 

 

(156

)

 

 

(1,234

)

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

(43

)

 

 

191

 

 

 

(174

)

 

 

131

 

Investing activities

 

 

171

 

 

 

2,536

 

 

 

170

 

 

 

2,478

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

(7

)

Effect of exchange rate changes on cash

 

 

8

 

 

 

37

 

 

 

(15

)

 

 

39

 

Net change in cash, cash equivalents and restricted cash of discontinued operations

 

 

136

 

 

 

2,764

 

 

 

(19

)

 

 

2,641

 

Net change in cash, cash equivalents and restricted cash

 

 

(58

)

 

 

2,498

 

 

 

(175

)

 

 

1,407

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

1,727

 

 

 

1,355

 

 

 

1,844

 

 

 

2,446

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,669

 

 

$

3,853

 

 

$

1,669

 

 

$

3,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,474

 

 

$

3,470

 

 

$

1,474

 

 

$

3,470

 

Cash restricted for discontinued operations

 

 

195

 

 

 

370

 

 

 

195

 

 

 

370

 

Restricted cash included in other current assets

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Total cash, cash equivalents and restricted cash

 

$

1,669

 

 

$

3,853

 

 

$

1,669

 

 

$

3,853

 

 

See accompanying notes to consolidated financial statements

7

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,474

 

 

$

1,464

 

Cash restricted for discontinued operations

 

 

195

 

 

 

380

 

Accounts receivable

 

 

515

 

 

 

832

 

Current assets associated with discontinued operations

 

 

748

 

 

 

896

 

Other current assets

 

 

446

 

 

 

279

 

Total current assets

 

 

3,378

 

 

 

3,851

 

Oil and gas property and equipment, based on successful efforts

   accounting, net

 

 

4,673

 

 

 

7,558

 

Other property and equipment, net ($96 million and $80 million related to CDM in 2020 and 2019, respectively)

 

 

1,013

 

 

 

1,035

 

Total property and equipment, net

 

 

5,686

 

 

 

8,593

 

Goodwill

 

 

753

 

 

 

753

 

Right-of-use assets

 

 

231

 

 

 

243

 

Other long-term assets

 

 

227

 

 

 

196

 

Long-term assets associated with discontinued operations

 

 

82

 

 

 

81

 

Total assets

 

$

10,357

 

 

$

13,717

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

309

 

 

$

428

 

Revenues and royalties payable

 

 

473

 

 

 

730

 

Current liabilities associated with discontinued operations

 

 

441

 

 

 

459

 

Other current liabilities

 

 

229

 

 

 

310

 

Total current liabilities

 

 

1,452

 

 

 

1,927

 

Long-term debt

 

 

4,296

 

 

 

4,294

 

Lease liabilities

 

 

245

 

 

 

244

 

Asset retirement obligations

 

 

391

 

 

 

380

 

Other long-term liabilities

 

 

458

 

 

 

426

 

Long-term liabilities associated with discontinued operations

 

 

162

 

 

 

185

 

Deferred income taxes

 

 

 

 

 

341

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.10 par value. Authorized 1.0 billion shares; issued

   383 million and 382 million shares in 2020 and 2019, respectively

 

 

38

 

 

 

38

 

Additional paid-in capital

 

 

2,720

 

 

 

2,735

 

Retained earnings

 

 

586

 

 

 

3,148

 

Accumulated other comprehensive loss

 

 

(117

)

 

 

(119

)

Total stockholders’ equity attributable to Devon

 

 

3,227

 

 

 

5,802

 

Noncontrolling interests

 

 

126

 

 

 

118

 

Total equity

 

 

3,353

 

 

 

5,920

 

Total liabilities and equity

 

$

10,357

 

 

$

13,717

 

 

See accompanying notes to consolidated financial statements

 

 

 

 


8

 


Table of Contents

 

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

(Accumulated

 

 

Earnings

 

 

Treasury

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit)

 

 

(Loss)

 

 

Stock

 

 

Interests

 

 

Equity

 

 

 

(Unaudited)

 

Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2020

 

 

383

 

 

$

38

 

 

$

2,701

 

 

$

1,298

 

 

$

(118

)

 

$

 

 

$

121

 

 

$

4,040

 

Net earnings (loss)

 

 

 

 

 

 

 

 

 

 

 

(670

)

 

 

 

 

 

 

 

 

2

 

 

 

(668

)

Other comprehensive earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

 

 

 

(42

)

Share-based compensation

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

6

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

Balance as of June 30, 2020

 

 

383

 

 

$

38

 

 

$

2,720

 

 

$

586

 

 

$

(117

)

 

$

 

 

$

126

 

 

$

3,353

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2019

 

 

417

 

 

$

42

 

 

$

3,518

 

 

$

3,280

 

 

$

1,064

 

 

$

(47

)

 

$

 

 

$

7,857

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

495

 

 

 

 

 

 

 

 

 

 

 

 

495

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,181

)

 

 

 

 

 

 

 

 

(1,181

)

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(164

)

 

 

 

 

 

(164

)

Common stock retired

 

 

(7

)

 

 

(1

)

 

 

(190

)

 

 

 

 

 

 

 

 

191

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(37

)

 

 

 

 

 

 

 

 

 

 

 

(37

)

Share-based compensation

 

 

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

Balance as of June 30, 2019

 

 

410

 

 

$

41

 

 

$

3,352

 

 

$

3,738

 

 

$

(117

)

 

$

(20

)

 

$

 

 

$

6,994

 

Six Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2019

 

 

382

 

 

$

38

 

 

$

2,735

 

 

$

3,148

 

 

$

(119

)

 

$

 

 

$

118

 

 

$

5,920

 

Net earnings (loss)

 

 

 

 

 

 

 

 

 

 

 

(2,486

)

 

 

 

 

 

 

 

 

3

 

 

 

(2,483

)

Other comprehensive earnings, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Restricted stock grants, net of cancellations

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54

)

 

 

 

 

 

(54

)

Common stock retired

 

 

(3

)

 

 

 

 

 

(54

)

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(76

)

 

 

 

 

 

 

 

 

 

 

 

(76

)

Share-based compensation

 

 

1

 

 

 

 

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

Balance as of June 30, 2020

 

 

383

 

 

$

38

 

 

$

2,720

 

 

$

586

 

 

$

(117

)

 

$

 

 

$

126

 

 

$

3,353

 

Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

 

450

 

 

$

45

 

 

$

4,486

 

 

$

3,650

 

 

$

1,027

 

 

$

(22

)

 

$

 

 

$

9,186

 

Effect of adoption of lease accounting

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

 

 

 

 

 

 

 

 

 

(19

)

Net earnings

 

 

 

 

 

 

 

 

 

 

 

178

 

 

 

 

 

 

 

 

 

 

 

 

178

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,144

)

 

 

 

 

 

 

 

 

(1,144

)

Restricted stock grants, net of cancellations

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,206

)

 

 

 

 

 

(1,206

)

Common stock retired

 

 

(43

)

 

 

(4

)

 

 

(1,204

)

 

 

 

 

 

 

 

 

1,208

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(71

)

 

 

 

 

 

 

 

 

 

 

 

(71

)

Share-based compensation

 

 

 

 

 

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70

 

Balance as of June 30, 2019

 

 

410

 

 

$

41

 

 

$

3,352

 

 

$

3,738

 

 

$

(117

)

 

$

(20

)

 

$

 

 

$

6,994

 

 

 

See accompanying notes to consolidated financial statements

 

9

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Summary of Significant Accounting Policies

The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2019 Annual Report on Form 10-K.

The accompanying unaudited interim financial statements 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, 2020 and 2019 and Devon’s financial position as of June 30, 2020. As further discussed in Note 17, Devon reached an agreement to sell its Barnett Shale assets in December 2019, which was amended in April 2020, and sold its Canadian operations in the second quarter of 2019. Activity relating to Devon’s Barnett Shale assets, inclusive of properties divested as partial sales of the Barnett Shale common operating field in previous reporting periods located primarily in Johnson and Wise counties, Texas, and its Canadian operations are classified as discontinued operations within Devon’s consolidated statements of comprehensive earnings and consolidated statements of cash flows. The associated assets and liabilities of Devon’s Barnett Shale assets and Canadian operations are presented as assets and liabilities associated with discontinued operations on the consolidated balance sheets.

During the fourth quarter of 2019, Devon entered into an agreement to form Cotton Draw Midstream, L.L.C. (“CDM”), a joint-venture entity in the Delaware Basin with an affiliate of QL Capital Partners, LP (“QLCP”). Devon holds a controlling interest in CDM and the portions of CDM’s net earnings and equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated statements of comprehensive earnings and consolidated balance sheets. CDM is considered a VIE to Devon. The assets of CDM cannot be used by Devon for general corporate purposes and are included in and disclosed parenthetically on Devon's consolidated balance sheets. The carrying amount of liabilities related to CDM for which the creditors do not have recourse to Devon's assets are also included in, and disclosed parenthetically, on Devon's consolidated balance sheets if material.

 

Disaggregation of Revenue

 

The following table presents revenue from contracts with customers that are disaggregated based on the type of good or service.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Oil

 

$

296

 

 

$

750

 

 

$

958

 

 

$

1,409

 

Gas

 

 

72

 

 

 

73

 

 

 

142

 

 

 

211

 

NGL

 

 

56

 

 

 

113

 

 

 

131

 

 

 

235

 

Oil, gas and NGL sales

 

 

424

 

 

 

936

 

 

 

1,231

 

 

 

1,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

 

140

 

 

 

394

 

 

 

469

 

 

 

750

 

Gas

 

 

79

 

 

 

172

 

 

 

171

 

 

 

390

 

NGL

 

 

110

 

 

 

164

 

 

 

247

 

 

 

355

 

Total marketing revenues

 

 

329

 

 

 

730

 

 

 

887

 

 

 

1,495

 

Midstream revenues

 

 

2

 

 

 

 

 

 

4

 

 

 

 

Marketing and midstream revenues

 

 

331

 

 

 

730

 

 

 

891

 

 

 

1,495

 

Total revenues from contracts with customers

 

$

755

 

 

$

1,666

 

 

$

2,122

 

 

$

3,350

 

 

 


10

 


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Recently Adopted Accounting Standards

 

In 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. This ASU changes the impairment model for trade receivables, held-to-maturity debt securities, net investments in leases, loans and other financial assets measured at amortized cost from the current “incurred loss” model to a new forward-looking “expected loss” model. Devon adopted this ASU in the first quarter of 2020 using the modified retrospective approach. Devon assesses credit risk by class of account type which includes cash equivalents and oil and gas, marketing and midstream, joint interest and other accounts receivable. These classes are then further evaluated using a probability weighted scenario assessment based on historical losses and a probability of future default. This evaluation is supported by an assessment of risk factors such as the age of receivable, current macro-economic conditions, credit rating of the counterparty and our historical loss rate. This adoption did not have a material impact on Devon’s consolidated financial statements.

 

2.Divestitures

 

Discontinued Operations – Upstream Assets

 

In June 2019, Devon completed the sale of substantially all of its oil and gas assets and operations in Canada to Canadian Natural Resources Limited for proceeds, net of purchase price adjustments, of $2.6 billion ($3.4 billion Canadian dollars), and recognized a pre-tax gain of $223 million ($425 million, net of tax, primarily due to a significant deferred tax benefit) in 2019. Additional information can be found in Note 17.

 

Devon announced the sale of its Barnett Shale assets to BKV in December 2019 and subsequently amended the agreement in April 2020. Under the amended terms, Devon has agreed to sell its Barnett Shale assets for $570 million in cash, before purchase price adjustments, at closing, which is scheduled for October 1, 2020. Under the terms of the agreement, Devon received deposit funds of $170 million in April 2020. Devon recognized a $748 million asset impairment related to these assets in the fourth quarter of 2019 and an incremental $179 million asset impairment during the first quarter of 2020. Additional information can be found in Note 17.

 

Continuing Operations – Upstream Assets

 

During the first quarter of 2020, Devon entered into a farmout agreement in which the third party to the agreement can participate in the development of certain Devon-owned non-operated interests in the Delaware Basin. Under the agreement, Devon will periodically transfer working interests to the third party, who will then fund its share of operating and development costs. Once certain investment hurdles are met, a portion of the working interest held by the third party will revert back to Devon. No material activity occurred during the first six months of 2020.

 

In the first quarter of 2019, Devon received proceeds of approximately $300 million and recognized a $45 million net gain on asset dispositions, primarily from sales of non-core assets in the Permian Basin. In aggregate, the total estimated proved reserves associated with these divested assets were approximately 25 MMBoe.

 

3.Derivative Financial Instruments

Objectives and Strategies

Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps and costless price collars. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. As of June 30, 2020, Devon did not have any open interest rate swap contracts.

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


11


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Counterparty Credit Risk

By using derivative financial instruments, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment-grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally contain provisions that provide for collateral payments if Devon’s or its counterparty’s credit rating falls below certain credit rating levels. As of June 30, 2020, Devon did 0t hold any cash collateral of its counterparties.

Commodity Derivatives

As of June 30, 2020, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume

(Bbls/d)

 

 

Weighted

Average

Price ($/Bbl)

 

 

Volume

(Bbls/d)

 

 

Weighted

Average Floor

Price ($/Bbl)

 

 

Weighted

Average

Ceiling Price

($/Bbl)

 

Q3-Q4 2020

 

 

87,750

 

 

$

36.65

 

 

 

43,500

 

 

$

50.96

 

 

$

60.96

 

Q1-Q4 2021

 

 

23,558

 

 

$

35.69

 

 

 

15,964

 

 

$

41.24

 

 

$

51.24

 

 

 

 

 

Oil Basis Swaps

 

Period

 

Index

 

Volume

(Bbls/d)

 

 

Weighted Average

Differential to WTI

($/Bbl)

 

Q3-Q4 2020

 

Argus MEH

 

 

52,500

 

 

$

0.42

 

Q3-Q4 2020

 

Midland Sweet

 

 

32,000

 

 

$

(1.23

)

Q3-Q4 2020

 

NYMEX Roll

 

 

54,000

 

 

$

0.38

 

Q1-Q4 2021

 

Midland Sweet

 

 

7,000

 

 

$

1.27

 

 

As of June 30, 2020, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.

 

 

 

Price Swaps

 

 

Price Collars

 

Period

 

Volume (MMBtu/d)

 

 

Weighted Average Price ($/MMBtu)

 

 

Volume (MMBtu/d)

 

 

Weighted Average Floor Price ($/MMBtu)

 

 

Weighted Average

Ceiling Price ($/MMBtu)

 

Q3-Q4 2020

 

 

59,150

 

 

$

2.69

 

 

 

180,000

 

 

$

1.96

 

 

$

2.45

 

Q1-Q4 2021

 

 

18,699

 

 

$

2.69

 

 

 

106,055

 

 

$

2.31

 

 

$

2.81

 

 

 

 

Natural Gas Basis Swaps

 

Period

 

Index

 

Volume

(MMBtu/d)

 

 

Weighted Average

Differential to

Henry Hub

($/MMBtu)

 

Q3-Q4 2020

 

Panhandle Eastern Pipe Line

 

 

30,000

 

 

$

(0.47

)

Q3-Q4 2020

 

El Paso Natural Gas

 

 

65,000

 

 

$

(0.78

)

Q3-Q4 2020

 

Houston Ship Channel

 

 

30,000

 

 

$

(0.02

)

Q1-Q4 2021

 

El Paso Natural Gas

 

 

35,000

 

 

$

(0.92

)

 

 

12


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

As of June 30, 2020, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.

 

 

 

 

 

Price Swaps

 

Period

 

Product

 

Volume (Bbls/d)

 

 

Weighted Average Price ($/Bbl)

 

Q3-Q4 2020

 

Ethane

 

 

7,500

 

 

$

5.62

 

Q3-Q4 2020

 

Natural Gasoline

 

 

1,000

 

 

$

44.84

 

Q3-Q4 2020

 

Normal Butane

 

 

1,500

 

 

$

23.56

 

Q3-Q4 2020

 

Propane

 

 

4,500

 

 

$

25.18

 

 

Financial Statement Presentation

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

 

 

June 30, 2020

 

 

December 31, 2019

 

Commodity derivative assets:

 

 

 

 

 

 

 

 

Other current assets

 

$

95

 

 

$

49

 

Other long-term assets

 

 

6

 

 

 

1

 

Total derivative assets

 

$

101

 

 

$

50

 

Commodity derivative liabilities:

 

 

 

 

 

 

 

 

Other current liabilities

 

$

49

 

 

$

30

 

Other long-term liabilities

 

 

9

 

 

 

1

 

Total derivative liabilities

 

$

58

 

 

$

31

 

 

 

4.Share-Based Compensation

 

The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings. The vesting for certain share-based awards was accelerated in conjunction with the reduction of workforce described in Note 6 and is included in restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

G&A

 

$

39

 

 

$

44

 

Exploration expenses

 

 

 

 

 

1

 

Restructuring and transaction costs

 

 

 

 

 

24

 

Total

 

$

39

 

 

$

69

 

Related income tax benefit

 

$

 

 

$

10

 

 

13


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Under its approved long-term incentive plan, Devon granted share-based awards to certain employees in the first six months of 2020. The following table presents a summary of Devon’s unvested restricted stock awards, performance-based restricted stock awards and performance share units granted under the plan.

 

 

 

 

 

 

Performance-Based

 

 

Performance

 

 

 

Restricted Stock Awards

 

 

Restricted Stock Awards

 

 

Share Units

 

 

 

Awards

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Awards

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

Units

 

 

 

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

 

(Thousands, except fair value data)

 

Unvested at 12/31/19

 

 

4,984

 

 

$

29.65

 

 

 

153

 

 

$

33.88

 

 

 

2,155

 

 

 

 

 

$

40.35

 

Granted

 

 

3,051

 

 

$

21.93

 

 

 

 

 

$

 

 

 

688

 

 

 

 

 

$

27.89

 

Vested

 

 

(1,847

)

 

$

29.26

 

 

 

(109

)

 

$

29.51

 

 

 

(455

)

 

 

 

 

$

52.56

 

Forfeited

 

 

(162

)

 

$

25.01

 

 

 

 

 

$

 

 

 

(364

)

 

 

 

 

$

48.66

 

Unvested at 6/30/20

 

 

6,026

 

 

$

25.98

 

 

 

44

 

 

$

44.70

 

 

 

2,024

 

 

(1

)

 

$

31.87

 

 

(1)

A maximum of 4.0 million common shares could be awarded based upon Devon’s final TSR ranking.

The following table presents the assumptions related to the performance share units granted in 2020, as indicated in the previous summary table.

 

 

 

2020

 

Grant-date fair value

 

$

27.89

 

Risk-free interest rate

 

1.36%

 

Volatility factor

 

38.4%

 

Contractual term (years)

 

2.89

 

 

 

The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of June 30, 2020.

 

 

 

 

 

 

 

Performance-Based

 

 

 

 

 

 

 

Restricted Stock

 

 

Restricted Stock

 

 

Performance

 

 

 

Awards

 

 

Awards

 

 

Share Units

 

Unrecognized compensation cost

 

$

107

 

 

$

 

 

$

19

 

Weighted average period for recognition (years)

 

 

2.7

 

 

 

0.9

 

 

 

1.8

 

 

 

5.Asset Impairments

 

The following table presents a summary of Devon’s asset impairments. Unproved impairments shown below are included in exploration expenses in the consolidated statements of comprehensive earnings.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Proved oil and gas assets

 

$

 

 

$

 

 

$

2,664

 

 

$

 

Other assets

 

 

 

 

 

 

 

 

2

 

 

 

 

Total asset impairments

 

$

 

 

$

 

 

$

2,666

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unproved impairments

 

$

3

 

 

$

1

 

 

$

113

 

 

$

2

 

 


14


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Proved Oil and Gas and Other Asset Impairments

Reduced demand from the COVID-19 pandemic caused an unprecedented downturn in the price of oil. As a result, Devon reduced planned 2020 capital investment by 45%. With materially lower commodity prices and reduced near-term investment, Devon assessed all of its oil and gas fields for impairment as of March 31, 2020. For impairment determinations, Devon historically utilized NYMEX forward strip prices for the first five years and applied internally generated price forecasts for subsequent years. In response to the COVID-19 pandemic, the NYMEX forward market became highly illiquid as evidenced by materially reduced trading volumes for periods beyond 2021. Therefore, Devon supplemented the NYMEX forward strip prices with price forecasts published by reputable investment banks and reservoir engineering firms to estimate future revenues as of March 31, 2020. To measure indicated impairments, Devon used a market-based weighted-average cost of capital to discount the future net cash flows. These inputs are categorized as level 3 in the fair value hierarchy.

Devon recognized approximately $2.7 billion of proved asset impairments during the first quarter of 2020. These impairments related to the Anadarko Basin and Rockies fields in which the cost basis included acquisitions completed in 2016 and 2015, respectively, when commodity prices were much higher than they are today. During the first quarter of 2020, Devon recognized $2 million of product line fill impairments.

Unproved Impairments

Due to the downturn in the commodity price environment and reduced near-term investment as discussed above, Devon also recognized $113 million of unproved impairments during the first six months of 2020, primarily in the Rockies field.

6.Restructuring and Transaction Costs

During the first quarter of 2019, Devon announced workforce reductions and other initiatives designed to enhance its operational focus and cost structure in conjunction with the portfolio transformation discussed in Note 2. As a result, Devon recognized $63 million of restructuring expenses during the first six months of 2019. Of these expenses, $24 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, $5 million resulted from settlements of defined retirement benefits.

The following table summarizes Devon’s restructuring liabilities.

 

 

 

Other

 

 

Other

 

 

 

 

 

 

 

Current

 

 

Long-term

 

 

 

 

 

 

 

Liabilities

 

 

Liabilities

 

 

Total

 

 

 

(Millions)

 

Balance as of December 31, 2019

 

$

20

 

 

$

1

 

 

$

21

 

Changes related to prior years' restructurings

 

 

(13

)

 

 

 

 

 

(13

)

Balance as of June 30, 2020

 

$

7

 

 

$

1

 

 

$

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

39

 

 

$

3

 

 

$

42

 

Changes related to prior years' restructurings

 

 

 

 

 

(2

)

 

 

(2

)

Balance as of June 30, 2019

 

$

39

 

 

$

1

 

 

$

40

 

 

15


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

7.Income Taxes

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Earnings (loss) from continuing operations before income taxes

 

$

(680

)

 

$

219

 

 

$

(2,787

)

 

$

(278

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current income tax expense (benefit)

 

$

(3

)

 

$

3

 

 

$

(109

)

 

$

(1

)

Deferred income tax expense (benefit)

 

 

 

 

 

65

 

 

 

(311

)

 

 

(50

)

Total income tax expense (benefit)

 

$

(3

)

 

$

68

 

 

$

(420

)

 

$

(51

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

21

%

 

 

21

%

 

 

21

%

 

 

21

%

State income taxes

 

 

0

%

 

 

9

%

 

 

1

%

 

 

3

%

Change in tax legislation

 

 

0

%

 

 

0

%

 

 

3

%

 

 

0

%

Other

 

 

(1

%)

 

 

1

%

 

 

(2

%)

 

 

(6

%)

Deferred tax asset valuation allowance

 

 

(20

%)

 

 

0

%

 

 

(8

%)

 

 

0

%

Effective income tax rate

 

 

0

%

 

 

31

%

 

 

15

%

 

 

18

%

 

Devon estimates its annual effective income tax rate to record 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.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law on March 27, 2020. The CARES Act allows net operating losses generated in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back five years to offset taxable income and generate a refund. Devon intends to carry net operating losses generated in 2019 and 2020 back to 2014 and 2015, respectively. As a result, Devon recorded a $96 million income tax benefit through the first six months of 2020, and expects to record an additional $2 million income tax benefit by the end of the year.

On July 28, 2020, the Department of Treasury issued final regulations regarding the provision of the Tax Cuts and Jobs Act that limits the deduction for business interest expense. Upon preliminary review of the regulations, there are provisions that may have a favorable impact to Devon. Upon completing a full review of the final regulations, Devon expects to record the effects of this tax legislation in the third quarter of 2020.

Throughout 2019, Devon maintained a valuation allowance against certain deferred tax assets, including certain tax credits and state net operating losses. Since then, reduced demand from the COVID-19 pandemic has caused an unprecedented downturn in the commodity price environment. As a result, Devon recorded significant impairments during the first quarter of 2020 and is now in a net deferred tax asset position. Devon reassessed its position and recorded a 100% valuation allowance against all net deferred tax assets as of March 31, 2020 and remains in a full valuation allowance position as of June 30, 2020.

 

Included in “other” in the table above is the impact of increasing Devon’s unrecognized tax benefits by approximately $34 million during the first quarter of 2020.

 

 

 

16


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

8.

Net Earnings (Loss) Per Share from Continuing Operations

The following table reconciles net earnings (loss) from continuing operations and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings (loss) per share from continuing operations.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net earnings (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) from continuing operations

 

$

(679

)

 

$

151

 

 

$

(2,370

)

 

$

(227

)

Attributable to participating securities

 

 

 

 

 

(2

)

 

 

(1

)

 

 

(1

)

Basic and diluted earnings (loss) from continuing operations

 

$

(679

)

 

$

149

 

 

$

(2,371

)

 

$

(228

)

Common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding - total

 

 

383

 

 

 

415

 

 

 

383

 

 

 

425

 

Attributable to participating securities

 

 

(6

)

 

 

(6

)

 

 

(6

)

 

 

(6

)

Common shares outstanding - basic

 

 

377

 

 

 

409

 

 

 

377

 

 

 

419

 

Dilutive effect of potential common shares issuable

 

 

 

 

 

2

 

 

 

 

 

 

 

Common shares outstanding - diluted

 

 

377

 

 

 

411

 

 

 

377

 

 

 

419

 

Net earnings (loss) per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.80

)

 

$

0.37

 

 

$

(6.29

)

 

$

(0.54

)

Diluted

 

$

(1.80

)

 

$

0.37

 

 

$

(6.29

)

 

$

(0.54

)

Antidilutive options (1)

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

(1)

Amounts represent options to purchase shares of Devon’s common stock that are excluded from the diluted net earnings per share calculations because the options are antidilutive.

 

9.

Other Comprehensive Earnings (Loss)

Components of other comprehensive earnings (loss) consist of the following:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Foreign currency translation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning accumulated foreign currency translation and other

 

$

 

 

$

1,194

 

 

$

 

 

$

1,159

 

Change in cumulative translation adjustment

 

 

 

 

 

43

 

 

 

 

 

 

78

 

Release of Canadian cumulative translation adjustment (1)

 

 

 

 

 

(1,237

)

 

 

 

 

 

(1,237

)

Ending accumulated foreign currency translation and other

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning accumulated pension and postretirement benefits

 

 

(118

)

 

 

(130

)

 

 

(119

)

 

 

(132

)

Recognition of net actuarial loss and prior service cost in earnings (2)

 

 

1

 

 

 

17

 

 

 

3

 

 

 

20

 

Income tax expense

 

 

 

 

 

(4

)

 

 

(1

)

 

 

(5

)

Ending accumulated pension and postretirement benefits

 

 

(117

)

 

 

(117

)

 

 

(117

)

 

 

(117

)

Accumulated other comprehensive loss, net of tax

 

$

(117

)

 

$

(117

)

 

$

(117

)

 

$

(117

)

 

 

(1)

In conjunction with the sale of substantially all of its oil and gas assets and operations in Canada, Devon released the cumulative translation adjustment as part of its gain on the disposition of its Canadian business. See Note 17 for additional details.

 

(2)

These accumulated other comprehensive earnings (loss) components are included in the computation of net periodic benefit cost, which is a component of other expenses in the accompanying consolidated statements of comprehensive earnings.

 

17


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

10.

Supplemental Information to Statements of Cash Flows

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Changes in assets and liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

80

 

 

$

39

 

 

$

318

 

 

$

10

 

Income tax receivable

 

 

1

 

 

 

(1

)

 

 

(112

)

 

 

(1

)

Other current assets

 

 

30

 

 

 

(6

)

 

 

(8

)

 

 

3

 

Other long-term assets

 

 

 

 

 

(7

)

 

 

(24

)

 

 

(15

)

Accounts payable

 

 

(44

)

 

 

14

 

 

 

(2

)

 

 

(37

)

Revenues and royalties payable

 

 

(145

)

 

 

(62

)

 

 

(258

)

 

 

(16

)

Other current liabilities

 

 

(16

)

 

 

(66

)

 

 

(97

)

 

 

(89

)

Other long-term liabilities

 

 

(5

)

 

 

14

 

 

 

28

 

 

 

9

 

Total

 

$

(99

)

 

$

(75

)

 

$

(155

)

 

$

(136

)

Supplementary cash flow data - total operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

66

 

 

$

108

 

 

$

130

 

 

$

161

 

Income taxes paid

 

$

21

 

 

$

10

 

 

$

172

 

 

$

16

 

 

As of June 30, 2020 and December 31, 2019, Devon had approximately $130 million and $250 million, respectively, of accrued capital expenditures included in “Total property and equipment, net” and “Accounts payable” on the consolidated balance sheets.

 

11.

Accounts Receivable

Components of accounts receivable include the following:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Oil, gas and NGL sales

 

$

228

 

 

$

452

 

Joint interest billings

 

 

95

 

 

 

168

 

Marketing and midstream revenues

 

 

114

 

 

 

207

 

Other

 

 

88

 

 

 

13

 

Gross accounts receivable

 

 

525

 

 

 

840

 

Allowance for doubtful accounts

 

 

(10

)

 

 

(8

)

Net accounts receivable

 

$

515

 

 

$

832

 

 

 

12.Property, Plant and Equipment

 

The following table presents the aggregate capitalized costs related to Devon’s oil and gas and non-oil and gas activities.

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Property and equipment:

 

 

 

 

 

 

 

 

Proved

 

$

28,200

 

 

$

27,668

 

Unproved and properties under development

 

 

483

 

 

 

583

 

Total oil and gas

 

 

28,683

 

 

 

28,251

 

Less accumulated DD&A

 

 

(24,010

)

 

 

(20,693

)

Oil and gas property and equipment, net

 

 

4,673

 

 

 

7,558

 

Other property and equipment

 

 

1,735

 

 

 

1,725

 

Less accumulated DD&A

 

 

(722

)

 

 

(690

)

Other property and equipment, net (1)

 

 

1,013

 

 

 

1,035

 

Property and equipment, net

 

$

5,686

 

 

$

8,593

 

 

 

(1)

$96 million and $80 million related to CDM in 2020 and 2019, respectively.

 

18


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

During the first six months of 2020, Devon recognized asset impairments of $2.7 billion primarily related to proved oil and gas assets and $113 million of unproved impairments, which significantly reduced the carrying value of its property and equipment, net. See Note 5 for additional details.

 

13.

 

        See below for a summary of debt instruments and balances. The notes and debentures are senior, unsecured obligations of Devon.

 

 

 

June 30, 2020

 

 

December 31, 2019

 

5.85% due December 15, 2025

 

$

485

 

 

$

485

 

7.50% due September 15, 2027

 

 

73

 

 

 

73

 

7.875% due September 30, 2031

 

 

675

 

 

 

675

 

7.95% due April 15, 2032

 

 

366

 

 

 

366

 

5.60% due July 15, 2041

 

 

1,250

 

 

 

1,250

 

4.75% due May 15, 2042

 

 

750

 

 

 

750

 

5.00% due June 15, 2045

 

 

750

 

 

 

750

 

Net discount on debentures and notes

 

 

(20

)

 

 

(20

)

Debt issuance costs

 

 

(33

)

 

 

(35

)

Total long-term debt

 

$

4,296

 

 

$

4,294

 

Devon has a $3.0 billion Senior Credit Facility. As of June 30, 2020, Devon had 0 outstanding borrowings under the Senior Credit Facility and had issued $2 million in outstanding letters of credit under this facility. 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 no greater than 65%. Under the terms of the credit agreement, total capitalization is adjusted to add back noncash financial write-downs such as impairments. As of June 30, 2020, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 19.3%.

Retirement of Senior Notes

In January 2019, Devon repaid the $162 million of 6.30% senior notes at maturity.

Net Financing Costs

The following schedule includes the components of net financing costs.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest based on debt outstanding

 

$

65

 

 

$

65

 

 

$

130

 

 

$

130

 

Interest income

 

 

(2

)

 

 

(7

)

 

 

(7

)

 

 

(18

)

Other

 

 

6

 

 

 

8

 

 

 

11

 

 

 

14

 

Total net financing costs

 

$

69

 

 

$

66

 

 

$

134

 

 

$

126

 

 

14.Leases

 

The following table presents Devon’s right-of-use assets and lease liabilities as of June 30, 2020 and December 31, 2019.

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Finance

 

 

Operating

 

 

Total

 

 

Finance

 

 

Operating

 

 

Total

 

Right-of-use assets

 

$

225

 

 

$

6

 

 

$

231

 

 

$

229

 

 

$

14

 

 

$

243

 

Lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current lease liabilities (1)

 

$

7

 

 

$

4

 

 

$

11

 

 

$

7

 

 

$

10

 

 

$

17

 

Long-term lease liabilities

 

 

242

 

 

 

3

 

 

 

245

 

 

 

240

 

 

 

4

 

 

 

244

 

Total lease liabilities

 

$

249

 

 

$

7

 

 

$

256

 

 

$

247

 

 

$

14

 

 

$

261

 

 

(1)Current lease liabilities are included in other current liabilities on the consolidated balance sheets.

19


Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Devon’s right-of-use operating lease assets are for certain leases related to real estate, drilling rigs and other equipment related to the exploration, development and production of oil and gas. Devon’s right-of-use financing lease assets are related to real estate.

 

15.

Asset Retirement Obligations

 

The following table presents the changes in Devon’s asset retirement obligations.

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Asset retirement obligations as of beginning of period

 

$

398

 

 

$

484

 

Liabilities incurred

 

 

11

 

 

 

8

 

Liabilities settled and divested

 

 

(21

)

 

 

(39

)

Revision of estimated obligation

 

 

4

 

 

��

(62

)

Accretion expense on discounted obligation

 

 

10

 

 

 

11

 

Asset retirement obligations as of end of period

 

 

402

 

 

 

402

 

Less current portion

 

 

11

 

 

 

15

 

Asset retirement obligations, long-term

 

$

391

 

 

$

387

 

 

During the first six months of 2019, Devon reduced its asset retirement obligations by $62 million, primarily due to changes in the future cost estimates and retirement dates for its oil and gas assets. Additionally, during the first six months of 2019, Devon reduced its asset retirement obligations by $29 million as a result of the non-core asset divestitures. For additional information, see Note 2.

 

16.

Stockholders’ Equity

Share Repurchase Programs

In March 2018, Devon announced a $1.0 billion share repurchase program. In June 2018, Devon announced the expansion of this program to $4.0 billion. In February 2019, Devon announced a further expansion to $5.0 billion with a December 31, 2019 expiration date. In December 2019, Devon announced a new $1.0 billion share repurchase program with a December 31, 2020 expiration date. Under the new program, $800 million of the $1.0 billion authorization is conditioned upon the closing of the Barnett Shale divestiture for cash proceeds of at least $725 million. As the pricing and economic environment has changed due to the COVID-19 pandemic and demand challenges for commodities, Devon has temporarily suspended its share repurchase program to preserve liquidity.

The table below provides information regarding purchases of Devon’s common stock that were made under the respective share repurchase programs (shares in thousands).

 

 

 

Total Number of

Shares Purchased

 

 

Dollar Value of

Shares Purchased

 

 

Average Price Paid

per Share

 

$5.0 Billion Plan

 

 

 

 

 

 

 

 

 

 

 

 

Full year 2018

 

 

78,149

 

 

$

2,978

 

 

$

38.11

 

First quarter 2019

 

 

36,141

 

 

 

1,024

 

 

 

28.33

 

Second quarter 2019

 

 

5,911

 

 

 

159

 

 

 

27.01

 

Third quarter 2019

 

 

22,137

 

 

 

550

 

 

 

24.80

 

Fourth quarter 2019

 

 

4,436

 

 

 

94

 

 

 

21.32

 

Total inception-to-date

 

 

146,774

 

 

$

4,805

 

 

$

32.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.0 Billion Plan

 

 

 

 

 

 

 

 

 

 

 

 

First quarter 2020

 

 

2,243

 

 

$

38

 

 

$

16.85

 

Total inception-to-date

 

 

2,243

 

 

$

38

 

 

$

16.85

 

 


20


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Dividends

 

The table below summarizes the dividends Devon paid on its common stock.

 

 

Amounts

 

 

Rate Per Share

 

Quarter Ended 2020:

 

 

 

 

 

 

 

First quarter

$

34

 

 

$

0.09

 

Second quarter

 

42

 

 

$

0.11

 

Total year-to-date

$

76

 

 

 

 

 

Quarter Ended 2019:

 

 

 

 

 

 

 

First quarter

$

34

 

 

$

0.08

 

Second quarter

 

37

 

 

$

0.09

 

Total year-to-date

$

71

 

 

 

 

 

Devon raised its quarterly dividend by 22%, to $0.11 per share, beginning in the second quarter of 2020. In the second quarter of 2019, Devon increased the quarterly dividend rate from $0.08 to $0.09 per share.

On August 4, 2020, our Board of Directors approved a $0.26 per share (approximately $100 million total) special dividend to be payable as of October 1, 2020, to holders of record as of August 14, 2020.

 

 

17.

Discontinued Operations and Assets Held For Sale

 

Barnett Shale

 

In 2019, Devon announced that it had entered into an agreement to sell its Barnett Shale assets to BKV and subsequently amended the agreement in April 2020. Under the amended terms, Devon has agreed to sell its Barnett Shale assets for $570 million in cash, before purchase price adjustments, at closing, which is scheduled for October 1, 2020. Additionally, the agreement provides for contingent earnout payments to Devon of up to $260 million based upon future commodity prices, with upside participation beginning at a $2.75 Henry Hub natural gas price or a $50 WTI oil price. The contingent payment period commences on January 1, 2021 and has a term of four years. Under the terms of the agreement, Devon received deposit funds of $170 million in April 2020. The deposit is being held by Devon pursuant to the terms of the sale agreement, which only requires Devon to return such funds to BKV in the event the transaction does not close as a result of Devon’s breach of its closing obligations. The deposit is classified as current liabilities associated with discontinued operations on Devon’s consolidated balance sheets.

 

In connection with the announced sale of its Barnett Shale assets, approximately $88 million of the U.S. reporting unit goodwill was allocated to the Barnett Shale assets. Additionally, Devon ceased depreciation for all property, plant and equipment classified as assets held for sale on the date the sales agreement was approved by the Board of Directors. Devon also recognized a $748 million asset impairment in the fourth quarter of 2019 related to these assets, primarily due to the difference between the net carrying value and the purchase price, net of estimated customary purchase price adjustments. During the first quarter of 2020, Devon adjusted the estimated impairment $179 million, primarily due to the amended agreement terms. The valuation of the future contingent earnout payments included in the March 31, 2020 Barnett Shale impairment computation was $41 million. The value was derived utilizing a Monte Carlo valuation model and qualifies as a level 3 fair value measurement.

 

As of June 30, 2020, Devon has restricted approximately $20 million of cash to fund obligations in connection with the abandonment of certain gas processing contracts related to divestitures of other Barnett Shale assets that occurred in 2018 and is classified as cash restricted for discontinued operations on the consolidated balance sheets. Cash payments for these charges total approximately $2 million per quarter.

 

Canada

 

In the second quarter of 2019, Devon completed the sale of its Canadian business for $2.6 billion ($3.4 billion Canadian dollars), net of purchase price adjustments, and recognized a pre-tax gain of $223 million ($425 million net of tax, primarily due to a significant deferred tax benefit) in 2019. Current (cash) income and withholding taxes associated with the Canadian business were

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

approximately $175 million and were paid in the first half of 2020. The disposition of substantially all of Devon’s Canadian oil and gas assets resulted in Devon releasing its historical cumulative foreign currency translation adjustment of $1.2 billion from accumulated other comprehensive earnings to be included within the gain computation. The historical cumulative foreign currency translation portion of the gain is not taxable.

 

During the third quarter of 2019, Devon utilized a portion of the sales proceeds to early retire its $500 million of the 4.00% senior notes due July 15, 2021 and $1.0 billion of the 3.25% senior notes due May 15, 2022. Devon recognized a charge on the early retirement of these notes consisting of $52 million in cash retirement costs and $6 million of noncash charges.

 

As of June 30, 2020, Devon has restricted approximately $175 million of cash to fund obligations retained related to the Canadian business and is classified as cash restricted for discontinued operations on the consolidated balance sheets. The remaining obligations consist of a firm transportation agreement and office leases. Cash payments for these charges total approximately $6 million per quarter.

 

The following table presents the amounts reported in the consolidated statements of comprehensive earnings as discontinued operations.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

Barnett Shale

 

 

Canada

 

 

Total

 

 

Barnett Shale

 

 

Canada

 

 

Total

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil, gas and NGL sales

 

$

77

 

 

$

 

 

$

77

 

 

$

169

 

 

$

 

 

$

169

 

Total revenues

 

 

77

 

 

 

 

 

 

77

 

 

 

169

 

 

 

 

 

 

169

 

Production expenses

 

 

74

 

 

 

 

 

 

74

 

 

 

148

 

 

 

 

 

 

148

 

Asset impairments

 

 

 

 

 

 

 

 

 

 

 

179

 

 

 

 

 

 

179

 

Asset dispositions

 

 

 

 

 

(2

)

 

 

(2

)

 

 

 

 

 

(2

)

 

 

(2

)

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Financing costs, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Other expenses

 

 

2

 

 

 

(6

)

 

 

(4

)

 

 

(11

)

 

 

4

 

 

 

(7

)

Total expenses

 

 

76

 

 

 

(8

)

 

 

68

 

 

 

316

 

 

 

1

 

 

 

317

 

Earnings (loss) from discontinued operations before income taxes

 

 

1

 

 

 

8

 

 

 

9

 

 

 

(147

)

 

 

(1

)

 

 

(148

)

Income tax benefit

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

 

 

 

(32

)

Net earnings (loss) from discontinued operations, net of tax

 

$

1

 

 

$

8

 

 

$

9

 

 

$

(115

)

 

$

(1

)

 

$

(116

)

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil, gas and NGL sales

 

$

115

 

 

$

379

 

 

$

494

 

 

$

264

 

 

$

730

 

 

$

994

 

Oil, gas and NGL derivatives

 

 

 

 

 

9

 

 

 

9

 

 

 

 

 

 

(95

)

 

 

(95

)

Marketing and midstream revenues

 

 

 

 

 

12

 

 

 

12

 

 

 

 

 

 

38

 

 

 

38

 

Total revenues

 

 

115

 

 

 

400

 

 

 

515

 

 

 

264

 

 

 

673

 

 

 

937

 

Production expenses

 

 

76

 

 

 

153

 

 

 

229

 

 

 

157

 

 

 

294

 

 

 

451

 

Exploration expenses

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

13

 

 

 

13

 

Marketing and midstream expenses

 

 

 

 

 

9

 

 

 

9

 

 

 

 

 

 

18

 

 

 

18

 

Depreciation, depletion and amortization

 

 

20

 

 

 

49

 

 

 

69

 

 

 

40

 

 

 

128

 

 

 

168

 

Asset impairments

 

 

 

 

 

37

 

 

 

37

 

 

 

 

 

 

37

 

 

 

37

 

Asset dispositions

 

 

1

 

 

 

(189

)

 

 

(188

)

 

 

2

 

 

 

(189

)

 

 

(187

)

General and administrative expenses

 

 

 

 

 

13

 

 

 

13

 

 

 

 

 

 

31

 

 

 

31

 

Financing costs, net

 

 

 

 

 

13

 

 

 

13

 

 

 

 

 

 

26

 

 

 

26

 

Restructuring and transaction costs

 

 

 

 

 

236

 

 

 

236

 

 

 

 

 

 

239

 

 

 

239

 

Other expenses

 

 

 

 

 

31

 

 

 

31

 

 

 

6

 

 

 

3

 

 

 

9

 

Total expenses

 

 

97

 

 

 

356

 

 

 

453

 

 

 

205

 

 

 

600

 

 

 

805

 

Earnings from discontinued operations before income taxes

 

 

18

 

 

 

44

 

 

 

62

 

 

 

59

 

 

 

73

 

 

 

132

 

Income tax expense (benefit)

 

 

3

 

 

 

(285

)

 

 

(282

)

 

 

12

 

 

 

(285

)

 

 

(273

)

Net earnings from discontinued operations, net of tax

 

$

15

 

 

$

329

 

 

$

344

 

 

$

47

 

 

$

358

 

 

$

405

 

 

 


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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

The following table presents the carrying amounts of the assets and liabilities associated with discontinued operations on the consolidated balance sheets.

 

 

As of June 30, 2020

 

 

As of December 31, 2019

 

 

 

Barnett Shale

 

 

Canada

 

 

Total

 

 

Barnett Shale

 

 

Canada

 

 

Total

 

Cash restricted for discontinued operations

 

$

20

 

 

$

175

 

 

$

195

 

 

$

25

 

 

$

355

 

 

$

380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

47

 

 

$

2

 

 

$

49

 

 

$

38

 

 

$

1

 

 

$

39

 

Other current assets

 

 

5

 

 

 

2

 

 

 

7

 

 

 

5

 

 

 

2

 

 

 

7

 

Oil and gas property and equipment, based on

   successful efforts accounting, net

 

 

593

 

 

 

 

 

 

593

 

 

 

751

 

 

 

 

 

 

751

 

Other property and equipment, net

 

 

11

 

 

 

 

 

 

11

 

 

 

11

 

 

 

 

 

 

11

 

Goodwill

 

 

88

 

 

 

 

 

 

88

 

 

 

88

 

 

 

 

 

 

88

 

Other long-term assets

 

 

 

 

 

82

 

 

 

82

 

 

 

 

 

 

81

 

 

 

81

 

Total assets associated with discontinued operations

 

$

744

 

 

$

86

 

 

$

830

 

 

$

893

 

 

$

84

 

 

$

977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

18

 

 

$

3

 

 

$

21

 

 

$

15

 

 

$

4

 

 

$

19

 

Revenues and royalties payable

 

 

33

 

 

 

3

 

 

 

36

 

 

 

44

 

 

 

3

 

 

 

47

 

Other current liabilities

 

 

188

 

 

 

53

 

 

 

241

 

 

 

19

 

 

 

233

 

 

 

252

 

Asset retirement obligations

 

 

143

 

 

 

 

 

 

143

 

 

 

141

 

 

 

 

 

 

141

 

Other long-term liabilities

 

 

15

 

 

 

147

 

 

 

162

 

 

 

16

 

 

 

169

 

 

 

185

 

Total liabilities associated with discontinued operations

 

$

397

 

 

$

206

 

 

$

603

 

 

$

235

 

 

$

409

 

 

$

644

 

 

18.

Commitments and Contingencies

Devon is party to various legal actions arising in the normal course of business. Matters that are probable of an 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 likely 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 oil and natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. Devon is currently named as a defendant in a number of such lawsuits, including some lawsuits in which the plaintiffs seek to certify classes of similarly situated plaintiffs. Among the allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with oil, natural gas and NGLs produced and sold. Devon is also involved in governmental agency proceedings and royalty audits and is subject to related contracts and regulatory controls in the ordinary course of business, some that may lead to additional royalty claims. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.

Environmental and Other 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.

Beginning in 2013, various parishes in Louisiana filed suit against more than 100 oil and gas companies, including Devon, alleging that the companies’ operations and activities in certain fields violated the State and Local Coastal Resource Management Act of 1978, as amended, and caused substantial environmental contamination, subsidence and other environmental damages to land and water bodies located in the coastal zone of Louisiana. The plaintiffs’ claims against Devon relate primarily to the operations of several of Devon’s corporate predecessors. The plaintiffs seek, among other things, the payment of the costs necessary to clear, re-vegetate and otherwise restore the allegedly impacted areas. Although Devon cannot predict the ultimate outcome of these matters, Devon is vigorously defending against these claims.

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Table of Contents

DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Various municipalities and other governmental and private parties in California have filed legal proceedings against certain oil and gas companies, including Devon, seeking relief to abate alleged impacts of climate change. These proceedings include far-reaching claims for monetary damages and injunctive relief. Although Devon cannot predict the ultimate outcome of these matters, Devon believes these claims to be baseless and intends to vigorously defend against the proceedings.

 

19.

Fair Value Measurements

The following table provides carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, cash restricted for discontinued operations, accounts receivable, other current receivables, accounts payable, other current payables, accrued expenses and lease liabilities included in the accompanying consolidated balance sheets approximated fair value at June 30, 2020 and December 31, 2019, as applicable. Therefore, such financial assets and liabilities are not presented in the following table. Additionally, information regarding the fair values of oil and gas assets is provided in Note 5.

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

Carrying

 

 

Total Fair

 

 

Level 1

 

 

Level 2

 

 

 

Amount

 

 

Value

 

 

Inputs

 

 

Inputs

 

June 30, 2020 assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

831

 

 

$

831

 

 

$

831

 

 

$

 

Commodity derivatives

 

$

101

 

 

$

101

 

 

$

 

 

$

101

 

Commodity derivatives

 

$

(58

)

 

$

(58

)

 

$

 

 

$

(58

)

Debt

 

$

(4,296

)

 

$

(4,382

)

 

$

 

 

$

(4,382

)

December 31, 2019 assets (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

702

 

 

$

702

 

 

$

702

 

 

$

 

Commodity derivatives

 

$

50

 

 

$

50

 

 

$

 

 

$

50

 

Commodity derivatives

 

$

(31

)

 

$

(31

)

 

$

 

 

$

(31

)

Debt

 

$

(4,294

)

 

$

(5,376

)

 

$

 

 

$

(5,376

)

 

The following methods and assumptions were used to estimate the fair values in the table above.

Level 1 Fair Value Measurements

Cash equivalents – Amounts consist primarily of money market investments and the fair value approximates the carrying value.

Level 2 Fair Value Measurements

 

Commodity derivatives – The fair value of commodity derivatives is estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.

 

Debt – Devon’s debt instruments do not consistently trade actively in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity when active trading is not available.

 

 

24


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis addresses material changes in our results of operations for the three-month and six-month periods ended June 30, 2020 compared to previous periods and in our financial condition and liquidity since December 31, 2019. For information regarding our critical accounting policies and estimates, see our 2019 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

COVID – 19

A novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced in China in late 2019 and has subsequently spread to multiple countries worldwide, resulting in a global pandemic and health crisis. Devon began actively monitoring COVID-19 in January 2020 and formally established a COVID-19 cross-functional planning team at the beginning of March. The COVID-19 team is focused on two key priorities: the health and safety of our employees and contractors and the uninterrupted operation of our business.

 

 

Health and safety – The COVID-19 team has developed and implemented a number of safety measures, which have successfully kept our workforce healthy and safe. The COVID-19 team has established an informational campaign to provide employees an understanding of the virus risk factors and safety measures, as well as timely updates from governmental stay-at-home regulations. Expectations have also been set for employees to communicate immediately if they, or someone they have been in contact with, has experienced symptoms or tested positive for COVID-19. Other measures have included closing all of Devon’s office buildings and locations to the public, implementing social distancing and encouraging employees to work from home. Beginning in late March, more than 90% of the workforce assigned to Devon’s Oklahoma City Headquarters office were primarily working from home until the vast majority returned to the office late in the second quarter. The COVID-19 team also strongly encourages employees to wear masks, reinforces social distancing measures and continues to perform targeted and routine intensive and deep cleaning of all Devon office locations.

 

 

Uninterrupted operation of our business – Beyond workforce safety measures, the COVID-19 team has worked with government officials to ensure our business continues to be deemed an essential business or infrastructure. The COVID-19 team has ensured technology and resources are available for employees to execute their job duties while working from home and implemented further social distancing and contactless initiatives in our oil and gas field operations. The collective efforts of our COVID-19 team and our entire workforce have enabled us to avoid the need to implement COVID-19 containment or mitigation measures, which would require closure or suspension of any of our operations.

 

This outbreak and the related responses of governmental authorities and others to limit the spread of the virus have significantly reduced global economic activity, resulting in an unprecedented decline in the demand for oil and other commodities. This supply-and-demand imbalance was exacerbated by uncertainty regarding the future global supply of oil due to disputes between Russia and the members of OPEC in March 2020. These factors caused a swift and material deterioration in commodity prices in early 2020, with NYMEX WTI oil prices falling from a high of over $60/Bbl at the beginning of the year to below $20/Bbl in April 2020. By the end of the second quarter of 2020, NYMEX WTI oil prices recovered to approximately $40/Bbl.

 

Despite the current economic challenges, we remain focused on building economic value by executing on our strategic priorities of maximizing free cash flow, maintaining low leverage, delivering cash returns to our shareholders and pursuing ESG excellence. Our recent performance highlights for these priorities include the following items: 

 

 

Efficiency gains drove second quarter capital expenditures 10% below our plan, which had already been reduced 45% in response to COVID-19 effects on commodity benchmark prices 

 

Second-quarter oil production totaled 153 MBbls/d, exceeding our plan by 2% 

 

Operating costs continued to decline in the second quarter led by 17% and 23% decreases from the first quarter for production and administrative expenses, respectively 

 

Initiatives are underway to deliver $300 million of sustainable, annualized cash cost reductions by year-end 2020 

 

Exited the second-quarter with $4.7 billion of liquidity, including $1.7 billion of cash, with no near-term debt maturities 

 

Accelerating Barnett Shale closing to October 1, 2020, from previously scheduled date of December 31, 2020 

 

Board of Directors approved a $0.26 per share (approximately $100 million total) special dividend payable as of October 1, 2020

 

Board of Directors approved a $1.5 billion debt repurchase plan 


25


Table of Contents

Overview of 2020 Results

 

We operate under a disciplined returns-driven strategy focused on delivering strong operational results, financial strength and value to our shareholders and continuing our commitment to environmental, social and governance excellence, which provides us with a strong foundation to grow returns, margin and profitability. We continue to execute on our strategy and navigate through the challenged economic environment by protecting our financial strength, tailoring our capital investment to market conditions, improving our cash cost structure and preserving operational continuity.

 

Trends of our quarterly earnings, operating cash flow, EBITDAX and capital expenditures are shown below. The quarterly earnings chart presents amounts pertaining to both Devon’s continuing and discontinuing operations. The quarterly cash flow chart presents amounts pertaining to Devon’s continuing operations. “Core earnings” and “EBITDAX” are financial measures not prepared in accordance with GAAP. For a description of these measures, including reconciliations to the comparable GAAP measures, see “Non-GAAP Measures” in this Item 2.

 

 

Our net earnings in recent quarters have been significantly impacted by divestiture transactions, asset impairments and temporary, noncash adjustments to the value of our commodity hedges. Net earnings in the second quarter of 2020 included a $0.5 billion hedge valuation loss, net of tax. Net earnings in the first quarter of 2020 included $2.3 billion of asset impairments on our proved and unproved properties and a $0.5 billion hedge valuation gain, both net of taxes. Net earnings in the fourth quarter of 2019 included $0.6 billion of asset impairments and a $0.1 billion hedge valuation loss, both net of taxes. Net earnings in the second quarter of 2019 included $0.3 billion for net after-tax gains and charges related to our Canadian disposition. Excluding these amounts, our core earnings have been more stable over recent quarters but continue to be heavily influenced by commodity prices.

 

Despite our portfolio enhancements, aggressive cost reductions and operational advancements, our financial results were challenged by commodity prices and deterioration of the macro-economic environment resulting from the unprecedented COVID-19 pandemic. Our earnings declined from the first quarter of 2020 to the second quarter of 2020 due to a decrease in overall commodity prices. Led by a 39% decrease in WTI from the first quarter of 2020 to the second quarter of 2020, our unhedged combined realized price dropped 44%. In response to this commodity price environment, we were able to reduce our production and general and administrative costs 19% compared to the first quarter of 2020.

 

26


Table of Contents

 

Like earnings, our operating cash flow is sensitive to volatile commodity prices. EBITDAX, which excludes financial amounts related to discontinued operations, and operating cash flows were significantly lower during the second quarter of 2020 resulting from impacts of the COVID-19 pandemic and declines in commodity prices. As operating cash flow has declined, we have reduced our 2020 capital development plans approximately $800 million, or 45% compared to the original capital budget.

 

We exited the second quarter of 2020 with $4.7 billion of liquidity comprised of $1.7 billion of cash, inclusive of $195 million of cash restricted for discontinued operations, and $3.0 billion of available credit under our Senior Credit Facility. We have $4.3 billion of debt outstanding with no maturities until the end of 2025. We currently have approximately 95% of our expected oil production and approximately 45% of our expected gas production protected with hedges for the remainder of 2020. These contracts consist of collars and swaps based off the WTI oil benchmark and the Henry Hub natural gas index. Additionally, we have entered into regional basis swaps in an effort to protect price realizations across our portfolio.

Results of Operations

 

The following graphs, discussion and analysis are intended to provide an understanding of our results of operations and current financial condition. To facilitate the review, these numbers are being presented before consideration of earnings attributable to noncontrolling interests. Analysis of the change in net earnings from continuing operations is shown below and analysis of the change in net earnings from discontinued operations is shown on page 36.

 

Continuing Operations

 

Q2 2020 vs. Q1 2020

Our second quarter 2020 net loss from continuing operations was $677 million, compared to a net loss of $1.7 billion for the first quarter of 2020. The graph below shows the change in net loss from the first quarter of 2020 to the second quarter of 2020. The material changes are further discussed by category on the following pages.

 

 

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Table of Contents

 

Production Volumes

 

 

Q2 2020

 

 

% of Total

 

 

Q1 2020

 

 

Change

 

Oil (MBbls/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

79

 

 

 

52

%

 

 

84

 

 

 

- 5

%

Powder River Basin

 

 

18

 

 

 

12

%

 

 

21

 

 

 

- 14

%

Eagle Ford

 

 

27

 

 

 

18

%

 

 

26

 

 

 

+4

%

Anadarko Basin

 

 

21

 

 

 

13

%

 

 

24

 

 

 

- 11

%

Other

 

 

8

 

 

 

5

%

 

 

8

 

 

 

- 6

%

Total

 

 

153

 

 

 

100

%

 

 

163

 

 

 

- 6

%

 

 

 

Q2 2020

 

 

% of Total

 

 

Q1 2020

 

 

Change

 

Gas (MMcf/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

241

 

 

 

39

%

 

 

244

 

 

 

- 1

%

Powder River Basin

 

 

20

 

 

 

3

%

 

 

29

 

 

 

- 29

%

Eagle Ford

 

 

87

 

 

 

14

%

 

 

86

 

 

 

+2

%

Anadarko Basin

 

 

262

 

 

 

43

%

 

 

272

 

 

 

- 4

%

Other

 

 

4

 

 

 

1

%

 

 

3

 

 

 

+13

%

Total

 

 

614

 

 

 

100

%

 

 

634

 

 

 

- 3

%

 

 

 

Q2 2020

 

 

% of Total

 

 

Q1 2020

 

 

Change

 

NGLs (MBbls/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

29

 

 

 

42

%

 

 

37

 

 

 

- 22

%

Powder River Basin

 

 

2

 

 

 

3

%

 

 

3

 

 

 

- 15

%

Eagle Ford

 

 

12

 

 

 

17

%

 

 

9

 

 

 

+27

%

Anadarko Basin

 

 

25

 

 

 

37

%

 

 

30

 

 

 

- 14

%

Other

 

 

1

 

 

 

1

%

 

 

1

 

 

 

- 37

%

Total

 

 

69

 

 

 

100

%

 

 

80

 

 

 

- 13

%

 

 

 

Q2 2020

 

 

% of Total

 

 

Q1 2020

 

 

Change

 

Combined (MBoe/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

149

 

 

 

46

%

 

 

162

 

 

 

- 8

%

Powder River Basin

 

 

24

 

 

 

7

%

 

 

29

 

 

 

- 17

%

Eagle Ford

 

 

53

 

 

 

16

%

 

 

50

 

 

 

+7

%

Anadarko Basin

 

 

90

 

 

 

28

%

 

 

98

 

 

 

- 8

%

Other

 

 

9

 

 

 

3

%

 

 

9

 

 

 

- 6

%

Total

 

 

325

 

 

 

100

%

 

 

348

 

 

 

- 7

%

 

From the first quarter of 2020 to the second quarter of 2020, a decrease in volumes contributed to a $51 million decrease in earnings. Due to the challenged macro-economic environment, planned 2020 capital expenditures were reduced by 45% and certain marginal wells were shut-in during the second quarter resulting in lower volumes. The majority of the shut-in production was restored by the end of the second quarter.  

 

In response to the challenged current macro-economic environment and the timing of completions, we expect volumes to continue to decrease for the second half of 2020. Volumes for the third quarter are expected to range from approximately 301 to 318 MBoe/d and improve in the fourth quarter due to timing of completions.

Field Prices

 

 

Q2 2020

 

 

Realization

 

 

Q1 2020

 

 

Change

 

Oil (per Bbl)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WTI index

 

$

28.42

 

 

 

 

 

 

$

46.44

 

 

 

- 39

%

Realized price, unhedged

 

$

21.25

 

 

75%

 

 

$

44.59

 

 

 

- 52

%

Cash settlements

 

$

15.25

 

 

 

 

 

 

$

5.14

 

 

 

 

 

Realized price, with hedges

 

$

36.50

 

 

128%

 

 

$

49.73

 

 

 

- 27

%

 

 

 

Q2 2020

 

 

Realization

 

 

Q1 2020

 

 

Change

 

Gas (per Mcf)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Henry Hub index

 

$

1.71

 

 

 

 

 

 

$

1.95

 

 

 

- 12

%

Realized price, unhedged

 

$

1.29

 

 

76%

 

 

$

1.21

 

 

 

+7

%

Cash settlements

 

$

0.28

 

 

 

 

 

 

$

0.36

 

 

 

 

 

Realized price, with hedges

 

$

1.57

 

 

92%

 

 

$

1.57

 

 

 

+0

%

 

 

 

Q2 2020

 

 

Realization

 

 

Q1 2020

 

 

Change

 

NGLs (per Bbl)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mont Belvieu blended index (1)

 

$

12.57

 

 

 

 

 

 

$

14.39

 

 

 

- 13

%

Realized price, unhedged

 

$

8.89

 

 

71%

 

 

$

10.40

 

 

 

- 15

%

Cash settlements

 

$

0.51

 

 

 

 

 

 

$

0.61

 

 

 

 

 

Realized price, with hedges

 

$

9.40

 

 

75%

 

 

$

11.01

 

 

 

- 15

%

(1)Based upon composition of our NGL barrel.

 

 

 

Q2 2020

 

 

Q1 2020

 

 

Change

 

Combined (per Boe)

 

 

 

 

 

 

 

 

 

 

 

 

Realized price, unhedged

 

$

14.37

 

 

$

25.43

 

 

 

- 44

%

Cash settlements

 

$

7.83

 

 

$

3.20

 

 

 

 

 

Realized price, with hedges

 

$

22.20

 

 

$

28.63

 

 

 

- 22

%

 

From the first quarter of 2020 to the second quarter of 2020, field prices contributed to a $332 million decrease in earnings. Unhedged realized oil and NGL prices decreased primarily due to lower WTI and Mont Belvieu index prices. These decreases were partially offset by favorable hedge cash settlements across each of our products.

 

As prices deteriorated towards the end of the first quarter from the COVID-19 pandemic, we added additional oil and gas hedges for the remainder of 2020 and the year 2021. We currently have approximately 95% of our remaining 2020 oil production hedged with an average floor price of $41/Bbl and approximately 45% of our remaining 2020 gas production hedged with an average floor price of $2.20/Mcf. Additionally, we continue to build our 2021 hedge positions at market prices.

 

Hedge Settlements

 

 

 

Q2 2020

 

 

Q1 2020

 

 

Change

 

 

 

Q

 

 

 

 

 

 

 

 

 

Oil

 

$

213

 

 

$

76

 

 

 

+180

%

Natural gas

 

 

15

 

 

 

21

 

 

 

- 29

%

NGL

 

 

4

 

 

 

4

 

 

 

+0

%

Total cash settlements (1)

 

$

232

 

 

$

101

 

 

 

+130

%

 

(1)

Included as a component of oil, gas and NGL derivatives on the consolidated statements of comprehensive earnings.

 

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Table of Contents

Cash settlements as presented in the tables above represent realized gains or losses related to the instruments described in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.  

 

Production Expenses

 

 

 

Q2 2020

 

 

Q1 2020

 

 

Change

 

LOE

 

$

108

 

 

$

126

 

 

 

- 14

%

Gathering, processing & transportation

 

 

123

 

 

 

130

 

 

 

- 5

%

Production taxes

 

 

25

 

 

 

56

 

 

 

- 55

%

Property taxes

 

 

7

 

 

 

6

 

 

 

+2

%

Total

 

$

263

 

 

$

318

 

 

 

- 17

%

Per Boe:

 

 

 

 

 

 

 

 

 

 

 

 

LOE

 

$

3.69

 

 

$

3.96

 

 

 

- 7

%

Gathering, processing &

   transportation

 

$

4.16

 

 

$

4.11

 

 

 

+1

%

Percent of oil, gas and NGL sales:

 

 

 

 

 

 

 

 

 

 

 

 

Production taxes

 

 

5.9

%

 

 

6.9

%

 

 

- 14

%

 

LOE and gathering, processing and transportation costs decreased in the second quarter due to the challenged macro-economic environment which resulted in lower activity levels. Additionally, production taxes decreased due to lower oil, gas and NGL sales.

Field-Level Cash Margin

The table below presents the field-level cash margin for each of our operating areas. Field-level cash margin is computed as oil, gas and NGL sales less production expenses and is not prepared in accordance with GAAP. A reconciliation to the comparable GAAP measures is found in “Non-GAAP Measures” in this Item 2. The changes in production volumes, field prices and production expenses, shown above, had the following impact on our field-level cash margins by asset.

 

 

 

Q2 2020

 

 

$ per BOE

 

 

Q1 2020

 

 

$ per BOE

 

Field-level cash margin (non-GAAP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

$

106

 

 

$

7.81

 

 

$

260

 

 

$

17.72

 

Powder River Basin

 

 

20

 

 

$

9.09

 

 

 

54

 

 

$

20.48

 

Eagle Ford

 

 

22

 

 

$

4.50

 

 

 

87

 

 

$

19.20

 

Anadarko Basin

 

 

13

 

 

$

1.67

 

 

 

74

 

 

$

8.22

 

Other

 

 

 

 

$

0.10

 

 

 

14

 

 

$

15.55

 

Total

 

$

161

 

 

$

5.45

 

 

$

489

 

 

$

15.41

 

 

Due to lower commodity benchmark prices, our unhedged realized price per Boe dropped 44% from the first quarter to the second quarter of 2020. These lower realizations dramatically reduced our field-level cash margin and other performance measures. Consequently, we have initiatives underway to reduce annualized expenses $300 million by the end of 2020. These initiatives include decreasing annualized production expenses $125 million and general and administrative expenses $100 million. These savings will be generated from adjustments to our workforce and production operations, as well as expiries of minimum volume commitments. We also intend to reduce net financing costs $75 million upon repurchasing up to $1.5 billion of debt as authorized by our Board of Directors. 

DD&A and Asset Impairments

 

 

 

Q2 2020

 

 

Q1 2020

 

 

Change

 

Oil and gas per Boe

 

$

9.33

 

 

$

11.90

 

 

 

- 22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

276

 

 

$

377

 

 

 

- 27

%

Other property and equipment

 

 

23

 

 

 

24

 

 

 

- 2

%

Total

 

$

299

 

 

$

401

 

 

 

- 25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairments

 

$

 

 

$

2,666

 

 

N/M

 

 

Asset impairments were $2.7 billion in the first quarter of 2020 due to significant decreases in commodity prices since the end of 2019 resulting primarily from the COVID-19 pandemic. For additional information, see Note 5 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

 

DD&A decreased in the second quarter primarily due to lower volumes and lower rates resulting from impairments recorded in the first quarter of 2020.

 

General and Administrative Expenses

 

 

 

 

Q2 2020

 

 

Q1 2020

 

 

Change

 

Labor and benefits (net of reimbursements)

 

$

45

 

 

$

66

 

 

 

- 32

%

Non-labor

 

 

34

 

 

 

36

 

 

 

- 6

%

Total

 

$

79

 

 

$

102

 

 

 

- 23

%

 

G&A decreased primarily as a result of lower employee costs and benefits.

 

Other Items

 

 

Q2 2020

 

 

Q1 2020

 

 

Change in earnings

 

Commodity hedge valuation changes (1)

 

$

(593

)

 

$

619

 

 

$

(1,212

)

Marketing and midstream operations

 

 

(8

)

 

 

(18

)

 

 

10

 

Exploration expenses

 

 

12

 

 

 

112

 

 

 

100

 

Net financing costs

 

 

69

 

 

 

65

 

 

 

(4

)

Other expenses

 

 

13

 

 

 

(48

)

 

 

(61

)

 

 

 

 

 

 

 

 

 

 

$

(1,167

)

 

(1)

Included as a component of oil, gas and NGL derivatives on the consolidated statements of comprehensive earnings.

 

We recognize fair value changes on our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. For additional information, see Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

 

Marketing and midstream operations improved primarily due to downstream product inventory impairments of $17 million recognized in the first quarter of 2020.

 

Exploration expenses decreased due to $110 million of unproved asset impairments during the first quarter of 2020. For additional information, see Note 5 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

29


Table of Contents

Other expenses increased due to a severance tax refund recorded in the first quarter of 2020 related to prior periods.

 

Income Taxes

 

 

 

Q2 2020

 

 

Q1 2020

 

Current benefit

 

$

(3

)

 

$

(106

)

Deferred benefit

 

 

 

 

 

(311

)

Total benefit

 

$

(3

)

 

$

(417

)

Effective income tax rate

 

 

0

%

 

 

20

%

 

For discussion on income taxes, see Note 7 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

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Table of Contents

2020 vs. 2019

 

The following graphs, discussion and analysis are intended to provide an understanding of our results of operations and current financial condition. To facilitate the review, these numbers are being presented before consideration of earnings attributable to noncontrolling interests.

 

Q2 2020 vs. Q2 2019

 

Our second quarter 2020 net loss from continuing operations was $677 million, compared to net earnings of $151 million in the second quarter of 2019. The graph below shows the change in net earnings (loss) from the second quarter of 2019 to the second quarter of 2020. The material changes are further discussed on the following pages.

 

 

June 30, YTD 2020 vs. June 30, YTD 2019

 

Our six months ended June 30, 2020 net loss from continuing operations was $2.4 billion, compared to a net loss of $227 million for the six months ended June 30, 2019. The graph below shows the change in the net loss from the six months ended June 30, 2019 to the six months ended June 30, 2020. The material changes are further discussed on the following pages.

 

 

 

 

 

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Table of Contents

Production Volumes

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

% of Total

 

 

2019

 

 

Change

 

 

2020

 

 

% of Total

 

 

2019

 

 

Change

 

Oil (MBbls/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

79

 

 

 

52

%

 

 

67

 

 

 

+19

%

 

 

81

 

 

 

51

%

 

 

63

 

 

 

+29

%

Powder River Basin

 

 

18

 

 

 

12

%

 

 

15

 

 

 

+20

%

 

 

20

 

 

 

13

%

 

 

15

 

 

 

+30

%

Eagle Ford

 

 

27

 

 

 

18

%

 

 

23

 

 

 

+16

%

 

 

27

 

 

 

17

%

 

 

24

 

 

 

+11

%

Anadarko Basin

 

 

21

 

 

 

13

%

 

 

31

 

 

 

- 32

%

 

 

22

 

 

 

14

%

 

 

32

 

 

 

- 30

%

Other

 

 

8

 

 

 

5

%

 

 

8

 

 

 

- 1

%

 

 

8

 

 

 

5

%

 

 

9

 

 

 

- 8

%

Total

 

 

153

 

 

 

100

%

 

 

144

 

 

 

+6

%

 

 

158

 

 

 

100

%

 

 

143

 

 

 

+11

%

Gas (MMcf/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

241

 

 

 

39

%

 

 

158

 

 

 

+52

%

 

 

242

 

 

 

39

%

 

 

152

 

 

 

+60

%

Powder River Basin

 

 

20

 

 

 

3

%

 

 

22

 

 

 

- 7

%

 

 

24

 

 

 

4

%

 

 

20

 

 

 

+21

%

Eagle Ford

 

 

87

 

 

 

14

%

 

 

81

 

 

 

+8

%

 

 

87

 

 

 

14

%

 

 

82

 

 

 

+6

%

Anadarko Basin

 

 

262

 

 

 

43

%

 

 

313

 

 

 

- 16

%

 

 

267

 

 

 

43

%

 

 

323

 

 

 

- 17

%

Other

 

 

4

 

 

 

1

%

 

 

4

 

 

 

+0

%

 

 

4

 

 

 

0

%

 

 

6

 

 

 

- 38

%

Total

 

 

614

 

 

 

100

%

 

 

578

 

 

 

+6

%

 

 

624

 

 

 

100

%

 

 

583

 

 

 

+7

%

NGLs (MBbls/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

29

 

 

 

42

%

 

 

27

 

 

 

+8

%

 

 

33

 

 

 

45

%

 

 

25

 

 

 

+33

%

Powder River Basin

 

 

2

 

 

 

3

%

 

 

2

 

 

 

+20

%

 

 

3

 

 

 

3

%

 

 

2

 

 

 

+32

%

Eagle Ford

 

 

12

 

 

 

17

%

 

 

12

 

 

 

- 7

%

 

 

10

 

 

 

14

%

 

 

12

 

 

 

- 13

%

Anadarko Basin

 

 

25

 

 

 

37

%

 

 

40

 

 

 

- 37

%

 

 

28

 

 

 

37

%

 

 

38

 

 

 

- 27

%

Other

 

 

1

 

 

 

1

%

 

 

1

 

 

 

- 40

%

 

 

1

 

 

 

1

%

 

 

1

 

 

 

- 35

%

Total

 

 

69

 

 

 

100

%

 

 

82

 

 

 

- 15

%

 

 

75

 

 

 

100

%

 

 

78

 

 

 

- 5

%

Combined (MBoe/d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

 

 

149

 

 

 

46

%

 

 

120

 

 

 

+24

%

 

 

155

 

 

 

46

%

 

 

113

 

 

 

+37

%

Powder River Basin

 

 

24

 

 

 

7

%

 

 

21

 

 

 

+15

%

 

 

27

 

 

 

8

%

 

 

21

 

 

 

+28

%

Eagle Ford

 

 

53

 

 

 

16

%

 

 

49

 

 

 

+8

%

 

 

52

 

 

 

15

%

 

 

50

 

 

 

+3

%

Anadarko Basin

 

 

90

 

 

 

28

%

 

 

124

 

 

 

- 27

%

 

 

94

 

 

 

28

%

 

 

123

 

 

 

- 24

%

Other

 

 

9

 

 

 

3

%

 

 

10

 

 

 

- 9

%

 

 

9

 

 

 

3

%

 

 

11

 

 

 

- 15

%

Total

 

 

325

 

 

 

100

%

 

 

324

 

 

 

+0

%

 

 

337

 

 

 

100

%

 

 

318

 

 

 

+6

%

 

From the second quarter of 2019 to the second quarter of 2020, an increase in higher-margin oil volumes contributed to a $34 million increase in earnings. From the six months ended 2019 to the six months ended 2020, an increase in volumes contributed to a $166 million increase in earnings. Continued development in the Delaware Basin and Powder River Basin has resulted in higher production volumes during 2020 compared to 2019. These increases were partially offset by significantly lower activity in the Anadarko Basin.

 

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Table of Contents

Field Prices

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

Realization

 

 

2019

 

 

Change

 

 

2020

 

 

Realization

 

 

2019

 

 

Change

 

Oil (per Bbl)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WTI index

 

$

28.42

 

 

 

 

 

 

$

59.85

 

 

 

- 53

%

 

$

37.43

 

 

 

 

 

 

$

57.36

 

 

 

- 35

%

Realized price, unhedged

 

$

21.25

 

 

75%

 

 

$

57.11

 

 

 

- 63

%

 

$

33.27

 

 

89%

 

 

$

54.51

 

 

 

- 39

%

Cash settlements

 

$

15.25

 

 

 

 

 

 

$

(0.41

)

 

 

 

 

 

$

10.04

 

 

 

 

 

 

$

1.59

 

 

 

 

 

Realized price, with hedges

 

$

36.50

 

 

128%

 

 

$

56.70

 

 

 

- 36

%

 

$

43.31

 

 

116%

 

 

$

56.10

 

 

 

- 23

%

Gas (per Mcf)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Henry Hub index

 

$

1.71

 

 

 

 

 

 

$

2.64

 

 

 

- 35

%

 

$

1.83

 

 

 

 

 

 

$

2.90

 

 

 

- 37

%

Realized price, unhedged

 

$

1.29

 

 

76%

 

 

$

1.38

 

 

 

- 6

%

 

$

1.25

 

 

68%

 

 

$

2.00

 

 

 

- 38

%

Cash settlements

 

$

0.28

 

 

 

 

 

 

$

0.34

 

 

 

 

 

 

$

0.32

 

 

 

 

 

 

$

0.02

 

 

 

 

 

Realized price, with hedges

 

$

1.57

 

 

92%

 

 

$

1.72

 

 

 

- 9

%

 

$

1.57

 

 

86%

 

 

$

2.02

 

 

 

- 22

%

NGLs (per Bbl)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mont Belvieu blended index (1)

 

$

12.57

 

 

 

 

 

 

$

19.05

 

 

 

- 34

%

 

$

13.48

 

 

 

 

 

 

$

21.00

 

 

 

- 36

%

Realized price, unhedged

 

$

8.89

 

 

71%

 

 

$

15.00

 

 

 

- 41

%

 

$

9.70

 

 

72%

 

 

$

16.57

 

 

 

- 41

%

Cash settlements

 

$

0.51

 

 

 

 

 

 

$

1.40

 

 

 

 

 

 

$

0.56

 

 

 

 

 

 

$

1.06

 

 

 

 

 

Realized price, with hedges

 

$

9.40

 

 

75%

 

 

$

16.40

 

 

 

- 43

%

 

$

10.26

 

 

76%

 

 

$

17.63

 

 

 

- 42

%

Combined (per Boe)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized price, unhedged

 

$

14.37

 

 

 

 

 

 

$

31.79

 

 

 

- 55

%

 

$

20.09

 

 

 

 

 

 

$

32.21

 

 

 

- 38

%

Cash settlements

 

$

7.83

 

 

 

 

 

 

$

0.79

 

 

 

 

 

 

$

5.43

 

 

 

 

 

 

$

1.00

 

 

 

 

 

Total

 

$

22.20

 

 

 

 

 

 

$

32.58

 

 

 

- 32

%

 

$

25.52

 

 

 

 

 

 

$

33.21

 

 

 

- 23

%

 

(1)

Based upon composition of our NGL barrel.

 

From the second quarter of 2019 to the second quarter of 2020, field prices contributed to a $546 million decrease in earnings. From the six months ended 2019 to the six months ended 2020, field prices contributed to a $790 million decrease in earnings. Unhedged realized oil, gas and NGL prices decreased primarily due to lower WTI, Henry Hub and Mont Belvieu index prices. These decreases were partially offset by favorable hedge cash settlements across each of our products.

 

 

Hedge Settlements

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Oil

 

$

213

 

 

$

(6

)

 

$

289

 

 

$

40

 

Natural gas

 

 

15

 

 

 

18

 

 

 

36

 

 

 

2

 

NGL

 

 

4

 

 

 

11

 

 

 

8

 

 

 

15

 

Total cash settlements (1)

 

$

232

 

 

$

23

 

 

$

333

 

 

$

57

 

 

(1)

Included as a component of oil, gas and NGL derivatives on the consolidated statements of comprehensive earnings.

 

Production Expenses

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

LOE

 

$

108

 

 

$

114

 

 

 

- 6

%

 

$

234

 

 

$

224

 

 

 

+5

%

Gathering, processing & transportation

 

 

123

 

 

 

111

 

 

 

+11

%

 

 

253

 

 

 

220

 

 

 

+15

%

Production taxes

 

 

25

 

 

 

64

 

 

 

- 60

%

 

 

81

 

 

 

124

 

 

 

- 35

%

Property taxes

 

 

7

 

 

 

7

 

 

 

- 2

%

 

 

13

 

 

 

11

 

 

 

+15

%

Total

 

$

263

 

 

$

296

 

 

 

- 11

%

 

$

581

 

 

$

579

 

 

 

+0

%

Per Boe:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOE

 

$

3.69

 

 

$

3.85

 

 

 

- 4

%

 

$

3.83

 

 

$

3.90

 

 

 

- 2

%

Gathering, processing & transportation

 

$

4.16

 

 

$

3.78

 

 

 

+10

%

 

$

4.13

 

 

$

3.82

 

 

 

+8

%

Percent of oil, gas and NGL sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production taxes

 

 

5.9

%

 

 

6.8

%

 

 

- 13

%

 

 

6.6

%

 

 

6.7

%

 

 

- 2

%

33


Table of Contents

An increase in gathering, processing and transportation costs from the six months ended 2019 to the six months ended 2020 was due to higher volumes and the Anadarko minimum volume commitments which are set to expire at the end of 2020. These increases were offset by lower production taxes resulting from lower oil, gas and NGL sales.

Field-Level Cash Margin

The changes in production volumes, field prices and production expenses, shown above, had the following impact on our field-level cash margins by asset.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2020

 

 

$ per BOE

 

 

2019

 

 

$ per BOE

 

 

2020

 

 

$ per BOE

 

 

2019

 

 

$ per BOE

 

Field-Level Cash Margin (non-GAAP)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delaware Basin

$

106

 

 

$

7.81

 

 

$

267

 

 

$

24.46

 

 

$

366

 

 

$

12.97

 

 

$

501

 

 

$

24.43

 

Powder River Basin

 

20

 

 

$

9.09

 

 

 

60

 

 

$

31.79

 

 

 

74

 

 

$

15.31

 

 

 

110

 

 

$

29.44

 

Eagle Ford

 

22

 

 

$

4.50

 

 

 

120

 

 

$

26.63

 

 

 

109

 

 

$

11.58

 

 

 

249

 

 

$

27.58

 

Anadarko Basin

 

13

 

 

$

1.67

 

 

 

177

 

 

$

15.77

 

 

 

87

 

 

$

5.09

 

 

 

380

 

 

$

17.01

 

Other

 

 

 

$

0.10

 

 

 

17

 

 

$

18.93

 

 

 

14

 

 

$

8.16

 

 

 

36

 

 

$

18.17

 

Total

$

161

 

 

$

5.45

 

 

$

641

 

 

$

21.78

 

 

$

650

 

 

$

10.60

 

 

$

1,276

 

 

$

22.15

 

 

DD&A and Asset Impairments

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Oil and gas per Boe

 

$

9.33

 

 

$

11.74

 

 

 

- 20

%

 

$

10.66

 

 

$

11.73

 

 

 

- 9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas

 

$

276

 

 

$

345

 

 

 

- 20

%

 

$

653

 

 

$

676

 

 

 

- 3

%

Other property and equipment

 

 

23

 

 

 

29

 

 

 

- 20

%

 

 

47

 

 

 

58

 

 

 

- 19

%

Total

 

$

299

 

 

$

374

 

 

 

- 20

%

 

$

700

 

 

$

734

 

 

 

- 5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairments

 

$

 

 

$

 

 

N/M

 

 

$

2,666

 

 

$

 

 

N/M

 

 

DD&A decreased primarily due to lower rates resulting from asset impairments recorded in the first quarter of 2020.

 

General and Administrative Expenses

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Labor and benefits (net of reimbursements)

 

$

45

 

 

$

74

 

 

 

- 40

%

 

$

111

 

 

$

160

 

 

 

- 31

%

Non-labor

 

 

34

 

 

 

40

 

 

 

- 13

%

 

 

70

 

 

 

89

 

 

 

- 21

%

Total

 

$

79

 

 

$

114

 

 

 

- 31

%

 

$

181

 

 

$

249

 

 

 

- 27

%

 

 

Labor and benefits and non-labor expenses decreased primarily as a result of continued workforce reduction and cost savings initiatives.


34


Table of Contents

Other Items

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

Change in earnings

 

 

2020

 

 

2019

 

 

Change in earnings

 

Commodity hedge valuation changes (1)

 

$

(593

)

 

$

117

 

 

$

(710

)

 

$

26

 

 

$

(522

)

 

$

548

 

Marketing and midstream operations

 

 

(8

)

 

 

17

 

 

 

(25

)

 

 

(26

)

 

 

32

 

 

 

(58

)

Exploration expenses

 

 

12

 

 

 

7

 

 

 

(5

)

 

 

124

 

 

 

11

 

 

 

(113

)

Asset dispositions

 

 

 

 

 

(2

)

 

 

(2

)

 

 

 

 

 

(47

)

 

 

(47

)

Net financing costs

 

 

69

 

 

 

66

 

 

 

(3

)

 

 

134

 

 

 

126

 

 

 

(8

)

Restructuring and transaction costs

 

 

 

 

 

12

 

 

 

12

 

 

 

 

 

 

63

 

 

 

63

 

Other expenses

 

 

13

 

 

 

7

 

 

 

(6

)

 

 

(35

)

 

 

(15

)

 

 

20

 

 

 

 

 

 

 

 

 

 

 

$

(739

)

 

 

 

 

 

 

 

 

 

$

405

 

 

 

(1)

Included as a component of oil, gas and NGL derivatives on the consolidated statements of comprehensive earnings.

 

We recognize fair value changes on our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. For additional information, see Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

 

Marketing and midstream operations decreased approximately $58 million for the first six months ended 2020 compared to the first six months ended 2019 primarily due to lower commodity prices resulting from the challenged macro-economic environment in 2020, as well as downstream product inventory impairments of $17 million recognized in the first quarter of 2020.

 

Exploration expenses increased approximately $113 million for the first six months ended 2020 compared to the first six months ended 2019 primarily due to $113 million in unproved asset impairments in the first six months of 2020. For additional information, see Note 5 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

 

Devon recognized $63 million in restructuring expenses during the first six months of 2019 due to workforce reductions and other initiatives designed to enhance its operational focus and cost structure. For additional information, see Note 6 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

 


35


Table of Contents

Discontinued Operations

 

Results of Operations – Discontinued Operations

 

The table below presents key components from discontinued operations for the time periods presented. Discontinued operations include the Canadian business that Devon sold in June 2019 and the Barnett Shale assets that Devon has contracted to sell and which is scheduled to close on October 1, 2020. For additional information on discontinued operations, see Note 17 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Oil, gas and NGL sales

 

$

77

 

 

$

92

 

 

$

494

 

 

$

169

 

 

$

994

 

Oil, gas and NGL derivatives

 

$

 

 

$

 

 

$

9

 

 

$

 

 

$

(95

)

Production expenses

 

$

74

 

 

$

74

 

 

$

229

 

 

$

148

 

 

$

451

 

Asset impairments

 

$

 

 

$

179

 

 

$

37

 

 

$

179

 

 

$

37

 

Asset dispositions

 

$

(2

)

 

$

 

 

$

(188

)

 

$

(2

)

 

$

(187

)

Restructuring and transaction costs

 

$

 

 

$

 

 

$

236

 

 

$

 

 

$

239

 

Earnings (loss) from discontinued operations before income taxes

 

$

9

 

 

$

(157

)

 

$

62

 

 

$

(148

)

 

$

132

 

Income tax benefit

 

$

 

 

$

(32

)

 

$

(282

)

 

$

(32

)

 

$

(273

)

Net earnings (loss) from discontinued operations, net of tax

 

$

9

 

 

$

(125

)

 

$

344

 

 

$

(116

)

 

$

405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production (MMBoe):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barnett Shale

 

 

9

 

 

 

9

 

 

 

9

 

 

 

18

 

 

 

18

 

Canada

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

19

 

Total production

 

 

9

 

 

 

9

 

 

 

18

 

 

 

18

 

 

 

37

 

Realized price, unhedged (per Boe) - Barnett Shale

 

$

8.89

 

 

$

10.16

 

 

$

12.57

 

 

$

9.54

 

 

$

14.38

 

Realized price, unhedged (per Boe) - Canada

 

N/A

 

 

N/A

 

 

$

43.03

 

 

N/A

 

 

$

38.41

 

 

Q2 2020 vs. Q1 2020

 

Net earnings (loss) from discontinued operations, net of tax increased $134 million from the first quarter of 2020 to the second quarter of 2020. During the first quarter of 2020, we recognized $179 million in asset impairments on our Barnett Shale assets due to the amended terms of the Barnett Shale sales agreement. This increase in earnings was partially offset by lower gas and NGL sales in the second quarter resulting from lower commodity prices.

 

Q2 2020 vs. Q2 2019  

 

Net earnings from discontinued operations, net of tax decreased $335 million from the second quarter of 2019 to the second quarter of 2020. Net earnings decreased primarily due to the divestment of Devon’s Canadian operations during the second quarter of 2019.

 

June 30, 2020 YTD vs. June 30, 2019 YTD

 

Net earnings (loss) from discontinued operations, net of tax decreased $521 million for the first six months ended June 30, 2020 compared to the first six months ended June 30, 2019. Net earnings decreased primarily due to the divestment of Devon’s Canadian operations during the second quarter of 2019, as well as lower revenues resulting from the challenged macro-economic environment in 2020. Additionally, 2020 includes $179 million in incremental asset impairments to our Barnett Shale assets related to the amended terms of the Barnett Shale sales agreement during the first quarter of 2020.

 

 

 

36


Table of Contents

Capital Resources, Uses and Liquidity

Sources and Uses of Cash

The following table presents the major changes in cash and cash equivalents for the three and six months ended June 30, 2020 and 2019.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating cash flow from continuing operations

 

$

150

 

 

$

432

 

 

$

679

 

 

$

868

 

Divestitures of property and equipment

 

 

3

 

 

 

28

 

 

 

28

 

 

 

338

 

Capital expenditures

 

 

(307

)

 

 

(486

)

 

 

(732

)

 

 

(976

)

Acquisitions of property and equipment

 

 

(1

)

 

 

(13

)

 

 

(5

)

 

 

(23

)

Debt activity, net

 

 

 

 

 

 

 

 

 

 

 

(162

)

Repurchases of common stock

 

 

 

 

 

(187

)

 

 

(38

)

 

 

(1,185

)

Common stock dividends

 

 

(42

)

 

 

(37

)

 

 

(76

)

 

 

(71

)

Contributions from noncontrolling interests

 

 

6

 

 

 

 

 

 

11

 

 

 

 

Distributions to noncontrolling interests

 

 

(3

)

 

 

 

 

 

(6

)

 

 

 

Other

 

 

 

 

 

(3

)

 

 

(17

)

 

 

(23

)

Net change in cash, cash equivalents and restricted cash

   from discontinued operations

 

 

136

 

 

 

2,764

 

 

 

(19

)

 

 

2,641

 

Net change in cash, cash equivalents and restricted cash

 

$

(58

)

 

$

2,498

 

 

$

(175

)

 

$

1,407

 

Cash, cash equivalents and restricted cash at end of period

 

$

1,669

 

 

$

3,853

 

 

$

1,669

 

 

$

3,853

 

 

Operating Cash Flow

 

Despite our portfolio enhancements, aggressive cost reductions and operational advancements, our financial results were challenged by commodity prices and deterioration of the macro-economic environment resulting from the unprecedented COVID-19 pandemic. As presented in the table above, net cash provided by operating activities continued to be a significant source of capital and liquidity. During the six months ended June 30, 2020, our operating cash flow funded approximately 85% of our capital expenditures and dividends.

Divestitures of Property and Equipment

During the first six months of 2019, we sold non-core U.S. assets for approximately $338 million, net of customary purchase price adjustments. For additional information, please see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

Capital Expenditures and Acquisitions of Property and Equipment

The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Delaware Basin

 

$

192

 

 

$

245

 

 

$

413

 

 

$

470

 

Powder River Basin

 

 

46

 

 

 

60

 

 

 

131

 

 

 

116

 

Eagle Ford

 

 

42

 

 

 

54

 

 

 

136

 

 

 

109

 

Anadarko Basin

 

 

10

 

 

 

93

 

 

 

18

 

 

 

229

 

Other

 

 

3

 

 

 

15

 

 

 

6

 

 

 

26

 

Total oil and gas

 

 

293

 

 

 

467

 

 

 

704

 

 

 

950

 

Midstream

 

 

11

 

 

 

11

 

 

 

19

 

 

 

11

 

Other

 

 

3

 

 

 

8

 

 

 

9

 

 

 

15

 

Total capital expenditures

 

$

307

 

 

$

486

 

 

$

732

 

 

$

976

 

Acquisitions

 

$

1

 

 

$

13

 

 

$

5

 

 

$

23

 

 

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Capital expenditures consist primarily of amounts related to our oil and gas exploration and development operations, midstream operations and other corporate activities. Our capital program is designed to operate within or near operating cash flow. This is evidenced by our operating cash flow funding approximately 90% of our capital expenditures for the six months ended June 30, 2020. Our capital investment program is driven by a disciplined allocation process focused on returns. Our capital expenditures are lower in 2020 primarily due to our decreased spending in the Anadarko Basin, partially offset by increased capital investment in the Powder River Basin and Eagle Ford. In response to the current macro-economic environment, we reduced our 2020 capital expenditures outlook by approximately $800 million, or 45% compared to the original capital budget.

Debt Activity

During the first six months of 2019, our debt decreased $162 million due to the repayment of our 6.30% senior notes at maturity.

Shareholder Distributions and Stock Activity

The following table summarizes our common stock dividends during the first six months of 2020 and 2019. Beginning with the second quarter of 2020, we increased our quarterly dividend 22%, to $0.11 per share. We previously increased our quarterly dividend to $0.09 per share commencing with the second quarter of 2019.

 

Amounts

 

 

Rate Per Share

 

Quarter Ended 2020:

 

 

 

 

 

 

 

First quarter

$

34

 

 

$

0.09

 

Second quarter

 

42

 

 

$

0.11

 

Total year-to-date

$

76

 

 

 

 

 

Quarter Ended 2019:

 

 

 

 

 

 

 

First quarter

$

34

 

 

$

0.08

 

Second quarter

 

37

 

 

$

0.09

 

Total year-to-date

$

71

 

 

 

 

 

We repurchased 2.2 million shares of common stock for $38 million in the first six months of 2020 and 42.1 million shares of common stock for $1.2 billion in the first six months of 2019 under share repurchase programs authorized by our Board of Directors. For additional information, see Note 16 in “Part I. Financial Information – Item 1. Financial Statements” in this report.

Noncontrolling Interest Contributions and Distributions

During the first six months of 2020, we received $11 million in contributions from our noncontrolling interests in CDM and distributed $6 million to our noncontrolling interests in CDM.


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Cash Flows from Discontinued Operations

All cash flows in the following table relate to activities of our Canadian business that Devon sold in June 2019 and the Barnett Shale assets that Devon has contracted to sell and is scheduled to close on October 1, 2020.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Canadian tax payments

 

$

(20

)

 

$

 

 

$

(173

)

 

$

 

Settlements of intercompany foreign denominated assets/liabilities

 

 

 

 

 

(32

)

 

 

 

 

 

(31

)

Other

 

 

(23

)

 

 

223

 

 

 

(1

)

 

 

162

 

Operating activities

 

 

(43

)

 

 

191

 

 

 

(174

)

 

 

131

 

Divestitures of property and equipment - Canadian operations

 

 

 

 

 

2,601

 

 

 

 

 

 

2,601

 

Divestitures of property and equipment - Barnett Shale assets

 

 

170

 

 

 

 

 

 

170

 

 

 

 

Divestitures of property and equipment

 

 

170

 

 

 

2,601

 

 

 

170

 

 

 

2,601

 

Capital expenditures and other

 

 

1

 

 

 

(65

)

 

 

 

 

 

(123

)

Investing activities

 

 

171

 

 

 

2,536

 

 

 

170

 

 

 

2,478

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

(7

)

Settlements of intercompany foreign denominated assets/liabilities

 

 

 

 

 

32

 

 

 

 

 

 

31

 

Other

 

 

8

 

 

 

5

 

 

 

(15

)

 

 

8

 

Effect of exchange rate changes on cash

 

 

8

 

 

 

37

 

 

 

(15

)

 

 

39

 

Net change in cash, cash equivalents and restricted cash of

   discontinued operations

 

$

136

 

 

$

2,764

 

 

$

(19

)

 

$

2,641

 

Operating cash flows during the first six months of 2020 include $173 million of cash income and withholding tax payments in Canada related to divestitures and was also negatively impacted by lower commodity prices. Foreign currency denominated intercompany loan activity resulted in a realized loss of $32 million in the second quarter of 2019 as a result of the strengthening of the U.S. dollar in relation to the Canadian dollar. There was an offset in the effect of exchange rate changes on cash line in the table above, resulting in no impact to the net change in cash, cash equivalents and restricted cash. Investing cash flows during the first six months of 2020 include $170 million in deposit funds from BKV due to the amended terms on the sale of our Barnett Shale assets, which is scheduled to close on October 1, 2020. On June 27, 2019, we completed the sale of our Canadian business for proceeds of $2.6 billion. See Note 2 and Note 17 in “Part I. Financial Information – Item 1. Financial Statements” in this report for additional details on these divestitures.

Liquidity

The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, we, like all upstream operators, must continually make capital investments to grow and even sustain production. Generally, our capital investments are focused on drilling and completing new wells and maintaining production from existing wells. At opportunistic times, we also acquire operations and properties from other operators or land owners to enhance our existing portfolio of assets.

 

Historically, our primary sources of capital funding and liquidity have been our operating cash flow, cash on hand and asset divestiture proceeds. Additionally, we maintain a commercial paper program, supported by our revolving line of credit, which can be accessed as needed to supplement operating cash flow and cash balances. If needed, we can also issue debt and equity securities, including through transactions under our shelf registration statement filed with the SEC. We estimate the combination of our sources of capital will continue to be adequate to fund our planned capital requirements as discussed in this section.

 

Beginning in the first quarter of 2020, the macro-economic environment deteriorated significantly and has created extreme volatility primarily due to concerns arising from the COVID-19 pandemic. In response to this environment, we will continue to maintain flexibility within our capital program as we continue to focus on protecting our financial strength and maintaining operational continuity. Additionally, we have initiatives underway to reduce annualized production, administrative and financing expenses a total of $300 million. Further, we expect to fund a $0.26 per share (approximately $100 million total) special dividend on October 1, 2020. 

 

 

 

 

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Operating Cash Flow

Key inputs into determining our planned capital investment are the amounts of cash we hold and operating cash flow we expect to generate over the next one to three or more years. At the end of the second quarter of 2020, we held approximately $1.7 billion of cash, inclusive of $195 million of cash restricted for discontinued operations. Our operating cash flow forecasts are sensitive to many variables and include a measure of uncertainty as the actual results of these variables may differ from our expectations.

Commodity Prices – The most uncertain and volatile variables for our operating cash flow are the prices of the oil, gas and NGLs we produce and sell. Prices are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other substantially variable factors influence market conditions for these products. These factors, which are difficult to predict, create volatility in prices and are beyond our control.

To mitigate some of the risk inherent in prices, we utilize various derivative financial instruments to protect a portion of our production against downside price risk. We hedge our production in a manner that systematically places hedges for several quarters in advance, allowing us to maintain a disciplined risk management program as it relates to commodity price volatility. We supplement the systematic hedging program with discretionary hedges that take advantage of favorable market conditions. For the remainder of 2020, we have approximately 95% of our oil production hedged with an average floor price of $41/Bbl and approximately 45% of our gas production hedged with an average floor price of $2.20/Mcf. Additionally, we are currently building our 2021 hedge positions at market prices. The key terms to our oil, gas and NGL derivative financial instruments as of June 30, 2020 are presented in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” of this report.

Operating Expenses – Commodity prices can also affect our operating cash flow through an indirect effect on operating expenses. Significant commodity price decreases can lead to a decrease in drilling and development activities. As a result, the demand and cost for people, services, equipment and materials may also decrease, causing a positive impact on our cash flow as the prices paid for services and equipment decline. However, the inverse is also generally true during periods of rising commodity prices.

 

Driven by lower realized prices, margins and capital investment, we have begun initiatives to reduce our annualized production and administrative costs a total of $225 million. We expect these annualized savings to be sustainable as we tailor our workforce and operations for current activity levels. 

Credit Losses – Our operating cash flow is also exposed to credit risk in a variety of ways. This includes the credit risk related to customers who purchase our oil, gas and NGL production, the collection of receivables from our joint-interest partners for their proportionate share of expenditures made on projects we operate and counterparties to our derivative financial contracts. We utilize a variety of mechanisms to limit our exposure to the credit risks of our customers, partners and counterparties. Such mechanisms include, under certain conditions, requiring letters of credit, prepayments or collateral postings and other protections allowed per our agreements.

 

Divestitures of Property and Equipment

 

We expect to close our Barnett Shale divestiture on October 1, 2020. Pursuant to the terms of this transaction, we currently hold a $170 million deposit and expect to receive approximately $300 million at closing, net of purchase price adjustments.

 

Capital Expenditures

In response to the current macro-economic environment, we reduced our 2020 capital expenditures outlook by approximately $800 million, or 45% compared to the original capital budget. Our exploration and development budget for the remainder of 2020 is expected to range from $350 million to $400 million. As economic factors change, we will continue to be flexible with our capital program.

Debt Repurchases

Our Board of Directors has authorized a $1.5 billion debt repurchase program. Repurchases will be dependent on market conditions and may be made through open market purchases, tender offers or other transaction structures. The repurchases are expected to generate $75 million of annualized financing cost savings.

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Credit Availability

As of June 30, 2020, we had approximately $3.0 billion of available borrowing capacity under our Senior Credit Facility. This credit facility supports our $3.0 billion of short-term credit under our commercial paper program. At June 30, 2020, there were no borrowings under our commercial paper program, and we were in compliance with the Senior Credit Facility’s financial covenant.

Debt Ratings

We receive debt ratings from the major ratings agencies in the U.S. In determining our debt ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, commodity pricing levels, our liquidity, asset quality, reserve mix, debt levels, cost structure, planned asset sales and production growth opportunities. Our credit rating from Standard and Poor’s Financial Services is BBB- with a negative outlook. Our credit rating from Fitch is BBB with a stable outlook. Our credit rating from Moody’s Investor Service is Ba1 with a stable outlook. Any rating downgrades may result in additional letters of credit or cash collateral being posted under certain contractual arrangements.

Critical Accounting Estimates

Income Taxes

The amount of income taxes recorded requires interpretations of complex rules and regulations of federal, state, provincial and foreign tax jurisdictions. We recognize current tax expense based on estimated taxable income for the current period and the applicable statutory tax rates. We routinely assess potential uncertain tax positions and, if required, estimate and establish accruals for such amounts. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and other tax carryforwards. We routinely assess our deferred tax assets and reduce such assets by a valuation allowance if we deem it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to an unprecedented downturn in the commodity price environment and the resulting asset impairments, Devon had significant deferred tax assets at March 31, 2020. Accordingly, we reassessed the realizability of our deferred tax assets in future periods and recorded a 100% valuation allowance against our net deferred tax assets during the first quarter of 2020. As of June 30, 2020, we remain in a full valuation allowance position.

Valuation of Long-Lived Assets

Long-lived assets used in operations, including proved and unproved oil and gas properties, are depreciated and assessed for impairment annually or whenever changes in facts and circumstances indicate a possible significant deterioration in future cash flows is expected to be generated by an asset group. For DD&A calculations and impairment assessments, management groups individual assets based on a judgmental assessment of the lowest level (“common operating field”) for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets.

Management evaluates assets for impairment through an established process in which changes to significant assumptions such as prices, volumes and future development plans are reviewed. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Because there usually is a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs and capital investment plans, considering all available information at the date of review. The expected future cash flows used for impairment reviews include future production volumes associated with proved producing and risk-adjusted proved undeveloped, probable and possible reserves.

Besides the risk-adjusted estimates of reserves and future production volumes, future commodity prices are the largest driver in the variability of undiscounted pre-tax cash flows. For our impairment determinations, we historically have utilized NYMEX forward strip prices for the first five years and applied internally generated price forecasts for subsequent years. In response to the COVID-19 pandemic, the NYMEX forward market became highly illiquid as evidenced by materially reduced trading volumes for periods beyond 2021. Therefore, we altered our price forecast assumptions to perform our March 31, 2020 impairment computations. Specifically, we supplemented the NYMEX forward strip prices with price forecasts published by reputable investment banks and reservoir engineering firms to estimate our future revenues as of March 31, 2020.

We also estimate and escalate or de-escalate future capital and operating costs by using a method that correlates cost movements to price movements similar to recent history. To measure indicated impairments, we use a market-based weighted-average cost of

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capital to discount the future net cash flows. Changes to any of the reserves or market-based assumptions can significantly affect estimates of undiscounted and discounted pre-tax cash flows and impact the recognition and amount of impairments.

Reduced demand from the COVID-19 pandemic and management of production levels from OPEC caused WTI pricing to decrease more than 60% during the first quarter of 2020. As a result, we reduced our planned 2020 capital investment 45%. With materially lower commodity prices and reduced near-term investment, we assessed all our oil and gas fields for impairment as of March 31, 2020 and recognized proved and unproved impairments totaling $2.8 billion. The impairments relate to our Anadarko Basin and Rockies fields in which our basis included acquisitions completed in 2016 and 2015, respectively, when commodity prices were much higher than they are today.

We assessed our Eagle Ford asset for impairment as of June 30, 2020 utilizing the same methodology we applied for the impairment assessments for all of our and oil and gas fields in the first quarter of 2020. Our Eagle Ford asset’s sum of undiscounted cash flows exceeded the carrying value indicating no impairment as of June 30, 2020. Further, as a result of improved oil pricing, the cushion increased significantly from March 31, 2020 to June 30, 2020. If prices significantly deteriorate and/or management lowers the planned capital investment in the Eagle Ford field, our Eagle Ford asset could be subject to a material impairment of capitalized costs.  

 

Goodwill

 

We test goodwill for impairment annually at October 31, or more frequently if events or changes in circumstances dictate that the carrying value of goodwill may not be recoverable. We perform a qualitative assessment to determine whether it is more likely than not that the fair value of goodwill is less than its carrying amount. As part of our qualitative assessment, we considered the general macro-economic, industry and market conditions, changes in cost factors, actual and expected financial performance, significant changes in management, strategy or customers and stock performance. If the qualitative assessment determines that a quantitative goodwill impairment test is required, then the fair value is compared to the carrying value. If the fair value is less than the carrying value, an impairment charge will be recognized for the amount by which the carrying amount exceeds the fair value. Because quoted market prices are not available, the fair value is estimated based upon a valuation analyses including comparable companies and transactions and premiums paid.

 

Because the trading price of our common stock decreased 73% during the first quarter of 2020 in response to the COVID-19 pandemic, we performed a goodwill impairment test as of March 31, 2020. While the cushion narrowed significantly since our last impairment evaluation, we concluded an impairment was not required as of March 31, 2020. The two most critical judgements included in the March 31, 2020, test were the period utilized to determine Devon’s market capitalization and the control premium. For the test performed as of March 31, 2020 we derived our market capitalization by using our average common stock price from the latter two thirds of March 2020, to align with the time in the quarter subsequent to a key OPEC+ meeting and the date COVID-19 was officially classified as a pandemic. We applied a control premium based on recent comparable market transactions.

 

Subsequent to the end of the first quarter of 2020, Devon’s common stock price increased approximately 60% during the second quarter but remains significantly less than our average trading price before the events experienced in the first quarter of 2020. Although our common stock price and commodity prices are in a period of high volatility, a sustained period of depressed commodity prices would adversely affect our estimates of future operating results, which could result in future goodwill impairments due to the potential impact on the cash flows of our operations. The impairment of goodwill has no effect on liquidity or capital resources. However, it would adversely affect our results of operations in the period recognized.

For additional information regarding our critical accounting policies and estimates, see our 2019 Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Non-GAAP Measures

We make reference to “core earnings (loss) attributable to Devon” and “core earnings (loss) per share attributable to Devon” in “Overview of 2020 Results” in this Item 2 that are not required by or presented in accordance with GAAP. These non-GAAP measures are not alternatives to GAAP measures and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. Core earnings (loss) attributable to Devon, as well as the per share amount, represent net earnings excluding certain noncash and other items that are typically excluded by securities analysts in their published estimates of our financial results. For more information on the results of discontinued operations for our Barnett Shale asset and Canadian operations, see <