Oklahoma-based Devon Energy's Q1 net earnings plummet 65% from year ago to US$416M primarily from non-cash, unrealized loss on oil, gas and NGL derivatives, 33% drop in revenue to US$2.15B
May 4, 2011
– Devon Energy Corporation (NYSE:DVN) today reported net earnings of $416 million for the quarter ended March 31, 2011, or $0.97 per common share ($0.97 per diluted common share). This compares with first-quarter 2010 net earnings of $1.2 billion, or $2.67 per common share ($2.66 per diluted common share). The decrease in quarterly earnings is primarily attributable to non-cash, unrealized changes in the fair value of oil, gas and NGL derivatives.
First-quarter 2011 financial results were impacted by certain items securities analysts typically exclude from their published estimates. The most significant of the adjusting items was a non-cash, unrealized loss on oil, gas and NGL derivatives of $254 million before-tax ($166 million after-tax). Excluding these adjusting items, Devon earned $575 million or $1.34 per diluted common share in the first quarter of 2011. The adjusting items are discussed in more detail later in this news release.
Production Growth Exceeds Guidance, Driven By Strong Liquids Growth
Production from continuing operations averaged 629,000 oil-equivalent barrels (Boe) per day in the first quarter of 2011, in spite of curtailments related to severe winter weather. Compared to the first quarter of 2010, Devon’s North American onshore production increased seven percent and exceeded the top-end of the company’s guidance by 4,000 barrels per day. First-quarter production benefited from better than expected results from several core properties, including the Cana-Woodford and Barnett Shale.
Devon continued to deliver strong oil and natural gas liquids production growth in the first quarter of 2011. In aggregate, liquids production averaged 207,000 barrels per day. This represents an 11 percent increase in North American onshore liquids production compared to the first quarter of 2010 and a five percent increase over the fourth quarter of 2010.
Cana-Woodford Shale Production Growth Leads Operating Highlights
* Production from the company’s Cana-Woodford Shale play averaged a record 162 million cubic feet of natural gas equivalent per day in the first quarter of 2011. This represents a 120 percent increase compared to the first-quarter of 2010.
* In the Permian Basin, oil and natural gas liquids production increased 17 percent over the first-quarter 2010. In aggregate, liquids production accounted for nearly 75 percent of the 44,000 equivalent barrels per day produced in the Permian Basin during the first quarter.
* In Canada, the company plans to commence steam injection at Jackfish 2 in May with first production expected by year-end. At full production Jackfish 2 is expected to produce 35,000 barrels per day before royalties for more than 20 years.
* Immediately adjacent to its Jackfish lease, the company successfully completed the drilling of 135 appraisal wells on its Pike oil sands lease. The results were consistent with company expectations and will assist in determining the optimal development configuration. Devon anticipates filing a regulatory application for the first phase of Pike in the first half of 2012.
* Net production from the Barnett Shale exceeded 1.2 billion cubic feet of natural gas equivalent per day in the first quarter, including 43,000 barrels per day of liquids. This was an 11 percent increase over the first quarter of 2010.
* Devon brought six operated Granite Wash wells online in the first quarter. Initial production from these wells averaged 1,760 barrels of oil-equivalent per day, including 250 barrels of oil and 490 barrels of natural gas liquids per day. The company has an average working interest of 84 percent in these wells.
Although production increased, revenues from oil, gas and natural gas liquids sales declined 10 percent to $1.9 billion in the first quarter of 2011. Lower natural gas prices more than offset the increase in production.
The company’s average realized natural gas price, before the impact of hedges, decreased 25 percent to $3.62 per thousand cubic feet in the first quarter of 2011, as compared to $4.80 per thousand cubic feet in the first quarter of 2010. Devon’s average realized oil price increased five percent in the first quarter of 2011, to $70.95 per barrel. This compares with an average realized price of $67.58 per barrel in the year-ago period. The average realized natural gas liquids price increased four percent over the first quarter of 2010 to $37.39 per barrel.
Marketing and midstream operating profit was $122 million in the first quarter of 2011. Increased gas throughput and strong cost control drove the company’s solid first quarter result.
Cost Containment Mitigates Industry Inflation
Devon’s cost containment efforts were reflected in first-quarter 2011 expense results. In spite of rising industry costs and a stronger Canadian dollar, company expenses in most categories declined or reflected only nominal per-unit increases.
Lease operating expenses (LOE) in the first quarter of 2011 were $424 million. On a unit of production basis, LOE increased only one percent compared with the first quarter of 2010. Devon's focus on controlling costs combined with the divestiture of higher-cost offshore assets helped offset industry inflation and the strengthening of the Canadian dollar.
First-quarter general and administrative expenses were $130 million, or six percent lower than the first quarter of 2010. Lower personnel costs and efficiencies gained through the company’s strategic repositioning drove most of the savings.
Depreciation, depletion and amortization expense (DD&A) increased four percent to $442 million in the first quarter of 2011. However, on a unit of production basis, DD&A increased only two percent to $7.80 per Boe.
Interest expense for the first quarter of 2011 decreased to $81 million, a six percent decline year-over-year. The decrease was attributable to lower interest rates.
Financial Position Remains Strong; Share Repurchase Plan on Schedule
Devon generated $1.5 billion of cash flow before balance sheet changes in the first quarter of 2011, a four percent increase over the year-ago quarter. The company utilized this cash flow and liquidity provided through asset sales to fund its total capital program and return nearly $800 million to its shareholders in the form of stock buybacks and dividend payments.
As of March 31, 2011, the company had repurchased 26.4 million shares at a total cost of $1.9 billion. Devon expects to complete the stock repurchase program by the end of 2011.
Devon exited the first quarter of 2011 with cash and short-term investments of $3.4 billion and a net debt to adjusted capitalization ratio of 15 percent. Reconciliations of cash flow before balance sheet changes, net debt and adjusted capitalization, which are non-GAAP measures, are provided in this release.
Devon Adds Oil and Gas Hedges
The rise in oil prices has provided Devon the opportunity to add historically attractive oil hedges. For the full-year 2012, the company has entered into various swap and collar contracts to hedge 76,000 barrels per day of oil production. Of this total, 22,000 barrels per day of oil production is swapped at a weighted average price of $107 per barrel. The remaining 54,000 barrels per day utilizes costless collars with a weighted average ceiling of $126 per barrel and a floor of $86 per barrel. Oil hedges are based on West Texas Intermediate crude oil delivered at Cushing, Oklahoma.
The recent volatility in the natural gas market also provided the company a chance to bolster its natural gas hedging position. For the remaining three quarters of 2011, Devon now has 900 million cubic feet per day protected through hedges at a weighted average floor price of $5.24 per thousand cubic feet. In addition, the company has also initiated a gas hedging position for 2012 with swap and collar contracts covering 390 million cubic feet per day at a weighted average floor price of $4.93 per thousand cubic feet.
Strategic Repositioning Nearing Completion
Devon expects to receive regulatory approval for the $3.2 billion sale of its assets in Brazil during the second quarter of 2011. Following the close of this transaction, Devon will have substantially completed its planned International and Gulf of Mexico divestitures. In aggregate, sales proceeds from the combined divestitures will exceed $10 billion with after-tax proceeds approximating $8 billion.
In accordance with accounting standards, Devon has reclassified the assets, liabilities, and results of its international segment as discontinued operations for all accounting periods presented in this release. Although revenues and expenses for prior periods were reclassified, previously reported net earnings were not impacted. Included with this release is a table of revenues, expenses, production categories, and the amounts reclassified as discontinued operations for each period presented.
Items Excluded from Published Earnings Estimates
Devon's reported net earnings include items of income and expense that are typically excluded by securities analysts in their published estimates of the company's financial results. These items and their effects upon reported earnings for the first quarter of 2011 were as follows:
Items affecting continuing operations:
* A change in the fair value of oil, gas and NGL derivative instruments decreased first-quarter earnings by $254 million pre-tax ($166 million after tax).
* The reversal of previously accrued restructuring costs increased first-quarter earnings by $5 million pre-tax ($3 million after tax).
* A change in fair value of interest-rate and other financial instruments increased first-quarter earnings by $1 million pre-tax ($1 million after tax).
Items affecting discontinued operations:
* The decision to divest international assets generated financial benefits that increased first-quarter earnings by $10 million pre-tax ($6 million after tax).
* Restructuring costs decreased first-quarter earnings by $6 million pre-tax ($3 million after tax).
The following tables summarize the effects of these items on first-quarter 2011 earnings, income taxes and cash flow.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
Oil, gas, and NGL sales
Oil, gas and NGL derivatives
Marketing and midstream revenues
Expenses and other, net
Lease operating expenses
Taxes other than income taxes
Marketing and midstream operating costs and expenses
Depreciation, depletion and amortization of oil and gas properties
Depreciation and amortization of non-oil and gas properties
Accretion of asset retirement obligations
General and administrative expenses
Interest-rate and other financial instruments
Total expenses and other, net
Earnings from continuing operations before income taxes
Income tax (benefit) expense
Total income tax expense
Earnings from continuing operations
Earnings from discontinued operations before income taxes
Discontinued operations income tax expense
Earnings from discontinued operations
Basic net earnings per share
Basic earnings from continuing operations per share
Basic earnings from discontinued operations per share
Basic net earnings per share
Diluted net earnings per share
Diluted earnings from continuing operations per share
Diluted earnings from discontinued operations per share
Diluted net earnings per share
Weighted average common shares outstanding