| • FORM 10-Q • CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 • CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 • CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended March 31, 2012 or
Commission File Number 001-32318
DEVON ENERGY CORPORATION (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (405) 235-3611 Former address: 20 North Broadway, Oklahoma City, Oklahoma 73102-8260
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x On April 18, 2012, 404.4 million shares of common stock were outstanding.
Table of ContentsDEVON ENERGY CORPORATION FORM 10-Q
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This report includes forward-looking statements regarding our expectations and plans, as well as future events or conditions. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2011 reserve reports and other data in our possession or available from third parties. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, such as changes in the supply of and demand for oil, natural gas and NGLs and related products and services; exploration or drilling programs; political or regulatory events; general economic and financial market conditions; and other factors discussed in this report. All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS
See accompanying notes to consolidated financial statements.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary of Significant Accounting Policies The accompanying unaudited financial statements and notes of Devon Energy Corporation (“Devon”) have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying financial statements and notes should be read in conjunction with the accompanying financial statements and notes included in Devon’s 2011 Annual Report on Form 10-K. The accompanying unaudited interim financial statements furnished in this report reflect all adjustments that are, in the opinion of management, necessary to a fair statement of Devon’s results of operations and cash flows for the three-month periods ended March 31, 2012 and 2011 and Devon’s financial position as of March 31, 2012. 2. Derivative Financial Instruments Objectives and Strategies Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production that hedge the future prices received. These instruments are used to manage the inherent uncertainty of future revenues due to commodity price volatility. Devon’s derivative financial instruments typically include financial price swaps, basis swaps, costless price collars and call options. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. Devon’s interest rate swaps include contracts in which Devon receives a fixed rate and pays a variable rate on a total notional amount. Devon periodically enters into foreign exchange forward contracts to manage its exposure to fluctuations in exchange rates. Devon does not 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 minimal 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 require cash collateral to be posted if either its or the counterparty’s credit rating falls below certain credit rating levels. As of March 31, 2012, the credit ratings of all Devon’s counterparties were within established guidelines. Commodity Derivatives As of March 31, 2012, Devon had the following open oil derivative positions. Devon’s oil derivatives settle against the average of the prompt month NYMEX West Texas Intermediate futures price.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
As of March 31, 2012, Devon had the following open natural gas derivative positions. Devon’s natural gas derivatives settle against the Inside FERC first of the month Henry Hub index.
Interest Rate Derivatives As of March 31, 2012, Devon had the following open interest rate derivative positions:
Foreign Exchange Derivatives As of March 31, 2012, Devon had the following open foreign exchange rate derivative positions:
Financial Statement Presentation The following table presents the cash settlements and unrealized gains and losses on fair value changes included in the accompanying comprehensive statements of earnings associated with derivative financial instruments.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
The following table presents the derivative fair values included in the accompanying consolidated balance sheets.
3. Restructuring Costs In the fourth quarter of 2009, Devon announced plans to divest its offshore assets. As of March 31, 2012, Devon had divested all of its U.S. Offshore and International assets. Since inception of the plan, Devon had incurred $202 million of restructuring costs associated with these divestitures. The schedule below summarizes restructuring costs presented in the accompanying comprehensive statements of earnings. Restructuring costs related to Devon’s discontinued operations totaled $6 million in the three months ended March 31, 2011. These costs primarily related to cash severance and share-based awards and are not included in the schedule below. There were no costs related to discontinued operations in the three months ended March 31, 2012.
The schedule below summarizes Devon’s restructuring liabilities. Devon’s restructuring liabilities for cash severance related to its discontinued operations totaled $21 million at March 31, 2011 and are not included in the schedule below.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
4. Other, net The components of other, net in the accompanying comprehensive statements of earnings include the following:
5. Earnings Per Share The following table reconciles earnings from continuing operations and common shares outstanding used in the calculations of basic and diluted earnings per share.
Certain options to purchase shares of Devon’s common stock are excluded from the dilution calculations because the options are antidilutive. These excluded options totaled 6.4 million and 3.1 million during the three-month periods ended March 31, 2012 and 2011, respectively.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
6. Other Comprehensive Earnings Components of other comprehensive earnings consist of the following:
7. Supplemental Information to Statements of Cash Flows
8. Short-Term Investments The components of short-term investments include the following:
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
9. Accounts Receivable The components of accounts receivable include the following:
10. Other current assets The components of other current assets include the following:
11. Goodwill During the first three months of 2012, Devon’s Canadian goodwill increased $54 million entirely due to foreign currency translation. 12. Debt Commercial Paper As of March 31, 2012, Devon had $4.1 billion of outstanding commercial paper at an average rate of 0.43 percent. Credit Lines Devon has a $2.65 billion syndicated, unsecured revolving line of credit (the “Senior Credit Facility”). As of March 31, 2012, Devon had $750 million of borrowings under the Senior Credit Facility at an average borrowing rate of 0.47 percent. On April 7, 2012, $0.46 billion of Devon’s Senior Credit Facility matured and $150 million of borrowings were repaid on that date. 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 less than 65 percent. As of March 31, 2012, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 24.4 percent.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
13. Asset Retirement Obligations The schedule below summarizes changes in Devon’s asset retirement obligations.
During the first quarter of 2012, Devon recognized revisions to its asset retirement obligations totaling $399 million. The primary factor contributing to this revision was an overall increase in abandonment cost estimates for certain of its production operations facilities. 14. Retirement Plans The following table presents the components of net periodic benefit cost for Devon’s pension and postretirement benefit plans.
15. Stockholders’ Equity Dividends Devon paid common stock dividends of $80 million (or $0.20 per share) and $68 million (or $0.16 per share) in the first quarter of 2012 and 2011, respectively. 16. Commitments and Contingencies Devon is party to various legal actions arising in the normal course of business. Matters that are probable of unfavorable outcome to Devon and which 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. None of the actions are believed by management to involve future amounts that would be material to Devon’s financial position or results of operations after consideration of recorded accruals. Actual amounts could differ materially from management’s estimates.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Royalty Matters Numerous natural gas producers and related parties, including Devon, have been named in various lawsuits alleging violation of the federal False Claims Act. The suits allege that the producers and related parties used below-market prices, improper deductions, improper measurement techniques and transactions with affiliates, which resulted in underpayment of royalties in connection with natural gas and NGLs produced and sold. Devon does not currently believe that it is subject to material exposure with respect to such royalty matters. Environmental Matters Devon is subject to certain laws and regulations relating to environmental remediation activities associated with past operations, such as the Comprehensive Environmental Response, Compensation, and Liability Act and similar state statutes. In response to liabilities associated with these activities, loss accruals primarily consist of estimated uninsured remediation costs. Devon’s monetary exposure for environmental matters is not expected to be material. Chief Redemption Matters In 2006, Devon acquired Chief Holdings LLC (“Chief”) from the owners of Chief, including Trevor Rees-Jones, the majority owner of Chief. In 2008, a former owner of Chief filed a petition against Rees-Jones, as the former majority owner of Chief, and Devon, as Chief’s successor pursuant to the 2006 acquisition. The petition claimed, among other things, violations of the Texas Securities Act, fraud and breaches of Rees-Jones’ fiduciary responsibility to the former owner in connection with Chief’s 2004 redemption of the owner’s minority ownership stake in Chief. On June 20, 2011, a court issued a judgment against Rees-Jones for $196 million, of which $133 million of the judgment was also issued against Devon. Both Rees-Jones and Devon are appealing the judgment. If the appeal is unsuccessful, Devon can and will seek full payment of the judgment and any related interest, costs and expenses from Rees-Jones pursuant to an existing indemnification agreement between Rees-Jones, certain other parties and Devon. Devon does not expect to have any net exposure as a result of the judgment. However, because Devon does not have a legal right of set off with respect to the judgment, Devon has recorded in the accompanying March 31, 2012 and December 31, 2011, balance sheets both a $133 million liability relating to the judgment with an offsetting $133 million receivable relating to its right to be indemnified by Rees-Jones and certain other parties pursuant to the indemnification agreement. Other Matters Devon is involved in other various routine legal proceedings incidental to its business. However, to Devon’s knowledge, there were no other material pending legal proceedings to which Devon is a party or to which any of its property is subject. 17. Fair Value Measurements The following tables provide 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 payables and accrued expenses included in the accompanying balance sheets approximated fair value at March 31, 2012 and December 31, 2011. Therefore, such financial assets and liabilities are not presented in the following table.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
The following methods and assumptions were used to estimate the fair values in the tables above. Level 1 Fair Value Measurements Cash equivalents and short-term investments — Amounts consist primarily of U.S. and Canadian Treasury securities and money market investments. The fair value approximates the carrying value. Level 2 Fair Value Measurements Cash equivalents and short-term investments — Amounts consist primarily of commercial paper investments. The fair value is based upon quotes from brokers, which approximate the carrying value. Commodity, interest rate and foreign exchange derivatives — The fair values of commodity and interest rate derivatives are estimated using internal discounted cash flow calculations based upon forward curves and quotes obtained from brokers for contracts with similar terms or quotes obtained from counterparties to the agreements. Debt — Devon’s debt instruments do not actively trade in an established market. The fair values of its fixed-rate debt are estimated based on rates available for debt with similar terms and maturity. The fair values of Devon’s variable-rate commercial paper and credit facility borrowings are the carrying values. Level 3 Fair Value Measurements Long-term investments — Devon’s long-term investments presented in the tables above consisted entirely of auction rate securities. Due to auction failures and the lack of an active market for Devon’s auction rate securities, quoted market prices for these securities were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair values of its long-term auction rate securities. These inputs were based on the AAA credit rating of the securities, the probability of full repayment of the securities considering the U.S. government guarantees substantially all of the underlying student loans, the collection of all accrued interest to date and continued receipts of principal at par. As a result of using these inputs, Devon concluded the estimated fair values of its long-term auction rate securities approximated the par values as of March 31, 2012 and December 31, 2011. There were no changes in the fair value of these instruments in the three month periods ended March 31, 2012 and 2011, respectively.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
Debt — Devon’s Level 3 debt consisted of a non-interest bearing promissory note. Due to the lack of an active market, quoted marked prices for this note, or similar notes, were not available. Therefore, Devon used valuation techniques that rely on unobservable inputs to estimate the fair value of its promissory note. The fair value of this debt is estimated using internal discounted cash flow calculations based upon estimated future payment schedules and a 3.125% interest rate.
18. Discontinued Operations In March 2012, Devon received $71 million upon closing the divestiture of its operations in Angola, which completed Devon’s offshore divestiture program that was announced in November 2009. In aggregate, Devon’s U.S. and International offshore divestitures have generated total proceeds of $10.1 billion, or approximately $8 billion after-tax, assuming repatriation of a substantial portion of the foreign proceeds under current U.S. tax law. Revenues related to Devon’s discontinued operations totaled $43 million in the three months ended March 31, 2011. Devon did not have revenues related to its discontinued operations during the first three months of 2012. Earnings (loss) from discontinued operations before income taxes totaled $(16) million and $30 million in the three months ended March 31, 2012 and March 31, 2011, respectively. The following table presents the main classes of assets and liabilities associated with Devon’s discontinued operations at December 31, 2011. Devon did not have assets or liabilities held for sale at March 31, 2012.
19. Segment Information Devon manages its operations through distinct operating segments, or divisions, which are defined primarily by geographic areas. For financial reporting purposes, Devon aggregates its U.S. divisions into one reporting segment due to the similar nature of the businesses. However, Devon’s Canadian division is reported as separate reporting segment primarily due to the significant differences between the U.S. and Canadian regulatory environments. Devon’s segments are all primarily engaged in oil and gas producing activities. Revenues are all from external customers.
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Table of ContentsDEVON ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited)
20. Subsequent Event In April 2012, Devon closed its previously announced $2.5 billion joint venture transaction with Sinopec International Petroleum Exploration & Production Corporation. Pursuant to the agreement, Sinopec invested approximately $900 million in cash and received a 33.3% interest in five of Devon’s new ventures exploration plays in the U.S. at closing of the transaction. Additionally, Sinopec is required to fund approximately $1.6 billion of Devon’s share of future exploration, development and drilling costs associated with these plays.
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Table of ContentsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis addresses material changes in our results of operations and capital resources and uses for the three-month period ended March 31, 2012, compared to the three-month period ended March 31, 2011, and in our financial condition and liquidity since December 31, 2011. For information regarding our critical accounting policies and estimates, see our 2011 Annual Report on Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Overview of 2012 Results During the first three months of 2012 and 2011, our continuing operations generated net earnings of $414 million, or $1.03 per diluted share, and $389 million, or $0.91 per diluted share, for the respective periods. In spite of challenges from depressed natural gas prices, record production from our cornerstone development properties, including the Permian Basin, Jackfish, Cana-Woodford and the Barnett Shale, bolstered our first quarter earnings. Key measures of our financial performance are summarized below:
First-Quarter Operational Developments
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Results of Operations Production, Prices and Revenues
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Table of ContentsThe volume and price changes in the tables above caused the following changes to our oil, gas and NGL sales.
Oil Sales Oil sales increased $198 million in the first three months of 2012 due to a 26 percent increase in production. The increase was primarily due to continued development of our Jackfish thermal heavy oil projects and Permian Basin properties. Oil sales increased $73 million in the first three months of 2012 as a result of an 8 percent increase in our realized price without hedges. The largest contributor to the increase in our realized price was the increase in the average NYMEX West Texas Intermediate index price due to broad market conditions. Gas Sales Gas sales decreased $306 million during the first three months of 2012 as a result of a 35 percent decrease in our realized price without hedges. This decrease was largely due to the broad deterioration of gas prices in the North American market. Gas sales increased $41 million in the first three months of 2012 due to a 4 percent increase in production. The increased production resulted primarily from continued development activities in the liquids-rich gas portions of our Barnett and Cana-Woodford Shales. Production gains from development in these liquids-rich regions were partially offset by natural declines in our other operating areas, particularly those that produce dry gas. NGL Sales NGL sales increased $69 million in the first three months of 2012 due to a 21 percent increase in production. The increase in production was primarily due to increased drilling in the liquids-rich gas portions of the Barnett Shale, Cana-Woodford Shale and Granite Wash. NGL sales decreased $20 million during the first three months of 2012 as a result of a 5 percent decrease in our realized price without hedges. The lower price was largely due to decreases in the Mont Belvieu, Texas hub price. Oil, Gas and NGL Derivatives The following tables provide financial information associated with our oil, gas and NGL hedges. The first table presents the cash settlements and unrealized gains and losses that are recognized as components of our revenues. The subsequent tables present our oil, gas and NGL prices with, and without, the effects of the cash settlements. The prices do not include the effects of unrealized gains and losses.
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A summary of our outstanding commodity derivatives is included in Note 2 to the financial statements included in “Item 1. Consolidated Financial Statements” of this report. Cash settlements presented in the tables above represent realized gains or losses related to these various instruments. In addition to cash settlements, we also recognize unrealized changes in the fair values of 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 relationships between contract prices and the associated forward curves. Including the cash settlements discussed above, our oil, gas and NGL derivatives generated a net gain of $145 million during the first three months of 2012 and incurred a net loss of $168 million during the first three months of 2011. Marketing and Midstream Revenues and Operating Costs and Expenses
Marketing and midstream operating profit decreased $10 million primarily due to lower gas and NGL prices. Lease Operating Expenses (“LOE”)
LOE increased $0.67 per Boe during the first three months of 2012. The largest contributor to the higher unit cost is related to our liquids production growth, particularly at our Jackfish thermal heavy oil projects in Canada and in the Permian
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Table of ContentsBasin in the U.S. Such projects generally require a higher cost to produce per unit than our gas projects. We also experienced upward pressures on costs in certain operating areas, which also contributed to the higher LOE per Boe. Depreciation, Depletion and Amortization (“DD&A”)
Oil and gas property DD&A increased $123 million during 2012 due to a 25 percent increase in the DD&A rate and $51 million due to our increase in production. The largest contributor to the higher rate was our drilling and development activities subsequent to the end of the first quarter of 2011. General and Administrative Expenses (“G&A”)
Net G&A and net G&A per Boe increased during 2012 largely due to higher employee compensation and benefits. Employee costs increased primarily from an expansion of our workforce as part of growing production operations at certain of our key areas, including Jackfish, the Permian and the Cana-Woodford shale. Taxes Other Than Income Taxes
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Table of ContentsInterest Expense
Other, net
Income Taxes The following table presents our total income tax expense and a reconciliation of our effective income tax rate to the U.S. statutory income tax rate.
Earnings (Loss) From Discontinued Operations
Earnings decreased in the first quarter of 2012 primarily as a result of the lost operating earnings subsequent to divesting our Brazilian assets in the second quarter of 2011 and the $16 million loss ($21 million after-tax) on the divestiture of our Angola operations.
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Table of ContentsCapital Resources, Uses and Liquidity Sources and Uses of Cash The following table presents the major source and use categories of our cash and cash equivalents.
Operating Cash Flow – Continuing Operations Net cash provided by operating activities (“operating cash flow”) continued to be a significant source of capital and liquidity in the first three months of 2012. Our operating cash flow decreased approximately 21 percent during 2012 primarily due to lower commodity prices and higher expenses, partially offset by the effects from higher production. In 2011, we completed our offshore divestiture program that was announced in November 2009. This program generated approximately $8 billion in after-tax proceeds, which continue to provide us with substantial liquidity to invest in our North America property base. During the first three months of 2012 and 2011, our operating cash flow funded approximately 50 percent and 70 percent, respectively, of our cash payments for capital expenditures. Leveraging our liquidity, we largely used debt to fund the remainder of our cash-based capital expenditures. This cash flow deficit was largely expected as we have allocated approximately 25% of our 2012 capital expenditure budget to exploratory projects and leasehold acquisitions that are not yet generating production revenues. Debt Activity, Net During the first three months of 2012, we utilized net credit facility and commercial paper borrowings of $1.1 billion to fund capital expenditures in excess of our operating cash flow. During the first three months of 2011, we utilized commercial paper borrowings of $1.2 billion to fund capital expenditures, common share repurchases and dividends in excess of our operating cash flow. Short-term Investments During the first three months of 2012 and 2011, we had net short-term investment redemptions totaling $0.2 billion and net purchases totaling $1.5 billion, respectively. The 2011 purchases and remaining balances as of March 31, 2012 represent our investment of a portion of the International offshore divestiture proceeds into U.S. and Canadian Treasury securities, commercial paper and other marketable securities. Divestitures of property and equipment During the first three months of 2012, we received $71 million from the divestiture of our Angola operations.
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Table of ContentsCapital Expenditures The amounts in the table below reflect cash payments for capital expenditures, including cash paid for capital expenditures incurred in prior periods.
Our capital expenditures consist of amounts related to our oil and gas exploration and development operations, our midstream operations and other corporate activities. The vast majority of our capital expenditures are for the acquisition, drilling and development of oil and gas properties, which totaled $1.8 billion and $1.6 billion in the first three months of 2012 and 2011, respectively. The 13% growth in exploration and development capital spending in the first three months of 2012 was primarily due to increased new ventures exploratory activity and leasehold acquisition. Capital expenditures for our midstream operations are primarily for the construction and expansion of natural gas processing plants, natural gas gathering systems and oil transportation facilities. Our midstream capital expenditures are largely impacted by oil and gas drilling activities. Common Stock Repurchases and Dividends In connection with our offshore divestitures noted above, we conducted a $3.5 billion share repurchase program, which we completed in the fourth quarter of 2011. In the first quarter of 2012, we increased our dividend 25% over the first quarter of 2011 to $0.20 per share. The following table summarizes our repurchases and our common stock dividends (amounts and shares in millions) during the first three months of 2012 and 2011.
Liquidity Historically, our primary sources of capital and liquidity have been our operating cash flow and cash on hand. Additionally, we maintain revolving lines of credit and a commercial paper program, which can be accessed as needed to supplement operating cash flow and cash balances. Other available sources of capital and liquidity include debt and equity securities that can be issued pursuant to our shelf registration statement filed with the SEC. We estimate the combination of these sources of capital will be adequate to fund future capital expenditures, debt repayments and other contractual commitments. The following sections discuss changes to our liquidity subsequent to filing our 2011 Annual Report on Form 10-K. Operating Cash Flow Our operating cash flow is sensitive to many variables, the most volatile of which are the prices of the oil, gas and NGLs we produce. We expect operating cash flow to continue to be our primary source of liquidity. To mitigate some of the risk inherent in prices, we have utilized various derivative financial instruments to set minimum and maximum prices on our 2012 production. The key terms to our oil, gas and NGL derivative financial instruments as of March 31, 2012 are presented in Note 2 to the financial statements under “Item 1. Consolidated Financial Statements” of this report.
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Table of ContentsCredit Availability As of April 18, 2012, we had $1.5 billion of available capacity under our syndicated, unsecured Senior Credit Facility and $3.9 billion of commercial paper borrowings outstanding. The Senior Credit Facility contains only one material financial covenant. This covenant requires us to maintain a ratio of total funded debt to total capitalization, as defined in the credit agreement, of no more than 65 percent. As of March 31, 2012, we were in compliance with this covenant with a debt-to-capitalization ratio of 24.4 percent. Although we ended the first quarter of 2012 with approximately $7.1 billion of cash and short-term investments, the vast majority of this amount consists of proceeds from our International offshore divestitures that are held by certain of our foreign subsidiaries. We do not currently expect to repatriate such amounts to the U.S. If we were to repatriate a portion or all of the cash and short-term investments held by these foreign subsidiaries, we would be required to accrue and pay current income taxes in accordance with current U.S. tax law. With these proceeds remaining outside of the U.S., we expect to continue using commercial paper and credit facility borrowings in the U.S. to supplement our U.S. operating cash flow. We do not expect near-term increases in such borrowings will have a material effect on our overall liquidity or financial condition. Capital Expenditures We previously disclosed that we expected our 2012 capital expenditures to range from $6.2 billion to $6.8 billion. In the first quarter of 2012, we expanded our new ventures exploration activities, targeting oil and liquids-rich opportunities. As a result, we increased our total estimated 2012 capital expenditures by $1.0 billion. In April 2012, we closed our previously announced $2.5 billion joint venture transaction with Sinopec. Pursuant to the agreement, Sinopec invested approximately $900 million in cash and received a 33.3% interest in five of our new ventures exploration plays in the U.S. at closing of the transaction. Additionally, Sinopec is required to fund approximately $1.6 billion of our share of future exploration, development and drilling costs associated with these plays. Item 3. Quantitative and Qualitative Disclosures About Market Risk Commodity Price Risk We have commodity derivatives that pertain to production for the last nine months of 2012, as well as 2013 and 2014. The key terms to all our oil, gas and NGL derivative financial instruments as of March 31, 2012 are presented in Note 2 to the financial statements under “Item 1. Consolidated Financial Statements” of this report. The fair values of our commodity derivatives are largely determined by estimates of the forward curves of the relevant price indices. At March 31, 2012, a 10 percent increase and 10 percent decrease in the forward curves associated with our commodity derivative instruments would have changed our net asset positions by the following amounts:
Interest Rate Risk At March 31, 2012, we had debt outstanding of $10.8 billion. Of this amount, $6.0 billion bears fixed interest rates averaging 6.3 percent. Additionally, we had $4.1 billion of outstanding commercial paper and $750 million of credit facility borrowings, bearing interest at floating rates which averaged 0.43 percent and 0.47 percent, respectively. As of March 31, 2012, we had open interest rate swap positions that are presented in Note 2 to the financial statements under “Item 1. Consolidated Financial Statements” of this report. The fair values of our interest rate swaps are largely determined by estimates of the forward curves of the Federal Funds rate. A 10 percent change in these forward curves would not materially impact our balance sheet at March 31, 2012.
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Table of ContentsForeign Currency Risk Our net assets, net earnings and cash flows from our Canadian subsidiaries are based on the U.S. dollar equivalent of such amounts measured in the Canadian dollar functional currency. Assets and liabilities of the Canadian subsidiaries are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenues, expenses and cash flow are translated using the average exchange rate during the reporting period. A 10 percent unfavorable change in the Canadian-to-U.S. dollar exchange rate would not materially impact our March 31, 2012 balance sheet. Our non-Canadian foreign subsidiaries have a U.S. dollar functional currency. However, one of these foreign subsidiaries holds Canadian-dollar cash and engages in short-term intercompany loans with Canadian subsidiaries that are sometimes based in Canadian dollars. Additionally, at March 31, 2012, we held foreign currency exchange forward contracts to hedge exposures to fluctuations in exchange rates on the Canadian-dollar cash. The increase or decrease in the value of the forward contracts is offset by the increase or decrease to the U.S. dollar equivalent of the Canadian-dollar cash. The value of the intercompany loans increases or decreases from the remeasurement of the loans into the U.S. dollar functional currency. Based on the amount of the intercompany loans as of March 31, 2012, a 10 percent change in the foreign currency exchange rates would not materially impact our balance sheet. Item 4. Controls and Procedures Disclosure Controls and Procedures We have established disclosure controls and procedures to ensure that material information relating to Devon, including its consolidated subsidiaries, is made known to the officers who certify Devon’s financial reports and to other members of senior management and the Board of Directors. Based on their evaluation, Devon’s principal executive and principal financial officers have concluded that Devon’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of March 31, 2012, to ensure that the information required to be disclosed by Devon in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Changes in Internal Control Over Financial Reporting There was no change in Devon’s internal control over financial reporting during the first quarter of 2012 that has materially affected, or is reasonably likely to materially affect, Devon’s internal control over financial reporting.
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Table of ContentsThere have been no material changes to the information included in Item 3. “Legal Proceedings” in our 2011 Annual Report on Form 10-K. There have been no material changes to the information included in Item 1A. “Risk Factors” in our 2011 Annual Report on Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information regarding purchases of our common stock that were made by us during the first quarter of 2012.
Under the Devon Canada Corporation Savings Plan (the “Canadian Plan”), eligible Canadian employees may purchase shares of our common stock through an investment in the Canadian Plan, which is administered by an independent trustee, Sun Life Assurance Company of Canada. Eligible Canadian employees purchased approximately 2,100 shares of our common stock in the first quarter of 2012, at then-prevailing stock prices, that they held through their ownership in the Canadian Plan. We acquired the shares sold under the Canadian Plan through open-market purchases. These shares and any interest in the Canadian Plan were offered and sold in reliance on the exemptions for offers and sales of securities made outside of the U.S., including under Regulation S for offers and sales of securities to employees pursuant to an employee benefit plan established and administered in accordance with the law of a country other than the U.S. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures None. None.
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Table of Contents(a) Exhibits required by Item 601 of Regulation S-K are as follows:
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Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Table of ContentsINDEX TO EXHIBITS
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