8-KOther Events

DEVON ENERGY CORP/DE 8-K Report, Corporate Update (Aug 3, 2011)

Filed August 3, 2011For Securities:DVN

Summary

Devon Energy Corp./DE (DVN) filed an 8-K on August 3, 2011, to update its 2011 forward-looking estimates for North America Onshore operations. The company provided revised production estimates and detailed assumptions and risks associated with its projections, including price volatility for oil, gas, and NGLs, operational risks, and regulatory changes. A significant portion of the report focuses on the company's commodity price risk management strategies, outlining the use of financial contracts like swaps and collars to mitigate the impact of price fluctuations on revenues and earnings. The filing also provides updated guidance on marketing and midstream operating profit, lease operating expenses, taxes other than income taxes, depreciation, depletion, and amortization (DD&A), general and administrative (G&A) expenses, and interest expense. Investors are provided with updated capital expenditure budgets for oil and gas development and exploration, as well as midstream and corporate activities. The company also highlighted its ongoing share repurchase program and dividend policy, reaffirming its liquidity position and ability to fund anticipated capital expenditures and other cash uses through operating cash flow, existing cash balances, and commercial paper borrowings, despite a significant portion of cash proceeds from recent divestitures being held offshore.

Key Highlights

  • 1Devon Energy updated its 2011 forward-looking estimates for North America Onshore operations, including production, pricing, and expense guidance.
  • 2The company detailed its extensive commodity price risk management strategies, utilizing various financial derivative instruments (swaps, collars, options) to hedge against oil and gas price volatility.
  • 3Updated 2011 marketing and midstream operating profit is projected between $515 million and $545 million.
  • 4Total North America Onshore oil and gas capital expenditures for 2011 are estimated to range from $5.48 billion to $5.95 billion.
  • 5Devon Energy reported total debt of $7.9 billion as of June 30, 2011, with a recent issuance of $2.25 billion in senior notes.
  • 6The company continues its $3.5 billion share repurchase program, having repurchased $2.6 billion through July 22, 2011.
  • 7Liquidity is expected to remain adequate, funded by operating cash flow, existing cash, and commercial paper, though proceeds from international divestitures are held offshore.

Frequently Asked Questions

The primary risks highlighted include significant price volatility for oil, gas, and NGLs, operational risks inherent in exploration and production, potential regulatory changes, and the uncertainty in estimating future production and reserves. Marketing and midstream operations also face risks related to price volatility, transportation availability, and environmental factors. Currency exchange rate fluctuations also pose a risk for Canadian operations.

Devon Energy employs financial commodity contracts to manage price volatility. As of June 30, 2011, these included oil and gas price collars, oil call options, gas price swaps, gas basis swaps, and NGL basis swaps. These instruments are designed to hedge against revenue fluctuations by establishing price floors and ceilings or locking in prices for a portion of their production.

Devon Energy anticipates total capital expenditures for 2011 to be between $6.69 billion and $7.29 billion. This includes approximately $5.48 billion to $5.95 billion for oil and gas development and exploration, $370 million to $420 million for midstream assets, and $475 million to $525 million for corporate activities. A significant portion is allocated to development capital.

The company expects to fund its 2011 uses of cash, including capital activities, through a combination of existing cash balances and operating cash flow. These will be supplemented by commercial paper borrowings. While the company holds substantial cash and short-term investments, a significant portion is held offshore, necessitating the use of domestic borrowings to fund U.S. operations.