Ovintiv Inc. Form 10-Q Summary
Business Context and Reporting Period
Ovintiv is a North American energy producer engaged in the exploration, development, production and marketing of oil, NGLs and natural gas. The unaudited filing covers the quarter and nine months ended September 30, 2023, with comparisons to the same periods in 2022. Amounts are in U.S. dollars unless otherwise stated.
The report reflects the June 12, 2023 acquisition of Midland Basin assets in the Permian, which added approximately 65,000 net acres and 1,050 net well locations. Ovintiv paid approximately $3.2 billion in cash and issued approximately 31.8 million shares, for preliminary total consideration of $4.4 billion.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Product and service revenues | $2,913 million | $3,643 million | $7,857 million | $11,064 million |
| Total revenues | $2,649 million | $3,549 million | $7,717 million | $9,252 million |
| Operating income | $467 million | $1,373 million | $1,676 million | $2,689 million |
| Net earnings | $406 million | $1,186 million | $1,229 million | $2,302 million |
| Diluted earnings per share | $1.47 | $4.63 | $4.73 | $8.84 |
| Cash from operating activities | $906 million | $962 million | $2,805 million | $2,991 million |
| Non-GAAP cash flow | $1,112 million | $948 million | $2,662 million | $3,215 million |
- Q3 operating margin was approximately 17.6%, compared with 38.7% in Q3 2022; nine-month operating margin was approximately 21.7%, compared with 29.1%.
- Q3 net margin was approximately 15.3%, compared with 33.4% in Q3 2022; nine-month net margin was approximately 15.9%, compared with 24.9%.
- Q3 total production averaged 571.8 MBOE/d, up 11% year over year. Nine-month production averaged 552.3 MBOE/d, up 9%.
- Q3 production comprised 300.9 Mbbls/d of oil and NGLs and 1,625 MMcf/d of natural gas. Nine-month production comprised 278.9 Mbbls/d of oil and NGLs and 1,641 MMcf/d of natural gas.
- Q3 realized prices excluding risk management were $38.95/BOE versus $55.83/BOE in 2022. Nine-month realized prices were $36.94/BOE versus $56.94/BOE.
- Capital expenditures were $834 million in Q3 and $2.084 billion for the first nine months, compared with $511 million and $1.473 billion, respectively, in the prior-year periods.
Liquidity, Debt and Capital Allocation
- At September 30, 2023, cash was $3 million and total liquidity was approximately $3.1 billion, consisting of available credit facilities of $3.150 billion, available uncommitted demand lines of $273 million and cash, net of $359 million of commercial paper outstanding.
- Total long-term debt, including the current portion, was $6.163 billion, compared with $3.570 billion at December 31, 2022. The increase primarily reflects debt issued to fund the Permian acquisition.
- Ovintiv issued $2.3 billion of senior unsecured notes in May 2023, generating net proceeds of $2.278 billion. The notes mature from 2025 through 2053 and carry coupons ranging from 5.65% to 7.10%.
- The company had $350 million drawn on revolving credit facilities and $709 million of current debt, including revolving credit and term-loan borrowings.
- Debt to capitalization was 39%, debt to adjusted capitalization was 26%, debt to EBITDA was 1.4 times and debt to adjusted EBITDA was 1.5 times. Management stated that the company remained in compliance with its financial covenants.
- Ovintiv paid $225 million of dividends during the first nine months and repurchased approximately 8.7 million shares for $373 million. The quarterly dividend was increased to $0.30 per share, and a further $0.30 per share dividend was declared on November 7, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings declined principally because of lower commodity prices. For the first nine months, average realized natural gas and liquids prices decreased 53% and 26%, respectively, excluding risk management effects.
- Q3 product and service revenue decreased 20%, while nine-month product and service revenue decreased 29%. Lower prices reduced nine-month upstream product revenue by approximately $2.960 billion, partially offset by a $672 million benefit from higher production volumes.
- Risk management losses were $282 million in Q3 and $193 million for the first nine months, compared with losses of $111 million and $1.864 billion, respectively, in the prior-year periods. The 2023 amounts included unrealized losses of $292 million in Q3 and $132 million year to date.
- Depreciation, depletion and amortization increased to $486 million in Q3 and $1.269 billion for the first nine months, primarily due to the larger Permian asset base, higher depletion rates and increased production.
- Interest expense increased $15 million in Q3, primarily due to the May 2023 notes and borrowings, but was broadly unchanged for the nine-month period because of prior-year debt redemption costs and premiums.
- Income tax expense was a $13 million recovery in Q3, compared with $88 million of expense in 2022, partly due to recognition of U.S. research and development credits. Nine-month income tax expense increased to $214 million from $148 million.
- Ovintiv sold its Bakken assets for approximately $717 million after adjustments and used the proceeds, together with debt financing and other sources, to fund the Permian acquisition.
Guidance, Outlook, Commentary and Risks
- In November 2023, management updated full-year 2023 capital investment guidance to $2.745 billion-$2.785 billion.
- Full-year production guidance was maintained at 550.0-560.0 MBOE/d, including approximately 196.0-198.0 Mbbls/d of oil and plant condensate, 87.0-89.0 Mbbls/d of other NGLs and 1,615-1,630 MMcf/d of natural gas.
- Management expects upstream transportation and processing costs of approximately $8.00-$8.50/BOE, operating expenses of $4.00-$4.50/BOE and production, mineral and other taxes of approximately 4%-5% of upstream revenues.
- For the remainder of 2023, Ovintiv had hedged approximately 110.0 Mbbls/d of expected oil and condensate production and 600 MMcf/d of expected natural gas production.
- Key risks include volatile oil, NGL and natural gas prices; OPEC+ actions, weather and geopolitical events; inflation and supply-chain constraints; regional transportation and processing limitations; interest-rate and foreign-exchange exposure; integration and valuation estimates related to the Permian acquisition; environmental and regulatory requirements; and substantial transportation commitments.
- Undiscounted commitments totaled approximately $5.215 billion, including $4.816 billion for transportation and processing. The estimated maximum exposure related to the VMLP variable-interest arrangements was $1.280 billion, although the potential payout is highly uncertain.
- Management reported no material changes to previously disclosed risk factors or legal proceedings. Disclosure controls were effective as of September 30, 2023, but internal controls for the newly acquired Permian assets were excluded from management’s assessment during the permitted integration period.
Most Important Facts for Investors to Verify
- Reconcile reported earnings and cash flow with the effects of commodity prices, realized and unrealized derivative gains or losses, and non-GAAP cash flow adjustments.
- Assess the sustainability of production growth and the operating, integration and reserve assumptions underlying the Permian acquisition.
- Review the increase in debt, upcoming maturities, floating-rate exposure and available liquidity relative to planned capital spending and shareholder returns.
- Evaluate whether the updated capital and production guidance is consistent with current commodity prices, hedge positions and execution performance.
- Examine transportation commitments, VMLP exposure, derivative counterparty risk, environmental obligations and the preliminary nature of the acquisition purchase-price allocation.