Devon Energy has reported operational and financial results for the first-quarter 2020.

First-Quarter Highlights

• Efficiencies drove upstream capital expenditures 12 percent below midpoint guidance
• First-quarter oil production exceeded guidance by 3,000 barrels per day
• Operating cash flow increased 21 percent year-over-year to $529 million
• Free cash flow generation reached $104 million
• Maintained strong financial position with $4.7 billion of liquidity, no near-term debt maturities

Updated 2020 Outlook

• Capital investment reduced 45 percent from original plan to $1 billion
• Oil production expected to be essentially flat compared to 2019
• Guidance assumes 10,000 barrels per day of oil curtailments in the second quarter
• Hedges protect approximately 90 percent of oil volumes at $42 per barrel
• Full-year cost outlook improved by $250 million, includes executive pay reductions
• Barnett Shale asset sale process on track to close by year-end

“These are truly extraordinary times, as we cope with the impact of a global crisis that has touched all our lives, and I want to thank everyone in our communities working to keep people safe,” said Dave Hager, president and CEO. “At Devon, our top priority, as always, is ensuring the health and safety of our employees, and I want to acknowledge our team’s tireless efforts as they remain keenly focused on executing our business plan.

“Importantly, due to our recently completed portfolio transformation, Devon has entered these difficult times with the benefit of a strong balance sheet, excellent liquidity and top-tier assets,” Hager said. “In this uncertain environment, our top strategic priority is to preserve our financial strength, and our decisive actions to date have accomplished exactly that. Our swift response to recalibrate drilling and completion activity and lower operating costs ensures that we can fund all our 2020 capital requirements within cash flow. We are confident that we will emerge from this downturn a strong company, and we are well positioned to take full advantage of our high-quality portfolio when commodity prices normalize.”

Operating Results

Net production from retained assets averaged 348,000 oil-equivalent barrels (Boe) per day during the first quarter. Oil production averaged 163,000 barrels per day, a 15 percent increase from the same period a year ago. This result exceeded the company’s midpoint guidance by 3,000 barrels per day due to strong operating results in the Delaware Basin.

Capital spending in the first quarter was $391 million, or 12 percent below midpoint guidance. This positive variance was attributable to efficiency gains achieved by the company’s Wolfcamp program in the Delaware Basin.

Upstream revenue, excluding derivative valuation changes, totaled $908 million in the first quarter. This represents a 5 percent decrease in revenue compared to the first quarter of 2019 due to lower commodity prices.

Production expense averaged $10.02 per Boe in the first quarter. Including costs reclassified to discontinued operations, production costs declined 6 percent compared to the year-ago quarter. This improved result was driven by lower lease operating expenses across Devon’s retained U.S. asset portfolio and the divestiture of higher-cost assets.

Corporate costs also declined during the quarter. General and administrative (G&A) expenses totaled $102 million in the first quarter. Including costs reclassified to discontinued operations, Devon’s G&A expense improved 33 percent year-over-year, driven by reduced personnel expense. Financing costs (including discontinued operations) were reduced $8 million year-over-year due to the company’s ongoing debt-reduction program.

Additional items that improved the company’s cost structure in the first quarter were a $47 million credit to other expenses resulting from a prior-period severance tax refund and a $96 million income tax benefit resulting from recent tax legislation.

Asset-Level Overview

Delaware Basin: Net production averaged 162,000 Boe per day, a 51 percent increase compared to the first-quarter 2019. First-quarter volume growth was driven by 32 new wells averaging 30-day rates of 2,500 Boe per day (67 percent oil). Completed well costs in the Wolfcamp formation during the first quarter averaged $705 per foot, a 42 percent improvement compared to the 2018 average. The company also continued to improve its field-level operating costs, with production expense declining 11 percent year-over-year to $8.47 per Boe.

Powder River Basin: Net production averaged 29,000 Boe per day, of which 74 percent was light oil. In the quarter, Devon brought online 14 new wells at an average completed well cost of $6.4 million. The capital program was highlighted by appraisal work in the emerging Niobrara oil play. The Tillard 36-4X, targeting the Niobrara B interval, positively responded to increased stimulation and a slower flowback approach to deliver an average 90-day rate of 1,200 Boe per day (85 percent oil).

Eagle Ford: First-quarter net production averaged 50,000 Boe per day. The company brought online 30 wells in the quarter, with completed well costs averaging $6.4 million. This activity was highlighted by a 4-well redevelopment spacing test targeting the Upper Eagle Ford interval. This 4-well test attained average 30-day rates of 2,000 Boe per day per well (60 percent oil) and confirmed spacing potential of up to 12 wells per section in the Upper Eagle Ford.

Anadarko Basin: Net production averaged 98,000 Boe per day. The company’s operational focus during the quarter was concentrated on optimizing base production and reducing controllable downtime across the field. New well activity in the quarter was limited to 4 operated wells targeting the Meramec formation in Kingfisher County. These development wells averaged 30-day rates of 1,200 Boe per day.

Financial Highlights

Devon’s financial position continues to remain exceptionally strong with excellent liquidity and low leverage. The company exited the first 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.

Further enhancing liquidity was the company’s amended Barnett Shale purchase and sale agreement. Under the revised terms announced last month, Devon has agreed to sell its Barnett Shale assets for up to $830 million of total proceeds, consisting of $570 million in cash at closing and contingent payments of up to $260 million. As part of the amendment, Devon received an increased deposit of $170 million, and the scheduled closing date for the transaction was extended from April 15, 2020, to Dec. 31, 2020.

Devon’s financial strength is also enhanced by its attractive hedge position, where approximately 90 percent of expected oil production is protected for the remainder of 2020. These contracts, based off the West Texas Intermediate (WTI) oil benchmark, provide an average protected floor price of $42 per barrel.

The company invested $38 million to repurchase 2.2 million shares of its common stock in the first quarter. Devon has suspended its share repurchase program to preserve liquidity in light of the COVID-19 pandemic.

First-Quarter Earnings and Cash-Flow Results

Devon’s operating cash flow from continuing operations totaled $529 million in the first quarter, a 21 percent increase compared to the same period a year ago. This level of cash flow funded all capital requirements and generated $104 million of free cash flow in the quarter.

The company reported a net loss of $1.8 billion, or $4.82 per diluted share in the first quarter. The quarterly loss was attributable to $2.8 billion of non-cash impairment charges due to asset evaluations associated with current business conditions. Adjusting for this charge and other items analysts typically exclude from estimates, Devon’s core earnings were $48 million, or $0.13 per diluted share.

Updated Guidance

As previously announced on March 30, 2020, Devon has elected to reduce its capital expenditures by $800 million for the full-year 2020. The revised capital outlook of approximately $1 billion represents a reduction of nearly 45 percent compared to the company’s original 2020 capital budget. For the second quarter of 2020, Devon expects to invest approximately $200 million to $250 million of capital.

With this revised capital program, the company expects second-quarter oil production to average 145,000 to 155,000 barrels per day. Included within the company’s second-quarter production outlook is the election to curtail 10,000 barrels per day due to low commodity prices. Given the ongoing price volatility, curtailment decisions are expected to be made on a month-to-month basis. For the full-year, Devon expects oil production to be essentially flat compared to 2019.

The company is lowering its 2020 expense outlook by $250 million to $1.65 billion. The improved cost structure is driven by expectations of lower production costs across Devon’s portfolio coupled with reductions in G&A expenses. The reduction in G&A includes an expected decrease in executive cash compensation of approximately 40 percent compared to 2019.

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