01—Abstract
Summary
Summary of the 10-K filed February 21, 2018. Cited figures are marked; the original filing is the authoritative source.
Devon Energy's 2017 10-K shows a strong rebound year driven primarily by higher commodity prices.
Net earnings attributable to Devon were $1.06 billiona (diluted EPS $1.70), versus a $1.06 billion loss in 2016, and core (non-GAAP) earnings were $0.81 per diluted share versus a $0.73 per-share loss in 2016. Operating cash flow rose 94% to $2.9 billion and fully funded capital expenditures of $2.9 billion and dividends. Realized prices rose about 39% per Boe, while total production declined about 11% because of non-core divestitures, with retained-asset volumes down about 4%.
Devon exited the year with $2.7 billionb in cash and $2.9 billion of available credit, and its debt-to-capitalization ratio was 27.2%. The company also made a major accounting change, moving from full cost to successful efforts accounting, and recast prior periods. Under successful efforts, 2017 net earnings fell by $793 million compared with the full-cost presentation, and equity rose by $1.9 billion as of September 30, 2017.
Management points to the STACK and Delaware Basin as the core growth engines, with 2018 capital concentrated there, and it targets top-line production growth of 6%-9% on a retained-asset basis. Investors should weigh the 2018 plan against several items: a $10.4 billionc debt load (including $3.5 billion non-recourse to Devon at EnLink), a 100% valuation allowance on U.S. deferred tax assets, roughly $1.4 billion of undeveloped leasehold and capitalized interest (including about $750 million at the Pike oil sands project), and the ongoing $1 billion divestiture program, of which about $415 million closed in 2017. Commodity price volatility remains the dominant risk factor.
02—Key points
Key Highlights
- Net earnings attributable to Devon of $1.06 billion ($1.70 diluted EPS) in 2017, a swing from a $1.06 billion loss in 2016; core earnings of $0.81 per diluted share (non-GAAP).
- Operating cash flow rose 94% to $2.9 billion, fully funding $2.9 billion of capital expenditures (including acquisitions) and common dividends.
- Realized price per Boe rose 39% to $25.96 (unhedged), but total production declined about 11% due to non-core U.S. divestitures.
- Accounting change: switched from full cost to successful efforts, recasting prior periods; the change reduced 2017 net earnings by $793 million versus the full-cost presentation.
- Liquidity of $2.7 billion in cash plus $2.9 billion of undrawn credit; no significant debt maturities until 2021; debt-to-capitalization of 27.2% versus a 65% covenant.
- 2018 plan: about 10% more oil and gas investment ($2.2-2.4 billion budget), concentrated in STACK (~$700 million) and Delaware Basin (~$725 million), targeting 6%-9% production growth and roughly $1-1.5 billion of debt reduction.
- Asset divestiture program: about $415 million of the targeted $1 billion closed in 2017, with the remaining Barnett Shale (Johnson County) sales expected in 2018.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Devon Energy Corp kept $0.14.
- Revenue$6.50B100.0%
- Cost of revenue−$3.56B54.7%
- Gross profit$2.94B45.3%
- Operating costs−$2.91B44.7%
- Operating income$33.0M0.5%
- Interest, other & tax$865.0M13.3%
- Net income$898.0M13.8%
Where FY2017 revenue went
$6.50B- Cost of revenue: $3.56B, 55% of revenue
- Operating costs: $2.91B, 45% of revenue
- Operating income: $33.0M, 0.5% of revenue
Kept 0.5% as operating incomeOperating income $33.0M · 0.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 21, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $6.50B$6.75B | −3.7% |
| Cost of Revenue | $3.56B$2.82B | +26.2% |
| Gross Profit | $2.94B$3.93B | −25.2% |
| Operating Income | $33.00M-$2.90B | +101.1% |
| Interest Expense | $337.00M$488.00M | −30.9% |
| Net Income | $898.00M-$1.06B | +185.0% |
| EPS (Basic) | $1.71$-2.09 | +181.8% |
| EPS (Diluted) | $1.70$-2.09 | +181.3% |
| Shares Outstanding (Basic) | 520.00M507.00M | +2.6% |
| Shares Outstanding (Diluted) | 520.00M507.00M | +2.6% |
05—Questions
Frequently Asked Questions
What drove Devon's return to profitability in 2017?
Management attributes the improvement primarily to commodity prices: WTI averaged about 18% higher in 2017 than in 2016, and realized prices rose 39% per Boe on an unhedged basis. Lower impairments (2017 asset impairments were $1.3 billion in 2016 versus very little in 2017 under successful efforts) also helped. Asset dispositions added gains of $217 million.
How much debt does Devon carry, and how much is non-recourse?
Total debt was $10.4 billion at year-end 2017. Of that, about $3.5 billion represents EnLink and General Partner debt that is non-recourse to Devon. Devon's own debt was $6.9 billion, with no significant maturities until 2021, and the company was targeting around $1-1.5 billion of debt reduction in 2018.
Why did Devon change its accounting method, and what is the effect?
Devon moved from full cost to successful efforts to align with the more widely used industry method and its peers, and to provide what it considers more transparent results. The conversion increased total equity as of September 30, 2017 by $1.9 billion, mainly from lower impairments, partly offset by higher DD&A and expensed exploration costs. Prior-period results were recast, and 2017 net earnings were $793 million lower than they would have been under full cost.
What are the key risks investors should monitor?
The main risks are commodity price volatility, reserve estimation uncertainty, and the company's $10.4 billion debt level (with a credit rating downgrade potentially raising borrowing costs). Other material risks include a 100% valuation allowance on U.S. deferred tax assets, about $1.4 billion of undeveloped leasehold and capitalized interest (about $750 million tied to the unsanctioned Pike oil sands project), midstream capacity constraints, cyberattack exposure, and regulatory and climate-related policy changes, including the Tax Cuts and Jobs Act's effects.
What is the outlook for 2018 production and capital spending?
Devon expects to increase its oil and gas investment by about 10% and drill roughly 25% more wells in 2018, with an exploration and development budget of $2.2-2.4 billion funded from operating cash flow. It targets 6%-9% top-line oil-equivalent production growth on a retained-asset basis, centered on the STACK and Delaware Basin. Devon has hedged about 40% of its 2018 oil and 50% of its gas production.
06—Continue