Exploration & Production | General | Quarterly / Earnings Reports

Devon Details Latest on Midstream MLP, Q2 Shale Results

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Devon Energy Corporation reported net earnings of $683 million or $1.69 per common share ($1.68 per diluted share) for the quarter ended June 30, 2013.

This compares with the second-quarter 2012 net earnings of $477 million or $1.18 per common share ($1.18 per diluted share).

Adjusting for items securities analysts typically exclude from their published estimates, the company earned $491 million or $1.21 per diluted share in the second quarter. This adjusted earnings result represents a 119 percent increase compared to the second quarter of 2012.

Record Production Driven By Strong Oil Growth

Total production increased to an average of 698,000 oil-equivalent barrels (Boe) per day in the second quarter of 2013, exceeding the top-end of the company’s guidance range by 8,000 barrels per day. This is the highest average daily rate in Devon’s history from its North American property base. Second-quarter production benefited from better than expected results from several core development areas, including the Permian Basin and Barnett Shale.

Devon’s strong growth in oil production continued in the second quarter. In aggregate, oil production averaged 169,000 barrels per day, a 14 percent increase compared to the second quarter of 2012 and a 4 percent increase compared to the first quarter of 2013. Driven by the Permian Basin, the most significant growth came from the company’s U.S. operations, where oil production increased 36 percent year over year.

John Richels, President and CEO, commented: "The second quarter was an outstanding one for Devon as we continued to successfully grow high-margin oil production. We remain on track to deliver total companywide oil production growth in the high teens for 2013, led by light-oil growth of nearly 40 percent in the U.S."

Dave Hager, COO, added: "In addition to delivering an excellent quarter, we achieved some exciting results in a new light-oil resource play. We have now identified 400,000 net acres in the Mississippian Trend with Woodford Oil Shale potential."

Key Operating Highlights:

• Devon Averages 840 BOE/d IP at Oily Woodford Prospects
• Devon Ups Granite Wash, Barnett Production in Q2
• Devon Tags Strong Permian, Powder River Basin Results
• Devon Talks Canadian Jackfish Ops; Touts Performance

Midstream MLP Update

In June, Devon announced that its board of directors approved a plan to form a publicly traded midstream master limited partnership (MLP). The MLP is expected to initially own a minority interest in Devon’s U.S. midstream business. The company expects the MLP to file a registration statement with the Securities and Exchange Commission (SEC) by the end of the third quarter. Subject to market conditions, an offering of partnership units in the MLP would follow registration with the SEC.

In addition to the MLP announcement, the company divested non-core assets. Year to date, Devon has signed agreements to sell exploration and production and midstream assets totaling nearly $300 million. Estimated cash flow in 2013 from these divestiture assets is less than $15 million, and current production is essentially all dry gas, averaging around 20 million cubic feet of natural gas equivalent per day. The company expects to close these highly accretive transactions during the second half of 2013.

Upstream Revenue Increases 37 Percent; Costs Remain Essentially Flat

Revenue from oil, natural gas and natural gas liquids sales totaled $2.2 billion in the second quarter, a 37 percent increase from the second quarter of 2012. The significant increase in revenue was attributable to improved natural gas and oil price realizations combined with higher oil production. In the second quarter, oil sales increased to more than 50 percent of Devon’s total upstream revenues.

Devon’s marketing and midstream operating profit reached $121 million in the second quarter of 2013. This result exceeded the company’s guidance and represents a 79 percent increase compared to the second quarter of 2012. The year-over-year increase in operating profit was attributable to improved natural gas prices and higher utilization at the company’s fractionator facility in Mont Belvieu.

The company’s pre-tax expenses totaled $1.7 billion in the second quarter of 2013. On a unit of production basis, pre-tax expenses were 1 percent higher than the second quarter of 2012 but were 2 percent lower than the first quarter of 2013. Devon achieved these strong results through its focused cost management efforts offsetting the impact of increasing oil production. In general, oil projects are higher margin, but have higher operating costs than gas projects.

Cash Flow Increases 31 Percent; Devon Repatriates Foreign Cash

Devon generated $1.4 billion of cash flow before balance sheet changes in the second quarter of 2013, a 31 percent increase over the year-ago period. During the quarter, the company comfortably funded its total capital program and reduced its debt balances by $2.0 billion.

As of June 30, 2013, the company had repatriated $2.0 billion of foreign cash to the U.S. at an estimated tax rate of 5 percent. In addition, Devon transferred $500 million to Canada on a tax-free basis. The company exited the second quarter with cash and short-term investments totaling $4.2 billion and a net debt to adjusted capitalization of 23 percent.