Ovintiv Inc. 2020 Form 10-K Summary
Business context and reporting period
Ovintiv is a North American oil, NGL and natural gas exploration, development, production and marketing company with operations in the United States and Canada. The filing covers the fiscal year ended December 31, 2020, with quarterly information for the fourth quarter also provided. The company completed its reorganization and U.S. domestication from Encana on January 24, 2020; historical results represent the continuing Encana business before that date.
Core assets were the Permian and Anadarko in the United States and Montney in Canada. The company exited China in 2019 and terminated its PetroChina Canada joint venture in 2020. Ovintiv had approximately 1,916 employees at year-end.
Key financial and operating metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues | $6,087 million | $6,726 million | Down $639 million |
| Product and service revenues | $5,509 million | $7,013 million | Down $1,504 million |
| Net earnings attributable to common stockholders | $(6,097) million | $234 million | Turned to loss |
| Operating income (loss) | $(5,397) million | $598 million | Turned to loss |
| Cash from operating activities | $1,895 million | $2,921 million | Down $1,026 million |
| Non-GAAP cash flow | $1,929 million | $2,931 million | Down $1,002 million |
| Capital expenditures | $1,736 million | $2,626 million | Down $890 million |
| Net debt to adjusted EBITDA | 3.1x | 2.0x | Higher leverage |
Reported results included a $5,580 million non-cash ceiling-test impairment in U.S. Operations, $507 million of net risk-management gains, $90 million of restructuring costs and a $568 million increase in the Canadian deferred-tax valuation allowance. The effective tax rate was negative 6.4%, compared with 25.7% in 2019.
Average production was 543.8 MBOE/d, comprising 288.9 Mbbls/d of liquids and 1,529 MMcf/d of natural gas. Total production declined 4% year over year, while oil and NGL production declined 4% and natural gas declined 3%. Average realized prices excluding risk management were $36.83/bbl for oil, $28.34/bbl for total oil and NGLs, $1.87/Mcf for natural gas and $20.30/BOE overall.
Total costs declined to $2,313 million, or $11.60/BOE, from $2,602 million, or $12.59/BOE, in 2019. Non-GAAP cash flow margin declined to $9.69/BOE from $14.21/BOE. Cash from operating activities exceeded capital expenditures by $159 million.
Liquidity, debt and capital structure
- Cash and cash equivalents were $10 million at December 31, 2020, compared with $190 million a year earlier.
- Total liquidity was approximately $3.3 billion, consisting of $3.4 billion of available committed credit facilities, $269 million of available uncommitted demand lines and cash, net of $352 million of commercial paper.
- Long-term debt, including the current portion, was $6,885 million. This included $598 million drawn on revolving credit facilities and $352 million of commercial paper.
- The company repurchased $302 million principal amount of senior notes for approximately $272 million and recognized a $30 million gain.
- Debt to adjusted capitalization was 37%, below the 60% credit-facility covenant. A $518 million debt maturity was classified as current and is due in November 2021.
- Dividends were $0.375 per share for 2020, totaling $97 million. The board declared a further quarterly dividend of $0.09375 per share payable March 31, 2021.
Material changes versus the prior comparable period
- Commodity prices fell sharply amid COVID-19, excess supply and the Saudi Arabia-Russia price dispute. Upstream product revenues declined to $4,044 million from $5,847 million, primarily because of lower realized prices and lower production.
- Net risk-management gains improved to $507 million from a $361 million net loss in 2019. Realized risk-management gains were $711 million, partly offset by $204 million of unrealized losses.
- The company reduced its capital program by approximately 33% from the original 2020 plan, curtailed production and ceased operating 16 drilling rigs during the downturn.
- The workforce was reduced by approximately 25% in June 2020. Total restructuring charges were $90 million, with approximately $14 million accrued at year-end.
- Proved reserves declined 196.3 MMBOE to 1,992.5 MMBOE. Negative revisions were driven principally by changes in approved development plans and lower trailing average prices, partly offset by 377.5 MMBOE of extensions and discoveries.
- Property, plant and equipment declined to $9,450 million from $15,191 million, largely reflecting the U.S. ceiling-test impairment.
- Shareholders’ equity declined to $3,837 million from $9,930 million, primarily because of the net loss and related balance-sheet effects.
- Fourth-quarter 2020 revenue was $1,528 million and net loss was $614 million, including $717 million of impairment expense.
Guidance, outlook, risks and unusual items
For 2021, management planned approximately $1.5 billion of capital investment, focused primarily on core assets. Expected production was approximately 200.0 Mbbls/d of oil and plant condensate, 80.0 Mbbls/d of other NGLs and 1,550 MMcf/d of natural gas. Expected total costs were approximately $12.25 to $12.50/BOE.
Management intended to apply excess cash flow to debt reduction and targeted at least $1.25 billion of total long-term debt reduction by the end of 2021. As of the filing date, $481 million had been repaid toward that target. At January 31, 2021, the company had hedged approximately 127.0 Mbbls/d of crude oil and condensate and 1,038 MMcf/d of natural gas production for 2021.
In February 2021, Ovintiv agreed to sell its Duvernay assets for approximately $263 million, including up to $12 million of commodity-price-contingent payments. Closing was subject to customary conditions and was expected in the second quarter of 2021.
- Principal risks include commodity-price volatility, regional price differentials, transportation and processing commitments, production declines, reserve-estimation uncertainty and potential future impairments.
- Liquidity risks include low cash balances, commercial-paper refinancing, credit-rating downgrades, collateral requirements and the $518 million debt maturity in 2021.
- The company had $5,315 million of transportation and processing commitments and $19,519 million of total contractual obligations, including debt, interest, leases, asset-retirement obligations and other commitments.
- Ovintiv identified a maximum estimated exposure of $1,901 million related to certain Montney gathering and processing arrangements, although the ultimate payout is highly uncertain.
- In July 2020, the EPA and Utah environmental authorities issued a Notice of Violation concerning alleged Clean Air Act and related violations at Uinta Basin facilities. The company could not predict the resolution or financial impact; monetary sanctions could exceed $300,000.
- Climate, methane, carbon-tax, hydraulic-fracturing, seismicity and other environmental regulations may increase costs or restrict operations. Ovintiv targeted a 33% reduction in methane intensity by 2025.
- The filing states that management and the auditors concluded internal control over financial reporting was effective. The principal critical audit matter was the effect of proved reserve estimates on depletion and the ceiling-test impairment.
Most important facts for investors to verify
- Whether commodity prices and production volumes support the 2021 production, cost and cash-flow assumptions.
- The timing and amount of the planned $1.25 billion debt reduction, including repayment of the $518 million 2021 maturity.
- Available borrowing capacity after considering commercial paper, revolver drawings, credit-rating effects and possible collateral requirements.
- The closing proceeds, contingencies and balance-sheet impact of the Duvernay sale.
- The sensitivity of proved reserves, carrying values and future earnings to commodity prices and development-plan changes.
- The sustainability of the quarterly dividend while management prioritizes debt reduction.
- Exposure under transportation, processing, minimum-volume, asset-retirement, indemnification and variable-interest arrangements.
- The status and potential cost of the Uinta Basin environmental Notice of Violation and other legal, tax and environmental contingencies.