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 September 30, 2021
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 October 20, 2021, 677.0 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 Statements of Cash Flows
7
Consolidated Balance Sheets
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
13
Note 4 – Share-Based Compensation
15
Note 5 – Asset Impairments
16
Note 6 – Restructuring and Transaction Costs
17
Note 7 – Income Taxes
18
Note 8 – Net Earnings (Loss) Per Share From Continuing Operations
19
Note 9 – Other Comprehensive Earnings (Loss)
Note 10 – Supplemental Information to Statements of Cash Flows
20
Note 11 – Accounts Receivable
Note 12 – Property, Plant and Equipment
Note 13 – Debt and Related Expenses
21
Note 14 – Leases
22
Note 15 – Asset Retirement Obligations
23
Note 16 – Stockholders’ Equity
Note 17 – Discontinued Operations
24
Note 18 – Commitments and Contingencies
25
Note 19 – Fair Value Measurements
26
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Executive Overview
Results of Operations
30
Capital Resources, Uses and Liquidity
37
Critical Accounting Estimates
40
Non-GAAP Measures
41
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
Part II. Other Information
Legal Proceedings
45
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
46
Signatures
47
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:
“Bbl” or “Bbls” means barrel or barrels.
“BKV” means Banpu Kalnin Ventures.
“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.
“Canada” means the division of Devon encompassing oil and gas properties located in Canada. On June 27, 2019, all of Devon’s Canadian operating assets and operations were divested. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.
“Catalyst” means Catalyst Midstream Partners, LLC.
“CDM” means Cotton Draw Midstream, L.L.C.
“DD&A” means depreciation, depletion and amortization expenses.
“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.
“LOE” means lease operating expenses.
“MBbls” means thousand barrels.
“MBoe” means thousand Boe.
“Mcf” means thousand cubic feet.
“Merger” means the merger of 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 the Merger Agreement.
“Merger Agreement” means that certain Agreement and Plan of Merger, dated September 26, 2020, by and among the Company, Merger Sub and WPX.
“Merger Sub” means East Merger Sub, Inc., a wholly-owned subsidiary of the Company.
“MMBoe” means million Boe.
“MMBtu” means million Btu.
“MMcf” means million cubic feet.
3
“N/M” means not meaningful.
“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.
“Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.
“TSR” means total shareholder return.
“U.S.” means United States of America.
“VIE” means variable interest entity.
“WPX” means WPX Energy, Inc.
“WTI” means West Texas Intermediate.
“/Bbl” means per barrel.
“/d” means per day.
“/Mcf” means per Mcf.
“/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 volatility of oil, gas and NGL prices;
risks relating to the COVID-19 pandemic or other future pandemics;
uncertainties inherent in estimating oil, gas and NGL reserves;
the extent to which we are successful in acquiring and discovering additional reserves;
regulatory restrictions, compliance costs and other risks relating to governmental regulation, including with respect to environmental matters;
risks related to regulatory, social and market efforts to address climate change;
the uncertainties, costs and risks involved in our operations, including as a result of employee misconduct;
risks related to our hedging activities;
counterparty credit risks;
risks relating to our indebtedness;
cyberattack risks;
our limited control over third parties who operate some of our oil and gas properties;
midstream capacity constraints and potential interruptions in production;
the extent to which insurance covers any losses we may experience;
competition for assets, materials, people and capital;
risks related to investors attempting to effect change;
our ability to successfully complete mergers, acquisitions and divestitures;
risks related to the Merger, including the risk that we may not realize the anticipated benefits of the Merger or successfully integrate the two legacy businesses; and
any of the other risks and uncertainties discussed in this report, our 2020 Annual Report on Form 10-K and our other filings 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 assume no 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 September 30,
Nine Months Ended September 30,
2021
2020
(Unaudited)
Oil, gas and NGL sales
$
2,635
678
6,546
1,909
Oil, gas and NGL derivatives
(335
)
(87
(1,566
272
Marketing and midstream revenues
1,166
476
2,953
1,367
Total revenues
3,466
1,067
7,933
3,548
Production expenses
555
271
1,526
852
Exploration expenses
39
163
Marketing and midstream expenses
1,165
478
2,972
1,395
Depreciation, depletion and amortization
578
299
1,581
999
Asset impairments
—
2,666
Asset dispositions
(119
General and administrative expenses
95
75
296
256
Financing costs, net
86
66
243
200
Restructuring and transaction costs
32
230
Other, net
(41
(35
Total expenses
2,502
1,260
6,697
6,528
Earnings (loss) from continuing operations before income taxes
964
(193
1,236
(2,980
Income tax expense (benefit)
120
(90
(85
(510
Net earnings (loss) from continuing operations
844
(103
1,321
(2,470
Net earnings (loss) from discontinued operations, net of income taxes
Net earnings (loss)
(2,573
Net earnings attributable to noncontrolling interests
14
Net earnings (loss) attributable to Devon
838
(92
1,307
(2,578
Basic net earnings (loss) per share:
Basic earnings (loss) from continuing operations per share
1.24
(0.29
1.95
(6.58
Basic earnings (loss) from discontinued operations per share
0.04
(0.27
Basic net earnings (loss) per share
(0.25
(6.85
Diluted net earnings (loss) per share:
Diluted earnings (loss) from continuing operations per share
Diluted earnings (loss) from discontinued operations per share
Diluted net earnings (loss) per share
Comprehensive earnings (loss):
Other comprehensive earnings, net of tax:
Pension and postretirement plans
1
27
Other comprehensive earnings, net of tax
845
(89
1,348
(2,570
Comprehensive earnings attributable to noncontrolling interests
Comprehensive earnings (loss) attributable to Devon
839
(91
1,334
(2,575
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net earnings (loss) to net cash from operating activities:
Net (earnings) loss from discontinued operations, net of income taxes
(13
103
Leasehold impairments
36
149
(Amortization) accretion of liabilities
(7
(21
Total (gains) losses on commodity derivatives
335
87
1,566
(272
Cash settlements on commodity derivatives
(370
(969
343
Gains on asset dispositions
Deferred income tax expense (benefit)
119
(100
(311
Share-based compensation
31
80
70
Early retirement of debt
(30
Other
Changes in assets and liabilities, net
68
58
(42
(97
Net cash from operating activities - continuing operations
1,598
427
3,283
1,106
Cash flows from investing activities:
Capital expenditures
(474
(204
(1,477
(936
Acquisitions of property and equipment
(10
(15
(5
Divestitures of property and equipment
65
29
WPX acquired cash
344
Distributions from equity method investments
Net cash from investing activities - continuing operations
(203
(1,056
(912
Cash flows from financing activities:
Repayments of long-term debt
(1,243
(59
Repurchases of common stock
(38
Dividends paid on common stock
(329
(43
(761
Contributions from noncontrolling interests
12
Distributions to noncontrolling interests
(6
(4
Acquisition of noncontrolling interests
(24
Shares exchanged for tax withholdings and other
(3
(45
(17
Net cash from financing activities - continuing operations
(337
(46
(2,143
(172
Effect of exchange rate changes on cash - continuing operations
Net change in cash, cash equivalents and restricted cash of continuing operations
782
178
84
Cash flows from discontinued operations:
Operating activities
(129
Investing activities
171
Financing activities
Effect of exchange rate changes on cash
(11
Net change in cash, cash equivalents and restricted cash of discontinued operations
50
Net change in cash, cash equivalents and restricted cash
228
53
Cash, cash equivalents and restricted cash at beginning of period
1,539
1,669
2,237
1,844
Cash, cash equivalents and restricted cash at end of period
2,321
1,897
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
2,144
1,707
Restricted cash
177
190
Total cash, cash equivalents and restricted cash
CONSOLIDATED BALANCE SHEETS
September 30, 2021
December 31, 2020
ASSETS
Current assets:
Cash, cash equivalents and restricted cash
Accounts receivable
1,517
601
Income taxes receivable
174
Other current assets
309
248
Total current assets
4,227
3,260
Oil and gas property and equipment, based on successful efforts
accounting, net
13,613
4,436
Other property and equipment, net ($106 million and $102 million related to CDM in 2021 and 2020, respectively)
1,465
957
Total property and equipment, net
15,078
5,393
Goodwill
753
Right-of-use assets
244
223
Investments
388
Other long-term assets
367
Total assets
21,057
9,912
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
537
242
Revenues and royalties payable
1,443
662
Other current liabilities
1,525
536
Total current liabilities
3,505
1,440
Long-term debt
6,492
4,298
Lease liabilities
246
Asset retirement obligations
462
358
Other long-term liabilities
1,281
551
Stockholders' equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued
677 million and 382 million shares in 2021 and 2020, respectively
38
Additional paid-in capital
8,206
2,766
Retained earnings
750
208
Accumulated other comprehensive loss
(127
Total stockholders’ equity attributable to Devon
8,924
2,885
Noncontrolling interests
137
134
Total equity
9,061
3,019
Total liabilities and equity
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 September 30, 2021
Balance as of June 30, 2021
677
8,189
(101
136
8,535
Net earnings
Restricted stock grants, net of cancellations
(1
Common stock repurchased
Common stock retired
Common stock dividends
(331
Balance as of September 30, 2021
Three Months Ended September 30, 2020
Balance as of June 30, 2020
383
2,720
586
(117
126
3,353
(143
Balance as of September 30, 2020
2,750
351
(116
125
3,148
Nine Months Ended September 30, 2021
Balance as of December 31, 2020
382
(2
(765
Common stock issued
290
5,403
5,432
(14
Nine Months Ended September 30, 2020
Balance as of December 31, 2019
2,735
118
5,920
(55
55
(219
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
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 2020 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 nine-month periods ended September 30, 2021 and 2020 and Devon’s financial position as of September 30, 2021.
Devon and WPX completed an all-stock merger of equals on January 7, 2021. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. The transaction has been accounted for using the acquisition method of accounting, with Devon being treated as the accounting acquirer. See Note 2 for further discussion.
As further discussed in Note 17, Devon closed on the sale of its Barnett Shale assets in October 2020. Prior to December 31, 2020, activity relating to Devon’s Barnett Shale assets is classified as discontinued operations within Devon’s consolidated statements of comprehensive earnings and consolidated statements of cash flows.
As of September 30, 2021, Devon classified approximately $165 million of cash as restricted cash on the consolidated balance sheets for obligations retained related to the Barnett Shale assets and the Canadian business. Cash payments for these charges related to the Barnett assets and Canada business total approximately $10 million per quarter.
Variable Interest Entity
Cotton Draw Midstream, L.L.C. (“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.
In conjunction with the Merger, Devon acquired an interest in Catalyst which is a joint venture established between WPX and Howard Energy Partners (“HEP”) 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 HEP each have a 50 percent 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. The agreements do not include any minimum volume commitments. 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 sheet and Devon’s share of Catalyst earnings are reflected as a component of other, net in the accompanying consolidated statements of comprehensive earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Disaggregation of Revenue
The following table presents revenue from contracts with customers that are disaggregated based on the type of good or service.
Oil
1,900
504
4,917
1,462
Gas
79
699
221
NGL
426
930
226
649
233
1,758
702
196
100
477
275
321
143
718
390
Total revenues from contracts with customers
3,801
1,154
9,499
3,276
2.Acquisitions and Divestitures
WPX Merger
On January 7, 2021, Devon and WPX completed an all-stock merger of equals. WPX was an oil and gas exploration and production company with assets in the Delaware Basin in Texas and New Mexico and the Williston Basin in North Dakota. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. No fractional shares of Devon’s common stock were issued in the Merger, and holders of WPX common stock instead received cash in lieu of fractional shares of Devon common stock, if any. Based on the closing price of Devon’s common stock on January 7, 2021, the total value of Devon common stock issued to holders of WPX common stock as part of this transaction was approximately $5.4 billion. The Merger was structured as a tax-free reorganization for United States federal income tax purposes.
Purchase Price Allocation
The transaction has been accounted for using the acquisition method of accounting, with Devon being treated as the accounting acquirer. Under the acquisition method of accounting, the assets and liabilities of WPX and its subsidiaries have been recorded at their respective fair values as of the date of completion of the Merger and added to Devon’s. The preliminary purchase price assessment remains an ongoing process and is subject to change for up to one year subsequent to the closing date of the Merger. Determining the fair value of the assets and liabilities of WPX requires judgment and certain assumptions to be made, the most significant of these being related to the valuation of WPX’s oil and gas properties. The inputs and assumptions related to the oil and gas properties are categorized as level 3 in the fair value hierarchy.
The following table represents the preliminary allocation of the total purchase price of WPX to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date.
Preliminary Purchase
Price Allocation
as of September 30, 2021
Consideration:
WPX Common Stock outstanding
561.2
Exchange Ratio
0.5165
Devon common stock issued
289.9
Devon closing price on January 7, 2021
18.57
Total common equity consideration
5,383
Share-based replacement awards
49
Total consideration
Assets acquired:
425
Proved oil and gas property and equipment
7,017
Unproved and properties under development
2,362
Other property and equipment
485
400
43
Total assets acquired
11,163
Liabilities assumed:
346
Revenue and royalties payable
454
Debt
3,562
94
Deferred income taxes
249
765
Total liabilities assumed
5,731
Net assets acquired
WPX Revenues and Earnings
The following table represents WPX’s revenues and earnings included in Devon’s consolidated statements of comprehensive earnings subsequent to the closing date of the Merger.
1,564
3,977
414
969
Pro Forma Financial Information
Due to the Merger closing on January 7, 2021, all activity in the first nine months of 2021 except for the first six days of January is included in Devon’s consolidated statements of comprehensive earnings for the nine months ended September 30, 2021. The following unaudited pro forma financial information for the three and nine months ended September 30, 2020 is based on our historical consolidated financial statements adjusted to reflect as if the Merger had occurred on January 1, 2020. The information below reflects pro forma adjustments to conform WPX’s historical financial information to Devon’s financial statement presentation.
The unaudited pro forma financial information is not necessarily indicative of what would have occurred if the Merger had been completed as of the beginning of the periods presented, nor is it indicative of future results.
Continuing operations:
1,540
5,452
Net loss
(281
(3,247
Basic net loss per share
(0.42
(4.87
Divestitures
In the first quarter of 2021, Devon completed the sale of non-core assets in the Rockies for proceeds of $9 million, net of purchase price adjustments, and recognized a $35 million gain related to the sale. The transaction includes contingent earnout payments of up to $8 million. The total estimated proved reserves associated with these divested assets was approximately 3 MMBoe. As of December 31, 2020, the associated assets and liabilities were classified as assets held for sale and included in other current assets and other current liabilities, respectively.
In the fourth quarter of 2020, Devon completed the sale of its Barnett Shale assets to BKV for proceeds, net of purchase price adjustments, of $490 million. The agreement with BKV also provides for contingent earnout payments to Devon of up to $260 million based upon future commodity prices, 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. The valuation of the future contingent earnout payments included within other current assets and other long-term assets in the September 30, 2021 consolidated balance sheet was $46 million and $85 million, respectively. During the first nine months of 2021, Devon recorded a $65 million increase to the fair value within asset dispositions on the consolidated statements of comprehensive earnings. The value was derived utilizing a Monte Carlo valuation model and qualifies as a level 3 fair value measurement. Additional information can be found in Note 17.
3.Derivative Financial Instruments
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, price swaptions, basis swaps, costless price collars and call options. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. As of September 30, 2021, Devon did not have any open interest rate swap contracts.
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 September 30, 2021, Devon neither held cash collateral of its counterparties nor posted cash collateral to its counterparties.
Commodity Derivatives
As of September 30, 2021, 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 Swaptions
Price Collars
Call Options Sold
Period
Volume
(Bbls/d)
Weighted
Average
Price ($/Bbl)
Average Floor
Ceiling Price
($/Bbl)
Average Price
Q4 2021
66,460
41.24
48,250
38.82
48.82
5,000
39.50
Q1-Q4 2022
26,112
43.75
10,000
46.67
20,233
46.41
56.41
Oil Basis Swaps
Index
Weighted Average
Differential to WTI
Midland Sweet
23,000
0.84
Guernsey Light Sweet
4,000
(1.49
BRENT
1,000
(8.00
NYMEX Roll
13,000
0.39
(7.75
29,000
0.45
As of September 30, 2021, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index and the end of month NYMEX index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.
Price Swaps (1)
Price Swaptions (2)
Price Collars (2)
Call Options Sold (2)
Volume (MMBtu/d)
Weighted Average Price ($/MMBtu)
Weighted Average Floor Price ($/MMBtu)
Ceiling Price ($/MMBtu)
254,000
2.63
133,000
2.55
3.05
50,000
2.68
3,452
2.85
100,000
2.70
145,507
2.69
3.40
Q1-Q4 2023
10,603
3.11
4.56
(1)
Related to the 2021 open positions, 14,000 MMBtu/d settle against the Inside FERC first of month Henry Hub index at an average price of $2.85 and 240,000 MMBtu/d settle against the end of month NYMEX index at an average price of $2.62. All 2022 open positions settle against the Inside FERC first of month Henry Hub index.
(2)
Price swaptions and call options settle against end of month NYMEX index. Price collars settle against the Inside FERC first of month Henry Hub Index.
Natural Gas Basis Swaps
(MMBtu/d)
Differential to
Henry Hub
($/MMBtu)
El Paso Natural Gas
35,000
(0.92
WAHA
80,000
(0.65
70,000
(0.57
(0.51
Q1-Q4 2024
40,000
As of September 30, 2021, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.
Product
Volume (Bbls/d)
Weighted Average Price ($/Bbl)
Natural Gasoline
47.57
Normal Butane
31.40
Propane
27.88
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 September 30, 2021 and December 31, 2020.
Gross Fair Value
Amounts Netted
Net Fair Value
Balance Sheet Classification
Commodity derivatives:
Short-term derivative asset
(18
Long-term derivative asset
Short-term derivative liability
(984
(983
(161
Long-term derivative liability
Total derivative liability
(1,084
(142
4.Share-Based Compensation
The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings. The vesting for certain share-based awards was accelerated in conjunction with the reduction of workforce described in Note 6 and is included in restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
G&A
Related income tax benefit
Under its approved long-term incentive plan, Devon grants share-based awards to certain employees. The following table presents a summary of Devon’s unvested restricted stock awards and units, performance-based restricted stock awards and performance share units granted under the plan.
Performance-Based
Performance
Restricted Stock Awards & Units
Restricted Stock Awards
Share Units
Awards/Units
Grant-Date
Fair Value
Awards
Units
(Thousands, except fair value data)
Unvested at 12/31/20
5,316
25.82
44.70
1,994
31.89
Granted
7,711
19.69
861
18.08
Vested
(5,006
22.35
(44
(754
37.40
Forfeited
(126
23.21
(25
36.04
Unvested at 9/30/21
7,895
22.08
2,076
24.12
Due to the closing of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. As a result, approximately 4.9 million awards relate to the conversion of WPX equity awards to Devon equity awards.
A maximum of 4.2 million common shares could be awarded based upon Devon’s final TSR ranking.
The following table presents the assumptions related to the performance share units granted in 2021, as indicated in the previous summary table.
Grant-date fair value
Risk-free interest rate
0.18%
Volatility factor
67.8%
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 September 30, 2021.
Restricted Stock
Unrecognized compensation cost
97
Weighted average period for recognition (years)
2.5
1.9
5.Asset Impairments
The following table presents a summary of Devon’s asset impairments. Unproved impairments shown below are included in exploration expenses in the consolidated statements of comprehensive earnings.
Proved oil and gas assets
2,664
Other assets
Total asset impairments
Unproved impairments
Proved Oil and Gas and Other Asset Impairments
Due to the reduced demand from the COVID-19 pandemic causing an unprecedented downturn in the price of oil and reductions in near-term capital investment, Devon recognized approximately $2.7 billion of proved asset impairments during the first quarter of 2020. These impairments related to the Anadarko Basin and Rockies fields in which the cost basis included acquisitions completed in 2016 and 2015, respectively, when commodity prices were much higher. During the first quarter of 2020, Devon also recognized $2 million of product line fill impairments.
Unproved Impairments
Due to the downturn in the commodity price environment and reduced near-term investment as discussed above, Devon also recognized $149 million of unproved impairments during the first nine months of 2020, primarily in the Rockies field.
6.Restructuring and Transaction Costs
The following table summarizes Devon’s restructuring and transaction costs.
Restructuring costs
182
Transaction costs
48
Total costs
In conjunction with the Merger closing, Devon recognized $182 million of restructuring expenses during the first nine months of 2021 related to employee severance and termination benefits, settlements and curtailments from defined retirement benefits and contract terminations. Of these expenses, $65 million related to non-cash charges which primarily consisted of settlements and curtailments of defined retirement benefits of $40 million and the accelerated vesting of share-based grants of $21 million. Additionally, in conjunction primarily with the Merger closing, Devon recognized $48 million of transaction costs primarily comprised of bank, legal and accounting fees.
In the third quarter of 2020, Devon recognized $32 million of restructuring expenses. Of these expenses, $11 million resulted from the accelerated vesting of share-based grants, which are non-cash charges.
The following table summarizes Devon’s restructuring liabilities.
Current
Long-term
Liabilities
35
172
Changes related to 2021 merger integration
Changes related to prior years' restructurings
(8
(26
54
173
7.Income Taxes
The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.
Earnings (loss) from continuing
operations before income taxes
Current income tax expense (benefit)
(199
Total income tax expense (benefit)
U.S. statutory income tax rate
%
State income taxes
0
Unrecognized tax benefits
Deferred tax asset valuation allowance
(9
%)
(33
Effective income tax rate
The deferred income tax benefit recognized in the first nine months of 2021 primarily relates to the Merger and a reduced valuation allowance due to increased earnings. As shown in Note 2, Devon recognized $249 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon has recognized on its U.S. Federal deferred tax assets. Additionally, improved commodity prices and post-merger operating performance are causing reductions to Devon’s net operating losses, which also cause corresponding decreases to the associated deferred tax assets and valuation allowance.
As of September 30, 2021, Devon continued to maintain a valuation allowance against certain U.S. deferred tax assets. Devon continues to assess its valuation allowance position every quarter. Subject to any additional objective negative evidence or the addition of subjective evidence such as forecasted income, Devon may continue to adjust the valuation allowance on its deferred tax assets in future periods.
In the fourth quarter of 2020, Devon recorded a deferred tax asset representing the deductible outside basis difference in its investment in a consolidated subsidiary. In the second quarter of 2021, Devon realized this deferred tax asset, increasing its U.S. federal net operating loss carryforwards by $1.8 billion.
8.
Net Earnings (Loss) Per Share from Continuing Operations
The following table reconciles net earnings (loss) from continuing operations and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings (loss) per share from continuing operations.
Net earnings (loss) from continuing operations:
(105
(2,475
Attributable to participating securities
Basic and diluted earnings (loss) from continuing operations
832
(107
1,296
(2,478
Common shares:
Common shares outstanding - total
670
Common shares outstanding - basic
671
377
664
Dilutive effect of potential common shares issuable
Common shares outstanding - diluted
673
666
Net earnings (loss) per share from continuing operations:
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)
Settlement of pension benefits (2)
Income tax expense
Other (3)
Accumulated other comprehensive loss, net of tax
Recognition of net actuarial loss and prior service cost are included in the computation of net periodic benefit cost, which is a component of other, net in the accompanying consolidated statements of comprehensive earnings.
The Merger triggered settlement payments to certain plan participants, and the expense associated with this settlement is recognized as a component of restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
(3)
Other includes a remeasurement of the pension obligation due to the Merger, which was partially offset by a change in mortality assumption.
10.
Supplemental Information to Statements of Cash Flows
Changes in assets and liabilities, net:
(332
(495
339
Income tax receivable
(40
(112
(36
Accounts payable and revenues and royalties payable
469
557
(160
(49
(82
(123
Supplementary cash flow data - total operations:
Interest paid
64
319
194
Income taxes paid (refunded)
170
As of September 30, 2021, Devon had approximately $200 million of accrued capital expenditures included in total property and equipment, net and accounts payable on the consolidated balance sheets. As of December 31, 2020 (pre-merger), Devon had approximately $100 million of accrued capital expenditures in total property and equipment, net and accounts payable on the consolidated balance sheets. As of January 7, 2021 (date of Merger closing), Devon assumed approximately $150 million of accrued capital expenditures included in accounts payable.
11.
Accounts Receivable
Components of accounts receivable include the following:
986
Joint interest billings
150
57
371
195
Gross accounts receivable
1,529
612
Allowance for doubtful accounts
(12
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
36,489
27,589
2,169
392
Total oil and gas
38,658
27,981
Less accumulated DD&A
(25,045
(23,545
Oil and gas property and equipment, net
2,113
1,737
(648
(780
Other property and equipment, net (1)
Property and equipment, net
$106 million and $102 million related to CDM in 2021 and 2020, respectively.
13.
Debt and Related Expenses
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 (1)
5.25% due September 15, 2024 (1)
472
5.85% due December 15, 2025
7.50% due September 15, 2027
73
5.25% due October 15, 2027 (1)
5.875% due June 15, 2028 (1)
325
4.50% due January 15, 2030 (1)
585
7.875% due September 30, 2031
675
7.95% due April 15, 2032
366
5.60% due July 15, 2041
1,250
4.75% due May 15, 2042
5.00% due June 15, 2045
Net premium (discount) on debentures and notes
160
(20
Debt issuance costs
(31
Total long-term debt
These instruments were assumed by Devon in January 2021 in conjunction with the Merger. Subsequent to debt retirements and the obligor exchange transaction completed during the first nine months of 2021, approximately $51 million of these instruments remain the unsecured and unsubordinated obligation of WPX, a wholly-owned subsidiary of Devon.
Debt maturities as of September 30, 2021, excluding debt issuance costs, premiums and discounts, are as follows:
2022
2023
2024
2025
2026
Thereafter
5,164
6,363
The following schedule includes the summary of the WPX debt Devon assumed upon closing of the Merger on January 7, 2021.
Face Value
Optional Redemption(1)
6.00% due January 15, 2022
8.25% due August 1, 2023
281
June 1, 2023
5.25% due September 15, 2024
530
June 15, 2024
5.75% due June 1, 2026
500
529
June 1, 2021
5.25% due October 15, 2027
600
646
October 15, 2022
5.875% due June 15, 2028
554
June 15, 2023
4.50% due January 15, 2030
900
978
January 15, 2025
3,257
At any time prior to these dates, Devon has or had the option to redeem (i) some or all of the notes at a specified "make whole" premium and (ii) a portion of certain of the notes at applicable redemption prices, in each case as described in the indenture documents governing the notes to be redeemed. On or after these dates, Devon has or had the option to redeem the notes, in whole or in part, at the applicable redemption prices set forth in the indenture documents, plus accrued and unpaid interest thereon to the redemption date as more fully described in such documents.
Retirement of Senior Notes
In the first nine months of 2021, Devon redeemed $43 million of the 6.00% senior notes due 2022, $175 million of the 5.875% senior notes due 2028, $315 million of the 4.50% senior notes due 2030, $210 million of the 5.25% senior notes due 2027 and $500 million of the 5.75% senior notes due 2026. In the first nine months of 2021, Devon recognized $30 million of gains on early retirement of debt, consisting of $89 million of non-cash premium accelerations, partially offset by $59 million of cash retirement costs. The gain on early retirement is included in financing costs, net in the consolidated statements of comprehensive earnings.
Credit Lines
Devon has a $3.0 billion Senior Credit Facility. As of September 30, 2021, Devon had no outstanding borrowings under the Senior Credit Facility and had issued $2 million in outstanding letters of credit under this facility. The 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 September 30, 2021, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 25.1%.
Net Financing Costs
The following schedule includes the components of net financing costs.
Interest based on debt outstanding
93
Gain on early retirement of debt
Interest income
Total net financing costs
14.Leases
The following table presents Devon’s right-of-use assets and lease liabilities as of September 30, 2021 and December 31, 2020.
Finance
Operating
214
220
Lease liabilities:
Current lease liabilities (1)
Long-term lease liabilities
Total lease liabilities
254
284
252
255
(1)Current lease liabilities are included in other current liabilities on the consolidated balance sheets.
Devon’s right-of-use operating lease assets are for certain leases related to real estate, drilling rigs and other equipment related to the exploration, development and production of oil and gas. Devon’s right-of-use financing lease assets are related to real estate.
15.
Asset Retirement Obligations
The following table presents the changes in Devon’s asset retirement obligations.
Asset retirement obligations as of beginning of period
369
398
Assumed WPX obligations
98
Liabilities incurred
Liabilities settled and divested
(52
Revision of estimated obligation
Accretion expense on discounted obligation
Asset retirement obligations as of end of period
475
408
Less current portion
Asset retirement obligations, long-term
16.
Stockholders’ Equity
On January 7, 2021, Devon and WPX completed an all-stock merger of equals. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. Consequently, Devon issued approximately 290 million shares of Devon common stock to holders of WPX common stock to effect the Merger on January 7, 2021.
Share Repurchases
The table below provides information regarding purchases of Devon’s common stock that were made in 2020 under a share repurchase program that expired at the end of 2020 (shares in thousands).
Total Number of
Shares Purchased
Dollar Value of
Average Price Paid
per Share
First quarter 2020
2,243
16.85
In November 2021, Devon authorized a share repurchase program to buy up to $1.0 billion of common stock. This program expires December 31, 2022.
Dividends
Upon completion of the Merger, Devon continued its commitment to pay a quarterly dividend at a fixed rate and instituted a variable quarterly dividend, which is dependent on quarterly cash flows, among other factors. The following table summarizes Devon’s fixed and variable dividends for the first nine months of 2021 and 2020, respectively.
Fixed
Variable
Rate Per Share
2021:
First quarter
76
127
203
0.30
Second quarter
154
229
0.34
Third quarter
74
329
0.49
Total year-to-date
225
761
2020:
34
0.09
42
0.11
In November 2021, Devon announced a cash dividend in the amount of $0.84 per share payable in the fourth quarter of 2021. The dividend consists of a fixed quarterly dividend in the amount of approximately $74 million (or $0.11 per share) and a variable quarterly dividend in the amount of approximately $494 million (or $0.73 per share).
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.
17.
Discontinued Operations
On October 1, 2020, Devon completed the sale of its Barnett Shale assets to BKV for proceeds, net of purchase price adjustments, of $490 million. Additionally, the agreement provides for contingent earnout payments to Devon of up to $260 million based upon future commodity prices, 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.
The following table presents the amounts reported in the consolidated statements of comprehensive earnings as discontinued operations.
263
Asset impairments (1)
96
413
Loss from discontinued operations before income taxes
(150
Income tax benefit
(47
Net earnings (loss) from discontinued operations, net of tax
Devon recognized $182 million of asset impairments in the first nine months of 2020 related to the Barnett Shale assets primarily due to the difference between the net carrying value and the purchase price, net of estimated customary purchase price adjustments, which qualified as a level 2 fair value measurement.
18.
Commitments and Contingencies
Devon is party to various legal proceedings and other matters that may result in future payment obligations or other adverse consequences to its business. Matters that are probable of an unfavorable outcome to Devon and which any related potential payment obligation or other liability 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. While management does not believe any current matter is likely to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals, the ultimate outcome of such matters and the amounts involved 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 defending against a number of such lawsuits, either as a named defendant in the action or pursuant to indemnity obligations for the benefit of a third party. Plaintiffs in some of these lawsuits are seeking class certification. Among the allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, failed to “enhance” the value of gas through processing, used improper measurement techniques, entered into purchase and midstream arrangements with affiliates that resulted in underpayment of royalties or otherwise failed to prudently market oil, natural gas and NGLs produced and sold and pay royalties on the highest obtainable price. 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. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.
Environmental and Climate Change Matters
Devon’s business is subject to numerous federal, state, local and Native American tribal 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, the 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 believes these claims to be baseless and is vigorously defending 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 believes these claims to be baseless and intends to vigorously defend against the proceedings.
Williams’ Former Power Business Matter
Direct and indirect purchasers of natural gas in various states filed individual and class action lawsuits against The Williams Companies, Inc. (“Williams”) and other parties alleging the manipulation of published gas price indices and seeking unspecified amounts of damages. WPX and certain of its subsidiaries, which were then affiliates of Williams, were also named as defendants in these actions.
Devon cannot reasonably estimate a range of potential exposure at this time for these matters. In connection with its spin-off from Williams in 2011, WPX entered into a separation and distribution agreement with Williams, pursuant to which Williams agreed to indemnify and hold WPX and its subsidiaries harmless from any losses arising out of these matters.
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. 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.
19.
Fair Value Measurements
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 September 30, 2021 and December 31, 2020, as applicable. Therefore, such financial assets and liabilities are not presented in the following table. Additionally, information regarding the fair values of oil and gas assets is provided in Note 5.
Fair Value Measurements Using:
Carrying
Total Fair
Level 1
Level 2
Level 3
Value
Inputs
September 30, 2021 assets (liabilities):
Cash equivalents
Commodity derivatives
(1,086
(6,492
(7,629
Contingent earnout payments
135
December 31, 2020 assets (liabilities):
1,436
(148
(4,298
(5,365
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 and non-core Rockies asset divestitures 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 nine-month periods ended September 30, 2021 compared to previous periods and in our financial condition and liquidity since December 31, 2020. To help facilitate comparisons to the three-month period ended June 30, 2021, information regarding our second quarter 2021 financial results can be found in our Second Quarter 2021 Quarterly Report on Form 10-Q . Additionally, for information regarding our critical accounting policies and estimates, see our 2020 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
On September 26, 2020, we entered into the Merger Agreement, providing for an all-stock merger of equals with WPX which successfully closed on January 7, 2021. The Merger has created a leading unconventional oil producer in the U.S., with an asset base underpinned by premium acreage in the economic core of the Delaware Basin. This strategic combination accelerates our transition to a cash-return business model, including the implementation of a fixed plus variable dividend strategy. We remain focused on building economic value by executing on our strategic priorities of disciplined oil volume growth while capturing operational and corporate synergies, reducing 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:
Third quarter oil production totaled 303 MBbls/d, exceeding our plan by 3%.
On pace to achieve approximately $600 million in annual cost savings by the end of 2021.
Redeemed approximately $1.2 billion of senior notes in 2021.
Exited the third quarter with $5.3 billion of liquidity, including $2.3 billion of cash, with no debt maturities until 2023.
Generated $3.3 billion of operating cash flow through the first three quarters of 2021.
Including variable dividends, paid dividends of approximately $761 million in the first nine months of 2021 and have declared $568 million of dividends to be paid in the fourth quarter of 2021.
Authorized a $1.0 billion share repurchase program, representing 4% of outstanding shares at the time of announcement.
We operate under a disciplined returns-driven strategy focused on delivering strong operational results, financial strength and value to our shareholders and continuing our commitment to ESG excellence, which provides us with a strong foundation to grow returns, margin and profitability. We continue to execute on our strategy and navigate through various economic environments by protecting our financial strength, maintaining a commitment to capital discipline, improving our cash cost structure and preserving operational continuity.
Commodity prices have strengthened throughout 2021 which has significantly improved our earnings and cash flow generation. The increase in commodity prices has been primarily driven by increased demand resulting from the initial recovery from the COVID-19 pandemic, as well as OPEC+ and other oil and natural gas producers not rapidly increasing current production levels.
Trends of our quarterly earnings, operating cash flow, EBITDAX and capital expenditures are shown below. The quarterly earnings chart and cash flow chart present amounts pertaining to Devon’s continuing operations. “Core earnings” and “EBITDAX” are financial measures not prepared in accordance with GAAP. For a description of these measures, including reconciliations to the comparable GAAP measures, see “Non-GAAP Measures” in this Item 2.
Our earnings increased from the second quarter of 2021 to the third quarter of 2021 primarily due to an increase in overall commodity prices as well as higher sold volumes. Led by a 42% and 7% increase in Henry Hub and WTI from the second quarter of 2021 to the third quarter of 2021, respectively, our unhedged combined realized price rose 13%. Volumes increased due to new well activity in the Delaware Basin and Eagle Ford.
Our net earnings in recent quarters have been significantly impacted by non-cash adjustments to the value of our commodity hedges. Net earnings in the second quarter of 2021, the first quarter of 2021, the fourth quarter of 2020 and the third quarter of 2020 each included a hedge valuation loss, net of tax of $0.3 billion, $0.2 billion, $0.1 billion and $0.1 billion, respectively. Excluding these amounts, our core earnings have been more stable over recent quarters but continue to be heavily influenced by commodity prices.
Like earnings, our operating cash flow is sensitive to volatile commodity prices. Our cash flow and EBITDAX increased during the first, second and third quarters of 2021 primarily due to higher commodity prices and an increase in sold volumes driven by our WPX merger and improved post-merger operating performance.
We exited the third quarter of 2021 with $5.3 billion of liquidity, comprised of $2.3 billion of cash and $3.0 billion of available credit under our Senior Credit Facility. We currently have $6.5 billion of debt outstanding with no maturities until August 2023. We currently have approximately 45% and 50% of our remaining 2021 oil and gas production hedged, respectively, and 20% and 30% of our 2022 oil and gas production hedged, respectively. These contracts consist of collars and swaps based off the WTI oil benchmark and the Henry Hub and NYMEX last day natural gas indices. Additionally, we have entered into regional basis swaps in an effort to protect price realizations across our portfolio.
As commodity prices and our operating performance strengthen and bolster our financial condition, we have authorized opportunistic repurchases of up to $1.0 billion of our common shares through the end of 2022. Additionally, we continue funding our fixed plus variable dividends, which have grown 13%, 44% and 71% over the past three quarters, respectively, including the recently declared dividend payable in the fourth quarter of 2021.
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 earnings attributable to discontinued operations or noncontrolling interests.
Q3 2021 vs. Q2 2021
Our third quarter 2021 net earnings were $844 million, compared to net earnings of $261 million for the second quarter of 2021. The graph below shows the change in net earnings from the second quarter of 2021 to the third quarter of 2021. The material changes are further discussed by category on the following pages.
Production Volumes
Q3 2021
% of Total
Q2 2021
Change
Oil (MBbls/d)
Delaware Basin
213
191
+11
Anadarko Basin
- 15
Williston Basin
Eagle Ford
Powder River Basin
- 13
+1
303
291
+4
Gas (MMcf/d)
62
513
+13
219
- 3
59
61
- 4
67
+14
- 10
- 45
943
881
+7
NGLs (MBbls/d)
82
+23
+25
N/M
148
129
+15
Combined (MBoe/d)
409
- 6
- 12
+0
608
567
From the second quarter of 2021 to the third quarter of 2021, the change in volumes contributed to a $149 million increase in earnings. The increase in volumes was primarily due to new well activity in the Delaware Basin and Eagle Ford which was partially offset by lower volumes in the Anadarko, Williston and Powder River Basins.
Realized Prices
Realization
Oil (per Bbl)
WTI index
70.64
66.04
Realized price, unhedged
68.19
97%
63.63
Cash settlements
(10.60
(13.29
Realized price, with hedges
57.59
82%
50.34
Gas (per Mcf)
Henry Hub index
4.02
2.83
+42
3.55
88%
2.35
+51
(0.78
(0.15
2.77
69%
2.20
+26
NGLs (per Bbl)
31.25
44%
23.89
+31
(0.45
30.80
23.64
+30
Combined (per Boe)
47.08
41.75
(6.60
(7.11
40.48
34.64
+17
From the second quarter of 2021 to the third quarter of 2021, realized prices contributed to a $332 million increase in earnings. Unhedged realized oil, gas and NGL prices increased primarily due to higher WTI, Henry Hub and Mont Belvieu index prices.
We currently have approximately 45% of our remaining 2021 oil production hedged with an average floor price of $40/Bbl and approximately 50% of our remaining 2021 gas production hedged with an average floor price of $2.60/Mcf. We currently have approximately 20% of our 2022 oil production hedged with an average floor price of $45/Bbl and approximately 30% of our 2022 gas production hedged with an average floor price of $2.70/Mcf.
Hedge Settlements
Q
(296
(352
+16
Natural gas
(68
- 100
Total cash settlements (1)
(367
- 1
Included as a component of oil, gas and NGL derivatives on the consolidated statements of comprehensive earnings.
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
215
210
+2
Gathering, processing & transportation
157
147
Production taxes
176
Property taxes
- 46
+8
Per Boe:
3.85
4.06
- 5
Gathering, processing &
transportation
2.81
Percent of oil, gas and NGL sales:
6.7
- 0
Production expenses increased from the second quarter of 2021 to the third quarter of 2021 primarily due to new well activity in the Delaware Basin. Production taxes also increased due to the rise in 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)
1,480
39.28
1,102
33.79
25.20
145
19.86
192
36.12
197
32.98
37.81
106
31.88
69
38.18
36.78
49.53
42.85
2,080
37.17
1,641
31.79
DD&A and Asset Impairments
Oil and gas per Boe
9.85
9.88
Oil and gas
510
DD&A increased in the third quarter of 2021 primarily due to higher volumes.
Other Items
Change in earnings
Commodity hedge valuation changes (1)
(336
Marketing and midstream operations
Net financing costs
(16
267
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.
Asset dispositions in the second quarter of 2021 includes $65 million related to the re-valuation of contingent earnout payments associated with our divested Barnett Shale assets. For additional information, see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Income Taxes
Current expense
Deferred expense
Total expense
For discussion on income taxes, see Note 7 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
September 30, 2021 YTD vs. September 30, 2020 YTD
Our nine months ended September 30, 2021 net earnings were $1.3 billion, compared to a net loss of $2.5 billion (excludes discontinued operations) for the nine months ended September 30, 2020. The graph below shows the change in the net earnings (loss) from the nine months ended September 30, 2020 to the nine months ended September 30, 2021. The material changes are further discussed by category on the following pages.
33
+140
- 32
- 29
- 23
- 42
287
+87
521
60
241
+116
258
- 17
56
- 30
- 14
- 48
872
609
+43
81
+132
- 16
- 18
78
+62
360
155
92
- 20
- 27
- 19
- 43
558
333
+68
From the nine months ended 2020 to the nine months ended 2021, the change in volumes contributed to a $1.5 billion increase in earnings. Due to the Merger closing on January 7, 2021, volumes now include WPX legacy assets in the Delaware Basin in Texas and New Mexico and the Williston Basin in North Dakota. Volumes associated with these WPX legacy assets were approximately 225 MBoe/d for the nine months ended 2021. Continued development of Devon legacy assets in the Delaware Basin also increased volumes. These increases were partially offset by reduced activity across Devon’s remaining legacy assets.
64.85
38.57
62.69
34.63
+81
(11.06
7.06
51.63
80%
41.69
+24
3.19
1.88
+70
2.93
92%
1.32
+122
(0.38
0.24
1.56
+63
27.11
42%
10.66
+154
(0.32
0.25
26.79
41%
10.91
+146
42.94
20.91
+105
(6.35
3.76
36.59
24.67
+48
From the nine months ended 2020 to the nine months ended 2021, realized prices contributed to a $3.1 billion increase in earnings. Unhedged realized oil, gas and NGL prices increased primarily due to higher WTI, Henry Hub and Mont Belvieu index prices. The increase in index prices was partially offset by hedge cash settlements related to all products in the first nine months of 2021.
(868
298
624
334
433
378
436
123
+254
+94
+79
4.09
3.66
+12
2.84
4.15
- 31
6.4
Production expenses increased primarily due to the Merger closing on January 7, 2021. For additional information, see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report. Partially offsetting increases to gathering, processing and transportation costs were approximately $39 million of Anadarko volume commitments which expired at the end of 2020. Production taxes also increased due to the rise in commodity prices.
3,477
35.41
602
14.16
404
19.93
5.62
550
32.91
32.74
12.54
35.53
121
16.45
37.69
8.77
5,020
32.93
1,057
11.58
9.84
10.19
1,500
929
+61
+58
DD&A increased in 2021 primarily due to the Merger closing on January 7, 2021. For additional information, see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Asset impairments were $2.7 billion for the nine months ended 2020 due to significant decreases in commodity prices resulting primarily from the COVID-19 pandemic. For additional information, see Note 5 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
General and Administrative Expense
G&A per Boe
1.94
Labor and benefits
Non-labor
99
Labor and benefits increased primarily due to the Merger closing on January 7, 2021. However, Devon’s G&A per Boe rate decreased 31% primarily due to synergies resulting from the Merger.
(597
(71
(526
(19
(28
(198
(479
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.
Exploration expenses decreased primarily due to unproved asset impairments of $149 million in the first nine months of 2020. For additional information, see Note 5 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Asset dispositions includes $65 million related to the re-valuation of contingent earnout payments associated with our divested Barnett Shale assets and $35 million related to the sale of non-core assets in the Rockies. For additional information, see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Net financing costs increased as a result of WPX debt assumed in the Merger, partially offset by a $30 million gain associated with our debt retirements in the first nine months of 2021. For additional information, see Note 13 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Restructuring and transaction costs in 2021 reflect workforce reductions in conjunction with the Merger, as well as various transaction costs related to the Merger. For additional information, see Note 6 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Current expense (benefit)
Deferred benefit
Total benefit
Sources and Uses of Cash
The following table presents the major changes in cash and cash equivalents for the three and nine months ended September 30, 2021 and 2020.
Operating cash flow from continuing operations
Debt activity, net
(1,302
Noncontrolling interest activity, net
(22
from discontinued operations
Operating Cash Flow and WPX Acquired Cash
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 nearly tripled during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was due to the Merger and prices significantly increasing in the first nine months of 2021. Additionally, despite our portfolio enhancements, aggressive cost reductions and operational advancements, our 2020 financial results were challenged by commodity prices and deterioration of the macro-economic environment resulting from the unprecedented COVID-19 pandemic.
Divestitures of Property and Equipment
During the first nine months of 2021, we sold non-core assets for approximately $65 million, net of customary purchase price adjustments. For additional information, please see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Capital Expenditures
The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.
375
1,150
560
88
153
458
193
1,380
897
Midstream
Total capital expenditures
474
204
1,477
936
Capital expenditures consist primarily of amounts related to our oil and gas exploration and development operations, midstream operations and other corporate activities. Capital expenditures increased in 2021 primarily due to the Merger closing on January 7,
2021 and results now include activity related to WPX legacy assets in the Delaware Basin in Texas and New Mexico and the Williston Basin in North Dakota. Our capital program is designed to operate within operating cash flow. This is evidenced by our operating cash flow funding all of our capital expenditures for the nine months ended September 30, 2021. Our capital investment program is driven by a disciplined allocation process focused on returns.
Debt Activity
Subsequent to the Merger closing, we redeemed $1.2 billion of senior notes in the first nine months of 2021. We also paid $59 million of cash retirement costs related to these redemptions.
Shareholder Distributions and Stock Activity
The following table summarizes our common stock dividends during the third quarter and total for the first nine months of 2021 and 2020. We raised our quarterly dividend by 22% to $0.11 per share in the second quarter of 2020. In addition to the fixed quarterly dividend, we paid a variable dividend in each quarter of 2021.
We repurchased 2.2 million shares of common stock for $38 million in the first nine months of 2020. For additional information, see Note 16 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
Noncontrolling Interest Activity, net
During the first nine months of 2021, we received $4 million of contributions from our noncontrolling interests in CDM and distributed $15 million to our noncontrolling interests in CDM. In the first quarter of 2021, we paid $24 million to purchase the noncontrolling interest portion of a partnership that WPX had formed to acquire minerals in the Delaware Basin.
During the first nine months of 2020, we received $12 million in contributions from our noncontrolling interests in CDM and distributed $10 million to our noncontrolling interests in CDM.
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 land owners to enhance our existing portfolio of assets.
On January 7, 2021, Devon and WPX completed an all-stock merger of equals. With the Merger, we accelerated our transition to a cash-return business model, which moderates growth, emphasizes capital efficiencies and prioritizes cash returns to shareholders. These principles will position Devon to be a consistent builder of economic value through the cycle. The post-merger scalability enhanced Devon’s free cash flow, credit profile and decreased the overall cost of capital.
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 post-merger capital requirements as discussed in this section as well as accelerate our cash-return business model.
Operating Cash Flow
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 third quarter of 2021, we held approximately $2.3 billion of cash, inclusive of $177 million of cash restricted primarily for retained obligations related to divested assets. Our operating cash flow forecasts are sensitive to many variables and include a measure of uncertainty as these variables 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. We hedge our production in a manner that systematically places hedges for several quarters in advance, allowing us to maintain a disciplined risk management program as it relates to commodity price volatility. We supplement the systematic hedging program with discretionary hedges that take advantage of favorable market conditions. The key terms to our oil, gas and NGL derivative financial instruments as of September 30, 2021 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, as commodity prices have increased, we remain committed to a maintenance capital program for the foreseeable future. We do not intend to add any growth projects until market fundamentals recover, excess inventory clears up and OPEC+ curtailed volumes are effectively absorbed by the world markets.
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.
Merger Synergies – Cost savings from synergies resulting from the Merger are expected to be attained through cost reductions and efficiencies related to our capital programs, G&A, financing costs and production expenses. We anticipate the planned $600 million reduction of annualized costs will occur by year-end 2021. Approximately 35% of the reduced costs are related to our capital programs and the remainder relate to our operating expenses, including G&A, interest expense and production expenses.
Restructuring and Transaction Related Costs – The majority of the Merger-related restructuring and transaction cost cash outflows were paid in the first nine months of 2021 and the remaining costs will be paid mostly over the remaining three months of 2021. These payments relate to workforce reductions and the associated employee severance benefits, costs to modify or abandon vendor contracts and the acceleration of certain employee benefits triggered by the Merger.
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 partners 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, partners and counterparties. Such mechanisms include, under certain conditions, requiring letters of credit, prepayments or collateral postings.
Assumption and Repayment of WPX Debt
In conjunction with the Merger closing on January 7, 2021, we assumed a principal value of $3.3 billion of WPX debt. Subsequent to the Merger closing, we have reduced our debt by approximately $1.2 billion in the first half of 2021. We expect these redemptions to lower our annual cash net financing costs by approximately $70 million.
Credit Availability
As of September 30, 2021, we had approximately $3.0 billion of available borrowing capacity under our Senior Credit Facility. This credit facility supports our $3.0 billion of short-term credit under our commercial paper program. At September 30, 2021, 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 production growth opportunities. Our credit rating from Standard and Poor’s Financial Services is BBB- with a positive outlook. Our credit rating from Fitch is BBB+ with a stable outlook. Our credit rating from Moody’s Investor Service is Ba1 with a positive 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.
Fixed Plus Variable Dividend
Following the closing of the Merger, we initiated a new “fixed plus variable” dividend strategy. The fixed dividend is currently paid quarterly at a rate of $0.11 per share, and 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. In addition to the fixed quarterly dividend, we may pay a variable dividend 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, COVID-19 impacts and other factors deemed relevant by the Board.
Our 2021 exploration and development budget for the fourth quarter of 2021 is expected to range from approximately $440 million to $490 million.
In November 2021, our Board of Directors authorized a $1.0 billion share repurchase program, which expires December 31, 2022.
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. Due primarily to significant cumulative losses, we recorded a full valuation allowance against U.S. deferred tax assets in 2020 and remain in a partial valuation allowance position at September 30, 2021. Subject to any additional objective negative evidence or the addition of subjective evidence such as forecasted income, Devon may continue to adjust the valuation allowance on its deferred tax assets in future periods.
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 2021 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 three years.
Purchase Accounting
Periodically we acquire assets and assume liabilities in transactions accounted for as business combinations, such as the Merger with WPX. In connection with the Merger, as the accounting acquirer, we allocated the $5.4 billion of purchase price consideration to the assets acquired and liabilities assumed based on estimated fair values as of the date of the Merger. The preliminary purchase price assessment remains an ongoing process and is subject to change for up to one year subsequent to the closing date of the Merger.
We made a number of assumptions in estimating the fair value of assets acquired and liabilities assumed in the Merger. The most significant assumptions relate to the estimated fair values of proved and unproved oil and gas properties. Since sufficient market data was not available regarding the fair values of proved and unproved oil and gas properties, we prepared estimates and engaged third party valuation experts. Significant judgments and assumptions are inherent in these estimates and include, among other things, estimates of reserve quantities, estimates of future commodity prices, drilling plans, expected development costs, lease operating costs, reserve risk adjustment factors and an estimate of an applicable market participant discount rate that reflects the risk of the underlying cash flow estimates.
Estimated fair values ascribed to assets acquired can have a significant impact on future results of operations presented in Devon’s financial statements. A higher fair value ascribed to a property results in higher DD&A expense, which results in lower net earnings. Fair values are based on estimates of future commodity prices, reserve quantities, development costs and operating costs. In the event that future commodity prices or reserve quantities are lower than those used as inputs to determine estimates of acquisition date fair values, the likelihood increases that certain costs may be determined to not be recoverable.
In addition to the fair value of proved and unproved oil and gas properties, other significant fair value assessments for the assets acquired and liabilities assumed in the Merger relate to debt, the equity method investment in Catalyst and out-of-market contract assets and liabilities. The fair value of the assumed WPX publicly traded debt was based on available third party quoted prices. We prepared estimates and engaged third party valuation experts to assist in the valuation of the equity method investment in Catalyst. Significant judgments and assumptions inherent in this estimate included projected Catalyst cash flows, comparable companies cash flow multiples and an estimate of an applicable market participant discount rate. The fair value of assumed out-of-market contract assets and liabilities associated with longer-term marketing, gathering, processing and transportation contracts included significant judgments and assumptions related to determining the market rates, estimates of future reserves and production associated with the respective contracts and applying an applicable market participant discount rate.
For additional information regarding our critical accounting policies and estimates, see our 2020 Annual Report on Form 10-K.
We make reference to “core earnings (loss) attributable to Devon” and “core earnings (loss) per share attributable to Devon” in “Overview of 2021 Results” in this Item 2 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 (loss) 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, non-cash asset impairments (including non-cash unproved asset impairments), deferred tax asset valuation allowance, changes in tax legislation, fair value changes in derivative financial instruments and foreign currency, costs associated with early retirement of debt and restructuring and transaction costs associated with the workforce reductions described further in Note 6.
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 Noncontrolling Interests
Per Diluted Share
Earnings attributable to Devon (GAAP)
Adjustments:
(0.13
Asset and exploration impairments
0.00
(0.71
Change in tax legislation
Fair value changes in financial instruments and foreign currency
(23
(0.04
597
460
0.68
0.03
201
0.29
(0.03
Core earnings attributable to Devon (Non-GAAP)
952
739
733
1.08
1,917
1,453
1,439
2.14
Continuing Operations
Loss attributable to Devon (GAAP)
0.08
2,816
2,178
5.80
(0.01
0.65
Fair value changes in financial instruments
0.19
71
0.14
(0.11
0.07
0.06
Core loss attributable to Devon (Non-GAAP)
(0.07
(61
(65
(70
(0.20
Earnings (loss) attributable to Devon (GAAP)
(0.00
0.37
Fair value changes in foreign currency and other
0.01
Core earnings (loss) attributable to Devon (Non-GAAP)
(195
(3,130
165
0.22
2,919
2,405
6.38
184
144
0.38
(29
(27
(0.09
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 from continuing operations 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 continuing operations.
Below are reconciliations of net earnings to EBITDAX and a further reconciliation to Field-Level Cash Margin.
Net earnings (loss) (GAAP)
Net (earnings) loss from discontinued operations, net of tax
Derivative and financial instrument non-cash valuation changes
Accretion on discounted liabilities and other
EBITDAX (Non-GAAP)
1,634
359
3,794
1,174
Marketing and midstream revenues and expenses, net
Commodity derivative cash settlements
370
(343
General and administrative expenses, cash-based
77
238
198
407
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
As of September 30, 2021, we have commodity derivatives that pertain to a portion of our estimated production for the last three months of 2021, as well as for 2022, 2023 and 2024. 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 September 30, 2021, a 10% change in the forward curves associated with our commodity derivative instruments would have changed our net positions by approximately $280 million.
Interest Rate Risk
As of September 30, 2021, we had total debt of $6.5 billion. All of our debt is based on fixed interest rates averaging 5.7%.
Foreign Currency Risk
We had no material foreign currency risk at September 30, 2021.
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 September 30, 2021 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
In conjunction with the Merger closing, we have integrated WPX’s operations into our overall system of internal controls over financial reporting and they are now included in our assessment of the effectiveness of our internal controls over financial reporting. For additional information regarding the Merger, see Note 2 in “Part I. Financial Information – Item 1. Financial Statements” in this report.
There were no other 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 in Part II, Item 1. Legal Proceedings of our Second Quarter 2021 Quarterly Report on Form 10-Q, there were no material pending legal proceedings to which we are a party or to which any of our property is subject.
Please see our 2020 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 2020 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 third quarter of 2021 (shares in thousands).
Shares Purchased (1)
Paid per Share
July 1 - July 31
27.64
August 1 - August 31
25.65
September 1 - September 30
29.29
26.95
These amounts reflect the shares received by us from employees for the payment of personal income tax withholding on vesting transactions.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit
Number
Description
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).
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: November 3, 2021
/s/ Jeremy D. Humphers
Jeremy D. Humphers
Senior Vice President and Chief Accounting Officer