Ovintiv Inc. — Form 10-Q Summary
Business context and reporting period
Ovintiv is a North American energy producer focused on the exploration, development, production and marketing of oil, NGLs and natural gas. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparative periods ended June 30, 2022. Amounts are in U.S. dollars unless otherwise stated.
On June 12, 2023, Ovintiv completed its Permian Acquisition, adding approximately 65,000 net acres and 1,050 net well locations in the Midland Basin. The transaction was funded with cash consideration of approximately $3.2 billion and approximately 31.8 million newly issued shares valued at approximately $1.2 billion.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Total revenues | $2,517 million | $3,736 million | $5,068 million | $5,703 million |
| Operating income | $531 million | $1,516 million | $1,209 million | $1,316 million |
| Net earnings | $336 million | $1,357 million | $823 million | $1,116 million |
| Diluted EPS | $1.34 | $5.21 | $3.28 | $4.26 |
| Cash from operating activities | $831 million | $1,344 million | $1,899 million | $2,029 million |
| Non-GAAP Cash Flow | $699 million | $1,224 million | $1,550 million | $2,267 million |
- Second-quarter operating margin was approximately 21.1%, compared with 40.6% in the prior-year quarter; six-month operating margin was approximately 23.9%, compared with 23.1%.
- Second-quarter net margin was approximately 13.3%, compared with 36.3%; six-month net margin was approximately 16.2%, compared with 19.6%.
- Upstream product revenues declined to $1,646 million in the quarter and $3,521 million for the six months, primarily because of lower realized commodity prices.
- Average six-month production was 542.4 MBOE/d, consisting of 267.7 Mbbls/d of liquids and 1,649 MMcf/d of natural gas. Liquids represented 49% of total production.
- Capital expenditures were $640 million in the quarter and $1,250 million for the six months.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $52 million at June 30, 2023, compared with $5 million at December 31, 2022.
- Total long-term debt, including the current portion, was $6,134 million, compared with $3,570 million at year-end 2022. The increase primarily reflects debt issued to fund the Permian Acquisition.
- On May 31, 2023, Ovintiv issued $2.3 billion of senior unsecured notes, generating net proceeds of $2,278 million. The notes mature between 2025 and 2053 and carry coupons ranging from 5.65% to 7.10%.
- Commercial paper outstanding was $330 million at a weighted average interest rate of approximately 5.98%; $350 million was drawn under revolving credit facilities.
- Total liquidity was approximately $3.2 billion, comprising available credit facilities of $3,150 million, available uncommitted demand lines of $278 million and cash, net of commercial paper.
- Debt to capitalization was 40%, debt to adjusted capitalization was 26%, debt to EBITDA was 1.2 times and debt to adjusted EBITDA was 1.7 times. Management stated that the company remained in compliance with its financial covenants.
Material changes versus the prior comparable period
- Quarterly revenue fell 33% and six-month revenue fell 11%, primarily because benchmark and realized oil, NGL and natural gas prices were substantially lower than in 2022.
- Six-month average production increased 8% to 542.4 MBOE/d, driven by production growth in the Permian, Montney and other operations, partially offset by divestitures.
- Risk management gains were $147 million in the quarter and $89 million for the six months, compared with a $295 million loss and a $1,753 million loss, respectively, in the prior-year periods. These gains materially reduced the year-over-year earnings decline.
- DD&A increased to $419 million in the quarter and $783 million for the six months, primarily due to higher depletion rates, a higher depletable asset base and higher production volumes.
- Administrative expense increased by $97 million in the quarter, largely because of approximately $75 million of Permian Acquisition transaction costs.
- Ovintiv sold its Bakken assets for approximately $706 million after customary adjustments and used the proceeds, together with debt proceeds and other funding sources, to finance the Permian Acquisition.
- Shares outstanding increased to 273.9 million from 245.7 million at December 31, 2022, primarily due to the shares issued for the acquisition. The company also repurchased approximately 7.7 million shares for $328 million during the first six months.
- The quarterly dividend increased to $0.30 per share from $0.25, and the Board declared another $0.30-per-share dividend payable September 29, 2023.
Guidance, outlook, commentary and risks
- In July 2023, Ovintiv updated full-year 2023 capital investment guidance to $2.680 billion–$2.850 billion.
- Full-year production guidance was 535.0–550.0 MBOE/d, including approximately 190.0–196.0 Mbbls/d of oil and plant condensate, 83.0–87.0 Mbbls/d of other NGLs and 1,575–1,625 MMcf/d of natural gas.
- Management expects upstream transportation and processing costs of approximately $8.25–$8.75 per BOE for the remainder of 2023, upstream operating expense of approximately $4.00–$4.50 per BOE and production, mineral and other taxes of approximately 4%–5% of upstream revenues.
- As of June 30, 2023, the company had hedged approximately 110.0 Mbbls/d of expected oil and condensate production and 595 MMcf/d of expected natural gas production for the remainder of 2023.
- Principal risks include volatile oil, NGL and natural gas prices; geopolitical and macroeconomic conditions; inflation and supply-chain constraints; foreign exchange and interest-rate exposure; acquisition integration and valuation risk; regulatory and environmental requirements; counterparty credit risk; and transportation and processing commitments.
- Ovintiv reported undiscounted transportation and processing, drilling and field services, and building lease commitments totaling approximately $5.305 billion. Its maximum estimated exposure related to the VMLP variable interest entity was $1.367 billion, subject to future production and utilization conditions.
- An EPA and Utah environmental Notice of Violation relating to Uinta Basin facilities remains unresolved. The company cannot predict its financial impact; monetary sanctions could exceed $300,000.
- Management’s internal-control assessment excluded the Permian Acquisition, which represented approximately 33% of consolidated total assets as of March 31, 2023, while integration controls are assessed. Other disclosure controls were deemed effective as of June 30, 2023.
Most important facts for investors to verify
- Whether Permian production, operating costs and integration performance support the stated 2023 production and capital guidance.
- The effect of materially higher debt, interest costs and share count on per-share cash flow, leverage and shareholder returns.
- The sustainability of cash flow under lower commodity prices after separating realized operating performance from derivative gains.
- The company’s future hedge positions, realized prices, basis differentials and exposure to oil and natural gas price movements.
- The final purchase price allocation and any closing adjustments or integration costs related to the Permian Acquisition.
- The level and duration of transportation, processing and VMLP-related commitments relative to future production volumes.
- The status and potential financial consequences of the EPA and UDAQ Notice of Violation and other legal or environmental matters.