01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's 2010 10-K describes a company repositioning itself as a North American onshore oil and liquids-focused E&P after selling its Gulf of Mexico, Azerbaijan, China and other international assets for $5.6 billiona in after-tax proceeds in 2010, with pending Brazil and Angola sales expected to bring total after-tax divestiture proceeds above $8 billion.
Financially, 2010 was a strong year: revenues rose to $9.94 billionb from $8.02 billion, earnings from continuing operations swung to $2.33 billion from a $2.75 billion loss in 2009 (which included a $6.4 billion full-cost ceiling writedown), and total net earnings reached $4.55 billion including discontinued operations. Proved reserves reached a record 2,873 MMBoe, about 60% gas and 40% liquids, and North American onshore production was roughly 228 MMBoe, with oil and NGL volumes rising 6%. Balance sheet and capital allocation were strengthened.
Long-term debt fell to $3.8 billionc from $5.8 billion, and total debt was $5.6 billion at year-end, with a 15.1% debt-to-capitalization ratio under the credit covenant. Devon repurchased $1.2 billion of stock in 2010 under a $3.5 billion program that runs through 2011, and it expects 2011 capital spending of $5.4 to $6.0 billion and a 6-8% production increase led by oil and NGLs. Key risks include weak natural gas prices, a large Canadian heavy-oil development at Jackfish with high lease operating costs, reliance on commodity hedges, and exposure to policy changes such as the proposed elimination of intangible drilling cost deductions and potential hydraulic fracturing regulation.
02—Key points
Key Highlights
- Record 2010 results: total revenues of $9.94B (up 24% from $8.02B) and earnings from continuing operations of $2.33B versus a $2.75B loss in 2009, which was driven by the prior-year $6.4B ceiling writedown.
- Offshore divestiture program: $5.6B in 2010 after-tax proceeds from Gulf of Mexico, Azerbaijan, China and other international sales, with Brazil ($3.2B) and Angola ($70M plus contingent consideration) pending government approval.
- Record proved reserves of 2,873 MMBoe at year-end 2010 (about 60% gas, 40% liquids), with 831 MMBoe of proved undeveloped reserves, of which 396 MMBoe is Jackfish.
- Balance sheet deleveraging: long-term debt fell to $3.8B from $5.8B, debt-to-capitalization was 15.1%, and $3.4B of cash and short-term investments was on hand at year-end, mostly from international divestitures.
- Shareholder returns: $1.2B of share repurchases in 2010 under a $3.5B program running through December 2011 (about $1.6B and 23.5M shares repurchased through February 10, 2011), plus a $0.64 annual dividend.
- 2011 guidance: North America Onshore production of 236-240 MMBoe (6-8% growth), with oil and NGL growth of at least 16%, and capital expenditures of $5.4-6.0B, largely directed to liquids-rich plays such as Cana-Woodford, the Permian and Jackfish.
- Risk exposure: 2010 realized gas prices were about $3.84/Mcf versus $7.73 in 2008, Canadian royalty and operating costs are rising (Jackfish LOE of $16.81/Boe), and the company faces possible US tax changes and federal hydraulic fracturing regulation.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $9.94B$8.02B | +24.0% |
| Operating Expenses | $6.37B$12.54B | −49.2% |
| Operating Income | $2.33B-$2.75B | +184.7% |
| Interest Expense | $408.00M$437.00M | −6.6% |
| Net Income | $4.55B-$2.48B | +283.5% |
| EPS (Basic) | $10.35$-5.58 | +285.5% |
| EPS (Diluted) | $10.31$-5.58 | +284.8% |
05—Questions
Frequently Asked Questions
Why did Devon sell its offshore assets, and what is the company focused on now?
Devon announced in November 2009 a strategy to become a North American onshore E&P company. The offshore assets were monetized to reduce debt, fund onshore drilling and repurchase shares. Given weak natural gas prices, the near-term focus is oil and liquids-rich opportunities such as Jackfish, Pike, the Permian Basin and the Cana-Woodford Shale.
How did Devon's earnings and cash flow change in 2010?
Earnings from continuing operations rose to $2.33B from a $2.75B loss in 2009, which included a $6.4B writedown. Net earnings were $4.55B including $2.2B from discontinued operations, which mainly reflected the Azerbaijan and Panyu divestiture gains. Operating cash flow from continuing operations was $5.0B, and total operating cash flow was $5.5B, up 16%.
How is Devon's balance sheet positioned for risk?
Total debt was $5.6B at year-end 2010, down from $7.3B, and the company was in compliance with its 65% debt-to-capitalization covenant at 15.1%. Liquidity was about $3.4B in cash and short-term investments plus $2.0-2.6B of available credit. Most of the cash is offshore divestiture proceeds that are not yet repatriated to the US, so the company may increase commercial paper borrowings in the near term.
What are the main risks for investors?
Results depend heavily on commodity prices, which are volatile; the 10% forward-curve sensitivity for gas derivatives was about $154M. Hedges limit upside on higher prices. Jackfish costs are high, Canadian royalties rise with oil prices, reserve estimates carry uncertainty, and the Brazil and Angola sales still require government approval. Federal proposals to end intangible drilling cost deductions and to regulate hydraulic fracturing also pose policy risk.
06—Continue