filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted as they are inapplicable or the required information has been included in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Devon Energy Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Devon Energy Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of comprehensive earnings, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Changes in Accounting Principles
As discussed in Note 14 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842).
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue in 2018 due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606).
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting contained in “Item 9A. Controls and Procedures.” Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the estimate of proved and unproved oil and gas reserves used to assess the recoverability of the carrying value of oil and gas properties in the STACK common operating field
As discussed in Notes 1, 5, and 12 to the consolidated financial statements, the Company performs recoverability tests for the carrying value of its proved oil and gas properties subject to amortization. The recoverability tests are performed on an annual basis or more often if events and circumstances indicate that the carrying value of such properties may not be recoverable. The determination of the undiscounted cash flows is driven by the underlying estimate of proved and unproved oil and gas reserves for oil and gas properties as determined by the Company’s internal reservoir engineers. Estimating common operating fields’ future cash flows requires the expertise of reservoir engineers who take into consideration the estimate of future production quantities, future operating and capital cost assumptions, and projected oil and gas prices inclusive of market differentials. The STACK common operating field had a carrying value of $3.7 billion as of December 31, 2019.
We identified the evaluation of the estimate of proved and unproved oil and gas reserves used to assess the recoverability of the carrying value of the STACK common operating field’s oil and gas properties as a critical audit matter. Based on current and forecasted commodity prices and costs, production volumes and drilling plans, and the risk adjustment factors associated with the unproved reserve volumes, the STACK common operating field required more judgment to evaluate the estimate of both proved and unproved oil and gas reserves used in determining undiscounted future net cash flows for the asset group.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s processes to develop and monitor the estimate of proved and unproved oil and gas reserves used to determine future cash flows. We assessed compliance of the methodology used by the Company’s internal reservoir engineers and external reservoir engineers to estimate proved and unproved oil and gas reserves with industry and regulatory standards. To assess the Company’s ability to accurately estimate future proved and unproved production quantities, we compared the future production quantity assumptions used by the Company in prior periods to the actual production amounts in the current year and the year-end forecasted future production quantities. We compared the estimated future proved and unproved production quantities used by the Company in the current period to historical production trends and investigated differences. In addition, we assessed the competence, objectivity, and capabilities of the Company’s internal reservoir engineers and third-party reservoir engineers. We read and considered the report of the Company’s external reservoir engineers in connection with our evaluation of the Company’s reserve estimates. We also tested the processes and methodologies used by internal reservoir engineers to estimate unproved future production quantities. We have compared the risk adjustment factors for unproved reserves selected by the Company by prospect to the guideline risk adjustment factor ranges by reserve class in published industry surveys. We have also evaluated the Company’s selected risk adjustment factors by evaluation of the proximity of the unproved reserves to proved producing reserves. We evaluated the future operating and capital cost assumptions used by the internal reservoir engineers to estimate future cash flows by comparing them to historical costs. We also tested the projected oil and gas prices used by the internal reservoir engineers to estimate future cash flows by comparing those prices to publicly available prices and tested the relevant market differentials based on past results and any contractual changes in marketing and/or transportation and processing agreements that would impact future cash flows to be received.
Assessment of the estimate of proved oil and gas reserves used in the depletion of proved oil and gas properties
As discussed in Notes 1 and 12 to the consolidated financial statements, the Company calculates depletion for its proved oil and gas properties subject to amortization using a units-of-production method. The rates used to deplete the balance of oil and gas properties subject to amortization are set using the estimate of proved oil and gas reserves by common operating field. Under the units-of-production method, a rate is set annually using the beginning of year balance of oil and gas properties subject to amortization and estimated proved oil and gas reserves for each common operating field. That rate is then applied to production throughout the year to determine the amount of depletion expense to be recorded by common operating field. The Company’s internal reservoir engineers estimate proved oil and gas reserves, and the Company engages external reservoir engineers to perform an independent evaluation of a portion of the estimates of proved oil and gas reserves. These common operating fields had depletion expense of $1.4 billion for the year ended December 31, 2019.
We identified the assessment of the estimate of proved oil and gas reserves used in the depletion of proved oil and gas properties as a critical audit matter. There was a high degree of subjectivity in evaluating the Company’s estimate of the proved oil and gas reserves used as an input to determine depletion for each common operating field.
The primary procedures we performed to address this critical audit matter including the following. We tested certain internal controls over the Company’s depletion expense calculation process, including controls related to the determination and monitoring of the estimate of proved oil and gas reserves. We analyzed the grouping of costs and proved oil and gas reserves by common operating field. We analyzed and assessed the determination of depletion expense for compliance with industry and regulatory standards. To assess the Company’s ability to accurately estimate proved oil and gas reserves, we compared the estimated future production quantities assumptions used by the Company in prior periods to the actual production amounts received and the year-end future production quantities forecasted. We compared the estimated future production quantities used by the Company in the current period to historical production trends and investigated differences. In addition, we assessed the competence, objectivity, and capabilities of the Company’s internal reservoir engineers and the Company’s external reservoir engineers. We read and considered the report of the Company’s third-party reservoir engineers in connection with our evaluation of the Company’s reserve estimates.
/s/ KPMG LLP
We have served as the Company’s auditor since 1980.
Oklahoma City, Oklahoma
February 19, 2020
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| (Millions, except per share amounts) | ||||||||||||
| Upstream revenues | $ | 3,355 | $ | 4,542 | $ | 2,988 | ||||||
| Marketing and midstream revenues | 2,865 | 4,354 | 3,513 | |||||||||
| Total revenues | 6,220 | 8,896 | 6,501 | |||||||||
| Production expenses | 1,197 | 1,153 | 791 | |||||||||
| Exploration expenses | 58 | 128 | 346 | |||||||||
| Marketing and midstream expenses | 2,812 | 4,321 | 3,559 | |||||||||
| Depreciation, depletion and amortization | 1,497 | 1,228 | 1,008 | |||||||||
| Asset impairments | — | 156 | — | |||||||||
| Asset dispositions | (48 | ) | (278 | ) | (219 | ) | ||||||
| General and administrative expenses | 475 | 574 | 645 | |||||||||
| Financing costs, net | 250 | 580 | 321 | |||||||||
| Restructuring and transaction costs | 84 | 97 | — | |||||||||
| Other expenses | 4 | (7 | ) | 10 | ||||||||
| Total expenses | 6,329 | 7,952 | 6,461 | |||||||||
| Earnings (loss) from continuing operations before income taxes | (109 | ) | 944 | 40 | ||||||||
| Income tax expense (benefit) | (30 | ) | 230 | 7 | ||||||||
| Net earnings (loss) from continuing operations | (79 | ) | 714 | 33 | ||||||||
| Net earnings (loss) from discontinued operations, net of income taxes | (274 | ) | 2,510 | 1,045 | ||||||||
| Net earnings (loss) | (353 | ) | 3,224 | 1,078 | ||||||||
| Net earnings attributable to noncontrolling interests | 2 | 160 | 180 | |||||||||
| Net earnings (loss) attributable to Devon | $ | (355 | ) | $ | 3,064 | $ | 898 | |||||
| Basic net earnings (loss) per share: | ||||||||||||
| Basic earnings (loss) from continuing operations per share | $ | (0.21 | ) | $ | 1.43 | $ | 0.06 | |||||
| Basic earnings (loss) from discontinued operations per share | (0.68 | ) | 4.71 | 1.65 | ||||||||
| Basic net earnings (loss) per share | $ | (0.89 | ) | $ | 6.14 | $ | 1.71 | |||||
| Diluted net earnings (loss) per share: | ||||||||||||
| Diluted earnings (loss) from continuing operations per share | $ | (0.21 | ) | $ | 1.42 | $ | 0.06 | |||||
| Diluted earnings (loss) from discontinued operations per share | (0.68 | ) | 4.68 | 1.64 | ||||||||
| Diluted net earnings (loss) per share | $ | (0.89 | ) | $ | 6.10 | $ | 1.70 | |||||
| Comprehensive earnings (loss): | ||||||||||||
| Net earnings (loss) | $ | (353 | ) | $ | 3,224 | $ | 1,078 | |||||
| Other comprehensive earnings (loss), net of tax: | ||||||||||||
| Foreign currency translation, discontinued operations | 78 | (152 | ) | 83 | ||||||||
| Release of Canadian cumulative translation adjustment, discontinued operations | (1,237 | ) | — | — | ||||||||
| Pension and postretirement plans | 13 | 44 | 29 | |||||||||
| Other comprehensive earnings (loss), net of tax | (1,146 | ) | (108 | ) | 112 | |||||||
| Comprehensive earnings (loss): | (1,499 | ) | 3,116 | 1,190 | ||||||||
| Comprehensive earnings attributable to noncontrolling interests | 2 | 160 | 180 | |||||||||
| Comprehensive earnings (loss) attributable to Devon | $ | (1,501 | ) | $ | 2,956 | $ | 1,010 |
See accompanying notes to consolidated financial statements.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net earnings (loss) | $ | (353 | ) | $ | 3,224 | $ | 1,078 | |||||
| Adjustments to reconcile net earnings (loss) to net cash from operating activities: | ||||||||||||
| Net (earnings) loss from discontinued operations, net of income taxes | 274 | (2,510 | ) | (1,045 | ) | |||||||
| Depreciation, depletion and amortization | 1,497 | 1,228 | 1,008 | |||||||||
| Asset impairments | — | 156 | — | |||||||||
| Leasehold impairments | 18 | 94 | 219 | |||||||||
| Accretion on discounted liabilities | 33 | 27 | 27 | |||||||||
| Total (gains) losses on commodity derivatives | 454 | (457 | ) | (66 | ) | |||||||
| Cash settlements on commodity derivatives | 166 | (420 | ) | 115 | ||||||||
| Gains on asset dispositions | (48 | ) | (278 | ) | (219 | ) | ||||||
| Deferred income tax expense (benefit) | (25 | ) | 247 | (2 | ) | |||||||
| Share-based compensation | 115 | 137 | 126 | |||||||||
| Early retirement of debt | — | 312 | — | |||||||||
| Other | (6 | ) | (19 | ) | (8 | ) | ||||||
| Changes in assets and liabilities, net | (82 | ) | (158 | ) | 10 | |||||||
| Net cash from operating activities - continuing operations | 2,043 | 1,583 | 1,243 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (1,910 | ) | (2,116 | ) | (1,614 | ) | ||||||
| Acquisitions of property and equipment | (31 | ) | (55 | ) | (44 | ) | ||||||
| Divestitures of property and equipment | 390 | 500 | 425 | |||||||||
| Net cash from investing activities - continuing operations | (1,551 | ) | (1,671 | ) | (1,233 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Repayments of long-term debt | (162 | ) | (922 | ) | — | |||||||
| Early retirement of debt | — | (304 | ) | — | ||||||||
| Repurchases of common stock | (1,849 | ) | (2,956 | ) | — | |||||||
| Dividends paid on common stock | (140 | ) | (149 | ) | (127 | ) | ||||||
| Contributions from noncontrolling interests | 116 | — | — | |||||||||
| Shares exchanged for tax withholdings | (25 | ) | (39 | ) | (46 | ) | ||||||
| Other | (1 | ) | (7 | ) | — | |||||||
| Net cash from financing activities - continuing operations | (2,061 | ) | (4,377 | ) | (173 | ) | ||||||
| Net change in cash, cash equivalents and restricted cash of continuing operations | (1,569 | ) | (4,465 | ) | (163 | ) | ||||||
| Cash flows from discontinued operations: | ||||||||||||
| Operating activities | 28 | 1,121 | 1,666 | |||||||||
| Investing activities | 2,472 | 2,726 | (966 | ) | ||||||||
| Financing activities | (1,578 | ) | 174 | 182 | ||||||||
| Effect of exchange rate changes on cash | 45 | 206 | 6 | |||||||||
| Net change in cash, cash equivalents and restricted cash of discontinued operations | 967 | 4,227 | 888 | |||||||||
| Net change in cash, cash equivalents and restricted cash | (602 | ) | (238 | ) | 725 | |||||||
| Cash, cash equivalents and restricted cash at beginning of period | 2,446 | 2,684 | 1,959 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,844 | $ | 2,446 | $ | 2,684 | ||||||
| Reconciliation of cash, cash equivalents and restricted cash: | ||||||||||||
| Cash and cash equivalents | $ | 1,464 | $ | 2,414 | $ | 2,642 | ||||||
| Cash restricted for discontinued operations | 380 | — | — | |||||||||
| Restricted cash included in other current assets | — | 32 | 11 | |||||||||
| Cash and cash equivalents included in current assets associated with discontinued operations | — | — | 31 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 1,844 | $ | 2,446 | $ | 2,684 |
See accompanying notes to consolidated financial statements.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2019 | December 31, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,464 | $ | 2,414 | ||||
| Cash restricted for discontinued operations | 380 | — | ||||||
| Accounts receivable | 832 | 812 | ||||||
| Current assets associated with discontinued operations | 896 | 331 | ||||||
| Other current assets | 279 | 880 | ||||||
| Total current assets | 3,851 | 4,437 | ||||||
| Oil and gas property and equipment, based on successful efforts accounting, net | 7,558 | 7,430 | ||||||
| Other property and equipment, net ($80 million related to CDM in 2019) | 1,035 | 1,032 | ||||||
| Total property and equipment, net | 8,593 | 8,462 | ||||||
| Goodwill | 753 | 753 | ||||||
| Right-of-use assets | 243 | — | ||||||
| Other long-term assets | 196 | 276 | ||||||
| Long-term assets associated with discontinued operations | 81 | 5,638 | ||||||
| Total assets | $ | 13,717 | $ | 19,566 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 428 | $ | 530 | ||||
| Revenues and royalties payable | 730 | 722 | ||||||
| Short-term debt | — | 162 | ||||||
| Current liabilities associated with discontinued operations | 459 | 492 | ||||||
| Other current liabilities | 310 | 320 | ||||||
| Total current liabilities | 1,927 | 2,226 | ||||||
| Long-term debt | 4,294 | 4,292 | ||||||
| Lease liabilities | 244 | — | ||||||
| Asset retirement obligations | 380 | 468 | ||||||
| Other long-term liabilities | 426 | 411 | ||||||
| Long-term liabilities associated with discontinued operations | 185 | 2,454 | ||||||
| Deferred income taxes | 341 | 529 | ||||||
| Stockholders' equity: | ||||||||
| Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 382 million and 450 million shares in 2019 and 2018, respectively | 38 | 45 | ||||||
| Additional paid-in capital | 2,735 | 4,486 | ||||||
| Retained earnings | 3,148 | 3,650 | ||||||
| Accumulated other comprehensive earnings (loss) | (119 | ) | 1,027 | |||||
| Treasury stock, at cost, 1.0 million shares in 2018 | — | (22 | ) | |||||
| Total stockholders’ equity attributable to Devon | 5,802 | 9,186 | ||||||
| Noncontrolling interests | 118 | — | ||||||
| Total equity | 5,920 | 9,186 | ||||||
| Total liabilities and equity | $ | 13,717 | $ | 19,566 |
See accompanying notes to consolidated financial statements.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
| Retained | Other | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional | Earnings | Comprehensive | ||||||||||||||||||||||||||||||
| Common Stock | Paid-In | (Accumulated | Earnings | Treasury | Noncontrolling | Total | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit) | (Loss) | Stock | Interests | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2016 | 523 | $ | 52 | $ | 7,237 | $ | (69 | ) | $ | 1,054 | $ | — | $ | 4,448 | $ | 12,722 | ||||||||||||||||
| Net earnings | — | — | — | 898 | — | — | 180 | 1,078 | ||||||||||||||||||||||||
| Other comprehensive earnings, net of tax | — | — | — | — | 112 | — | — | 112 | ||||||||||||||||||||||||
| Restricted stock grants, net of cancellations | 1 | 1 | — | — | — | — | — | 1 | ||||||||||||||||||||||||
| Common stock repurchased | — | — | — | — | — | (44 | ) | — | (44 | ) | ||||||||||||||||||||||
| Common stock retired | — | — | (44 | ) | — | — | 44 | — | — | |||||||||||||||||||||||
| Common stock dividends | — | — | — | (127 | ) | — | — | — | (127 | ) | ||||||||||||||||||||||
| Share-based compensation | 1 | — | 126 | — | — | — | — | 126 | ||||||||||||||||||||||||
| Subsidiary equity transactions | — | — | 14 | — | — | — | 576 | 590 | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (354 | ) | (354 | ) | ||||||||||||||||||||||
| Balance as of December 31, 2017 | 525 | $ | 53 | $ | 7,333 | $ | 702 | $ | 1,166 | $ | — | $ | 4,850 | $ | 14,104 | |||||||||||||||||
| Net earnings | — | — | — | 3,064 | — | — | 160 | 3,224 | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (108 | ) | — | — | (108 | ) | ||||||||||||||||||||||
| Restricted stock grants, net of cancellations | 3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Common stock repurchased | — | — | — | — | — | (3,017 | ) | — | (3,017 | ) | ||||||||||||||||||||||
| Common stock retired | (79 | ) | (8 | ) | (2,987 | ) | — | — | 2,995 | — | — | |||||||||||||||||||||
| Common stock dividends | — | — | — | (149 | ) | — | — | — | (149 | ) | ||||||||||||||||||||||
| Share-based compensation | 1 | — | 140 | — | — | — | — | 140 | ||||||||||||||||||||||||
| Divestment of subsidiary equity investment | — | — | — | — | 2 | — | (4,863 | ) | (4,861 | ) | ||||||||||||||||||||||
| Subsidiary equity transactions | — | — | — | — | — | — | 72 | 72 | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | (219 | ) | (219 | ) | ||||||||||||||||||||||
| Other | — | — | — | 33 | (33 | ) | — | — | — | |||||||||||||||||||||||
| Balance as of December 31, 2018 | 450 | $ | 45 | $ | 4,486 | $ | 3,650 | $ | 1,027 | $ | (22 | ) | $ | — | $ | 9,186 | ||||||||||||||||
| Effect of adoption of lease accounting | — | — | — | (7 | ) | — | — | — | (7 | ) | ||||||||||||||||||||||
| Net earnings (loss) | — | — | — | (355 | ) | — | — | 2 | (353 | ) | ||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (1,146 | ) | — | — | (1,146 | ) | ||||||||||||||||||||||
| Restricted stock grants, net of cancellations | 3 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Common stock repurchased | — | — | — | — | — | (1,852 | ) | — | (1,852 | ) | ||||||||||||||||||||||
| Common stock retired | (71 | ) | (7 | ) | (1,867 | ) | — | — | 1,874 | — | — | |||||||||||||||||||||
| Common stock dividends | — | — | — | (140 | ) | — | — | — | (140 | ) | ||||||||||||||||||||||
| Share-based compensation | — | — | 116 | — | — | — | — | 116 | ||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | — | 116 | 116 | ||||||||||||||||||||||||
| Balance as of December 31, 2019 | 382 | $ | 38 | $ | 2,735 | $ | 3,148 | $ | (119 | ) | $ | — | $ | 118 | $ | 5,920 |
See accompanying notes to consolidated financial statements.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Summary of Significant Accounting Policies |
|---|
Devon is a leading independent energy company engaged primarily in the exploration, development and production of oil, natural gas and NGLs. Devon’s operations are concentrated in various onshore areas in the U.S.
As further discussed in Note 18, Devon reached an agreement to sell its Barnett Shale assets in December 2019, sold its Canadian operations on June 27, 2019 and sold its ownership interests in EnLink and the General Partner on July 18, 2018. Activity relating to Devon’s Barnett Shale assets, inclusive of properties divested as partial sales of the Barnett Shale common operating field in previous reporting periods located primarily in Johnson and Wise counties, Texas, Canadian operations and EnLink and the General Partner are classified as discontinued operations within Devon’s consolidated statements of comprehensive earnings and consolidated statements of cash flows. The associated assets and liabilities of Devon’s Barnett Shale assets and Canadian operations are presented as assets and liabilities associated with discontinued operations on the consolidated balance sheets.
Accounting policies used by Devon and its subsidiaries conform to accounting principles generally accepted in the U.S. and reflect industry practices. The more significant of such policies are discussed below.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Devon, entities in which it holds a controlling interest and VIEs for which Devon is the primary beneficiary. All intercompany transactions have been eliminated. Undivided interests in oil and natural gas exploration and production joint ventures are consolidated on a proportionate basis. Investments in non-controlled entities, over which Devon has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. In applying the equity method of accounting, the investments are initially recognized at cost and subsequently adjusted for Devon’s proportionate share of earnings, losses, contributions and distributions. Investments accounted for using the equity method and cost method are reported as a component of other long-term assets.
Devon entered into an agreement in the fourth quarter of 2019 to form Cotton Draw Midstream, L.L.C. or, “CDM”, a partnership in the Delaware Basin with an affiliate of QL Capital Partners, LP (“QLCP”). As part of this transaction, Devon contributed gathering system and compression assets in the Cotton Draw area to CDM in exchange for a $100 million cash distribution funded by QLCP. Devon will continue to operate the assets pursuant to the management services agreement. QLCP has also committed $40 million of expansion capital to CDM to fund the build out of the assets over the next several years. 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.
Devon, through its controlling interest in CDM, has the power to direct the activities that significantly affect the economic performance of CDM and the obligation to absorb losses or the right to receive benefits that could be significant to CDM; therefore, Devon is considered the primary beneficiary and consolidates CDM. CDM maintains its own capital structure that is separate from 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.
Segment Information
Subsequent to the sale of Devon’s Canadian business in 2019 discussed in Note 18, Devon’s oil and gas exploration and production activities are solely focused in the U.S. For financial reporting purposes, Devon
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
aggregates its U.S. operating segments into one reporting segment due to the similar nature of its business. With the reclassification of Devon’s Canadian operations to discontinued operations and assets and liabilities associated with discontinued operations, Devon now has one reporting segment, which is reflected in the consolidated financial statements.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates, and changes in these estimates are recorded when known. Significant items subject to such estimates and assumptions include the following:
| • | proved reserves and related present value of future net revenues; |
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| • | evaluation of suspended well costs; |
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| • | the carrying and fair values of oil and gas properties, other property and equipment and product and equipment inventories; |
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| • | derivative financial instruments; |
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| • | the fair value of reporting units and related assessment of goodwill for impairment; |
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| • | income taxes; |
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| • | asset retirement obligations; |
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| • | obligations related to employee pension and postretirement benefits; |
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| • | legal and environmental risks and exposures; and |
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| • | general credit risk associated with receivables and other assets. |
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Revenue Recognition
Impact of ASC 606 Adoption
In January 2018, Devon adopted ASC 606 – Revenue from Contracts with Customers (ASC 606) using the modified retrospective method and applied the standard to all existing contracts at adoption. ASC 606 supersedes previous revenue recognition requirements in ASC 605 and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services.
The changes to upstream revenues and production expenses were due to the conclusion that Devon represents the principal and controls a promised product before transferring it to the ultimate third party customer in accordance with the control model in ASC 606. This was a change from previous conclusions reached for these agreements utilizing the principal versus agent indicators under ASC 605 where the assessment was focused on Devon passing title and not control to the processing entity and Devon ultimately receiving a net price from the third-party end customer. As a result, Devon changed the presentation of revenues and expenses for these agreements. Revenues related to these agreements are presented on a gross basis for amounts expected to be received from third-party customers through the marketing process. Gathering, processing and transportation expenses related to these agreements, incurred prior to the transfer of control to the customer at the tailgate of the natural gas processing facilities, are presented as production expenses. During 2018, these changes resulted in a $191 million increase to upstream revenues and production expenses with no impact to net earnings. As a result of
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the adoption of ASC 606, Devon’s marketing and midstream revenues and marketing and midstream expenses were not impacted.
Upstream Revenues
Upstream revenues include the sale of oil, gas and NGL production. Oil, gas and NGL sales are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. Devon’s performance obligations are satisfied at a point in time. This occurs when control is transferred to the purchaser upon delivery of contract specified production volumes at a specified point. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced, if required, by calendar month based on volumes at contractually based rates with payment typically received within 30 days of the end of the production month. Taxes assessed by governmental authorities on oil, gas and NGL sales are presented separately from such revenues in the accompanying consolidated statements of comprehensive earnings.
Oil sales
Devon’s oil sales contracts are generally structured in one of two ways. First, production is sold at the wellhead at an agreed-upon index price, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received. Alternatively, production is delivered to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. Under this arrangement, a third party is paid to transport the product and Devon receives a specified index price from the purchaser with no transportation deduction. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. The third-party costs are recorded as gathering, processing and transportation expense as a component of production expenses in the consolidated statements of comprehensive earnings.
Natural gas and NGL sales
Under Devon’s natural gas processing contracts, natural gas is delivered to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds for the resulting sales of NGLs and residue gas. In these scenarios, Devon evaluates whether it is the principal or the agent in the transaction. Devon has concluded it is the principal under these contracts and the ultimate third party is the customer. Revenue is recognized on a gross basis, with gathering, processing and transportation fees presented as a component of production expenses in the consolidated statements of comprehensive earnings.
In certain natural gas processing agreements, Devon may elect to take residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the product is delivered to the ultimate third-party purchaser at a contractually agreed-upon delivery point, and Devon receives a specified index price from the purchaser. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as gathering, processing and transportation expense as a component of production expenses in the consolidated statements of comprehensive earnings.
Marketing Revenues
Marketing revenues are generated primarily as a result of Devon selling commodities purchased from third parties. Marketing revenues are recognized when performance obligations are satisfied. This occurs at the time contract-specified products are sold to third parties at a contractually fixed or determinable price, delivery occurs at
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
a specified point or performance has occurred, control has transferred and collectability of the revenue is probable. The transaction price used to recognize revenue and invoice customers is based on a contractually stated fee or on a third party published index price plus or minus a known differential. Devon typically receives payment for invoiced amounts within 30 days. Marketing revenues and expenses attributable to oil, gas and NGL purchases are reported on a gross basis when Devon takes control of the products and has risks and rewards of ownership.
Satisfaction of Performance Obligations and Revenue Recognitions
Because Devon has a right to consideration from its customers in amounts that correspond directly to the value that the customer receives from the performance completed on each contract, Devon recognizes revenue for sales at the time the crude oil, natural gas or NGLs are delivered at a fixed or determinable price.
Transaction Price Allocated to Remaining Performance Obligations
Most of Devon’s contracts are short-term in nature with a contract term of one year or less. Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For contracts with terms greater than one year, Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under Devon’s contracts, each unit of product typically represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
Contract Balances
Cash received relating to future performance obligations is deferred and recognized when all revenue recognition criteria are met. Contract liabilities generated from such deferred revenue are not considered material as of December 31, 2019. Devon’s product sales and marketing contracts do not give rise to contract assets.
Disaggregation of Revenue
The following table presents revenue from contracts with customers that are disaggregated based on the type of good.
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||||
| Oil | $ | 2,988 | $ | 2,941 | ||||
| Gas | 391 | 482 | ||||||
| NGL | 430 | 662 | ||||||
| Oil, gas and NGL revenues from contracts with customers | 3,809 | 4,085 | ||||||
| Oil, gas and NGL derivatives | (454 | ) | 457 | |||||
| Upstream revenues | 3,355 | 4,542 | ||||||
| Oil | 1,534 | 2,745 | ||||||
| Gas | 645 | 738 | ||||||
| NGL | 686 | 871 | ||||||
| Total marketing revenues from contracts with customers | 2,865 | 4,354 | ||||||
| Total revenues | $ | 6,220 | $ | 8,896 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Customers
During 2019 and 2017, no purchaser accounted for more than 10% of Devon’s consolidated sales revenue.
During 2018, Devon had one purchaser that accounted for approximately 11% of Devon’s consolidated sales revenue.
Derivative Financial Instruments
Devon is exposed to certain risks relating to its ongoing business operations, including risks related to commodity prices and interest rates. As discussed more fully below, Devon uses derivative instruments primarily to manage commodity price risk and interest rate risk. Devon does not intend to issue or hold derivative financial instruments for speculative trading purposes.
Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. These instruments are used to manage the inherent uncertainty of future revenues resulting from commodity price volatility. Devon’s derivative financial instruments typically include financial price swaps, basis swaps and costless price collars. Under the terms of the price swaps, Devon receives a fixed price for its production and pays a variable market price to the contract counterparty. For the basis swaps, Devon receives a fixed differential between two regional index prices and pays a variable differential on the same two index prices to the contract counterparty. For price collars, Devon utilizes two-way price collars. The two-way price collars set a floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, Devon will cash-settle the difference with the counterparty.
Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility. As of December 31, 2019, Devon did not have any open interest rate swap contracts.
All derivative financial instruments are recognized at their current fair value as either assets or liabilities in the balance sheet. Changes in the fair value of these derivative financial instruments are recorded in earnings unless specific hedge accounting criteria are met. For derivative financial instruments held during the three-year period ended December 31, 2019, Devon chose not to meet the necessary criteria to qualify its derivative financial instruments for hedge accounting treatment. Cash settlements with counterparties on Devon’s derivative financial instruments are also recorded in earnings.
By using derivative financial instruments to hedge exposures to changes in commodity prices and interest rates, 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 require cash collateral to be posted if either its or the counterparty’s credit rating falls below certain credit rating levels. As of December 31, 2019, Devon held no cash collateral of its counterparties nor posted collateral to its counterparties.
General and Administrative Expenses
G&A is reported net of amounts reimbursed by working interest owners of the oil and gas properties operated by Devon.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Share-Based Compensation
Devon grants share-based awards to members of its Board of Directors, management and employees. All such awards are measured at fair value on the date of grant and are generally recognized as a component of G&A in the accompanying consolidated statements of comprehensive earnings over the applicable requisite service periods. As a result of Devon’s restructuring activity discussed in Note 6, certain share-based awards were accelerated and recognized as a component of restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
Generally, Devon uses new shares from approved incentive programs to grant share-based awards and to issue shares upon stock option exercises. Shares repurchased under approved programs are generally available to be issued as part of Devon’s share-based awards. However, Devon has historically canceled these shares upon repurchase.
Income Taxes
Devon is subject to current income taxes assessed by the federal and various state jurisdictions in the U.S. and by other foreign jurisdictions. In addition, Devon accounts for deferred income taxes related to these jurisdictions using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are also recognized for the future tax benefits attributable to the expected utilization of existing tax net operating loss carryforwards and other types of carryforwards. If the future utilization of some portion of the deferred tax assets is determined to be unlikely, a valuation allowance is provided to reduce the recorded tax benefits from such assets. Devon periodically weighs the positive and negative evidence to determine if it is more likely than not that some or all of the deferred tax assets will be realized. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence, such as cumulative losses in recent years. See Note 7 for further discussion.
Devon recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with a taxing authority. Liabilities for unrecognized tax benefits related to such tax positions are included in other long-term liabilities unless the tax position is expected to be settled within the upcoming year, in which case the liabilities are included in other current liabilities. Interest and penalties related to unrecognized tax benefits are included in current income tax expense.
Devon estimates its annual effective income tax rate in recording its provision for income taxes in the various jurisdictions in which it operates. Statutory tax rate changes and other significant or unusual items are recognized as discrete items in the period in which they occur.
Net Earnings (Loss) Per Share Attributable to Devon
Devon’s basic earnings per share amounts have been computed based on the average number of shares of common stock outstanding for the period. Basic earnings per share includes the effect of participating securities, which primarily consist of Devon’s outstanding restricted stock awards, as well as performance-based restricted stock awards that have met the requisite performance targets. Diluted earnings per share is calculated using the
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
treasury stock method to reflect the assumed issuance of common shares for all potentially dilutive securities. Such securities primarily consist of unvested performance share units.
Cash and Cash Equivalents
Devon considers all highly liquid investments with original contractual maturities of three months or less to be cash equivalents.
Cash Restricted for Discontinued Operations
In conjunction primarily with the sale of its Canadian operations in June 2019, approximately $380 million of Devon’s cash balance is restricted for funding certain tax and other obligations related to the disposed assets. Other obligations primarily relate to abandoned firm transportation and office lease agreements. This cash is not legally restricted and can be used by Devon for other general corporate purposes. However, it has been designated to settle retained obligations associated with discontinued operations.
Accounts Receivable
Devon’s accounts receivable balance primarily consists of oil and gas sales receivables, marketing and midstream revenue receivables and joint interest receivables for which Devon does not require collateral security. Devon has established an allowance for bad debts equal to the estimable portions of accounts receivable, including joint interest receivables, for which failure to collect is considered probable. When a portion of the receivable is deemed uncollectible, the write-off is made against the allowance.
Property and Equipment
Oil and Gas Property and Equipment
Devon follows the successful efforts method of accounting for its oil and gas properties. Exploration costs, such as exploratory geological and geophysical costs, and costs associated with nonproductive exploratory wells, delay rentals and exploration overhead are charged against earnings as incurred. Costs of drilling successful exploratory wells along with acquisition costs and the costs of drilling development wells, including those that are unsuccessful, are capitalized. Devon groups its oil and gas properties with a common geological structure or stratigraphic condition (“common operating field”) for purposes of computing DD&A, assessing proved property impairments and accounting for asset dispositions.
Exploratory drilling costs and exploratory-type stratigraphic test wells are initially capitalized, or suspended, pending the determination of proved reserves. If proved reserves are found, drilling costs remain capitalized as proved properties. Costs of unsuccessful wells are charged to exploration expense. For exploratory wells that find reserves that cannot be classified as proved when drilling is completed, costs continue to be capitalized as suspended exploratory well costs if there have been sufficient reserves found to justify completion as a producing well and sufficient progress is being made in assessing the reserves and the economic and operating viability of the project. If management determines that future appraisal drilling or development activities are unlikely to occur, associated suspended exploratory well costs are expensed. In some instances, this determination may take longer than one year. Devon reviews the status of all suspended exploratory drilling costs quarterly.
Capitalized costs of proved oil and gas properties are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six Mcf of gas to one Bbl of oil. Proved leasehold acquisition costs, less accumulated amortization, are depleted over total proved reserves, which includes proved undeveloped reserves.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Capitalized costs of wells and related equipment and facilities, including estimated asset retirement costs, net of estimated salvage values and less accumulated amortization are depreciated over proved developed reserves associated with those capitalized costs. Depletion is calculated by applying the DD&A rate (amortizable base divided by beginning of period proved reserves) to current period production.
Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Devon assesses its unproved properties for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Significant unproved properties are assessed individually.
Proved properties are assessed for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of those assets may not be recoverable. Individual assets are grouped for impairment purposes based on a common operating field. If there is an indication the carrying amount of an asset may not be recovered, the asset is assessed for potential impairment by management through an established process. If, upon review, the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset, the carrying value is written down to estimated fair value. Because there is usually a lack of quoted market prices for long-lived assets, the fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or by comparable transactions. The expected future cash flows used for impairment reviews and related fair value calculations are typically based on judgmental assessments of future production volumes, commodity prices, operating costs, and capital investment plans, considering all available information at the date of review.
Gains or losses are recorded for sales or dispositions of oil and gas properties which constitute an entire common operating field or which result in a significant alteration of the common operating field’s DD&A rate. These gains and losses are classified as asset dispositions in the accompanying consolidated statements of earnings. Partial common operating field sales or dispositions deemed not to significantly alter the DD&A rates are generally accounted for as adjustments to capitalized costs with no gain or loss recognized.
Devon capitalizes interest costs incurred that are attributable to material unproved oil and gas properties and major development projects of oil and gas properties.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Property and Equipment
Costs for midstream assets that are in use are depreciated over the assets’ estimated useful lives, using the straight-line method. Depreciation and amortization of other property and equipment, including corporate and leasehold improvements, are provided using the straight-line method based on estimated useful lives ranging from three to 60 years. Interest costs incurred and attributable to major corporate construction projects are also capitalized.
Asset Retirement Obligations
Devon recognizes liabilities for retirement obligations associated with tangible long-lived assets, such as producing well sites when there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The initial measurement of an asset retirement obligation is recorded as a liability at its fair value, with an offsetting asset retirement cost recorded as an increase to the associated property and equipment on the consolidated balance sheet. When the assumptions used to estimate a recorded asset retirement obligation change, a revision is recorded to both the asset retirement obligation and the asset retirement cost. Devon’s asset retirement obligations also include estimated environmental remediation costs which arise from normal operations and are associated with the retirement of such long-lived assets. The asset retirement cost is depreciated using a systematic and rational method similar to that used for the associated property and equipment.
Goodwill
Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment annually, or more frequently if events or changes in circumstances dictate that the carrying value of goodwill may not be recoverable. Such test includes a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, then a quantitative goodwill impairment test is performed. The quantitative goodwill impairment test requires the fair value of each reporting unit be compared to the carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying value, an impairment charge will be recognized for the amount by which the carrying amount exceeds the fair value. Because quoted market prices are not available for Devon’s reporting unit, the fair value of the reporting unit is estimated based upon several valuation analyses, including comparable companies, comparable transactions and premiums paid.
Devon performed impairment tests of goodwill in the fourth quarters of 2019, 2018 and 2017. No impairment was required as a result of the annual tests in these time periods.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Liabilities for environmental remediation or restoration claims resulting from allegations of improper operation of assets are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Expenditures related to such environmental matters are expensed or capitalized in accordance with Devon’s accounting policy for property and equipment.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Fair Value Measurements
Certain of Devon’s assets and liabilities are measured at fair value at each reporting date. Fair value represents the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants. This price is commonly referred to as the “exit price.” Fair value measurements are classified according to a hierarchy that prioritizes the inputs underlying the valuation techniques. This hierarchy consists of three broad levels:
| • | Level 1 – Inputs consist of unadjusted quoted prices in active markets for identical assets and liabilities and have the highest priority. When available, Devon measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. |
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| • | Level 2 – Inputs consist of quoted prices that are generally observable for the asset or liability. Common examples of Level 2 inputs include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in markets not considered to be active. |
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| • | Level 3 – Inputs are not observable from objective sources and have the lowest priority. The most common Level 3 fair value measurement is an internally developed cash flow model. |
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Foreign Currency Translation Adjustments
The U.S. dollar is the functional currency for Devon’s consolidated operations. Devon’s recently divested Canadian operations used the Canadian dollar as the functional currency. Assets and liabilities of the Canadian operations were translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenues, expenses and cash flow were translated using an average exchange rate during the reporting period.
The disposition of substantially all of Devon’s Canadian oil and gas assets and operations resulted in Devon releasing its historical cumulative foreign currency translation adjustment of $1.2 billion from accumulated other comprehensive earnings to be included within the gain computation.
Noncontrolling Interests
Noncontrolling interests represent third-party ownership in the net assets of Devon’s consolidated subsidiaries and are presented as a component of equity. Changes in Devon’s ownership interests in subsidiaries that do not result in deconsolidation are recognized in equity.
Recently Adopted Accounting Standards
In January 2019, Devon adopted ASU 2016-02, Leases (Topic 842), using the modified retrospective method. See Note 14 for further discussion regarding Devon’s adoption of the leases standard.
The SEC released Final Rule Release No. 33-10618*, FAST Act Modernization and Simplification of Regulation S-K*, which amends Regulation S-K to modernize and simplify certain disclosure requirements in a manner that reduces costs and burdens on registrants while continuing to provide all material information to investors. The rule became effective May 2, 2019. The rule amended numerous SEC rules, items and forms covering a diverse group of topics, primarily focusing on reducing or eliminating disclosures. Other than presentation, this adoption did not have a material impact on Devon’s consolidated financial statements.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 2. | Divestitures |
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Discontinued Operations – Upstream Assets
In February 2019, Devon announced its intent to separate its Canadian business and Barnett Shale assets from the Company, based on authorizations provided by its Board of Directors. On June 27, 2019, Devon completed the sale of substantially all of its oil and gas assets and operations in Canada to Canadian Natural Resources Limited for proceeds, net of purchase price adjustments, of $2.6 billion ($3.4 billion Canadian dollars), and recognized a pre-tax gain of $223 million ($425 million, net of tax, primarily due to a significant deferred tax benefit). As a part of the transaction, $436 million of asset retirement obligations were assumed by Canadian Natural Resources Limited. In aggregate, the total estimated proved reserves associated with these assets were approximately 400 MMBoe, or 21% of total proved reserves. In conjunction with the Canadian divestiture, Devon recognized approximately $285 million of restructuring and asset impairment related charges. These costs relate to personnel, office lease abandonment and a firm transportation agreement abandonment. Additional information on these discontinued operations can be found in Note 18.
In December 2019, Devon announced the sale of its Barnett Shale assets to BKV for approximately $770 million, before purchase price adjustments. Estimated proved reserves associated with Devon’s Barnett Shale assets are approximately 45% of total U.S. proved reserves. In connection with the announced sale of its Barnett Shale assets, Devon recognized a $748 million asset impairment related to these assets, primarily due to the difference between the net carrying value and the purchase price, net of estimated customary purchase price adjustments. This transaction is expected to close in the second quarter of 2020. For additional information see Note 18.
During 2018, Devon received proceeds of approximately $500 million and recognized a $26 million net gain on asset dispositions from the sales of non-core assets in the Barnett Shale, located primarily in Johnson and Wise counties, Texas. In conjunction with these divestitures, Devon settled certain gas processing contracts and recognized $40 million in settlement expense, which is included in asset dispositions within the discontinued operations. For additional information, see Note 18.
Discontinued Operations – EnLink and General Partner
During the third quarter of 2018, Devon completed the sale of its aggregate ownership interests in EnLink and the General Partner for $3.125 billion and recognized a gain of approximately $2.6 billion ($2.2 billion after-tax). The proceeds from the sale were utilized to increase Devon’s share repurchase activities, which are discussed further in Note 17. Additional information on these discontinued operations can be found in Note 18.
Continuing Operations
During 2019, Devon received proceeds of approximately $390 million and recognized a $48 million net gain on asset dispositions, primarily from sales of non-core assets in the Permian Basin. In aggregate, the total estimated proved reserves associated with these divested assets were approximately 54 MMBoe. As of December 31, 2018, assets and liabilities associated with the Permian Basin divested assets were classified as held for sale in the accompanying consolidated balance sheet.
During 2018, Devon received proceeds totaling approximately $500 million, primarily from the sales of non-core assets in the Delaware Basin, and recognized a net gain on asset dispositions of $278 million. In aggregate, the total estimated proved reserves associated with these divested assets were approximately 24 MMBoe.
During 2017, Devon received proceeds totaling approximately $425 million, and recognized a net gain on asset dispositions of $219 million. Estimated proved reserves associated with these assets were less than 1% of total U.S. proved reserves.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 3. | Derivative Financial Instruments |
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Commodity Derivatives
As of December 31, 2019, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.
| Price Swaps | Price Collars | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Period | Volume (Bbls/d) | Weighted Average Price ($/Bbl) | Volume (Bbls/d) | Weighted Average Floor Price ($/Bbl) | Weighted Average Ceiling Price ($/Bbl) | |||||||||||||||
| Q1-Q4 2020 | 11,238 | $ | 57.68 | 44,932 | $ | 51.30 | $ | 61.36 | ||||||||||||
| Q1-Q4 2021 | 989 | $ | 54.81 | 5,942 | $ | 49.59 | $ | 59.59 |
| Oil Basis Swaps | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Period | Index | Volume (Bbls/d) | Weighted Average Differential to WTI ($/Bbl) | |||||||
| Q1-Q4 2020 | Argus MEH | 10,000 | $ | 3.38 | ||||||
| Q1-Q4 2020 | NYMEX Roll | 50,000 | $ | 0.36 |
As of December 31, 2019, 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. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.
| Price Swaps | Price Collars | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Period | Volume (MMBtu/d) | Weighted Average Price ($/MMBtu) | Volume (MMBtu/d) | Weighted Average Floor Price ($/MMBtu) | Weighted Average Ceiling Price ($/MMBtu) | |||||||||||||||
| Q1-Q4 2020 | 81,409 | $ | 2.77 | 42,557 | $ | 2.73 | $ | 3.03 |
| Natural Gas Basis Swaps | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Period | Index | Volume (MMBtu/d) | Weighted Average Differential to Henry Hub ($/MMBtu) | |||||||
| Q1-Q4 2020 | Panhandle Eastern Pipe Line | 30,000 | $ | (0.47 | ) | |||||
| Q1-Q4 2020 | El Paso Natural Gas | 45,000 | $ | (0.70 | ) | |||||
| Q1-Q4 2020 | Houston Ship Channel | 10,000 | $ | 0.02 |
As of December 31, 2019, 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) | |||||||
| Q1-Q4 2020 | Natural Gasoline | 1,000 | $ | 44.84 | ||||||
| Q1-Q4 2020 | Normal Butane | 1,500 | $ | 23.56 | ||||||
| Q1-Q4 2020 | Propane | 4,500 | $ | 25.18 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Financial Statement Presentation
The following table presents the net gains and losses by derivative financial instrument type followed by the corresponding individual consolidated statements of comprehensive earnings caption.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Commodity derivatives: | ||||||||||||
| Upstream revenues | $ | (454 | ) | $ | 457 | $ | 67 | |||||
| Marketing and midstream revenues | 1 | (1 | ) | 3 | ||||||||
| Interest rate derivatives: | ||||||||||||
| Other expenses | — | 65 | (22 | ) | ||||||||
| Net gains (losses) recognized | $ | (453 | ) | $ | 521 | $ | 48 |
The following table presents the derivative fair values by derivative financial instrument type followed by the corresponding individual consolidated balance sheet caption.
| December 31, 2019 | December 31, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Commodity derivative assets: | ||||||||
| Other current assets | $ | 49 | $ | 634 | ||||
| Other long-term assets | 1 | 40 | ||||||
| Total derivative assets | $ | 50 | $ | 674 | ||||
| Commodity derivative liabilities: | ||||||||
| Other current liabilities | $ | 30 | $ | 32 | ||||
| Other long-term liabilities | 1 | 1 | ||||||
| Total derivative liabilities | $ | 31 | $ | 33 |
| 4. | Share-Based Compensation |
|---|
In 2017, Devon’s stockholders approved the 2017 Plan. The 2017 Plan replaces the 2015 Plan. From the effective date of the 2017 Plan, no further awards may be made under the 2015 Plan, and awards previously granted will continue to be governed by the terms of the respective award documents. Subject to the terms of the 2017 Plan, awards may be made for a total of 33.5 million shares of Devon common stock, plus the number of shares available for issuance under the 2015 Plan (including shares subject to outstanding awards that were transferred to the 2017 Plan in accordance with its terms). The 2017 Plan authorizes the Compensation Committee, which consists of independent, non-management members of Devon’s Board of Directors, to grant nonqualified and incentive stock options, restricted stock awards or units, performance units and stock appreciation rights to eligible employees. The 2017 Plan also authorizes the grant of nonqualified stock options, restricted stock awards or units and stock appreciation rights to non-employee directors. To calculate the number of shares that may be granted in awards under the 2017 Plan, options and stock appreciation rights represent one share and other awards represent 2.3 shares.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The vesting for certain share-based awards was accelerated in 2019 and 2018 in conjunction with the reduction of workforce activities described in Note 6 and is included in restructuring and transaction costs in the accompanying consolidated statements of comprehensive earnings.
The table below presents the share-based compensation expense included in Devon’s accompanying consolidated statements of comprehensive earnings.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| G&A | $ | 83 | $ | 104 | $ | 121 | ||||||
| Exploration expenses | 1 | 2 | 5 | |||||||||
| Restructuring and transaction costs | 31 | 31 | — | |||||||||
| Total | $ | 115 | $ | 137 | $ | 126 | ||||||
| Related income tax benefit | $ | 13 | $ | 17 | $ | — |
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 plans.
| Restricted Stock | Performance-Based | Performance | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Awards and Units | Restricted Stock Awards | Share Units | |||||||||||||||||||||||||
| Awards and 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 12/31/18 | 5,963 | $ | 35.47 | 302 | $ | 35.93 | 2,868 | $ | 30.14 | ||||||||||||||||||
| Granted | 4,430 | $ | 25.47 | — | $ | — | 741 | $ | 28.97 | ||||||||||||||||||
| Vested | (4,646 | ) | $ | 33.48 | (149 | ) | $ | 38.03 | (145 | ) | $ | 37.23 | |||||||||||||||
| Forfeited | (763 | ) | $ | 27.50 | — | $ | — | (1,309 | ) | $ | 11.91 | ||||||||||||||||
| Unvested at 12/31/19 | 4,984 | $ | 29.65 | 153 | $ | 33.88 | 2,155 | (1 | ) | $ | 40.35 |
| (1) | A maximum of 4.3 million common shares could be awarded based upon Devon’s final TSR ranking. |
|---|
The following table presents the aggregate fair value of awards and units that vested during the indicated period.
| 2019 | 2018 | 2017 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restricted Stock Awards and Units | $ | 127 | $ | 111 | $ | 105 | ||||||
| Performance-Based Restricted Stock Awards | $ | 4 | $ | 10 | $ | 10 | ||||||
| Performance Share Units | $ | 4 | $ | 20 | $ | 38 |
The following table presents the unrecognized compensation cost and the related weighted average recognition period associated with unvested awards and units as of December 31, 2019.
| Performance-Based | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restricted Stock | Restricted Stock | Performance | ||||||||||
| Awards and Units | Awards | Share Units | ||||||||||
| Unrecognized compensation cost | $ | 80 | $ | — | $ | 12 | ||||||
| Weighted average period for recognition (years) | 2.5 | 1.4 | 1.5 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Stock Awards and Units
Restricted stock awards and units are subject to the terms, conditions, restrictions and limitations, if any, that the Compensation Committee deems appropriate, including restrictions on continued employment. Generally, the service requirement for vesting ranges from one to four years. During the vesting period, recipients of restricted stock awards made under the 2015 Plan receive dividends that are not subject to restrictions or other limitations. However, dividends declared during the vesting period with respect to restricted stock awards made under the 2017 Plan and all restricted stock units will not be paid until the underlying award vests. Devon estimates the fair values of restricted stock awards and units as the closing price of Devon’s common stock on the grant date of the award or unit, which is expensed over the applicable vesting period.
Performance-Based Restricted Stock Awards
Performance-based restricted stock awards were granted to certain members of Devon’s senior management. Vesting of the awards is dependent on Devon meeting certain internal performance targets and the recipient meeting certain service requirements. Generally, the service requirement for vesting ranges from one to four years. In order for awards to vest, the performance target must be met in the first year. If the performance target is met, the recipient is entitled to dividends under the same terms described above for nonperformance-based restricted stock. If the performance target and service period requirements are not met, the award does not vest. Devon estimates the fair values of the awards as the closing price of Devon’s common stock on the grant date of the award, which is expensed over the applicable vesting period. No performance-based restricted stock awards were granted in 2019 and 2018.
Performance Share Units
Performance share units are granted to certain members of Devon’s management and employees. Each unit that vests entitles the recipient to one share of Devon common stock. The vesting of these units is based on comparing Devon’s TSR to the TSR of a predetermined group of fourteen peer companies over the specified three-year performance period. The vesting of units may be between zero and 200% of the units granted depending on Devon’s TSR as compared to the peer group on the vesting date.
At the end of the vesting period, recipients receive dividend equivalents with respect to the number of units vested. The fair value of each performance share unit is estimated as of the date of grant using a Monte Carlo simulation with the following assumptions used for all grants made under the plan: (i) a risk-free interest rate based on U.S. Treasury rates as of the grant date; (ii) a volatility assumption based on the historical realized price volatility of Devon and the designated peer group; and (iii) an estimated ranking of Devon among the designated peer group. The fair value of the unit on the date of grant is expensed over the applicable vesting period. The following table presents the assumptions related to performance share units granted.
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Grant-date fair value | $ | 28.43 | — | $ | 29.53 | $ | 36.23 | — | $ | 37.88 | $ | 51.05 | — | $ | 53.12 | |||||||||||||||
| Risk-free interest rate | 2.48% | 2.28% | 1.50% | |||||||||||||||||||||||||||
| Volatility factor | 39.1% | 45.8% | 45.8% | |||||||||||||||||||||||||||
| Contractual term (years) | 2.89 | 2.89 | 2.89 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 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.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Proved oil and gas assets | $ | — | $ | 109 | $ | — | ||||||
| Other assets | — | 47 | — | |||||||||
| Total asset impairments | $ | — | $ | 156 | $ | — | ||||||
| Unproved impairments | $ | 18 | $ | 95 | $ | 217 |
Proved Oil and Gas and Other Asset Impairments
In 2018, Devon recognized $109 million of proved asset impairments relating to U.S. non-core assets no longer in its development plans and approximately $47 million of non-oil and gas asset impairments.
Unproved Impairments
In 2019, 2018 and 2017, Devon allowed certain non-core acreage to expire without plans for development resulting in unproved impairments.
| 6. | Restructuring and Transaction Costs |
|---|
2019 Workforce Reductions
During the first quarter of 2019, Devon announced workforce reductions and other initiatives designed to enhance its operational focus and cost structure in conjunction with the portfolio transformation announcement further discussed in Note 2. As a result, Devon recognized $84 million of restructuring expenses during 2019. Of these expenses, $31 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, $7 million resulted from settlements of defined retirement benefits.
Prior Years’ Restructurings
During 2018, Devon recognized $97 million in personnel related restructuring expenses related to workforce reductions. Of these expenses, $31 million resulted from accelerated vesting of share-based grants, which are noncash charges. Additionally, $14 million resulted from estimated settlements of defined retirement benefits.
The following table summarizes Devon’s restructuring liabilities presented in the accompanying consolidated balance sheets.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Other | Other | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Current | Long-term | |||||||||||
| Liabilities | Liabilities | Total | ||||||||||
| Balance as of December 31, 2017 | $ | 17 | $ | 17 | $ | 34 | ||||||
| Changes related to prior years' restructurings | 22 | (14 | ) | 8 | ||||||||
| Balance as of December 31, 2018 | $ | 39 | $ | 3 | $ | 42 | ||||||
| Changes due to 2019 workforce reductions | 18 | — | 18 | |||||||||
| Changes related to prior years' restructurings | (37 | ) | (2 | ) | (39 | ) | ||||||
| Balance as of December 31, 2019 | $ | 20 | $ | 1 | $ | 21 |
| 7**.** | Income Taxes |
|---|
Income Tax Expense (Benefit)
The following table presents Devon’s income tax components.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Current income tax expense (benefit): | ||||||||||||
| U.S. federal | $ | (3 | ) | $ | (14 | ) | $ | 8 | ||||
| Various states | (2 | ) | (3 | ) | 1 | |||||||
| Total current income tax expense (benefit) | (5 | ) | (17 | ) | 9 | |||||||
| Deferred income tax expense (benefit): | ||||||||||||
| U.S. federal | 8 | 184 | (2 | ) | ||||||||
| Various states | (33 | ) | 63 | — | ||||||||
| Total deferred income tax expense (benefit) | (25 | ) | 247 | (2 | ) | |||||||
| Total income tax expense (benefit) | $ | (30 | ) | $ | 230 | $ | 7 |
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate to earnings (loss) from continuing operations before income taxes as a result of the following:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Earnings (loss) from continuing operations before income taxes | $ | (109 | ) | $ | 944 | $ | 40 | |||||
| U.S. statutory income tax rate | 21 | % | 21 | % | 35 | % | ||||||
| U.S. Tax Reform | 0 | % | 0 | % | 957 | % | ||||||
| State income taxes | 24 | % | 5 | % | (2 | %) | ||||||
| Change in unrecognized tax benefits | (13 | %) | (2 | %) | (15 | %) | ||||||
| Audit settlements | 15 | % | (2 | %) | 0 | % | ||||||
| Other | (19 | %) | 2 | % | 2 | % | ||||||
| Deferred tax asset valuation allowance | 0 | % | 0 | % | (959 | %) | ||||||
| Effective income tax rate | 28 | % | 24 | % | 18 | % |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Devon and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. Devon’s tax reserves are related to tax years that may be subject to examinations by the relevant taxing authority. Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business.
Devon assesses the realizability of its deferred tax assets. If Devon concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws.
2019
In December 2019, Devon announced the sale of its Barnett Shale assets. This transaction is expected to close in the second quarter of 2020. Devon expects no incremental cash taxes associated with the divestiture of these assets.
On June 27, 2019, Devon completed the sale of substantially all of its oil and gas assets and operations in Canada. Devon’s foreign earnings have not been considered indefinitely reinvested since the announcement of the plan to separate the assets in the first quarter of 2019. As the separation took the form of an asset sale and Devon has retained certain non-operating obligations to be settled over time, Devon has not recorded a deferred tax asset or corresponding valuation allowance related to its Canadian investment.
Devon has recorded materially all tax impacts related to the Barnett Shale and Canadian assets in discontinued operations. Additional information on these discontinued operations can be found in Note 18.
During 2019, Devon recorded a tax expense of $14 million related to unrecognized tax benefits, due to a change in tax positions taken in prior periods.
In the fourth quarter of 2019, Devon entered into an audit agreement with the Canada Revenue Agency. The Canadian income tax expense resulting from this agreement is reflected in discontinued operations. However, the agreement also resulted in a $16 million tax benefit to Devon’s U.S. continuing operations.
The “other” effect is composed of permanent differences, including stock compensation, for which the dollar amounts do not increase or decrease in relation to the change in pre-tax earnings. Generally, permanent adjustments, as well as the state income tax, have an insignificant impact on Devon’s effective income tax rate. However, these items had a more noticeable impact to the rate in 2019 due to the low relative net loss in the period.
2018
Through the first six months of 2018, Devon maintained a 100% valuation allowance against its deferred tax assets resulting from prior year cumulative financial losses, oil and gas impairments and significant net operating losses for U.S. federal and state income tax. However, upon closing the EnLink divestiture in the third quarter of 2018, Devon realized a pre-tax gain of $2.6 billion. Based on its net deferred tax liability position, current period projected net operating loss utilization, and projections of future taxable income, Devon reassessed its position and determined that it was no longer in a full valuation allowance position, maintaining only valuation allowances against certain deferred tax assets, including certain tax credits and state net operating losses. As part of its reassessment, Devon determined that apart from the sale of EnLink and the General Partner, Devon would have remained in a full valuation allowance position. Accordingly, the deferred tax benefit resulting from the release of the valuation allowance that was generated in the first two quarters was allocated to continuing operations, while the
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
$259 million of the deferred tax benefit resulting from the release of the remainder of the full valuation allowance position was allocated entirely to discontinued operations.
2017
The Tax Reform Legislation, enacted on December 22, 2017, contained several key tax provisions that affected Devon, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018. Devon was required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, remeasuring deferred tax assets and liabilities and reassessing the net realizability of deferred tax assets and liabilities. Devon recognized $167 million of deferred tax expense for the one-time mandatory transition tax on accumulated foreign earnings, and $205 million in deferred tax expense related to the reduction of the U.S. corporate income tax rate to 21%.
During 2017, Devon recorded a tax benefit of $6 million related to unrecognized tax benefits, primarily as a result of a change in tax positions taken in prior periods.
Devon maintained a 100% valuation allowance against its deferred tax assets resulting from prior year cumulative financial losses largely due to asset impairments and significant net operating losses for U.S. federal and state income tax. Devon reduced its valuation allowance by $342 million in 2017 based primarily on the financial income recorded during the period.
Deferred Tax Assets and Liabilities
The following table presents the tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities.
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||||
| Deferred tax assets: | ||||||||
| Asset retirement obligations | $ | 123 | $ | 146 | ||||
| Accrued liabilities | 35 | 45 | ||||||
| Net operating loss carryforwards | 306 | 126 | ||||||
| Pension benefit obligations | 39 | 44 | ||||||
| Tax credits and other | 66 | 77 | ||||||
| Total deferred tax assets before valuation allowance | 569 | 438 | ||||||
| Less: valuation allowance | (106 | ) | (31 | ) | ||||
| Net deferred tax assets | 463 | 407 | ||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | (800 | ) | (786 | ) | ||||
| Other | (4 | ) | (150 | ) | ||||
| Total deferred tax liabilities | (804 | ) | (936 | ) | ||||
| Net deferred tax liability | $ | (341 | ) | $ | (529 | ) |
At December 31, 2019, Devon has recognized $306 million of deferred tax assets related to various net operating loss carryforwards available to offset future taxable income. Devon has $871 million of U.S. federal net operating loss carryforwards ($466 million expiring in 2037 with the remainder having an indefinite life) and $2.5 billion of U.S. state net operating loss carryforwards expiring between 2021 and 2039. In the current environment, Devon expects tax benefits from the U.S. federal and $377 million of U.S. state net operating loss carryforwards to be utilized in 2022 and beyond. A valuation allowance is recorded against the remaining $2.1 billion of U.S. state net operating loss carryforwards.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Unrecognized Tax Benefits
The following table presents changes in Devon’s unrecognized tax benefits.
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||||
| Balance at beginning of year | $ | 51 | $ | 71 | ||||
| Tax positions taken in prior periods | 14 | (20 | ) | |||||
| Balance at end of year | $ | 65 | $ | 51 |
Devon recognized a net interest benefit of $5 million in 2019 and its unrecognized tax benefit balance included no interest and penalties at December 31, 2019. Devon recognized no net interest or penalties in 2018 and its unrecognized tax benefit balance included $5 million of interest and penalties at December 31, 2018. At December 31, 2019 and December 31, 2018, there are $65 million and $51 million, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.
| Jurisdiction | Tax Years Open | |
|---|---|---|
| U.S. Federal | 2016-2019 | |
| Various U.S. states | 2015-2019 |
Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process.
| 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.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Net earnings (loss) from continuing operations: | ||||||||||||
| Net earnings (loss) from continuing operations | $ | (81 | ) | $ | 714 | $ | 33 | |||||
| Attributable to participating securities | (2 | ) | (8 | ) | (1 | ) | ||||||
| Basic and diluted earnings (loss) from continuing operations | $ | (83 | ) | $ | 706 | $ | 32 | |||||
| Common shares: | ||||||||||||
| Common shares outstanding - total | 407 | 499 | 525 | |||||||||
| Attributable to participating securities | (6 | ) | (5 | ) | (5 | ) | ||||||
| Common shares outstanding - basic | 401 | 494 | 520 | |||||||||
| Dilutive effect of potential common shares issuable | — | 3 | — | |||||||||
| Common shares outstanding - diluted | 401 | 497 | 520 | |||||||||
| Net earnings (loss) per share from continuing operations: | ||||||||||||
| Basic | $ | (0.21 | ) | $ | 1.43 | $ | 0.06 | |||||
| Diluted | $ | (0.21 | ) | $ | 1.42 | $ | 0.06 | |||||
| Antidilutive options (1) | 1 | 1 | 2 |
| (1) | Amounts represent options to purchase shares of Devon’s common stock that are excluded from the diluted net earnings per share calculations because the options are antidilutive. |
|---|
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 9**.** | Other Comprehensive Earnings |
|---|
Components of other comprehensive earnings consist of the following:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Foreign currency translation: | ||||||||||||
| Beginning accumulated foreign currency translation and other | $ | 1,159 | $ | 1,309 | $ | 1,226 | ||||||
| Change in cumulative translation adjustment | 78 | (166 | ) | 113 | ||||||||
| Release of Canadian cumulative translation adjustment (1) | (1,237 | ) | — | — | ||||||||
| Income tax benefit (expense) | — | 14 | (30 | ) | ||||||||
| Other | — | 2 | — | |||||||||
| Ending accumulated foreign currency translation and other | — | 1,159 | 1,309 | |||||||||
| Pension and postretirement benefit plans: | ||||||||||||
| Beginning accumulated pension and postretirement benefits | (132 | ) | (143 | ) | (172 | ) | ||||||
| Net actuarial loss (gain) and prior service cost arising in current year | (10 | ) | (3 | ) | 10 | |||||||
| Recognition of net actuarial loss and prior service cost in earnings (2) | 6 | 12 | 19 | |||||||||
| Curtailment and settlement of pension benefits | 21 | 47 | — | |||||||||
| Income tax expense | (4 | ) | (12 | ) | — | |||||||
| Other (3) | — | (33 | ) | — | ||||||||
| Ending accumulated pension and postretirement benefits | (119 | ) | (132 | ) | (143 | ) | ||||||
| Accumulated other comprehensive earnings (loss), net of tax | $ | (119 | ) | $ | 1,027 | $ | 1,166 |
| (1) | In conjunction with the sale of substantially all of its oil and gas assets and operations in Canada, Devon released the cumulative translation adjustment as part of its gain on the disposition of its Canadian business. See Note 18 for additional details. |
|---|
| (2) | These accumulated other comprehensive earnings components are included in the computation of net periodic benefit cost, which is a component of other expenses in the accompanying consolidated statements of comprehensive earnings. See Note 16 for additional details. |
|---|
| (3) | As a result of Devon’s early adoption of ASU 2018-02 in the fourth quarter of 2018, Devon reclassified $33 million from accumulated other comprehensive income to retained earnings in the December 31, 2018 consolidated balance sheet. |
|---|
| 10. | Supplemental Information to Statements of Cash Flows |
|---|
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Changes in assets and liabilities, net: | ||||||||||||
| Accounts receivable | $ | (3 | ) | $ | (69 | ) | $ | (139 | ) | |||
| Other current assets | (7 | ) | (152 | ) | 15 | |||||||
| Other long-term assets | 17 | (7 | ) | (36 | ) | |||||||
| Accounts payable | (54 | ) | (3 | ) | 91 | |||||||
| Revenues and royalties payable | 8 | 106 | 102 | |||||||||
| Other current liabilities | (66 | ) | 3 | (15 | ) | |||||||
| Other long-term liabilities | 23 | (36 | ) | (8 | ) | |||||||
| Total | $ | (82 | ) | $ | (158 | ) | $ | 10 | ||||
| Supplementary cash flow data - total operations: | ||||||||||||
| Interest paid (net of capitalized interest) | $ | 308 | $ | 385 | $ | 481 | ||||||
| Income taxes paid | $ | 6 | $ | 40 | $ | 78 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 11. | Accounts Receivable |
|---|
Components of accounts receivable include the following:
| December 31, 2019 | December 31, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Oil, gas and NGL sales | $ | 452 | $ | 375 | ||||
| Joint interest billings | 168 | 149 | ||||||
| Marketing and midstream revenues | 207 | 284 | ||||||
| Other | 13 | 10 | ||||||
| Gross accounts receivable | 840 | 818 | ||||||
| Allowance for doubtful accounts | (8 | ) | (6 | ) | ||||
| Net accounts receivable | $ | 832 | $ | 812 |
12.Property, Plant and Equipment
Capitalized Costs
The following table reflects the aggregate capitalized costs related to Devon’s oil and gas and non-oil and gas activities.
| December 31, 2019 | December 31, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| Property and equipment: | ||||||||
| Proved | $ | 27,668 | $ | 25,901 | ||||
| Unproved and properties under development | 583 | 830 | ||||||
| Total oil and gas | 28,251 | 26,731 | ||||||
| Less accumulated DD&A | (20,693 | ) | (19,301 | ) | ||||
| Oil and gas property and equipment, net | 7,558 | 7,430 | ||||||
| Other property and equipment | 1,725 | 1,680 | ||||||
| Less accumulated DD&A | (690 | ) | (648 | ) | ||||
| Other property and equipment, net (1) | 1,035 | 1,032 | ||||||
| Property and equipment, net | $ | 8,593 | $ | 8,462 |
| (1) | $80 million related to CDM in 2019. |
|---|
Suspended Exploratory Well Costs
The following summarizes the changes in suspended exploratory well costs for the three years ended December 31, 2019.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Beginning balance | $ | 98 | $ | 100 | $ | 75 | ||||||
| Additions pending determination of proved reserves | 278 | 658 | 491 | |||||||||
| Reclassifications to proved properties | (294 | ) | (660 | ) | (466 | ) | ||||||
| Ending balance | $ | 82 | $ | 98 | $ | 100 |
Devon had no projects with suspended exploratory well costs capitalized for a period greater than one year since the completion of drilling as of December 31, 2019, 2018 and 2017, respectively.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 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.
| December 31, 2019 | December 31, 2018 | |||||||
|---|---|---|---|---|---|---|---|---|
| 6.30% due January 15, 2019 | $ | — | $ | 162 | ||||
| 5.85% due December 15, 2025 | 485 | 485 | ||||||
| 7.50% due September 15, 2027 (1) | 73 | 73 | ||||||
| 7.875% due September 30, 2031 (2) (3) | 675 | 675 | ||||||
| 7.95% due April 15, 2032 (2) | 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 discount on debentures and notes | (20 | ) | (21 | ) | ||||
| Debt issuance costs | (35 | ) | (36 | ) | ||||
| Total debt | 4,294 | 4,454 | ||||||
| Less amount classified as short-term debt | — | 162 | ||||||
| Total long-term debt (4) | $ | 4,294 | $ | 4,292 |
| (1) | This instrument was assumed by Devon in April 2003 in conjunction with the merger with Ocean Energy. The fair value and effective rates of this note at the time assumed was $169 million and 6.5%. This instrument is the unsecured and unsubordinated obligation of Devon OEI Operating, L.L.C. and is guaranteed by Devon Energy Production Company, L.P. Each of these entities is a wholly-owned subsidiary of Devon. |
|---|
| (2) | These senior notes were included in 2018 tender offer repurchases discussed below. |
|---|
| (3) | These senior notes were originally issued by Devon Financing, a wholly-owned subsidiary of Devon, and guaranteed by Devon. On June 19, 2019, Devon Financing assigned its obligations and rights with respect to these senior notes to Devon pursuant to the terms of the related indenture. As a result of this transfer, Devon Financing was relieved of its obligations under the senior notes and related indenture and Devon assumed all such obligations. |
|---|
| (4) | The balance as of December 31, 2018 excludes the $1.5 billion of Senior Notes classified as liabilities held for sale that were retired early in July 2019 utilizing a portion of the proceeds from the sale of Devon’s Canadian business. See Note 18 for additional details. |
|---|
As noted in the table above, as of December 31, 2019, Devon does not have any outstanding debt maturities due within the next five years.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Credit Lines
Devon has a $3.0 billion Senior Credit Facility. As of December 31, 2019, Devon had $2 million in outstanding letters of credit under the Senior Credit Facility. There were no borrowings under the Senior Credit Facility as of December 31, 2019.
In connection with the closing of the sale of its Canadian business, Devon reallocated and terminated all Canadian commitments under the Senior Credit Facility in accordance with the terms of the credit agreement governing the Senior Credit Facility. The termination of the Canadian subfacility was effective as of June 27, 2019, and such termination did not decrease the $3.0 billion in total revolving commitments under, or otherwise modify the terms of, the Senior Credit Facility. Subsequent to Devon’s divestment of substantially all of its oil and gas assets and operations in Canada, Devon entered into an amendment and extension agreement on December 13, 2019 to, among other things, (i) effect the extension of the maturity date of the Senior Credit Facility from October 5, 2023 to October 5, 2024 with respect to the consenting lenders, (ii) modify the maximum number of maturity extension requests during the term of the Senior Credit Facility from two to three and (iii) eliminate various references to the terminated Canadian subfacility. As a result of this amendment, Devon has the option to extend the October 5, 2024 maturity date by two additional one-year periods subject to lender consent, and the maximum borrowing capacity of the Senior Credit Facility becomes $2.8 billion after October 5, 2023. Amounts borrowed under the Senior Credit Facility may, at the election of Devon, bear interest at various fixed rate options for periods of up to twelve months. Such rates are generally less than the prime rate. However, Devon may elect to borrow at the prime rate. The Senior Credit Facility currently provides for an annual facility fee of $6 million.
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%. The credit agreement contains definitions of total funded debt and total capitalization that include adjustments to the respective amounts reported in the accompanying consolidated financial statements. For example, total capitalization is adjusted to add back noncash financial write-downs such as asset impairments. As of December 31, 2019, Devon was in compliance with this covenant with a debt-to-capitalization ratio of 19.1%.
Commercial Paper
Devon’s Senior Credit Facility supports its $3.0 billion of short-term credit under its commercial paper program. Commercial paper debt generally has a maturity of between 1 and 90 days, although it can have a maturity of up to 365 days, and bears interest at rates agreed to at the time of the borrowing. The interest rate is generally based on a standard index such as the Federal Funds Rate, LIBOR or the money market rate as found in the commercial paper market. As of December 31, 2019, Devon had no outstanding commercial paper borrowings.
Retirement of Senior Notes
In January 2019, Devon repaid the $162 million of 6.30% senior notes at maturity.
During 2018, Devon completed tender offers to repurchase $807 million in aggregate principal amount of debt using cash on hand. This included $384 million of the 7.875% senior notes due September 30, 2031 and $423 million of the 7.95% senior notes due April 15, 2032. Devon recognized a $312 million charge on early retirement of debt, consisting of $304 million in cash retirement costs and $8 million of noncash charges. These costs, along with other charges associated with retiring the debt, are included in net financing costs in the consolidated statements of comprehensive earnings. During 2018, Devon repaid $115 million of senior notes at maturity.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Financing Costs, Net
The following schedule includes the components of net financing costs.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Interest based on debt outstanding | $ | 260 | $ | 287 | $ | 337 | ||||||
| Early retirement of debt | — | 312 | — | |||||||||
| Other | (10 | ) | (19 | ) | (16 | ) | ||||||
| Total net financing costs | $ | 250 | $ | 580 | $ | 321 |
| 14. | Leases |
|---|
Devon adopted ASU No. 2016-02, Leases (Topic 842), as of January 1, 2019, using the modified retrospective transition approach. ASC 842 supersedes the previous lease accounting requirements in ASC 840 and requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASC 842 establishes a right-of-use model that requires a lessee to recognize a right-of-use asset and lease liability on the balance sheet for all leases with a term longer than 12 months. At adoption, using the modified retrospective transition approach, Devon recorded right-of-use lease assets of $410 million and lease liabilities of $380 million. Additionally, Devon recorded a $8 million before tax, $7 million net of tax, cumulative-effect adjustment to reduce retained earnings. Comparative periods have been presented in accordance with ASC Topic 840 and do not include any retrospective adjustments to reflect the adoption of Topic 842. Excluding land easements and rights-of-way, all leases that existed at January 1, 2019 or were entered into or modified thereafter, are accounted for under Topic 842. Devon elected the practical expedient provided in the standard that allows the new guidance to be applied prospectively to all new or modified land easements and rights-of-way. Devon also elected a policy not to recognize right-of-use assets and lease liabilities related to short-term leases with terms of 12 months or less. Additionally, Devon elected to account for lease components separately from the nonlease components.
Devon made certain significant assumptions and judgments in determining its right-of-use asset and lease liability balances. First is the determination of whether a contract contains a lease. Devon considered the presence of an identified asset that is physically distinct, and for which the supplier does not have substantive substitution rights and whether Devon has the right to control the underlying asset. Second, Devon assessed lease terms and considered whether Devon is reasonably certain to extend leases or exercise purchase options. Certain of Devon’s leases include one or more options to renew, with renewal terms that can extend the lease term for additional years. Certain leases also include options to purchase the leased property. For options to renew or purchase that Devon is reasonably certain to exercise, these costs are recognized as part of the right-of-use assets and lease liabilities. Third, significant judgments have been made in determining discount rates. Devon estimates discount rates using market rates that approximate collateralized borrowings over the remaining term of Devon’s lease payments.
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. Certain of Devon’s lease agreements include variable payments based on usage or rental payments adjusted periodically for inflation. Devon’s lease agreements do not contain any material residual value guarantees or restrictive covenants.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents Devon’s right-of-use assets and lease liabilities as of December 31, 2019.
| Finance | Operating | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Right-of-use assets | $ | 229 | $ | 14 | $ | 243 | ||||||
| Lease liabilities: | ||||||||||||
| Current lease liabilities (1) | $ | 7 | $ | 10 | $ | 17 | ||||||
| Long-term lease liabilities | 240 | 4 | 244 | |||||||||
| Total lease liabilities | $ | 247 | $ | 14 | $ | 261 |
| (1) | Current lease liabilities are included in other current liabilities on the consolidated balance sheets. |
|---|
The following table presents Devon’s total lease cost.
| Year Ended | |||||
|---|---|---|---|---|---|
| December 31, 2019 | |||||
| Operating lease cost | Property, plant and equipment; G&A | $ | 40 | ||
| Short-term lease cost (1) | Property, plant and equipment; G&A | 84 | |||
| Financing lease cost: | |||||
| Amortization of right-of-use assets | DD&A | 8 | |||
| Interest on lease liabilities | Net financing costs | 10 | |||
| Variable lease cost | G&A | 2 | |||
| Lease income | G&A | (5 | ) | ||
| Net lease cost | $ | 139 |
| (1) | Short-term lease cost excludes leases with terms of one month or less. |
|---|
The following table presents Devon’s additional lease information for the year ended December 31, 2019.
| Year Ended December 31, 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Finance | Operating | |||||||
| Cash outflows for lease liabilities: | ||||||||
| Operating cash flows | $ | 7 | $ | 2 | ||||
| Investing cash flows | $ | — | $ | 41 | ||||
| Right-of-use assets obtained in exchange for new lease liabilities | $ | — | $ | 3 | ||||
| Weighted average remaining lease term (years) | 8.0 | 2.2 | ||||||
| Weighted average discount rate | 4.2 | % | 3.2 | % |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents Devon’s maturity analysis as of December 31, 2019 for leases expiring in each of the next 5 years and thereafter.
| Finance | Operating | Total (1) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | $ | 7 | $ | 10 | $ | 17 | ||||||
| 2021 | 7 | 1 | 8 | |||||||||
| 2022 | 8 | 1 | 9 | |||||||||
| 2023 | 8 | 1 | 9 | |||||||||
| 2024 | 8 | 1 | 9 | |||||||||
| Thereafter | 297 | 1 | 298 | |||||||||
| Total lease payments | 335 | 15 | 350 | |||||||||
| Less: interest | (88 | ) | (1 | ) | (89 | ) | ||||||
| Present value of lease liabilities | $ | 247 | $ | 14 | $ | 261 |
| (1) | Under previous lease accounting standard, ASC 840, Devon’s lease obligations as of December 31, 2018 expiring in each of the next 5 years and thereafter were $61 million for 2019, $48 million for 2020, $18 million for 2021, $9 million for 2022, $8 million for 2023 and $33 million thereafter. |
|---|
Devon rents or subleases certain real estate to third parties. The following table presents Devon’s expected lease income as of December 31, 2019 for each of the next 5 years and thereafter.
| Operating | ||||
|---|---|---|---|---|
| Lease Income | ||||
| 2020 | $ | 6 | ||
| 2021 | 6 | |||
| 2022 | 6 | |||
| 2023 | 7 | |||
| 2024 | 7 | |||
| Thereafter | 44 | |||
| Total | $ | 76 |
| 15. | Asset Retirement Obligations |
|---|
The following table presents the changes in asset retirement obligations.
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||||
| Asset retirement obligations as of beginning of period | $ | 484 | $ | 492 | ||||
| Liabilities incurred | 20 | 30 | ||||||
| Liabilities settled and divested | (66 | ) | (48 | ) | ||||
| Revision of estimated obligation | (61 | ) | (16 | ) | ||||
| Accretion expense on discounted obligation | 21 | 26 | ||||||
| Asset retirement obligations as of end of period | 398 | 484 | ||||||
| Less current portion | 18 | 16 | ||||||
| Asset retirement obligations, long-term | $ | 380 | $ | 468 |
During 2019, Devon reduced its asset retirement obligations by $61 million, primarily due to changes in the future cost estimates and retirement dates for its oil and gas assets. During 2019, Devon also reduced its asset
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
retirement obligations by $42 million as a result of Devon’s 2019 divestitures. For additional information, see Note 2.
During 2018, Devon reduced its asset retirement obligations by $34 million as a result of Devon’s 2018 divestitures. For additional information, see Note 2.
| 16. | Retirement Plans |
|---|
Defined Contribution Plans
Devon sponsors defined contribution plans covering its employees. Such plans include its 401(k) plan and enhanced contribution plan. Contributions are primarily based upon percentages of annual compensation and years of service. In addition, each plan is subject to regulatory limitations by the U.S. government. Devon contributed $34 million, $40 million and $42 million to these plans in 2019, 2018 and 2017, respectively.
Defined Benefit Plans
Devon has various non-contributory defined benefit pension plans, including qualified plans and nonqualified plans covering eligible employees and former employees meeting certain age and service requirements. Benefits under the defined benefit plans have been closed to new employees; however, eligible employees continue to accrue benefits based upon years of service and compensation. Benefits are primarily funded from assets held in the plans’ trusts.
Devon’s investment objective for its plans’ assets is to achieve stability of the funded status while providing long-term growth of invested capital and income to ensure benefit payments can be funded when required. Devon has established certain investment strategies, including target allocation percentages and permitted and prohibited investments, designed to mitigate risks inherent with investing. Devon’s target allocations for its plan assets are 70% fixed income, 20% equity and 10% other. See the following discussion for Devon’s pension assets by asset class.
Fixed-income – Devon’s fixed-income securities consist of U.S. Treasury obligations, bonds issued by investment-grade companies from diverse industries and asset-backed securities. These fixed-income securities are actively traded securities that can be redeemed upon demand. The fair values of these Level 1 securities are based upon quoted market prices and were $240 million and $193 million at December 31, 2019 and 2018, respectively. Also included are commingled funds that primarily invest in long-term bonds and U.S. Treasury securities. These fixed income securities can be redeemed on demand but are not actively traded. The fair values of these securities are based upon the net asset values provided by the investment managers and were $233 million and $291 million at December 31, 2019 and 2018, respectively.
Equity – Devon’s equity securities include commingled global equity funds that invest in large, mid and small capitalization stocks across the world’s developed and emerging markets and international large cap equity securities. These equity securities can be sold on demand but are not actively traded. The fair values of these securities are based upon the net asset values provided by the investment managers and were $112 million and $77 million at December 31, 2019 and 2018, respectively.
Other – Devon’s other securities include short-term investment funds and a hedge fund that invest both long and short term using a variety of investment strategies. The fair value of these securities is based upon the net asset values provided by investment managers and were $109 million and $124 million at December 31, 2019 and 2018, respectively.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Defined Postretirement Plans
Devon also has defined benefit postretirement plans that provide benefits for substantially all qualifying retirees. Benefit obligations for such plans are estimated based on Devon’s future cost-sharing intentions. Devon’s funding policy for the plans is to fund the benefits as they become payable with available cash and cash equivalents.
Benefit Obligations and Funded Status
The following table summarizes the benefit obligations, assets, funded status and balance sheet impacts associated with its defined pension and postretirement plans. Devon’s benefit obligations and plan assets are measured each year as of December 31. The accumulated benefit obligation for pension plans approximated the projected benefit obligation at December 31, 2019 and 2018.
| Pension Benefits | Postretirement Benefits | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Benefit obligation at beginning of year | $ | 916 | $ | 1,247 | $ | 17 | $ | 19 | ||||||||
| Service cost | 7 | 9 | — | — | ||||||||||||
| Interest cost | 32 | 38 | — | — | ||||||||||||
| Actuarial loss (gain) | 91 | (81 | ) | (3 | ) | (3 | ) | |||||||||
| Plan amendments | 3 | — | — | — | ||||||||||||
| Plan curtailments | (3 | ) | 2 | 1 | 2 | |||||||||||
| Plan settlements | (75 | ) | (241 | ) | — | — | ||||||||||
| Participant contributions | — | — | 2 | 2 | ||||||||||||
| Benefits paid | (47 | ) | (58 | ) | (3 | ) | (3 | ) | ||||||||
| Benefit obligation at end of year | 924 | 916 | 14 | 17 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets at beginning of year | 685 | 1,007 | — | — | ||||||||||||
| Actual return on plan assets | 118 | (36 | ) | — | — | |||||||||||
| Employer contributions | 13 | 13 | 1 | 1 | ||||||||||||
| Participant contributions | — | — | 2 | 2 | ||||||||||||
| Plan settlements | (75 | ) | (241 | ) | — | — | ||||||||||
| Benefits paid | (47 | ) | (58 | ) | (3 | ) | (3 | ) | ||||||||
| Fair value of plan assets at end of year | 694 | 685 | — | — | ||||||||||||
| Funded status at end of year | $ | (230 | ) | $ | (231 | ) | $ | (14 | ) | $ | (17 | ) | ||||
| Amounts recognized in balance sheet: | ||||||||||||||||
| Other current liabilities | $ | (13 | ) | $ | (13 | ) | $ | (2 | ) | $ | (3 | ) | ||||
| Other long-term liabilities | (217 | ) | (218 | ) | (12 | ) | (14 | ) | ||||||||
| Net amount | $ | (230 | ) | $ | (231 | ) | $ | (14 | ) | $ | (17 | ) | ||||
| Amounts recognized in accumulated other comprehensive earnings: | ||||||||||||||||
| Net actuarial loss (gain) | $ | 183 | $ | 198 | $ | (12 | ) | $ | (11 | ) | ||||||
| Prior service cost (credit) | 5 | 4 | (1 | ) | (2 | ) | ||||||||||
| Total | $ | 188 | $ | 202 | $ | (13 | ) | $ | (13 | ) |
During the third quarter of 2018, Devon entered into a group annuity contract, under which a third party has permanently assumed certain of Devon’s defined benefit pension obligations. The purchase of this group annuity contract reduced Devon’s pension assets and liabilities and is the primary component of the $241 million of plan
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
settlements within the preceding table. In connection with the group annuity contract transaction, Devon recorded a settlement expense of approximately $33 million, which was reclassified from other comprehensive earnings to other expense on the consolidated statements of comprehensive earnings in 2018.
Certain of Devon’s pension plans have a combined projected benefit obligation or accumulated benefit obligation in excess of plan assets at December 31, 2019 and December 31, 2018, as presented in the table below.
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | |||||||
| Projected benefit obligation | $ | 924 | $ | 916 | ||||
| Accumulated benefit obligation (1) | $ | 223 | $ | 900 | ||||
| Fair value of plan assets | $ | 694 | $ | 685 |
| (1) | The accumulated benefit obligation as of December 31, 2019 included a qualified pension plan that contained $690 million of accumulated benefit obligation which was not in excess of plan assets. |
|---|
The following table presents the components of net periodic benefit cost and other comprehensive earnings.
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
| Net periodic benefit cost: | ||||||||||||||||||||||||
| Service cost | $ | 7 | $ | 9 | $ | 15 | $ | — | $ | — | $ | — | ||||||||||||
| Interest cost | 32 | 38 | 41 | — | — | — | ||||||||||||||||||
| Expected return on plan assets | (38 | ) | (48 | ) | (54 | ) | — | — | — | |||||||||||||||
| Recognition of net actuarial loss (gain) (1) | 7 | 13 | 19 | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||
| Recognition of prior service cost (1) | 1 | 1 | 2 | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||
| Total net periodic benefit cost (2) | 9 | 13 | 23 | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||
| Other comprehensive loss (earnings): | ||||||||||||||||||||||||
| Actuarial loss (gain) arising in current year | 7 | 5 | (8 | ) | (2 | ) | (1 | ) | (1 | ) | ||||||||||||||
| Prior service cost arising in current year | 3 | — | — | — | — | — | ||||||||||||||||||
| Recognition of net actuarial gain (loss), including settlement expense, in net periodic benefit cost (3) | (22 | ) | (59 | ) | (19 | ) | 1 | 1 | 1 | |||||||||||||||
| Recognition of prior service cost, including curtailment, in net periodic benefit cost (3) | (2 | ) | (2 | ) | (2 | ) | 1 | 1 | 1 | |||||||||||||||
| Total other comprehensive loss (earnings) | (14 | ) | (56 | ) | (29 | ) | — | 1 | 1 | |||||||||||||||
| Total recognized | $ | (5 | ) | $ | (43 | ) | $ | (6 | ) | $ | (2 | ) | $ | (1 | ) | $ | (1 | ) |
| (1) | These net periodic benefit costs were reclassified out of other comprehensive earnings in the current period. |
|---|
| (2) | The service cost component of net periodic benefit cost is included in G&A expense and the remaining components of net periodic benefit costs are included in other expenses in the accompanying consolidated statements of comprehensive earnings. |
|---|
| (3) | These amounts include restructuring costs that were reclassified out of other comprehensive earnings in 2019 and 2018. See Note 6 for further discussion. |
|---|
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Assumptions
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
| Assumptions to determine benefit obligations: | ||||||||||||||||||||||||
| Discount rate | 3.14% | 4.09% | 3.51% | 2.81% | 4.01% | 3.25% | ||||||||||||||||||
| Rate of compensation increase | 2.50% | 2.50% | 2.50% | N/A | N/A | N/A | ||||||||||||||||||
| Assumptions to determine net periodic benefit cost: | ||||||||||||||||||||||||
| Discount rate - service cost | 3.74% | 3.77% | 4.06% | 3.99% | 4.13% | 4.22% | ||||||||||||||||||
| Discount rate - interest cost | 3.36% | 3.14% | 2.91% | 3.21% | 2.67% | 2.39% | ||||||||||||||||||
| Rate of compensation increase | 2.50% | 2.50% | 4.50% | N/A | N/A | N/A | ||||||||||||||||||
| Expected return on plan assets | 5.75% | 5.75% | 5.75% | N/A | N/A | N/A |
Discount Rate - Future pension and post-retirement obligations are discounted based on the rate at which obligations could be effectively settled, considering the timing of expected future cash flows related to the plans. This rate is based on high-quality bond yields, after allowing for call and default risk.
Expected return on plan assets – This was determined by evaluating input from external consultants and economists, as well as long-term inflation assumptions and consideration of target allocation of investment types.
Mortality rate – Devon utilized the Society of Actuaries produced mortality tables.
Other assumptions – For measurement of the 2019 benefit obligation for the other postretirement medical plans, a 7.1% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2020. The rate was assumed to decrease annually to an ultimate rate of 5% in the year 2029 and remain at that level thereafter.
Expected Cash Flows
Devon expects benefit plan payments to average approximately $56 million a year for the next five years and $278 million total for the five years thereafter. Of these payments to be paid in 2020, $16 million is expected to be funded from Devon’s available cash, cash equivalents and other assets.
| 17. | Stockholders’ Equity |
|---|
The authorized capital stock of Devon consists of 1.0 billion shares of common stock, par value $0.10 per share, and 4.5 million shares of preferred stock, par value $1.00 per share. The preferred stock may be issued in one or more series, and the terms and rights of such stock will be determined by the Board of Directors.
Share Repurchase Program
On March 7, 2018, Devon announced a $1.0 billion share repurchase program. On June 6, 2018, Devon announced the expansion of this program to $4.0 billion. On February 19, 2019, Devon announced a further expansion to $5.0 billion with a December 31, 2019 expiration date. Of the $5.0 billion authorized amount, $4.8 billion was repurchased when the program expired on December 31, 2019. On December 17, 2019, Devon announced a new $1.0 billion share repurchase program with a December 31, 2020 expiration date. Under the new program, $800 million of the $1.0 billion authorization is conditioned upon the closing of the pending Barnett Shale divestiture.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below provides information regarding purchases of Devon’s common stock that were made during 2018 and 2019 (shares in thousands).
| Total Number of Shares Purchased | Dollar Value of Shares Purchased | Average Price Paid per Share | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First quarter 2018: | ||||||||||||
| Open-Market | 2,561 | $ | 82 | $ | 32.19 | |||||||
| Second quarter 2018: | ||||||||||||
| Open-Market | 11,154 | 439 | 39.35 | |||||||||
| Third quarter 2018: | ||||||||||||
| Open-Market | 16,492 | 712 | 43.13 | |||||||||
| ASR | 24,330 | 1,000 | 41.10 | |||||||||
| Total | 40,822 | 1,712 | 41.92 | |||||||||
| Fourth quarter 2018: | ||||||||||||
| Open-Market | 23,612 | 745 | 31.57 | |||||||||
| First quarter 2019: | ||||||||||||
| Open-Market | 36,141 | 1,024 | 28.33 | |||||||||
| Second quarter 2019: | ||||||||||||
| Open-Market | 5,911 | 159 | 27.01 | |||||||||
| Third quarter 2019: | ||||||||||||
| Open-Market | 22,137 | 550 | 24.80 | |||||||||
| Fourth quarter 2019: | ||||||||||||
| Open-Market | 4,436 | 94 | 21.32 | |||||||||
| Total inception-to-date | 146,774 | $ | 4,805 | $ | 32.74 |
Dividends
The table below summarizes the dividends Devon paid on its common stock.
| Amounts | Rate Per Share | ||||||
|---|---|---|---|---|---|---|---|
| Year Ended 2019: | |||||||
| First quarter | $ | 34 | $ | 0.08 | |||
| Second quarter | 37 | $ | 0.09 | ||||
| Third quarter | 35 | $ | 0.09 | ||||
| Fourth quarter | 34 | $ | 0.09 | ||||
| Total year-to-date | $ | 140 | |||||
| Year Ended 2018: | |||||||
| First quarter | $ | 32 | $ | 0.06 | |||
| Second quarter | 42 | $ | 0.08 | ||||
| Third quarter | 38 | $ | 0.08 | ||||
| Fourth quarter | 37 | $ | 0.08 | ||||
| Total year-to-date | $ | 149 | |||||
| Year Ended 2017: | |||||||
| First quarter | $ | 32 | $ | 0.06 | |||
| Second quarter | 33 | $ | 0.06 | ||||
| Third quarter | 30 | $ | 0.06 | ||||
| Fourth quarter | 32 | $ | 0.06 | ||||
| Total year-to-date | $ | 127 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Devon raised its quarterly dividend by 12.5%, to $0.09 per share, beginning in the second quarter of 2019. In the second quarter of 2018, Devon increased the quarterly dividend rate by 33% from $0.06 to $0.08 per share. In February 2020, Devon announced a 22% increase to its quarterly dividend, to $0.11 per share, beginning in the second quarter of 2020.
Noncontrolling Interests
As discussed in Note 1, the noncontrolling interests’ share of CDM’s net earnings and the contributions from the noncontrolling interests are presented as components of equity for 2019. The noncontrolling interests’ equity balances and activities for 2017 and 2018 are related to EnLink and the divestment of Devon’s aggregate ownership interests in EnLink and the General Partner, as further discussed in Note 18.
| 18. | Discontinued Operations and Assets Held For Sale |
|---|
Barnett Shale
On December 17, 2019, Devon announced that it had entered into an agreement to sell its Barnett Shale assets to BKV for approximately $770 million, before purchase price adjustments. Devon concluded that the transaction was a strategic shift and met the requirements of assets held for sale and discontinued operations upon the authorization to enter the agreement by Devon’s Board of Directors. As part of its assessment, Devon is effectively exiting its last natural gas focused asset and the transaction resulted in a material reduction to total assets, revenues, net earnings and total proved reserves. Estimated proved reserves associated with Devon’s Barnett Shale assets are approximately 45% of total U.S. proved reserves. As a result, Devon has classified the results of operations and cash flows related to its Barnett Shale assets, inclusive of Barnett properties divested in previous reporting periods located primarily in Johnson and Wise counties, Texas, as discontinued operations on its consolidated financial statements. In connection with the abandonment of certain gas processing contracts related to 2018 divestitures, Devon has restricted approximately $25 million to fund these obligations. Cash payments for the abandonment charges total approximately $2 million per quarter.
In connection with the announced sale of its Barnett Shale assets, Devon recognized a $748 million asset impairment related to these assets, primarily due to the difference between the net carrying value and the purchase price, net of estimated customary purchase price adjustments, and qualifies as a level 2 fair value measurement. Approximately $88 million of the U.S. reporting unit goodwill was allocated to the Barnett Shale assets. Additionally, Devon ceased depreciation for all plant, property and equipment classified as assets held for sale on the date the sales agreement was approved by the Board of Directors. This transaction is expected to close in the second quarter of 2020.
Canada
On May 29, 2019, Devon announced it had entered into an agreement to sell substantially all of its oil and gas assets and operations in Canada to Canadian Natural Resources Limited. Devon concluded that the transaction was a strategic shift and met the requirements of assets held for sale and discontinued operations upon the authorization to enter the agreement by Devon’s Board of Directors. As part of its assessment, Devon considered the following: 1) Devon is exiting its entire heavy oil and Canadian operations; 2) Devon’s Canadian operations is a separate reportable segment and is a component of Devon’s business; and 3) the transaction resulted in a material reduction in total assets, revenues, net earnings and total proved reserves. As a result, Devon has classified the results of operations and cash flows related to its Canadian operations as discontinued operations on its consolidated financial statements. Additionally, Devon ceased depreciation for all plant, property and equipment classified as assets held for sale on the date the sales agreement was approved by the Board of Directors.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On June 27, 2019, Devon completed the sale of its Canadian business for $2.6 billion ($3.4 billion Canadian dollars), net of purchase price adjustments, and recognized a pre-tax gain of $223 million ($425 million net of tax, primarily due to a significant deferred tax benefit). Included within this gain is a $55 million adjustment to the gain in the fourth quarter of 2019 related to income taxes. Current (cash) income tax associated with the sale was approximately $150 million and is expected to be paid in early 2020. The disposition of substantially all of Devon’s Canadian oil and gas assets resulted in Devon releasing its historical cumulative foreign currency translation adjustment of $1.2 billion from accumulated other comprehensive earnings to be included within the gain computation. The historical cumulative foreign currency translation portion of the gain is not taxable. As of December 31, 2019, $355 million of the Canadian cash balance is restricted for funding certain tax and other obligations related to the Canadian business and is classified as cash restricted for discontinued operations on the consolidated balance sheets.
In conjunction with the sale of Devon’s Canadian business, Devon recognized approximately $285 million of restructuring and asset impairment related charges. Canadian Natural Resources Limited has reimbursed Devon for approximately $50 million of these restructuring costs, under the terms of the disposition agreement. Along with certain tax obligations, these costs will be funded with the restricted cash described above. These charges consist of $154 million related to a firm transportation agreement abandonment and $57 million related to office lease abandonment and associated asset impairment charges. Cash payments for the abandonment charges total approximately $6 million per quarter. Additionally, there are $74 million of employee related costs, including approximately $40 million of noncash accelerated vesting of employee stock awards. As mentioned above, Canadian Natural Resources Limited reimbursed the Company for approximately $50 million of these costs pursuant to the disposition agreement and Devon funded the remaining employee related costs.
Prior to the second quarter of 2019, Devon’s Canadian business maintained a valuation allowance against certain capital loss carryforwards and net operating losses. As a result of the sale of substantially all of Devon’s Canadian oil and gas assets and operations and the lack of future forecasted income, all but approximately $22 million of the Canadian deferred tax assets have been offset with a valuation allowance. In the fourth quarter of 2019, Devon entered into an audit agreement with the Canada Revenue Agency. As a result of this agreement, income tax expense of $82 million is reflected in discontinued operations.
In July 2019, Devon utilized a portion of the sales proceeds to early retire $500 million of the 4.00% senior notes due July 15, 2021 and $1.0 billion of the 3.25% senior notes due May 15, 2022. Devon recognized a charge on the early retirement of these notes in the third quarter of 2019 consisting of $52 million in cash retirement costs and $6 million of noncash charges.
EnLink
On June 6, 2018, Devon announced that it had entered into an agreement to sell its aggregate ownership interests in EnLink and the General Partner for $3.125 billion. Upon entering into the agreement to sell its ownership interest in June 2018, Devon concluded that the transaction was a strategic shift and met the requirements of assets held for sale and discontinued operations. As a result, Devon classified the results of operations and cash flows related to EnLink and the General Partner as discontinued operations on its consolidated financial statements.
On July 18, 2018, Devon completed the sale of its aggregate ownership interests in EnLink and the General Partner for $3.125 billion and recognized a gain of approximately $2.6 billion ($2.2 billion after-tax). Current (cash) income tax associated with the transaction was approximately $12 million. The vast majority of the tax effect relates to deferred tax expense offset by the valuation allowance adjustment.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As part of the sale agreement, Devon extended its fixed-fee gathering and processing contracts with respect to the Bridgeport and Cana plants with EnLink through 2029. Although the agreements were extended to 2029, the minimum volume commitments for the Bridgeport and Cana plants expired at the end of 2018. Devon has minimum volume commitments for gathering and processing of 77-128 MMcf/d with EnLink at the Chisholm plant through early 2021.
Prior to the divestment of Devon’s aggregate ownership of EnLink and the General Partner, certain activity between Devon and EnLink were eliminated in consolidation. Subsequent to the divestment, all activity related to EnLink represent third-party transactions and are no longer eliminated in consolidation.
During 2019 and from the period of July 19, 2018 through December 31, 2018, Devon had net outflows of approximately $560 million and $380 million with EnLink, respectively, which primarily related to gathering and processing expenses. These net outflows represent gross cash amounts and not net working interest amounts.
The following table presents the amounts reported in the consolidated statements of comprehensive earnings as discontinued operations.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| Year ended December 31, | Barnett Shale | Canada | EnLink | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | ||||||||||||||||
| Upstream revenues | $ | 486 | $ | 628 | $ | — | $ | 1,114 | ||||||||
| Marketing and midstream revenues | — | 38 | — | 38 | ||||||||||||
| Total revenues | 486 | 666 | — | 1,152 | ||||||||||||
| Production expenses | 306 | 293 | — | 599 | ||||||||||||
| Exploration expenses | — | 13 | — | 13 | ||||||||||||
| Marketing and midstream expenses | — | 18 | — | 18 | ||||||||||||
| Depreciation, depletion and amortization | 77 | 128 | — | 205 | ||||||||||||
| Asset impairments | 748 | 37 | — | 785 | ||||||||||||
| Asset dispositions | 1 | (223 | ) | — | (222 | ) | ||||||||||
| General and administrative expenses | — | 34 | — | 34 | ||||||||||||
| Financing costs, net | — | 87 | — | 87 | ||||||||||||
| Restructuring and transaction costs | — | 248 | — | 248 | ||||||||||||
| Other expenses | 11 | 6 | — | 17 | ||||||||||||
| Total expenses | 1,143 | 641 | — | 1,784 | ||||||||||||
| Earnings (loss) from discontinued operations before income taxes | (657 | ) | 25 | — | (632 | ) | ||||||||||
| Income tax benefit | (142 | ) | (216 | ) | — | (358 | ) | |||||||||
| Net earnings (loss) from discontinued operations, net of tax | $ | (515 | ) | $ | 241 | $ | — | $ | (274 | ) | ||||||
| 2018 | ||||||||||||||||
| Upstream revenues | $ | 777 | $ | 965 | $ | — | $ | 1,742 | ||||||||
| Marketing and midstream revenues | — | 95 | 3,567 | 3,662 | ||||||||||||
| Total revenues | 777 | 1,060 | 3,567 | 5,404 | ||||||||||||
| Production expenses | 467 | 605 | — | 1,072 | ||||||||||||
| Exploration expenses | — | 48 | — | 48 | ||||||||||||
| Marketing and midstream expenses | — | 42 | 2,912 | 2,954 | ||||||||||||
| Depreciation, depletion and amortization | 100 | 330 | 244 | 674 | ||||||||||||
| Asset dispositions | 14 | — | (2,607 | ) | (2,593 | ) | ||||||||||
| General and administrative expenses | — | 76 | 65 | 141 | ||||||||||||
| Financing costs, net | — | 14 | 98 | 112 | ||||||||||||
| Restructuring and transaction costs | — | 17 | — | 17 | ||||||||||||
| Other expenses | (34 | ) | 182 | (8 | ) | 140 | ||||||||||
| Total expenses | 547 | 1,314 | 704 | 2,565 | ||||||||||||
| Earnings (loss) from discontinued operations before income taxes | 230 | (254 | ) | 2,863 | 2,839 | |||||||||||
| Income tax expense (benefit) | 50 | (124 | ) | 403 | 329 | |||||||||||
| Net earnings (loss) from discontinued operations, net of tax | 180 | (130 | ) | 2,460 | 2,510 | |||||||||||
| Net earnings attributable to noncontrolling interests | — | — | 160 | 160 | ||||||||||||
| Net earnings (loss) from discontinued operations, attributable to Devon | $ | 180 | $ | (130 | ) | $ | 2,300 | $ | 2,350 | |||||||
| 2017 | ||||||||||||||||
| Upstream revenues | $ | 825 | $ | 1,494 | $ | — | $ | 2,319 | ||||||||
| Marketing and midstream revenues | — | 58 | 5,071 | 5,129 | ||||||||||||
| Total revenues | 825 | 1,552 | 5,071 | 7,448 | ||||||||||||
| Production expenses | 440 | 591 | — | 1,031 | ||||||||||||
| Exploration expenses | — | 34 | — | 34 | ||||||||||||
| Marketing and midstream expenses | — | 60 | 4,111 | 4,171 | ||||||||||||
| Depreciation, depletion and amortization | 141 | 380 | 545 | 1,066 | ||||||||||||
| Asset impairments | — | — | 17 | 17 | ||||||||||||
| Asset dispositions | 1 | 1 | — | 2 | ||||||||||||
| General and administrative expenses | — | 92 | 128 | 220 | ||||||||||||
| Financing costs, net | — | (4 | ) | 181 | 177 | |||||||||||
| Other expenses | 12 | (104 | ) | (34 | ) | (126 | ) | |||||||||
| Total expenses | 594 | 1,050 | 4,948 | 6,592 | ||||||||||||
| Earnings from discontinued operations before income taxes | 231 | 502 | 123 | 856 | ||||||||||||
| Income tax expense (benefit) | — | 8 | (197 | ) | (189 | ) | ||||||||||
| Net earnings from discontinued operations, net of tax | 231 | 494 | 320 | 1,045 | ||||||||||||
| Net earnings attributable to noncontrolling interests | — | — | 180 | 180 | ||||||||||||
| Net earnings from discontinued operations, attributable to Devon | $ | 231 | $ | 494 | $ | 140 | $ | 865 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the carrying amounts of the assets and liabilities associated with discontinued operations on the consolidated balance sheets. The U.S. Other amounts in the table below relate to the divestiture of non-core upstream Permian Basin assets which closed in January 2019 as further discussed in Note 2.
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Barnett Shale (1) | Canada | Total | Barnett Shale | Canada | U.S. Other | Total | ||||||||||||||||||||||
| Cash restricted for discontinued operations | $ | 25 | $ | 355 | $ | 380 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| Accounts receivable | $ | 38 | $ | 1 | $ | 39 | $ | 44 | $ | 30 | $ | 7 | $ | 81 | ||||||||||||||
| Other current assets | 5 | 2 | 7 | 4 | 56 | — | 60 | |||||||||||||||||||||
| Oil and gas property and equipment, based on successful efforts accounting, net | 751 | — | 751 | 1,552 | 3,829 | 190 | 5,571 | |||||||||||||||||||||
| Other property and equipment, net | 11 | — | 11 | 12 | 78 | — | 90 | |||||||||||||||||||||
| Goodwill | 88 | — | 88 | 88 | — | — | 88 | |||||||||||||||||||||
| Other long-term assets | — | 81 | 81 | — | 79 | — | 79 | |||||||||||||||||||||
| Total assets associated with discontinued operations | $ | 893 | $ | 84 | $ | 977 | $ | 1,700 | $ | 4,072 | $ | 197 | $ | 5,969 | ||||||||||||||
| Accounts payable | $ | 15 | $ | 4 | $ | 19 | $ | 32 | $ | 98 | $ | 3 | $ | 133 | ||||||||||||||
| Revenues and royalties payable | 44 | 3 | 47 | 111 | 67 | — | 178 | |||||||||||||||||||||
| Other current liabilities | 19 | 233 | 252 | 11 | 104 | 19 | 134 | |||||||||||||||||||||
| Long-term debt (2) | — | — | — | — | 1,493 | — | 1,493 | |||||||||||||||||||||
| Asset retirement obligations | 141 | — | 141 | 139 | 424 | 47 | 610 | |||||||||||||||||||||
| Deferred income taxes | — | — | — | — | 348 | — | 348 | |||||||||||||||||||||
| Other long-term liabilities | 16 | 169 | 185 | 30 | 20 | — | 50 | |||||||||||||||||||||
| Total liabilities associated with discontinued operations | $ | 235 | $ | 409 | $ | 644 | $ | 323 | $ | 2,554 | $ | 69 | $ | 2,946 |
| (1) | Certain long-term assets and liabilities for the Barnett Shale were reclassified to respective current assets and liabilities as of December 31, 2019 with the announced sale of the Barnett Shale assets expected to close during the second quarter of 2020. |
|---|
| (2) | Includes the $500 million 4.00% Senior Notes due July 15, 2021 and $1.0 billion 3.25% Senior Notes due May 15, 2022 that were retired early in July 2019 utilizing a portion of the proceeds from the sale of Devon’s Canadian business. |
|---|
| 19. | Commitments and Contingencies |
|---|
Devon is party to various legal actions arising in connection with its 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 likely 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.
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 named as a defendant in a number of such lawsuits, including some lawsuits in which the plaintiffs seek to certify classes of similarly situated plaintiffs. Among the
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
allegations typically asserted in these suits are claims that Devon used below-market prices, made improper deductions, used improper measurement techniques and entered into gas purchase and processing arrangements with affiliates that resulted in underpayment of royalties in connection with oil, natural gas and NGLs produced and sold. 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 Other 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.
Beginning in 2013, various parishes in Louisiana filed suit against more than 100 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, 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 denies any wrongdoing and is vigorously defending against these claims.
Various municipalities and other governmental and private parties in California have filed legal proceedings against certain 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 injunctions against the production of all fossil fuels. 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.
Commitments
The following table presents Devon’s commitments that have initial or remaining noncancelable terms in excess of one year as of December 31, 2019.
| Year Ending December 31, | Drilling and Facility Obligations | Operational Agreements | Office and Equipment Leases | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | $ | 131 | $ | 320 | $ | 51 | ||||||
| 2021 | 31 | 223 | 41 | |||||||||
| 2022 | 30 | 208 | 12 | |||||||||
| 2023 | 22 | 162 | 12 | |||||||||
| 2024 | 16 | 139 | 12 | |||||||||
| Thereafter | 32 | 416 | 298 | |||||||||
| Total | $ | 262 | $ | 1,468 | $ | 426 |
Devon has certain drilling and facility obligations under contractual agreements with third-party service providers to procure drilling rigs and other related services for developmental and exploratory drilling and facilities construction. The value of the drilling obligations reported is based on gross contractual value.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Devon has certain operational agreements whereby Devon has committed to transport or process certain volumes of oil, gas and NGLs for a fixed fee. Devon has entered into these agreements to aid the movement of its production to downstream markets.
Devon leases certain office space and equipment under financing and operating lease arrangements.
| 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, cash restricted for discontinued operations, 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 December 31, 2019 and December 31, 2018, as applicable. Therefore, such financial assets and liabilities are not presented in the following table.
| Fair Value Measurements Using: | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying | Total Fair | Level 1 | Level 2 | |||||||||||||
| Amount | Value | Inputs | Inputs | |||||||||||||
| December 31, 2019 assets (liabilities): | ||||||||||||||||
| Cash equivalents | $ | 702 | $ | 702 | $ | 702 | $ | — | ||||||||
| Commodity derivatives | $ | 50 | $ | 50 | $ | — | $ | 50 | ||||||||
| Commodity derivatives | $ | (31 | ) | $ | (31 | ) | $ | — | $ | (31 | ) | |||||
| Debt | $ | (4,294 | ) | $ | (5,376 | ) | $ | — | $ | (5,376 | ) | |||||
| December 31, 2018 assets (liabilities): | ||||||||||||||||
| Cash equivalents | $ | 1,505 | $ | 1,505 | $ | 1,405 | $ | 100 | ||||||||
| Commodity derivatives | $ | 674 | $ | 674 | $ | — | $ | 674 | ||||||||
| Commodity derivatives | $ | (33 | ) | $ | (33 | ) | $ | — | $ | (33 | ) | |||||
| Debt | $ | (4,454 | ) | $ | (4,494 | ) | $ | — | $ | (4,494 | ) |
The following methods and assumptions were used to estimate the fair values in the tables above.
Level 1 Fair Value Measurements
Cash equivalents – Amounts consist primarily of money market investments and the fair value approximates the carrying value.
Level 2 Fair Value Measurements
Cash equivalents – Amounts primarily consist of Canadian agency and provincial securities investments. The fair value approximates the carrying value.
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 actively trade in an established market. The fair values of its debt are estimated based on rates available for debt with similar terms and maturity.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 21. | Supplemental Information on Oil and Gas Operations (Unaudited) |
|---|
Supplemental unaudited information regarding Devon’s oil and gas activities is presented in this note. With the sale of substantially all of its Canadian assets and operations, all of Devon’s reserves are located within the U.S.
The supplemental information in the tables below exclude amounts for all periods presented related to Devon’s discontinued operations, which consist of Devon’s Canadian operations that were sold in 2019 and its Barnett Shale assets, inclusive of properties divested in previous reporting periods located primarily in Johnson and Wise counties, Texas, which is expected to close in 2020. 612 MMBoe of estimated proved reserves and $940 million of discounted future net cash flows were excluded for 2019, which all related to Devon’s Barnett Shale assets. Amounts excluded for 2018 and 2017 consisted of 1,104 MMBoe and 1,365 MMBoe, respectively, of estimated proved reserves and $3,042 million and $5,383 million, respectively, of discounted future net cash flows, which related to both Devon’s Canadian operations and its Barnett Shale assets, inclusive of properties divested in previous reporting periods located primarily in Johnson and Wise counties, Texas. 410 MMBoe and $1,426 million of discounted future net cash flows related to Devon’s Canadian operations in 2018 were sold in the second quarter of 2019. For additional information on these discontinued operations, see Note 18.
Costs Incurred
The following tables reflect the costs incurred in oil and gas property acquisition, exploration and development activities.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Property acquisition costs: | ||||||||||||
| Proved properties | $ | — | $ | 2 | $ | 1 | ||||||
| Unproved properties | 35 | 70 | 50 | |||||||||
| Exploration costs | 312 | 679 | 591 | |||||||||
| Development costs | 1,499 | 1,505 | 1,046 | |||||||||
| Costs incurred | $ | 1,846 | $ | 2,256 | $ | 1,688 |
Development costs in the tables above include additions and revisions to Devon’s asset retirement obligations.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Results of Operations
The following tables include revenues and expenses associated with Devon’s oil and gas producing activities. They do not include any allocation of Devon’s interest costs or general corporate overhead and, therefore, are not necessarily indicative of the contribution to net earnings of Devon’s oil and gas operations. Income tax expense has been calculated by applying statutory income tax rates to oil, gas and NGL sales after deducting costs, including DD&A and after giving effect to permanent differences.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Oil, gas and NGL sales | $ | 3,809 | $ | 4,085 | $ | 2,921 | ||||||
| Production expenses | (1,197 | ) | (1,153 | ) | (791 | ) | ||||||
| Exploration expenses | (58 | ) | (128 | ) | (346 | ) | ||||||
| Depreciation, depletion and amortization | (1,398 | ) | (1,134 | ) | (908 | ) | ||||||
| Asset dispositions | 37 | 276 | 212 | |||||||||
| Asset impairments | — | (109 | ) | — | ||||||||
| Accretion of asset retirement obligations | (21 | ) | (26 | ) | (27 | ) | ||||||
| Income tax expense | (270 | ) | (416 | ) | — | |||||||
| Results of operations | $ | 902 | $ | 1,395 | $ | 1,061 | ||||||
| Depreciation, depletion and amortization per Boe | $ | 11.72 | $ | 10.51 | $ | 9.58 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Proved Reserves
The following table presents Devon’s estimated proved reserves by product.
| Oil (MMBbls) | Gas (Bcf) | NGL (MMBbls) | Combined (MMBoe) | |||||||||||||
| Proved developed and undeveloped reserves: | ||||||||||||||||
| December 31, 2016 | 191 | 1,613 | 200 | 660 | ||||||||||||
| Revisions due to prices | 12 | 55 | 5 | 27 | ||||||||||||
| Revisions other than price | 6 | (31 | ) | (15 | ) | (14 | ) | |||||||||
| Extensions and discoveries | 90 | 371 | 63 | 215 | ||||||||||||
| Production | (42 | ) | (189 | ) | (21 | ) | (95 | ) | ||||||||
| Sale of reserves | (3 | ) | (9 | ) | (1 | ) | (6 | ) | ||||||||
| December 31, 2017 | 254 | 1,810 | 231 | 787 | ||||||||||||
| Revisions due to prices | 12 | 7 | 2 | 15 | ||||||||||||
| Revisions other than price | (10 | ) | (102 | ) | (27 | ) | (53 | ) | ||||||||
| Extensions and discoveries | 93 | 358 | 54 | 206 | ||||||||||||
| Production | (47 | ) | (206 | ) | (26 | ) | (108 | ) | ||||||||
| Sale of reserves | (6 | ) | (65 | ) | (7 | ) | (24 | ) | ||||||||
| December 31, 2018 | 296 | 1,802 | 227 | 823 | ||||||||||||
| Revisions due to prices | (7 | ) | (86 | ) | (6 | ) | (28 | ) | ||||||||
| Revisions other than price | (13 | ) | (50 | ) | (9 | ) | (31 | ) | ||||||||
| Extensions and discoveries | 76 | 269 | 39 | 160 | ||||||||||||
| Purchase of reserves | 3 | 7 | 1 | 6 | ||||||||||||
| Production | (55 | ) | (219 | ) | (28 | ) | (119 | ) | ||||||||
| Sale of reserves | (24 | ) | (102 | ) | (13 | ) | (54 | ) | ||||||||
| December 31, 2019 | 276 | 1,621 | 211 | 757 | ||||||||||||
| Proved developed reserves: | ||||||||||||||||
| December 31, 2016 | 157 | 1,359 | 161 | 545 | ||||||||||||
| December 31, 2017 | 175 | 1,455 | 168 | 585 | ||||||||||||
| December 31, 2018 | 196 | 1,427 | 166 | 600 | ||||||||||||
| December 31, 2019 | 198 | 1,344 | 167 | 589 | ||||||||||||
| Proved developed-producing reserves: | ||||||||||||||||
| December 31, 2016 | 141 | 1,267 | 148 | 500 | ||||||||||||
| December 31, 2017 | 163 | 1,384 | 160 | 554 | ||||||||||||
| December 31, 2018 | 188 | 1,394 | 162 | 582 | ||||||||||||
| December 31, 2019 | 191 | 1,327 | 165 | 578 | ||||||||||||
| Proved undeveloped reserves: | ||||||||||||||||
| December 31, 2016 | 34 | 254 | 39 | 115 | ||||||||||||
| December 31, 2017 | 79 | 355 | 63 | 202 | ||||||||||||
| December 31, 2018 | 100 | 375 | 61 | 223 | ||||||||||||
| December 31, 2019 | 78 | 277 | 44 | 168 |
| (1) | Gas reserves are converted to Boe at the rate of six Mcf per Bbl of oil, based upon the approximate relative energy content of gas and oil. NGL reserves are converted to Boe on a one-to-one basis with oil. The conversion rates are not necessarily indicative of the relationship of oil, natural gas and NGL prices. |
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DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Proved Undeveloped Reserves
The following table presents the changes in Devon’s total proved undeveloped reserves during 2019 (MMBoe).
| U.S. | ||||
|---|---|---|---|---|
| Proved undeveloped reserves as of December 31, 2018 | 223 | |||
| Extensions and discoveries | 89 | |||
| Revisions due to prices | — | |||
| Revisions other than price | (20 | ) | ||
| Sale of reserves | (17 | ) | ||
| Conversion to proved developed reserves | (107 | ) | ||
| Proved undeveloped reserves as of December 31, 2019 | 168 |
Total proved undeveloped reserves decreased 25% from 2018 to 2019 with the year-end 2019 balance representing 22% of total proved reserves. Over 70% of the 89 MMBoe in extensions and discoveries were the result of Devon’s focus on drilling and development activities in the STACK and Delaware Basin. This continued development in the STACK, and Delaware Basin also led to the conversion of 107 MMBoe, or 48% of the 2018 U.S. proved undeveloped reserves to proved developed reserves. Costs incurred to develop and convert Devon’s proved undeveloped reserves were approximately $918 million for 2019.
Price Revisions
Reserves decreased 28 MMBoe in 2019 primarily due to price decreases in the trailing 12 month averages for oil, gas and NGLs.
Reserves increased 15 MMBoe and 27 MMBoe primarily due to price increases in the trailing 12 month averages for oil, gas and NGLs in 2018 and 2017, respectively.
Revisions Other Than Price
Total revisions other than price in 2019 and 2018 primarily related to Devon’s development programs evaluation of certain oil and dry gas regions, with the largest revisions being made in the STACK.
Extensions and Discoveries
2019 – Of the 160 MMBoe of additions from extensions and discoveries, 77 MMBoe were in the Delaware Basin, 37 MMBoe were in the STACK, 28 MMBoe in the Powder River Basin and 18 MMBoe in Eagle Ford. In 2019, there were no additions related to infill drilling activities.
2018 – Approximately 85% of the additions were through focused efforts in the STACK (87 MMBoe) and the Delaware Basin (88 MMBoe). The remaining extensions were added throughout the remainder of Devon’s portfolio.
The 2018 extensions and discoveries included 21 MMBoe related to additions from Devon’s infill drilling activities, primarily relating to the STACK.
2017 – Over 90% of the additions were through focused efforts in the STACK (120 MMBoe) and the Delaware Basin (79 MMBoe). The remaining extensions were added throughout the remainder of Devon’s portfolio.
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The 2017 extensions and discoveries included 61 MMBoe related to additions from Devon’s infill drilling activities primarily related to the STACK.
Sale of Reserves
During 2019, 2018 and 2017, Devon had U.S. non-core asset divestitures. For additional information on these divestitures, see Note 2.
Standardized Measure
The following tables reflect Devon’s standardized measure of discounted future net cash flows from its proved reserves.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Future cash inflows | $ | 20,750 | $ | 27,759 | $ | 20,845 | ||||||
| Future costs: | ||||||||||||
| Development | (2,093 | ) | (2,957 | ) | (2,687 | ) | ||||||
| Production | (9,174 | ) | (10,991 | ) | (7,782 | ) | ||||||
| Future income tax expense | (1,037 | ) | (2,036 | ) | — | |||||||
| Future net cash flow | 8,446 | 11,775 | 10,376 | |||||||||
| 10% discount to reflect timing of cash flows | (3,048 | ) | (4,625 | ) | (4,422 | ) | ||||||
| Standardized measure of discounted future net cash flows | $ | 5,398 | $ | 7,150 | $ | 5,954 |
Future cash inflows, development costs and production costs were computed using the same assumptions for prices and costs that were used to estimate Devon’s proved oil and gas reserves at the end of each year. For 2019 estimates, Devon’s future realized prices were assumed to be $53.58 per Bbl of oil, $1.69 per Mcf of gas and $15.26 per Bbl of NGLs. Of the $2.1 billion of future development costs as of the end of 2019, $0.8 billion, $0.5 billion and $0.2 billion are estimated to be spent in 2020, 2021 and 2022, respectively.
Future development costs include not only development costs but also future asset retirement costs. Included as part of the $2.1 billion of future development costs are $0.4 billion of future asset retirement costs. The future income tax expenses have been computed using statutory tax rates, giving effect to allowable tax deductions and tax credits under current laws.
The principal changes in Devon’s standardized measure of discounted future net cash flows are as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Beginning balance | $ | 7,150 | $ | 5,954 | $ | 3,292 | ||||||
| Net changes in prices and production costs | (2,323 | ) | 1,533 | 1,784 | ||||||||
| Oil, gas and NGL sales, net of production costs | (2,612 | ) | (2,932 | ) | (2,130 | ) | ||||||
| Changes in estimated future development costs | 303 | (273 | ) | (73 | ) | |||||||
| Extensions and discoveries, net of future development costs | 1,690 | 2,944 | 2,398 | |||||||||
| Purchase of reserves | 43 | — | 2 | |||||||||
| Sales of reserves in place | (481 | ) | (120 | ) | (3 | ) | ||||||
| Revisions of quantity estimates | (359 | ) | (152 | ) | (51 | ) | ||||||
| Previously estimated development costs incurred during the period | 857 | 787 | 322 | |||||||||
| Accretion of discount | 506 | 648 | 445 | |||||||||
| Net change in income taxes and other | 624 | (1,239 | ) | (32 | ) | |||||||
| Ending balance | $ | 5,398 | $ | 7,150 | $ | 5,954 |
DEVON ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| 22. | Supplemental Quarterly Financial Information (Unaudited) |
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The following tables present a summary of Devon’s unaudited interim results of operations.
| 2019 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||||||||
| Total revenues (1) | $ | 1,079 | $ | 1,806 | $ | 1,746 | $ | 1,589 | $ | 6,220 | ||||||||||
| Asset dispositions (2) | $ | (45 | ) | $ | (2 | ) | $ | (1 | ) | $ | — | $ | (48 | ) | ||||||
| Earnings (loss) from continuing operations before income taxes | $ | (497 | ) | $ | 219 | $ | 190 | $ | (21 | ) | $ | (109 | ) | |||||||
| Net earnings (loss) from continuing operations | $ | (378 | ) | $ | 151 | $ | 136 | $ | 12 | $ | (79 | ) | ||||||||
| Net earnings (loss) from discontinued operations, net of income tax expense (benefit) (4) | $ | 61 | $ | 344 | $ | (27 | ) | $ | (652 | ) | $ | (274 | ) | |||||||
| Net earnings (loss) attributable to Devon | $ | (317 | ) | $ | 495 | $ | 109 | $ | (642 | ) | $ | (355 | ) | |||||||
| Basic net earnings (loss) per share attributable to Devon | $ | (0.74 | ) | $ | 1.20 | $ | 0.27 | $ | (1.70 | ) | $ | (0.89 | ) | |||||||
| Diluted net earnings (loss) per share attributable to Devon | $ | (0.74 | ) | $ | 1.19 | $ | 0.27 | $ | (1.70 | ) | $ | (0.89 | ) |
| 2018 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||||||||||||||||
| Total revenues (1) | $ | 1,665 | $ | 1,727 | $ | 1,974 | $ | 3,530 | $ | 8,896 | ||||||||||
| Asset dispositions (2) | $ | (12 | ) | $ | (18 | ) | $ | (6 | ) | $ | (242 | ) | $ | (278 | ) | |||||
| Earnings (loss) from continuing operations before income taxes (3) | $ | (264 | ) | $ | (486 | ) | $ | (105 | ) | $ | 1,799 | $ | 944 | |||||||
| Net earnings (loss) from continuing operations | $ | (261 | ) | $ | (499 | ) | $ | 96 | $ | 1,378 | $ | 714 | ||||||||
| Net earnings (loss) from discontinued operations, net of income tax expense (benefit) (4) | $ | 108 | $ | 163 | $ | 2,469 | $ | (230 | ) | $ | 2,510 | |||||||||
| Net earnings (loss) attributable to Devon | $ | (197 | ) | $ | (425 | ) | $ | 2,537 | $ | 1,149 | $ | 3,064 | ||||||||
| Basic net earnings (loss) per share attributable to Devon | $ | (0.38 | ) | $ | (0.83 | ) | $ | 5.17 | $ | 2.50 | $ | 6.14 | ||||||||
| Diluted net earnings (loss) per share attributable to Devon | $ | (0.38 | ) | $ | (0.83 | ) | $ | 5.14 | $ | 2.48 | $ | 6.10 |
| (1) | Includes noncash commodity hedge valuation changes of approximately $600 million loss in the first quarter of 2019 and approximately $1.4 billion gain in the fourth quarter of 2018. |
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| (2) | Additional discussion regarding asset dispositions can be found in Note 2. |
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| (3) | Includes asset impairments of approximately $150 million in the second quarter of 2018. Additional discussion regarding asset impairments can be found in Note 5. |
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| (4) | 2019 includes a $748 million asset impairment recognized in connection with the announced sale of Devon’s Barnett Shale assets in the fourth quarter of 2019. In addition, 2019 includes a gain of $425 million (after-tax) on the sale of its Canadian business during 2019, and 2018 includes a gain on sale associated with the divestment of Devon’s aggregate ownership interests in EnLink and the General Partner of approximately $2.2 billion (after-tax) in the third quarter of 2018. Additional discussion can be found in Note 18. |
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