01—Abstract
Summary
Summary of the 10-K filed February 15, 2017. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's FY2016 10-K (filed February 15, 2017) reflects a transformational but loss-making year.
Devon reported a net loss attributable to Devon of $3.3 billiona ($6.52 per share) after $5.0 billion of noncash asset impairments, partly offset by $1.9 billion of divestiture gains. Core earnings were a loss of $38 million ($0.08 per share, non-GAAP). Revenue fell sharply: oil, gas and NGL sales were $4.2 billion versus $5.4 billion in 2015, and realized prices dropped 14% to $18.72 per Boe.
Operating cash flow fell 68% to $1.7 billionb, largely because favorable hedges from 2015 expired. Management repositioned the portfolio. Devon divested non-core U.S. upstream assets and its 50% interest in the Access Pipeline for roughly $3.1 billion, bought STACK acreage for $1.5 billion, cut exploration and development capital by about 65%, reduced G&A and field operating costs by $845 million, and cut the quarterly dividend to $0.06 from $0.24.
Total debt fell $3.1 billion to $10.2 billionc, with no significant maturities until 2021, and the company exited 2016 with about $5 billion of liquidity. Proved reserves were 2,058 MMBoe, and the company reported the best well productivity in its 45-year history. Looking ahead, Devon plans to expand capital spending by about 80% in 2017, to a range of $2.3 billion to $2.7 billion excluding EnLink, focused on the STACK and Delaware Basin, with rig counts rising to as many as 10 in each.
The outlook depends on commodity prices, which the filing describes as volatile. Investors should also weigh EnLink, the consolidated midstream MLP, whose debt is non-recourse to Devon and whose goodwill impairments added to 2016 losses. Devon's U.S. deferred tax assets carry a full valuation allowance.
02—Key points
Key Highlights
- Net loss attributable to Devon of $3.3 billion ($6.52/share) in 2016, versus a $14.5 billion loss in 2015, mainly due to $5.0 billion of asset impairments partly offset by $1.9 billion of divestiture gains.
- Core (non-GAAP) earnings were a loss of $38 million ($0.08/share), compared with core earnings of $1.0 billion in 2015.
- Operating cash flow fell 68% to $1.7 billion as 2015 commodity hedges expired and prices declined; realized price per Boe was $18.72, down 14%.
- About $3.1 billion of divestiture proceeds, including the Access Pipeline sale, funded debt reduction of $3.1 billion (31%) to $10.2 billion total debt, with no significant maturities until 2021.
- Capital discipline: exploration and development capital cut about 65%, G&A and field operating costs cut $845 million (25%), and the quarterly dividend cut 75% to $0.06 per share.
- Growth pivot to U.S. oil: $1.5 billion STACK acquisition (about 430,000 net acres) and plans for roughly $700 million in the Delaware Basin and $750 million in the STACK in 2017, with 2017 E&D capital of $2.0-2.3 billion.
- Proved reserves of 2,058 MMBoe at year-end 2016, with 175% of retained-asset production replaced, and an approximately $5 billion liquidity position at year-end.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2016, Devon Energy Corp lost $0.16.
- Revenue$6.75B100.0%
- Cost of revenue−$2.82B41.8%
- Gross profit$3.93B58.2%
- Operating costs−$6.83B101.1%
- Operating income−$2.90B42.9%
- Interest, other & tax$1.84B27.2%
- Net income−$1.06B15.6%
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 15, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $6.75B$13.14B | −48.6% |
| Cost of Revenue | $2.82B— | — |
| Gross Profit | $3.93B— | — |
| Operating Expenses | $15.09B$33.87B | −55.4% |
| Operating Income | -$2.90B-$20.73B | +86.0% |
| Interest Expense | $488.00M$565.00M | −13.6% |
| Net Income | -$1.06B-$12.90B | +91.8% |
| EPS (Basic) | $-2.09$-31.72 | +93.4% |
| EPS (Diluted) | $-2.09$-31.72 | +93.4% |
| Shares Outstanding (Basic) | 507.00M407.00M | +24.6% |
| Shares Outstanding (Diluted) | 507.00M407.00M | +24.6% |
05—Questions
Frequently Asked Questions
Why did Devon report a large net loss in 2016 even though it sold assets for gains?
The 2016 net loss of $3.3 billion was driven mainly by $5.0 billion of noncash asset impairments, including $2.8 billion on U.S. oil and gas assets and $1.3 billion on Canadian assets, plus EnLink goodwill impairments. These were partly offset by $1.9 billion of gains on asset sales. Impairments are driven by full cost ceiling tests that reflect low commodity prices, so they are noncash and do not affect liquidity or debt covenants.
How did the company reduce its debt and what is its near-term maturity profile?
Devon reduced total debt by $3.1 billion (31%) using divestiture proceeds, including $2.1 billion of senior notes repurchased through tender offers, which produced a $269 million early-retirement loss. Devon's Senior Credit Facility is $3.0 billion, and its debt-to-capitalization ratio was 18.7% against a 65% covenant. Devon has no significant long-term maturities until July 2021.
What is Devon's 2017 capital plan and what drives it?
Excluding EnLink, 2017 capital expenditures are expected at $2.3 to $2.7 billion, including $2.0 to $2.3 billion for exploration and development. The largest allocations are about $750 million for the STACK, about $700 million for the Delaware Basin (rising to as many as 10 rigs), about $300 million for Canadian Heavy Oil, and about $175 million each for the Eagle Ford and Rockies. Devon says it can defer or accelerate spending depending on commodity prices and expects to fund it from cash flow, cash on hand, and credit availability.
What is the risk from EnLink and the midstream business?
EnLink is a consolidated publicly traded MLP that Devon controls through its general partner interest. Its approximately $3.3 billion of debt is non-recourse to Devon, but it is consolidated on Devon's balance sheet. EnLink recorded goodwill impairments of about $873 million in 2016, and the fair values of its Texas and General Partner reporting units are not substantially in excess of carrying value, so further impairments are possible. Devon also expects margins on its downstream marketing commitments to weigh on results into 2017.
What are the main risks to the outlook?
The main risks are commodity price volatility. WTI oil ranged from $26.21 to $107.26 per barrel from 2014 to 2016, and management says it expects continued volatility into 2017. Other risks include reserve revisions, a 100% valuation allowance against U.S. deferred tax assets, possible downgrades of Devon's credit ratings (Moody's and S&P downgraded it in 2016), midstream capacity constraints, and pending EPA enforcement matters. Devon has hedged roughly 50% of its 2017 oil production and 45% of its gas production.
06—Continue