DEVON ENERGY CORP/DE - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32318

DEVON ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		73-1567067
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)

333 West Sheridan Avenue, Oklahoma City, Oklahoma		73102-5015
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (405) 235-3611

Former name, address and former fiscal year, if changed from last report: Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

On October 17, 2018, 468.2 million shares of common stock were outstanding.

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DEVON ENERGY CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. Financial Information
Item 1.	Financial Statements	6
	Consolidated Comprehensive Statements of Earnings	6
	Consolidated Statements of Cash Flows	7
	Consolidated Balance Sheets	8
	Consolidated Statements of Equity	9
	Notes to Consolidated Financial Statements	10
	Note 1 – Summary of Significant Accounting Policies	10
	Note 2 – Revenue Recognition	12
	Note 3 – Divestitures	14
	Note 4 – Derivative Financial Instruments	15
	Note 5 – Share-Based Compensation	18
	Note 6 – Asset Impairments	19
	Note 7 – Restructuring and Transaction Costs	19
	Note 8 – Other Expenses	19
	Note 9 – Income Taxes	20
	Note 10 – Net Earnings (Loss) Per Share From Continuing Operations	21
	Note 11 – Other Comprehensive Earnings	21
	Note 12 – Supplemental Information to Statements of Cash Flows	22
	Note 13 – Accounts Receivable	22
	Note 14 – Property, Plant and Equipment	22
	Note 15 – Other Current Liabilities	23
	Note 16 – Debt and Related Expenses	23
	Note 17 – Asset Retirement Obligations	24
	Note 18 – Retirement Plans	24
	Note 19 – Stockholders’ Equity	25
	Note 20 – Discontinued Operations	26
	Note 21 – Commitments and Contingencies	28
	Note 22 – Fair Value Measurements	29
	Note 23 – Segment Information	29
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46

Part II. Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48

Signatures		49

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DEFINITIONS

Unless the context otherwise indicates, references to “us,” “we,” “our,” “ours,” “Devon” and the “Company” refer to Devon Energy Corporation and its consolidated subsidiaries. All monetary values, other than per unit and per share amounts, are stated in millions of U.S. dollars unless otherwise specified. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“2012 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 24, 2012.

“2018 Senior Credit Facility” means Devon’s syndicated unsecured revolving line of credit, effective as of October 5, 2018.

“ASC” means Accounting Standards Codification.

“ASR” means an accelerated share-repurchase transaction with a financial institution to repurchase Devon’s common stock.

“ASU” means Accounting Standards Update.

“Bbl” or “Bbls” means barrel or barrels.

“Boe” means barrel of oil equivalent. Gas proved reserves and production are converted to Boe, at the pressure and temperature base standard of each respective state in which the gas is produced, at the rate of six Mcf of gas per Bbl of oil, based upon the approximate relative energy content of gas and oil. Bitumen and NGL proved reserves and production are converted to Boe on a one-to-one basis with oil.

“Btu” means British thermal units, a measure of heating value.

“Canada” means the division of Devon encompassing oil and gas properties located in Canada. All dollar amounts associated with Canada are in U.S. dollars, unless stated otherwise.

“Canadian Plan” means Devon Canada Corporation Incentive Savings Plan.

“DD&A” means depreciation, depletion and amortization expenses.

“Devon Plan” means Devon Energy Corporation Incentive Savings Plan.

“E&P” means exploration and production activities.

“EnLink” means EnLink Midstream Partners, LP, a master limited partnership.

“FASB” means Financial Accounting Standards Board.

“G&A” means general and administrative expenses.

“GAAP” means U.S. generally accepted accounting principles.

“General Partner” means EnLink Midstream, LLC, the indirect general partner of EnLink, and, unless the context otherwise indicates, EnLink Midstream Manager, LLC, the managing member of EnLink Midstream, LLC.

“Inside FERC” refers to the publication Inside FERC’s Gas Market Report.

“LIBOR” means London Interbank Offered Rate.

“LOE” means lease operating expenses.

“MBbls” means thousand barrels.

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“MBoe” means thousand Boe.

“Mcf” means thousand cubic feet.

“MMBtu” means million Btu.

“MMcf” means million cubic feet.

“M&M operations” means marketing revenues minus marketing expenses.

“N/M” means not meaningful.

“NGL” or “NGLs” means natural gas liquids.

“NYMEX” means New York Mercantile Exchange.

“OPIS” means Oil Price Information Service.

“SEC” means United States Securities and Exchange Commission.

“Tax Reform Legislation” means Tax Cuts and Jobs Act.

“TSR” means total shareholder return.

“Upstream operations” means upstream revenues minus production expenses.

“U.S.” means United States of America.

“WTI” means West Texas Intermediate.

“/Bbl” means per barrel.

“/d” means per day.

“/MMBtu” means per MMBtu.

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” as defined by the SEC. Such statements include those concerning strategic plans, our expectations and objectives for future operations, as well as other future events or conditions, and are often identified by use of the words “expects,” “believes,” “will,” “would,” “could,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. Such forward-looking statements are based on our examination of historical operating trends, the information used to prepare our December 31, 2017 reserve reports and other data in our possession or available from third parties. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. Consequently, actual future results could differ materially from our expectations due to a number of factors, including, but not limited to:

•

the volatility of oil, gas and NGL prices;

•

uncertainties inherent in estimating oil, gas and NGL reserves;

•

the extent to which we are successful in acquiring and discovering additional reserves;

•

the uncertainties, costs and risks involved in oil and gas operations;

•

regulatory restrictions, compliance costs and other risks relating to governmental regulation, including with respect to environmental matters;

•

risks related to our hedging activities;

•

counterparty credit risks;

•

risks relating to our indebtedness;

•

cyberattack risks;

•

our limited control over third parties who operate some of our oil and gas properties;

•

midstream capacity constraints and potential interruptions in production;

•

the extent to which insurance covers any losses we may experience;

•

competition for leases, materials, people and capital;

•

our ability to successfully complete mergers, acquisitions and divestitures; and

•

any of the other risks and uncertainties discussed in this report, our 2017 Annual Report on Form 10-K and our other filings with the SEC.

All subsequent written and oral forward-looking statements attributable to Devon, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements above. We assume no duty to update or revise our forward-looking statements based on new information, future events or otherwise.

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Part I. Financial Information

Item 1. Financial Statements

DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED COMPREHENSIVE STATEMENTS OF EARNINGS

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Unaudited)
Upstream revenues	$	1,332		$	1,101		$	3,720		$	3,974
Marketing revenues		1,247			832			3,306			2,524
Total revenues		2,579			1,933			7,026			6,498
Production expenses		554			448			1,669			1,360
Exploration expenses		32			57			133			209
Marketing expenses		1,217			843			3,250			2,571
Depreciation, depletion and amortization		416			370			1,235			1,139
Asset impairments		2			—			156			—
Asset dispositions		(6	)		(170	)		5			(200	)
General and administrative expenses		147			170			499			546
Financing costs, net		75			78			524			238
Restructuring and transaction costs		11			—			105			—
Other expenses		(31	)		(70	)		14			(92	)
Total expenses		2,417			1,726			7,590			5,771
Earnings (loss) from continuing operations before income taxes		162			207			(564	)		727
Income tax expense (benefit)		(138	)		13			(179	)		13
Net earnings (loss) from continuing operations		300			194			(385	)		714
Net earnings from discontinued operations, net of income tax expense		2,263			18			2,460			60
Net earnings		2,563			212			2,075			774
Net earnings attributable to noncontrolling interests		26			19			160			59
Net earnings attributable to Devon	$	2,537		$	193		$	1,915		$	715
Basic net earnings (loss) per share:
Basic earnings (loss) from continuing operations per share	$	0.61		$	0.37		$	(0.76	)	$	1.36
Basic earnings from discontinued operations per share		4.56			—			4.50			—
Basic net earnings per share	$	5.17		$	0.37		$	3.74		$	1.36
Diluted net earnings (loss) per share:
Diluted earnings (loss) from continuing operations per share	$	0.61		$	0.37		$	(0.76	)	$	1.35
Diluted earnings from discontinued operations per share		4.53			—			4.47			—
Diluted net earnings per share	$	5.14		$	0.37		$	3.71		$	1.35
Comprehensive earnings (loss):
Net earnings	$	2,563		$	212		$	2,075		$	774
Other comprehensive earnings (loss), net of tax:
Foreign currency translation		35			42			(47	)		78
Pension and postretirement plans		36			5			43			14
Other comprehensive earnings (loss), net of tax		71			47			(4	)		92
Comprehensive earnings	$	2,634		$	259		$	2,071		$	866
Comprehensive earnings attributable to noncontrolling interests		26			19			160			59
Comprehensive earnings attributable to Devon	$	2,608		$	240		$	1,911		$	807

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Unaudited)
Cash flows from operating activities:
Net earnings	$	2,563		$	212		$	2,075		$	774
Adjustments to reconcile net earnings to net cash from operating activities:
Earnings from discontinued operations, net of tax		(2,263	)		(18	)		(2,460	)		(60	)
Depreciation, depletion and amortization		416			370			1,235			1,139
Asset impairments		2			—			156			—
Leasehold impairments		15			16			76			80
Accretion on discounted liabilities		15			15			46			47
Total (gains) losses on commodity derivatives		276			144			814			(214	)
Cash settlements on commodity derivatives		(91	)		24			(211	)		43
(Gains) losses on asset dispositions		(6	)		(170	)		5			(200	)
Deferred income tax benefit		(114	)		(25	)		(132	)		(57	)
Share-based compensation		31			33			127			114
Early retirement of debt		—			—			312			—
Total (gains) losses on foreign exchange		(28	)		(74	)		53			(138	)
Settlements of intercompany foreign denominated assets/liabilities		—			—			(243	)		10
Other		42			(14	)		(8	)		(3	)
Changes in assets and liabilities, net		(51	)		(12	)		(159	)		121
Net cash from operating activities - continuing operations		807			501			1,686			1,656
Cash flows from investing activities:
Capital expenditures		(598	)		(467	)		(1,851	)		(1,298	)
Acquisitions of property and equipment		(19	)		(6	)		(35	)		(39	)
Divestitures of property and equipment		89			280			696			387
Net cash from investing activities - continuing operations		(528	)		(193	)		(1,190	)		(950	)
Cash flows from financing activities:
Repayments of long-term debt principal		(21	)		—			(828	)		—
Early retirement of debt		—			—			(304	)		—
Repurchases of common stock		(1,698	)		—			(2,197	)		—
Dividends paid on common stock		(38	)		(30	)		(112	)		(95	)
Shares exchanged for tax withholdings		(3	)		(1	)		(47	)		(57	)
Net cash from financing activities - continuing operations		(1,760	)		(31	)		(3,488	)		(152	)
Effect of exchange rate changes on cash:
Settlements of intercompany foreign denominated assets/liabilities		—			—			243			(10	)
Other		10			12			(21	)		22
Total effect of exchange rate changes on cash - continuing operations		10			12			222			12
Net change in cash, cash equivalents and restricted cash of continuing operations		(1,471	)		289			(2,770	)		566
Cash flows from discontinued operations:
Operating activities		46			200			476			528
Investing activities		2,950			(191	)		2,548			(475	)
Financing activities		71			187			183			276
Net change in cash, cash equivalents and restricted cash of discontinued operations		3,067			196			3,207			329
Net change in cash, cash equivalents and restricted cash		1,596			485			437			895
Cash, cash equivalents and restricted cash at beginning of period		1,525			2,369			2,684			1,959
Cash, cash equivalents and restricted cash at end of period	$	3,121		$	2,854		$	3,121		$	2,854

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	3,102		$	2,639		$	3,102		$	2,639
Restricted cash included in other current assets		19			73			19			73
Cash and cash equivalents included in current assets held for sale		—			142			—			142
Total cash, cash equivalents and restricted cash	$	3,121		$	2,854		$	3,121		$	2,854

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,102		$	2,642
Accounts receivable		1,226			989
Current assets held for sale		—			760
Other current assets		429			400
Total current assets		4,757			4,791
Oil and gas property and equipment, based on successful efforts accounting, net		13,056			13,318
Other property and equipment, net		1,146			1,266
Total property and equipment, net		14,202			14,584
Goodwill		841			841
Other long-term assets		372			296
Long-term assets held for sale		—			9,729
Total assets	$	20,172		$	30,241
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	777		$	633
Revenues and royalties payable		947			748
Short-term debt		257			115
Current liabilities held for sale		—			991
Other current liabilities		1,243			828
Total current liabilities		3,224			3,315
Long-term debt		5,791			6,749
Asset retirement obligations		1,103			1,099
Other long-term liabilities		613			549
Long-term liabilities held for sale		—			3,936
Deferred income taxes		543			489
Equity:
Common stock, $0.10 par value. Authorized 1.0 billion shares; issued 474 million and 525 million shares in 2018 and 2017, respectively		47			53
Additional paid-in capital		5,217			7,333
Retained earnings		2,505			702
Accumulated other comprehensive earnings		1,164			1,166
Treasury stock, at cost, 0.9 million shares in 2018		(35	)		—
Total stockholders’ equity attributable to Devon		8,898			9,254
Noncontrolling interests		—			4,850
Total equity		8,898			14,104
Total liabilities and equity	$	20,172		$	30,241

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

										Retained			Accumulated
							Additional			Earnings			Other
	Common Stock						Paid-In			(Accumulated			Comprehensive		Treasury			Noncontrolling			Total
	Shares			Amount			Capital			Deficit)			Earnings		Stock			Interests			Equity
	(Unaudited)
Nine Months Ended September 30, 2018
Balance as of December 31, 2017		525		$	53		$	7,333		$	702		$	1,166	$	—		$	4,850		$	14,104
Net earnings		—			—			—			1,915			—		—			160			2,075
Other comprehensive loss, net of tax		—			—			—			—			(4)		—			—			(4)
Restricted stock grants, net of cancellations		3			—			—			—			—		—			—			—
Common stock repurchased		—			—			—			—			—		(2,271	)		—			(2,271	)
Common stock retired		(55	)		(6	)		(2,230	)		—			—		2,236			—			—
Common stock dividends		—			—			—			(112	)		—		—			—			(112	)
Share-based compensation		1			—			114			—			—		—			—			114
Divestment of subsidiary equity investment		—			—			—			—			2		—			(4,863	)		(4,861	)
Subsidiary equity transactions		—			—			—			—			—		—			72			72
Distributions to noncontrolling interests		—			—			—			—			—		—			(219	)		(219	)
Balance as of September 30, 2018		474		$	47		$	5,217		$	2,505		$	1,164	$	(35	)	$	—		$	8,898
Nine Months Ended September 30, 2017
Balance as of December 31, 2016		523		$	52		$	7,237		$	(69	)	$	1,054	$	—		$	4,448		$	12,722
Net earnings		—			—			—			715			—		—			59			774
Other comprehensive earnings, net of tax		—			—			—			—			92		—			—			92
Restricted stock grants, net of cancellations		1			1			—			—			—		—			—			1
Common stock repurchased		—			—			—			—			—		(43	)		—			(43	)
Common stock retired		—			—			(43	)		—			—		43			—			—
Common stock dividends		—			—			—			(95	)		—		—			—			(95	)
Share-based compensation		1			—			96			—			—		—			—			96
Subsidiary equity transactions		—			—			12			—			—		—			545			557
Distributions to noncontrolling interests		—			—			—			—			—		—			(247	)		(247	)
Balance as of September 30, 2017		525		$	53		$	7,302		$	551		$	1,146	$	—		$	4,805		$	13,857

See accompanying notes to consolidated financial statements

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Summary of Significant Accounting Policies

The accompanying unaudited interim financial statements and notes of Devon have been prepared pursuant to the rules and regulations of the SEC. Pursuant to such rules and regulations, certain disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted. The accompanying unaudited interim financial statements and notes should be read in conjunction with the financial statements and notes included in Devon’s 2017 Annual Report on Form 10-K.

The accompanying unaudited interim financial statements in this report reflect all adjustments that are, in the opinion of management, necessary for a fair statement of Devon’s results of operations and cash flows for the three-month and nine-month periods ended September 30, 2018 and 2017 and Devon’s financial position as of September 30, 2018. As further discussed in Note 3, during the second quarter of 2018, Devon announced the sale of its interests in the General Partner and EnLink, which closed on July 18, 2018. Activity relating to the General Partner and EnLink are classified as discontinued operations within Devon’s consolidated comprehensive statements of earnings and consolidated statements of cash flows. The associated assets and liabilities of EnLink and the General Partner are presented as assets and liabilities held for sale on the consolidated balance sheets.

Recently Adopted Accounting Standards

In January 2018, Devon adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606), using the modified retrospective method. See Note 2 for further discussion regarding Devon’s adoption of the revenue recognition standard.

In January 2018, Devon adopted ASU 2017-07, Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires entities to present the service cost component of net periodic benefit cost in the same line item as other employee compensation costs. Only the service cost component of net periodic benefit cost is eligible for capitalization. As a result of the adoption of this ASU, consolidated statements of earnings presentation changes were applied retrospectively, while service cost component capitalization was applied prospectively.

In January 2018, Devon adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires an entity to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents on the statement of cash flows and to provide a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet when the cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than one line item on the balance sheet. As a result of the adoption of this ASU, Devon made changes to the statement of cash flows to include the required presentation and reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents retrospectively. Other than presentation, adoption of this ASU did not have a material impact on Devon’s consolidated statements of cash flows.

Issued Accounting Standards Not Yet Adopted

The FASB issued ASU 2016-02, Leases (Topic 842). This ASU will supersede the lease requirements in Topic 840, Leases. Its objective is to increase transparency and comparability among organizations. This ASU provides guidance requiring lessees to recognize most leases on their balance sheet. Short-term leases can continue being accounted for off balance sheet based on a policy election. Lessor accounting does not significantly change, except for some changes made to align with new revenue recognition requirements. This ASU is effective for Devon beginning January 1, 2019. Early adoption is permitted, but Devon does not plan to early adopt. The guidance will be applied using a modified retrospective transition method at the beginning of the earliest period presented in the financial statements. Entities will be allowed to continue to apply the legacy guidance in Topic 840, including its disclosure requirements, in the comparative periods presented in the year the new leases standard is adopted.

Devon plans to elect the practical expedients provided in the standard that allow entities to not reassess under the new standard our prior conclusions about lease identification and classification related to contracts that commenced prior to adoption and allows the new guidance to be applied prospectively to all new or modified land easements and rights-of-way. Devon also plans to elect a policy to not recognize right-of-use assets and lease liabilities related to short-term leases.

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DEVON ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Devon has determined its portfolio of leased assets and is reviewing all related contracts to determine the impact the adoption will have on its consolidated financial statements and related disclosures. Devon anticipates recognizing right-of-use assets and lease liabilities for certain commitments related to real estate, drilling rigs and other equipment related to the exploration and development of oil and gas. Devon has designed processes and controls and has implemented a technology solution needed to comply with the requirements of this ASU. The adoption will increase asset and liability balances on the consolidated balance sheets due to the required recognition of right-of-use assets and corresponding lease liabilities.

The FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU will expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company’s risk management activities. The guidance also eliminates the requirement to separately measure and report hedge ineffectiveness. This ASU is effective for annual and interim periods beginning January 1, 2019, with early adoption permitted in 2018. This ASU only applies to entities that elect hedge accounting, which Devon has not for derivative financial instruments. Devon continues to evaluate the provisions of this ASU and the impact it may have on its consolidated financial statements if hedge accounting were elected in the future.

The FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Reform Legislation. The ASU is effective for fiscal years beginning January 1, 2019, including interim periods within those fiscal years and allows for early adoption in any interim period after issuance of the update. Devon is currently assessing the impact this ASU will have on its consolidated financial statements.

The FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. This ASU will eliminate, add and modify certain disclosure requirements for fair value measurement. The ASU is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted for either the entire standard or only the provisions that eliminate or modify requirements. The ASU requires the additional disclosure requirements to be adopted using a prospective approach and all other amendments are required to be adopted using a retrospective approach. Devon is currently evaluating the provisions of this ASU and assessing the impact it may have on its disclosures in the notes to the consolidated financial statements.

The FASB issued ASU 2018-14, Compensation, Retirement Benefits and Defined Benefit Plans (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU will eliminate and add certain disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. This ASU is effective for annual and interim periods beginning January 1, 2021, with early adoption permitted. The ASU is required to be adopted using a retrospective approach. Devon is currently evaluating the provisions of this ASU and assessing the impact it may have on its disclosures in the notes to the consolidated financial statements.

The FASB issued ASU 2018-15, Intangibles, Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU will require a customer in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This ASU is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted. Entities have the option to adopt the ASU using either a retrospective approach or a prospective approach applied to all implementation costs incurred after the date of adoption. Devon is currently evaluating the provisions of this ASU and assessing the impact it may have on its consolidated financial statements.

The SEC released Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends various SEC disclosure requirements determined to be redundant, duplicative, overlapping, outdated or superseded as part of the SEC’s ongoing disclosure effectiveness initiative. The rule is effective November 5, 2018. The rule amends numerous SEC rules, items and forms covering a diverse group of topics. As the changes are generally expected to reduce or eliminate disclosures, Devon is currently evaluating and assessing the impact it may have on its disclosures.

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2.	Revenue Recognition

Impact of ASC 606 Adoption

In January 2018, Devon adopted ASC 606 – Revenue from Contracts with Customers (ASC 606) using the modified retrospective method and has applied the standard to all existing contracts. ASC 606 supersedes previous revenue recognition requirements in ASC 605 and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration in exchange for those goods or services.

The impact of adoption in the current period results is as follows:

	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	Under ASC 606		Under ASC 605		Increase/ (Decrease)		Under ASC 606			Under ASC 605			Increase/ (Decrease)
Upstream revenues	$	1,332	$	1,268	$	64	$	3,720		$	3,529		$	191
Marketing revenues		1,247		1,247		—		3,306			3,306			—
Total impacted revenues	$	2,579	$	2,515	$	64	$	7,026		$	6,835		$	191

Production expenses	$	554	$	490	$	64	$	1,669		$	1,478		$	191
Marketing expenses		1,217		1,217		—		3,250			3,250			—
Total impacted expenses	$	1,771	$	1,707	$	64	$	4,919		$	4,728		$	191

Earnings (loss) from continuing operations before income taxes	$	162	$	162	$	—	$	(564	)	$	(564	)	$	—

Changes to upstream revenues and production expenses are due to the conclusion that Devon represents the principal and controls a promised product before transferring it to the ultimate third party customer in accordance with the control model in ASC 606. This is a change from previous conclusions reached for these agreements utilizing the principal versus agent indicators under ASC 605 where the assessment was focused on Devon passing title and not control to the processing entity and Devon ultimately receiving a net price from the third-party end customer. As a result, Devon has changed the presentation of revenues and expenses for these agreements. Revenues related to these agreements are now presented on a gross basis for amounts expected to be received from third-party customers through the marketing process. Gathering, processing and transportation expenses related to these agreements, incurred prior to the transfer of control to the customer at the tailgate of the natural gas processing facilities, are now presented as production expenses.

Upstream Revenues

Upstream revenues include the sale of oil, gas and NGL production. Oil, gas and NGL sales are recognized when production is sold to a purchaser at a fixed or determinable price, delivery has occurred, control has transferred and collectability of the revenue is probable. Devon’s performance obligations are satisfied at a point in time. This occurs when control is transferred to the purchaser upon delivery of contract specified production volumes at a specified point. The transaction price used to recognize revenue is a function of the contract billing terms. Revenue is invoiced, if required, by calendar month based on volumes at contractually based rates with payment typically received within 30 days of the end of the production month. Taxes assessed by governmental authorities on oil, gas and NGL sales are presented separately from such revenues in the accompanying consolidated comprehensive statements of earnings.

Natural gas and NGL sales

Under Devon’s natural gas processing contracts, natural gas is delivered to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds for the resulting sales of NGLs and residue gas. In these scenarios, Devon evaluates whether it is the principal or the agent in the transaction. Devon has concluded it is the principal under these contracts and the ultimate third party is the customer. Revenue is recognized on a gross basis, with gathering, processing and transportation fees presented as a component of production expenses in the consolidated comprehensive statements of earnings.

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In certain natural gas processing agreements, Devon may elect to take residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, the product is delivered to the ultimate third-party purchaser at a contractually agreed-upon delivery point, and Devon receives a specified index price from the purchaser. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as gathering, processing and transportation expense as a component of production expenses in the consolidated comprehensive statements of earnings.

Oil sales

Devon’s oil sales contracts are generally structured in one of two ways. First, production is sold at the wellhead at an agreed-upon index price, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received. Alternatively, production is delivered to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title and risk of loss of the product. Under this arrangement, a third party is paid to transport the product and Devon receives a specified index price from the purchaser with no transportation deduction. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. The third-party costs are recorded as gathering, processing and transportation expense as a component of production expenses in the consolidated comprehensive statements of earnings.

Marketing Revenues

Marketing revenues are generated primarily as a result of Devon selling commodities purchased from third parties. Marketing revenues are recognized when performance obligations are satisfied. This occurs at the time contract specified products are sold to third parties at a contractually fixed or determinable price, delivery occurs at a specified point or performance has occurred, control has transferred and collectability of the revenue is probable. The transaction price used to recognize revenue and invoice customers is based on a contractually stated fee or on a third party published index price plus or minus a known differential. Devon typically receives payment for invoiced amounts within 30 days. Marketing revenues and expenses attributable to oil, gas and NGL purchases are reported on a gross basis when Devon takes control of the products and has risks and rewards of ownership.

Satisfaction of Performance Obligations and Revenue Recognitions

Since Devon has a right to consideration from its customers in amounts that correspond directly to the value that the customer receives from the performance completed on each contract, Devon applies the practical expedient in ASC 606 that allows recognition of revenue in the amount to which there is a right to invoice and prevents the need to estimate a transaction price for each contract and allocating that transaction price to the performance obligations within each contract. Devon recognizes revenue for sales at the time the natural gas, NGLs or crude oil are delivered at a fixed or determinable price.

Transaction Price Allocated to Remaining Performance Obligations

Most of Devon’s contracts are short-term in nature with a contract term of one year or less. Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. For contracts with terms greater than one year, Devon applies the practical expedient in ASC 606 exempting the disclosure of the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under Devon’s contracts, each unit of product typically represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

Contract Balances

Cash received relating to future performance obligations are deferred and recognized when all revenue recognition criteria are met. Contract liabilities generated from such deferred revenue are not considered material as of September 30, 2018. Devon’s product sales and marketing contracts do not give rise to contract assets under ASC 606.

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Disaggregation of Revenue

Revenue from oil, gas and NGL sales and marketing revenues represent revenue from contracts with customers. The following table presents revenue from contracts with customers that are disaggregated based on the type of good.

	Three Months Ended September 30, 2018								Nine Months Ended September 30, 2018
	U.S.			Canada		Total			U.S.			Canada		Total
Oil	$	794		$	298	$	1,092		$	2,279		$	841	$	3,120
Gas		210			—		210			672			—		672
NGL		306			—		306			742			—		742
Oil, gas and NGL revenues from contracts with customers		1,310			298		1,608			3,693			841		4,534
Oil, gas and NGL derivatives		(376	)		100		(276	)		(976	)		162		(814	)
Upstream revenues		934			398		1,332			2,717			1,003		3,720

Oil		750			25		775			2,047			66		2,113
Gas		191			—		191			506			—		506
NGL		281			—		281			687			—		687
Total marketing revenues from contracts with customers		1,222			25		1,247			3,240			66		3,306

Total revenues	$	2,156		$	423	$	2,579		$	5,957		$	1,069	$	7,026

3.	Divestitures

2018 Asset Divestitures

During the third quarter of 2018, Devon completed the sale of its aggregate ownership interests in EnLink and the General Partner for $3.125 billion and recognized a gain of approximately $2.6 billion ($2.2 billion after-tax). The proceeds from the sale were utilized to increase Devon’s share repurchase program to $4.0 billion, which is discussed further in Note 19. Additional information on these discontinued operations can be found in Note 20.

Additionally, during the third quarter of 2018, Devon entered into definitive agreements to sell non-core Delaware Basin and Barnett Shale assets for approximately $320 million in the aggregate, before purchase price adjustments. Devon expects to recognize a gain in the consolidated statements of earnings upon closing the transactions in the fourth quarter of 2018.

Subsequent to September 30, 2018, Devon reached an agreement to sell additional non-core assets for $100 million, before purchase price adjustments. The transaction is expected to close in the first quarter of 2019. Devon is currently evaluating the impact this transaction will have on its consolidated financial statements.

During the second quarter of 2018, Devon sold a portion of its Barnett Shale assets, primarily located in Johnson County for $553 million ($481 million after customary purchase price adjustments). Estimated proved reserves associated with these assets are approximately 10% of total proved reserves. The transaction resulted in an adjustment to Devon’s capitalized costs with no gain recognized in the consolidated statements of earnings. In conjunction with the divestiture, Devon settled certain gas processing contracts and recognized an approximately $40 million settlement expense, which is included in asset dispositions within the consolidated statements of earnings.

2017 Asset Divestitures

Through September 30, 2017, Devon completed divestiture transactions with proceeds totaling approximately $400 million, before purchase price adjustments and recognized a net gain of approximately $200 million in the consolidated statements of earnings. Estimated proved reserves associated with these assets were less than 1% of total proved reserves.

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4.Derivative Financial Instruments

Objectives and Strategies

Devon enters into derivative financial instruments with respect to a portion of its oil, gas and NGL production to hedge future prices received. Additionally, Devon periodically enters into derivative financial instruments with respect to a portion of its oil, gas and NGL marketing activities. These commodity derivative financial instruments include financial price swaps, basis swaps and costless price collars. Devon periodically enters into interest rate swaps to manage its exposure to interest rate volatility and foreign exchange forward contracts to manage its exposure to fluctuations in the U.S. and Canadian dollar exchange rates. As of September 30, 2018, Devon did not have any open foreign exchange contracts.

Devon does not intend to hold or issue derivative financial instruments for speculative trading purposes and has elected not to designate any of its derivative instruments for hedge accounting treatment.

Counterparty Credit Risk

By using derivative financial instruments, Devon is exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instruments are placed with a number of counterparties whom Devon believes are acceptable credit risks. It is Devon’s policy to enter into derivative contracts only with investment-grade rated counterparties deemed by management to be competent and competitive market makers. Additionally, Devon’s derivative contracts generally contain provisions that provide for collateral payments if Devon’s or its counterparty’s credit rating falls below certain credit rating levels.

Commodity Derivatives

As of September 30, 2018, Devon had the following open oil derivative positions. The first table presents Devon’s oil derivatives that settle against the average of the prompt month NYMEX WTI futures price. The second table presents Devon’s oil derivatives that settle against the respective indices noted within the table.

	Price Swaps				Price Collars
Period	Volume (Bbls/d)		Weighted Average Price ($/Bbl)		Volume (Bbls/d)		Weighted Average Floor Price ($/Bbl)		Weighted Average Ceiling Price ($/Bbl)
Q4 2018		93,800	$	58.95		110,200	$	53.95	$	64.49
Q1-Q4 2019		57,130	$	59.73		79,904	$	54.23	$	64.23
Q1-Q4 2020		1,740	$	62.88		1,989	$	57.86	$	67.86

	Oil Basis Swaps						Oil Basis Collars
Period	Index	Volume (Bbls/d)		Weighted Average Differential to WTI ($/Bbl)			Volume (Bbls/d)		Weighted Average Floor Differential to WTI ($/Bbl)			Weighted Average Ceiling Differential to WTI ($/Bbl)
Q4 2018	Midland Sweet		23,000	$	(1.02	)		—	$	—		$	—
Q4 2018	Argus LLS		12,000	$	3.95			—	$	—		$	—
Q4 2018	Argus MEH		16,000	$	2.84			—	$	—		$	—
Q4 2018	NYMEX Roll		27,000	$	0.58			—	$	—		$	—
Q4 2018	Western Canadian Select		62,109	$	(16.41	)		1,326	$	(15.50	)	$	(13.93	)
Q1-Q4 2019	Midland Sweet		28,000	$	(0.46	)		—	$	—		$	—
Q1-Q4 2019	Argus LLS		14,000	$	4.82			—	$	—		$	—
Q1-Q4 2019	Argus MEH		16,000	$	2.84			—	$	—		$	—
Q1-Q4 2019	NYMEX Roll		38,000	$	0.45			—	$	—		$	—
Q1-Q4 2019	Western Canadian Select		10,647	$	(23.39	)		—	$	—		$	—
Q1-Q4 2020	NYMEX Roll		38,000	$	0.31			—	$	—		$	—

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As of September 30, 2018, Devon had the following open natural gas derivative positions. The first table presents Devon’s natural gas derivatives that settle against the Inside FERC first of the month Henry Hub index. The second table presents Devon’s natural gas derivatives that settle against the respective indices noted within the table.

Price Swaps

Price Collars

Period

Volume (MMBtu/d)

Weighted Average Price ($/MMBtu)

Volume (MMBtu/d)

Weighted Average Floor Price ($/MMBtu)

Weighted Average

Ceiling Price ($/MMBtu)

Q4 2018

304,000

2.92

267,000