Ovintiv Inc. 2023 Q1 Form 10-Q Summary
Business context and reporting period
Ovintiv is a North American energy producer focused on the exploration, development, production and marketing of oil, NGLs and natural gas in the United States and Canada. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparison to the three months ended March 31, 2022. Amounts are in U.S. dollars unless otherwise stated.
Financial and operating metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Product and service revenues | $2.592 billion | $3.407 billion |
| Total revenues | $2.551 billion | $1.967 billion |
| Operating income | $678 million | $(200) million |
| Net earnings | $487 million | $(241) million |
| Diluted earnings per share | $1.97 | $(0.94) |
| Cash from operating activities | $1.068 billion | $685 million |
| Non-GAAP cash flow | $851 million | $1.043 billion |
| Capital expenditures | $610 million | $451 million |
| Total long-term debt | $3.756 billion | $3.570 billion at Dec. 31, 2022 |
| Total liquidity | $3.226 billion | $4.583 billion at Mar. 31, 2022 |
Approximate margins were 26.6% for operating income and 19.1% for net earnings in Q1 2023, compared with negative margins in Q1 2022. The effective tax rate was 20.6%, versus 2.0% in the prior-year period.
- Average production increased 2% year over year to 511.4 MBOE/d, including 252.2 Mbbls/d of liquids and 1,555 MMcf/d of natural gas.
- Liquids represented 49% of total production and natural gas represented 51%.
- Average realized total production price, excluding risk management, declined to $40.72/BOE from $51.62/BOE.
- Upstream transportation and processing costs increased to $414 million, or $9.00/BOE, from $366 million, or $8.12/BOE.
- Upstream operating costs increased to $199 million, or $4.33/BOE, from $179 million, or $3.98/BOE.
- DD&A increased to $364 million from $264 million, primarily due to higher depletion rates and production in the U.S. operations.
- At March 31, 2023, cash and cash equivalents were $26 million. Long-term debt included $580 million of current borrowings and $3.176 billion of long-term borrowings; commercial paper outstanding was $280 million.
- Debt to capitalization was 32%, debt to adjusted capitalization was 19%, debt to EBITDA was 0.6 times and debt to adjusted EBITDA was 0.9 times.
Material changes versus the prior comparable period
- Net earnings improved by $728 million, from a $241 million loss to $487 million of earnings. Operating income improved by $878 million.
- Total revenues increased despite a $815 million decline in product and service revenues because Q1 2022 included a $1.458 billion net risk-management loss, compared with a $58 million loss in Q1 2023.
- Upstream product revenues declined to $1.875 billion from $2.324 billion. Lower realized prices reduced revenue by approximately $436 million, partly offset by production-volume effects.
- Benchmark prices declined materially: WTI averaged $76.13/bbl versus $94.29/bbl, and NYMEX natural gas averaged $3.42/MMBtu versus $4.95/MMBtu.
- Cash from operating activities increased $383 million, helped by favorable working-capital changes and lower realized risk-management losses, but non-GAAP cash flow declined $192 million because Q1 2022 benefited from unusually favorable working-capital effects.
- Capital expenditures increased $159 million, and acquisitions increased to $199 million from $15 million, primarily for U.S. and Canadian oil and liquids-rich properties.
- Ovintiv repurchased approximately 5.2 million shares for $239 million, compared with approximately 1.7 million shares for $71 million in Q1 2022. The quarterly dividend increased to $0.25 per share from $0.20.
- Shareholders’ equity increased to $7.894 billion from $7.689 billion at December 31, 2022, while outstanding shares declined to 244.5 million from 245.7 million.
Guidance, outlook, commentary and risks
- Q1 capital investment of $610 million was within the $600 million to $650 million guidance range. Full-year 2023 capital investment guidance was increased to $2.6 billion to $2.9 billion from $2.15 billion to $2.35 billion, reflecting the planned Permian acquisition.
- Full-year production guidance is 520.0 to 545.0 MBOE/d, including approximately 185.0 to 195.0 Mbbls/d of oil and plant condensate, 80.0 to 85.0 Mbbls/d of other NGLs and 1,525 to 1,575 MMcf/d of natural gas.
- Management expects full-year upstream transportation and processing costs of approximately $9.00 to $9.50/BOE, upstream operating costs of $4.00 to $4.50/BOE and production, mineral and other taxes of approximately 4% to 5% of upstream revenues.
- As of April 30, 2023, the company had hedged approximately 92.6 Mbbls/d of expected oil and condensate production and 546 MMcf/d of expected natural gas production for the remainder of 2023.
- On April 3, 2023, Ovintiv agreed to acquire core Midland Basin assets for approximately $4.275 billion before closing adjustments, consisting of approximately $3.125 billion of cash and 32.6 million shares. The transaction was expected to close in Q2 2023 and would add approximately 65,000 net acres and 1,050 net well locations.
- Ovintiv also agreed to sell its Bakken assets for approximately $825 million before closing adjustments. The cash consideration for the Permian acquisition is expected to be funded with cash, Bakken-sale proceeds and new or existing debt financing; fully committed bridge financing is available if required.
- Key risks include commodity-price volatility, inflation and supply-chain constraints, transportation commitments, derivative-market exposure, interest rates, foreign exchange, regulatory and environmental requirements, and the ability to close and integrate the Permian acquisition.
- The filing identifies potential exposure of approximately $1.394 billion related to certain VMLP gathering and processing commitments, although the ultimate payout is highly uncertain. Legal claims are considered ordinary-course matters and are not expected to have a material adverse effect based on current information.
- Management reported effective disclosure controls as of March 31, 2023, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Confirm the closing status, final consideration, financing and share issuance related to the Permian acquisition and the timing and proceeds of the Bakken divestiture.
- Reconcile reported earnings and cash flow for the effects of realized and unrealized commodity derivatives, working-capital movements and non-GAAP adjustments.
- Assess the sensitivity of future cash generation to oil, NGL and natural gas prices, including the disclosed hedging volumes and option terms.
- Review post-transaction debt, liquidity, credit ratings, covenant compliance and interest expense after funding the Permian acquisition.
- Evaluate whether production growth and integration benefits offset higher capital spending, transportation commitments, operating costs and inflationary pressures.
- Monitor the VMLP commitments, transportation and processing obligations, environmental liabilities and other contingencies disclosed in the filing.