Fitch Affirms Devon Energy's LT IDR at 'BBB+'; Outlook Stable
CHICAGO -- November 8, 2013
Fitch Ratings has affirmed Devon Energy Corporation's (Devon) long-term Issuer
Default Rating (IDR) and unsecured ratings at 'BBB+'. Additionally, Fitch has
affirmed the company's short-term IDR and commercial paper ratings at 'F2'.
The Rating Outlook remains Stable. See the full list of ratings at the end of
this release. Approximately $10 billion in debt is affected by today's rating
The ratings reflect Devon's position as a large, diversified independent
exploration and production company, its low-cost reserve position and
production profile, its low net leverage, and conservative operational and
financial strategy. The company's proven reserve base is nearly 3 billion
barrels of oil equivalent (boe) located entirely onshore in North America and
is approximately 72% proven developed. Devon's production profile is 691,000
boe/d split approximately 24% crude oil, 19% natural gas liquids (NGLs) and
57% natural gas. Net debt/EBITDA is roughly 1.0x as the company still benefits
from large cash holdings, both domestic and overseas. Gross balance sheet debt
totalled slightly over $10 billion at the end of the third quarter with cash
on hand of $4.3 billion, most of which is held overseas. Gross debt peaked at
approximately $12.1 billion earlier this year and Devon paid down $2 billion
in the second quarter from cash balances. More overseas cash (~$2 billion) is
expected to be repatriated before year-end 2013. These strengths are somewhat
mitigated by the company's significant exposure to weak natural gas and
natural gas liquids prices and discounts on heavy crude oil in Canada.
In terms of operational debt metrics, Devon's gross debt/proven developed (PD)
reserves are respectable at $4.72/PD and gross debt/flowing boe/d is
approximately $14,500/boe/d. Net debt/PD is low at $2.70/PD and net debt/boe/d
is very low at approximately $8,300/boe/d. These calculations do not adjust
for asset retirement obligations (approximately $2 billion) nor do they give
credit for the company's substantial midstream operations. The company's
reserve life is strong at nearly 12 years and three-year average reserve
replacement is consistently well above 100% year after year, with the latest
three-year finding, development and replacement cost at a competitive
Operationally, the company's strategy has been to direct capital spending over
the last few years towards increasing crude oil production as crude
realizations and margins are substantially higher, particularly in the U.S.
Free cash flow (FCF) deficits have resulted from this effort and largely been
filled from asset divestitures and monetizations. The efforts thus far have
been successful, as oil production volumes in the U.S. have doubled in the
last two years to approximately 81,000 barrels per day and are expected to
continue to increase. The largest driver of the increase is in the Permian
Basin. Fitch expects that Devon will continue to be FCF negative in the near-
to intermediate-term while emphasizing growth in U.S. crude oil production
Liquidity is provided by the previously mentioned cash on hand and the
company's $3 billion CP program, and its $3 billion revolving credit facility
due 2018. The credit facility contains one material financial covenant that
requires the company's ratio of total funded debt-to total-capitalization to
be less than 65%. As of the end of the third quarter, the company was in
compliance with this covenant with a debt-to-capitalization ratio of 22.4%.
Near-term maturities other than the $1.6 billion CP balance are $500 million
in senior notes due in January of 2014 and $500 million in senior note due in
July of 2016.
Positive: Future developments that could, individually or collectively, lead
to positive rating actions include:
-- Consistent positive FCF and sustained low gross debt balances;
-- Consistently strong reserve replacement with competitive finding and
Negative: Future developments that could, individually or collectively, lead
to negative rating action include:
-- A leveraging acquisition;
-- Material and sustained negative FCF that results in higher leverage
-- Significantly leveraging share repurchases or major dividend increases;
-- Material disappointments in reserve replacement or production levels.
Fitch affirms the following ratings:
Devon Energy Corporation
--Long-term IDR at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Senior unsecured credit facility at 'BBB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) at 'F2'.
Devon Financing Corporation U.L.C.
--Long-term IDR at 'BBB+';
--Senior unsecured notes at 'BBB+'.
--Long-term IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlooks for Devon and Ocean are Stable.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Relevant Research:
-- 'Crossover Credits in Natural Resources-Migration Catalysts 2003-2013'
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--'Full Cycle Cost Survey for E&P Producers-2012 Numbers Up, but Adjustments
Tell a Different Story' (May 28, 2013);
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services
Sectors (Aug 12, 2013);
--Updating Fitch's Oil & Gas Price Deck (July 29, 2013);
--Energy Handbook--Upstream Oil & Gas (June 28, 2013).
Applicable Criteria and Related Research:
Energy Handbook -- Upstream Oil & Gas
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and
Full Cycle Cost Survey for E&P Companies (2012 Numbers Up, but Adjustments
Tell a Different Story)
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Crossover Credits in Natural Resources -- Migration Catalysts 2003-2013
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Sean T. Sexton, CFA, +1-312-368-3130
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Mark C. Sadeghian, CFA, +1-312-368-2090
Stephen Brown, +1-312-368-3139
Brian Bertsch, +1-212-908-0549
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