01—Abstract
Summary
Summary of the 10-K filed March 7, 2003. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's 2002 10-K shows a company that grew sharply through acquisitions but faced weaker commodity prices and large non-cash charges.
Proved reserves reached 1,609 MMBoe at year-end 2002 (60% gas), with a pre-tax 10% present value of $15.3 billiona and a standardized measure of $10.4 billion. Total revenues rose 51% to $4.3 billion, driven by the January 2002 Mitchell Energy acquisition, which also brought a large marketing and midstream business. Net earnings were only $104 million, or $0.61 per diluted share, after a $651 million full-cost ceiling writedown on Canadian properties and a $205 million impairment on ChevronTexaco stock held by Devon.
Balance sheet leverage rose meaningfully. Long-term debt stood at about $7.6 billionb, and total assets reached $16.2 billion. Management reports a funded debt-to-capitalization ratio of 55% against a 65% covenant, and the company disclosed plans to pay down the $3 billion term loan, with $1.1 billion remaining.
Average realized gas prices fell 27% to $2.80c per Mcf, which compressed margins despite production rising 50% to 188 MMBoe. Investors should weigh the reserve growth and cash flow against the earnings volatility and the pending Ocean Energy merger, which Devon announced on February 24, 2003, and which would add about $1.8 billion of assumed debt.
For 2003, Devon guides to production of 178 to 187 MMBoe, a capital budget of roughly $1.4 to $1.6 billiond for drilling, and a 2003 interest expense of $512 to $522 million. The company's stated policy is to keep paying a $0.05 quarterly dividend and to use excess operating cash flow to retire debt.
02—Key points
Key Highlights
- Proved reserves of 1,609 MMBoe at year-end 2002, 60% natural gas, with a 10% PV of $15.3 billion (pre-tax) and standardized measure of $10.4 billion.
- Total revenues rose 51% to $4.3 billion, largely from the January 2002 Mitchell acquisition, which added marketing and midstream operations.
- Net earnings fell to $104 million ($0.61 diluted EPS), held down by a $651 million Canadian full-cost ceiling writedown and a $205 million ChevronTexaco stock impairment.
- Production rose 50% to 188 MMBoe, but average gas prices dropped 27% to $2.80 per Mcf, and oil prices were broadly flat at $21.71 per barrel.
- Long-term debt of about $7.6 billion; funded debt-to-capitalization of 55% versus a 65% covenant; the $3 billion term loan had $1.1 billion outstanding.
- Pending merger with Ocean Energy (0.414 Devon shares per Ocean share, plus about $1.8 billion of assumed debt), announced February 24, 2003.
- 2003 guidance: 178 to 187 MMBoe production, $1.4 to $1.6 billion in drilling capex, and a $0.05 quarterly dividend maintained.
03—Questions
Frequently Asked Questions
Why did Devon's earnings fall even though revenue grew sharply in 2002?
Revenue rose 51% to $4.3 billion, but operating costs rose faster. Depreciation, depletion and amortization increased to $1.2 billion, marketing and midstream operating costs jumped with the Mitchell acquisition, and Devon took a $651 million pre-tax full-cost ceiling writedown on Canadian properties after a sharp drop in June 2002 gas prices. It also recorded a $205 million impairment on its ChevronTexaco holdings. Together these non-cash charges pushed net earnings down to $104 million, or $0.61 per diluted share.
How much debt does Devon carry, and is it a concern?
Long-term debt was about $7.6 billion at year-end 2002, up from $6.6 billion a year earlier, and interest expense rose to $533 million. The company's most restrictive covenant caps total funded debt at 65% of total capitalization, and Devon reports 55% under that definition. Management expects operating cash flow to exceed planned 2003 capital spending and intends to use excess cash to retire debt. Debt ratings are BBB (S&P), Baa2 with a negative outlook (Moody's), and BBB (Fitch). Leverage is manageable but considerably higher than before the 2001 and 2002 acquisitions.
What are the main risks from the Ocean Energy merger?
Devon will issue 0.414 shares for each Ocean share and assume about $1.8 billion of Ocean debt. The deal still needs stockholder approval from both companies and regulatory clearances. The 2003 guidance in this filing excludes Ocean's contribution, so the combined company's production, capital needs and leverage will differ from these figures if the deal closes. Ocean's year-end 2002 reserves were 593 MMBoe, so the deal is meaningful in scale.
How exposed is Devon to commodity price swings?
Devon's revenue depends heavily on oil, gas and NGL prices, and it hedges a portion of production. For 2003, fixed-price swaps and collars cover about 55% of estimated oil production and 39% of estimated gas production. Roughly 75% of its US gas is sold at spot prices. Devon also took full-cost writedowns in 2001 and 2002 when prices fell, and it notes that further writedowns are likely if prices drop below the June 30, 2002 or December 31, 2001 reference levels.
Is the dividend safe, and what does the company expect in 2003?
Devon pays $0.05 per share quarterly, about $31 million a year, and says it expects to keep the policy. It also pays $10 million a year on its 6.49% preferred stock. For 2003, Devon expects production of 178 to 187 MMBoe, drilling and facilities capital of $1.4 to $1.6 billion (before Ocean), lease operating expenses of $611 to $649 million, and interest expense of $512 to $522 million. Its 2003 outlook assumes market conditions similar to 2002.
04—Continue