Ovintiv Inc. 2021 Q3 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. Core assets at September 30, 2021 were Permian and Anadarko in the United States and Montney in Canada. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Amounts are in U.S. dollars unless stated otherwise.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Product and service revenues | $2,720 million | $1,326 million | $7,440 million | $3,919 million |
| Total revenues | $1,789 million | $1,190 million | $5,319 million | $4,559 million |
| Operating income (loss) | $0 million | $(1,506) million | $74 million | $(4,806) million |
| Net earnings (loss) | $(72) million | $(1,521) million | $32 million | $(5,483) million |
| Basic EPS | $(0.28) | $(5.85) | $0.12 | $(21.10) |
| Cash from operating activities | $812 million | $493 million | $2,389 million | $1,176 million |
| Non-GAAP cash flow | $845 million | $398 million | $2,468 million | $1,237 million |
| Non-GAAP cash flow margin | $17.17/BOE | $8.49/BOE | $16.66/BOE | $8.37/BOE |
| Capital expenditures | $365 million | $351 million | $1,098 million | $1,393 million |
Reported total-revenue margins were approximately 0% at the operating level and negative 4.0% at the net-earnings level in Q3 2021. For the first nine months, operating and net margins were approximately 1.4% and 0.6%, respectively. Results were significantly affected by derivative losses.
- Net risk-management losses were $950 million in Q3 and $2.176 billion for the first nine months, compared with losses of $154 million and gains of $587 million in the respective 2020 periods.
- Realized commodity prices increased materially year over year. Nine-month average realized prices rose 77% for oil, 96% for plant condensate, 176% for other NGLs and 88% for natural gas.
- Average Q3 production was 273.6 Mbbls/d of liquids and 1,566 MMcf/d of natural gas. Nine-month production was 278.7 Mbbls/d of liquids and 1,583 MMcf/d of natural gas.
- At September 30, 2021, cash was $8 million, long-term debt was $4.791 billion, shareholders’ equity was $3.797 billion and total liquidity was approximately $4.3 billion.
- Net debt was $4.783 billion and Net Debt to Adjusted EBITDA was 1.5 times, compared with 3.1 times at December 31, 2020. Debt to adjusted capitalization was 29%, below the 60% credit-facility covenant threshold.
Material Changes Versus the Prior Comparable Period
- Product and service revenues increased 105% in Q3 and 90% for the first nine months, primarily from higher commodity prices and increased market-optimization activity.
- Operating results improved substantially because 2020 included non-cash ceiling-test impairments of $1.336 billion in Q3 and $4.863 billion for the first nine months. No ceiling-test impairment was recorded in 2021.
- Cash from operating activities increased by $319 million in Q3 and $1.213 billion for the first nine months, despite larger realized derivative losses.
- Ovintiv sold its Eagle Ford assets for approximately $762 million and its Duvernay assets for approximately $238 million after adjustments. Total divestiture proceeds for the first nine months were $1.017 billion.
- The Company redeemed $600 million of 5.75% senior notes and $518 million of 3.90% senior notes. These redemptions contributed to a $2.094 billion reduction in long-term debt during the first nine months and are expected to reduce annualized interest expense by more than $50 million.
- The quarterly dividend increased to $0.14 per share from $0.09375. The Company also received approval for a normal-course issuer bid to repurchase up to approximately 26 million shares from October 1, 2021 through September 30, 2022.
- Total Costs increased to $12.97/BOE from $11.77/BOE for the first nine months, primarily because of higher transportation and processing expenses, production taxes and foreign-exchange effects.
Guidance, Outlook, Risks and Unusual Items
- Management remained on track for its approximately $1.5 billion 2021 capital program. Through September 30, $1.098 billion had been invested, with 92% directed to Core Assets.
- Third-quarter guidance was narrowed to approximately 191.0–194.0 Mbbls/d of oil and plant condensate, 82.0–83.0 Mbbls/d of other NGLs and 1,555–1,570 MMcf/d of natural gas. Management expected to meet or exceed production targets.
- Management targeted Net Debt of approximately $3.0 billion by the end of 2023 and continued to emphasize disciplined capital allocation, debt reduction and shareholder returns.
- For the remainder of 2021, the Company had hedged approximately 130.0 Mbbls/d of expected crude oil and condensate production and 1,145 MMcf/d of expected natural gas production. The derivative portfolio had a net fair-value liability of approximately $1.660 billion at September 30, 2021.
- Commodity-price volatility, derivative settlements and valuation changes, regional basis differentials, foreign-exchange movements, inflation in services and supplies, transportation availability, counterparty risk, COVID-19 effects, environmental and climate regulation, and legal or regulatory matters remain key risks.
- Ovintiv reported maximum estimated exposure of $1.782 billion under certain long-term gathering and processing arrangements with Veresen Midstream Limited Partnership; the potential payout is highly uncertain and depends on future production and capacity utilization.
- Transportation and processing commitments totaled approximately $4.871 billion, with total disclosed commitments of $5.052 billion, on an undiscounted basis.
- Restructuring charges were $13 million for the first nine months, with $3 million accrued at September 30. Total transition and severance costs were expected to be approximately $104 million before tax.
- The first-nine-month tax recovery of $175 million included a $156 million current-tax recovery primarily from resolving prior-year tax matters. The resulting 122.4% effective tax rate is not representative of a normal operating tax rate.
Most Important Facts for Investors to Verify
- Whether commodity prices remain high enough to offset the Company’s substantial hedge losses and derivative liability position.
- Progress toward the $3.0 billion 2023 Net Debt target and the effect of share repurchases and increased dividends on debt reduction.
- Execution of the $1.5 billion capital program and delivery of the narrowed production guidance.
- Liquidity availability, credit ratings, covenant compliance and the maturity profile of remaining senior notes.
- Exposure under long-term transportation, processing and take-or-pay commitments, including the VMLP arrangement.
- Sustainability of cost savings amid service-cost inflation and the effects of asset divestitures on future production and cash flow.