Ovintiv(OVV) - 2023 Q1 - Quarterly Report

Part I Item 1. Financial Statements Ovintiv's unaudited condensed consolidated financial statements for Q1 2023 are presented, covering earnings, balance sheet, cash flows, and detailed notes Condensed Consolidated Financial Statements Ovintiv reported Q1 2023 net earnings of $487 million, a turnaround from a $241 million net loss in Q1 2022, with operating cash flow increasing to $1.068 billion Condensed Consolidated Statement of Earnings (Q1 2023 vs Q1 2022) | (US$ millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Revenues | 2,551 | 1,967 | | Total Operating Expenses | 1,873 | 2,167 | | Operating Income (Loss) | 678 | (200) | | Net Earnings (Loss) | 487 | (241) | | Diluted Net Earnings (Loss) per Share | $1.97 | $(0.94) | Condensed Consolidated Balance Sheet (As at March 31, 2023) | (US$ millions) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | 1,395 | 1,695 | | Property, plant and equipment, net | 9,911 | 9,468 | | Total Assets | 15,123 | 15,056 | | Total Current Liabilities | 2,632 | 2,780 | | Long-Term Debt | 3,176 | 3,177 | | Total Liabilities | 7,229 | 7,367 | | Total Shareholders' Equity | 7,894 | 7,689 | Condensed Consolidated Statement of Cash Flows (Q1 2023 vs Q1 2022) | (US$ millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Cash From Operating Activities | 1,068 | 685 | | Cash Used in Investing Activities | (863) | (417) | | Cash Used in Financing Activities | (184) | (193) | Notes to Condensed Consolidated Financial Statements Detailed notes cover segmented performance, $199 million in Q1 acquisitions, $300 million in shareholder returns, and subsequent $4.275 billion Permian acquisition and $825 million Bakken divestiture Segment Operating Income (Loss) (Q1 2023 vs Q1 2022) | (US$ millions) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | USA Operations | 497 | 761 | | Canadian Operations | 247 | 220 | | Market Optimization | (33) | (33) | | Corporate & Other | (33) | (1,148) | - In Q1 2023, the company completed acquisitions totaling $199 million, primarily for property purchases in the Permian and Uinta basins ($193 million in USA Operations). Divestitures amounted to $12 million[58][59] - During Q1 2023, Ovintiv purchased approximately 5.2 million shares for $239 million under its Normal Course Issuer Bid (NCIB) and paid dividends of $0.25 per share, totaling $61 million[73][77] - Subsequent to quarter end, on April 3, 2023, Ovintiv announced a definitive agreement to acquire core Midland Basin assets for approximately $4.275 billion ($3.125 billion cash and ~32.6 million shares)[134] - Concurrently with the Permian acquisition announcement, Ovintiv agreed to sell its Bakken assets for approximately $825 million. Both transactions are expected to close in Q2 2023[135] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 performance, strategic portfolio changes including a $4.275 billion Permian acquisition, and updated 2023 outlook with increased capital guidance Executive Overview Ovintiv generated $487 million net earnings and $1.068 billion cash from operations in Q1 2023, announcing a major Permian acquisition, Bakken divestiture, and a 20% dividend increase - Announced a definitive agreement to acquire core Midland Basin assets for ~$4.275 billion and to sell its Bakken assets for ~$825 million, both expected to close in Q2 2023[144] - Announced a 20% increase to its quarterly dividend, representing an annualized dividend of $1.20 per share[144] Q1 2023 Financial Highlights | Metric | Value (US$ millions) | | :--- | :--- | | Net Earnings | 487 | | Cash from Operating Activities | 1,068 | | Non-GAAP Cash Flow | 851 | | Share Repurchases | 239 | | Dividends Paid | 61 | 2023 Outlook The 2023 outlook anticipates oil and gas price volatility, with updated capital investment guidance of $2.6 billion-$2.9 billion and production guidance of 520.0-545.0 MBOE/d post-Permian acquisition, alongside ESG commitments - Oil prices in 2023 will be influenced by recessionary concerns, OPEC+ production cuts, and geopolitical supply uncertainties[148] - Full year 2023 capital investment guidance was updated to $2,600 million - $2,900 million, reflecting the Permian Acquisition[157] Updated Full Year 2023 Production Guidance | Product | Guidance Range | | :--- | :--- | | Total Production | 520.0 - 545.0 MBOE/d | | Oil & Plant Condensate | 185.0 - 195.0 Mbbls/d | | Natural Gas | 1,525 - 1,575 MMcf/d | - The company has achieved a >30% reduction in Scope 1&2 GHG emissions intensity and is on track to meet its 50% reduction target by 2030. The GHG target is tied to 2023 employee compensation[165] Results of Operations Q1 2023 total revenues increased to $2.55 billion due to reduced risk management losses, despite a 21% decline in average realized prices and a 2% increase in total production to 511.4 MBOE/d Production Volumes and Realized Prices (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total Production (MBOE/d) | 511.4 | 499.9 | | Total Oil & NGLs (Mbbls/d) | 252.2 | 252.1 | | Natural Gas (MMcf/d) | 1,555 | 1,487 | | Avg. Realized Price ($/BOE) | $40.72 | $51.62 | - Upstream product revenues decreased by $447 million YoY, driven by a $436 million negative impact from lower sales prices, particularly for oil and NGLs[181] - Transportation and processing expenses increased by $49 million YoY to $455 million, primarily due to rate escalations and higher costs for downstream market diversification[196] - Administrative expense decreased by $86 million YoY to $58 million, mainly due to a $98 million reduction in long-term incentive costs reflecting a decrease in the company's share price[210] Liquidity and Capital Resources As of March 31, 2023, Ovintiv maintained $3.2 billion in total liquidity and a 19% Debt to Adjusted Capitalization ratio, with Q1 operating cash flow of $1.068 billion funding capital expenditures, acquisitions, and shareholder returns Liquidity Position (As at March 31, 2023) | (US$ millions) | Amount | | :--- | :--- | | Cash and Cash Equivalents | 26 | | Available Credit Facilities | 3,200 | | Available Uncommitted Demand Lines | 280 | | Issuance of U.S. Commercial Paper | (280) | | Total Liquidity | 3,226 | - The company is in compliance with all financial covenants, with a Debt to Adjusted Capitalization ratio of 19% as of March 31, 2023, well below the 60% covenant limit[234] - In Q1 2023, the company returned $300 million to shareholders through $239 million in share repurchases and $61 million in dividends[236][242] - The cash portion of the Permian Acquisition will be funded through cash on hand, proceeds from the Bakken divestiture, and new debt financing and/or credit facility borrowings[232] Non-GAAP Measures Reconciliations for non-GAAP measures show Q1 2023 Non-GAAP Cash Flow at $851 million, with Debt to Adjusted Capitalization at 19% and Debt to Adjusted EBITDA at 0.9 times Reconciliation of Non-GAAP Cash Flow | (US$ millions) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Cash From Operating Activities | 1,068 | 685 | | Excl: Net change in other assets/liabilities | (5) | (12) | | Excl: Net change in non-cash working capital | 222 | (346) | | Non-GAAP Cash Flow | 851 | 1,043 | Debt to Adjusted EBITDA Ratio | (US$ millions, except ratio) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Debt | 3,756 | 3,570 | | Adjusted EBITDA (LTM) | 4,191 | 4,243 | | Debt to Adjusted EBITDA (times) | 0.9 | 0.8 | Item 3. Quantitative and Qualitative Disclosures About Market Risk Ovintiv faces market risks from commodity prices, foreign exchange, and interest rates, with a 10% commodity price change impacting fair value by $16-30 million and a 10% CAD/USD rate change impacting pre-tax earnings by $129-157 million Commodity Price Sensitivity Analysis (Impact on Fair Value of Hedges) | (US$ millions) | 10% Price Increase | 10% Price Decrease | | :--- | :--- | :--- | | Crude oil price | (24) | 30 | | Natural gas price | (17) | 16 | - A 10% increase or decrease in the Canadian to U.S. foreign currency exchange rate could result in unrealized gains/losses impacting pre-tax net earnings by $129 million or $(157) million, respectively[276] - As of March 31, 2023, the company had $580 million in floating-rate debt. A 1% change in interest rates would impact pre-tax earnings by approximately $6 million[278] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting in Q1 2023 - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[280] - No changes in internal control over financial reporting occurred during Q1 2023 that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting[281] Part II Item 1A. Risk Factors New material risk factors related to the pending Permian Basin acquisition include transaction completion risks, integration challenges, increased indebtedness, and potential earnings per share dilution - Completion of the Permian Acquisition is subject to conditions that may not be satisfied, and failure to complete it could have adverse effects on the company, including unrecovered transaction costs and negative market reactions[285][286] - The company may be unable to successfully integrate the acquired assets, and the assessment of recoverable reserves and operating costs is inherently uncertain, which could prevent the realization of anticipated benefits[287][288] - The company will have substantial indebtedness after the acquisition, which could limit financial flexibility, increase vulnerability to adverse economic conditions, and make it harder to service debt obligations[292] - The issuance of approximately 32.6 million new shares for the acquisition may be dilutive to earnings per share and could depress the stock price, especially if sellers dispose of their shares after the 90-day lock-up period[296] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Ovintiv repurchased approximately 5.2 million shares for $238 million in Q1 2023 under its NCIB program, with 16.2 million shares remaining for repurchase until October 2, 2023 Share Repurchases in Q1 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2023 | 1,312,436 | $49.43 | | February 2023 | 1,551,789 | $45.80 | | March 2023 | 2,339,252 | $43.63 | | Total | 5,203,477 | $45.74 | - The company has an exemption from Canadian securities regulators allowing it to make larger repurchases on U.S. Markets under its NCIB, effectively permitting purchases up to 10% of its public float[307] Other Part II Items This section covers other required disclosures, including references for legal proceedings, and confirms no defaults on senior securities or mine safety disclosures - Item 1. Legal Proceedings: Refers to Item 3 of the 2022 Annual Report on Form 10‑K and Note 20 of this report[283] - Item 3. Defaults Upon Senior Securities: None[308] - Item 4. Mine Safety Disclosures: Not applicable[309]