DEVON ENERGY CORPORATION The following discussion and analysis addresses material changes in our results of operations for the three-month and six-month periods endedJune 30, 2020 compared to previous periods and in our financial condition and liquidity sinceDecember 31, 2019 . For information regarding our critical accounting policies and estimates, see our 2019 Annual Report on Form 10-K under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
COVID - 19
A novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced inChina in late 2019 and has subsequently spread to multiple countries worldwide, resulting in a global pandemic and health crisis.Devon began actively monitoring COVID-19 inJanuary 2020 and formally established a COVID-19 cross-functional planning team at the beginning of March. The COVID-19 team is focused on two key priorities: the health and safety of our employees and contractors and the uninterrupted operation of our business.
• Health and safety - The COVID-19 team has developed and implemented a
number of safety measures, which have successfully kept our workforce
healthy and safe. The COVID-19 team has established an informational
campaign to provide employees an understanding of the virus risk factors
and safety measures, as well as timely updates from governmental
stay-at-home regulations. Expectations have also been set for employees
to communicate immediately if they, or someone they have been in contact
with, has experienced symptoms or tested positive for COVID-19. Other
measures have included closing all of Devon's office buildings andlocations to the public, implementing social distancing and encouraging
employees to work from home. Beginning in late March, more than 90% of
the workforce assigned to
primarily working from home until the vast majority returned to the
office late in the second quarter. The COVID-19 team also strongly
encourages employees to wear masks, reinforces social distancing measures
and continues to perform targeted and routine intensive and deep cleaning
of all Devon office locations.
• Uninterrupted operation of our business - Beyond workforce safety
measures, the COVID-19 team has worked with government officials to
ensure our business continues to be deemed an essential business orinfrastructure. The COVID-19 team has ensured technology and resources
are available for employees to execute their job duties while working
from home and implemented further social distancing and contactless
initiatives in our oil and gas field operations. The collective efforts
of our COVID-19 team and our entire workforce have enabled us to avoid
the need to implement COVID-19 containment or mitigation measures, which
would require closure or suspension of any of our operations.
This outbreak and the related responses of governmental authorities and others
to limit the spread of the virus have significantly reduced global economic
activity, resulting in an unprecedented decline in the demand for oil and other
commodities. This supply-and-demand imbalance was exacerbated by uncertainty
regarding the future global supply of oil due to disputes between Russia and the
members of OPEC in March 2020 . These factors caused a swift and material
deterioration in commodity prices in early 2020, with NYMEX WTI oil prices
falling from a high of over $60 /Bbl at the beginning of the year to below
$20 /Bbl in April 2020 . By the end of the second quarter of 2020, NYMEX WTI oil
prices recovered to approximately $40 /Bbl.
Despite the current economic challenges, we remain focused on building economic
value by executing on our strategic priorities of maximizing 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:
• Efficiency gains drove second quarter capital expenditures 10% below our
plan, which had already been reduced 45% in response to COVID-19 effects on
commodity benchmark prices
• Second-quarter oil production totaled 153 MBbls/d, exceeding our plan by 2%
• Operating costs continued to decline in the second quarter led by 17% and
23% decreases from the first quarter for production and
administrative expenses, respectively
• Initiatives are underway to deliver
cash cost reductions by year-end 2020
• Exited the second-quarter with
billion of cash, with no near-term debt maturities
•
scheduled date of
• Board of Directors approved a
total) special dividend payable as of October 1, 2020
• Board of Directors approved a $1.5 billion debt repurchase plan
25
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Table of Contents Overview of 2020 Results 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 environmental, social and governance excellence, which provides us with a strong foundation to grow returns, margin and profitability. We continue to execute on our strategy and navigate through the challenged economic environment by protecting our financial strength, tailoring our capital investment to market conditions, improving our cash cost structure and preserving operational continuity. Trends of our quarterly earnings, operating cash flow, EBITDAX and capital expenditures are shown below. The quarterly earnings chart presents amounts pertaining to bothDevon's continuing and discontinuing operations. The quarterly cash flow chart presents amounts pertaining toDevon'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. [[Image Removed]] Our net earnings in recent quarters have been significantly impacted by divestiture transactions, asset impairments and temporary, noncash adjustments to the value of our commodity hedges. Net earnings in the second quarter of 2020 included a$0.5 billion hedge valuation loss, net of tax. Net earnings in the first quarter of 2020 included$2.3 billion of asset impairments on our proved and unproved properties and a$0.5 billion hedge valuation gain, both net of taxes. Net earnings in the fourth quarter of 2019 included$0.6 billion of asset impairments and a$0.1 billion hedge valuation loss, both net of taxes. Net earnings in the second quarter of 2019 included$0.3 billion for net after-tax gains and charges related to our Canadian disposition. Excluding these amounts, our core earnings have been more stable over recent quarters but continue to be heavily influenced by commodity prices. Despite our portfolio enhancements, aggressive cost reductions and operational advancements, our financial results were challenged by commodity prices and deterioration of the macro-economic environment resulting from the unprecedented COVID-19 pandemic. Our earnings declined from the first quarter of 2020 to the second quarter of 2020 due to a decrease in overall commodity prices. Led by a 39% decrease in WTI from the first quarter of 2020 to the second quarter of 2020, our unhedged combined realized price dropped 44%. In response to this commodity price environment, we were able to reduce our production and general and administrative costs 19% compared to the first quarter of 2020. 26
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Table of Contents [[Image Removed]] Like earnings, our operating cash flow is sensitive to volatile commodity prices. EBITDAX, which excludes financial amounts related to discontinued operations, and operating cash flows were significantly lower during the second quarter of 2020 resulting from impacts of the COVID-19 pandemic and declines in commodity prices. As operating cash flow has declined, we have reduced our 2020 capital development plans approximately$800 million , or 45% compared to the original capital budget. We exited the second quarter of 2020 with$4.7 billion of liquidity comprised of$1.7 billion of cash, inclusive of$195 million of cash restricted for discontinued operations, and$3.0 billion of available credit under our Senior Credit Facility. We have$4.3 billion of debt outstanding with no maturities until the end of 2025. We currently have approximately 95% of our expected oil production and approximately 45% of our expected gas production protected with hedges for the remainder of 2020. These contracts consist of collars and swaps based off the WTI oil benchmark and the Henry Hub natural gas index. Additionally, we have entered into regional basis swaps in an effort to protect price realizations across our portfolio.
Results of Operations
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 noncontrolling interests. Analysis of the change in net earnings from continuing operations is shown below and analysis of the change in net earnings from discontinued operations is shown on page 36. Continuing Operations Q2 2020 vs. Q1 2020 Our second quarter 2020 net loss from continuing operations was$677 million , compared to a net loss of$1.7 billion for the first quarter of 2020. The graph below shows the change in net loss from the first quarter of 2020 to the second quarter of 2020. The material changes are further discussed by category on the following pages. [[Image Removed]] 27
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Production Volumes
Q2 2020 % of Total Q1 2020 Change
Oil (MBbls/d)
Delaware Basin 79 52 % 84 - 5 %
Powder River Basin 18 12 % 21 - 14 %
Eagle Ford 27 18 % 26 +4 %
Anadarko Basin 21 13 % 24 - 11 %
Other 8 5 % 8 - 6 %
Total 153 100 % 163 - 6 %
Q2 2020 % of Total Q1 2020 Change
Gas (MMcf/d)
Delaware Basin 241 39 % 244 - 1 %
Powder River Basin 20 3 % 29 - 29 %
Eagle Ford 87 14 % 86 +2 %
Anadarko Basin 262 43 % 272 - 4 %
Other 4 1 % 3 +13 %
Total 614 100 % 634 - 3 %
Q2 2020 % of Total Q1 2020 Change
NGLs (MBbls/d)
Delaware Basin 29 42 % 37 - 22 %
Powder River Basin 2 3 % 3 - 15 %
Eagle Ford 12 17 % 9 +27 %
Anadarko Basin 25 37 % 30 - 14 %
Other 1 1 % 1 - 37 %
Total 69 100 % 80 - 13 %
Q2 2020 % of Total Q1 2020 Change
Combined (MBoe/d)
Delaware Basin 149 46 % 162 - 8 %
Powder River Basin 24 7 % 29 - 17 %
Eagle Ford 53 16 % 50 +7 %
Anadarko Basin 90 28 % 98 - 8 %
Other 9 3 % 9 - 6 %
Total 325 100 % 348 - 7 %
From the first quarter of 2020 to the second quarter of 2020, a decrease in
volumes contributed to a $51 million decrease in earnings. Due to the challenged
macro-economic environment, planned 2020 capital expenditures were reduced by
45% and certain marginal wells were shut-in during the second quarter resulting
in lower volumes. The majority of the shut-in production was restored by the end
of the second quarter.
In response to the challenged current macro-economic environment and the timing
of completions, we expect volumes to continue to decrease for the second half of
2020. Volumes for the third quarter are expected to range from approximately 301
to 318 MBoe/d and improve in the fourth quarter due to timing of completions.
Field Prices
Q2 2020 Realization Q1 2020 Change
Oil (per Bbl)
WTI index $ 28.42 $ 46.44 - 39 %
Realized price, unhedged $ 21.25 75% $ 44.59 - 52 %
Cash settlements $ 15.25 $ 5.14 Realized price, with hedges
- 27 %
Q2 2020 Realization Q1 2020 Change
Gas (per Mcf)
Henry Hub index $ 1.71 $ 1.95 - 12 %
Realized price, unhedged $ 1.29 76% $ 1.21 +7 %
Cash settlements $ 0.28 $ 0.36
Realized price, with hedges
+0 %
Q2 2020 Realization Q1 2020 Change
NGLs (per Bbl)
Mont Belvieu blended index (1) $ 12.57 $ 14.39 - 13 %
Realized price, unhedged $ 8.89 71% $ 10.40 - 15 %
Cash settlements $ 0.51 $ 0.61 Realized price, with hedges
- 15 %
(1)Based upon composition of our NGL barrel.
Q2 2020 Q1 2020 Change
Combined (per Boe)
Realized price, unhedged
$ 7.83 $ 3.20
Realized price, with hedges
From the first quarter of 2020 to the second quarter of 2020, field prices contributed to a$332 million decrease in earnings. Unhedged realized oil and NGL prices decreased primarily due to lower WTI and Mont Belvieu index prices. These decreases were partially offset by favorable hedge cash settlements across each of our products. As prices deteriorated towards the end of the first quarter from the COVID-19 pandemic, we added additional oil and gas hedges for the remainder of 2020 and the year 2021. We currently have approximately 95% of our remaining 2020 oil production hedged with an average floor price of$41 /Bbl and approximately 45% of our remaining 2020 gas production hedged with an average floor price of$2.20 /Mcf. Additionally, we continue to build our 2021 hedge positions at market prices. Hedge Settlements Q2 2020 Q1 2020 Change Q Oil$ 213 $ 76 +180 % Natural gas 15 21 - 29 % NGL 4 4 +0 %
Total cash settlements (1)
(1) Included as a component of oil, gas and NGL derivatives on the
consolidated statements of comprehensive earnings.
28
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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
Q2 2020 Q1 2020 Change
LOE $ 108 $ 126 - 14 %
Gathering, processing & transportation 123 130 - 5 %
Production taxes 25 56 - 55 %
Property taxes 7 6 +2 %
Total $ 263 $ 318 - 17 %
Per Boe:
LOE $ 3.69 $ 3.96 - 7 %
Gathering, processing &
transportation $ 4.16 $ 4.11 +1 %
Percent of oil, gas and NGL sales:
Production taxes 5.9 % 6.9 % - 14 %
LOE and gathering, processing and transportation costs decreased in the second
quarter due to the challenged macro-economic environment which resulted in lower
activity levels. Additionally, production taxes decreased due to lower oil, gas
and NGL sales.
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 prepared in accordance with GAAP. A
reconciliation to the comparable GAAP measures is found in "Non-GAAP Measures"
in this Item 2. The changes in production volumes, field prices and production
expenses, shown above, had the following impact on our field-level cash margins
by asset.
Q2 2020 $ per BOE Q1 2020 $ per BOE
Field-level cash margin (non-GAAP)
Delaware Basin $ 106 $ 7.81 $ 260 $ 17.72
Powder River Basin 20 $ 9.09 54 $ 20.48
Eagle Ford 22 $ 4.50 87 $ 19.20
Anadarko Basin 13 $ 1.67 74 $ 8.22
Other - $ 0.10 14 $ 15.55
Total $ 161 $ 5.45 $ 489 $ 15.41
Due to lower commodity benchmark prices, our unhedged realized price per Boe
dropped 44% from the first quarter to the second quarter of 2020. These lower
realizations dramatically reduced our field-level cash margin and other
performance measures. Consequently, we have initiatives underway to reduce
annualized expenses $300 million by the end of 2020. These initiatives include
decreasing annualized production expenses $125 million and general and
administrative expenses $100 million . These savings will be generated from
adjustments to our workforce and production operations, as well as expiries of
minimum volume commitments. We also intend to reduce net financing costs $75
million upon repurchasing up to $1.5 billion of debt as authorized by our Board
of Directors.
DD&A and Asset Impairments
Q2 2020 Q1 2020 Change
Oil and gas per Boe $ 9.33 $ 11.90 - 22 %
Oil and gas $ 276 $ 377 - 27 %
Other property and equipment 23 24 - 2 %
Total $ 299 $ 401 - 25 %
Asset impairments $ - $ 2,666 N/M
Asset impairments were
DD&A decreased in the second quarter primarily due to lower volumes and lower rates resulting from impairments recorded in the first quarter of 2020.
General and Administrative Expenses
Q2 2020 Q1 2020 Change
Labor and benefits (net of reimbursements) $ 45 $ 66 - 32 %
Non-labor 34 36 - 6 %
Total $ 79 $ 102 - 23 %
G&A decreased primarily as a result of lower employee costs and benefits.
Other Items
Q2 2020 Q1 2020 Change in earnings
Commodity hedge valuation changes (1) $ (593 ) $ 619 $ (1,212 )
Marketing and midstream operations (8 ) (18 ) 10
Exploration expenses 12 112 100
Net financing costs 69 65 (4 )
Other expenses 13 (48 ) (61 )
$ (1,167 )
(1) Included as a component of oil, gas and NGL derivatives on the consolidated
statements of comprehensive earnings.
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.
Marketing and midstream operations improved primarily due to downstream product
inventory impairments of
Exploration expenses decreased due to
in
"Part I. Financial Information - Item 1. Financial Statements" in this report.
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Other expenses increased due to a severance tax refund recorded in the first quarter of 2020 related to prior periods.
Income Taxes
Q2 2020 Q1 2020
Current benefit $ (3 ) $ (106 )
Deferred benefit - (311 )
Total benefit $ (3 ) $ (417 )
Effective income tax rate 0 % 20 %
For discussion on income taxes, see Note 7 in "Part I. Financial Information - Item 1. Financial Statements" in this report.
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Table of Contents 2020 vs. 2019 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 noncontrolling interests. Q2 2020 vs. Q2 2019 Our second quarter 2020 net loss from continuing operations was$677 million , compared to net earnings of$151 million in the second quarter of 2019. The graph below shows the change in net earnings (loss) from the second quarter of 2019 to the second quarter of 2020. The material changes are further discussed on the following pages. [[Image Removed]]
Our six months endedJune 30, 2020 net loss from continuing operations was$2.4 billion , compared to a net loss of$227 million for the six months endedJune 30, 2019 . The graph below shows the change in the net loss from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 . The material changes are further discussed on the following pages. [[Image Removed]] 31
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Production Volumes
Three Months Ended June 30, Six Months Ended June 30,
2020 % of Total 2019 Change 2020 % of Total 2019 Change
Oil (MBbls/d)
Delaware Basin 79 52 % 67 +19 % 81 51 % 63 +29 %
Powder River Basin 18 12 % 15 +20 % 20 13 % 15 +30 %
Eagle Ford 27 18 % 23 +16 % 27 17 % 24 +11 %
Anadarko Basin 21 13 % 31 - 32 % 22 14 % 32 - 30 %
Other 8 5 % 8 - 1 % 8 5 % 9 - 8 %
Total 153 100 % 144 +6 % 158 100 % 143 +11 %
Gas (MMcf/d)
Delaware Basin 241 39 % 158 +52 % 242 39 % 152 +60 %
Powder River Basin 20 3 % 22 - 7 % 24 4 % 20 +21 %
Eagle Ford 87 14 % 81 +8 % 87 14 % 82 +6 %
Anadarko Basin 262 43 % 313 - 16 % 267 43 % 323 - 17 %
Other 4 1 % 4 +0 % 4 0 % 6 - 38 %
Total 614 100 % 578 +6 % 624 100 % 583 +7 %
NGLs (MBbls/d)
Delaware Basin 29 42 % 27 +8 % 33 45 % 25 +33 %
Powder River Basin 2 3 % 2 +20 % 3 3 % 2 +32 %
Eagle Ford 12 17 % 12 - 7 % 10 14 % 12 - 13 %
Anadarko Basin 25 37 % 40 - 37 % 28 37 % 38 - 27 %
Other 1 1 % 1 - 40 % 1 1 % 1 - 35 %
Total 69 100 % 82 - 15 % 75 100 % 78 - 5 %
Combined (MBoe/d)
Delaware Basin 149 46 % 120 +24 % 155 46 % 113 +37 %
Powder River Basin 24 7 % 21 +15 % 27 8 % 21 +28 %
Eagle Ford 53 16 % 49 +8 % 52 15 % 50 +3 %
Anadarko Basin 90 28 % 124 - 27 % 94 28 % 123 - 24 %
Other 9 3 % 10 - 9 % 9 3 % 11 - 15 %
Total 325 100 % 324 +0 % 337 100 % 318 +6 %
From the second quarter of 2019 to the second quarter of 2020, an increase in
higher-margin oil volumes contributed to a $34 million increase in earnings.
From the six months ended 2019 to the six months ended 2020, an increase in
volumes contributed to a $166 million increase in earnings. Continued
development in the Delaware Basin and Powder River Basin has resulted in higher
production volumes during 2020 compared to 2019. These increases were partially
offset by significantly lower activity in the Anadarko Basin .
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Field Prices
Three Months Ended June 30, Six Months Ended June 30,
2020 Realization 2019 Change 2020 Realization 2019 Change
Oil (per Bbl)
WTI index $ 28.42 $ 59.85 - 53 % $ 37.43 $ 57.36 - 35 %
Realized price, unhedged $ 21.25 75% $ 57.11 - 63 % $ 33.27 89% $ 54.51 - 39 %
Cash settlements $ 15.25 $ (0.41 ) $ 10.04 $ 1.59
Realized price, with hedges $ 36.50 128% $ 56.70 - 36 % $ 43.31 116% $ 56.10 - 23 %
Gas (per Mcf)
Henry Hub index $ 1.71 $ 2.64 - 35 % $ 1.83 $ 2.90 - 37 %
Realized price, unhedged $ 1.29 76% $ 1.38 - 6 % $ 1.25 68% $ 2.00 - 38 %
Cash settlements $ 0.28 $ 0.34 $ 0.32 $ 0.02
Realized price, with hedges $ 1.57 92% $ 1.72 - 9 %
$ 19.05 - 34 %$ 13.48 $ 21.00 - 36 % Realized price, unhedged$ 8.89 71%$ 15.00 - 41 %$ 9.70 72%$ 16.57 - 41 % Cash settlements$ 0.51 $ 1.40 $ 0.56 $ 1.06
Realized price, with hedges
- 43 %$ 10.26 76%$ 17.63 - 42 % Combined (per Boe) Realized price, unhedged$ 14.37 $ 31.79 - 55 %$ 20.09 $ 32.21 - 38 % Cash settlements$ 7.83 $ 0.79 $ 5.43 $ 1.00 Total$ 22.20 $ 32.58 - 32 %$ 25.52 $ 33.21 - 23 % (1) Based upon composition of our NGL barrel. From the second quarter of 2019 to the second quarter of 2020, field prices contributed to a$546 million decrease in earnings. From the six months ended 2019 to the six months ended 2020, field prices contributed to a$790 million decrease in earnings. Unhedged realized oil, gas and NGL prices decreased primarily due to lower WTI,Henry Hub and Mont Belvieu index prices. These decreases were partially offset by favorable hedge cash settlements across each of our products. Hedge Settlements Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Oil $ 213 $ (6 ) $ 289 $ 40 Natural gas 15 18 36 2 NGL 4 11 8 15 Total cash settlements (1) $ 232 $ 23 $ 333 $ 57 (1) Included as a component of oil, gas and NGL derivatives on the consolidated statements of comprehensive earnings. Production Expenses Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change LOE$ 108 $ 114 - 6 %$ 234 $ 224 +5 % Gathering, processing & transportation 123 111 +11 % 253 220 +15 % Production taxes 25 64 - 60 % 81 124 - 35 % Property taxes 7 7 - 2 % 13 11 +15 % Total$ 263 $ 296 - 11 %$ 581 $ 579 +0 % Per Boe: LOE$ 3.69 $ 3.85 - 4 %$ 3.83 $ 3.90 - 2 % Gathering, processing & transportation$ 4.16 $ 3.78 +10 %$ 4.13 $ 3.82 +8 % Percent of oil, gas and NGL sales: Production taxes 5.9 % 6.8 % - 13 % 6.6 % 6.7 % - 2 % 33
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An increase in gathering, processing and transportation costs from the six months ended 2019 to the six months ended 2020 was due to higher volumes and theAnadarko minimum volume commitments which are set to expire at the end of 2020. These increases were offset by lower production taxes resulting from lower oil, gas and NGL sales.Field-Level Cash Margin
The changes in production volumes, field prices and production expenses, shown above, had the following impact on our field-level cash margins by asset.
Three Months Ended June 30, Six Months Ended June 30,
2020 $ per BOE 2019 $ per BOE 2020 $ per BOE 2019 $ per BOEField-Level Cash Margin (non-GAAP) Delaware Basin$ 106 $ 7.81 $ 267 $ 24.46 $ 366 $ 12.97 $ 501 $ 24.43 Powder River Basin 20$ 9.09 60$ 31.79 74$ 15.31 110$ 29.44 Eagle Ford 22$ 4.50 120$ 26.63 109$ 11.58 249$ 27.58 Anadarko Basin 13$ 1.67 177$ 15.77 87$ 5.09 380$ 17.01 Other -$ 0.10 17$ 18.93 14$ 8.16 36$ 18.17 Total$ 161 $ 5.45 $ 641 $ 21.78 $ 650 $ 10.60 $ 1,276 $ 22.15 DD&A and Asset Impairments Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change Oil and gas per Boe$ 9.33 $ 11.74 - 20
%
Oil and gas$ 276 $ 345 - 20 %$ 653 $ 676 - 3 % Other property and equipment 23 29 - 20 % 47 58 - 19 % Total$ 299 $ 374 - 20 %$ 700 $ 734 - 5 % Asset impairments $ - $ - N/M$ 2,666 $ - N/M
DD&A decreased primarily due to lower rates resulting from asset impairments recorded in the first quarter of 2020.
General and Administrative Expenses
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
Labor and benefits (net of
reimbursements) $ 45 $ 74 - 40 % $ 111 $ 160 - 31 %
Non-labor 34 40 - 13 % 70 89 - 21 %
Total $ 79 $ 114 - 31 % $ 181 $ 249 - 27 %
Labor and benefits and non-labor expenses decreased primarily as a result of continued workforce reduction and cost savings initiatives.
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Other Items
Three Months Ended June 30, Six Months Ended June 30,
Change in Change in
2020 2019 earnings 2020 2019 earnings
Commodity hedge valuation changes (1)
(710 )
(8 ) 17 (25 ) (26 ) 32 (58 )
Exploration expenses 12 7 (5 ) 124 11 (113 )
Asset dispositions - (2 ) (2 ) - (47 ) (47 )
Net financing costs 69 66 (3 ) 134 126 (8 )
Restructuring and transaction costs - 12 12 - 63 63
Other expenses 13 7 (6 ) (35 ) (15 ) 20
$ (739 ) $ 405 (1) Included as a component of oil, gas and NGL derivatives on the consolidated
statements of comprehensive earnings.
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.
Marketing and midstream operations decreased approximately
Exploration expenses increased approximately$113 million for the first six months ended 2020 compared to the first six months ended 2019 primarily due to$113 million in unproved asset impairments in the first six months of 2020. For additional information, see Note 5 in "Part I. Financial Information - Item 1. Financial Statements" in this report.Devon recognized$63 million in restructuring expenses during the first six months of 2019 due to workforce reductions and other initiatives designed to enhance its operational focus and cost structure. For additional information, see Note 6 in "Part I. Financial Information - Item 1. Financial Statements" in this report. 35
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Table of Contents Discontinued Operations
Results of Operations - Discontinued Operations
The table below presents key components from discontinued operations for the time periods presented. Discontinued operations include the Canadian business thatDevon sold inJune 2019 and theBarnett Shale assets thatDevon has contracted to sell and which is scheduled to close onOctober 1, 2020 . For additional information on discontinued operations, see Note 17 in "Part I. Financial Information - Item 1. Financial Statements" in this report. Three Months Ended Six Months Ended June 30, March 31, June 30, June 30, June 30, 2020 2020 2019 2020 2019
Oil, gas and NGL sales
$ 169 $ 994 Oil, gas and NGL derivatives $ - $ -$ 9 $ -$ (95 ) Production expenses$ 74 $ 74 $ 229 $ 148 $ 451 Asset impairments $ -$ 179 $ 37 $ 179 $ 37 Asset dispositions$ (2 ) $ -$ (188 ) $ (2 ) $ (187 ) Restructuring and transaction costs $ - $ -$ 236 $ -$ 239 Earnings (loss) from discontinued operations before income taxes$ 9 $ (157 ) $ 62 $ (148 ) $ 132 Income tax benefit $ -$ (32 ) $ (282 ) $ (32 ) $ (273 ) Net earnings (loss) from discontinued operations, net of tax$ 9 $ (125 ) $ 344 $ (116 ) $ 405 Production (MMBoe): Barnett Shale 9 9 9 18 18 Canada - - 9 - 19 Total production 9 9 18 18 37 Realized price, unhedged (per Boe) - Barnett Shale$ 8.89 $ 10.16 $ 12.57 $ 9.54 $ 14.38 Realized price, unhedged (per Boe) - Canada N/A N/A$ 43.03 N/A$ 38.41 Q2 2020 vs. Q1 2020 Net earnings (loss) from discontinued operations, net of tax increased$134 million from the first quarter of 2020 to the second quarter of 2020. During the first quarter of 2020, we recognized$179 million in asset impairments on ourBarnett Shale assets due to the amended terms of theBarnett Shale sales agreement. This increase in earnings was partially offset by lower gas and NGL sales in the second quarter resulting from lower commodity prices. Q2 2020 vs. Q2 2019 Net earnings from discontinued operations, net of tax decreased$335 million from the second quarter of 2019 to the second quarter of 2020. Net earnings decreased primarily due to the divestment ofDevon's Canadian operations during the second quarter of 2019.
Net earnings (loss) from discontinued operations, net of tax decreased$521 million for the first six months endedJune 30, 2020 compared to the first six months endedJune 30, 2019 . Net earnings decreased primarily due to the divestment ofDevon's Canadian operations during the second quarter of 2019, as well as lower revenues resulting from the challenged macro-economic environment in 2020. Additionally, 2020 includes$179 million in incremental asset impairments to ourBarnett Shale assets related to the amended terms of theBarnett Shale sales agreement during the first quarter of 2020. 36
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Capital Resources, Uses and Liquidity
Sources and Uses of Cash
The following table presents the major changes in cash and cash equivalents for
the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Operating cash flow from continuing
operations $ 150 $ 432 $ 679 $ 868
Divestitures of property and
equipment 3 28 28 338
Capital expenditures (307 ) (486 ) (732 ) (976 )
Acquisitions of property and
equipment (1 ) (13 ) (5 ) (23 )
Debt activity, net - - - (162 )
Repurchases of common stock - (187 ) (38 ) (1,185 )
Common stock dividends (42 ) (37 ) (76 ) (71 )
Contributions from noncontrolling
interests 6 - 11 -
Distributions to noncontrolling
interests (3 ) - (6 ) -
Other - (3 ) (17 ) (23 )
Net change in cash, cash
equivalents and restricted cash
from discontinued operations 136 2,764 (19 ) 2,641
Net change in cash, cash
equivalents and restricted cash $ (58 ) $ 2,498 $ (175 ) $ 1,407
Cash, cash equivalents and
restricted cash at end of period $ 1,669 $ 3,853 $ 1,669 $ 3,853
Operating Cash Flow
Despite our portfolio enhancements, aggressive cost reductions and operational
advancements, our financial results were challenged by commodity prices and
deterioration of the macro-economic environment resulting from the unprecedented
COVID-19 pandemic. As presented in the table above, net cash provided by
operating activities continued to be a significant source of capital and
liquidity. During the six months ended June 30, 2020 , our operating cash flow
funded approximately 85% of our capital expenditures and dividends.
Divestitures of Property and Equipment
During the first six months of 2019, we sold non-coreU.S. assets for approximately$338 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 and Acquisitions of Property and Equipment
The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Delaware Basin $ 192 $ 245 $ 413 $ 470
Powder River Basin 46 60 131 116
Eagle Ford 42 54 136 109
Anadarko Basin 10 93 18 229
Other 3 15 6 26
Total oil and gas 293 467 704 950
Midstream 11 11 19 11
Other 3 8 9 15
Total capital expenditures $ 307 $ 486 $ 732 $ 976
Acquisitions $ 1 $ 13 $ 5 $ 23
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Capital expenditures consist primarily of amounts related to our oil and gas exploration and development operations, midstream operations and other corporate activities. Our capital program is designed to operate within or near operating cash flow. This is evidenced by our operating cash flow funding approximately 90% of our capital expenditures for the six months endedJune 30, 2020 . Our capital investment program is driven by a disciplined allocation process focused on returns. Our capital expenditures are lower in 2020 primarily due to our decreased spending in theAnadarko Basin , partially offset by increased capital investment in thePowder River Basin andEagle Ford . In response to the current macro-economic environment, we reduced our 2020 capital expenditures outlook by approximately$800 million , or 45% compared to the original capital budget.
Debt Activity
During the first six months of 2019, our debt decreased
Shareholder Distributions and Stock Activity
The following table summarizes our common stock dividends during the first six months of 2020 and 2019. Beginning with the second quarter of 2020, we increased our quarterly dividend 22%, to$0.11 per share. We previously increased our quarterly dividend to$0.09 per share commencing with the second quarter of 2019. Amounts Rate Per Share Quarter Ended 2020: First quarter$ 34 $ 0.09 Second quarter 42 $ 0.11 Total year-to-date$ 76 Quarter Ended 2019: First quarter$ 34 $ 0.08 Second quarter 37 $ 0.09 Total year-to-date$ 71 We repurchased 2.2 million shares of common stock for$38 million in the first six months of 2020 and 42.1 million shares of common stock for$1.2 billion in the first six months of 2019 under share repurchase programs authorized by our Board of Directors. For additional information, see Note 16 in "Part I. Financial Information - Item 1. Financial Statements" in this report.
Noncontrolling Interest Contributions and Distributions
During the first six months of 2020, we received
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Cash Flows from Discontinued Operations
All cash flows in the following table relate to activities of our Canadian
business that
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Canadian tax payments $ (20 ) $ - $ (173 ) $ -
Settlements of intercompany foreign
denominated assets/liabilities - (32 ) - (31 )
Other (23 ) 223 (1 ) 162
Operating activities (43 ) 191 (174 ) 131
Divestitures of property and equipment -
Canadian operations - 2,601 - 2,601
Divestitures of property and equipment -
Barnett Shale assets 170 - 170 -
Divestitures of property and equipment 170 2,601 170 2,601
Capital expenditures and other 1 (65 ) - (123 )
Investing activities 171 2,536 170 2,478
Financing activities - - - (7 )
Settlements of intercompany foreign
denominated assets/liabilities - 32 - 31
Other 8 5 (15 ) 8
Effect of exchange rate changes on cash 8 37 (15 ) 39
Net change in cash, cash equivalents and
restricted cash of
discontinued operations $ 136 $ 2,764 $ (19 ) $ 2,641
Operating cash flows during the first six months of 2020 include $173 million of
cash income and withholding tax payments in Canada related to divestitures and
was also negatively impacted by lower commodity prices. Foreign currency
denominated intercompany loan activity resulted in a realized loss of $32
million in the second quarter of 2019 as a result of the strengthening of the
U.S. dollar in relation to the Canadian dollar. There was an offset in the
effect of exchange rate changes on cash line in the table above, resulting in no
impact to the net change in cash, cash equivalents and restricted cash.
Investing cash flows during the first six months of 2020 include $170 million in
deposit funds from BKV due to the amended terms on the sale of our Barnett Shale
assets, which is scheduled to close on October 1, 2020 . On June 27, 2019 , we
completed the sale of our Canadian business for proceeds of $2.6 billion . See
Note 2 and Note 17 in "Part I. Financial Information - Item 1. Financial Statements" in this report for additional details on these divestitures.
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. 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 theSEC . We estimate the combination of our sources of capital will continue to be adequate to fund our planned capital requirements as discussed in this section. Beginning in the first quarter of 2020, the macro-economic environment deteriorated significantly and has created extreme volatility primarily due to concerns arising from the COVID-19 pandemic. In response to this environment, we will continue to maintain flexibility within our capital program as we continue to focus on protecting our financial strength and maintaining operational continuity. Additionally, we have initiatives underway to reduce annualized production, administrative and financing expenses a total of$300 million . Further, we expect to fund a$0.26 per share (approximately$100 million total) special dividend onOctober 1, 2020 . 39
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Operating Cash Flow
Key inputs into determining our planned capital investment are the amounts of cash we hold and operating cash flow we expect to generate over the next one to three or more years. At the end of the second quarter of 2020, we held approximately$1.7 billion of cash, inclusive of$195 million of cash restricted for discontinued operations. Our operating cash flow forecasts are sensitive to many variables and include a measure of uncertainty as the actual results of 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 substantially 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. For the remainder of 2020, we have approximately 95% of our oil production hedged with an average floor price of$41 /Bbl and approximately 45% of our gas production hedged with an average floor price of$2.20 /Mcf. Additionally, we are currently building our 2021 hedge positions at market prices. The key terms to our oil, gas and NGL derivative financial instruments as of June 30, 2020 are presented in Note 3 in "Part I. Financial Information - Item 1. Financial Statements" of this report. 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. Driven by lower realized prices, margins and capital investment, we have begun initiatives to reduce our annualized production and administrative costs a total of$225 million . We expect these annualized savings to be sustainable as we tailor our workforce and operations for current activity levels. 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 and other protections allowed per our agreements.
Divestitures of Property and Equipment
We expect to close ourBarnett Shale divestiture onOctober 1, 2020 . Pursuant to the terms of this transaction, we currently hold a$170 million deposit and expect to receive approximately$300 million at closing, net of purchase price adjustments. Capital Expenditures In response to the current macro-economic environment, we reduced our 2020 capital expenditures outlook by approximately$800 million , or 45% compared to the original capital budget. Our exploration and development budget for the remainder of 2020 is expected to range from$350 million to$400 million . As economic factors change, we will continue to be flexible with our capital program.
Debt Repurchases
Our Board of Directors has authorized a$1.5 billion debt repurchase program. Repurchases will be dependent on market conditions and may be made through open market purchases, tender offers or other transaction structures. The repurchases are expected to generate$75 million of annualized financing cost savings. 40
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Credit Availability
As ofJune 30, 2020 , 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. AtJune 30, 2020 , 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 theU.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 fromStandard and Poor's Financial Services is BBB- with a negative outlook. Our credit rating from Fitch is BBB with a stable outlook. Our credit rating from Moody's Investor Service is Ba1 with a stable outlook. Any rating downgrades may result in additional letters of credit or cash collateral being posted under certain contractual arrangements. Critical Accounting Estimates Income Taxes 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 to an unprecedented downturn in the commodity price environment and the resulting asset impairments,Devon had significant deferred tax assets atMarch 31, 2020 . Accordingly, we reassessed the realizability of our deferred tax assets in future periods and recorded a 100% valuation allowance against our net deferred tax assets during the first quarter of 2020. As ofJune 30, 2020 , we remain in a full valuation allowance position.
Valuation of Long-Lived Assets
Long-lived assets used in operations, including proved and unproved oil and gas
properties, are depreciated and assessed for impairment annually or whenever
changes in facts and circumstances indicate a possible significant deterioration
in future cash flows is expected to be generated by an asset group. For DD&A
calculations and impairment assessments, management groups individual assets
based on a judgmental assessment of the lowest level ("common operating field")
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets.
Management evaluates assets for impairment through an established process in
which changes to significant assumptions such as prices, volumes and future
development plans are reviewed. If, upon review, the sum of the undiscounted
pre-tax cash flows is less than the carrying value of the asset group, the
carrying value is written down to estimated fair value. Because there usually is
a lack of quoted market prices for long-lived assets, the fair value of impaired
assets is typically determined based on the present values of expected future
cash flows using discount rates believed to be consistent with those used by
principal market participants. The expected future cash flows used for
impairment reviews and related fair value calculations are typically based on
judgmental assessments of future production volumes, commodity prices, operating
costs and capital investment plans, considering all available information at the
date of review. The expected future cash flows used for impairment reviews
include future production volumes associated with proved producing and
risk-adjusted proved undeveloped, probable and possible reserves.
Besides the risk-adjusted estimates of reserves and future production volumes,
future commodity prices are the largest driver in the variability of
undiscounted pre-tax cash flows. For our impairment determinations, we
historically have utilized NYMEX forward strip prices for the first five years
and applied internally generated price forecasts for subsequent years. In
response to the COVID-19 pandemic, the NYMEX forward market became highly
illiquid as evidenced by materially reduced trading volumes for periods beyond
2021. Therefore, we altered our price forecast assumptions to perform our March
31, 2020 impairment computations. Specifically, we supplemented the NYMEX
forward strip prices with price forecasts published by reputable investment
banks and reservoir engineering firms to estimate our future revenues as of
March 31, 2020 .
We also estimate and escalate or de-escalate future capital and operating costs
by using a method that correlates cost movements to price movements similar to
recent history. To measure indicated impairments, we use a market-based
weighted-average cost of
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capital to discount the future net cash flows. Changes to any of the reserves or market-based assumptions can significantly affect estimates of undiscounted and discounted pre-tax cash flows and impact the recognition and amount of impairments. Reduced demand from the COVID-19 pandemic and management of production levels fromOPEC caused WTI pricing to decrease more than 60% during the first quarter of 2020. As a result, we reduced our planned 2020 capital investment 45%. With materially lower commodity prices and reduced near-term investment, we assessed all our oil and gas fields for impairment as ofMarch 31, 2020 and recognized proved and unproved impairments totaling$2.8 billion . The impairments relate to ourAnadarko Basin and Rockies fields in which our basis included acquisitions completed in 2016 and 2015, respectively, when commodity prices were much higher than they are today. We assessed ourEagle Ford asset for impairment as ofJune 30, 2020 utilizing the same methodology we applied for the impairment assessments for all of our and oil and gas fields in the first quarter of 2020. OurEagle Ford asset's sum of undiscounted cash flows exceeded the carrying value indicating no impairment as ofJune 30, 2020 . Further, as a result of improved oil pricing, the cushion increased significantly fromMarch 31, 2020 toJune 30, 2020 . If prices significantly deteriorate and/or management lowers the planned capital investment in the EagleFord field , ourEagle Ford asset could be subject to a material impairment of capitalized costs.Goodwill We test goodwill for impairment annually atOctober 31 , or more frequently if events or changes in circumstances dictate that the carrying value of goodwill may not be recoverable. We perform a qualitative assessment to determine whether it is more likely than not that the fair value of goodwill is less than its carrying amount. As part of our qualitative assessment, we considered the general macro-economic, industry and market conditions, changes in cost factors, actual and expected financial performance, significant changes in management, strategy or customers and stock performance. If the qualitative assessment determines that a quantitative goodwill impairment test is required, then the fair value is compared to the carrying value. If the fair value is less than the carrying value, an impairment charge will be recognized for the amount by which the carrying amount exceeds the fair value. Because quoted market prices are not available, the fair value is estimated based upon a valuation analyses including comparable companies and transactions and premiums paid. Because the trading price of our common stock decreased 73% during the first quarter of 2020 in response to the COVID-19 pandemic, we performed a goodwill impairment test as ofMarch 31, 2020 . While the cushion narrowed significantly since our last impairment evaluation, we concluded an impairment was not required as ofMarch 31, 2020 . The two most critical judgements included in theMarch 31, 2020 , test were the period utilized to determineDevon's market capitalization and the control premium. For the test performed as ofMarch 31, 2020 we derived our market capitalization by using our average common stock price from the latter two thirds ofMarch 2020 , to align with the time in the quarter subsequent to a key OPEC+ meeting and the date COVID-19 was officially classified as a pandemic. We applied a control premium based on recent comparable market transactions. Subsequent to the end of the first quarter of 2020,Devon's common stock price increased approximately 60% during the second quarter but remains significantly less than our average trading price before the events experienced in the first quarter of 2020. Although our common stock price and commodity prices are in a period of high volatility, a sustained period of depressed commodity prices would adversely affect our estimates of future operating results, which could result in future goodwill impairments due to the potential impact on the cash flows of our operations. The impairment of goodwill has no effect on liquidity or capital resources. However, it would adversely affect our results of operations in the period recognized.
For additional information regarding our critical accounting policies and estimates, see our 2019 Annual Report on Form 10-K .
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Non-GAAP Measures
We make reference to "core earnings (loss) attributable toDevon " and "core earnings (loss) per share attributable toDevon " in "Overview of 2020 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 toDevon , as well as the per share amount, represent net earnings excluding certain noncash and other items that are typically excluded by securities analysts in their published estimates of our financial results. For more information on the results of discontinued operations for ourBarnett Shale asset and Canadian operations, see Note 17 in "Part I. Financial Information - Item 1. Financial Statements" in this report. Our non-GAAP measures are typically used as a quarterly performance measure. Amounts excluded relate to asset dispositions, noncash asset impairments (including noncash unproved asset impairments), deferred tax asset valuation allowance, fair value changes in derivative financial instruments and foreign currency, changes in tax legislation and restructuring and transaction costs associated with the workforce reductions in 2019. 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. 43
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Below are reconciliations of our core earnings and core earnings per share
attributable to
Three Months Ended June 30, Six Months Ended June 30,
After Per After Per
Noncontrolling Diluted Noncontrolling Diluted
Before tax After tax Interests Share Before tax After tax Interests Share
2020
Continuing Operations
Loss attributable to Devon (GAAP) $ (680 ) $ (677 ) $ (679 ) $ (1.80 ) $ (2,787 ) $ (2,367 ) $ (2,370 ) $ (6.29 )
Adjustments:
Asset and exploration impairments 4 3 3 0.01 2,780 2,149 2,149 5.71
Deferred tax asset valuation allowance - 149 149 0.39 - 257 257 0.67
Fair value changes in financial
instruments 593 459 459 1.22 (26 ) (20 ) (20 ) (0.05 )
Change in tax legislation - - - (0.00 ) - (62 ) (62 ) (0.16 )
Core loss attributable to Devon
(Non-GAAP) $ (83 ) $ (66 ) $ (68 ) $ (0.18 ) $ (33 ) $ (43 ) $ (46 ) $ (0.12 )
Discontinued Operations
Earnings (loss) attributable to Devon
(GAAP) $ 9 $ 9 $ 9 $ 0.02 $ (148 ) $ (116 ) $ (116 ) $ (0.31 )
Adjustments:
Asset dispositions (2 ) (1 ) (1 ) (0.00 ) (2 ) (1 ) (1 ) (0.00 )
Asset impairments - - - - 179 141 141 0.37
Fair value changes in foreign currency
and other (5 ) (6 ) (6 ) (0.02 ) 5 4 4 0.01
Core earnings attributable to Devon
(Non-GAAP) $ 2 $ 2 $ 2 $ 0.00 $ 34 $ 28 $ 28 $ 0.07
Total
Loss attributable to Devon (GAAP) $ (671 ) $ (668 ) $ (670 ) $ (1.78 ) $ (2,935 ) $ (2,483 ) $ (2,486 ) $ (6.60 )
Adjustments:
Continuing Operations 597 611 611 1.62 2,754 2,324 2,324 6.17
Discontinued Operations (7 ) (7 ) (7 ) (0.02 ) 182 144 144 0.38
Core earnings (loss) attributable to
Devon (Non-GAAP) $ (81 ) $ (64 ) $ (66 ) $ (0.18 ) $ 1 $ (15 ) $ (18 ) $ (0.05 )
2019
Continuing Operations
Earnings (loss) attributable to Devon
(GAAP) $ 219 $ 151 $ 151 $ 0.37 $ (278 ) $ (227 ) $ (227 ) $ (0.54 )
Adjustments:
Asset dispositions (2 ) (1 ) (1 ) (0.00 ) (47 ) (36 ) (36 ) (0.08 )
Asset and exploration impairments 1 1 1 0.00 2 2 2 0.00
Deferred tax asset valuation allowance - 11 11 0.03 - (2 ) (2 ) (0.01 )
Fair value changes in financial
instruments (117 ) (90 ) (90 ) (0.22 ) 521 402 402 0.95
Restructuring and transaction costs 12 10 10 0.02 63 49 49 0.12
Core earnings attributable to Devon
(Non-GAAP) $ 113 $ 82 $ 82 $ 0.20 $ 261 $ 188 $ 188 $ 0.44
Discontinued Operations
Earnings attributable to Devon (GAAP) $ 62 $ 344 $ 344 $ 0.82 $ 132 $ 405 $ 405 $ 0.96
Adjustments:
Asset dispositions (188 ) (460 ) (460 ) (1.12 ) (187 ) (459 ) (459 ) (1.10 )
Asset and exploration impairments 38 27 27 0.07 38 27 27 0.07
Deferred tax asset valuation allowance - 32 32 0.08 - 27 27 0.06
Fair value changes in financial
instruments and foreign currency and
other (20 ) (17 ) (17 ) (0.04 ) (23 ) (24 ) (24 ) (0.06 )
Restructuring and transaction costs 236 172 172 0.42 239 175 175 0.42
Core earnings attributable to Devon
(Non-GAAP) $ 128 $ 98 $ 98 $ 0.23 $ 199 $ 151 $ 151 $ 0.35
Total
Earnings (loss) attributable to Devon
(GAAP) $ 281 $ 495 $ 495 $ 1.19 $ (146 ) $ 178 $ 178 $ 0.42
Adjustments:
Continuing Operations (106 ) (69 ) (69 ) (0.17 ) 539 415 415 0.98
Discontinued Operations 66 (246 ) (246 ) (0.59 ) 67 (254 ) (254 ) (0.61 )
Core earnings attributable to Devon
(Non-GAAP) $ 241 $ 180 $ 180 $ 0.43 $ 460 $ 339 $ 339 $ 0.79
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EBITDAX and
To assess the performance of our assets, we use EBITDAX andField-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 andField-Level Cash Margin provide information useful in assessing our operating and financial performance across periods. EBITDAX andField-Level Cash Margin as defined byDevon 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
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net earnings (loss) (GAAP) $ (668 ) $ 495 $ (2,483 ) $ 178
Net (earnings) loss from discontinued
operations, net of tax (9 ) (344 ) 116 (405 )
Financing costs, net 69 66 134 126
Income tax expense (benefit) (3 ) 68 (420 ) (51 )
Exploration expenses 12 7 124 11
Depreciation, depletion and amortization 299 374 700 734
Asset impairments - - 2,666 -
Asset dispositions - (2 ) - (47 )
Share-based compensation 19 21 39 44
Derivative and financial instrument
non-cash valuation changes 593 (117 ) (26 ) 521
Restructuring and transaction costs - 12 - 63
Accretion on discounted liabilities and
other 13 8 (35 ) (14 )
EBITDAX (non-GAAP) 325 588 815 1,160
Marketing and midstream revenues and
expenses, net 8 (17 ) 26 (32 )
Commodity derivative cash settlements (232 ) (23 ) (333 ) (57 )
General and administrative expenses,
cash-based 60 93 142 205
Field-level cash margin (non-GAAP) $ 161 $ 641 $ 650
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