Ovintiv Inc. 2020 Q3 Form 10-Q Summary
Business context and reporting period
Ovintiv is a North American oil, NGL and natural gas producer operating primarily in the United States and Canada, with core assets in the Permian, Anadarko and Montney. The filing covers the three and nine months ended September 30, 2020, with comparative periods from 2019. The January 24, 2020 reorganization changed the company’s name from Encana, completed a share consolidation and U.S. domestication, and made Ovintiv a Delaware corporation reporting in U.S. dollars. Results are presented on a historical-comparative basis.
Key financial metrics
| US$ millions, except per-share data | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenues | $1,190 | $1,871 | $4,559 | $5,161 |
| Operating income (loss) | $(1,506) | $315 | $(4,806) | $626 |
| Net earnings (loss) | $(1,521) | $149 | $(5,483) | $240 |
| Basic and diluted EPS | $(5.85) | $0.56 | $(21.10) | $0.92 |
| Cash from operating activities | $493 | $756 | $1,176 | $2,191 |
| Capital expenditures | $351 | $566 | $1,393 | $2,052 |
| Non-GAAP cash flow | $398 | $817 | $1,237 | $2,116 |
| Non-GAAP cash flow margin | $8.49/BOE | $14.67/BOE | $8.37/BOE | $13.95/BOE |
Reported net margin was approximately (127.8%) in Q3 2020 and (120.3%) for the first nine months, compared with approximately 8.0% and 4.7%, respectively, in the comparable 2019 periods. The reported margins were heavily affected by non-cash impairments.
- Q3 upstream product revenues were $980 million, down from $1,476 million, primarily because of lower oil and condensate prices and lower production volumes.
- Q3 total production was 510.2 MBOE/d, down 16% year over year; liquids were 269.9 Mbbls/d and natural gas was 1,442 MMcf/d.
- For the first nine months, production was 539.3 MBOE/d, down 3%; liquids represented 53% and natural gas 47% of production.
- Q3 operating expenses included a $1,336 million non-cash U.S. ceiling-test impairment. The nine-month impairment totaled $4,863 million.
- Long-term debt was $7,142 million at September 30, 2020, compared with $6,974 million at December 31, 2019. Shareholders’ equity declined to $4,352 million from $9,930 million.
- Cash and cash equivalents were $32 million. Total liquidity was approximately $3.1 billion, including $2.99 billion of available credit facilities, $186 million of available uncommitted demand lines and cash, net of $140 million of commercial paper.
- Debt to adjusted capitalization was 37%, below the 60% financial-covenant threshold. Net debt to adjusted EBITDA was 2.9 times, compared with 2.0 times at December 31, 2019.
- Dividends paid were $24 million in Q3 and $73 million year to date, or $0.09375 and $0.28125 per share, respectively.
Material changes versus the prior comparable period
- Revenue decreased 36% in Q3 and 12% for the first nine months, reflecting lower benchmark and realized commodity prices and lower production.
- Oil and NGL prices declined materially year over year; nine-month average realized oil prices fell to $35.49 per barrel from $56.58, while realized natural gas prices fell to $1.69/Mcf from $1.93.
- Cash from operations fell 35% in Q3 and 46% for the first nine months, despite lower operating costs and higher realized risk-management gains for the nine-month period.
- Cost reductions partially offset weaker prices. Nine-month Total Costs declined to $1,740 million, or $11.77/BOE, from $1,921 million, or $12.66/BOE.
- Ovintiv reduced capital expenditures by $659 million year to date and directed 82% of nine-month capital spending to core assets.
- The company repurchased $252 million of senior-note principal for $224 million of cash, recognizing $28 million of gains. It made no share repurchases in 2020, compared with $1.25 billion in 2019.
- Deferred tax valuation allowances, including a $568 million Canadian allowance, contributed to the nine-month tax expense of $395 million despite the reported pretax loss.
- Ovintiv reduced its workforce by approximately 25% in June 2020 and recorded $88 million of restructuring charges through September 30; total transition and severance costs are expected to be approximately $93 million.
Guidance, outlook, risks and unusual items
- The company suspended previously issued 2020 guidance after reducing its capital program by $500 million. It subsequently expected full-year 2020 capital investment of approximately $1.8 billion, funded with cash from operations.
- Management expected approximately 200 Mbbls/d of oil and plant condensate production in Q4 2020 and planned to allocate excess cash flow to debt reduction over the next five quarters.
- Management stated that more than $200 million of annual cost savings was expected from workforce reductions and other initiatives.
- As of October 16, 2020, Ovintiv had hedged approximately 87% of expected crude oil and condensate production and 70% of expected natural gas production for the remainder of 2020.
- Further sustained low commodity prices could cause additional ceiling-test impairments, negative reserve revisions and additional deferred-tax valuation allowances. Management’s sensitivity analysis indicated an estimated additional U.S. impairment of approximately $1.3 billion using then-current futures prices, although the estimate was not a forecast.
- COVID-19, oil-market oversupply, OPEC+ decisions, demand weakness, refinery curtailments, storage constraints and regional price differentials remain significant operating and financial risks.
- One credit-rating agency downgraded Ovintiv below investment grade during the first nine months. The company retained access to its credit facilities, but further downgrades could raise borrowing costs, restrict commercial-paper access and require additional collateral.
- The company has transportation and processing commitments totaling $4.771 billion, including commitments associated with VMLP. Its estimated maximum exposure related to VMLP was $1.858 billion, although the potential payout is highly uncertain.
- Ovintiv received an EPA and Utah environmental Notice of Violation concerning certain Uinta Basin facilities. The financial impact and resolution timing were not determinable; monetary sanctions could exceed $100,000.
- The company reported no material adverse impact expected from other routine legal claims, but unfavorable outcomes could materially affect earnings when estimable.
Important facts for investors to verify
- Reconcile reported losses with the $4.863 billion year-to-date non-cash impairment and assess potential future reserve and impairment sensitivity.
- Evaluate liquidity after considering $7.142 billion of debt, $1.01 billion drawn on revolving facilities, commercial paper maturities and possible rating-related collateral requirements.
- Review commodity hedges, counterparty exposure and the net risk-management liability of $52 million at September 30, 2020.
- Assess whether the approximately $1.8 billion capital plan and expected production levels can be funded from operating cash flow under prevailing commodity prices.
- Confirm the sustainability of the dividend while management prioritizes debt reduction and reports only $32 million of cash.
- Monitor the EPA/UDAQ Notice of Violation, VMLP commitments, transportation obligations and other abandonment and reclamation liabilities.
- Review the company’s non-GAAP cash flow, Total Costs and leverage measures alongside, rather than instead of, U.S. GAAP results.