01—Abstract
Summary
Summary of the 10-K filed February 24, 2012. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's 2011 10-K reflects a pivotal year of strategic repositioning into a pure North American onshore company.
Following the divestiture of its offshore and International assets (roughly $10 billiona in gross proceeds, about $8 billion after tax, including the $3.25 billion Brazil sale), Devon completed its $3.5 billion share repurchase program in Q4 2011 and reported record net earnings of $4.7 billion (earnings from continuing operations of $2.1 billion, or $5.10 diluted). Total revenues rose 15% to $11.5 billion, driven by higher oil and NGL prices, and operating cash flow from continuing operations climbed 24% to $6.2 billion. Proved reserves reached an all-time high of 3,005 MMBoe, with liquids accounting for about 42% of the total.
The balance sheet is a key strength, with a debt-to-capitalization ratio of 22.8% against a covenant ceiling of 65%, and debt rated BBB+/Baa1. However, Devon is spending more than its operating cash flow: 2011 capital expenditures were $7.5 billionb against $6.2 billion of operating cash flow, funded by commercial paper and the remaining offshore proceeds. Total debt rose to $9.8 billion, and roughly $7.1 billion of cash and short-term investments is largely held offshore and not expected to be repatriated without a significant tax cost.
Management guides to a 2012 capital budget of $6.2 to $6.8 billionc and a 6% production increase, with liquids growth approaching 20%, while acknowledging that natural gas prices are expected to remain challenged. Key forward-looking catalysts include the expected Q1 2012 closing of a Sinopec transaction, which would pay $2.5 billion ($900 million at closing plus a $1.6 billion drilling carry) for a 33.3% interest in five new-venture plays.
Growth is concentrated in liquids-rich assets such as the Cana-Woodford, Permian, Granite Wash, and the Jackfish oil sands project. Principal risks include commodity price volatility, reserve estimate uncertainty, a Canadian royalty burden that rises with oil prices, potential U.S. tax changes affecting intangible drilling costs, and a pending appeal related to the Chief Holdings judgment, for which Devon recorded an offsetting $133 milliond liability and receivable.
02—Key points
Key Highlights
- Record 2011 net earnings of $4.7 billion ($11.25 diluted EPS), including $2.6 billion from discontinued operations driven mainly by the Brazil divestiture gain; earnings from continuing operations were $2.1 billion ($5.10 diluted EPS).
- Total revenues rose 15% to $11.45 billion, and operating cash flow from continuing operations increased 24% to $6.2 billion despite $454 million of discretionary pension contributions.
- Proved reserves hit an all-time high of 3,005 MMBoe, up from 2010, with about 42% liquids and 26% proved undeveloped.
- Completed the $3.5 billion share repurchase program (49.2 million shares at $71.18 average) in Q4 2011, after the offshore divestiture program generated roughly $8 billion of after-tax proceeds.
- Capital expenditures of $7.5 billion exceeded operating cash flow (83% coverage), with the gap funded by commercial paper ($3.7 billion outstanding) and new notes; total debt reached $9.8 billion.
- 2012 plan: capital budget of $6.2 to $6.8 billion, targeted 6% production growth with liquids growth near 20%, and a pending $2.5 billion Sinopec partnership on five new-venture plays expected to close in Q1 2012.
- Balance sheet remains strong, with a 22.8% debt-to-capitalization ratio versus a 65% covenant limit, BBB+/Baa1 ratings, and $1.8 billion of available credit facility capacity as of February 2012.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 24, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $11.45B$9.94B | +15.1% |
| Operating Expenses | $7.16B$6.37B | +12.4% |
| Operating Income | $4.63B$2.33B | +98.5% |
| Interest Expense | $352.00M$408.00M | −13.7% |
| Net Income | $4.70B$4.55B | +3.4% |
| EPS (Basic) | $11.29$10.35 | +9.1% |
| EPS (Diluted) | $11.25$10.31 | +9.1% |
| Shares Outstanding (Basic) | 412.00M— | — |
| Shares Outstanding (Diluted) | 414.00M— | — |
05—Questions
Frequently Asked Questions
How much did Devon's earnings and cash flow improve in 2011, and what drove it?
Net earnings were $4.7 billion in 2011, up from $4.55 billion in 2010, but continuing-operations earnings fell to $2.1 billion from $2.3 billion because of higher deferred taxes (including $725 million of repatriation tax tied to offshore divestitures). Operating cash flow from continuing operations rose 24% to $6.2 billion, supported by higher oil, gas and NGL prices (the combined realized price rose 9% to $34.64 per Boe) and 8% higher North American onshore production.
Is Devon's balance sheet strong enough to fund its growth plans?
Devon reports a debt-to-capitalization ratio of 22.8%, well under the 65% covenant, and an investment-grade rating of BBB+ (Fitch and S&P) and Baa1 (Moody's), all with stable outlooks. However, total debt climbed to $9.8 billion, commercial paper borrowings were $3.7 billion, and most of the roughly $7.1 billion in cash and short-term investments is held offshore and not expected to be repatriated, so U.S. operations rely on borrowing to supplement cash flow.
What are the main growth drivers and what is the Sinopec transaction?
Growth is focused on liquids-rich onshore plays: the Cana-Woodford (production up 85% in 2011), Permian Basin, Barnett, and Granite Wash, plus Canadian Jackfish oil sands, where the third phase is under construction for startup in late 2014. In January 2012, Devon agreed to sell Sinopec a 33.3% interest in five new-venture plays for $2.5 billion ($900 million at closing and a $1.6 billion drilling carry), with closing expected in Q1 2012.
What are the key risks investors should watch?
The main risks are commodity price volatility (the company is exposed to oil, gas and NGL prices, and natural gas prices are expected to remain challenged in 2012), uncertainty in reserve estimates, and high capital spending relative to operating cash flow. Other risks include rising Canadian royalties as oil prices increase, potential U.S. tax changes that would eliminate immediate deduction of intangible drilling costs, possible hydraulic fracturing regulation on federal lands, and an appeal of a $196 million judgment (Devon recorded a $133 million liability offset by a matching indemnification receivable).
How much of Devon's production is hedged, and how do derivatives affect reported results?
Devon hedges a portion of production using swaps, collars, basis swaps and call options, and it has not designated any of these as hedges for accounting purposes. As a result, changes in fair value flow through earnings: 2011 oil, gas and NGL derivatives produced a $881 million net gain, including $392 million in cash settlements. The company's 2012 oil hedges cover 22,000 Bbls/d of swaps and 54,000 Bbls/d of collars, and its 2012 gas hedges cover 325,000 MMBtu/d of swaps and 490,000 MMBtu/d of collars. Hedges can cap upside when prices rise, and they expose Devon to counterparty credit risk.
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