Ovintiv(US:OVV)2023-02-26 16:00Part I Business and Properties Ovintiv is a North American oil and natural gas exploration and production company with a multi-basin portfolio in the U.S. and Canada, focused on disciplined capital allocation and free cash flow generation Strategy and Approach Ovintiv's strategy focuses on delivering quality returns, generating free cash flow, and providing significant cash returns to shareholders through disciplined capital allocation and operational excellence - The company aims to maximize shareholder returns through a transparent capital allocation framework that includes base dividends, share buybacks, and/or variable dividends41 - Ovintiv's strategic pillars include: Execution Excellence, Disciplined Capital Allocation, Commercial Acumen & Risk Management, Driving ESG Progress, Top Tier Multi-Basin Assets, Financial Strength, and People & Values424546 - A key focus is on debt reduction, with over $3.3 billion in total long-term debt reduced since the end of 202047 Reporting Segments Ovintiv's operations are organized into three reportable segments: USA Operations, Canadian Operations, and Market Optimization, each focusing on distinct geographic and functional areas - USA Operations include key plays such as Permian (Texas), Anadarko (Oklahoma), Bakken (North Dakota), and Uinta (Utah)49 - Canadian Operations are focused on plays including Montney (British Columbia/Alberta), Horn River (British Columbia), and Wheatland (Alberta)49 - The Market Optimization segment handles the sale of proprietary production and uses third-party purchases and sales to manage transportation commitments and diversify customer base49 USA Operations In 2022, USA Operations invested approximately $1.49 billion, drilled 153 net wells, and produced 131.5 thousand barrels per day of oil, accounting for 66% of upstream revenues USA Operations 2022 Overview | Metric | Value | | :--- | :--- | | Capital Investment | $1,493 million | | Net Wells Drilled | 153 wells | | Average Oil Production | 131.5 thousand barrels/day | | Average NGL Production | 82.1 thousand barrels/day | | Average Natural Gas Production | 492 million cubic feet/day | | Net Acreage | 822,000 acres | USA Operations Production by Play (2022 Average Daily) | Play | Oil (thousand barrels/day) | NGLs (thousand barrels/day) | Natural Gas (million cubic feet/day) | | :--- | :--- | :--- | :--- | | Permian | 62.7 | 29.4 | 149 | | Anadarko | 35.5 | 43.2 | 286 | | Bakken | 15.3 | 8.2 | 36 | | Uinta | 17.9 | 1.1 | 16 | Canadian Operations In 2022, Canadian Operations invested $334 million, drilled 55 net wells, and produced 47.5 thousand barrels per day of oil and NGLs, primarily in the Montney play Canadian Operations 2022 Overview | Metric | Value | | :--- | :--- | | Capital Investment | $334 million | | Net Wells Drilled | 55 wells | | Average Oil & NGL Production | 47.5 thousand barrels/day | | Average Natural Gas Production | 1,002 million cubic feet/day | | Net Acreage | 1.2 million acres | Canadian Operations Production by Play (2022 Average Daily) | Play | Oil & NGLs (thousand barrels/day) | Natural Gas (million cubic feet/day) | | :--- | :--- | :--- | | Montney | 47.5 | 970 | | Other (Horn River, etc.) | - | 32 | Proved Reserves and Other Oil and Natural Gas Information As of December 31, 2022, Ovintiv's total proved reserves were 2,273.6 million barrels of oil equivalent, with 43% classified as proved undeveloped reserves Total Proved Reserves by Product (as of Dec 31, 2022) | Product | Developed | Undeveloped | Total | | :--- | :--- | :--- | :--- | | Oil (million barrels) | 257.3 | 278.0 | 535.3 | | NGLs (million barrels) | 359.5 | 247.4 | 606.9 | | Natural Gas (billion cubic feet) | 4,031 | 2,757 | 6,789 | | Total (million barrels of oil equivalent) | 1,288.7 | 984.9 | 2,273.6 | Changes in Proved Reserves (2022, MMBOE) | Category | Amount (million barrels of oil equivalent) | | :--- | :--- | | Beginning of year | 2,258.2 | | Revisions and improved recovery | (189.2) | | Extensions and discoveries | 370.6 | | Purchases | 45.9 | | Sales | (25.7) | | Production | (186.2) | | End of year | 2,273.6 | - Proved undeveloped reserves (PUDs) decreased from 932.5 million barrels of oil equivalent at the start of 2022 to 984.9 million barrels of oil equivalent at year-end. The company converted 161.3 million barrels of oil equivalent of PUDs to proved developed status during the year, spending approximately $1,195 million on this development106109 Marketing, Competition, and Human Capital Ovintiv manages market risk through derivatives, faces intense industry competition, and as of December 31, 2022, employed 1,744 people, with Vitol Inc. accounting for over 10% of consolidated revenues - The company has significant long-term transportation and processing financial commitments totaling $5.156 billion137 - For the year ended December 31, 2022, Vitol Inc. was a major customer, accounting for over 10% of consolidated revenues140 - As of December 31, 2022, the company employed 1,744 people (997 in the U.S. and 747 in Canada) with an average tenure of over nine years and a voluntary turnover rate of approximately six percent144148 Regulatory Matters Ovintiv's operations are subject to extensive federal, state, provincial, and local regulations in the U.S. and Canada, covering exploration, production, and environmental protection - The company faces regulatory risks related to oil and gas leasing and permitting on U.S. federal lands, with potential for increased royalty rates and stricter land-use planning158159 - In British Columbia, a court ruling and subsequent agreements with First Nations (Blueberry River First Nation) will transform land and resource management, potentially impacting development activities in the Montney play, though the company does not anticipate a material impact on its plans169 - The company is subject to increasing regulation of GHG emissions in both the U.S. and Canada, including proposed EPA standards for methane and Canada's goal to reduce oil and gas methane emissions by 75% by 2030172232233 Risk Factors The company faces diverse risks including market volatility, operational uncertainties, increasing environmental regulations, financial indebtedness, and regulatory compliance challenges - Market Risk: A substantial or extended decline in oil, NGLs, or natural gas prices could materially and adversely affect business, financial condition, and results of operations187189 - Operational Risk: Oil and natural gas reserve estimates are inherently uncertain, and inaccuracies could cause the quantity and value of reserves to be materially misstated187208 - Environmental Risk: The company is subject to increasing environmental regulations and government actions related to climate change, which could reduce demand for its products, increase operating costs, and limit development areas187231240 - Financial Risk: The company's level of indebtedness may limit its financial flexibility, and downgrades in credit ratings could increase the cost of capital and limit access to it187248250 Legal Proceedings Ovintiv is involved in various legal claims arising in the normal course of business, which are not currently expected to have a material adverse effect on its financial position - The company is involved in various legal claims and actions arising in the normal course of operations274 - Management does not expect these matters to have a material adverse effect, but an unfavorable outcome is possible and could materially impact net earnings in the period it becomes estimable274 Part II Market for Common Equity, Shareholder Matters, and Issuer Purchases Ovintiv's common stock trades on the NYSE and TSX, with the company paying $0.95 per share in dividends and repurchasing 3.5 million shares in Q4 2022, aiming to return 50% of free cash flow to shareholders - In 2022, the company paid a total annual dividend of $0.95 per share of common stock281 - The company increased its cash return target to 50% of Non-GAAP Cash Flow in excess of capital expenditures and base dividends, delivered through share buybacks and/or variable dividends282 Share Repurchases (Q4 2022) | Period | Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Oct 2022 | 957,525 | $52.22 | | Nov 2022 | 1,803,312 | $54.93 | | Dec 2022 | 724,362 | $53.77 | | Total | 3,485,199 | $53.94 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2022, Ovintiv reported $3.64 billion in net earnings and $3.87 billion in cash from operations, while reducing debt by $1.22 billion and repurchasing $719 million in shares, with a 2023 capital outlook of $2.15-$2.35 billion 2022 Financial & Operational Highlights | Metric | 2022 Value | | :--- | :--- | | Net Earnings | $3,637 million | | Cash from Operating Activities | $3,866 million | | Capital Expenditures | $1,831 million | | Total Long-Term Debt Reduction | $1,216 million | | Shares Repurchased | 14.7 million shares for $719 million | | Dividends Paid | $0.95 per share ($239 million total) | | Average Total Production | 510.0 thousand barrels of oil equivalent/day | - The company's 2023 capital investment plan is approximately $2,150 million to $2,350 million, with expected average total production of 500.0 to 525.0 thousand barrels of oil equivalent/day317321 Results of Operations In 2022, total revenues increased to $12.46 billion, resulting in $3.64 billion in net earnings, despite a $1.87 billion net loss on risk management and higher operating expenses Selected Financial Information (in millions) | Metric | 2022 ($ millions) | 2021 ($ millions) | | :--- | :--- | :--- | | Total Revenues | $12,464 | $8,658 | | Total Operating Expenses | $8,611 | $7,139 | | Operating Income | $3,853 | $1,519 | | Net Earnings | $3,637 | $1,416 | - Upstream product revenues increased by $2.7 billion YoY, driven by a $3.16 billion increase from higher sales prices, partially offset by a $437 million decrease from lower production volumes346 - The company recorded a realized loss of $2.61 billion on risk management activities in 2022, a significant increase from the $1.40 billion realized loss in 2021, primarily due to higher commodity prices exceeding hedged levels351 Liquidity and Capital Resources As of December 31, 2022, Ovintiv maintained $3.3 billion in liquidity, reduced long-term debt to $3.57 billion, and generated $3.87 billion in cash from operations to fund investments and shareholder returns Capital Structure (as of Dec 31, in millions) | Metric | 2022 ($ millions) | 2021 ($ millions) | | :--- | :--- | :--- | | Total Liquidity | $3,307 | $4,495 | | Long-Term Debt | $3,570 | $4,786 | | Total Shareholders' Equity | $7,689 | $5,074 | | Debt to Capitalization | 32% | 49% | - In 2022, the company redeemed its $1.0 billion, 5.625% senior notes due 2024 and repurchased an additional $565 million of other senior notes in the open market422423 - The company increased its cash return to shareholders to 50% of Non-GAAP Cash Flow (in excess of capex and base dividends) during the third quarter of 2022, delivering the returns via its NCIB program425 Critical Accounting Estimates Management's critical accounting estimates involve significant judgment, particularly in estimating proved oil and gas reserves, assessing goodwill impairment, valuing asset retirement obligations, and determining deferred income taxes - Upstream Assets and Reserve Estimates: The estimation of proved reserves is a subjective process based on geological and engineering data and is a key input for depletion and ceiling test impairment calculations. Revisions can be necessary due to changes in development plans, reservoir performance, and economic conditions443444449 - Goodwill Impairments: Goodwill is assessed annually by comparing the carrying amount of each reporting unit (country cost center) to its fair value. Fair value is estimated using income and market approaches, relying on significant assumptions about reserves, commodity prices, and costs446447452 - Income Taxes: The company assesses the realizability of deferred tax assets, and if it's more likely than not they won't be realized, a valuation allowance is recorded. This assessment involves judgments about future taxable income, which is dependent on factors like future commodity prices460465470 Quantitative and Qualitative Disclosures about Market Risk Ovintiv manages market risks from commodity prices, foreign currency, and interest rates using derivative financial instruments, with a 10% commodity price change having a relatively small impact on derivative fair value - The company uses derivative financial instruments, including options and swaps, to manage exposure to fluctuations in oil, NGL, and natural gas prices489 Commodity Price Sensitivity on Risk Management Positions (Dec 31, 2022) | Price Change | Impact on Pre-Tax Net Earnings (US$ millions) | | :--- | :--- | | 10% Crude Oil Price Increase | $(28) | | 10% Crude Oil Price Decrease | $27 | | 10% Natural Gas Price Increase | $6 | | 10% Natural Gas Price Decrease | $(6) | - As of December 31, 2022, the company had $393 million in floating-rate debt, exposing it to interest rate risk. A one percent change in interest rates would result in a $4 million change in before-tax earnings499 Financial Statements and Supplementary Data This section presents Ovintiv's audited consolidated financial statements for 2022, including the auditor's report and detailed notes on accounting policies, segment information, debt, and reserves - The auditor's report from PricewaterhouseCoopers LLP provides an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting509 - A critical audit matter identified by the auditor was the impact of estimates of proved oil, NGL, and natural gas reserves on the net value of oil and natural gas properties, due to the significant judgment involved in these estimates517518 Key Consolidated Balance Sheet Items (in millions) | Account | Dec 31, 2022 ($ millions) | Dec 31, 2021 ($ millions) | | :--- | :--- | :--- | | Total Assets | $15,056 | $14,055 | | Total Liabilities | $7,367 | $8,981 | | Total Shareholders' Equity | $7,689 | $5,074 | | Long-Term Debt (incl. current) | $3,570 | $4,786 | Key Consolidated Statement of Cash Flows Items (in millions) | Account | 2022 ($ millions) | 2021 ($ millions) | | :--- | :--- | :--- | | Cash From Operating Activities | $3,866 | $3,129 | | Cash Used in Investing Activities | $(1,786) | $(525) | | Cash Used in Financing Activities | $(2,268) | $(2,419) | Controls and Procedures As of December 31, 2022, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes in Q4 2022 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2022803 - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework804505 Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information on directors, executive compensation, security ownership, and principal accountant fees is incorporated by reference from the company's 2023 definitive proxy statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accounting Fees and Services is incorporated by reference from the registrant's definitive proxy statement for the 2023 Annual Meeting of Shareholders811813814 Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as exhibits to the Form 10-K, including governance documents, debt agreements, compensation plans, and required certifications - This section provides a comprehensive list of all exhibits filed with the Form 10-K, including key agreements, indentures, and certifications819820 - Key exhibits filed include reports from independent reserves auditors McDaniel & Associates Consultants Ltd. and Netherland, Sewell & Associates, Inc826