Ovintiv Inc. 2019 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2019. The filing was issued by Ovintiv Inc. on February 21, 2020, but 2019 operating and financial results primarily relate to Encana Corporation and its subsidiaries before the January 24, 2020 reorganization. The reorganization included a one-for-five share consolidation, migration from Canada to the United States, and Ovintiv’s succession to Encana.
Ovintiv is a North American oil, NGL and natural gas exploration and production company with core assets in the Permian, Anadarko and Montney plays. It also conducts marketing and midstream activities. The company completed its acquisition of Newfield Exploration on February 13, 2019 and exited its China operations on July 31, 2019.
Key financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $6,726 million | $5,939 million | 13% increase |
| Operating income | $598 million | $1,694 million | 65% decrease |
| Net earnings | $234 million | $1,069 million | 78% decrease |
| Basic and diluted earnings per share | $0.90 | $5.57 | 84% decrease |
| Cash from operating activities | $2,921 million | $2,300 million | 27% increase |
| Non-GAAP cash flow | $2,931 million | $2,115 million | 39% increase |
| Capital expenditures | $2,626 million | $1,975 million | 33% increase |
| Cash flow less capital expenditures | $295 million | Not clearly provided in the filing | Positive in 2019 |
| Cash and cash equivalents | $190 million | $1,058 million | 82% decrease |
| Long-term debt, including current portion | $6,974 million | $4,198 million | 66% increase |
| Total shareholders’ equity | $9,930 million | $7,447 million | 33% increase |
| Net debt to adjusted EBITDA | 2.0x | 1.3x | Higher leverage |
Reported operating margin was approximately 8.9% of revenue and net margin was approximately 3.5%, compared with approximately 28.5% and 18.0%, respectively, in 2018. The decline principally reflected a $776 million year-over-year swing in net risk-management results, higher depreciation, depletion and amortization, restructuring costs and acquisition-related expenses.
- Total production increased 56% to 564.9 MBOE/d, including 301.9 Mbbls/d of oil and NGLs and 1,577 MMcf/d of natural gas. Production mix was approximately 53% oil and NGLs and 47% natural gas.
- Average realized prices excluding risk management declined to $56.27 per barrel for oil, $26.33 per barrel for NGLs and $1.97 per Mcf for natural gas, compared with $64.00, $40.31 and $2.25, respectively, in 2018.
- Non-GAAP cash flow margin was $14.21 per BOE, down from $16.05 per BOE.
- Total Costs, a non-GAAP measure, were $12.59 per BOE, compared with $13.00 per BOE in 2018.
- Year-end liquidity was approximately $3.5 billion, consisting of $190 million of cash and $4.0 billion of available credit facilities less $698 million of commercial paper outstanding. No amounts were outstanding under the revolving credit facilities.
- Debt to capitalization was 41%, while debt to adjusted capitalization was 28%, compared with 36% and 22%, respectively, in 2018.
- Proved reserves increased to 2,188.8 MMBOE from 1,215.7 MMBOE, primarily from the Newfield acquisition and extensions and discoveries. Approximately 52% of proved reserves were undeveloped.
- After-tax standardized discounted future net cash flows from proved reserves were $11.6 billion at December 31, 2019, based on prescribed constant prices and a 10% discount rate.
Material changes versus the prior comparable period
- The Newfield acquisition added substantial Anadarko, Bakken, Uinta and other assets, increased production, added $2.45 billion of senior notes, and resulted in the issuance of approximately 108.7 million post-consolidation shares. Newfield contributed $2.1 billion of revenue and $101 million of net earnings for the post-acquisition period.
- Production growth and acquisition-related volumes more than offset lower commodity prices, increasing total revenue by $787 million. Upstream product revenues rose to approximately $5.8 billion from $4.2 billion.
- Net risk-management results changed from a $415 million gain in 2018 to a $361 million loss in 2019, including a $730 million unrealized loss.
- DD&A increased to $2.015 billion from $1.272 billion, primarily because of higher production and the enlarged asset base.
- Restructuring charges totaled $138 million, primarily severance costs related to workforce reductions following the Newfield acquisition. Approximately $8 million remained accrued at year-end.
- The company repurchased approximately 196.7 million pre-consolidation shares for $1.25 billion and paid $102 million of dividends. The annual dividend increased to $0.375 per post-consolidation share from $0.30.
- Arkoma natural gas assets were sold for $155 million. China operations were terminated, and related 2019 results were not material.
- The adoption of ASC Topic 842 increased recognized operating lease assets and liabilities and caused The Bow office building to be treated as an operating lease. It also shifted related expense presentation into administrative expense.
Fourth-quarter 2019 information
| Metric | Q4 2019 | Q4 2018 |
|---|---|---|
| Revenue | $1,565 million | $2,381 million |
| Operating income (loss) | $(28) million | $1,354 million |
| Net earnings (loss) before tax | $(68) million | $1,179 million |
| Net earnings (loss) | $(6) million | $1,030 million |
| Basic and diluted EPS | $(0.02) | $5.41 |
The unusually strong Q4 2018 comparison was affected by significant items, so the year-over-year quarterly decline should not be interpreted solely as an operational trend.
Guidance, outlook, commentary and risks
- For 2020, management expected capital investment of approximately $2.7 billion, funded from operating cash flow, with cash flow expected to exceed capital expenditures.
- 2020 production guidance was 318.0–332.0 Mbbls/d of liquids and 1,520–1,580 MMcf/d of natural gas.
- 2020 Total Costs guidance was $12.20–$12.50 per BOE.
- At December 31, 2019, the company had hedged approximately 165 Mbbls/d of expected 2020 crude oil and condensate production and 1,188 MMcf/d of expected natural gas production.
- Management cited continued low and volatile oil, NGL and natural gas prices, regional differentials, pipeline and processing constraints, transportation commitments, counterparty risk and potential credit-rating effects as principal risks.
- Uinta minimum-volume contracts generated $24 million of deficiency fees in 2019; management expected approximately $15 million of additional deficiency fees in 2020. Remaining commitments require delivery of approximately 15 Mbbls/d through May 2020 and 20 Mbbls/d through August 2025.
- Transportation and processing commitments totaled $5.165 billion, and total contractual obligations were $19.993 billion, both on an undiscounted basis.
- The company disclosed an estimated maximum exposure of $2.091 billion related to certain VMLP gathering and processing arrangements, although the potential payout is highly uncertain.
- Asset retirement obligations were $614 million at year-end. Deep Panuke decommissioning was expected to be completed in 2020.
- Legal matters were described as arising in the ordinary course, with no expected material adverse effect; however, the filing notes that unfavorable outcomes could materially affect earnings when estimable.
- PwC issued unqualified opinions on the financial statements and internal control over financial reporting. The filing identified proved-reserve estimates and valuation of Newfield properties as critical audit matters.
Most important facts for an investor to verify
- Reconcile the historical Encana financial statements with the post-January 2020 Ovintiv legal structure, share consolidation and debt assumptions.
- Assess whether production growth and Newfield synergies can offset lower commodity prices and the higher debt burden.
- Review the maturity profile and refinancing requirements for the $6.859 billion of principal debt, including $600 million due in 2021, $1.448 billion in 2022 and $1.0 billion in 2024.
- Evaluate the sensitivity of cash flow, reserves and asset carrying values to oil, NGL and natural gas prices, including the filing’s disclosed derivative sensitivities.
- Examine the sustainability of dividends and capital returns in light of only $190 million of cash, $698 million of commercial paper and substantial transportation commitments.
- Review the Uinta minimum-volume obligations, VMLP exposure, asset retirement obligations, environmental requirements and potential liabilities associated with previously divested properties.
- Confirm the impact of the January 2020 U.S. domestication on tax rates, foreign-exchange exposure, credit facilities and future reported results.