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Devon Energy Q2 2020 Results; Cuts Another $25MM from Capex

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   |    Tuesday,August 04,2020

Devon Energy Corp. reported its Q2 2020 results.

Cuts 2020 Capex Again, Raises Oil Production Guidance

Devon is lowering its full-year 2020 E&P capital expenditure guidance to a range of $950 million to $1 billion, a $25 million reduction compared to prior midpoint expectations.

This improvement is driven by capital efficiency gains in the Delaware Basin. For the third quarter of 2020, the company expects to invest approximately $175 million to $225 million of upstream capital.

In conjunction with the improved full-year capital spending outlook, Devon is raising its full-year oil production forecast in 2020 to a range of 148,000 to 152,000 barrels per day due to strong base production performance across its diversified asset portfolio. In the third quarter, due to timing of completion activity, the company expects oil production to decline to a range of 138,000 to 143,000 barrels per day.

Highlights:

  • Efficiency gains drove capital expenditures 10 percent below guidance to $203 million in the quarter
  • Second-quarter oil production totaled 153,000 barrels per day, exceeding midpoint guidance by 3,000 barrels per day
  • Operating costs were below guidance, declining 14 percent year-over-year
  • Exited second quarter with $4.7 billion of liquidity, including $1.7 billion of cash, with no debt maturities until 2025
  • Accelerating Barnett Shale closing to Oct. 1, 2020, from previously scheduled date of Dec. 31, 2020
  • Board of directors declares a $100 million special dividend in conjunction with Barnett closing
  • Expect to achieve $300 million of sustainable cash cost savings by year end
  • Plan to use cash on hand to repurchase up to $1.5 billion of additional debt

President & CEO Dave Hager said: “As we navigate through the challenges presented by the COVID-19 crisis, our top priority continues to be the safety and well-being of our employees and the communities in which we operate. I want to commend our workforce for rapidly adjusting to difficult industry conditions. Our strong second-quarter operational results demonstrate the professionalism of our employees to safely execute our business plan and protect shareholder value.”

“In a separate release issued today, we announced the next phase of our strategic plan to accelerate value creation for shareholders. These actions include initiatives to reduce cash costs by $300 million annually, reduce debt balances by up to $1.5 billion and return cash to shareholders in the form of a $100 million special dividend. These shareholder-friendly initiatives demonstrate our commitment to a new E&P business model, which moderates growth, emphasizes capital efficiencies, generates free cash flow and returns increasing amounts of cash directly to our shareholders.”

Operating Results

Second-quarter oil production averaged 153,000 barrels per day, a 6 percent increase from the year-ago period. This result exceeded the company’s midpoint guidance by 3,000 barrels per day, resulting from better-than-expected base production performance in the Eagle Ford and Anadarko Basin. Due to low oil prices in the quarter, Devon elected to voluntarily curtail

10,000 barrels per day. As oil prices have stabilized and begun to recover, the company has no plans to curtail production in the second half of 2020.

The company’s operating costs, which consists of production expenses, general and administrative (G&A) expenses and financing costs, totaled $13.92 per oil-equivalent barrel (Boe), a 14 percent improvement compared to the second quarter of 2019. Costs

in several categories were lower than guidance, most notably Devon’s G&A expense, which declined 31 percent year over year.

Capital spending in the second quarter was $203 million, or 10 percent below midpoint guidance. This positive variance was attributable to efficiency gains in the Delaware Basin and improvements in service-cost pricing. Devon exited the second quarter running nine operated drilling rigs and one completion crew.

Delaware Basin

Net production averaged 149,000 Boe per day, a 24 percent increase compared to the year-ago period. In the second quarter, Devon’s Wolfcamp-oriented capital program brought 22 operated wells online across Southeast New Mexico. Completed well costs for activity targeting the Wolfcamp formation improved to a new record of $700 per

foot. In addition to capital efficiencies, the company continued to lower its operating costs, with production expenses declining 20 percent year over year to $7.58 per Boe.

Powder River Basin

Production averaged 24,000 Boe per day, of which 76 percent was oil. During the quarter, Devon dropped its drilling rigs in the basin and limited activity to bringing 4 new wells online. The average completed well cost for this activity, targeting the Parkman and Turner formations, was $5.9 million. For the remainder of 2020, the capital

program is focused on appraisal work in the emerging Niobrara oil play. A key upcoming project is the Steinle pad, a 3-well spacing test targeting the Niobrara “B” interval. The Steinle pad is expected to commence production in the third quarter.

Eagle Ford

Second-quarter net production averaged 53,000 Boe per day, an 8 percent increase compared to the second quarter 2019. The company brought online 13 development wells in the quarter, averaging 30-day rates of 2,300 Boe per day. Completed well costs for this activity averaged $6.6 million. Devon and its partner are not currently operating drilling rigs or completion crews in the play. The partnership has 22 high-impact uncompleted wells in its inventory and expects to resume capital activity around year-end.

Anadarko Basin

Net production averaged 90,000 Boe per day. The company’s operational focus during the quarter was concentrated on optimizing base production and reducing controllable downtime across the field. Devon does not currently operate drilling rigs or completion crews in the basin.

Financial Results

Devon reported a net loss of $670 million, or $1.78 per diluted share, in the second quarter. The quarterly result was negatively impacted by a $593 million unrealized change in the fair value of the company’s derivative position due to higher futures commodity pricing. Adjusting for items analysts typically exclude from estimates, Devon had a core loss of $66 million, or $0.18 per diluted share. The company’s operating cash flow in the second quarter totaled $150 million, with EBITDAX reaching $325 million.

Devon’s financial position continues to remain exceptionally strong with excellent liquidity and low leverage. The company exited the second quarter with $1.7 billion of cash (inclusive of restricted cash) and an undrawn credit facility of $3 billion. At the end of the quarter, Devon had an outstanding debt balance of $4.3 billion with no outstanding debt maturities occurring until late 2025.

Barnett Update

In a separate press release issued today, Devon announced the accelerated closing of its Barnett Shale divestiture to Oct. 1, 2020, from the previously anticipated date of Dec. 31, 2020. The company also provided details on the next phase of its strategic plan. These strategic initiatives include the board declaring a $100 million special dividend and a plan to reduce G&A and other cash costs by $300 million annually. In addition, Devon intends to use surplus cash to repurchase up to $1.5 billion of debt.


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