01—Abstract
Summary
Summary of the 10-K filed February 21, 2013. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's 2012 10-K shows a year of mixed results: production grew 4% to 682.3 MBoe/d and the company closed two joint ventures (Sinopec and Sumitomo) worth roughly $4.0 billiona in combined value, yet GAAP results swung to a net loss of $206 million ($0.52 per diluted share) because of $2.0 billion in noncash asset impairments, largely from full-cost ceiling write-downs on U.S. gas and midstream assets.
Excluding impairments and other items typically removed by analysts, adjusted earnings were $1.3 billionb, or $3.26 per diluted share, down 46% from $6.07 in 2011. Realized prices fell 17% without hedges, with gas down 34% and NGLs down 26%, and proved reserves declined 1% to 2,963 MMBoe as downward price revisions of 171 MMBoe offset strong extensions and discoveries. Cash flow and balance sheet trends were weaker.
Operating cash flow from continuing operations fell 21% to $4.9 billion while capital expenditures rose to $8.2 billionc, so the company borrowed to fund the gap. Total debt reached $11.6 billion, up from $9.8 billion, and the debt-to-capitalization ratio was 25.4% against a 65% covenant. Management guided to 2013 capital spending of $6.4 to $7.0 billion, shifted its near-term focus toward oil and bitumen assets (Permian Basin and Jackfish), and flagged continued pressure on NGL and Canadian heavy oil prices.
For investors, the central tension is between strong volume growth and liquids-weighted development on one side and depressed gas and NGL prices, impairments, and rising spending on the other. The company also holds about $6.5 billiond of cash and short-term investments abroad that it does not expect to repatriate, and it has about $2.3 billion of partner drilling carries remaining, which will fund 70% of joint venture capital requirements through 2014.
02—Key points
Key Highlights
- Production rose 4% to 682.3 MBoe/d, with oil and bitumen up 20%, while realized price per Boe fell 17% to $28.65.
- GAAP net loss of $206 million ($0.52 per diluted share) reflects $2.0 billion in pre-tax asset impairments, mainly U.S. oil and gas full-cost ceiling write-downs.
- Adjusted earnings fell 46% to $3.26 per diluted share from $6.07 in 2011, excluding impairments and other non-recurring items.
- Operating cash flow fell 21% to $4.9 billion, and capital expenditures of $8.2 billion exceeded it, so net debt rose to $11.6 billion.
- Two joint ventures with Sinopec (about $900 million at closing) and Sumitomo (about $400 million) brought in roughly $4.0 billion in value, with $2.3 billion of partner carries remaining.
- Proved reserves ended at 2,963 MMBoe, down 1%, as price revisions of 171 MMBoe offset 449 MMBoe of extensions and discoveries; the reserve replacement rate from non-price sources was 152%.
- 2013 capital expenditure guidance is $6.4 to $7.0 billion, with near-term focus on oil properties and debt-to-capitalization of 25.4% against a 65% covenant.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 21, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $9.50B$11.45B | −17.0% |
| Operating Expenses | $9.43B$7.16B | +31.6% |
| Operating Income | $74.00M$4.63B | −98.4% |
| Interest Expense | $406.00M$352.00M | +15.3% |
| Net Income | -$206.00M$4.70B | −104.4% |
| EPS (Basic) | $-0.52$11.29 | −104.6% |
| EPS (Diluted) | $-0.52$11.25 | −104.6% |
| Shares Outstanding (Basic) | 400.00M412.00M | −2.9% |
| Shares Outstanding (Diluted) | 400.00M414.00M | −3.4% |
05—Questions
Frequently Asked Questions
Why did Devon report a net loss in 2012 when it was profitable in 2011?
The 2012 net loss of $206 million was driven by $2.0 billion in pre-tax asset impairments, mainly full-cost ceiling write-downs on U.S. oil and gas properties and midstream assets, as lower gas and NGL prices reduced the value of proved reserves. Net earnings in 2011 were $4.7 billion, which included large gains on divestitures of offshore assets.
What do adjusted earnings tell us, and how much did they decline?
Adjusted earnings are a non-GAAP measure that excludes non-cash impairments, derivative mark-to-market effects, restructuring costs and similar items. They were $1.3 billion, or $3.26 per diluted share, in 2012, down 46% from $6.07 in 2011. Investors should note that the adjustments are management's choices and that the GAAP result is the official measure.
How is Devon funding its growth program?
Operating cash flow covered about three-quarters of cash capital spending net of divestiture proceeds in 2012, with the rest funded by debt. Total debt rose to $11.6 billion, and the company has $2.9 billion of available capacity under its $3.0 billion credit facility plus a $5.0 billion commercial paper program, of which $3.2 billion was in use at year-end. The company also holds $6.5 billion of cash and short-term investments abroad that it does not expect to bring back to the U.S.
What are the main risks to Devon's outlook for 2013?
Key risks include continued weak North American natural gas prices, NGL price pressure from oversupply without new petrochemical capacity, and wide Canadian heavy oil differentials tied to pipeline and refinery constraints. Management said further full-cost ceiling impairments are possible if prices do not recover, and it flagged potential tax changes, including elimination of the immediate deduction for intangible drilling costs.
What is the strategy for the business going forward?
Devon is shifting capital toward higher-margin oil and bitumen assets, notably the Permian Basin, Jackfish heavy oil and the Cana-Woodford and Mississippian plays, while reducing exposure to dry gas. It is also using joint ventures with Sinopec and Sumitomo to share exploration and development costs, and it has consolidated U.S. operations into Oklahoma City, which is expected to be substantially complete in the first quarter of 2013.
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