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

DBRS has today confirmed the long- and short-term ratings of Devon Energy Corporation (Devon or the Company) and its subsidiary, Devon Finance Corporation (Devon Finance), at BBB (high) and R-2 (high), with Stable trends. The ratings reflect its strong asset base in North America, strong reserves replacement record and good liquidity profile.

Devon’s balance sheet weakened throughout 2012, as a result of decreased cash flow from lower realized commodity pricing in conjunction with increased capital expenditure (capex). As a result, Devon incurred a free cash flow deficit of $3.6 billion, which was funded by joint venture (JV) proceeds, cash on hand and incremental debt. Credit metrics faced increased pressure, as adjusted debt-to-capital increased to 36% (32.2% at year-end 2011), which is at the high end of the current BBB (high) rating category. DBRS notes that leverage has been increasing steadily since 2010, and would consider leverage above 40% to be aggressive for the current rating category. Breaching this level would likely result in negative rating action.

A key challenge facing the Company is its heavy exposure toward North American natural gas, despite growth in liquids production in 2012. However, through Devon’s continued focus on liquids-rich natural gas and oil project developments (Barnett Shale formation and Jackfish operation), the production mix is expected to gradually become more balanced (37% liquids in 2012). This focus has led to an increased level of capex as liquids and oil developments generally have higher upfront capital costs, particularly in the oil sands.

The Company’s capex for the year ($8.2 billion) was aggressive relative to cash flow. Continued high capex is expected going forward ($6.5 billion to $6.9 billion in 2013) and could result in further deterioration of credit metrics unless other sources of funding (asset sales, JVs) are used. Devon announced two JVs in 2012, which helped mitigate cash flow shortfalls and should help provide increased financial flexibility. DBRS anticipates similar actions going forward to manage metrics within the rating category, as it is expected that operating cash flow will not fully fund capex and dividends for 2013.

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

The rating of Devon Finance Corporation is based on an irrevocable guarantee of Devon Energy Corporation.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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