Research: Rating Action: Moody’s Upgrades Devon Energy to Baa2

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New York, October 24, 2022 — Moody’s Investors Service (Moody’s) has upgraded Devon Energy Corporation’s (Devon) senior unsecured rating to Baa2 from Baa3 and its commercial paper rating to P-2 from P-3. The rating outlook remains stable.

“Devon Energy’s upgrade to Baa2 reflects the company’s improved credit metrics through its focus on developing higher yielding U.S. shale assets as well as its increased scale through recent acquisitions without increasing debt,” commented Amol Joshi, Moody’s Vice President – Senior Credit Officer. “Devon’s continued strong operational execution has significantly strengthened its resilience and credit profile, although the company has also significantly improved shareholder payouts.”

Updates :

..Issuer: Devon Energy Corporation

….Commercial paper, upgraded to P-2 from P-3

….Senior regular unsecured bond/debenture, upgrade to Baa2 from Baa3

..Issuer: Devon Financing Company, LLC

….Gtd senior regular unsecured bond/debenture, upgrade to Baa2 from Baa3

Outlook Actions:

..Issuer: Devon Energy Corporation

….Outlook remains stable

..Issuer: Devon Financing Company, LLC

….Outlook remains stable

RATINGS RATIONALE

Devon’s Baa2 rating is underpinned by the significant size and scale of its E&P operations with a diverse geographic presence in major onshore US hydrocarbon basins. Devon’s focus on developing its higher yielding assets in the Delaware Basin has significantly increased its operating cash flow and credit metrics. The company’s acquisitions in 2022 financed by balance sheet cash also strengthened its Eagle Ford and Bakken positions without increasing debt. Devon’s considerable scale in the prolific Delaware Basin, while operating a portfolio of sustainable assets across multiple basins, provides capital allocation flexibility and differentiates the company from many of its peers. Although the company has been focused on increasing its oil production, Devon has a mixed production of oil, natural gas and natural gas liquids providing an option on the price of raw materials. Devon’s strong cash and commodity hedging strategy provided resistance to oil and gas price volatility. Devon’s financial policy reflects its commitment to maintaining strong leverage metrics, including its stated leverage target of approximately 1x net debt to EBITDA, while pursuing shareholder returns, including its variable dividend strategy in addition to a fixed dividend and opportunistic share buybacks. Moody’s expects the company to fund shareholder returns from cash flow, while funding capital expenditures enough to support its asset base.

The company has demonstrated the resilience of its operating model and financial profile amid extreme oil price volatility in 2020-21. Devon’s free cash flow generation and continued low leverage will strengthen its ability to withstand adverse credit impacts from carbon transition risk. While Devon’s financial performance will continue to be influenced by industry cycles, relative to historical experience, Moody’s expects profitability and future cash flows in this sector to be less robust to the top of the cycle and worse at the bottom of the cycle because global initiatives to limit the impacts of climate change will limit the use of hydrocarbons and accelerate the transition to energy sources that are less harmful to the environment.

Devon should have very good liquidity to finance its capital budget and dividends, as well as to support its P-2 commercial paper rating. The company had about $3.5 billion in cash on the balance sheet as of June 30. In the third quarter, Devon completed the add-on acquisition of Bakken for $865 million in cash and the add-on acquisition of Eagle Ford for $1.8 billion in cash, reducing its cash balances. . Devon’s $3 billion unsecured revolving credit facility matures in October 2024 and was undrawn as of June 30. Revolver has only one major financial covenant requiring that debt to total capitalization not exceed 65%. Devon has a considerable cushion under this covenant, with debt to total capitalization of 23.9% as of June 30. In terms of short-term debt maturities, Devon has $242 million in debt maturing in August 2023.

Devon’s stable rating outlook reflects the company’s robust credit metrics and its ability to generate free cash flow supported by a sustainable asset base.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Devon’s ratings could be improved if the company generates consistent free cash flow after sufficient reinvestment in the business and distribution to shareholders, reduces additional debt by following conservative financial policies, and demonstrates consistently high capital efficiency. An upgrade could be considered if Devon can generate retained cash flow (RCF) for debt above 70% while maintaining a leveraged full cycle ratio of at least 2x at mid-cycle prices.

Ratings could be downgraded if the company generates significant negative free cash flow, the debt RCF falls below 35% or capital efficiency deteriorates. A significant increase in shareholder-friendly actions or borrowing to fund a large acquisition, which significantly erodes the company’s liquidity or leverage measures, could also lead to a downgrade.

The main methodology used in these ratings is Independent Exploration and Production published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74836. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Devon Energy Corporation, headquartered in Oklahoma City, Oklahoma, is a large independent exploration and production (E&P) company focused on US onshore oil and gas properties.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Amol Joshi, CFA
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Peter Speer
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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