OKLAHOMA CITY–(BUSINESS WIRE)–Devon Energy Corp. (NYSE: DVN) today reported operational and financial results for the fourth quarter and full-year 2018. Also provided is the company’s guidance for the first quarter and full-year 2019. Supplemental financial tables for the fourth quarter, full-year 2018 and 2019 outlook are available on the company’s website at www.devonenergy.com.
Fourth-Quarter and Full-Year 2018 Highlights
- Light-oil production advances 20 percent year over year in fourth quarter
- Prolific well productivity in Delaware Basin drives high-return U.S. oil growth
- U.S. oil reserves added at attractive finding cost
- Corporate cost structure improves 21 percent in fourth quarter
- Divestiture program approaches nearly $5 billion in proceeds
- Stock-repurchase program reaches $3.4 billion
“2018 was a pivotal year for Devon as we took several significant steps toward achieving our long-term strategic goals,” said Dave Hager, president and CEO. “Operationally, we successfully transitioned our franchise U.S. oil business into full-field development, which resulted in high-return, light-oil production advancing 20 percent in the fourth quarter. In addition to this strong operating performance, we made substantial progress high-grading our asset portfolio, building per-share value through our industry-leading share-repurchase program and reducing our outstanding debt by more than 40 percent.”
Completing Transformation to High-Return U.S. Oil Growth Company
Additionally, in a separate press release issued today, Devon announced that its board of directors has authorized the company to pursue the separation of its Canadian and Barnett Shale assets to complete the transformation to a high-return U.S. oil growth business. The company will evaluate multiple methods of separating the assets, including a potential sale or spin-off. The separation will allow Devon to focus on its top-tier, high-return U.S. oil assets and is aligned with the company’s previously announced long-term strategic plan.
“With our world-class U.S. oil resource plays rapidly building momentum and achieving operating scale, the final step in our multi-year transformation is an aggressive, transformational move that will accelerate value creation for our shareholders by further simplifying our resource-rich asset portfolio,” said Hager. “New Devon will emerge with a highly focused U.S. oil portfolio and has the ability to substantially increase returns and profitability as we aggressively align our cost structure to expand margins with this top-tier oil business. The New Devon will be able to grow oil volumes at a mid-teens rate while generating free cash flow at pricing above $46 per barrel.”
Share-Repurchase Program Increased to $5 Billion and Dividend Raised 13 Percent
Devon also announced today that its board of directors authorized a $1 billion increase to the company’s previously announced $4 billion share-repurchase program, bringing the total repurchase program to $5 billion. The authorization for the repurchase program expires on Dec. 31, 2019. As of Feb. 18, 2019, Devon had completed $3.4 billion of repurchases under the program, totaling approximately 90 million shares.
All purchases will be made in accordance with applicable laws from time to time in open-market or private transactions, depending on market conditions, and may be discontinued at any time. At the current share price, this program covers nearly 30 percent of the company’s outstanding common stock.
Additionally, the company’s board of directors approved a 13 percent increase in its quarterly common stock dividend beginning in the second quarter of 2019. The new quarterly dividend rate will be $0.09 per share, compared to the prior quarterly dividend of $0.08 per share. The adjusted dividend is payable on June 28, 2019, to stockholders of record at the close of business on June 14, 2019.
Delaware Basin Drives U.S. Oil Production 20 Percent Higher
Fourth-quarter production was highlighted by Devon’s U.S. oil business, which is attaining the highest margins and returns in the company’s portfolio. In the quarter, light-oil production from the company’s retained assets in the U.S. averaged 126,000 barrels per day, a 20 percent increase compared to the fourth quarter of 2017. This strong performance in the U.S. was driven by growth in the company’s four key oil assets: the Delaware Basin, STACK, Powder River Basin and Eagle Ford.
The strongest asset-level performance in the quarter was achieved by the Delaware Basin operations in southeast New Mexico. Oil production from this world-class asset increased 49 percent year over year, driving volumes to 84,000 oil-equivalent barrels (Boe) per day. In early 2019, production growth has accelerated, with January rates averaging 96,000 Boe per day, a 14 percent increase compared to the fourth quarter of 2018.
In Canada, net oil production averaged 120,000 barrels per day in the fourth quarter. Production was reduced by approximately 17,000 barrels per day in the quarter due to the company’s decision to curtail volumes in response to market conditions. These curtailments were partially offset by royalty adjustments related to the lower commodity price environment.
Overall, Devon’s reported net production averaged 532,000 Boe per day during the fourth quarter of 2018, exceeding midpoint guidance by 3,000 Boe per day. Of this total, oil production accounted for the largest component of the product mix at 47 percent of total volumes.
Light-Oil Reserves Added at Attractive Finding Costs
Devon’s estimated proved reserves were 1.9 billion Boe on Dec. 31, 2018, with proved developed reserves accounting for 77 percent of the total. The company’s reserve additions in 2018 came primarily from its retained U.S. assets, where proved oil reserves increased 16 percent year over year.
In 2018, Devon’s oil-driven capital programs in the U.S. added 232 million Boe of reserves (extensions and discoveries). This represents a reserve replacement rate in the U.S. of approximately 150 percent. Excluding property acquisition costs, these reserves were added at an attractive finding cost of less than $10 per Boe.
Premium Gulf Coast Pricing Drives Upstream Revenue Higher in 2018
Devon’s upstream revenue, excluding commodity derivatives, totaled $5.7 billion in 2018, a 10 percent increase compared to 2017. Contributing factors to revenue growth were higher commodity price realizations and growth in higher-margin U.S. oil production.
Also contributing to higher revenues in 2018 were firm transport and marketing agreements that provide the majority of Devon’s U.S. oil production direct access to advantaged Gulf Coast pricing. Combined with price protection provided by regional basis swaps, oil realizations in the U.S. averaged nearly 100 percent of the West Texas Intermediate (WTI) benchmark.
In the fourth quarter, the company’s upstream revenue, excluding commodity derivatives, totaled $1.1 billion, an 18 percent decline compared to the year-ago quarter. Revenue in the fourth quarter was impacted by historically wide differentials in Canada, which negatively impacted the realized price on heavy oil production. Devon mitigated the weak pricing environment in Canada through its Western Canadian Select basis swap hedge position that generated $144 million of cash settlements in the quarter.
Cost Structure Continues to Improve in the Fourth Quarter
Devon’s production expense, which represents field-level operating costs, totaled $556 million in the fourth quarter. This result is a 2 percent improvement on a per-unit basis compared to the third quarter of 2018. The largest components of production expense are lease operating expense and transportation, which totaled $471 million, or $9.62 per Boe in the quarter. Production and property taxes also contributed $85 million to production expense during the fourth quarter.
General and administrative (G&A) expenses totaled $151 million in the fourth quarter, a 21 percent improvement from the fourth quarter of 2017. The lower overhead costs were driven by reduced personnel expenses.
The company also reduced financing costs in 2018. With the retirement of $1.1 billion of outstanding debt over the past year, net financing costs improved by 9 percent in the fourth quarter to $70 million compared to the fourth quarter of 2017.
Fourth-Quarter Earnings and Cash-Flow Results
The company reported net earnings attributable to Devon of $1.1 billion, or $2.48 per diluted share, in the fourth quarter. Adjusting for items securities analysts typically exclude from published estimates, the company’s core earnings totaled $46 million, or $0.10 per diluted share.
Devon’s operating cash flow from continuing operations totaled $542 million in the fourth quarter and $2.2 billion for the full-year 2018. The company also generated additional cash inflows through its ongoing divestiture activity. With the closing of the EnLink transaction, combined with other minor asset sales, total proceeds from Devon’s divestiture program have reached nearly $5 billion.
Debt Reduction Strengthens Investment-Grade Financial Position
Overall, Devon’s financial position remains exceptionally strong, with investment-grade credit ratings and excellent liquidity. The company exited the fourth quarter with $2.4 billion of cash on hand and an undrawn credit facility of $3 billion. At year end, Devon had an outstanding balance of $5.9 billion with no significant debt maturities until mid-2021.
Three-Year Performance Targets and Detailed 2019 Guidance
In conjunction with fourth-quarter results, Devon provided updated three-year performance targets and its detailed capital and production outlook for 2019. The company’s three-year performance targets are available within the company’s fourth-quarter 2018 operations report at www.devonenergy.com. Detailed guidance for the first quarter and full-year 2019 are provided within the supplemental financial tables that are available on the company’s website at www.devonenergy.com.
Conference Call Webcast and Supplemental Earnings Materials
Also provided with today’s release is the company’s detailed operations report that is available on the company’s website at www.devonenergy.com. The company’s fourth-quarter conference call will be held at 10 a.m. Central (11 a.m. Eastern) on Wednesday, Feb. 20, 2019, and will serve primarily as a forum for analyst and investor questions and answers.