Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-32318
DEVON ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
73-1567067
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
identification No.)
333 West Sheridan Avenue, Oklahoma City, Oklahoma
73102-5015
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (405) 235-3611
Former name, address and former fiscal year, if changed from last report: Not applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.10 per share
DVN
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
On July 19, 2023, 640.7 million shares of common stock were outstanding.
FORM 10-Q
TABLE OF CONTENTS
Part I. Financial Information
Item 1.
Financial Statements
6
Consolidated Statements of Comprehensive Earnings
Consolidated Balance Sheets
7
Consolidated Statements of Cash Flows
8
Consolidated Statements of Equity
9
Notes to Consolidated Financial Statements
10
Note 1 – Summary of Significant Accounting Policies
Note 2 – Acquisitions and Divestitures
11
Note 3 – Derivative Financial Instruments
Note 4 – Share-Based Compensation
13
Note 5 – Restructuring
14
Note 6 – Other, Net
15
Note 7 – Income Taxes
Note 8 – Net Earnings Per Share
16
Note 9 – Other Comprehensive Earnings (Loss)
Note 10 – Supplemental Information to Statements of Cash Flows
17
Note 11 – Accounts Receivable
Note 12 – Property, Plant and Equipment
Note 13 – Debt and Related Expenses
18
Note 14 – Leases
19
Note 15 – Asset Retirement Obligations
Note 16 – Stockholders’ Equity
20
Note 17 – Commitments and Contingencies
Note 18 – Fair Value Measurements
22
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Executive Overview
Results of Operations
24
Capital Resources, Uses and Liquidity
32
Critical Accounting Estimates
35
Non-GAAP Measures
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
38
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
39
Signatures
40
2
DEFINITIONS
Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Devon,” the “Company” and “Registrant” refer to Devon Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:
“2022 Plan” means the Devon Energy Corporation 2022 Long-Term Incentive Plan.
“AFSI” means adjusted financial statement income.
“Bbl” or “Bbls” means barrel or barrels.
“Boe” means barrel of oil equivalent. Gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.
“Btu” means British thermal units, a measure of heating value.
“CAMT” means corporate alternative minimum tax.
“Catalyst” means Catalyst Midstream Partners, LLC.
“CDM” means Cotton Draw Midstream, L.L.C.
“DD&A” means depreciation, depletion and amortization expenses.
“EPA” means the United States Environmental Protection Agency.
“ESG” means environmental, social and governance.
“G&A” means general and administrative expenses.
“GAAP” means U.S. generally accepted accounting principles.
“Inside FERC” refers to the publication Inside FERC’s Gas Market Report.
“IRA” refers to the Inflation Reduction Act of 2022.
“LOE” means lease operating expenses.
“Matterhorn” refers to Matterhorn Express Pipeline, LLC and, as applicable, its direct parent, MXP Parent, LLC.
“MBbls” means thousand barrels.
“MBoe” means thousand Boe.
“Mcf” means thousand cubic feet.
“Merger” means the merger of East Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”) with and into WPX, with WPX continuing as the surviving corporation and a wholly-owned subsidiary of the Company, pursuant to the terms of that certain Agreement and Plan of Merger, dated September 26, 2020, by and among the Company, Merger Sub and WPX.
“MMBoe” means million Boe.
“MMBtu” means million Btu.
3
“MMcf” means million cubic feet.
“N/M” means not meaningful.
“NCI” means noncontrolling interests.
“NGL” or “NGLs” means natural gas liquids.
“NYMEX” means New York Mercantile Exchange.
“OPEC” means Organization of the Petroleum Exporting Countries.
“SEC” means United States Securities and Exchange Commission.
“2018 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.
“2023 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of March 24, 2023.
“TSR” means total shareholder return.
“U.S.” means United States of America.
“VIE” means variable interest entity.
“Water JV” means NDB Midstream L.L.C.
“WPX” means WPX Energy, Inc.
“WTI” means West Texas Intermediate.
“/Bbl” means per barrel.
“/d” means per day.
“/MMBtu” means per MMBtu.
4
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words and phrases “expects,” “believes,” “will,” “would,” “could,” “continue,” “may,” “aims,” “likely to be,” “intends,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this report that address activities, events or developments that Devon expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially and adversely from our expectations due to a number of factors, including, but not limited to:
The forward-looking statements included in this filing speak only as of the date of this report, represent management’s current reasonable expectations as of the date of this filing and are subject to the risks and uncertainties identified above as well as those described elsewhere in this report and in other documents we file from time to time with the SEC. We cannot guarantee the accuracy of our forward-looking statements, and readers are urged to carefully review and consider the various disclosures made in this report and in other documents we file from time to time with the SEC. All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We do not undertake, and expressly disclaim, any duty to update or revise our forward-looking statements based on new information, future events or otherwise.
5
Item 1. Financial Statements
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
(Unaudited)
Oil, gas and NGL sales
$
2,493
4,100
5,172
7,275
Oil, gas and NGL derivatives
(76
)
(170
(12
(853
Marketing and midstream revenues
1,037
1,696
2,117
3,016
Total revenues
3,454
5,626
7,277
9,438
Production expenses
719
729
1,412
1,347
Exploration expenses
12
Marketing and midstream expenses
1,051
1,700
2,156
3,024
Depreciation, depletion and amortization
638
528
1,253
1,017
Asset dispositions
(41
(14
(15
General and administrative expenses
92
84
198
178
Financing costs, net
78
150
169
Other, net
(51
Total expenses
2,557
3,131
5,156
5,681
Earnings before income taxes
897
2,495
2,121
3,757
Income tax expense
199
557
420
824
Net earnings
698
1,938
1,701
2,933
Net earnings attributable to noncontrolling interests
Net earnings attributable to Devon
690
1,932
1,685
2,921
Net earnings per share:
Basic net earnings per share
1.08
2.94
2.61
4.42
Diluted net earnings per share
1.07
2.93
2.60
4.40
Comprehensive earnings:
Other comprehensive earnings, net of tax:
Pension and postretirement plans
1
Other comprehensive earnings, net of tax
699
1,939
1,703
2,935
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings attributable to Devon
691
1,933
1,687
2,923
See accompanying notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
June 30, 2023
December 31, 2022
ASSETS
Current assets:
Cash, cash equivalents and restricted cash
488
1,454
Accounts receivable
1,519
1,767
Inventory
201
Other current assets
397
469
Total current assets
2,605
3,891
Oil and gas property and equipment, based on successful efforts accounting, net
17,317
16,567
Other property and equipment, net ($117 million and $109 million related to CDM in 2023 and 2022, respectively)
1,446
1,539
Total property and equipment, net
18,763
18,106
Goodwill
753
Right-of-use assets
266
224
Investments
675
440
Other long-term assets
293
307
Total assets
23,355
23,721
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
843
859
Revenues and royalties payable
1,199
1,506
Short-term debt
244
251
Other current liabilities
383
489
Total current liabilities
2,669
3,105
Long-term debt
6,169
6,189
Lease liabilities
299
257
Asset retirement obligations
548
511
Other long-term liabilities
858
900
Deferred income taxes
1,662
1,463
Stockholders' equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 641 million and 653 million shares in 2023 and 2022, respectively
64
65
Additional paid-in capital
6,131
6,921
Retained earnings
4,940
4,297
Accumulated other comprehensive loss
(114
(116
Total stockholders’ equity attributable to Devon
11,021
11,167
Noncontrolling interests
129
Total equity
11,150
11,296
Total liabilities and equity
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash from operating activities:
Leasehold impairments
Amortization of liabilities
(8
(9
Total losses on commodity derivatives
76
170
853
Cash settlements on commodity derivatives
(472
50
(816
Gains on asset dispositions
Deferred income tax expense
119
305
Share-based compensation
25
48
43
Other
(2
—
(17
Changes in assets and liabilities, net
(140
(128
55
Net cash from operating activities
1,405
2,678
3,082
4,515
Cash flows from investing activities:
Capital expenditures
(1,079
(573
(2,091
(1,110
Acquisitions of property and equipment
(18
(100
(31
(101
Divestitures of property and equipment
Distributions from investments
Contributions to investments and other
(21
(52
(43
Net cash from investing activities
(1,102
(670
(2,135
(1,196
Cash flows from financing activities:
Repurchases of common stock
(228
(324
(745
(535
Dividends paid on common stock
(462
(830
(1,058
(1,497
Contributions from noncontrolling interests
Distributions to noncontrolling interests
(13
(5
(24
Shares exchanged for tax withholdings and other
(96
(85
Net cash from financing activities
(704
(1,171
(1,915
(2,130
Effect of exchange rate changes on cash
(3
Net change in cash, cash equivalents and restricted cash
(399
832
(966
1,186
Cash, cash equivalents and restricted cash at beginning of period
887
2,625
2,271
Cash, cash equivalents and restricted cash at end of period
3,457
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
372
3,300
Restricted cash
116
157
Total cash, cash equivalents and restricted cash
CONSOLIDATED STATEMENTS OF EQUITY
Additional
Comprehensive
Common Stock
Paid-In
Retained
Earnings
Treasury
Noncontrolling
Total
Shares
Amount
Capital
(Loss)
Stock
Interests
Equity
Three Months Ended June 30, 2023
Balance as of March 31, 2023
645
6,344
4,712
(115
(28
126
11,103
Common stock repurchased
(208
(210
Common stock retired
(4
(236
236
Common stock dividends
Balance as of June 30, 2023
641
Three Months Ended June 30, 2022
Balance as of March 31, 2022
661
66
7,371
2,013
(131
(19
135
9,435
Restricted stock grants, net of cancellations
(329
(1
(334
335
(838
Balance as of June 30, 2022
656
7,060
3,107
(130
136
10,226
Six Months Ended June 30, 2023
Balance as of December 31, 2022
653
(6
(833
(839
(832
833
(1,042
Six Months Ended June 30, 2022
Balance as of December 31, 2021
663
7,636
1,692
(132
137
9,399
(634
(10
(620
621
(1,506
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2022 Annual Report on Form 10-K. The accompanying unaudited interim financial statements in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month and six-month periods ended June 30, 2023 and 2022 and Devon’s financial position as of June 30, 2023.
Restricted Cash
As of June 30, 2023, approximately $116 million of cash on the consolidated balance sheets is presented as restricted cash for obligations primarily related to an abandoned Canadian firm transportation agreement.
Variable Interest Entity
CDM is a joint venture entity formed by Devon and an affiliate of QL Capital Partners, LP. CDM provides gathering, compression and dehydration services for natural gas production in the Cotton Draw area of the Delaware Basin. Devon holds a controlling interest in CDM and the portions of CDM’s net earnings and equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated statements of comprehensive earnings and consolidated balance sheets. CDM is considered a VIE to Devon. The assets of CDM cannot be used by Devon for general corporate purposes and are included in, and disclosed parenthetically, on Devon's consolidated balance sheets. The carrying amount of liabilities related to CDM for which the creditors do not have recourse to Devon's assets are also included in, and disclosed parenthetically, if material, on Devon's consolidated balance sheets.
The following table presents Devon's investments.
Carrying Amount
% Interest
Catalyst
50%
324
339
Water JV
30%
212
Matterhorn
12.5%
90
54
Various
49
47
Devon has an interest in Catalyst, which is a joint venture with an affiliate of Howard Energy Partners, LLC (“HEP”) and certain other investors, to develop oil gathering and natural gas processing infrastructure in the Stateline area of the Delaware Basin. Under the terms of the arrangement, Devon and a holding company owned by the other joint venture investors each have a 50% voting interest in the joint venture legal entity, and HEP serves as the operator. Through 2038, Devon’s production from 50,000 net acres in the Stateline area of the Delaware Basin has been dedicated to Catalyst subject to fixed-fee oil gathering and natural gas processing agreements. Devon accounts for the investment in Catalyst as an equity method investment. Devon's investment in Catalyst is shown within investments on the consolidated balance sheets and Devon's share of Catalyst earnings are reflected as a component of other, net in the accompanying consolidated statements of comprehensive earnings.
In the second quarter of 2023, Devon made an investment in the Water JV, a joint venture entity formed with an affiliate of WaterBridge NDB LLC (“WaterBridge”), for the purpose of providing increased capacity and flexibility in disposing of produced water in the Delaware Basin and Eagle Ford. Under terms of the arrangement, Devon contributed water infrastructure assets and committed to a water gathering and disposal dedication to the Water JV through 2038, in exchange for a 30% voting interest in the joint venture legal entity. WaterBridge contributed water infrastructure assets to the Water JV, in exchange for a 70% voting interest in the joint venture legal entity and will serve as the operator. At closing of the Water JV, Devon recognized a $64 million gain in asset dispositions in the consolidated statements of comprehensive earnings, which represented the excess of the estimated fair value of Devon's interest in the Water JV over the carrying value of the water infrastructure assets Devon contributed to the Water JV. Devon accounts for the investment in the Water JV as an equity method investment. Devon's investment in the Water JV is shown
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
within investments on the consolidated balance sheets and Devon's share of the Water JV earnings are reflected as a component of other, net in the accompanying consolidated statements of comprehensive earnings.
During 2023 and 2022, Devon made investments in Matterhorn. Matterhorn is a joint venture entity and was formed for the purpose of constructing a natural gas pipeline that will transport natural gas from the Permian Basin to the Katy, Texas area. Devon's investment in Matterhorn does not give it the ability to exercise significant influence over Matterhorn.
Disaggregation of Revenue
The following table presents revenue from contracts with customers that are disaggregated based on the type of good or service.
Oil
2,106
2,970
4,249
5,376
Gas
122
864
NGL
265
573
588
1,035
735
952
1,465
1,728
123
322
275
531
179
422
377
757
Total revenues from contracts with customers
3,530
5,796
7,289
10,291
2. Acquisitions and Divestitures
Acquisitions
In September 2022, Devon completed its acquisition of producing properties and leasehold interests located in the Eagle Ford for cash consideration of approximately $1.7 billion, net of purchase price adjustments. Additionally, in July 2022, Devon completed its acquisition of producing properties and leasehold interests located in the Williston Basin for cash consideration of approximately $830 million, net of purchase price adjustments. The total estimated proved reserves associated with these Eagle Ford and Williston Basin assets were approximately 87 MMBoe and 66 MMBoe, respectively. Each of these acquisitions were accounted for as asset acquisitions as substantially all of the fair value was concentrated in a group of similar assets. Each of the acquisitions resulted in the purchase of producing properties and leasehold interests in a defined geographical and geological area, and substantially all of the assets have similar risk characteristics.
Contingent Earnout Payments
Devon is entitled to contingent earnout payments associated with the sale of its Barnett Shale assets in 2020 with upside participation beginning at a $2.75 Henry Hub natural gas price or a $50 WTI oil price. The contingent payment period commenced on January 1, 2021 and has a term of four years. Devon received $65 million in contingent earnout payments related to this transaction in the first quarter of 2023 and 2022 and could receive up to an additional $130 million in contingent earnout payments for the remaining performance periods depending on future commodity prices. The valuation of the future contingent earnout payments included within other current assets and other long-term assets in the June 30, 2023 consolidated balance sheet was approximately $30 million and $35 million, respectively. These values were derived utilizing a Monte Carlo valuation model and qualify as a level 3 fair value measurement.
Devon also received $4 million in contingent earnout payments related to the sale of non-core assets in the Rockies in the first quarter of 2023 and 2022.
Objectives and Strategies
Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas
and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps and costless price collars.
Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.
Counterparty Credit Risk
By using derivative financial instruments, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment-grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally contain provisions that provide for collateral payments if Devon’s or its counterparty’s credit rating falls below certain credit rating levels. As of June 30, 2023, Devon neither held cash collateral of its counterparties nor posted cash collateral to its counterparties. Given Devon's current credit ratings and the terms of the underlying contracts, Devon is not currently required to post collateral to its counterparties with respect to its open derivative positions, and we would not be required to post any such collateral as a result of any change to the amount of Devon's net liability for such positions.
Commodity Derivatives
As of June 30, 2023, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.
Price Swaps
Price Collars
Period
Volume(Bbls/d)
WeightedAveragePrice ($/Bbl)
WeightedAverage FloorPrice ($/Bbl)
WeightedAverageCeiling Price($/Bbl)
Q3-Q4 2023
6,000
68.42
82,750
69.52
94.57
Q1-Q4 2024
1,492
21,486
60.00
85.66
Oil Basis Swaps
Index
Weighted AverageDifferential to WTI($/Bbl)
Midland Sweet
66,500
1.11
61,500
1.17
Q1-Q4 2025
49,000
0.96
As of June 30, 2023, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.
Volume (MMBtu/d)
Weighted Average Price ($/MMBtu)
Weighted Average Floor Price ($/MMBtu)
Weighted AverageCeiling Price ($/MMBtu)
108,000
3.30
171,000
3.64
7.44
94,426
40,527
3.78
7.05
Natural Gas Basis Swaps
Volume(MMBtu/d)
Weighted AverageDifferential toHenry Hub($/MMBtu)
El Paso Natural Gas
145,000
(1.58
Houston Ship Channel
140,000
(0.19
WAHA
70,000
(0.51
34,863
(0.91
90,000
(0.25
44,973
(0.58
As of June 30, 2023, Devon did not have any open NGL positions.
Financial Statement Presentation
All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the consolidated balance sheets. Amounts related to contracts allowed to be netted upon payment subject to a master netting arrangement with the same counterparty are reported on a net basis in the consolidated balance sheets. The tables below present a summary of these positions as of June 30, 2023 and December 31, 2022.
Gross Fair Value
Amounts Netted
Net Fair Value
Balance Sheet Classification
Commodity derivatives:
Short-term derivative asset
111
(20
91
138
Long-term derivative asset
Short-term derivative liability
(23
(22
Long-term derivative liability
Total derivative asset
128
The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings.
G&A
42
Related income tax benefit
27
26
Under its approved long-term incentive plan, Devon grants share-based awards to its employees. The following table presents a summary of Devon’s unvested restricted stock awards and units and performance share units granted under the plan.
Restricted Stock Awards & Units
Performance Share Units
Awards/Units
WeightedAverageGrant-DateFair Value
Units
(Thousands, except fair value data)
Unvested at 12/31/22
5,788
29.11
1,841
31.33
Granted
1,224
62.95
743
51.38
Vested
(2,905
25.18
(1,037
27.89
Forfeited
(79
43.82
Unvested at 6/30/23
4,028
41.94
1,547
(1)
43.25
The following table presents the assumptions related to the performance share units granted in 2023, as indicated in the previous summary table. The grants in the previous summary table also include the impacts of performance share units granted in a prior year that vested higher than 100% of target due to Devon's TSR performance compared to our peers.
Grant-date fair value
81.70
Risk-free interest rate
4.15
%
Volatility factor
61.43
Contractual term (years)
2.89
The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of June 30, 2023.
Restricted Stock
Performance
Share Units
Unrecognized compensation cost
118
30
Weighted average period for recognition (years)
2.8
1.9
5. Restructuring
The following table summarizes Devon’s restructuring liabilities. The remaining liabilities primarily relate to an abandoned Canadian firm transportation agreement.
Current
Long-term
Liabilities
34
81
115
Changes related to prior years' restructurings
77
149
28
99
127
6. Other, Net
The following table summarizes Devon's other expenses (income) presented in the accompanying consolidated comprehensive statements of earnings.
Estimated future obligation under a performance guarantee
Ukraine charitable pledge
Asset retirement obligation accretion
Devon has guaranteed performance through 2026 for a minimum volume commitment associated with assets divested in 2018. Due to improved commodity prices, market conditions, and performance by the purchaser of the assets, the purchaser was able to fully satisfy the performance obligation due in the first quarter of 2023 and 2022. Additionally, at March 31, 2022, Devon reduced the estimated future exposure of the performance guarantee. The effect of these cash collections and liability revisions resulted in a $96 million benefit in the first six months of 2022.
The first six months of 2022 includes a $20 million pledge for humanitarian relief for the Ukrainian people and surrounding countries supporting refugees.
7. Income Taxes
The following table presents Devon’s total income tax expense and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.
Current income tax expense
80
252
221
355
Total income tax expense
U.S. statutory income tax rate
21
State income taxes
0
%)
Effective income tax rate
On August 16, 2022, the IRA was signed into law and included various income tax related provisions with effective dates generally beginning in 2023. Among the enacted provisions are a 15% CAMT on AFSI and several new and expanded clean energy credits and incentives. Dependent upon future regulations, Devon believes it is subject to the CAMT as Devon has an average annual AFSI that exceeds $1 billion for the three-year period ended December 31, 2022.
The following table reconciles net earnings and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings per share.
Net earnings:
Attributable to participating securities
(11
(33
Basic and diluted earnings
687
1,915
1,674
2,888
Common shares:
Common shares outstanding - total
642
658
646
(7
Common shares outstanding - basic
652
654
Dilutive effect of potential common shares issuable
Common shares outstanding - diluted
639
643
Basic
Diluted
9.Other Comprehensive Earnings (Loss)
Components of other comprehensive earnings (loss) consist of the following:
Pension and postretirement benefit plans:
Beginning accumulated pension and postretirement benefits
Recognition of net actuarial loss and prior service cost in earnings (1)
Accumulated other comprehensive loss, net of tax
Changes in assets and liabilities, net:
98
(346
248
(803
75
Accounts payable and revenues and royalties payable
(65
540
(230
787
(138
93
(141
101
(27
(84
Supplementary cash flow data:
Interest paid
88
85
189
185
Income taxes paid
259
133
110
Devon's non-cash investing activities for the three and six months ended June 30, 2023, included approximately $150 million of contributions of other property and equipment for the formation of the Water JV.
Components of accounts receivable include the following:
913
1,153
Joint interest billings
217
162
364
428
33
Gross accounts receivable
1,526
1,776
Allowance for doubtful accounts
Net accounts receivable
12.Property, Plant and Equipment
The following table presents the aggregate capitalized costs related to Devon’s oil and gas and non-oil and gas activities.
Property and equipment:
Proved
44,711
42,734
Unproved and properties under development
1,528
1,548
Total oil and gas
46,239
44,282
Less accumulated DD&A
(28,922
(27,715
Oil and gas property and equipment, net
Other property and equipment
2,204
2,280
(758
(741
Other property and equipment, net (1)
Property and equipment, net
See below for a summary of debt instruments and balances. The notes and debentures are senior, unsecured obligations of Devon.
8.25% due August 1, 2023
242
5.25% due September 15, 2024
472
5.85% due December 15, 2025
485
7.50% due September 15, 2027
73
5.25% due October 15, 2027
390
5.875% due June 15, 2028
325
4.50% due January 15, 2030
585
7.875% due September 30, 2031
7.95% due April 15, 2032
366
5.60% due July 15, 2041
1,250
4.75% due May 15, 2042
750
5.00% due June 15, 2045
Net premium on debentures and notes
82
103
Debt issuance costs
(32
(26
Total debt
6,413
6,440
Less amount classified as short-term debt
Total long-term debt
Retirement of Senior Notes
On August 1, 2023, Devon repaid the $242 million of 8.25% senior notes at maturity.
Credit Lines
On March 24, 2023, Devon amended and restated its 2018 Senior Credit Facility to provide for a new $3.0 billion revolving 2023 Senior Credit Facility with a financial covenant and other terms similar to the 2018 Senior Credit Facility. The 2023 Senior Credit Facility matures on March 24, 2028, with the option to extend the maturity date by three additional one-year periods, subject to lender consent. As of June 30, 2023, Devon had no outstanding borrowings under the 2023 Senior Credit Facility and had issued $2 million in outstanding letters of credit under this facility. The 2023 Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be no greater than 65%. Under the terms of the credit agreement, total capitalization is adjusted to add back non-cash financial write-downs such as impairments. As of June 30, 2023, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 23.1%.
Net Financing Costs
The following schedule includes the components of net financing costs.
Interest based on debt outstanding
96
Interest income
Total net financing costs
14. Leases
The following table presents Devon’s right-of-use assets and lease liabilities as of June 30, 2023 and December 31, 2022.
Finance
Operating
203
Lease liabilities:
Current lease liabilities (1)
Long-term lease liabilities
295
249
Total lease liabilities
309
323
278
(1)Current lease liabilities are included in other current liabilities on the consolidated balance sheets.
Devon’s operating lease right-of-use assets relate to real estate, drilling rigs and other equipment for the exploration, development and production of oil and gas. Devon’s financing lease right-of-use assets relate to real estate. In the second quarter of 2023, Devon's financing lease right-of-use assets and the associated liabilities increased primarily from an amendment of lease terms.
The following table presents the changes in Devon’s asset retirement obligations.
Asset retirement obligations as of beginning of period
529
Liabilities incurred
Liabilities settled and divested
Revision of estimated obligation
(35
Accretion expense on discounted obligation
Asset retirement obligations as of end of period
566
Less current portion
Asset retirement obligations, long-term
452
During the first six months of 2023, Devon increased its asset retirement obligations by approximately $27 million primarily due to inflation-driven increases in current cost estimates. During the first six months of 2022, Devon reduced its asset retirement obligations by $35 million primarily due to extended retirement dates for oil and gas assets, partially offset by inflation-driven increases to current settlement costs.
Share Repurchases
In November 2021, Devon authorized a share repurchase program of $1.0 billion with a December 31, 2022 expiration date. In 2022, the Board of Directors authorized expansions of the share repurchase program ultimately to $2.0 billion and extended the expiration date to May 4, 2023. In May 2023, the Board of Directors authorized a further expansion to $3.0 billion and extended the expiration date to December 31, 2024. The table below provides information regarding purchases of Devon’s common stock under the $3.0 billion share repurchase program (shares in thousands).
Total Number ofShares Purchased
Dollar Value ofShares Purchased
Average Price Paidper Share
$3.0 Billion Plan
2021:
Fourth quarter
13,983
589
42.15
2022:
First quarter
3,979
230
57.74
Second quarter
5,052
318
63.07
Third quarter
1,875
113
59.99
802
57
71.69
2023:
10,090
545
53.96
3,795
200
52.70
Total plan
39,576
2,052
51.86
Dividends
Devon pays a quarterly dividend which is comprised of a fixed dividend and a variable dividend. The variable dividend is dependent on quarterly cash flows, among other factors. Devon raised its fixed dividend multiple times over the past two calendar years from $0.16 per share in the first quarter of 2022 to $0.20 per share beginning in the first quarter of 2023. The following table summarizes Devon’s fixed and variable dividends for the first six months of 2023 and 2022, respectively.
Fixed
Variable
Rate Per Share
463
596
0.89
334
462
0.72
Total year-to-date
261
797
1,058
109
558
667
1.00
105
725
830
1.27
214
1,283
1,497
In August 2023, Devon announced a cash dividend in the amount of $0.49 per share payable in the third quarter of 2023. The dividend consists of a $0.20 per share fixed quarterly dividend and a $0.29 per share variable quarterly dividend and will total approximately $314 million.
Noncontrolling Interests
The noncontrolling interests’ share of CDM’s net earnings and the contributions from and distributions to the noncontrolling interests are presented as components of equity.
Devon is party to various legal actions arising in connection with its business. Matters that are probable of unfavorable outcome to Devon and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. None of the
actions are believed by management to likely involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. Actual amounts could differ materially from management’s estimates.
Royalty Matters
Numerous oil and natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. Devon is currently named as a defendant in a number of such lawsuits, including some lawsuits in which the plaintiffs seek to certify classes of similarly situated plaintiffs. Among the allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, paid royalty proceeds in an untimely manner without including required interest, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with oil, natural gas and NGLs produced and sold. Devon is also involved in governmental agency proceedings and royalty audits and is subject to related contracts and regulatory controls in the ordinary course of business, some that may lead to additional royalty claims.
Environmental and Climate Change Matters
Devon’s business is subject to numerous federal, state, tribal and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties, as well as remediation costs. Although Devon believes that it is in substantial compliance with applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on its business, there can be no assurance that this will continue in the future.
Beginning in 2013, various parishes in Louisiana filed suit against numerous oil and gas companies, including Devon, alleging that the companies’ operations and activities in certain fields violated the State and Local Coastal Resource Management Act of 1978, as amended, and caused substantial environmental contamination, subsidence and other environmental damages to land and water bodies located in the coastal zone of Louisiana. The plaintiffs’ claims against Devon relate primarily to the operations of several of Devon’s corporate predecessors. The plaintiffs seek, among other things, payment of the costs necessary to clear, re-vegetate and otherwise restore the allegedly impacted areas. Although Devon cannot predict the ultimate outcome of these matters, Devon denies the allegations in these lawsuits and intends to vigorously defend against these claims.
The State of Delaware and various municipalities and other governmental and private parties in California have filed legal proceedings against numerous oil and gas companies, including Devon, seeking relief to abate alleged impacts of climate change. These proceedings include far-reaching claims for monetary damages and injunctive relief. Although Devon cannot predict the ultimate outcome of these matters, Devon denies all allegations asserted in these lawsuits and intends to vigorously defend against these claims.
Other Indemnifications and Legacy Matters
Pursuant to various sale agreements relating to divested businesses and assets, Devon has indemnified various purchasers against liabilities that they may incur with respect to the businesses and assets acquired from Devon. Additionally, federal, state and other laws in areas of former operations may require previous operators (including corporate successors of previous operators) to perform or make payments in certain circumstances where the current operator may no longer be able to satisfy the applicable obligation. Such obligations may include plugging and abandoning wells, removing production facilities or performing requirements under surface agreements in existence at the time of disposition.
In November 2020, the Department of the Interior, Bureau of Safety and Environmental Enforcement ordered several oil and gas operators, including Devon, to perform decommissioning and reclamation activities related to two California offshore oil and gas production platforms and related facilities. The current operator and owner of the platforms contends that it does not have the financial ability to perform these obligations and relinquished the related federal lease in October 2020. In response to the apparent insolvency of the current operator, the government has ordered the former operators and alleged former lease record title owners to decommission the platforms and related facilities. The government contends that an alleged corporate predecessor of Devon owned a partial interest in the subject lease and platforms. Although Devon cannot predict the ultimate outcome of this matter, Devon denies any obligation to decommission the subject platforms, has appealed the order, and believes any decommissioning obligation related to the subject platforms should be assumed by others.
The following table provides carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other current payables, accrued expenses and lease liabilities included in the accompanying consolidated balance sheets approximated fair value at June 30, 2023 and December 31, 2022, as applicable. Therefore, such financial assets and liabilities are not presented in the following table.
Fair Value Measurements Using:
Carrying
Total Fair
Level 1
Level 2
Level 3
Value
Inputs
June 30, 2023 assets (liabilities):
Cash equivalents
Commodity derivatives
Debt
(6,413
(6,187
Contingent earnout payments
December 31, 2022 assets (liabilities):
708
131
(6,440
(6,231
The following methods and assumptions were used to estimate the fair values in the table above.
Level 1 Fair Value Measurements
Cash equivalents – Amounts consist primarily of money market investments and the fair value approximates the carrying value.
Level 2 Fair Value Measurements
Commodity derivatives – The fair value of commodity derivatives is estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.
Debt – Devon’s debt instruments do not consistently trade actively in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity when active trading is not available.
Level 3 Fair Value Measurements
Contingent Earnout Payments – Devon has the right to receive contingent consideration related to the Barnett asset divestiture based on future oil and gas prices. These values were derived using a Monte Carlo valuation model and qualify as a level 3 fair value measurement. For additional information, see Note 2.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis addresses material changes in our results of operations for the three-month and six-month periods ended June 30, 2023 compared to previous periods, and in our financial condition and liquidity since December 31, 2022. For information regarding our critical accounting policies and estimates, see our 2022 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We are a leading independent oil and natural gas exploration and production company whose operations are focused onshore in the United States. Our operations are currently focused in five core areas: the Delaware Basin, Eagle Ford, Anadarko Basin, Williston Basin and Powder River Basin. Our asset base is underpinned by premium acreage in the economic core of the Delaware Basin and our diverse, top-tier resource plays provide a deep inventory of opportunities for years to come. In the third quarter of 2022, we acquired additional producing properties and leasehold interests in both the Williston Basin and Eagle Ford that were complementary to our existing acreage, offered operational synergies and added additional high-quality inventory to our portfolio.
We remain focused on building economic value by executing on our strategic priorities of moderating production growth, emphasizing capital and operational efficiencies, optimizing reinvestment rates to maximize free cash flow, maintaining low leverage, delivering cash returns to our shareholders and pursuing ESG excellence. Our recent performance highlights for these priorities include the following items:
We remain committed to capital discipline and delivering the objectives that underpin our current plan. Those objectives prioritize value creation through moderated capital investment and production growth, particularly with a view of the volatility in commodity prices, supply chain constraints and the economic uncertainty arising from inflation and geopolitical events.
The following graphs, discussion and analysis are intended to provide an understanding of our results of operations and current financial condition. To facilitate the review, these numbers are being presented before consideration of noncontrolling interests.
Q2 2023 vs. Q1 2023
Our second quarter 2023 and first quarter 2023 net earnings were $0.7 billion and $1.0 billion, respectively. The graph below shows the change in net earnings from the first quarter of 2023 to the second quarter of 2023. The material changes are further discussed by category on the following pages.
Production Volumes
Q2 2023
% of Total
Q1 2023
Change
Oil (MBbls/d)
Delaware Basin
209
211
-1
Eagle Ford
45
Anadarko Basin
Williston Basin
36
Powder River Basin
-3
-2
100
320
Gas (MMcf/d)
636
60
640
86
254
237
59
1,054
1,030
NGLs (MBbls/d)
97
31
N/M
164
Combined (MBoe/d)
415
74
68
89
56
53
-11
662
From the first quarter of 2023 to the second quarter of 2023, the change in volumes contributed to an $82 million increase to earnings. The increase in volumes was primarily due to modest growth in the Anadarko Basin, Eagle Ford, Delaware Basin and Williston Basin resulting from new well activity.
Realized Prices
Realization
Oil (per Bbl)
WTI index
73.76
76.17
Realized price, unhedged
71.74
97%
74.32
Cash settlements
(0.10
Realized price, with hedges
74.22
Gas (per Mcf)
Henry Hub index
2.09
3.44
-39
61%
2.29
-45
0.39
0.18
1.66
79%
2.47
-33
NGLs (per Bbl)
17.79
24%
24.12
-26
Combined (per Boe)
41.39
46.44
0.61
0.22
42.00
46.66
-10
From the first quarter of 2023 to the second quarter of 2023, realized prices contributed to a $268 million decrease in earnings. Unhedged realized oil, gas and NGL prices decreased primarily due to lower WTI, Henry Hub and Mont Belvieu index prices. The decrease in Henry Hub index prices was partially offset by improved hedge cash settlements related to gas commodities.
We currently have approximately 30% of both our remaining anticipated 2023 oil and gas production hedged.
Hedge Settlements
Q
Natural gas
Total cash settlements (1)
Cash settlements as presented in the tables above represent realized gains or losses related to the instruments described in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Production Expenses
LOE
353
327
Gathering, processing & transportation
177
166
Production taxes
165
175
-6
Property taxes
-4
693
Per Boe:
5.86
5.67
2.88
Percent of oil, gas and NGL sales:
6.6
6.5
Production expenses increased in the second quarter of 2023 primarily due to higher LOE and gathering, processing and transportation costs resulting from increased activity. These increases were partially offset by a decrease in production taxes which resulted from lower commodity prices.
Field-Level Cash Margin
The table below presents the field-level cash margin for each of our operating areas. Field-level cash margin is computed as oil, gas and NGL sales less production expenses and is not a measure defined by GAAP. A reconciliation to the comparable GAAP measures is found in “Non-GAAP Measures” in this Item 2. The changes in production volumes, realized prices and production expenses, shown above, had the following impact on our field-level cash margins by asset.
$ per BOE
Field-level cash margin (Non-GAAP)
1,196
31.28
1,334
35.71
263
38.87
41.75
13.72
154
21.09
25.54
156
32.65
63
36.54
70
41.43
1,774
29.45
1,986
34.42
DD&A
Oil and gas per Boe
10.22
10.25
Oil and gas
616
591
-7
615
DD&A increased in the second quarter of 2023 primarily due to higher volumes.
G&A per Boe
1.52
1.85
-18
Labor and benefits
Non-labor
-16
106
-13
G&A decreased in the second quarter of 2023 due to seasonal decreases in costs.
Other Items
Change in earnings
Commodity hedge valuation changes (1)
(113
51
(164
Marketing and midstream operations
(25
41
Net financing costs
72
We recognize fair value changes on our oil, gas and NGL derivative instruments in each reporting period. The changes in fair value resulted from new positions and settlements that occurred during each period, as well as the relationship between contract prices and the associated forward curves. For additional information, see Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
In the second quarter of 2023, we recorded a $64 million gain within asset dispositions related to the difference between the fair market value and book value of assets contributed to the Water JV. For additional information, see Note 1 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Income Taxes
Current expense
141
Deferred expense
Total expense
Current tax rate
Deferred tax rate
We continue to analyze the new CAMT and its effects on our tax planning. Our current rate is trending below the 15% stated rate in the CAMT due to projected utilization of tax credits and favorable AFSI adjustments, including depreciation and other items. For further discussion on income taxes, see Note 7 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
June 30, 2023 YTD vs. June 30, 2022 YTD
Our six months ended June 30, 2023 net earnings were $1.7 billion, compared to net earnings of $2.9 billion for the first six months ended June 30, 2022. The graph below shows the change in net earnings from the six months ended June 30, 2022 to the six months ended June 30, 2023. The material changes are further discussed by category on the following pages.
210
216
140
29
-9
294
61
245
1,042
934
146
418
71
595
From the six months ended 2022 to the six months ended 2023, the change in volumes contributed to a $682 million increase in earnings. Volumes increased primarily due to acquisitions in the Eagle Ford and Williston Basin which both closed in the third quarter of 2022. Volumes also increased due to new well activity in the Anadarko Basin.
74.96
101.57
73.02
101.14
-28
(0.06
(12.25
72.96
88.89
2.77
6.06
-54
1.77
64%
5.11
-65
0.29
(0.97
2.06
74%
4.14
-50
20.79
28%
39.11
-47
43.86
67.50
-35
0.42
(7.57
44.28
59.93
From the six months ended 2022 to the six months ended 2023, realized prices contributed to a $2.8 billion decrease in earnings. Unhedged realized oil, gas and NGL prices decreased primarily due to lower WTI, Henry Hub and Mont Belvieu index prices. The decrease in index prices was partially offset by improved hedge cash settlements related to oil and gas commodities.
(651
(165
132
680
479
343
338
340
492
-31
5.77
4.45
2.91
3.13
6.8
LOE expenses and LOE per Boe increased for the six months ended 2023 primarily due to acquisitions in the Eagle Ford and Williston Basin as well as cost inflation. Production taxes decreased due to lower commodity prices.
2,530
33.47
4,388
58.45
520
40.24
54.49
17.22
481
35.73
284
29.00
431
51.01
38.97
205
61.67
3,760
31.88
5,928
55.00
10.24
8.99
1,207
969
46
-5
DD&A and our oil and gas per Boe rate both increased for the six months ended 2023 primarily due to acquisitions in the Eagle Ford and Williston Basin which both closed in the third quarter of 2022.
1.68
102
G&A increased for the six months ended 2023 primarily due to an increase in non-labor costs.
(62
(37
(39
(66
(78
Net financing costs decreased for the six months ended 2023 due to an increase in interest income resulting from higher interest rates. For additional information, see Note 13 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
For discussion on other, net, see Note 6 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Sources and Uses of Cash
The following table presents the major changes in cash and cash equivalents for the three and six months ended June 30, 2023 and 2022.
Operating cash flow
Investment activity, net
Noncontrolling interest activity, net
(16
(94
(88
Operating Cash Flow
As presented in the table above, net cash provided by operating activities continued to be a significant source of capital and liquidity. Operating cash flow funded all of our capital expenditures, and we continued to return value to our shareholders by utilizing cash flow and cash balances for dividends and share repurchases.
Capital Expenditures
The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.
644
412
1,228
807
79
83
182
1,046
524
2,022
1,014
Midstream
Total capital expenditures
1,079
2,091
1,110
Capital expenditures consist primarily of amounts related to our oil and gas exploration and development operations, midstream operations and other corporate activities. Our capital investment program is driven by a disciplined allocation process focused on moderating our production growth and maximizing our returns. As such, our capital expenditures for the first six months of 2023 represented approximately 68% of our operating cash flow. Capital expenditures increased due to capital spend on assets acquired in 2022 and general inflation trends.
Divestitures of Property and Equipment
During the first six months of 2023 and 2022, we received contingent earnout payments related to assets previously sold. For additional information, please see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Investment Activity
During the first six months of both 2023 and 2022, Devon received distributions from our investments of $17 million and $23 million, respectively. Devon contributed $52 million and $43 million to our investments during the first six months of 2023 and 2022, respectively.
Shareholder Distributions and Stock Activity
We repurchased approximately 13.9 million shares of common stock for $745 million and 9.0 million shares of common stock for $548 million under the share repurchase program authorized by our Board of Directors in the first half of 2023 and 2022, respectively. For additional information, see Note 16 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
The following table summarizes our common stock dividends during the second quarter and total for the first six months of 2023 and 2022. Devon has raised its fixed dividend multiple times over the past two calendar years to $0.20 per share beginning in the first quarter of 2023. In addition to the fixed quarterly dividend, we paid a variable dividend in the first and second quarters of 2023 and 2022.
Noncontrolling Interest Activity, net
During the first six months of 2023 and 2022, we distributed $24 million and $13 million, respectively, to our noncontrolling interests in CDM. During the first six months of 2023, we received contributions from our noncontrolling interests of $8 million.
Liquidity
The business of exploring for, developing and producing oil and natural gas is capital intensive. Because oil, natural gas and NGL reserves are a depleting resource, we, like all upstream operators, must continually make capital investments to grow and even sustain production. Generally, our capital investments are focused on drilling and completing new wells and maintaining production from existing wells. At opportunistic times, we also acquire operations and properties from other operators or landowners to enhance our existing portfolio of assets.
Historically, our primary sources of capital funding and liquidity have been our operating cash flow, cash on hand and asset divestiture proceeds. Additionally, we maintain a commercial paper program, supported by our revolving line of credit, which can be accessed as needed to supplement operating cash flow and cash balances. If needed, we can also issue debt and equity securities, including through transactions under our shelf registration statement filed with the SEC. We estimate the combination of our sources of capital will continue to be adequate to fund our planned capital requirements as discussed in this section as well as accelerate our cash-return business model.
Key inputs into determining our planned capital investment are the amount of cash we hold and operating cash flow we expect to generate over the next one to three or more years. At the end of the second quarter of 2023, we held approximately $0.5 billion of cash. Our operating cash flow forecasts are sensitive to many variables and include a measure of uncertainty as actual results may differ from our expectations.
Commodity Prices – The most uncertain and volatile variables for our operating cash flow are the prices of the oil, gas and NGLs we produce and sell. Prices are determined primarily by prevailing market conditions. Regional and worldwide economic activity, weather and other highly variable factors influence market conditions for these products. These factors, which are difficult to predict, create volatility in prices and are beyond our control.
To mitigate some of the risk inherent in prices, we utilize various derivative financial instruments to protect a portion of our production against downside price risk. The key terms to our oil, gas and NGL derivative financial instruments as of June 30, 2023 are presented in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” of this report.
Further, when considering the current commodity price environment and our current hedge position, we expect to achieve our capital investment priorities. Additionally, we remain committed to capital discipline and focused on delivering the objectives that underpin our capital plan for 2023. The currently elevated level of cost inflation has eroded, and could continue to erode, the cost efficiencies gained over previous years and further pressure our margins for the remainder of 2023. Despite this, we expect to continue generating material amounts of free cash flow at current commodity price levels due to our strategy of spending within cash flow.
Operating Expenses – Commodity prices can also affect our operating cash flow through an indirect effect on operating expenses. Significant commodity price decreases can lead to a decrease in drilling and development activities. As a result, the demand and cost for people, services, equipment and materials may also decrease, causing a positive impact on our cash flow as the prices paid for services and equipment decline. However, the inverse is also generally true during periods of rising commodity prices. We expect to mitigate the impact of cost inflation through efficiencies gained from the scale of our operations as well as by leveraging our long-standing relationships with our suppliers.
Credit Losses – Our operating cash flow is also exposed to credit risk in a variety of ways. This includes the credit risk related to customers who purchase our oil, gas and NGL production, the collection of receivables from our joint interest owners for their proportionate share of expenditures made on projects we operate and counterparties to our derivative financial contracts. We utilize a variety of mechanisms to limit our exposure to the credit risks of our customers, joint interest owners and counterparties. Such mechanisms include, under certain conditions, requiring letters of credit, prepayments or cash collateral postings.
Credit Availability
As of June 30, 2023, we had approximately $3.0 billion of available borrowing capacity under our 2023 Senior Credit Facility. This credit facility supports our $3.0 billion of short-term credit under our commercial paper program. At June 30, 2023, there were no borrowings under our commercial paper program, and we were in compliance with the Senior Credit Facility’s financial covenant.
Debt Ratings
We receive debt ratings from the major ratings agencies in the U.S. In determining our debt ratings, the agencies consider a number of qualitative and quantitative items including, but not limited to, commodity pricing levels, our liquidity, asset quality, reserve mix, debt levels, cost structure, planned asset sales and the size and scale of our production. Our credit rating from Standard and Poor’s Financial Services is BBB with a stable outlook. Our credit rating from Fitch is BBB+ with a stable outlook. Our credit rating from Moody’s Investor Service is Baa2 with a stable outlook. Any rating downgrades may result in additional letters of credit or cash collateral being posted under certain contractual arrangements.
There are no “rating triggers” in any of our contractual debt obligations that would accelerate scheduled maturities should our debt rating fall below a specified level. However, a downgrade could adversely impact our interest rate on any credit facility borrowings and the ability to economically access debt markets in the future.
Repayment of Debt
On August 1, 2023, we repaid the $242 million of the 8.25% senior notes at maturity.
Fixed Plus Variable Dividend
We are committed to a “fixed plus variable” dividend strategy. Our Board of Directors will consider a number of factors when setting the quarterly dividend, if any, including a general target of paying out approximately 10% of operating cash flow through the fixed dividend. Our Board of Directors increased our quarterly fixed dividend rate by 11% to $0.20 per share beginning in February 2023. In addition to the fixed quarterly dividend, we may pay a variable dividend of up to 50% of our excess free cash flow, which is a non-GAAP measure. Each quarter’s excess free cash flow is computed as operating cash flow (a GAAP measure) before balance sheet
changes, less capital expenditures and the fixed dividend. The declaration and payment of any future dividend, whether fixed or variable, will remain at the full discretion of our Board of Directors and will depend on our financial results, cash requirements, future prospects and other factors deemed relevant by the Board.
In May 2023, our Board of Directors increased our share repurchase program by $1.0 billion to a total authorized amount of $3.0 billion and extended the expiration date to December 31, 2024. Through July 2023, we had executed $2.1 billion of the authorized program.
Our capital expenditures budget for the remainder of 2023 is expected to range from approximately $1.6 billion to $1.8 billion.
The amount of income taxes recorded requires interpretations of complex rules and regulations of federal, state, provincial and foreign tax jurisdictions. We recognize current tax expense based on estimated taxable income for the current period and the applicable statutory tax rates. We routinely assess potential uncertain tax positions and, if required, estimate and establish accruals for such amounts. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and other tax carryforwards. We routinely assess our deferred tax assets and reduce such assets by a valuation allowance if we deem it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Further, in the event we were to undergo an “ownership change” (as defined in Section 382 of the Internal Revenue Code of 1986, as amended), our ability to use net operating losses and tax credits generated prior to the ownership change may be limited. Generally, an “ownership change” occurs if one or more shareholders, each of whom owns five percent or more in value of a corporation’s stock, increase their aggregate percentage ownership by more than 50 percent over the lowest percentage of stock owned by those shareholders at any time during the preceding three-year period. Based on currently available information, we do not believe an ownership change has occurred during the first six months of 2023 for Devon, but the Merger did cause an ownership change for WPX and increased the likelihood Devon could experience an ownership change over the next year.
On August 16, 2022, the IRA was signed into law and included various income tax related provisions with an effective date beginning in 2023. Among the enacted provisions are a 15% CAMT and several new and expanded clean energy credits and incentives. Devon believes it is subject to the CAMT as Devon has an average annual AFSI that exceeds $1 billion for the three-year period ended December 31, 2022. Devon continues to assess the potential impact of the CAMT, and material incremental cash tax could be incurred depending on actual operating results as well as future U.S. Treasury guidance.
For additional information regarding our critical accounting policies and estimates, see our 2022 Annual Report on Form 10-K.
We utilize “core earnings attributable to Devon” and “core earnings per share attributable to Devon” that are not required by or presented in accordance with GAAP. These non-GAAP measures are not alternatives to GAAP measures and should not be considered in isolation or as a substitute for analysis of our results reported under GAAP. Core earnings attributable to Devon, as well as the per share amount, represent net earnings excluding certain non-cash and other items that are typically excluded by securities analysts in their published estimates of our financial results. Our non-GAAP measures are typically used as a quarterly performance measure. Amounts excluded relate to asset dispositions, noncash asset impairments (including unproved asset impairments), deferred tax asset valuation allowance and fair value changes in derivative financial instruments.
We believe these non-GAAP measures facilitate comparisons of our performance to earnings estimates published by securities analysts. We also believe these non-GAAP measures can facilitate comparisons of our performance between periods and to the performance of our peers.
Below are reconciliations of core earnings and core earnings per share attributable to Devon to comparable GAAP measures.
Before Tax
After Tax
After NCI
Per Diluted Share
Earnings attributable to Devon (GAAP)
Adjustments:
(0.05
Asset and exploration impairments
0.01
Deferred tax asset valuation allowance
0.02
Fair value changes in financial instruments
112
0.13
44
0.07
Core earnings attributable to Devon (Non-GAAP)
971
763
755
1.18
2,142
1,723
1,707
2.64
(0.02
(299
(0.35
0.05
2,190
1,713
2.59
3,789
2,974
2,962
4.46
EBITDAX and Field-Level Cash Margin
To assess the performance of our assets, we use EBITDAX and Field-Level Cash Margin. We compute EBITDAX as net earnings before income tax expense; financing costs, net; exploration expenses; DD&A; asset impairments; asset disposition gains and losses; non-cash share-based compensation; non-cash valuation changes for derivatives and financial instruments; restructuring and transaction costs; accretion on discounted liabilities; and other items not related to our normal operations. Field-Level Cash Margin is computed as oil, gas and NGL sales less production expenses. Production expenses consist of lease operating, gathering, processing and transportation expenses, as well as production and property taxes.
We exclude financing costs from EBITDAX to assess our operating results without regard to our financing methods or capital structure. Exploration expenses and asset disposition gains and losses are excluded from EBITDAX because they generally are not indicators of operating efficiency for a given reporting period. DD&A and impairments are excluded from EBITDAX because capital expenditures are evaluated at the time capital costs are incurred. We exclude share-based compensation, valuation changes, restructuring and transaction costs, accretion on discounted liabilities and other items from EBITDAX because they are not considered a measure of asset operating performance.
We believe EBITDAX and Field-Level Cash Margin provide information useful in assessing our operating and financial performance across periods. EBITDAX and Field-Level Cash Margin as defined by Devon may not be comparable to similarly titled measures used by other companies and should be considered in conjunction with net earnings from operations.
Below are reconciliations of net earnings to EBITDAX and a further reconciliation to Field-Level Cash Margin.
Net earnings (GAAP)
Derivative and financial instrument non-cash valuation changes
(302
62
Accretion on discounted liabilities and other
EBITDAX (Non-GAAP)
1,730
2,833
3,621
4,968
Marketing and midstream revenues and expenses, net
Commodity derivative cash settlements
(50
816
General and administrative expenses, cash-based
67
3,371
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
As of June 30, 2023, we have commodity derivatives that pertain to a portion of our estimated production for the last six months of 2023, as well as for 2024 and 2025. The key terms to our open oil, gas and NGL derivative financial instruments are presented in Note 3 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
The fair values of our commodity derivatives are largely determined by the forward curves of the relevant price indices. At June 30, 2023, a 10% change in the forward curves associated with our commodity derivative instruments would have changed our net positions by approximately $125 million.
Interest Rate Risk
As of June 30, 2023, we had total debt of $6.4 billion. All of our debt is based on fixed interest rates averaging 5.8%.
Foreign Currency Risk
We had no material foreign currency risk at June 30, 2023.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to Devon, including its consolidated subsidiaries, is made known to the officers who certify Devon’s financial reports and to other members of senior management and the Board of Directors.
Based on their evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of June 30, 2023 to ensure that the information required to be disclosed by Devon in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
We are involved in various legal proceedings incidental to our business. However, to our knowledge as of the date of this report and subject to the environmental matters noted below and in Part I, Item 3. Legal Proceedings of our 2022 Annual Report on Form 10-K, as updated by our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, there were no material pending legal proceedings to which we are a party or to which any of our property is subject. For more information on our legal contingencies, see Note 17 in “Part I. Financial Information – Item 1. Financial Statements” of this report.
On June 1, 2023, we received a notice of violation from the EPA relating to alleged air permit violations by Devon Energy Production Company, L.P., a wholly-owned subsidiary of the Company, during 2020 and 2022 in New Mexico. The Company has been engaging with the EPA to resolve this matter. Although this matter is ongoing and management cannot predict its ultimate outcome, the resolution of this matter may result in a fine or penalty in excess of $300,000.
Please see our 2022 Annual Report on Form 10-K and other SEC filings for additional information.
Item 1A. Risk Factors
There have been no material changes to the information included in Item 1A. “Risk Factors” in our 2022 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding purchases of our common stock that were made by us during the second quarter of 2023 (shares in thousands).
Total Number ofShares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (2)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 1 - April 30
2,905
53.73
2,762
May 1 - May 31
50.33
1,000
June 1 - June 30
1,040
49.88
1,033
948
3,947
52.72
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
During the three months ended June 30, 2023, none of the Company's directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).
Item 6. Exhibits
Exhibit
Number
Description
3.1
Registrant’s Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed June 12, 2023; File No. 001-32318).
3.2
Registrant’s Bylaws (incorporated by reference to Exhibit 3.2 of Registrant’s Form 8-K filed June 12, 2023; File No. 001-32318).
10.1*
2023 Form of Notice of Grant of Restricted Stock Award and Award Agreement under the 2022 Long-Term Incentive Plan between the Company and certain non-management directors for restricted stock awarded.
10.2*
2023 Form of Notice of Grant of Restricted Stock Unit Award and Award Agreement under the 2022 Long-Term Incentive Plan between the Company and certain non-management directors for deferred restricted stock units awarded.
31.1
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document – the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 2, 2023
/s/ Jeremy D. Humphers
Jeremy D. Humphers
Senior Vice President and Chief Accounting Officer