Devon Energy Reports Third-Quarter 2018 Results

OKLAHOMA CITY–(BUSINESS WIRE)–Devon Energy Corp. (NYSE: DVN) today reported operational and financial results for the third quarter of 2018. Also included within the release is the company’s guidance outlook for the fourth quarter of 2018.

“Devon continued to execute at a high level on its U.S.-focused growth initiatives,” said Dave Hager, president and CEO. “Our third-quarter performance was highlighted by improving well productivity and capital efficiency that drove U.S. production above the high end of guidance with a total capital investment well below forecast. Furthermore, our unwavering commitment to capital discipline allowed us to comfortably fund our drilling programs and generate free cash flow in the quarter.

“In addition to our strong operational and financial results, we also made significant progress building per-share value through our industry-leading $4 billion share-repurchase program,” Hager said. “Given the value proposition of our current share price, we opportunistically accelerated the buyback of our shares and are on track to repurchase approximately 20 percent of the company’s outstanding shares by the time we complete the program in the first quarter of 2019.”

Delaware Basin and Eagle Ford Drive U.S. Production Outperformance

Devon’s total companywide production averaged 522,000 oil-equivalent barrels (Boe) per day in the third quarter. With the company’s capital programs focused on expanding higher-margin production, oil and natural gas liquids (NGLs) volumes increased to 67 percent of the product mix.

Third-quarter production was highlighted by results from Devon’s U.S. resource plays, which are attaining the highest returns in the company’s portfolio. U.S. production averaged 418,000 Boe per day in the quarter, exceeding the company’s third-quarter guidance range, adjusted for asset sales, of 398,000 to 417,000 Boe per day.

Within Devon’s diversified U.S. portfolio, the strongest asset-level performance was achieved by the company’s Delaware Basin operations in southeast New Mexico. Oil production from this world-class asset increased 45 percent year over year, driving volumes in the Delaware to 79,000 Boe per day. A key driver of growth was seven prolific Wolfcamp wells around the state-line area that averaged initial 30-day rates of 4,000 Boe per day per well.

Devon’s Eagle Ford assets in south Texas also delivered strong results, with production advancing 12 percent compared to the second quarter of 2018. The growth was driven by 20 high-rate wells brought online during the quarter that averaged initial 30-day rates of approximately 3,000 Boe per day per well.

With the strong well productivity Devon has achieved year to date in the U.S., light-oil production growth from retained assets is on track to advance 17 percent in 2018. This growth rate is trending at approximately 200 basis points above the company’s original budget expectations, adjusted for asset sales.

For additional details on Devon’s E&P operations and preliminary 2019 outlook, please refer to the company’s third-quarter 2018 operations report at www.devonenergy.com.

Capital Spending Below Q3 Guidance; No Change to 2018 Outlook

In addition to the strong U.S. production performance, the company maintained discipline with its capital program. Devon’s upstream capital spending was $523 million in the third quarter, which was $52 million, or 9 percent below the company’s midpoint guidance.

For the full year, Devon has made no modifications to its capital outlook and expects its upstream capital spending to be approximately $2.4 billion in 2018.

Premium Gulf Coast Pricing Drives Upstream Revenue Higher

Devon’s upstream revenue, excluding commodity derivatives, totaled $1.6 billion in the third quarter, a 29 percent improvement compared to the year-ago quarter. Contributing factors to revenue growth were higher commodity price realizations and growth in higher-margin, liquids production.

Revenue associated with NGLs production delivered the highest growth, advancing 134 percent year over year. The company’s NGLs volumes are benefitting from direct access to premium Mont Belvieu pricing through fixed, low-cost transportation and fractionation agreements.

Also contributing to higher revenues were firm transport and marketing agreements that provide the majority of Devon’s U.S. oil production direct access to advantaged Gulf Coast pricing. Combined with price protection provided by regional basis swaps, oil realizations in the U.S. averaged approximately 97 percent of the West Texas Intermediate (WTI) benchmark.

The company’s heavy-oil business in Canada continues to benefit from Western Canadian Select (WCS) basis swaps on approximately 50 percent of its estimated oil production in 2018. These attractive WCS basis swaps are locked in at $15 off WTI pricing and have generated cash settlements of $193 million year to date.

Operating Costs Improve and Field-Level Margins Expand

Devon’s largest field-level cost, lease operating expense and transportation, totaled $453 million, or $9.45 per Boe in the third quarter. This represents a $40 million improvement compared to the previous quarter and was 2 percent below guidance. The field-level cost savings were achieved in both the U.S. and Canada.

The improving operating costs coupled with the benefits of improved price realizations and higher-margin liquids production resulted in margin expansion for Devon. Field-level cash margin reached $22 per Boe in the third quarter, a 34 percent increase compared to the year-ago period. Field-level cash margin is computed as upstream revenues, excluding commodity derivatives, less production expenses with the result divided by oil-equivalent production volumes.

Corporate Cost Savings Initiatives Enhancing Profitability

Further enhancing Devon’s profitability is its improving general and administrative (G&A) cost structure. G&A expenses totaled $147 million in the third quarter, which was below the low end of guidance and represents a 13 percent improvement compared to the third quarter of 2017. The lower overhead costs were driven by reduced personnel expenses.

With the retirement of $828 million of debt year to date, the company expects to reduce net financing costs by $66 million on an annual basis. With reduced debt balances, Devon’s net borrowing costs (net financing costs plus capitalized interest) improved 17 percent year over year to $81 million.

The aforementioned cost savings, combined with the financial benefits related to the sale of EnLink Midstream, position Devon’s go-forward G&A and interest expense to improve by approximately $475 million annually.

Earnings Exceeds Wall Street Consensus

The company reported net earnings attributable to Devon of $2.5 billion or $5.14 per diluted share in the third quarter. Adjusting for items securities analysts typically exclude from their published estimates, the company’s core earnings totaled $324 million or $0.65 per diluted share, exceeding the consensus estimates of analysts.

With the closing of the EnLink transaction, EnLink’s financial results are no longer consolidated with Devon’s upstream business, and historical results related to EnLink are presented as discontinued operations in the company’s consolidated financial statements.

Operating Cash Flow Increases 61 Percent; Free Cash Flow Reaches $249 Million

Devon’s operating cash flow from continuing operations totaled $807 million in the third quarter, a 61 percent increase compared to the same period a year ago. This level of operating cash flow fully funded the company’s total capital investments and generated $249 million of free cash flow in the quarter.

The company also generated additional cash inflows through its ongoing divestiture activity. With the closing of the EnLink transaction in July, asset sale proceeds exceeded $3 billion in the third quarter. To date, total proceeds from Devon’s divestiture program have now reached $4.7 billion, and the company expects to achieve its $5 billion divestiture target around year-end.

Industry-Leading $4 Billion Share-Repurchase Program Advances

The company’s $4 billion share-repurchase authorization represents the largest in the upstream industry when measured as a percentage of market capitalization. To date, Devon has repurchased 67 million shares, or nearly 13 percent of outstanding shares, at a total cost of approximately $2.7 billion. The company expects to complete its $4 billion share-repurchase program during the first quarter of 2019.

Devon exited the third quarter with $3.1 billion of cash on hand and an undrawn credit facility of $3 billion. Devon has a debt balance of $6.0 billion and no significant debt maturities until mid-2021. Overall, Devon’s financial position remains exceptionally strong, with investment-grade credit ratings and excellent liquidity.

Conference Call Webcast and Supplemental Earnings Materials

Also provided with today’s release is the company’s detailed operations report that is available on the company’s website at www.devonenergy.com. The company’s third-quarter conference call will be held at 10 a.m. Central (11 a.m. Eastern) on Wednesday, Nov. 7, 2018, and will serve primarily as a forum for analyst and investor questions and answers.

Non-GAAP Disclosures

This release may include non-GAAP (generally accepted accounting principles) financial measures. Such non-GAAP measures are not alternatives to GAAP measures, and you should not consider these non-GAAP measures in isolation or as a substitute for analysis of our results as reported under GAAP. Reconciliations of these non-GAAP measures and other disclosures are provided below in this release.

Forward-Looking Statements

This release includes “forward-looking statements” as defined by the Securities and Exchange Commission (SEC). Such statements include those concerning strategic plans, expectations and objectives for future operations, and are often identified by use of the words “expects,” “believes,” “will,” “would,” “could,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the company expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Statements regarding our business and operations are subject to all of the risks and uncertainties normally incident to the exploration for and development and production of oil and gas. These risks include, but are not limited to: the volatility of oil, gas and NGL prices; uncertainties inherent in estimating oil, gas and NGL reserves; the extent to which we are successful in acquiring and discovering additional reserves; the uncertainties, costs and risks involved in oil and gas operations; regulatory restrictions, compliance costs and other risks relating to governmental regulation, including with respect to environmental matters; risks related to our hedging activities; counterparty credit risks; risks relating to our indebtedness; cyberattack risks; our limited control over third parties who operate our oil and gas properties; midstream capacity constraints and potential interruptions in production; the extent to which insurance covers any losses we may experience; competition for leases, materials, people and capital; our ability to successfully complete mergers, acquisitions and divestitures; and any of the other risks and uncertainties identified in our Form 10-K and our other filings with the SEC. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. The forward-looking statements in this release are made as of the date of this release, even if subsequently made available by Devon on its website or otherwise. Devon does not undertake any obligation to update the forward-looking statements as a result of new information, future events or otherwise. The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves that meet the SEC’s definitions for such terms, and price and cost sensitivities for such reserves, and prohibits disclosure of resources that do not constitute such reserves. This release may contain certain terms, such as resource potential, potential locations, risked and unrisked locations, estimated ultimate recovery (or EUR), exploration target size and other similar terms. These estimates are by their nature more speculative than estimates of proved, probable and possible reserves and accordingly are subject to substantially greater risk of being actually realized. The SEC guidelines strictly prohibit us from including these estimates in filings with the SEC. Investors are urged to consider closely the disclosure in our Form 10-K, available at www.devonenergy.com. You can also obtain this form from the SEC by calling 1-800-SEC-0330 or from the SEC’s website at www.sec.gov.

About Devon Energy

Devon Energy is a leading independent energy company engaged in finding and producing oil and natural gas. Based in Oklahoma City and included in the S&P 500, Devon operates in several of the most prolific oil and natural gas plays in the U.S. and Canada with an emphasis on achieving strong returns and capital-efficient cash-flow growth. For more information, please visit www.devonenergy.com.

NON-GAAP FINANCIAL MEASURES

This press release includes non-GAAP financial measures. These non-GAAP measures are not alternatives to GAAP measures, and you should not consider these non-GAAP measures in isolation or as a substitute for analysis of our results as reported under GAAP. Below is additional disclosure regarding each of the non-GAAP measures used in this press release, including reconciliations to their most directly comparable GAAP measure.

CORE EARNINGS

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. Accordingly, the company also uses the measures of core earnings and core earnings per share attributable to Devon. Devon believes these non-GAAP measures facilitate comparisons of its performance to earnings estimates published by securities analysts. Devon also believes these non-GAAP measures can facilitate comparisons of its performance between periods and to the performance of its peers. The following table summarizes the effects of these items on third-quarter 2018 earnings.

NET DEBT

Devon defines net debt as debt less cash and cash equivalents. Devon believes that netting these sources of cash against debt provides a clearer picture of the future demands on cash from Devon to repay debt.

FREE CASH FLOW

Devon defines free cash flow as operating cash flow from continuing operations less capital expenditures. Devon believes that free cash flow provides a useful measure of available cash generated by operating activities for other investing and financing activities.

Devon’s oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price. Devon’s natural gas derivatives settle against the Inside FERC first of the month Henry Hub index. Commodity hedge positions are shown as of November 1, 2018.