Devon Energy Reports 3rd Quarter 2020 Financial & Operational Results

Source: www.gulfoilandgas.com 10/29/2020, Location: North America

Devon Energy Corp. reported financial and operational results for the third-quarter 2020.

KEY FINANCIAL AND OPERATIONAL HIGHLIGHTS
• Third-quarter oil production totaled 146,000 barrels per day, exceeding midpoint guidance by 6,000 barrels per day
• Delaware Basin efficiency gains drove capital expenditures below midpoint guidance in the quarter
• Production expenses were below guidance, improving 8 percent year over year
• Operating cash flow expanded quarter over quarter to $427 million
• Free cash flow generation reached $223 million in the third quarter
• Barnett Shale asset divestiture was completed on Oct. 1
• Paid $100 million special dividend in conjunction with Barnett divestiture
• Announced transformational merger of equals with WPX Energy on Sept. 28, creating a leading U.S. energy company “Devon is executing at a very high level on all aspects of our disciplined cash-return business model,” said Dave Hager, president and CEO. “Our third-quarter performance was highlighted by record-setting well productivity and capital efficiency gains in the Delaware Basin that drove oil production well above guidance with a total capital investment that was below forecast. Furthermore, this strong operational performance, coupled with significant improvements in our corporate cost structure, positioned us to generate $223 million of free cash flow in the quarter.”

“With our operations successfully scaled to generate free cash flow, our advantaged financial position allows us to accelerate the return of capital to shareholders,” Hager said. “In conjunction with the recent closing of the Barnett Shale divestiture, we rewarded our shareholders with a $100 million special dividend. This action further demonstrates our commitment to the cashreturn business model, which moderates growth, emphasizes capital efficiencies, prioritizes free cash flow and returns increasing amounts of cash to shareholders.”

OPERATING RESULTS
Net production from Devon’s retained assets averaged 326,000 oil-equivalent barrels (Boe) per day during the third quarter. Oil production averaged 146,000 barrels per day, exceeding the company’s midpoint guidance by 6,000 barrels per day. Thirdquarter oil production benefited from strong well productivity in the Delaware Basin and better-than-expected base production performance across the portfolio.

Upstream capital spending in the third quarter was $195 million, or 3 percent below midpoint guidance. This positive variance was attributable to efficiency gains in the Delaware Basin and improvements in service-cost pricing. Devon averaged nine operated drilling rigs and three completion crews in the third quarter, all residing in the Delaware Basin. Devon’s production expense totaled $271 million in the third quarter, an 8 percent improvement year over year. The largest component of production expense is lease operating expense and gathering, processing and transportation costs, which totaled $225 million in aggregate, or $7.49 per Boe in the quarter. Effective cost management efforts and efficient field-level operations drove per-unit rates 8 percent below guidance expectations for the quarter.

The company also improved its general and administrative (G&A) cost structure during the quarter. G&A expenses totaled $75 million in the third quarter, a 30 percent improvement from the third quarter of 2019. The lower overhead costs were primarily driven by reduced personnel expense.

Delaware Basin: Net production averaged 155,000 Boe per day, a 22 percent increase compared to the year-ago period. Activity in the quarter was highlighted by the company’s Cobra project in Lea County. This 3-mile lateral development, consisting of the longest wells ever drilled in the basin, set a company record for Wolfcamp well productivity, with 30-day rates averaging 7,300 Boe per day per well. Overall, Devon’s Wolfcamp-oriented capital program brought 32 operated wells online across Southeast New Mexico, including 14 wells that reached 30-day peak rates in the quarter. Completed well costs improved to a record low $560 per lateral foot in the third quarter, a 40 percent improvement compared to 2018.

Powder River Basin: Production averaged 28,000 Boe per day, of which 76 percent was oil. This represents a 9 percent increase in production compared to the year-ago period, driven by 9 wells that commenced first production in the quarter. In addition to higher production, Devon also made significant progress improving its per-unit field-level operating costs, which declined 20 percent year over year.

Eagle Ford: Third-quarter net production averaged 46,000 Boe per day, an 11 percent decline compared to average rates in the first half of 2020. To conserve capital, Devon and its partner did not pursue any drilling and completion activity in the quarter. The partnership has 22 high-impact uncompleted wells in its inventory and expects to resume capital activity in early 2021.

Anadarko Basin: Net production averaged 89,000 Boe per day in the third quarter, essentially flat compared to the previous quarter. The company did not operate any rigs or complete any new wells in the quarter. The success in holding production flat reflects ongoing focus on base production optimization and downtime reduction across the field. With the recent improvement in natural gas prices, Devon is evaluating the resumption of activity in early 2021 through its $100 million drilling carry with Dow.

FINANCIAL RESULTS
Devon reported a net loss of $92 million, or $0.25 per diluted share, in the third quarter. Adjusting for items analysts typically exclude from estimates, Devon had a core loss of $12 million, or $0.04 per diluted share. In the third quarter, the company’s operating cash flow from continuing operations totaled $427 million, funding all capital requirements and generating $223 million of free cash flow in the quarter.

The company’s financial position continues to remain exceptionally strong with excellent liquidity and low leverage. Devon exited the third quarter with $1.9 billion of cash (inclusive of restricted cash) and an undrawn credit facility of $3 billion. At the end of the quarter, the company had an outstanding debt balance of $4.3 billion with no debt maturities occurring until late 2025.

On Oct. 1, Devon completed the sale of its Barnett Shale assets. The company received a cash payment of $320 million at closing, after adjusting for a $170 million deposit received in April and other purchase-price adjustments. Devon has the opportunity for contingent cash payments of up to $260 million based upon future commodity prices, with upside participation beginning at either a $2.75 Henry Hub natural gas price or a $50 West Texas Intermediate oil price. In conjunction with the Barnett closing, Devon paid a $100 million special dividend to shareholders. The special dividend was paid on Oct. 1 in the amount of $0.26 per share.

UPDATED 2020 GUIDANCE
For the second consecutive quarter, Devon is raising its full-year 2020 oil production forecast to a range of 152,000 to 154,000 barrels per day. The improved outlook is due to better than expected well productivity and strong base production performance across its asset portfolio. In the fourth-quarter 2020, oil production is forecasted to average 148,000 to 153,000 barrels per day, a 7,000 barrel per day improvement versus prior guidance expectations.

Devon expects to deliver this improved oil growth outlook with less capital than previously projected. The company is lowering the top end of its full-year 2020 E&P capital expenditure guidance by $10 million to a range of $950 million to $990 million in 2020. This improvement is driven by capital efficiency gains in the Delaware Basin. Fourth-quarter upstream capital is expected to range from $160 million to $200 million.

Additionally, the company is lowering its 2020 lease operating expense and gathering, processing and transportation costs outlook by 6 percent compared to previous expectations.

STRATEGIC MERGER OF EQUALS WITH WPX ENERGY
On Sept. 28, 2020, Devon announced that it had entered into an agreement to combine in an all-stock merger of equals transaction with WPX Energy. The strategic combination will create a leading unconventional oil producer in the U.S., with an asset base underpinned by a premium acreage position in the economic core of the Delaware Basin. The combined company, which will be named Devon Energy, will benefit from enhanced scale, improved margins, higher free cash flow and the financial strength to accelerate the return of cash to shareholders through an industry-first “fixed plus variable” dividend strategy. The transaction is expected to close in the first quarter of 2021. Upon completion of the transaction, Devon shareholders will own approximately 57 percent of the combined company and WPX shareholders will own approximately 43 percent of the combined company on a fully diluted basis.


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