Moody's Lifts Outlook on Devon Energy (DVN) to Stable; Notes Recent Divestiture Progress

Moody's Investors Service (Moody's) affirmed Devon Energy Corporation's (NYSE: DVN)(Devon) Ba2 Corporate Family Rating, Ba2-PD Probability of Default Rating, and Ba2 senior unsecured notes ratings. The Speculative Grade Liquidity Rating has been upgraded to SGL-1 from SGL-2. The rating outlook has been changed to stable from negative.

"The stabilization of Devon's rating outlook reflects the company's material progress on its asset divestiture program to date, and assumes that Devon will announce the sale of its stake in the Access Pipeline in 2016, which will strengthen the company's balance sheet and result in improving financial leverage metrics," commented Gretchen French, Moody's Vice President.

Issuer: Devon Energy Corporation

....Corporate Family Rating, Affirmed at Ba2

....Probability of Default Rating, Affirmed at Ba2-PD

....Speculative Grade Liquidity Ratings, Rating upgraded to SGL-1 from SGL-2

....Senior Unsecured Bonds/Debentures, Affirmed at Ba2 (LGD 4)

....Multiple Seniority Shelf, Affirmed at (P)Ba2, (P)Ba3, (P)B1

....Commercial Paper Rating, Affirmed at NP

.Outlook revised to Stable from Negative

Issuer: Devon Financing Corporation U.L.C.

....Backed Senior Unsecured Bond/Debenture, Affirmed at Ba2 (LGD 4)

....Backed Senior Unsecured Shelf, Affirmed at (P)Ba2

.Outlook revised to Stable from Negative

Issuer: Devon Financing Trust II

....Backed Pref. Stock Shelf, Affirmed at (P)B1

.Outlook revised to Stable from Negative

RATINGS RATIONALE

Devon Energy Corporation's Ba2 Corporate Family Rating reflects Moody's expectation that the company will have elevated cash flow-based leverage metrics in 2016 and 2017, despite the number of steps the company has taken in order to shore up its balance sheet, including substantial capital spending reductions, issuing equity, reducing its dividend, and pursuing non-core asset sales. The Ba2 rating also reflects weak operating and capital productivity as compared to peers. Devon's Ba2 Corporate Family Rating is supported by the significant size and scale of its E&P operations, its diversified geographic presence across key onshore hydrocarbon basins in North America, and a manageable overall portfolio decline rate. The rating is further supported by Devon's interest in the EnLink companies, which owns a sizeable and valuable midstream business and represents a source of alternative liquidity for Devon.

Devon has demonstrated a strong track record in executing asset sales. Devon's asset sales announced to date in 2016 now total $2 billion in non-core in announced upstream divestitures. In addition, the company expects to announce the sale of its 50% stake in the Access Pipeline in Canada in 2016, which Moody's expects will result in the company reaching the upper end its goal of $2-$3 billion in asset sales this year. All upstream asset sale proceeds are targeted at debt reduction, with the proceeds of the Access stake targeted for funding capital spending in excess of cash flow.

Devon's financial leverage is elevated compared to a number of its higher rated Ba1 E&P peers and relative to its funds from operations (cash flow generated from operations before working capital changes). Devon generated negative funds from operations in the first quarter of 2016, but with a higher commodity price environment assumed through 2017, cash flow generation should improve. Higher cash flow combine with the benefit of debt reduction and management's commitment to maintain capital spending within cash flow and asset sale proceeds, Devon's leverage metrics are set to improve (retained cash flow/debt projected at less than 5% in 2016 but improving to just under 15% in 2017). Moreover, Moody's expects Devon's asset coverage (based on the pre-tax PV-10 value relative to Devon's adjusted debt, excluding EnLink) to improve to just over 1.0x. These improvements in 2017 metrics have resulted in the rating outlook changing to stable.

Devon's SGL-1 rating reflects a very good liquidity profile through mid-2017 that is supported by its large, undrawn credit facility, material cash balances, and an unsecured capital structure. Constraining Devon's liquidity profile is the expectation it will generate negative free cash flow in 2016, despite the benefit of a substantially curtailed E&P capital spending program of only $1.1 billion to $1.3 billion. At March 31, 2016, Devon had no commercial paper outstanding, zero drawings under its revolver ($43 million in letters of credit outstanding), and cash balances of $1.6 billion. Upcoming long-term debt maturities include $350 million coming due in December 2016, $125 million coming due in July 2018, $750 million coming due in December 2018, and $700 million coming due in January 2019.

Devon has a $3 billion commercial paper program that is fully backed by a high quality, unsecured $3 billion revolving credit facility. The revolving credit facility matures in October 2019 (except for $30 million of the facility that matures in October 2017 and $164 million of the facility that matures in October 2018) and has same day availability for up the full facility size. Drawings under the facility are not subject to a material adverse change clause. The revolver has only one material financial covenant requiring debt/capitalization less than 65%. Devon has considerable leeway against this covenant, with debt/capitalization of 23% at March 31, 2016. In addition, non-cash write-downs are excluded from the covenant calculation. The credit facility does contain a material adverse effect clause with respect to litigation, however, if the litigation is disclosed in Devon's SEC filings or the credit facility's Disclosure Schedules this condition would be satisfied.

Devon's capital structure is comprised of a unsecured revolving credit facility and unsecured notes. The revolver and unsecured notes do not benefit from upstream guarantees from operating subsidiaries and are, as a result, structurally subordinated to the obligations of Devon's wholly-owned subsidiaries. Despite this structural subordination, the unsecured notes are rated in-line with the Corporate Family Rating as these obligations are not material in size relative to the unsecured notes to warrant notching below the Corporate Family Rating.

Devon's rating outlook is stable and assumes the company is successful in restoring its retained cash flow/debt metric above 10% in 2017.

Devon's ratings could be upgraded if the company is able to maintain consolidated retained cash flow/debt above 15% and pre-tax PV-10/debt (excluding EnLink) above 1.0x. A rating upgrade would also focus on Devon's ability to demonstrate improved reserve reinvestment economics (leveraged full-cycle ratio approaching 1.0x).

Devon's ratings could be downgraded if retained cash flow/debt remains less than 10%.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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