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, 2021 compared to previous periods and in our financial condition and liquidity sinceDecember 31, 2020 . To help facilitate comparisons to the three-month period endedMarch 31, 2021 , information regarding our first quarter 2021 financial results can be found in our First 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."
WPX Merger and Operating Results
OnSeptember 26, 2020 , we entered into the Merger Agreement, providing for an all-stock merger of equals with WPX which successfully closed onJanuary 7, 2021 . The Merger has created a leading unconventional oil producer in theU.S. , with an asset base underpinned by premium acreage in the economic core of theDelaware 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:
• Efficiency gains drove second quarter capital expenditures 9% below our plan.
• Second quarter Boe production totaled 567 MBoe/d, exceeding our plan by 3%.
• On pace to achieve approximately
end of 2021.
• Redeemed approximately $1.2 billion of senior notes in 2021.
• Exited the second quarter with
billion of cash, with no debt maturities until 2023.
• Including variable dividends, paid dividends of approximately
in the first six months of 2021 and have declared
to be paid in the third quarter of 2021.
Overview of 2021 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 various economic environments by protecting our financial strength, tailoring our capital investment to market conditions, improving our cash cost structure and preserving operational continuity. After a significant downturn in economic activity in 2020 resulting from the unprecedented COVID-19 pandemic, economic activity has begun to recover, and commodity prices have continued to increase in 2021. However, we expect commodity prices to remain volatile with the emergence of COVID-19 variants and pending OPEC+ curtailment decisions. We will continue to evaluate the global impacts of COVID-19 as they evolve and will adapt accordingly as a company. 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 discontinued operations. The quarterly cash flow chart presents amounts pertaining toDevon's continuing operations. Activity related to discontinued operations is only applicable for 2020 periods. "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. 27
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Table of Contents [[Image Removed]] Our net earnings in recent quarters have been significantly impacted by divestiture transactions, asset impairments and temporary, 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. Despite our portfolio enhancements, aggressive cost reductions and operational advancements, our financial results have been challenged by commodity prices and deterioration of the macro-economic environment resulting from the aforementioned COVID-19 pandemic; however, prices have begun to recover and increase significantly in 2021. Our earnings increased from the first quarter of 2021 to the second quarter of 2021 primarily due to an increase in overall commodity prices as well as higher sold volumes. Led by a 14% increase in WTI from the first quarter of 2021 to the second quarter of 2021, our unhedged combined realized price rose 7%. Volumes increased due to new well activity and restored production operations following winter storms in the first quarter. [[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 have been impacted by the COVID-19 pandemic and its impact on commodity prices. Our cash flow increased during the first and second quarters of 2021 primarily due to higher commodity prices and an increase in sold volumes. We exited the second quarter of 2021 with$4.5 billion of liquidity, comprised of$1.5 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 untilAugust 2023 . We currently have approximately 45% and 60% of our remaining 2021 oil and gas production hedged, respectively, and 20% and 25% of our 2022 oil and gas production hedged, respectively. These contracts consist of collars and swaps based off the WTI oil 28
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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.
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 discontinued operations or noncontrolling interests. Q2 2021 vs. Q1 2021 Our second quarter 2021 net earnings were$261 million , compared to net earnings of$216 million for the first quarter of 2021. The graph below shows the change in net earnings from the first quarter of 2021 to the second quarter of 2021. The material changes are further discussed by category on the following pages. [[Image Removed]] 29
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Production Volumes
Q2 2021 % of Total Q1 2021 Change
Oil (MBbls/d)
Delaware Basin 191 66 % 172 +11 %
Anadarko Basin 17 6 % 13 +29 %
Williston Basin 46 16 % 44 +3 %
Eagle Ford 18 6 % 16 +14 %
Powder River Basin 16 5 % 17 - 4 %
Other 3 1 % 6 - 45 %
Total 291 100 % 268 +9 %
Q2 2021 % of Total Q1 2021 Change
Gas (MMcf/d)
Delaware Basin 513 58 % 471 +9 %
Anadarko Basin 225 26 % 200 +13 %
Williston Basin 61 7 % 49 +24 %
Eagle Ford 59 7 % 47 +25 %
Powder River Basin 21 2 % 21 +3 %
Other 2 0 % 3 - 25 %
Total 881 100 % 791 +11 %
Q2 2021 % of Total Q1 2021 Change
NGLs (MBbls/d)
Delaware Basin 82 64 % 60 +36 %
Anadarko Basin 26 20 % 21 +21 %
Williston Basin 9 7 % 8 +21 %
Eagle Ford 9 7 % 6 +39 %
Powder River Basin 3 2 % 3 - 4 %
Other - 0 % 1 - 100 %
Total 129 100 % 99 +30 %
Q2 2021 % of Total Q1 2021 Change
Combined (MBoe/d)
Delaware Basin 358 63 % 310 +16 %
Anadarko Basin 80 14 % 68 +18 %
Williston Basin 66 12 % 61 +8 %
Eagle Ford 37 6 % 30 +21 %
Powder River Basin 22 4 % 23 - 3 %
Other 4 1 % 7 - 43 %
Total 567 100 % 499 +14 %
From the first quarter of 2021 to the second quarter of 2021, the change in
volumes contributed to a
Realized Prices
Q2 2021 Realization Q1 2021 Change
Oil (per Bbl)
WTI index $ 66.04 $ 57.87 +14 %
Realized price, unhedged $ 63.63 96% $ 55.28 +15 %
Cash settlements $ (13.29 ) $ (9.13 )
Realized price, with hedges $ 50.34 76% $ 46.15 +9 %
Q2 2021 Realization Q1 2021 Change
Gas (per Mcf)
Henry Hub index $ 2.83 $ 2.71 +4 %
Realized price, unhedged $ 2.35 83% $ 2.84 - 17 %
Cash settlements $ (0.15 ) $ (0.15 )
Realized price, with hedges $ 2.20 78% $ 2.69 - 18 %
Q2 2021 Realization Q1 2021 Change
NGLs (per Bbl)
WTI index $ 66.04 $ 57.87 +14 %
Realized price, unhedged $ 23.89 36% $ 25.01 - 4 %
Cash settlements $ (0.25 ) $ (0.20 )
Realized price, with hedges $ 23.64 36% $ 24.81 - 5 %
Q2 2021 Q1 2021 Change
Combined (per Boe)
Realized price, unhedged $ 41.75 $ 39.14 +7 %
Cash settlements $ (7.11 ) $ (5.17 )
Realized price, with hedges $ 34.64 $ 33.97 +2 %
From the first quarter of 2021 to the second quarter of 2021, field prices
contributed to a $168 million increase in earnings. Unhedged realized oil prices
increased primarily due to higher WTI index prices. This was partially offset by
lower unhedged realized gas and NGL prices which was primarily due to higher
first quarter pricing contracts resulting from the winter storm and increased
ethane rejection, respectively. The increase in WTI was also partially offset by
an increase in hedge cash settlement payments.
We currently have approximately 45% of our remaining 2021 oil production hedged
with an average floor price of $40 /Bbl and approximately 60% of our remaining
2021 gas production hedged with an average floor price of $2.57 /Mcf. We
currently have approximately 20% of our 2022 oil production hedged with an
average floor price of $45 /Bbl and approximately 25% of our 2022 gas production
hedged with an average floor price of $2.64 /Mcf.
Hedge Settlements
Q2 2021 Q1 2021 Change
Q
Oil $ (352 ) $ (220 ) - 60 %
Natural gas (12 ) (10 ) - 20 %
NGL (3 ) (2 ) - 50 %
Total cash settlements (1) $ (367 ) $ (232 ) - 58 %
(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.
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Production Expenses
Q2 2021 Q1 2021 Change
LOE $ 210 $ 199 +6 %
Gathering, processing & transportation 147 129 +14 %
Production taxes 143 117 +22 %
Property taxes 13 13 +0 %
Total $ 513 $ 458 +12 %
Per Boe:
LOE $ 4.06 $ 4.44 - 9 %
Gathering, processing &
transportation $ 2.85 $ 2.87 - 1 %
Percent of oil, gas and NGL sales:
Production taxes 6.7 % 6.6 % +1 %
Production expenses increased from the first quarter of 2021 to the second
quarter of 2021 primarily due to the activity impacts from the February 2021
winter storm and new well activity in the second quarter. 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.
Q2 2021 $ per BOE Q1 2021 $ per BOE
Field-level cash margin (Non-GAAP)
Delaware Basin $ 1,102 $ 33.79 $ 895 $ 32.07
Anadarko Basin 145 $ 19.86 85 $ 14.01
Williston Basin 197 $ 32.98 161 $ 29.70
Eagle Ford 106 $ 31.88 72 $ 26.57
Powder River Basin 74 $ 36.78 67 $ 31.99
Other 17 $ 42.85 19 $ 28.21
Total $ 1,641 $ 31.79 $ 1,299 $ 28.95
DD&A and Asset Impairments
Q2 2021 Q1 2021 Change
Oil and gas per Boe $ 9.88 $ 9.78 +1 %
Oil and gas $ 510 $ 439 +16 %
Other property and equipment $ 26 28 - 7 %
Total $ 536 $ 467 +15 %
DD&A increased in the second quarter of 2021 primarily due to higher volumes.
General and Administrative Expense
Q2 2021 Q1 2021 Change
G&A per Boe $ 1.81 $ 2.40 - 25 %
Labor and benefits $ 60 $ 72 - 17 %
Non-labor 34 35 - 3 %
Total $ 94 $ 107 - 12 %
G&A decreased primarily as a result of lower employee costs and benefits.
Other Items
Q2 2021 Q1 2021 Change in earnings
Commodity hedge valuation changes (1) $ (336 ) $ (296 ) $ (40 )
Marketing and midstream operations 1 (21 ) 22
Exploration expenses 3 3 -
Asset dispositions (87 ) (32 ) 55
Net financing costs 80 77 (3 )
Restructuring and transaction costs 23 189 166
Other, net (14 ) (29 ) (15 )
$ 185
(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.
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.
Restructuring and transaction costs reflect workforce reductions in conjunction
with the Merger, as well as various transaction costs related to the Merger. The
majority of these costs were recorded in the first quarter of 2021. For
additional information, see Note 6 in "Part I. Financial Information -
Item 1. Financial Statements" in this report.
Income Taxes
Q2 2021 Q1 2021
Current expense (benefit) $ 19 $ (5 )
Deferred expense (benefit) 24 (243 )
Total expense (benefit) $ 43 $ (248 )
Effective income tax rate 14 % 763 %
For discussion on income taxes, see Note 7 in "Part I. Financial Information - Item 1. Financial Statements" in this report.
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Our six months endedJune 30, 2021 net earnings were$477 million , compared to a net loss of$2.4 billion (excludes discontinued operations) for the six months endedJune 30, 2020 . The graph below shows the change in the net earnings (loss) from the six months endedJune 30, 2020 to the six months endedJune 30, 2021 . The material changes are further discussed by category on the following pages. [[Image Removed]] 32
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Production Volumes
Six Months Ended June 30,
2021 % of Total 2020 Change
Oil (MBbls/d)
Delaware Basin 181 65 % 81 +123 %
Anadarko Basin 15 5 % 22 - 34 %
Williston Basin 45 16 % - N/M
Eagle Ford 17 6 % 27 - 37 %
Powder River Basin 16 6 % 20 - 17 %
Other 5 2 % 8 - 40 %
Total 279 100 % 158 +77 %
Six Months Ended June 30,
2021 % of Total 2020 Change
Gas (MMcf/d)
Delaware Basin 492 59 % 242 +103 %
Anadarko Basin 213 25 % 267 - 20 %
Williston Basin 55 7 % - N/M
Eagle Ford 53 6 % 87 - 39 %
Powder River Basin 21 3 % 24 - 13 %
Other 2 0 % 4 - 39 %
Total 836 100 % 624 +34 %
Six Months Ended June 30,
2021 % of Total 2020 Change
NGLs (MBbls/d)
Delaware Basin 71 62 % 33 +114 %
Anadarko Basin 23 21 % 28 - 15 %
Williston Basin 9 8 % - N/M
Eagle Ford 8 7 % 10 - 26 %
Powder River Basin 3 2 % 3 +7 %
Other - 0 % 1 - 100 %
Total 114 100 % 75 +53 %
Six Months Ended June 30,
2021 % of Total 2020 Change
Combined (MBoe/d)
Delaware Basin 334 63 % 155 +116 %
Anadarko Basin 74 14 % 94 - 22 %
Williston Basin 63 12 % - N/M
Eagle Ford 33 6 % 52 - 35 %
Powder River Basin 23 4 % 27 - 14 %
Other 6 1 % 9 - 38 %
Total 533 100 % 337 +58 %
From the six months ended 2020 to the six months ended 2021, the change in
volumes contributed to an $841 million 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 219 MBoe/d
for the six months ended 2021. Continued development of Devon legacy assets in
the Delaware Basin also increased volumes. These increases were partially offset
by impacts of the February 2021 winter storm and reduced activity across Devon's
remaining assets.
Realized Prices
Six Months Ended June 30,
2021 Realization 2020 Change
Oil (per Bbl)
WTI index $ 61.95 $ 37.43 +66 %
Realized price, unhedged $ 59.65 96% $ 33.27 +79 %
Cash settlements $ (11.30 ) $ 10.04
Realized price, with hedges $ 48.35 78% $ 43.31 +12 %
Six Months Ended June 30,
2021 Realization 2020 Change
Gas (per Mcf)
Henry Hub index $ 2.77 $ 1.83 +51 %
Realized price, unhedged $ 2.58 93% $ 1.25 +106 %
Cash settlements $ (0.15 ) $ 0.32
Realized price, with hedges $ 2.43 88% $ 1.57 +55 %
Six Months Ended June 30,
2021 Realization 2020 Change
NGLs (per Bbl)
WTI index $ 61.95 $ 37.43 +66 %
Realized price, unhedged $ 24.37 39% $ 9.70 +151 %
Cash settlements $ (0.23 ) $ 0.56
Realized price, with hedges $ 24.14 39% $ 10.26 +135 %
Six Months Ended June 30,
2021 2020 Change
Combined (per Boe)
Realized price, unhedged $ 40.54 $ 20.09 +102 %
Cash settlements $ (6.21 ) $ 5.43
Realized price, with hedges $ 34.33 $ 25.52 +35 %
From the six months ended 2020 to the six months ended 2021, field prices
contributed to a $1.8 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 a decrease in
hedge cash settlements related to all products.
Hedge Settlements
Six Months Ended June 30,
2021 2020 Change
Oil $ (572 ) $ 289 - 298 %
Natural gas (22 ) 36 - 161 %
NGL (5 ) 8 - 163 %
Total cash settlements (1) $ (599 ) $ 333 - 280 %
(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.
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Production Expenses
Six Months Ended June 30,
2021 2020 Change
LOE $ 409 $ 234 +75 %
Gathering, processing & transportation 276 253 +9 %
Production taxes 260 81 +221 %
Property taxes 26 13 +100 %
Total $ 971 $ 581 +67 %
Per Boe:
LOE $ 4.24 $ 3.83 +11 %
Gathering, processing &
transportation $ 2.86 $ 4.13 - 31 %
Percent of oil, gas and NGL sales:
Production taxes 6.7 % 6.6 % +2 %
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
$23 million of Anadarko volume commitments which expired at the end of 2020.
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.
Six Months Ended June 30,
2021 $ per BOE 2020 $ per BOE
Field-level cash margin (Non-GAAP)
Delaware Basin $ 1,997 $ 33.00 $ 366 $ 12.97
Anadarko Basin 230 $ 17.20 87 $ 5.09
Williston Basin 358 $ 31.42 - N/M
Eagle Ford 178 $ 29.50 109 $ 11.58
Powder River Basin 141 $ 34.36 74 $ 15.31
Other 36 $ 33.43 14 $ 8.16
Total $ 2,940 $ 30.48 $ 650 $ 10.60
DD&A and Asset Impairments
Six Months Ended June 30,
2021 2020 Change
Oil and gas per Boe $ 9.83 $ 10.66 - 8 %
Oil and gas $ 949 $ 653 +45 %
Other property and equipment 54 47 +17 %
Total $ 1,003 $ 700 +43 %
Asset impairments $ - $ 2,666 N/M
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 six months ended 2020 due to
significant decreases in commodity prices resulting primarily from the COVID-19
pandemic. These impairments resulted in lower DD&A rates in 2021 compared to
2020. For additional information, see Note 5 in "Part I. Financial
Information - Item 1. Financial Statements" in this report.
General and Administrative Expense
Six Months Ended June 30,
2021 2020 Change
G&A per Boe $ 2.08 $ 2.96 - 30 %
Labor and benefits $ 132 $ 111 +19 %
Non-labor 69 70 - 1 %
Total $ 201 $ 181 +11 %
Labor and benefits increased primarily due to the Merger closing on January 7,
2021 . However, Devon's G&A per Boe rate decreased 30% primarily due to synergies
created by the Merger.
Other Items
Six Months Ended June 30,
2021 2020 Change in earnings
Commodity hedge valuation changes (1) $ (632 ) $ 26 $ (658 )
Marketing and midstream operations (20 ) (26 ) 6
Exploration expenses 6 124 118
Asset dispositions (119 ) - 119
Net financing costs 157 134 (23 )
Restructuring and transaction costs 212 - (212 )
Other, net (43 ) (35 ) 8
$ (642 )
(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
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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
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 divestedBarnett Shale assets. 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$30 million gain associated with our debt retirements in the first six months of 2021. For additional information, see Note 13 in "Part I. Financial Information - Item 1. Financial Statements" in this report. Restructuring and transaction costs reflect workforce reductions in conjunction with the Merger, as well as various transaction costs related to the Merger. For additional information, see Note 6 in "Part I. Financial Information - Item 1. Financial Statements" in this report. Income Taxes Six Months Ended June 30, 2021 2020 Current expense (benefit)$ 14 $ (109 ) Deferred benefit (219 ) (311 ) Total benefit$ (205 ) $ (420 ) Effective income tax rate (75 %) 15 %
For discussion on income taxes, see Note 7 in "Part I. Financial Information - Item 1. Financial Statements" in this report.
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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,
2021 2020 2021 2020Operating cash flow from continuing operations$ 1,093 $ 150 $ 1,685 $ 679 WPX acquired cash - - 344 - Divestitures of property and equipment 49 3 64 28 Capital expenditures (504 ) (307 ) (1,003 ) (732 ) Debt activity, net (742 ) - (1,302 ) - Repurchases of common stock - - - (38 ) Common stock dividends (229 ) (42 ) (432 ) (76 ) Noncontrolling interest activity, net (2 ) 3 (30 ) 5 Other (4 ) (1 ) (24 ) (22 ) Net change in cash, cash equivalents and restricted cash from discontinued operations - 136 - (19 ) Net change in cash, cash equivalents and restricted cash$ (339 ) $ (58 ) $ (698 ) $ (175 ) Cash, cash equivalents and restricted cash at end of period$ 1,539 $ 1,669 $ 1,539 $ 1,669
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 grew approximately 150% during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase was due to the Merger and prices significantly increasing in the first half of 2021. 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 six months of 2021, we sold non-core assets for approximately$64 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.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Delaware Basin $ 378 $ 192 $ 775 $ 413
Anadarko Basin 9 10 18 18
Williston Basin 18 - 46 -
Eagle Ford 29 42 43 136
Powder River Basin 7 46 40 131
Other - 3 - 6
Total oil and gas 441 293 922 704
Midstream 43 11 48 19
Other 20 3 33 9
Total capital expenditures $ 504 $ 307 $ 1,003 $ 732
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
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Basin inNorth Dakota . Our capital program is designed to operate within or near operating cash flow. This is evidenced by our operating cash flow funding all of our capital expenditures for the six months endedJune 30, 2021 . Our capital investment program is driven by a disciplined allocation process focused on returns. Our capital expenditures are expected to range between$1.7 billion to$2.0 billion for the full year 2021.
Debt Activity
Subsequent to the Merger closing, we redeemed
Shareholder Distributions and Stock Activity
The following table summarizes our common stock dividends during the second quarter and total for the first six months of 2021 and 2020. We raised our quarterly dividend by 22% to$0.11 per share in the second quarter of 2020. In addition to the fixed quarterly dividend, we paid a variable dividend in the first and second quarters of 2021. Fixed Variable Total Rate Per Share 2021: First quarter$ 76 $ 127 $ 203 $ 0.30 Second quarter 75 154 229 $ 0.34 Total year-to-date$ 151 $ 281 $ 432 2020: First quarter$ 34 $ -$ 34 $ 0.09 Second quarter 42 - 42 $ 0.11 Total year-to-date$ 76 $ -$ 76
We repurchased 2.2 million shares of common stock for
Noncontrolling Interest Activity, net
During the first six months of 2021, we received$3 million of contributions from our noncontrolling interests in CDM and distributed$9 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 theDelaware Basin .
During the first six months of 2020, we received
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. OnJanuary 7, 2021 ,Devon and WPX completed an all-stock merger of equals. With the Merger, we are accelerating our transition to a cash-return business model, which moderates growth, emphasizes capital efficiencies and prioritizes cash returns to shareholders. These principles will positionDevon to be a consistent builder of economic value through the cycle. The post-merger scalability is expected to enhanceDevon's free cash flow, credit profile and decrease 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 theSEC . 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. 37
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Table of Contents 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 second quarter of 2021, we held approximately$1.5 billion of cash, inclusive of$191 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 ofJune 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. 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 six months of 2021 and the remaining costs will be paid mostly over the remaining six 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 onJanuary 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 ofJune 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. AtJune 30, 2021 , there were no borrowings under our commercial paper program, and we were in compliance with the Senior Credit Facility's financial covenant. 38
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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 stable outlook. Our credit rating from Fitch is BBB with a positive 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 percent 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. InAugust 2021 ,Devon announced a cash dividend in the amount of$0.49 per share payable in the third 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$257 million (or$0.38 per share). Capital Expenditures
Our 2021 exploration and development budget for the remainder of 2021 is
expected to range from approximately
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 primarily to significant cumulative losses, we recorded a full valuation allowance againstU.S. deferred tax assets in 2020 and remain in a full valuation allowance position atJune 30, 2021 . However, absent any additional objective negative evidence, and with the addition of subjective evidence such as forecasted taxable income, we may adjust the valuation allowance 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. No ownership change has occurred during 2021 forDevon , but the Merger did cause an ownership change for WPX and increased the likelihoodDevon could experience an ownership change over the next three years. 39
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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 inDevon'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 .
Non-GAAP Measures We make reference to "core earnings (loss) attributable toDevon " and "core earnings (loss) per share attributable toDevon " 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 toDevon , 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. 40
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Below are reconciliations of 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
2021
Total
Earnings attributable to
256 $ 0.38 $ 272 $ 477 $ 469 $ 0.70
Adjustments:
Asset dispositions (87 ) (67 ) (67 ) (0.10 ) (119 ) (91 ) (91 ) (0.13 )
Asset and exploration impairments 1 1 1 0.00 2 1 1 0.00
Deferred tax asset valuation allowance - (115 ) (115 ) (0.17 ) - (378 ) (378 ) (0.57 )
Change in tax legislation - 62 62 0.09 - 62 62 0.09
Fair value changes in financial
instruments and foreign currency 334 258 258 0.38 628 483 483 0.72
Restructuring and transaction costs 23 21 21 0.03 212 183 183 0.28
Early retirement of debt (10 ) (8 ) (8 ) (0.01 ) (30 ) (23 ) (23 ) (0.03 )
Core earnings attributable to Devon
(Non-GAAP) $ 565 $ 413 $ 408 $ 0.60 $ 965 $ 714 $ 706 $ 1.06
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 - - - - - (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 ) 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. 41
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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,
2021 2020 2021 2020
Net earnings (loss) (GAAP) $ 261 $ (668 ) $ 477 $ (2,483 )
Net (earnings) loss from discontinued
operations, net of tax - (9 ) - 116
Financing costs, net 80 69 157 134
Income tax expense (benefit) 43 (3 ) (205 ) (420 )
Exploration expenses 3 12 6 124
Depreciation, depletion and
amortization 536 299 1,003 700
Asset impairments - - - 2,666
Asset dispositions (87 ) - (119 ) -
Share-based compensation 20 19 40 39
Derivative and financial instrument
non-cash valuation changes 336 593 632 (26 )
Restructuring and transaction costs 23 - 212 -
Accretion on discounted liabilities
and other (14 ) 13 (43 ) (35 )
EBITDAX (Non-GAAP) 1,201 325 2,160 815
Marketing and midstream revenues and
expenses, net (1 ) 8 20 26
Commodity derivative cash settlements 367 (232 ) 599 (333 )
General and administrative expenses,
cash-based 74 60 161 142
Field-level cash margin (Non-GAAP) $ 1,641
$ 2,940 $ 650 42
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