Ovintiv Inc. 2022 Q1 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 March 31, 2022 were the Permian and Anadarko in the United States and Montney in Canada. This unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Amounts are in U.S. dollars unless otherwise stated.
Financial and Operating Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Product and service revenues | $3,407 million | $2,247 million | +$1,160 million |
| Total revenues | $1,967 million | $1,838 million | +$129 million |
| Risk-management gains/(losses), net | $(1,458) million | $(427) million | $(1,031) million |
| Total operating expenses | $2,167 million | $1,643 million | +$524 million |
| Operating income/(loss) | $(200) million | $195 million | Down $395 million |
| Net earnings/(loss) | $(241) million | $309 million | Down $550 million |
| Basic EPS | $(0.94) | $1.19 | Down $2.13 |
| Cash from operating activities | $685 million | $827 million | Down $142 million |
| Non-GAAP cash flow | $1,043 million | $890 million | +$153 million |
| Non-GAAP cash flow margin | $23.18/BOE | $18.39/BOE | +$4.79/BOE |
| Total costs | $697 million | $628 million | +$69 million |
| Total costs per BOE | $15.48 | $12.93 | +$2.55 |
Average production was 252.1 Mbbls/d of liquids and 1,487 MMcf/d of natural gas, for total production of 499.9 MBOE/d. Liquids represented 50% of production and natural gas represented 50%. Total oil and NGL production declined 9% year over year, natural gas declined 6%, and total production declined 7%.
Average realized prices, excluding risk management, increased to $75.00 per barrel for total oil and NGLs from $46.56 and to $4.64 per Mcf for natural gas from $3.08. Benchmark prices also rose materially, including WTI to $94.29 per barrel from $57.84 and NYMEX natural gas to $4.95 per MMBtu from $2.69.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $271 million at March 31, 2022, compared with $195 million at December 31, 2021.
- Total liquidity was approximately $4.6 billion, consisting of $4.0 billion of available credit facilities, $312 million of available uncommitted demand lines and cash.
- Long-term debt was $4.775 billion, compared with $4.786 billion at December 31, 2021. Net debt was $4.504 billion, and trailing net debt to adjusted EBITDA was 1.3 times.
- The company had no outstanding borrowings under its revolving credit facilities or commercial paper programs at March 31, 2022. Effective April 1, 2022, revolving credit facilities were amended to total $3.5 billion and mature in July 2026.
- Capital expenditures were $451 million, up from $350 million, with approximately 80% directed to core assets.
- Ovintiv repurchased approximately 1.7 million shares for $71 million and paid $52 million of dividends, or $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Higher commodity prices increased upstream product revenues by approximately $730 million, but production volumes were lower and risk-management losses increased substantially.
- Realized risk-management losses were $445 million, while total net risk-management losses including unrealized losses were $1.458 billion. The March 31, 2022 net derivative fair-value position was a liability of $1.735 billion, versus $724 million at year-end 2021.
- Operating expenses rose primarily because of higher purchased-product costs, production taxes, transportation and processing costs, operating expenses and long-term incentive costs. Long-term incentive expense increased to $90 million from $44 million.
- Income tax recovery decreased to $5 million from $176 million. The prior-year recovery was significantly affected by the resolution of prior-period tax items and changes in valuation allowances.
- Interest expense declined to $74 million from $87 million following prior debt redemptions.
- Shareholders’ equity declined to $4.684 billion from $5.074 billion, primarily reflecting the quarterly loss, dividends and share repurchases.
Guidance, Outlook, Risks and Unusual Items
- In May 2022, management increased full-year 2022 capital investment guidance to $1.7 billion-$1.8 billion, primarily because of inflationary pressures.
- Full-year production guidance was approximately 180.0-185.0 Mbbls/d for oil and plant condensate, 1,450-1,500 MMcf/d for natural gas and 78.0-82.0 Mbbls/d for other NGLs.
- Full-year Total Costs guidance was increased to $15.75-$16.25 per BOE, based on assumed WTI of $100 per barrel and NYMEX natural gas of $6.00 per MMBtu.
- As of April 15, 2022, Ovintiv had hedged approximately 80.0 Mbbls/d of expected oil and condensate production and 1,297 MMcf/d of expected natural gas production for the remainder of 2022.
- Management expected to reach a net debt balance of $3.0 billion in the second half of 2022. On May 9, 2022, the company announced redemption of $1.0 billion of 5.625% senior notes due July 2024, funded with cash and existing liquidity; expected annualized interest savings were approximately $55 million.
- The May 9, 2022 dividend declaration increased the quarterly dividend to $0.25 per share, payable June 30, 2022.
- Key risks include oil, NGL and natural gas price volatility; derivative losses and counterparty exposure; inflation in services and supplies; production, transportation and processing interruptions; geopolitical effects from the Russia-Ukraine conflict; weather and COVID-19 impacts; foreign exchange movements; regulatory, environmental, GHG and carbon requirements; cybersecurity; litigation; and the company’s substantial transportation and processing commitments.
- Commitments at March 31, 2022 totaled $4.917 billion on an undiscounted basis, including $4.766 billion for transportation and processing. Ovintiv also reported potential maximum exposure of approximately $1.718 billion related to certain long-term midstream service arrangements, although the ultimate payout is highly uncertain.
- Management stated that existing legal proceedings were not expected to have a material adverse effect, but unfavorable outcomes could materially affect earnings when estimable. No material changes were reported to the risk factors in the 2021 Form 10-K.
Important Facts for Investors to Verify
- Reconcile reported revenue and earnings with the significant realized and unrealized derivative losses, including the $1.735 billion net derivative liability.
- Review the assumptions supporting 2022 commodity-price, production, capital-spending and Total Costs guidance, particularly given inflation and market volatility.
- Confirm the timing, funding and interest savings from the planned $1.0 billion senior-note redemption.
- Assess liquidity after the debt redemption, planned capital spending, dividends and share repurchases, including the amended $3.5 billion credit facilities.
- Evaluate transportation and processing commitments and the potential exposure associated with the VMLP arrangements.
- Review non-GAAP cash flow, Total Costs and leverage measures against U.S. GAAP results and comparable-company definitions.
- Verify the effect of lower production volumes, prior asset divestitures, higher royalties and hedging on future cash generation.