DBRS Confirms Devon Energy Corporation and Subsidiaries at BBB (high), Stable

DBRS has confirmed the Senior Unsecured Debt ratings of Devon Energy Corporation (Devon or the Company) and its subsidiary, Devon Finance Corporation (Devon Finance) at BBB (high) and the Company’s Commercial Paper at R-2 (high), all with Stable trends. The ratings are based on results and corporate developments in the six months ending June 30, 2012 (H1 2012).

Devon maintained a solid balance sheet through H1 2012, despite lower cash flow resulting from decreased commodity pricing. Credit metrics faced modest pressure, as adjusted debt-to-capital increased to 33.1% (32.2% at year-end 2011); however, this still remains within the parameters for its BBB (high) rating.

The Company’s capital expenditure (capex) for the year ($6.5 billion to $6.9 billion) is aggressive relative to cash flow, as it focuses the majority of its spending on liquids growth. This capex could result in deterioration of credit metrics unless other sources of funding (asset sales, joint ventures (JV)) are used, as DBRS does not expect operating cash flow to fully fund capex and dividends (expected $330 million) for 2012. A free cash flow deficit of $1.5 billion to $2.0 billion is estimated by DBRS, and is expected to be funded by current cash balances ($7.0 billion) and proceeds of asset sales or JVs. In August 2012, Devon announced a JV with Sumitomo Corporation, whereby Devon will receive $340 million in cash and $1.025 billion in a capex carry, for a 30% interest in acreage in the Cline and Midland Wolfcamp Shales. This, along with the JV announced in January 2012 with Sinopec (proceeds of $0.9 billion cash and 1.6 billion in capex carry) should help mitigate cash flow shortfalls.

Despite growth in liquids production in H1 2012, the Company is highly weighted toward North American natural gas, for which prices continue to be significantly depressed. However, through Devon’s continued focus on liquids-rich natural gas project developments, such as the Barnett Shale formation and production at the Jackfish operation in the oil sands, the production mix will gradually become more balanced (37% liquids at H1 2012). Assuming a favourable pricing environment for liquids, Devon’s financial profile should remain strong as a higher proportion of liquids is added to the production mix. DBRS notes that Devon issued $2.5 billion in notes during Q2 2012, proceeds of which were used for repayment of commercial paper and borrowings under its credit facility.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.