Ovintiv Inc. 2020 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Ovintiv is a North American oil, NGL and natural gas exploration, development, production and marketing company. The filing covers the three months ended March 31, 2020, with comparative results for the same period in 2019. On January 24, 2020, Encana completed a reorganization, share consolidation and U.S. domestication, becoming Ovintiv Inc., a Delaware corporation reporting in U.S. dollars. The historical results were carried forward as a common-control reorganization.
Core assets at March 31, 2020 were the Permian and Anadarko in the United States and Montney in Canada. Average production was 571.3 MBOE/d, including 309.8 Mbbls/d of liquids and 1,569 MMcf/d of natural gas.
Key Financial Metrics
| US$ millions, except per-share data | Q1 2020 | Q1 2019 |
|---|---|---|
| Product and service revenues | 1,570 | 1,572 |
| Net risk-management gains | 1,055 | (355) |
| Total revenues | 2,643 | 1,235 |
| Operating income (loss) | 759 | (227) |
| Net earnings (loss) | 421 | (245) |
| Basic and diluted EPS | $1.62 | $(1.00) |
| Cash from operating activities | 566 | 529 |
| Capital expenditures | 790 | 736 |
| Non-GAAP cash flow | 535 | 422 |
| Non-GAAP cash flow margin | $10.29/BOE | $10.02/BOE |
Total revenues included a $1.055 billion net risk-management gain, of which $904 million was unrealized. Excluding this item, product and service revenues were essentially flat year over year. Approximate operating margin was 28.7% versus negative 18.4% in Q1 2019, and approximate net margin was 15.9% versus negative 19.8%.
- Upstream product revenues declined to $1.151 billion from $1.245 billion as lower realized prices more than offset higher volumes.
- Total production increased 22% to 571.3 MBOE/d, while total liquids production increased 34% to 309.8 Mbbls/d.
- Average realized prices, excluding risk management, declined 20% for oil, 61% for other NGLs, 14% for plant condensate and 33% for natural gas.
- Total operating expenses increased to $1.884 billion from $1.462 billion, primarily because of higher DD&A, a $277 million non-cash impairment and higher transportation and purchased-product costs.
- Total Costs, a non-GAAP measure, declined to $12.17/BOE from $13.44/BOE.
Liquidity, Debt and Balance Sheet
| US$ millions, except ratios | March 31, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | 82 | 190 |
| Long-term debt | 7,006 | 6,974 |
| Shareholders’ equity | 10,191 | 9,930 |
| Debt to capitalization | 41% | Not clearly provided |
| Debt to adjusted capitalization | 28% | 28% |
| Net debt to adjusted EBITDA | 2.0x | 2.0x |
| Total liquidity | 3,430 | 4,662 |
Total liquidity comprised $82 million of cash, $3.515 billion of available credit facilities, $190 million of available uncommitted demand lines and a $357 million reduction for outstanding commercial paper. The company had $485 million drawn on revolving credit facilities and $357 million of commercial paper outstanding. Management stated that the commercial paper was expected to be repaid with credit-facility borrowings as it matured.
Ovintiv repurchased $100 million of senior-note principal for $89 million plus accrued interest, recognizing an $11 million gain. There were no scheduled long-term debt maturities until November 2021, and management stated that more than 80% of debt was due in 2024 or later. The reported fair value of long-term debt was $4.005 billion, compared with a $7.006 billion carrying value.
Material Changes Versus the Prior Comparable Period
- Net earnings improved from a $245 million loss to $421 million of earnings, primarily due to the large change in derivative fair values and lower unusual administrative costs.
- Net risk-management results changed from a $355 million loss to a $1.055 billion gain, including a $904 million unrealized gain.
- Production increased substantially following the Newfield acquisition and drilling activity, but lower commodity prices reduced upstream product revenues by $94 million.
- DD&A increased by $157 million to $534 million, reflecting higher production and depletion rates.
- The company recorded a $277 million non-cash ceiling-test impairment in U.S. operations, primarily attributable to lower NGL and natural gas prices.
- Administrative expense fell to $53 million from $227 million, partly because Q1 2019 included $113 million of restructuring costs and Q1 2020 included a $26 million recovery of long-term incentive costs.
- Cash from operating activities increased modestly to $566 million from $529 million, while capital expenditures increased to $790 million from $736 million.
- China operations were no longer active because the company terminated its CNOOC production-sharing contract on July 31, 2019.
Guidance, Outlook, Risks and Unusual Items
- Because of COVID-19, the oil-market oversupply and sharply lower commodity prices, Ovintiv suspended its previously issued 2020 guidance.
- Second-quarter 2020 capital spending was reduced by $500 million in total. The company ceased operating ten drilling rigs and planned to cut six additional rigs in May 2020.
- Management announced a $200 million full-year cost-reduction target, including approximately $115 million of operating-cost reductions and $85 million of other savings.
- The company may shut in low-margin production and further adjust capital spending if low prices persist. Full-year production is expected to reflect the reduced capital plan and shut-in strategy.
- As of April 30, 2020, the company had hedged approximately 185.0 Mbbls/d, or 94% of expected crude oil and condensate production, and 1,196 MMcf/d, or 75% of expected natural gas production, for the remainder of 2020.
- Management estimated that, using lower commodity futures prices as of March 31, 2020 and holding other assumptions constant, an additional $3.7 billion before-tax U.S. ceiling-test impairment could have been recognized. This is an estimate, not a recorded charge.
- COVID-19 risks include lower demand, storage constraints, refinery curtailments, wider differentials, operational disruptions, staffing and supply-chain constraints, cyber risks from remote work, counterparty risk and reduced access to capital.
- Transportation and processing commitments totaled approximately $4.711 billion on an undiscounted basis, including $2.022 billion payable after 2024. The company’s maximum estimated exposure related to VMLP variable interests was $1.929 billion, although the potential payout was described as highly uncertain.
- The company remained investment grade and stated that it was in compliance with credit-facility covenants. Further credit-rating downgrades could increase borrowing costs or trigger additional collateral requirements.
- The Board declared a quarterly dividend of $0.09375 per share payable June 30, 2020.
Investor Verification Priorities
- Verify the sustainability of operating cash flow and dividend payments after removing unrealized derivative gains.
- Reassess leverage, commercial-paper refinancing and available credit capacity under prolonged low commodity prices.
- Monitor subsequent ceiling-test impairments, reserve revisions and valuation allowances on deferred tax assets.
- Track actual capital spending, rig reductions, production shut-ins, cost savings and any changes to suspended 2020 guidance.
- Review the valuation, maturity profile and liquidity effects of the company’s extensive commodity and foreign-exchange derivative positions.
- Evaluate transportation commitments, VMLP exposure, abandonment obligations and potential collateral requirements following any credit-rating changes.