Ovintiv Inc. quarterly report, Q1 FY2021

Business Context and Reporting Period

Ovintiv Inc. is a North American energy producer focused on the exploration, development, production and marketing of oil, NGLs and natural gas. Its core assets were the Permian and Anadarko basins in the United States and the Montney play in Canada. This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparison to the three months ended March 31, 2020. Amounts are in U.S. dollars unless otherwise stated.

Financial Performance and Position

Metric	Q1 2021	Q1 2020
Product and service revenues	$2.247 billion	$1.570 billion
Total revenues	$1.838 billion	$2.643 billion
Operating income	$195 million	$759 million
Net earnings	$309 million	$421 million
Basic diluted EPS	$1.19 / $1.16	$1.62 / $1.62
Cash from operating activities	$827 million	$566 million
Capital expenditures	$350 million	$790 million

Total revenue declined 30% because Q1 2021 included a $427 million net risk-management loss versus a $1.055 billion gain in Q1 2020. Product and service revenue increased 43%.
Operating margin was approximately 10.6%, compared with 28.7% in the prior-year quarter. Net margin was approximately 16.8%, compared with 15.9%.
Net earnings included a $176 million income-tax recovery, compared with $140 million of tax expense in Q1 2020. The effective tax rate was negative 132.3%, primarily due to resolution of prior-year tax matters and reduced valuation allowances; this rate is not representative of normalized earnings.
Average production was 538.3 MBOE/d, down 6% year over year. Liquids production was 275.6 Mbbls/d, down 11%, while natural gas production was 1,576 MMcf/d, broadly flat.
Average realized prices excluding risk management increased to $46.56/BOE for oil and NGLs from $32.16 and to $3.08/Mcf for natural gas from $1.70.
Non-GAAP Cash Flow was $890 million, versus $535 million, and Non-GAAP Cash Flow Margin was $18.39/BOE, versus $10.29/BOE. These measures are not standardized under U.S. GAAP.
Cash and cash equivalents were $9 million at March 31, 2021. Total liquidity was approximately $3.8 billion, comprising $4.0 billion of available credit facilities, $279 million of available uncommitted demand lines and cash, net of $490 million of commercial paper.
Total long-term debt, including the current portion, was $6.418 billion, down from $6.885 billion at December 31, 2020. Debt to adjusted capitalization was 35%, and Net Debt to Adjusted EBITDA was 2.7 times.
Shareholders’ equity increased to $4.134 billion from $3.837 billion at year-end 2020. The quarterly dividend was $0.09375 per share, totaling $24 million.

Material Changes Versus the Prior Comparable Period

Higher benchmark commodity prices drove a $527 million increase in upstream revenue, partially offset by an $86 million volume-related reduction. Realized natural gas and liquids prices increased 81% and 45%, respectively.
Total operating expenses decreased to $1.643 billion from $1.884 billion. DD&A declined to $308 million from $534 million, and Q1 2021 had no ceiling-test impairment versus a $277 million impairment in Q1 2020.
Administrative expense increased to $122 million from $53 million, primarily due to higher long-term incentive costs, consulting costs and $6 million of restructuring charges.
Interest expense decreased to $87 million from $96 million. A $7 million foreign-exchange gain replaced a $116 million loss in Q1 2020, partly reflecting the 2020 U.S. domestication.
Operating cash flow increased $261 million, while capital spending fell $440 million. Financing activities used $507 million, primarily reflecting a $460 million repayment of revolving debt.
Ovintiv allocated $332 million, or 95% of first-quarter capital expenditures, to its core assets.

Guidance, Outlook, Risks and Unusual Items

Management commenced a $1.5 billion 2021 capital program, focused primarily on high-margin liquids projects and core assets.
Full-year 2021 guidance was updated to approximately 190.0 Mbbls/d of oil and plant condensate, approximately 80.0 Mbbls/d of other NGLs and approximately 1,550 MMcf/d of natural gas.
Management expects 2021 Total Costs of approximately $12.25 to $12.50 per BOE, compared with $12.93 per BOE in Q1. Costs are expected to trend downward during the remainder of the year.
Ovintiv intends to apply excess cash flow and divestiture proceeds toward reducing total long-term debt to $4.5 billion by the first half of 2022. Since Q2 2020, it had allocated $948 million of excess cash flow to debt reduction.
Ovintiv agreed to sell its Duvernay assets for approximately $263 million; the transaction closed April 28, 2021, with approximately $232 million received after adjustments. It also agreed to sell its Eagle Ford assets for approximately $880 million, subject to closing conditions and expected to close in Q2 2021.
As of April 19, 2021, the Company had hedged approximately 131.7 Mbbls/d of expected crude oil and condensate production and 1,143 MMcf/d of expected natural gas production for the remainder of 2021.
Commodity prices remain sensitive to COVID-19 developments, economic recovery, OPEC+ production decisions, weather, supply and demand, regional differentials and geopolitical conditions. A 10% commodity-price increase would have reduced the fair value of risk-management positions by approximately $188 million for crude oil, $16 million for NGLs and $94 million for natural gas, before tax.
Material commitments included $5.330 billion of transportation and processing obligations and total commitments of $5.408 billion. The Company’s estimated maximum exposure related to its VMLP gathering and processing arrangements was $1.894 billion, although the potential payout is highly uncertain.
Restructuring charges totaled $6 million in Q1 2021. Cumulative restructuring charges were $96 million, with approximately $104 million of total transition and severance costs expected before tax.
Management reported no material change in previously disclosed risk factors, no material adverse effect expected from existing legal claims, and effective disclosure controls as of March 31, 2021.

Investor Verification Priorities

Verify the sustainability of earnings and cash flow excluding the unusual $176 million tax recovery and the substantial risk-management losses.
Reconcile the reported $6.418 billion debt balance, including $1.118 billion current debt and $490 million of commercial paper, with the planned $4.5 billion debt target.
Confirm closing proceeds, production effects and debt-reduction application from the Duvernay and Eagle Ford divestitures.
Assess exposure to commodity-price volatility, derivative settlements and the net risk-management liability of approximately $495 million at March 31, 2021.
Evaluate whether production guidance and the $12.25–$12.50 per BOE cost target remain achievable after lower liquids volumes, weather impacts and divestitures.
Review the $5.330 billion of transportation and processing commitments and the potential VMLP-related exposure, particularly under lower production or capacity-utilization scenarios.
Confirm covenant compliance, credit ratings, availability of the $4.0 billion revolving facilities and the effect of any rating downgrade on collateral or liquidity requirements.