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. Core assets at June 30, 2021 were the Permian and Anadarko in the United States and Montney in Canada. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Amounts are in U.S. dollars unless otherwise stated.
Financial Performance and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Product and service revenues | $2,473 million | $1,023 million | $4,720 million | $2,593 million |
| Total revenues | $1,692 million | $726 million | $3,530 million | $3,369 million |
| Operating income (loss) | $(121) million | $(4,059) million | $74 million | $(3,300) million |
| Net earnings (loss) | $(205) million | $(4,383) million | $104 million | $(3,962) million |
| Basic earnings (loss) per share | $(0.79) | $(16.87) | $0.40 | $(15.25) |
| Cash from operating activities | $750 million | $117 million | $1,577 million | $683 million |
| Capital expenditures | $383 million | $252 million | $733 million | $1,042 million |
| Non-GAAP cash flow | $733 million | $304 million | $1,623 million | $839 million |
| Non-GAAP cash flow margin | $14.51/BOE | $6.23/BOE | $16.41/BOE | $8.32/BOE |
Q2 operating margin was approximately negative 7.1% and six-month operating margin was approximately 2.1%. Net margins were approximately negative 12.1% and 2.9%, respectively. Reported results were significantly affected by derivative losses: net risk-management losses were $799 million in Q2 and $1.226 billion for the six months, including unrealized losses of $576 million and $847 million, respectively.
- Average Q2 production was 286.7 Mbbls/d of liquids and 1,607 MMcf/d of natural gas, or 554.6 MBOE/d in total. Liquids represented 52% of production.
- Average six-month production was 281.2 Mbbls/d of liquids and 1,591 MMcf/d of natural gas, or 546.5 MBOE/d. Liquids represented 51% of production.
- Higher commodity prices drove upstream revenue growth. Q2 realized prices, excluding risk management, increased to $63.65/bbl for oil, $50.70/bbl for total oil and NGLs, and $2.75/Mcf for natural gas, compared with $22.91/bbl, $17.88/bbl and $1.57/Mcf, respectively, in Q2 2020.
- Total operating expenses declined to $3.456 billion for the six months from $6.669 billion, primarily because 2020 included $3.527 billion of non-cash ceiling-test impairments. DD&A declined to $619 million from $1.027 billion.
- Total Costs, a non-GAAP measure, increased to $1.277 billion, or $12.92/BOE, from $1.182 billion, or $11.72/BOE.
- The six-month income tax recovery was $176 million, including a $156 million current tax recovery principally related to resolution of prior-year tax matters. The effective tax rate was unusually high at 244.4% because of discrete tax items and changes in valuation allowances.
Liquidity, Debt and Capital Structure
- At June 30, 2021, cash and cash equivalents were $122 million, total long-term debt was $5.314 billion, shareholders’ equity was $3.934 billion and total liquidity was approximately $4.403 billion.
- Total liquidity comprised $4.0 billion of available committed credit facilities, $281 million of available uncommitted demand lines and $122 million of cash.
- No amounts were outstanding under the revolving credit facilities or U.S. commercial paper programs at quarter-end. Debt to adjusted capitalization was 31%, below the 60% credit-facility covenant threshold, and net debt to adjusted EBITDA was 1.9 times.
- Ovintiv redeemed $600 million of 5.75% senior notes in June 2021, paying approximately $632 million including accrued interest and a $19 million make-whole payment. The company expected to redeem the $518 million of 3.90% senior notes due November 2021 in August 2021.
- Dividends paid were $0.09375 per share in Q2 and $0.1875 per share for the six months. On July 27, 2021, the board declared a $0.14 per-share dividend, representing an approximately 50% increase.
Material Changes Versus the Prior Comparable Period
- Product and service revenues increased 142% in Q2 and 82% for the six months, primarily from higher oil, NGL and natural gas prices and modestly higher Q2 production.
- Net earnings improved substantially from the prior-year losses, although Q2 remained loss-making because of derivative losses and other costs.
- Cash from operating activities increased $633 million in Q2 and $894 million for the six months, despite realized risk-management losses of $223 million and $379 million, respectively.
- Capital expenditures decreased $309 million year-to-date as Ovintiv continued its lower-spending capital program. Approximately 94% of six-month capital expenditures was directed to Core Assets.
- Ovintiv sold its Eagle Ford assets for approximately $771 million and its Duvernay assets for approximately $239 million, after closing and other adjustments. These divestitures reduced production and supported debt repayment.
- Debt declined by approximately $1.571 billion during the first six months. Since the second quarter of 2020, the company reported allocating $2.052 billion of excess cash flow, including divestiture proceeds, to debt reduction.
- Restructuring charges declined to $5 million in Q2 and $11 million for the six months from $81 million in each comparable 2020 period. Remaining restructuring accruals were $5 million, with total transition and severance costs expected to be approximately $104 million before tax.
Guidance, Outlook, Commentary and Risks
- Ovintiv reaffirmed a $1.5 billion 2021 capital investment program, focused primarily on high-margin liquids and Core Assets. Six-month spending was $733 million.
- Updated full-year 2021 production guidance was approximately 190.0–195.0 Mbbls/d of oil and plant condensate, 80.0–85.0 Mbbls/d of other NGLs and 1,550–1,575 MMcf/d of natural gas.
- Updated 2021 Total Costs guidance was approximately $12.95–$13.20/BOE, reflecting higher foreign exchange rates and production taxes. Six-month Total Costs were $12.92/BOE.
- Management is targeting a long-term debt balance, less cash, of approximately $3.0 billion by the end of 2023. The planned 2021 debt redemptions were expected to generate annualized interest savings of more than $50 million.
- As of July 15, 2021, Ovintiv had hedged approximately 130.0 Mbbls/d of expected crude oil and condensate production and 1,170 MMcf/d of expected natural gas production for the remainder of 2021.
- Key risks include oil, NGL and natural gas price volatility; derivative-related losses; COVID-19 and related operational disruptions; transportation and processing constraints; cost inflation; foreign exchange movements; counterparty and credit risk; changes in tax, environmental, carbon and regulatory requirements; cybersecurity; litigation; and obligations under long-term midstream agreements.
- Commitments included approximately $5.129 billion of transportation and processing payments, $53 million of drilling and field-services commitments and $36 million of building-lease commitments, or $5.218 billion in total undiscounted commitments.
- Ovintiv estimated maximum exposure to loss related to VMLP gathering and processing commitments at $1.883 billion, although the potential payout is highly uncertain and contingent on future production and capacity utilization.
- Management reported no material changes to the risk factors disclosed in the 2020 Form 10-K and concluded that disclosure controls and procedures were effective as of June 30, 2021.
Important Facts for Investors to Verify
- Reconcile reported revenue and earnings with the substantial $1.226 billion year-to-date net derivative loss and review the composition of realized versus unrealized risk-management results.
- Assess the sustainability of cash flow at commodity prices below the Q2 2021 benchmarks and after scheduled hedge settlements.
- Confirm completion and proceeds of the Eagle Ford and Duvernay divestitures and the effect of those sales on production, reserves and future cash flow.
- Verify the timing and completion of the planned $518 million senior-note redemption and the resulting interest savings.
- Monitor progress toward the $3.0 billion net-debt target, liquidity availability, credit ratings and compliance with debt covenants.
- Evaluate whether the $1.5 billion capital program, production guidance and Total Costs guidance remain achievable amid service-cost inflation and commodity-price volatility.
- Review the VMLP take-or-pay exposure, transportation commitments and other long-term contractual obligations.
- Consider the unusually volatile effective tax rate and the company’s valuation allowances, tax attributes and unresolved tax matters.