NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Summary of Significant Accounting Policies
|
The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2020 Annual Report on Form 10-K. The accompanying unaudited interim financial statements in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month periods ended March 31, 2021 and 2020 and Devon’s financial position as of March 31, 2021.
Devon and WPX completed an all-stock merger of equals on January 7, 2021. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. The transaction has been accounted for using the acquisition method of accounting, with Devon being treated as the accounting acquirer. See Note 2 for further discussion.
As further discussed in Note 18, Devon closed on the sale of its Barnett Shale assets in October 2020. Prior to December 31, 2020, activity relating to Devon’s Barnett Shale assets is classified as discontinued operations within Devon’s consolidated statements of comprehensive earnings and consolidated statements of cash flows.
As of March 31, 2021, Devon classified approximately $185 million of cash as restricted cash on the consolidated balance sheets for obligations associated with the abandonment of certain gas processing contracts related to divestitures of other Barnett Shale assets that occurred in 2018 and obligations retained related to the Canadian business. Cash payments for these charges related to the Barnett assets and Canada business total approximately $10 million per quarter.
Variable Interest Entity
Cotton Draw Midstream, L.L.C. (“CDM”) is a joint-venture entity formed by Devon and an affiliate of QL Capital Partners, LP (“QLCP”). CDM provides gathering, compression and dehydration services for natural gas production in the Cotton Draw area of the Delaware Basin. Devon holds a controlling interest in CDM and the portions of CDM’s net earnings and equity not attributable to Devon’s controlling interest are shown separately as noncontrolling interests in the accompanying consolidated statements of comprehensive earnings and consolidated balance sheets. CDM is considered a VIE to Devon. The assets of CDM cannot be used by Devon for general corporate purposes and are included in, and disclosed parenthetically, on Devon's consolidated balance sheets. The carrying amount of liabilities related to CDM for which the creditors do not have recourse to Devon's assets are also included in, and disclosed parenthetically, on Devon's consolidated balance sheets if material.
Investments
In conjunction with the Merger, Devon acquired an interest in Catalyst which is a joint venture established between WPX and Howard Energy Partners (“HEP”) to develop oil gathering and natural gas processing infrastructure in the Stateline area of the Delaware Basin. Under the terms of the agreement, Devon and HEP each have a 50 percent voting interest in the joint venture legal entity and HEP serves as the operator. Through 2038, Devon’s production from 50,000 net acres in the Stateline area of the Delaware Basin has been dedicated to Catalyst subject to fixed-fee oil gathering and natural gas processing agreements. The agreements do not include any minimum volume commitments. Devon accounts for the investment in Catalyst as an equity method investment. Devon’s investment in Catalyst is shown within investments on the consolidated balance sheet and Devon’s share of Catalyst earnings are reflected as a component of other, net in the accompanying consolidated statements of comprehensive earnings.
10
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Disaggregation of Revenue
The following table presents revenue from contracts with customers that are disaggregated based on the type of good or service.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Oil
|
|
$
|
1,357
|
|
|
$
|
662
|
|
Gas
|
|
|
207
|
|
|
|
70
|
|
NGL
|
|
|
224
|
|
|
|
75
|
|
Oil, gas and NGL sales
|
|
|
1,788
|
|
|
|
807
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
|
209
|
|
|
|
329
|
|
Gas
|
|
|
118
|
|
|
|
94
|
|
NGL
|
|
|
175
|
|
|
|
137
|
|
Marketing and midstream revenues
|
|
|
502
|
|
|
|
560
|
|
Total revenues from contracts with customers
|
|
$
|
2,290
|
|
|
$
|
1,367
|
|
2.Acquisitions and Divestitures
WPX Merger
On January 7, 2021, Devon and WPX completed an all-stock merger of equals. WPX was an oil and gas exploration and production company with assets in the Delaware Basin in Texas and New Mexico and the Williston Basin in North Dakota. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. No fractional shares of Devon’s common stock were issued in the Merger, and holders of WPX common stock instead received cash in lieu of fractional shares of Devon common stock, if any. Based on the closing price of Devon’s common stock on January 7, 2021, the total value of Devon common stock issued to holders of WPX common stock as part of this transaction was approximately $5.4 billion. The Merger was structured as a tax-free reorganization for United States federal income tax purposes.
Purchase Price Allocation
The transaction has been accounted for using the acquisition method of accounting, with Devon being treated as the accounting acquirer. Under the acquisition method of accounting, the assets and liabilities of WPX and its subsidiaries have been recorded at their respective fair values as of the date of completion of the Merger and added to Devon’s. The preliminary purchase price assessment remains an ongoing process and is subject to change for up to one year subsequent to the closing date of the Merger. Determining the fair value of the assets and liabilities of WPX requires judgment and certain assumptions to be made, the most significant of these being related to the valuation of WPX’s oil and gas properties. The inputs and assumptions related to the oil and gas properties are categorized as level 3 in the fair value hierarchy.
11
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table represents the preliminary allocation of the total purchase price of WPX to the identifiable assets acquired and the liabilities assumed based on the fair values as of the acquisition date.
|
|
Preliminary Purchase Price Allocation
|
|
Consideration:
|
|
|
|
|
WPX Common Stock outstanding
|
|
|
561.2
|
|
Exchange Ratio
|
|
|
0.5165
|
|
Devon common stock issued
|
|
|
289.9
|
|
Devon closing price on January 7, 2021
|
|
$
|
18.57
|
|
Total common equity consideration
|
|
|
5,383
|
|
Share-based replacement awards
|
|
|
49
|
|
Total consideration
|
|
$
|
5,432
|
|
Assets acquired:
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
344
|
|
Accounts receivable
|
|
|
425
|
|
Other current assets
|
|
|
49
|
|
Right-of-use assets
|
|
|
38
|
|
Proved oil and gas property and equipment
|
|
|
7,017
|
|
Unproved and properties under development
|
|
|
2,367
|
|
Other property and equipment
|
|
|
485
|
|
Investments
|
|
|
400
|
|
Other long-term assets
|
|
|
43
|
|
Total assets acquired
|
|
$
|
11,168
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
$
|
346
|
|
Revenue and royalties payable
|
|
|
223
|
|
Other current liabilities
|
|
|
454
|
|
Debt
|
|
|
3,562
|
|
Lease liabilities
|
|
|
38
|
|
Asset retirement obligations
|
|
|
94
|
|
Deferred income taxes
|
|
|
254
|
|
Other long-term liabilities
|
|
|
765
|
|
Total liabilities assumed
|
|
|
5,736
|
|
Net assets acquired
|
|
$
|
5,432
|
|
WPX Revenues and Earnings
The following table represents WPX’s revenues and earnings included in Devon’s consolidated comprehensive statements of earnings subsequent to the closing date of the Merger.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
Total revenues
|
|
$
|
772
|
|
Net earnings
|
|
$
|
166
|
|
12
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Pro Forma Financial Information
Due to the Merger closing on January 7, 2021, all activity in the first quarter of 2021 except for the first six days of January is included in Devon’s consolidated statements of comprehensive earnings. The following unaudited pro forma financial information for the three months ended March 31, 2020 is based on our historical consolidated financial statements adjusted to reflect as if the Merger had occurred on January 1, 2020. The information below reflects pro forma adjustments to conform WPX’s historical financial information to Devon’s financial statement presentation. The unaudited pro forma financial information is not necessarily indicative of what would have occurred if the Merger had been completed as of the beginning of the periods presented, nor is it indicative of future results.
|
|
Three Months Ended March 31,
|
|
Continuing operations:
|
|
2020
|
|
Total revenues
|
|
$
|
3,485
|
|
Net loss
|
|
$
|
(1,864
|
)
|
Basic net loss per share
|
|
$
|
(2.77
|
)
|
Divestitures
On March 3, 2021, Devon completed the sale of non-core assets in the Rockies for proceeds of $9 million, net of purchase price adjustments, and recognized a $35 million gain related to the sale. The transaction includes contingent earnout payments of up to $8 million. The total estimated proved reserves associated with these divested assets are approximately 3 MMBoe. As of December 31, 2020, the associated assets and liabilities were classified as assets held for sale and included in other current assets and other current liabilities, respectively.
On October 1, 2020, Devon completed the sale of its Barnett Shale assets to BKV for proceeds, net of purchase price adjustments, of $490 million. The agreement with BKV also provides for contingent earnout payments to Devon of up to $260 million based upon future commodity prices, with upside participation beginning at a $2.75 Henry Hub natural gas price or a $50 WTI oil price. The contingent payment period commenced on January 1, 2021 and has a term of four years. Devon recognized a $748 million asset impairment related to these assets in the fourth quarter of 2019 and incremental asset impairments of $179 million and $3 million during the first quarter and third quarter of 2020, respectively. Additional information can be found in Note 18.
3.Derivative Financial Instruments
Objectives and Strategies
Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, price swaptions, basis swaps, costless price collars and call options. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. As of March 31, 2021, Devon did not have any open interest rate swap contracts.
Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.
Counterparty Credit Risk
By using derivative financial instruments, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment-grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally contain provisions that provide for collateral payments if Devon’s or its counterparty’s credit rating falls below certain credit rating levels. As of March 31, 2021, Devon neither held cash collateral of its counterparties nor posted cash collateral to its counterparties.
13
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Commodity Derivatives
As of March 31, 2021, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.
|
|
Price Swaps
|
|
|
Price Swaptions
|
|
|
Price Collars
|
|
|
Call Options Sold
|
|
Period
|
|
Volume
(Bbls/d)
|
|
|
Weighted
Average
Price ($/Bbl)
|
|
|
Volume
(Bbls/d)
|
|
|
Weighted
Average
Price ($/Bbl)
|
|
|
Volume
(Bbls/d)
|
|
|
Weighted
Average Floor
Price ($/Bbl)
|
|
|
Weighted
Average
Ceiling Price
($/Bbl)
|
|
|
Volume
(Bbls/d)
|
|
|
Weighted
Average Price
($/Bbl)
|
|
Q2-Q4 2021
|
|
|
81,122
|
|
|
$
|
40.45
|
|
|
|
6,691
|
|
|
$
|
40.12
|
|
|
|
40,905
|
|
|
$
|
39.84
|
|
|
$
|
49.84
|
|
|
|
5,000
|
|
|
$
|
39.50
|
|
Q1-Q4 2022
|
|
|
25,619
|
|
|
$
|
43.82
|
|
|
|
10,323
|
|
|
$
|
46.46
|
|
|
|
15,733
|
|
|
$
|
44.92
|
|
|
$
|
54.92
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
Oil Basis Swaps
|
|
Period
|
|
Index
|
|
Volume
(Bbls/d)
|
|
|
Weighted Average
Differential to WTI
($/Bbl)
|
|
Q2-Q4 2021
|
|
Midland Sweet
|
|
|
22,669
|
|
|
$
|
0.84
|
|
Q2-Q4 2021
|
|
Guernsey Light Sweet
|
|
|
2,007
|
|
|
$
|
(1.48
|
)
|
Q2-Q4 2021
|
|
BRENT
|
|
|
1,000
|
|
|
$
|
(8.00
|
)
|
Q2-Q4 2021
|
|
NYMEX Roll
|
|
|
11,676
|
|
|
$
|
0.38
|
|
Q1-Q4 2022
|
|
BRENT
|
|
|
1,000
|
|
|
$
|
(7.75
|
)
|
Q1-Q4 2022
|
|
NYMEX Roll
|
|
|
16,000
|
|
|
$
|
0.37
|
|
As of March 31, 2021, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index and the end of month NYMEX index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.
|
|
Price Swaps (1)
|
|
|
Price Swaptions (2)
|
|
|
Price Collars (2)
|
|
|
Call Options Sold (2)
|
|
Period
|
|
Volume (MMBtu/d)
|
|
|
Weighted Average Price ($/MMBtu)
|
|
|
Volume (MMBtu/d)
|
|
|
Weighted Average Price ($/MMBtu)
|
|
|
Volume (MMBtu/d)
|
|
|
Weighted Average Floor Price ($/MMBtu)
|
|
|
Weighted Average
Ceiling Price ($/MMBtu)
|
|
|
Volume (MMBtu/d)
|
|
|
Weighted Average Price ($/MMBtu)
|
|
Q2-Q4 2021
|
|
|
270,636
|
|
|
$
|
2.63
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
196,218
|
|
|
$
|
2.46
|
|
|
$
|
2.96
|
|
|
|
50,000
|
|
|
$
|
2.68
|
|
Q1-Q4 2022
|
|
|
3,452
|
|
|
$
|
2.85
|
|
|
|
100,000
|
|
|
$
|
2.70
|
|
|
|
69,110
|
|
|
$
|
2.54
|
|
|
$
|
3.04
|
|
|
|
—
|
|
|
$
|
—
|
|
|
(1)
|
Related to the 2021 open positions, 30,636 MMBtu/d settle against the Inside FERC first of month Henry Hub index at an average price of $2.76 and 240,000 MMBtu/d settle against the end of month NYMEX index at an average price of $2.62. All 2022 open positions settle against the Inside FERC first of month Henry Hub index.
|
|
(2)
|
Price swaptions and call options settle against end of the month NYMEX index. Price collars settle against the Inside FERC first of the month Henry Hub Index.
|
|
|
Natural Gas Basis Swaps
|
|
Period
|
|
Index
|
|
Volume
(MMBtu/d)
|
|
|
Weighted Average
Differential to
Henry Hub
($/MMBtu)
|
|
Q2-Q4 2021
|
|
El Paso Natural Gas
|
|
|
35,000
|
|
|
$
|
(0.92
|
)
|
Q2-Q4 2021
|
|
WAHA
|
|
|
80,000
|
|
|
$
|
(0.65
|
)
|
Q1-Q4 2022
|
|
WAHA
|
|
|
70,000
|
|
|
$
|
(0.57
|
)
|
Q1-Q4 2023
|
|
WAHA
|
|
|
70,000
|
|
|
$
|
(0.51
|
)
|
Q1-Q4 2024
|
|
WAHA
|
|
|
40,000
|
|
|
$
|
(0.51
|
)
|
14
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
As of March 31, 2021, Devon had the following open NGL derivative positions. Devon’s NGL positions settle against the average of the prompt month OPIS Mont Belvieu, Texas index.
|
|
|
|
Price Swaps
|
|
Period
|
|
Product
|
|
Volume (Bbls/d)
|
|
|
Weighted Average Price ($/Bbl)
|
|
Q2-Q4 2021
|
|
Natural Gasoline
|
|
|
1,000
|
|
|
$
|
47.57
|
|
Q2-Q4 2021
|
|
Normal Butane
|
|
|
1,000
|
|
|
$
|
31.40
|
|
Q2-Q4 2021
|
|
Propane
|
|
|
1,000
|
|
|
$
|
27.88
|
|
Financial Statement Presentation
The following table presents the derivative fair values by derivative financial instrument type followed by the corresponding individual consolidated balance sheets caption.
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Commodity derivative assets:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
3
|
|
|
$
|
5
|
|
Other long-term assets
|
|
|
3
|
|
|
|
1
|
|
Total derivative assets
|
|
$
|
6
|
|
|
$
|
6
|
|
Commodity derivative liabilities:
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
667
|
|
|
$
|
143
|
|
Other long-term liabilities
|
|
|
122
|
|
|
|
5
|
|
Total derivative liabilities
|
|
$
|
789
|
|
|
$
|
148
|
|
4.Share-Based Compensation
The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings. The vesting for certain share-based awards was accelerated in conjunction with the reduction of workforce described in Note 6 and is included in restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
G&A
|
|
$
|
20
|
|
|
$
|
20
|
|
Restructuring and transaction costs
|
|
|
21
|
|
|
|
—
|
|
Total
|
|
$
|
41
|
|
|
$
|
20
|
|
15
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Under its approved long-term incentive plan, Devon grants share-based awards to certain employees. The following table presents a summary of Devon’s unvested restricted stock awards and units, performance-based restricted stock awards and performance share units granted under the plan.
|
|
|
|
|
Performance-Based
|
|
|
Performance
|
|
|
|
Restricted Stock Awards & Units
|
|
|
Restricted Stock Awards
|
|
|
Share Units
|
|
|
|
Awards/Units
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
|
Awards
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
|
Units
|
|
|
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
|
|
(Thousands, except fair value data)
|
|
Unvested at 12/31/20
|
|
|
5,316
|
|
|
$
|
25.82
|
|
|
|
44
|
|
|
$
|
44.70
|
|
|
|
1,994
|
|
|
|
|
|
$
|
31.89
|
|
Granted (1)
|
|
|
5,542
|
|
|
$
|
18.71
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
861
|
|
|
|
|
|
$
|
18.08
|
|
Vested
|
|
|
(4,329
|
)
|
|
$
|
22.63
|
|
|
|
(39
|
)
|
|
$
|
45.41
|
|
|
|
(754
|
)
|
|
|
|
|
$
|
37.40
|
|
Forfeited
|
|
|
(20
|
)
|
|
$
|
24.79
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(25
|
)
|
|
|
|
|
$
|
36.04
|
|
Unvested at 3/31/21
|
|
|
6,509
|
|
|
$
|
21.89
|
|
|
|
5
|
|
|
$
|
38.54
|
|
|
|
2,076
|
|
|
(2
|
)
|
|
$
|
24.12
|
|
|
(1)
|
Due to the closing of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. As a result, approximately 4.9 million awards relate to the conversion of WPX equity awards to Devon equity awards.
|
|
(2)
|
A maximum of 4.2 million common shares could be awarded based upon Devon’s final TSR ranking.
|
The following table presents the assumptions related to the performance share units granted in 2021, as indicated in the previous summary table.
|
|
2021
|
|
Grant-date fair value
|
|
$
|
18.08
|
|
Risk-free interest rate
|
|
0.18%
|
|
Volatility factor
|
|
67.8%
|
|
Contractual term (years)
|
|
2.89
|
|
The following table presents a summary of the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of March 31, 2021.
|
|
|
|
|
|
Performance-Based
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Restricted Stock
|
|
|
Performance
|
|
|
|
Awards/Units
|
|
|
Awards
|
|
|
Share Units
|
|
Unrecognized compensation cost
|
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Weighted average period for recognition (years)
|
|
|
2.2
|
|
|
|
0.2
|
|
|
|
2.3
|
|
5.Asset Impairments
The following table presents a summary of Devon’s asset impairments. Unproved impairments shown below are included in exploration expenses in the consolidated statements of comprehensive earnings.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Proved oil and gas assets
|
|
$
|
—
|
|
|
$
|
2,664
|
|
Other assets
|
|
|
—
|
|
|
|
2
|
|
Total asset impairments
|
|
$
|
—
|
|
|
$
|
2,666
|
|
|
|
|
|
|
|
|
|
|
Unproved impairments
|
|
$
|
1
|
|
|
$
|
110
|
|
16
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Proved Oil and Gas and Other Asset Impairments
Due to the reduced demand from the COVID-19 pandemic causing an unprecedented downturn in the price of oil and reductions in near-term capital investment, Devon recognized approximately $2.7 billion of proved asset impairments during the first quarter of 2020. These impairments related to the Anadarko Basin and Rockies fields in which the cost basis included acquisitions completed in 2016 and 2015, respectively, when commodity prices were much higher. During the first quarter of 2020, Devon also recognized $2 million of product line fill impairments.
Unproved Impairments
Due to the downturn in the commodity price environment and reduced near-term investment as discussed above, Devon also recognized $110 million of unproved impairments during the first three months of 2020, primarily in the Rockies field.
6.Restructuring and Transaction Costs
The following table summarizes Devon’s restructuring and transaction costs.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Restructuring
|
|
$
|
143
|
|
|
$
|
—
|
|
Transaction costs
|
|
|
46
|
|
|
|
—
|
|
Total
|
|
$
|
189
|
|
|
$
|
—
|
|
In conjunction with the Merger closing, Devon recognized $143 million of restructuring expenses during the first quarter of 2021 related to employee severance and termination benefits, settlements and curtailments from defined retirement benefits and contract terminations. Of these expenses, $37 million and $21 million resulted from settlements and curtailments of defined retirement benefits and accelerated vesting of share-based grants, respectively, which are non-cash charges. Additionally, in conjunction with the Merger closing, Devon recognized $46 million of transaction costs primarily comprised of bank, legal and accounting fees.
The following table summarizes Devon’s restructuring liabilities.
|
|
Other
|
|
|
Other
|
|
|
|
|
|
|
|
Current
|
|
|
Long-term
|
|
|
|
|
|
|
|
Liabilities
|
|
|
Liabilities
|
|
|
Total
|
|
Balance as of December 31, 2020
|
|
$
|
35
|
|
|
$
|
137
|
|
|
$
|
172
|
|
Changes related to 2021 workforce reductions
|
|
|
61
|
|
|
|
—
|
|
|
|
61
|
|
Changes related to prior years' restructurings
|
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
(9
|
)
|
Balance as of March 31, 2021
|
|
$
|
94
|
|
|
$
|
130
|
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
$
|
20
|
|
|
$
|
1
|
|
|
$
|
21
|
|
Changes related to prior years' restructurings
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
Balance as of March 31, 2020
|
|
$
|
11
|
|
|
$
|
1
|
|
|
$
|
12
|
|
17
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
7.Income Taxes
The following table presents Devon’s total income tax benefit and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Loss from continuing operations before income taxes
|
|
$
|
(32
|
)
|
|
$
|
(2,107
|
)
|
|
|
|
|
|
|
|
|
|
Current income tax benefit
|
|
$
|
(5
|
)
|
|
$
|
(106
|
)
|
Deferred income tax benefit
|
|
|
(243
|
)
|
|
|
(311
|
)
|
Total income tax benefit
|
|
$
|
(248
|
)
|
|
$
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
U.S. statutory income tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
State income taxes
|
|
|
(1
|
%)
|
|
|
1
|
%
|
Change in tax legislation
|
|
|
0
|
%
|
|
|
5
|
%
|
Unrecognized tax benefits
|
|
|
0
|
%
|
|
|
0
|
%
|
Other
|
|
|
(48
|
%)
|
|
|
(3
|
%)
|
Deferred tax asset valuation allowance
|
|
|
791
|
%
|
|
|
(4
|
%)
|
Effective income tax rate
|
|
|
763
|
%
|
|
|
20
|
%
|
The deferred income tax benefit recognized in the first quarter of 2021 primarily relates to the Merger. As shown in Note 2, Devon recognized $254 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon has recognized on its U.S. Federal deferred tax assets.
As of March 31, 2021, Devon continues to maintain a valuation allowance against materially all U.S. deferred tax assets. Devon continues to assess its valuation allowance position every quarter. Absent any additional objective negative evidence, and with the addition of subjective evidence such as forecasted taxable income, Devon may adjust the valuation allowance on its deferred tax assets in future periods.
In the table above, the “other” effect is composed primarily of permanent differences related to costs incurred in connection with the Merger. Such items represent $15 million of income tax expense in the first quarter of 2021.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law on March 27, 2020. The CARES Act allows net operating losses generated in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back five years to offset taxable income and recoup previously paid taxes. As a result, Devon is carrying back net operating losses generated in 2020 and 2019 to 2015 and 2014, respectively. Because the U.S. Federal income tax rate was higher in the carryback periods, Devon recognized an income tax benefit in the first quarter of 2020.
18
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
8.
|
Net Earnings (Loss) Per Share from Continuing Operations
|
The following table reconciles net earnings (loss) from continuing operations and weighted-average common shares outstanding used in the calculations of basic and diluted net earnings (loss) per share from continuing operations.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net earnings (loss) from continuing operations:
|
|
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations
|
|
$
|
213
|
|
|
$
|
(1,691
|
)
|
Attributable to participating securities
|
|
|
(2
|
)
|
|
|
(1
|
)
|
Basic and diluted earnings (loss) from continuing operations
|
|
$
|
211
|
|
|
$
|
(1,692
|
)
|
Common shares:
|
|
|
|
|
|
|
|
|
Common shares outstanding - total
|
|
|
654
|
|
|
|
383
|
|
Attributable to participating securities
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Common shares outstanding - basic
|
|
|
649
|
|
|
|
377
|
|
Dilutive effect of potential common shares issuable
|
|
|
2
|
|
|
|
—
|
|
Common shares outstanding - diluted
|
|
|
651
|
|
|
|
377
|
|
Net earnings (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.33
|
|
|
$
|
(4.48
|
)
|
Diluted
|
|
$
|
0.32
|
|
|
$
|
(4.48
|
)
|
Antidilutive options
|
|
|
—
|
|
|
|
—
|
|
9.
|
Other Comprehensive Earnings (Loss)
|
Components of other comprehensive earnings (loss) consist of the following:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
Beginning accumulated pension and postretirement benefits
|
|
$
|
(127
|
)
|
|
$
|
(119
|
)
|
Recognition of net actuarial loss and prior service cost in earnings (1)
|
|
|
1
|
|
|
|
2
|
|
Settlement of pension benefits (2)
|
|
|
15
|
|
|
|
—
|
|
Income tax expense
|
|
|
—
|
|
|
|
(1
|
)
|
Other (3)
|
|
|
7
|
|
|
|
—
|
|
Accumulated other comprehensive loss, net of tax
|
|
$
|
(104
|
)
|
|
$
|
(118
|
)
|
|
(1)
|
Recognition of net actuarial loss and prior service cost are included in the computation of net periodic benefit cost, which is a component of other, net in the accompanying consolidated statements of comprehensive earnings.
|
|
(2)
|
The Merger triggered settlement payments to certain plan participants, and the expense associated with this settlement is recognized as a component of restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
|
|
(3)
|
Includes a remeasurement of the pension obligation due to the change in control described above which was partially offset by a change in mortality assumption.
|
19
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
10.
|
Supplemental Information to Statements of Cash Flows
|
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Changes in assets and liabilities, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(63
|
)
|
|
$
|
238
|
|
Income tax receivable
|
|
|
15
|
|
|
|
(113
|
)
|
Other current assets
|
|
|
(25
|
)
|
|
|
(38
|
)
|
Other long-term assets
|
|
|
(10
|
)
|
|
|
(24
|
)
|
Accounts payable
|
|
|
71
|
|
|
|
42
|
|
Revenues and royalties payable
|
|
|
(55
|
)
|
|
|
(113
|
)
|
Other current liabilities
|
|
|
(33
|
)
|
|
|
(81
|
)
|
Other long-term liabilities
|
|
|
(27
|
)
|
|
|
33
|
|
Total
|
|
$
|
(127
|
)
|
|
$
|
(56
|
)
|
Supplementary cash flow data - total operations:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
114
|
|
|
$
|
64
|
|
Income taxes paid (refunded)
|
|
$
|
(6
|
)
|
|
$
|
151
|
|
As of March 31, 2021, Devon had approximately $230 million of accrued capital expenditures included in total property and equipment, net and accounts payable on the consolidated balance sheets. As of December 31, 2020 (pre-merger), Devon had approximately $100 million of accrued capital expenditures in total property and equipment, net and accounts payable on the consolidated balance sheets. As of January 7, 2021 (date of Merger closing), Devon assumed approximately $150 million of accrued capital expenditures included in accounts payable.
Components of accounts receivable include the following:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Oil, gas and NGL sales
|
|
$
|
742
|
|
|
$
|
335
|
|
Joint interest billings
|
|
|
127
|
|
|
|
57
|
|
Marketing and midstream revenues
|
|
|
181
|
|
|
|
195
|
|
Other
|
|
|
54
|
|
|
|
25
|
|
Gross accounts receivable
|
|
|
1,104
|
|
|
|
612
|
|
Allowance for doubtful accounts
|
|
|
(15
|
)
|
|
|
(11
|
)
|
Net accounts receivable
|
|
$
|
1,089
|
|
|
$
|
601
|
|
12.Property, Plant and Equipment
The following table presents the aggregate capitalized costs related to Devon’s oil and gas and non-oil and gas activities.
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
35,119
|
|
|
$
|
27,589
|
|
Unproved and properties under development
|
|
|
2,692
|
|
|
|
392
|
|
Total oil and gas
|
|
|
37,811
|
|
|
|
27,981
|
|
Less accumulated DD&A
|
|
|
(23,985
|
)
|
|
|
(23,545
|
)
|
Oil and gas property and equipment, net
|
|
|
13,826
|
|
|
|
4,436
|
|
Other property and equipment
|
|
|
2,060
|
|
|
|
1,737
|
|
Less accumulated DD&A
|
|
|
(612
|
)
|
|
|
(780
|
)
|
Other property and equipment, net (1)
|
|
|
1,448
|
|
|
|
957
|
|
Property and equipment, net
|
|
$
|
15,274
|
|
|
$
|
5,393
|
|
|
(1)
|
$106 million and $102 million related to CDM in 2021 and 2020, respectively.
|
20
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
13.
|
Debt and Related Expenses
|
See below for a summary of debt instruments and balances. The notes and debentures are senior, unsecured obligations of Devon.
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
8.25% due August 1, 2023 (1)
|
|
$
|
242
|
|
|
$
|
—
|
|
5.25% due September 15, 2024 (1)
|
|
|
472
|
|
|
|
—
|
|
5.85% due December 15, 2025
|
|
|
485
|
|
|
|
485
|
|
5.75% due June 1, 2026 (1)
|
|
|
500
|
|
|
|
—
|
|
7.50% due September 15, 2027
|
|
|
73
|
|
|
|
73
|
|
5.25% due October 15, 2027 (1)
|
|
|
600
|
|
|
|
—
|
|
5.875% due June 15, 2028 (1)
|
|
|
325
|
|
|
|
—
|
|
4.50% due January 15, 2030 (1)
|
|
|
585
|
|
|
|
—
|
|
7.875% due September 30, 2031
|
|
|
675
|
|
|
|
675
|
|
7.95% due April 15, 2032
|
|
|
366
|
|
|
|
366
|
|
5.60% due July 15, 2041
|
|
|
1,250
|
|
|
|
1,250
|
|
4.75% due May 15, 2042
|
|
|
750
|
|
|
|
750
|
|
5.00% due June 15, 2045
|
|
|
750
|
|
|
|
750
|
|
Net premium (discount) on debentures and notes
|
|
|
226
|
|
|
|
(20
|
)
|
Debt issuance costs
|
|
|
(31
|
)
|
|
|
(31
|
)
|
Total debt
|
|
$
|
7,268
|
|
|
$
|
4,298
|
|
Less amount classified as short-term debt
|
|
|
226
|
|
|
|
—
|
|
Total long-term debt
|
|
$
|
7,042
|
|
|
$
|
4,298
|
|
|
(1)
|
These instruments were assumed by Devon in January 2021 in conjunction with the Merger. These instruments are the unsecured and unsubordinated obligation of WPX, a wholly-owned subsidiary of Devon.
|
The following schedule includes the summary of the WPX debt Devon assumed upon closing of the Merger on January 7, 2021.
|
|
Face Value
|
|
|
Fair Value
|
|
|
Optional Redemption(1)
|
6.00% due January 15, 2022
|
|
$
|
43
|
|
|
$
|
44
|
|
|
|
8.25% due August 1, 2023
|
|
|
242
|
|
|
|
281
|
|
|
June 1, 2023
|
5.25% due September 15, 2024
|
|
|
472
|
|
|
|
530
|
|
|
June 15, 2024
|
5.75% due June 1, 2026
|
|
|
500
|
|
|
|
529
|
|
|
June 1, 2021
|
5.25% due October 15, 2027
|
|
|
600
|
|
|
|
646
|
|
|
October 15, 2022
|
5.875% due June 15, 2028
|
|
|
500
|
|
|
|
554
|
|
|
June 15, 2023
|
4.50% due January 15, 2030
|
|
|
900
|
|
|
|
978
|
|
|
January 15, 2025
|
|
|
$
|
3,257
|
|
|
$
|
3,562
|
|
|
|
|
(1)
|
At any time prior to these dates, Devon has the option to redeem some or all of the notes at a specified "make whole" premium as described in the indenture documents governing the notes to be redeemed. On or after these dates, Devon has the option to redeem the notes, in whole or in part, at the applicable redemption prices set forth in the indenture documents, plus accrued and unpaid interest thereon to the redemption date as more fully described in such documents.
|
Credit Lines
Devon has a $3.0 billion Senior Credit Facility. As of March 31, 2021, Devon had no outstanding borrowings under the Senior Credit Facility and had issued $2 million in outstanding letters of credit under this facility. The Senior Credit Facility contains only one material financial covenant. This covenant requires Devon’s ratio of total funded debt to total capitalization, as defined in the credit agreement, to be no greater than 65%. Under the terms of the credit agreement, total capitalization is adjusted to add back non-
21
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
cash financial write-downs such as impairments. As of March 31, 2021, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 27.4%.
Retirement of Senior Notes
In first quarter of 2021, Devon redeemed $43 million of the 6.00% senior notes due 2022, $175 million of the 5.875% senior notes due 2028 and $315 million of the 4.50% senior notes due 2030. In the first quarter of 2021, Devon recognized a $20 million gain on early retirement of debt, consisting of $47 million of non-cash premium accelerations partially offset by $27 million of cash retirement costs. The gain on early retirement is included in net financing costs in the consolidated comprehensive statements of earnings. Devon also redeemed $210 million of the 5.25% senior notes due 2027 in April 2021. In May 2021, Devon gave notice to exercise its early redemption to fully retire the 5.75% senior notes due 2026 in June 2021.
Net Financing Costs
The following schedule includes the components of net financing costs.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Interest based on debt outstanding
|
|
$
|
105
|
|
|
$
|
65
|
|
Gain on early retirement of debt
|
|
|
(20
|
)
|
|
|
—
|
|
Interest income
|
|
|
(1
|
)
|
|
|
(5
|
)
|
Other
|
|
|
(7
|
)
|
|
|
5
|
|
Total net financing costs
|
|
$
|
77
|
|
|
$
|
65
|
|
14.Leases
The following table presents Devon’s right-of-use assets and lease liabilities as of March 31, 2021 and December 31, 2020.
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Finance
|
|
|
Operating
|
|
|
Total
|
|
|
Finance
|
|
|
Operating
|
|
|
Total
|
|
Right-of-use assets
|
|
$
|
217
|
|
|
$
|
38
|
|
|
$
|
255
|
|
|
$
|
220
|
|
|
$
|
3
|
|
|
$
|
223
|
|
Lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities (1)
|
|
$
|
8
|
|
|
$
|
23
|
|
|
$
|
31
|
|
|
$
|
8
|
|
|
$
|
1
|
|
|
$
|
9
|
|
Long-term lease liabilities
|
|
|
244
|
|
|
|
16
|
|
|
|
260
|
|
|
|
244
|
|
|
|
2
|
|
|
|
246
|
|
Total lease liabilities
|
|
$
|
252
|
|
|
$
|
39
|
|
|
$
|
291
|
|
|
$
|
252
|
|
|
$
|
3
|
|
|
$
|
255
|
|
(1)Current lease liabilities are included in other current liabilities on the consolidated balance sheets.
Devon’s right-of-use operating lease assets are for certain leases related to real estate, drilling rigs and other equipment related to the exploration, development and production of oil and gas. Devon’s right-of-use financing lease assets are related to real estate.
15.
|
Asset Retirement Obligations
|
The following table presents the changes in Devon’s asset retirement obligations.
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Asset retirement obligations as of beginning of period
|
|
$
|
369
|
|
|
$
|
398
|
|
Assumed WPX obligations
|
|
|
98
|
|
|
|
—
|
|
Liabilities incurred
|
|
|
9
|
|
|
|
6
|
|
Liabilities settled and divested
|
|
|
(17
|
)
|
|
|
(13
|
)
|
Revision of estimated obligation
|
|
|
11
|
|
|
|
4
|
|
Accretion expense on discounted obligation
|
|
|
7
|
|
|
|
5
|
|
Asset retirement obligations as of end of period
|
|
|
477
|
|
|
|
400
|
|
Less current portion
|
|
|
22
|
|
|
|
14
|
|
Asset retirement obligations, long-term
|
|
$
|
455
|
|
|
$
|
386
|
|
22
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
16.
|
Other Long-Term Liabilities
|
Components of other long-term liabilities include the following:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Assumed gathering, processing and transportation contracts
|
|
$
|
482
|
|
|
$
|
—
|
|
Pension and post retirement benefit obligations
|
|
|
225
|
|
|
|
243
|
|
Restructuring and transaction costs
|
|
|
130
|
|
|
|
137
|
|
Estimated future obligation under a performance guarantee
|
|
|
128
|
|
|
|
—
|
|
Commodity derivatives
|
|
|
122
|
|
|
|
5
|
|
Other
|
|
|
182
|
|
|
|
166
|
|
Total other long-term liabilities
|
|
$
|
1,269
|
|
|
$
|
551
|
|
Devon assumed fixed gathering, processing and transportation contracts in the Merger and recognized a liability related to the difference in the contractual and market rates of these contracts as of the date of the Merger. The terms of the contracts extend through 2038 and all relate to the Delaware Basin. This difference will be recognized as a reduction to production expenses as the associated reserves are produced over the life of the respective contracts. In the first quarter of 2021, Devon recognized $8 million of non-cash amortization of these liabilities as a reduction of production expenses in the consolidated statement of comprehensive earnings.
Additionally, in the Merger, Devon assumed a future obligation under a performance guarantee related to gathering and processing commitments for assets WPX sold in 2018 in which the purchaser of those assets is now not expected to have the financial ability to satisfy the obligations. As of March 31, 2021, Devon has recorded a $164 million liability for the estimated potential exposure based on probability-weighted cash flows for the remainder of the contract term of five years. Of the $164 million, $128 million is included in other long-term liabilities and $36 million is included in other current liabilities on the consolidated balance sheets as of March 31, 2021.
WPX Merger
On January 7, 2021, Devon and WPX completed an all-stock merger of equals. On the closing date of the Merger, each share of WPX common stock was automatically converted into the right to receive 0.5165 of a share of Devon common stock. Consequently, Devon issued approximately 290 million shares of Devon common stock to holders of WPX common stock to effect the Merger on January 7, 2021.
Share Repurchases
The table below provides information regarding purchases of Devon’s common stock that were made in 2020 under a share repurchase program that expired at the end of 2020 (shares in thousands).
|
|
Total Number of
Shares Purchased
|
|
|
Dollar Value of
Shares Purchased
|
|
|
Average Price Paid
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter 2020
|
|
|
2,243
|
|
|
$
|
38
|
|
|
$
|
16.85
|
|
Total
|
|
|
2,243
|
|
|
$
|
38
|
|
|
$
|
16.85
|
|
23
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Dividends
Upon completion of the Merger, Devon continued its commitment to pay a quarterly dividend at a fixed rate and instituted a variable quarterly dividend, which is dependent on quarterly cash flows, among other factors. The following table summarizes Devon’s fixed and variable dividends for the first quarter of 2021 and 2020, respectively.
|
Amounts
|
|
|
Rate Per Share
|
|
2021:
|
|
|
|
|
|
|
|
Fixed
|
$
|
76
|
|
|
$
|
0.11
|
|
Variable
|
|
127
|
|
|
|
0.19
|
|
Total
|
$
|
203
|
|
|
$
|
0.30
|
|
2020:
|
|
|
|
|
|
|
|
Fixed
|
$
|
34
|
|
|
$
|
0.09
|
|
In May 2021, Devon announced a cash dividend in the amount of $0.34 per share payable in the second 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 $155 million (or $0.23 per share).
Noncontrolling Interests
The noncontrolling interests’ share of CDM’s net earnings and the contributions from and distributions to the noncontrolling interests are presented as components of equity.
18.
|
Discontinued Operations
|
On October 1, 2020, Devon completed the sale of its Barnett Shale assets to BKV for proceeds, net of purchase price adjustments, of $490 million. Additionally, the agreement provides for contingent earnout payments to Devon of up to $260 million based upon future commodity prices, with upside participation beginning at a $2.75 Henry Hub natural gas price or a $50 WTI oil price. The contingent payment period commenced on January 1, 2021 and has a term of four years. The valuation of the future contingent earnout payments included within other current assets in the March 31, 2021 balance sheet was $66 million. The value was derived utilizing a Monte Carlo valuation model and qualifies as a level 3 fair value measurement.
The following table presents the amounts reported in the consolidated statements of comprehensive earnings as discontinued operations.
|
|
Three Months Ended March 31, 2020
|
|
Oil, gas and NGL sales
|
|
$
|
92
|
|
Total revenues
|
|
|
92
|
|
Production expenses
|
|
|
74
|
|
Asset impairments (1)
|
|
|
179
|
|
General and administrative expenses
|
|
|
1
|
|
Financing costs, net
|
|
|
(2
|
)
|
Other, net
|
|
|
(3
|
)
|
Total expenses
|
|
|
249
|
|
Loss from discontinued operations before income taxes
|
|
|
(157
|
)
|
Income tax benefit
|
|
|
(32
|
)
|
Net loss from discontinued operations, net of tax
|
|
$
|
(125
|
)
|
|
(1)
|
Devon recognized an $179 million asset impairment in the first quarter of 2020 related to the Barnett Shale assets primarily due to the difference between the net carrying value and the purchase price, net of estimated customary purchase price adjustments, which qualified as a level 2 fair value measurement.
|
24
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
19.
|
Commitments and Contingencies
|
Devon is party to various legal proceedings and other matters that may result in future payment obligations or other adverse consequences to its business. Matters that are probable of an unfavorable outcome to Devon and which any related potential payment obligation or other liability can be reasonably estimated are accrued. Such accruals are based on information known about the matters, Devon’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters. While management does not believe any current matter is likely to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals, the ultimate outcome of such matters and the amounts involved could differ materially from management’s estimates.
Royalty Matters
Numerous oil and natural gas producers and related parties, including Devon, have been named in various lawsuits alleging royalty underpayments. Devon is currently defending against a number of such lawsuits, either as a named defendant in the action or pursuant to indemnity obligations for the benefit of a third party. Plaintiffs in some of these lawsuits are seeking class certification. Among the allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, failed to “enhance” the value of gas through processing, used improper measurement techniques, entered into purchase and midstream arrangements with affiliates that resulted in underpayment of royalties or otherwise failed to prudently market oil, natural gas and NGLs produced and sold and pay royalties on the highest obtainable price. Devon is also involved in governmental agency proceedings and royalty audits and is subject to related contracts and regulatory controls in the ordinary course of business, some that may lead to additional royalty claims. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters.
Environmental and Climate Change Matters
Devon’s business is subject to numerous federal, state, local, Native American tribal and foreign laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties, as well as remediation costs. Although Devon believes that it is in substantial compliance with applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on its business, there can be no assurance that this will continue in the future.
Beginning in 2013, various parishes in Louisiana filed suit against numerous oil and gas companies, including Devon, alleging that the companies’ operations and activities in certain fields violated the State and Local Coastal Resource Management Act of 1978, as amended, and caused substantial environmental contamination, subsidence and other environmental damages to land and water bodies located in the coastal zone of Louisiana. The plaintiffs’ claims against Devon relate primarily to the operations of several of Devon’s corporate predecessors. The plaintiffs seek, among other things, the payment of the costs necessary to clear, re-vegetate and otherwise restore the allegedly impacted areas. Although Devon cannot predict the ultimate outcome of these matters, Devon believes these claims to be baseless and is vigorously defending against these claims.
The State of Delaware and various municipalities and other governmental and private parties in California have filed legal proceedings against numerous oil and gas companies, including Devon, seeking relief to abate alleged impacts of climate change. These proceedings include far-reaching claims for monetary damages and injunctive relief. Although Devon cannot predict the ultimate outcome of these matters, Devon believes these claims to be baseless and intends to vigorously defend against the proceedings.
Williams’ Former Power Business Matter
Direct and indirect purchasers of natural gas in various states filed individual and class action lawsuits against The Williams Companies, Inc. (“Williams”) and other parties alleging the manipulation of published gas price indices and seeking unspecified amounts of damages. WPX and certain of its subsidiaries, which were then affiliates of Williams, were also named as defendants in these actions. Such actions were transferred to the Nevada federal district court for consolidation of discovery and pre-trial issues. Although certain of the actions were subsequently settled or otherwise resolved, two putative class actions and an individual action remain unresolved.
The putative class actions have been remanded to their originally filed court, the Wisconsin federal district court, and class certification motions are pending. The individual action, Reorganized FLI Inc., has been remanded to its originally filed court, the
25
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Kansas federal district court. The Tenth Circuit granted a petition to reconsider the denial of defendants’ motion for summary judgment, and the decision is pending after oral argument in January 2021.
Because of the uncertainty around pending unresolved issues, including an insufficient description of the purported classes and other related matters, Devon cannot reasonably estimate a range of potential exposure at this time for these matters. In connection with its spin-off from Williams in 2011, WPX entered into a separation and distribution agreement with Williams, pursuant to which Williams agreed to indemnify and hold WPX and its subsidiaries harmless from any losses arising out of these matters.
Other Indemnifications and Legacy Matters
Pursuant to various sale agreements relating to divested businesses and assets, Devon has indemnified various purchasers against liabilities that they may incur with respect to the businesses and assets acquired from Devon. Additionally, federal, state and other laws in areas of former operations may require previous operators (including corporate successors of previous operators) to perform or make payments in certain circumstances where the current operator may no longer be able to satisfy the applicable obligation. Such obligations may include plugging and abandoning wells, removing production facilities or performing requirements under surface agreements in existence at the time of disposition.
In November 2020, the Department of the Interior, Bureau of Safety and Environmental Enforcement, ordered several oil and gas operators, including Devon, to perform decommissioning and reclamation activities related to two California offshore oil and gas production platforms and related facilities. The current operator and owner of the platforms contends that it does not have the financial ability to perform these obligations and relinquished the related federal lease in October 2020. In response to the apparent insolvency of the current operator, the government has ordered the former operators and alleged former lease record title owners to decommission the platforms. The government contends that an alleged corporate predecessor of Devon owned a partial interest in the subject lease and platforms. Although Devon cannot predict the ultimate outcome of this matter, Devon denies any obligation to decommission the subject platforms, has appealed the order, and believes any decommissioning obligation related to the subject platforms should be assumed by others.
20.
|
Fair Value Measurements
|
The following table provides carrying value and fair value measurement information for certain of Devon’s financial assets and liabilities. The carrying values of cash, accounts receivable, other current receivables, accounts payable, other current payables, accrued expenses and lease liabilities included in the accompanying consolidated balance sheets approximated fair value at March 31, 2021 and December 31, 2020, as applicable. Therefore, such financial assets and liabilities are not presented in the following table. Additionally, information regarding the fair values of oil and gas assets is provided in Note 5.
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Carrying
|
|
|
Total Fair
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
Amount
|
|
|
Value
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
March 31, 2021 assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
1,075
|
|
|
$
|
1,075
|
|
|
$
|
1,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivatives
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Commodity derivatives
|
|
$
|
(789
|
)
|
|
$
|
(789
|
)
|
|
$
|
—
|
|
|
$
|
(789
|
)
|
|
$
|
—
|
|
Debt
|
|
$
|
(7,268
|
)
|
|
$
|
(8,091
|
)
|
|
$
|
—
|
|
|
$
|
(8,091
|
)
|
|
$
|
—
|
|
Contingent earnout payments
|
|
$
|
70
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70
|
|
December 31, 2020 assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
1,436
|
|
|
$
|
1,436
|
|
|
$
|
1,436
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodity derivatives
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Commodity derivatives
|
|
$
|
(148
|
)
|
|
$
|
(148
|
)
|
|
$
|
—
|
|
|
$
|
(148
|
)
|
|
$
|
—
|
|
Debt
|
|
$
|
(4,298
|
)
|
|
$
|
(5,365
|
)
|
|
$
|
—
|
|
|
$
|
(5,365
|
)
|
|
$
|
—
|
|
Contingent earnout payments
|
|
$
|
66
|
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66
|
|
The following methods and assumptions were used to estimate the fair values in the table above.
Level 1 Fair Value Measurements
Cash equivalents – Amounts consist primarily of money market investments and the fair value approximates the carrying value.
26
Table of Contents
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Level 2 Fair Value Measurements
Commodity derivatives – The fair value of commodity derivatives is estimated using internal discounted cash flow calculations based upon forward curves and data obtained from independent third parties for contracts with similar terms or data obtained from counterparties to the agreements.
Debt – Devon’s debt instruments do not consistently trade actively in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity when active trading is not available.
Level 3 Fair Value Measurements
Contingent Earnout Payments – Devon has the right to receive contingent consideration related to the Barnett and non-core Rockies asset divestitures based on future oil and gas prices. These values were derived using a Monte Carlo valuation model and qualify as a level 3 fair value measurement. For additional information, see Note 2.
27
Table of Contents