Ovintiv Inc. 2020 Q2 Form 10-Q Summary
Business Context and Reporting Period
Ovintiv is a North American producer and marketer of oil, NGLs and natural gas, with core assets in the Permian, Anadarko and Montney. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, reported in U.S. dollars under U.S. GAAP. The January 24, 2020 reorganization converted Encana into Ovintiv Inc., a Delaware corporation; comparative share and per-share data were restated for the share consolidation.
Financial Metrics
| US$ millions, except per-share data | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $726 | $2,055 | $3,369 | $3,290 |
| Product and service revenues | $1,023 | $1,848 | $2,593 | $3,420 |
| Operating income (loss) | $(4,059) | $538 | $(3,300) | $311 |
| Net earnings (loss) | $(4,383) | $336 | $(3,962) | $91 |
| Basic and diluted EPS | $(16.87) | $1.22 | $(15.25) | $0.35 |
| Cash from operating activities | $117 | $906 | $683 | $1,435 |
| Capital expenditures | $252 | $750 | $1,042 | $1,486 |
Q2 net loss included a $3.25 billion non-cash ceiling-test impairment, a $314 million net loss on risk management and $81 million of restructuring costs. Six-month results included a $3.527 billion impairment, $741 million of net risk-management gains and $81 million of restructuring costs. Effective tax rates were negative 7.2% for Q2 and negative 12.3% year to date, substantially affected by deferred-tax valuation allowances.
- Non-GAAP cash flow was $304 million in Q2 and $839 million for the six months, compared with $877 million and $1.299 billion, respectively, in the prior-year periods.
- Non-GAAP cash-flow margin was $6.23 per BOE in Q2 and $8.32 per BOE year to date, versus $16.27 and $13.53, respectively, in 2019.
- Total Costs declined to $11.23 per BOE in Q2 and $11.72 per BOE year to date, compared with $12.78 and $13.06, respectively.
- Average Q2 production was 536.6 MBOE/d, consisting of 278.4 Mbbls/d of liquids and 1,550 MMcf/d of natural gas. Six-month production was 554.0 MBOE/d.
- Cash and cash equivalents were $39 million at June 30, 2020. Available credit facilities were $2.75 billion and total reported liquidity was approximately $2.97 billion, including uncommitted demand lines.
- Long-term debt was $7.366 billion, including $1.25 billion drawn on revolving facilities. Debt to capitalization was 56%, debt to adjusted capitalization was 35%, and net debt to adjusted EBITDA was 2.6 times.
- Shareholders’ equity declined to $5.873 billion from $9.930 billion at December 31, 2019, primarily reflecting the year-to-date loss and reorganization-related capital reclassification.
Material Changes Versus the Prior Comparable Period
- Product and service revenues fell 45% in Q2, primarily from sharply lower realized oil, condensate, NGL and natural-gas prices and lower liquids production. Total revenues were partly supported by risk-management gains in the first half, but Q2 included a substantial unrealized risk-management loss.
- Q2 operating results moved from $538 million of operating income to a $4.059 billion loss, principally because of the U.S. ceiling-test impairment. Six-month operating results similarly moved from $311 million of income to a $3.300 billion loss.
- Cash from operations decreased $789 million in Q2 and $752 million for the six months, driven mainly by lower realized commodity prices, lower Q2 production, working-capital changes, restructuring payments and decommissioning costs.
- Capital spending was reduced materially in response to the commodity-price downturn and COVID-19, down 66% in Q2 and 30% for the first six months compared with 2019.
- Ovintiv reduced its workforce by approximately 25% in June 2020. It recorded $81 million of restructuring charges, with $49 million accrued at quarter end and approximately $91 million of total 2020 transition and severance costs expected.
- Ovintiv repurchased $137 million principal amount of senior notes for approximately $115 million of cash during the first six months, recognizing a $22 million gain. The company paid $49 million of dividends during the period.
Guidance, Outlook, Commentary and Risks
- Previously issued 2020 guidance was suspended because of commodity-price uncertainty and market volatility. Management expects approximately $1.8 billion of 2020 capital investment, subject to further review.
- The company reduced Q2 capital investment by $500 million, ceased operating 16 drilling rigs, and shut in or curtailed approximately 32 MBOE/d during Q2. Capital is concentrated on the Permian, Anadarko and Montney; programs in Eagle Ford, Bakken, Uinta and Duvernay were suspended.
- Management expects to exceed its $200 million cost-reduction target and had realized approximately $92 million by June 30. It expects Q4 oil and condensate production of approximately 200 Mbbls/d, while full-year production remains dependent on market conditions and shut-in decisions.
- As of July 27, 2020, approximately 94% of expected remaining 2020 crude oil and condensate production and 80% of expected natural-gas production were hedged.
- Management intends to allocate excess cash flow to reduce long-term debt over the next six quarters. The company had no long-term debt maturities until November 2021 and stated that it remained investment grade and in compliance with credit-facility covenants.
- Further sustained low commodity prices could cause additional ceiling-test impairments and negative reserve revisions. Management estimated that June 30 futures prices, with other assumptions unchanged, could have produced an additional approximately $1.3 billion impairment for the U.S. operations.
- Key risks include COVID-19 impacts on staffing, suppliers and operations; oil and gas price volatility; storage and transportation constraints; credit-rating downgrades and additional collateral requirements; counterparty risk; foreign-exchange and interest-rate exposure; cyber risk; environmental and regulatory obligations; legal claims; and possible limitations on use of tax attributes.
- Ovintiv reported an estimated maximum exposure of $1.855 billion related to long-term gathering and processing arrangements with Veresen Midstream Limited Partnership, primarily involving take-or-pay commitments and a contingent potential payout.
- Total undiscounted commitments at June 30, 2020 were $4.779 billion, including $4.665 billion for transportation and processing, $61 million for drilling and field services and $53 million for building leases.
Investor Verification Priorities
- Verify the sustainability of cash flow and liquidity under commodity-price scenarios, including the effect of hedges and potential credit-rating changes.
- Review the impairment sensitivity, reserve revisions and full-cost ceiling-test assumptions, particularly for U.S. operations.
- Reconcile reported liquidity to drawn facilities, uncommitted lines, letters of credit and any collateral requirements.
- Assess whether the planned $1.8 billion capital program and production targets are consistent with current prices, shut-ins and suspended drilling activity.
- Monitor debt reduction, covenant compliance, refinancing needs beginning in November 2021 and the company’s stated policy of directing excess cash flow to debt repayment.
- Evaluate the contingent exposure associated with transportation and processing commitments, including the VMLP maximum exposure and $4.665 billion of related commitments.
- Confirm the timing and final cost of the workforce reduction, tax valuation allowances and any subsequent impairment or restructuring charges.