OVINTIV INC. The MD&A is intended to provide a narrative description of the Company's business from management's perspective. This MD&A should be read in conjunction with the unaudited interim Condensed Consolidated Financial Statements and accompanying notes for the period endedJune 30, 2020 ("Consolidated Financial Statements"), which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited Consolidated Financial Statements and accompanying notes and MD&A for the year endedDecember 31, 2019 , which are included in Items 8 and 7, respectively, of the 2019 Annual Report on Form 10K. OnJanuary 24, 2020 ,Encana Corporation ("Encana") completed a corporate reorganization, which included a Share Consolidation, as described in Note 1 of the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Highlights section of this MD&A. Subsequent to the corporate reorganization,Ovintiv Inc. and its subsidiaries (collectively, "Ovintiv") continue to carry on the business which was previously conducted byEncana and its subsidiaries. References to the "Company" are toEncana Corporation and its subsidiaries prior to the completion of the Reorganization and toOvintiv Inc. and its subsidiaries following the completion of the Reorganization.
Common industry terms and abbreviations are used throughout this MD&A and are defined in the Definitions, Conversions and Conventions sections of this Quarterly Report on Form 10-Q. This MD&A includes the following sections:
• Executive Overview • Results of Operations • Liquidity and Capital Resources • Non-GAAP Measures Executive Overview StrategyOvintiv is a leading North American energy producer that is focused on developing its multi-basin portfolio of oil, NGLs and natural gas producing plays.Ovintiv is committed to growing long-term stockholder value through a combination of profitable growth and generating cash flows. The Company is pursuing the key business objectives of preserving balance sheet strength, maximizing profitability through operational and capital efficiencies, returning capital to stockholders through sustainable dividends, and driving cash flow through a disciplined capital allocation strategy by investing in a limited number of core assets with high margin liquids. In executing its strategy,Ovintiv focuses on its core values of One, Agile and Driven, which guide the organization to be flexible, responsive, innovative and determined. The Company is committed to excellence with a passion to drive corporate financial performance and succeed as a team.Ovintiv rapidly deploys successful ideas and practices across its assets, becoming more efficient as innovative and sustainable improvements are implemented.Ovintiv continually reviews and evaluates its strategy and changing market conditions. In 2020,Ovintiv continues to focus on maximizing cash flow generation from high margin, scalable, top tier assets located in some of the best plays inNorth America , referred to as the "Core Assets". In response to the current low commodity price environment resulting predominantly from the global coronavirus ("COVID-19") pandemic, coupled with excess oil production fromSaudi Arabia andRussia in the first quarter of 2020, the Company revised its capital program for the remainder of the year to focus on production from the Core Assets generating the highest returns and/or with the lowest costs, while choosing to cease operating rigs and shut-in production in certain areas. As atJune 30, 2020 , the Core Assets comprised Permian andAnadarko in theU.S. , andMontney inCanada . These Core Assets form a multi-basin portfolio of oil, NGLs and natural gas producing plays enabling flexible and efficient investment of capital that support the Company's strategy. For additional information onOvintiv's strategy, its reporting segments and the plays in which the Company operates, refer to Items 1 and 2 of the 2019 Annual Report on Form 10-K.
In evaluating its operations and assessing its leverage,
39
-------------------------------------------------------------------------------- Net Debt to Adjusted EBITDA, which are non-GAAP measures and do not have any standardized meaning underU.S. GAAP. These measures may not be similar to measures presented by other issuers and should not be viewed as a substitute for measures reported underU.S. GAAP. Additional information regarding these measures, including reconciliations to the closest GAAP measure, can be found in the Non-GAAP Measures section of this MD&A.
Highlights
During the first six months of 2020, the Company focused on executing its reduced second quarter 2020 capital plan, generating cash from operating activities and maximizing profitability through operational and capital efficiencies. Lower upstream product revenues in the first six months of 2020 compared to 2019 resulted from lower average realized prices, excluding the impact of risk management activities, partially offset by higher production volumes. Decreases in average realized liquids and natural gas prices of 43 percent and 23 percent, respectively, were primarily due to lower benchmark prices. Total production volumes increased by four percent compared to the first six months of 2019 primarily due to successful drilling programs and from the Newfield acquisition, which was completed onFebruary 13, 2019 .Ovintiv continues to focus on optimizing realized prices from the diversification of the Company's downstream markets. Significant Developments
• On
included a plan of arrangement (the "Arrangement") that involved, among
other things, a share consolidation by
post-consolidation share for each five pre-consolidation shares (the "Share
Consolidation"), and
outstanding common shares of
of Ovintiv Inc. on a one-for-one basis. Following completion of the
Arrangement, Ovintiv Inc. migrated from Canada and became a Delaware
corporation, domiciled in the U.S. (the "U.S. Domestication"). The
Arrangement and the U.S. Domestication together are referred to as the"Reorganization". Additional information on the Reorganization can be found
in Note 1 of the Consolidated Financial Statements included in Part I, Item
1 of this Quarterly Report on Form 10-Q.
• In June 2020 , Ovintiv undertook a plan to reduce its workforce byapproximately 25 percent as part of a company-wide reorganization to better
align staffing levels and organizational structure with the Company's
planned activity levels. The Company incurred restructuring charges of
million.
Financial Results
Three months ended
• Reported net loss of
impairment of
revenues of
before tax, as well as a deferred income tax valuation allowance of $568
million .
• Generated cash from operating activities of
of $304 million and NonGAAP Cash Flow Margin of $6.23 per BOE.
• Paid dividends of $0.09375 per common share totaling $25 million .
• Repurchased in the open market
Company's senior notes resulting in a gain of
Six months ended
• Reported net loss of
impairment of
revenues of
before tax, as well as a deferred income tax valuation allowance of $568
million .
• Generated cash from operating activities of
of $839 million and NonGAAP Cash Flow Margin of $8.32 per BOE.
• Paid dividends of $0.1875 per common share totaling $49 million .
40
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• Repurchased in the open market
Company's senior notes resulting in a gain of
• Held cash and cash equivalents of
available credit facilities.
• Reported Net Debt to Adjusted EBITDA of 2.6 times.
• Directed
Assets in the second quarter of 2020 and
the first six months of 2020.
• Focused on highly efficient capital activity and short-cycle high margin
and/or low cost projects providing flexibility to respond to fluctuations in
commodity prices.
Production
Three months ended
• Produced average liquids volumes of 278.4 Mbbls/d, which accounted for 52
percent of total production volumes. Average oil and plant condensate
production volumes of 198.3 Mbbls/d were 71 percent of total liquids
production volumes.
• Produced average natural gas volumes of 1,550 MMcf/d, which accounted for 48
percent of total production volumes.
Six months ended
• Produced average liquids volumes of 294.1 Mbbls/d, which accounted for 53
percent of total production volumes. Average oil and plant condensate
production volumes of 206.7 Mbbls/d were 70 percent of total liquids
production volumes.
• Produced average natural gas volumes of 1,559 MMcf/d, which accounted for 47
percent of total production volumes.
Revenues and Operating Expenses
• Focused on market diversification to optimize realized commodity prices and
revenues through a combination of derivative financial instruments and
physical transportation contracts.
• Incurred Total Costs in the second quarter and first six months of 2020 of
of
the Non-GAAP Measures section of this MD&A. Significant items in the second
quarter and first six months of 2020 impacting Total Costs include:o Lower production, mineral and other taxes, in the second quarter and
first six months of 2020 compared to 2019, of $0.81 per BOE and
per BOE, respectively, primarily due to lower commodity prices. In the
second quarter of 2020, production, mineral and other taxes was also
lower due to lower production volumes;
o Lower upstream operating expenses, excluding long-term incentive
costs, in the second quarter and first six months of 2020compared to
2019, of $0.54 per BOE and $0.33 per BOE, respectively,primarily due
to synergies achieved in 2019 through operating efficiencies, as well
as lower activity resulting from the economic downturn and cost saving
initiatives;
o Lower upstream transportation and processing expense in the second
quarter and first six months of 2020 compared to 2019 of $0.10 per BOE
and $0.28 per BOE, respectively. The decrease in the first six months
of 2020 was primarily due to the higher proportion of total production
volumes from the USA Operations relating to the Newfieldacquisition,
which benefit from lower than average per BOE transportation and
processing costs; and
41
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o Lower administrative expenses, excluding long-term incentive costs,
restructuring costs and current expected credit losses in the second
quarter and first six months of 2020 compared to 2019, of $0.10 per
BOE and $0.26 per BOE, respectively, primarily due to synergies
achieved in 2019 through workforce reductions.
• Preserved operational and administrative synergies achieved in 2019 andenhanced efficiencies through leveraging technology, innovation and scale.
2020 Outlook Industry Outlook Oil Markets The oil and gas industry is cyclical and commodity prices are inherently volatile. Oil prices during 2020 are expected to reflect global supply and demand dynamics as well as the geopolitical and macroeconomic environment. InMarch 2020 , during the midst of the global COVID-19 pandemic,Saudi Arabia andRussia failed to reach an agreement on production cuts, resulting in a price war which intensified the oversupply of oil and contributed to a dramatic decline in oil prices. InApril 2020 ,OPEC and a group of 10 non-OPEC member nations (collectively, "OPEC+") agreed to cut oil production throughApril 2022 to address the existing imbalance of global supply and demand, with the deepest cuts in May andJune 2020 . The production cuts, along with an increase in demand as a result of the gradual reopening of global economies, generally supported oil prices in the second quarter of 2020. At a meeting onJune 6, 2020 , OPEC+ reaffirmed the April agreement and extended the production cuts throughJuly 2020 . OPEC+ is expected to meet once a month thereafter until the end of the year to review market conditions, which could potentially result in other supply adjustments and contribute to price fluctuations. Global crude oil demand fell significantly in early 2020 as governments worldwide took action to contain the effects of the COVID-19 pandemic. Oil and product storage facilities were filling up at an unprecedented rate as supply materially exceeded demand. As the gap between supply and demand in oil markets grew increasingly pronounced, the oil and gas industry responded by reducing capital spending and implementing market-based supply shut-ins, leading to increased price volatility. As global restrictions began to ease in the latter half of the second quarter, demand for oil steadily increased, supporting a modest recovery of oil prices. The full impact of the increase in demand has yet to be reflected in oil prices as excess inventories accumulated due to the oversupply are gradually being drawn down. The re-balancing of global supply and demand, and the commodity price environment is highly dependent on the global containment of the virus, pace of economic recovery, as well as changes to OPEC+ production levels. With significant uncertainty amid a highly volatile market environment, oil prices for the remainder of 2020 are expected to fluctuate.
Natural Gas Markets
Natural gas prices in 2020 will be affected by changes in both supply and demand and the effects of seasonal weather. Higher-than-average inventory levels from oversupply in early 2020 and warmer than normal temperatures during the winter months continued to put downward pressure on natural gas prices, which remains volatile in bothCanada and theU.S. from demand concerns stemming from the COVID-19 pandemic. Natural gas prices in the second half of 2020 are expected to be impacted by lower associated natural gas production resulting from declines in North American oil production due to low oil prices, as well as increases in demand from the gradual reopening of global economies and seasonal fluctuations.
Company Outlook
Despite the current low commodity price environment,Ovintiv is well positioned to deliver on its updated capital plan while generating positive cash flows. In response to the rapid decline in crude oil prices witnessed in early March, the Company took immediate action to reduce its second quarter 2020 capital investments by$500 million and ceased operating 16 drilling rigs by the end of the second quarter. The Company has also shut-in and curtailed total production of 32 MBOE/d in the second quarter of 2020. DuringJune 2020 ,Ovintiv undertook a plan to reduce its workforce to better align staffing levels and organizational structure with the Company's planned activity levels. The Company will exercise discretion and disciplined capital allocation to adjust its capital spending beyond the third quarter as the current demand and price environment evolves. As the Company expects the current price environment to remain dynamic and volatile in the near-term, the Company will 42
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continue to assess the economics of production shut-ins to align with fluctuating demand. Due to ongoing uncertainty and continued market volatility, the Company has suspended its previously issued 2020 guidance.
The Company enters into derivative financial instruments which mitigate price volatility and help sustain revenues, particularly during periods of lower prices. Accordingly, during the first six months of 2020,Ovintiv restructured its remaining 2020 crude oil hedges to provide additional downside price protection. As atJuly 27, 2020 , the Company has hedged approximately 177.5 Mbbls/d, or 94 percent, of expected crude oil and condensate production and 1,267 MMcf/d, or 80 percent, of expected natural gas production for the remainder of the year. Additional information onOvintiv's hedging program can be found in Note 22 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Markets for crude oil and natural gas are exposed to different price risks and are inherently volatile. While the market price for crude oil tends to move in the same direction as the global market, regional differentials may develop. Natural gas prices may vary between geographic regions depending on local supply and demand conditions.Ovintiv proactively utilizes transportation contracts to diversify the Company's sales markets, thereby reducing significant exposure to any given market. Through a combination of derivative financial instruments and transportation capacity,Ovintiv attempts to limit exposure to regional pricing. In conjunction with the reduction in capital investment noted above,Ovintiv also announced its plans to reduce costs by$200 million . As ofJune 30, 2020 , the Company expects to exceed$200 million in cost savings and has realized approximately$92 million to date. The Company expects that operating cost reductions, excluding long-term incentive costs, will exceed$115 million and more than$85 million will come from other cost savings.
During the first six months of 2020, the Company spent$1,042 million , of which$363 million was directed to Permian,$294 million was directed toAnadarko and$188 million was directed toMontney .Ovintiv reduced its second quarter 2020 capital investment by$500 million and expects capital spending to be primarily allocated to the Core Assets with a focus on maximizing returns from high margin liquids, while suspending capital programs in Eagle Ford, Bakken, Uinta andDuvernay .Ovintiv expects full year 2020 capital investment to be approximately$1.8 billion and plans to fund the remainder of its 2020 capital program using cash from operations and funds available from the Company's credit facilities. As the Company monitors the global economic environment,Ovintiv will continue to evaluate its capital investment plans.Ovintiv continually strives to improve well performance and lower costs through innovative techniques.Ovintiv's large-scale cube development model utilizes multi-well pads and advanced completion designs to maximize returns and resource recovery from its reservoirs. The impact ofOvintiv's disciplined capital program and continuous innovation create flexibility to allocate capital in changing commodity markets and to maximize cash flows while preserving the long-term value of the Company's multi-basin portfolio.
Production
During the first six months of 2020, average liquids production volumes were 294.1 Mbbls/d, or 53 percent of total production volumes, and average natural gas production volumes were 1,559 MMcf/d, or 47 percent of total production volumes. For the fourth quarter of 2020, the Company expects to maintain average oil and condensate production volumes of approximately 200 Mbbls/d. Full year production volumes are expected to reflect the Company's reduced capital investment plans and shut-in strategy, which are highly dependent on market conditions.
Operating Expenses
In the first quarter of 2020,Ovintiv announced its commitment to reducing full year 2020 costs by$200 million in response to the low commodity price environment. These cost savings primarily include reductions to operating expenses reflected in Total Costs, as well as a reduction to other expenses discussed below. As a result of the workforce reduction completed inJune 2020 ,Ovintiv expects to exceed$200 million in cost savings, reflecting the Company's lower staffing levels. In the first six months of 2020, Total Costs was$11.72 per BOE, and is expected to remain relatively flat for the balance of the year as activity levels normalize and cost saving measures are realized through operational flexibility in response to the 43
-------------------------------------------------------------------------------- low commodity price environment. Upstream transportation and processing expense was$6.42 per BOE, while upstream operating expense and administrative expense, excluding long-term incentive costs, restructuring costs and current expected credit losses, were$3.10 per BOE and$1.41 per BOE, respectively.Ovintiv expects to continue pursuing innovative ways to reduce upstream operating and administrative expenses and expects efficiency improvements and effective supply chain management to maximize cash flows.
Other Expenses and Impairments
The remaining full year cost savings are expected to include reductions to cash outflows and other expenses, such as interest expense. Following the open market repurchases of$137 million in principal amount ofOvintiv's fixed rate senior notes, the Company expects to incur lower interest expense of approximately$6 million on an annualized basis on the reduced fixed long-term debt balances. In conjunction withOvintiv's focus on strengthening its liquidity position, the Company plans to allocate all excess cash flows to reduce long-term debt over the next six quarters. Additional information onOvintiv's long-term debt and liquidity position can be found in Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Liquidity and Capital Resources section of this MD&A, respectively.
If the current low oil price environment persists for an extended period of
time,
44
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Results of Operations
Selected Financial Information
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 (1) 2020 2019 (1)
Product and Service Revenues
Upstream product revenues $ 673 $ 1,594 $ 1,824 $ 2,839
Market optimization 348 250 767 576
Service revenues 2 4 2 5
Total Product and Service
Revenues 1,023 1,848 2,593 3,420
Gains (Losses) on Risk
Management, Net (314 ) 190 741 (165 )
Sublease Revenues 17 17 35 35
Total Revenues 726 2,055 3,369 3,290
Total Operating Expenses (2) 4,785 1,517 6,669 2,979
Operating Income (Loss) (4,059 ) 538 (3,300 ) 311
Total Other (Income) Expenses 30 41 228 120
Net Earnings (Loss) Before
Income Tax (4,089 ) 497 (3,528 ) 191
Income Tax Expense (Recovery) 294 161 434 100
Net Earnings (Loss) $ (4,383 ) $ 336 $ (3,962 ) $ 91
(1) Subsequent to the completion of the Newfield acquisition on
2019, the post-acquisition results of the operations of Newfield are included
in the Company's interim consolidated results beginning
(2) Total Operating Expenses include non-cash items such as DD&A, impairments,
accretion of asset retirement obligations and long-term incentive costs.
RevenuesOvintiv's revenues are substantially derived from sales of oil, NGLs and natural gas production. Increases or decreases inOvintiv's revenue, profitability and future production are highly dependent on the commodity prices the Company receives. Prices are market driven and fluctuate due to factors beyond the Company's control, such as supply and demand, seasonality and geopolitical and economic factors. TheUSA Operations realized prices generally reflect WTI and NYMEX benchmark prices, as well as other downstream oil benchmarks, includingHouston . The Canadian Operations realized prices are linked toEdmonton Condensate and AECO, as well as other downstream natural gas benchmarks, including Dawn. The other downstream benchmarks reflect the diversification of the Company's markets. Recent trends in benchmark prices relevant to the Company are shown in the table below.
Benchmark Prices
Three months ended June 30, Six months ended June 30,
(average for the period) 2020 2019 2020 2019
Oil & NGLs
WTI ($/bbl) $ 27.85 $ 59.82 $ 37.01 $ 57.36
Houston ($/bbl) 29.43 66.57 39.46 63.69
Edmonton Condensate (C$/bbl) 30.71 74.73 46.22 70.97
Natural Gas
NYMEX ($/MMBtu) $ 1.72 $ 2.64 $ 1.83 $ 2.89
AECO (C$/Mcf) 1.91 1.17 2.03 1.56
Dawn (C$/MMBtu) 2.25 3.13 2.32 3.49
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Production Volumes and Realized Prices
Three months ended June 30, Six months ended June 30,
Production Volumes (1) Realized Prices (2) Production Volumes (1) Realized Prices (2)
2020 2019 2020 2019 2020 2019 2020 2019
Oil (Mbbls/d, $/bbl)
USA Operations 146.0 175.7 $ 22.95 $ 59.12 153.9 149.6 $ 33.74 $ 57.19
Canadian Operations 0.5 0.2 11.90 53.31 0.6 0.3 28.38 44.20
China Operations (3) - 3.4 - 67.84 - 2.8 - 66.96
Total 146.5 179.3 22.91 59.27 154.5 152.7 33.72 57.35
NGLs - Plant Condensate
(Mbbls/d, $/bbl)
USA Operations 11.0 11.2 12.47 46.65 10.9 8.7 23.51 45.57
Canadian Operations 40.8 44.1 20.48 54.66 41.3 41.4 32.36 52.31
Total 51.8 55.3 18.79 53.04 52.2 50.1 30.51 51.14
NGLs - Other (Mbbls/d,
$/bbl)
USA Operations 67.2 73.6 7.83 13.19 72.4 59.2 7.56 14.92
Canadian Operations 12.9 15.8 9.56 6.95 15.0 15.9 8.08 13.54
Total 80.1 89.4 8.11 12.09 87.4 75.1 7.65 14.63
Total Oil & NGLs
(Mbbls/d, $/bbl)
USA Operations 224.2 260.5 17.91 45.60 237.2 217.5 25.28 45.22
Canadian Operations 54.2 60.1 17.79 42.12 56.9 57.6 25.91 41.57
China Operations (3) - 3.4 - 67.84 - 2.8 - 66.96
Total 278.4 324.0 17.88 45.19 294.1 277.9 25.40 44.68
Natural Gas (MMcf/d,
$/Mcf)
USA Operations 536 619 1.33 1.87 552 494 1.37 2.03
Canadian Operations 1,014 988 1.69 1.70 1,007 1,020 1.78 2.16
Total 1,550 1,607 1.57 1.76 1,559 1,514 1.63 2.12
Total Production
(MBOE/d, $/BOE)
USA Operations 313.4 363.6 15.09 35.85 329.2 299.8 20.52 36.15
Canadian Operations 223.2 224.8 11.99 18.72 224.8 227.8 14.50 20.20
China Operations (3) - 3.4 - 67.84 - 2.8 - 66.96
Total 536.6 591.8 13.80 29.52 554.0 530.4 18.08 29.46
Production Mix (%)
Oil & Plant Condensate 37 40 37 38
NGLs - Other 15 15 16 14
Total Oil & NGLs 52 55 53 52
Natural Gas 48 45 47 48
Production Change
Year Over Year (%) (4)
Total Oil & NGLs (14 ) 109 6 85
Natural Gas (4 ) 47 3 40
Total Production (9 ) 75 4 60
Core Assets Production
Oil (Mbbls/d) 107.9 118.9 109.6 101.2
NGLs - Plant Condensate
(Mbbls/d) 45.9 47.6 46.0 42.7
NGLs - Other (Mbbls/d) 71.8 79.1 77.7 65.5
Total Oil & NGLs
(Mbbls/d) 225.6 245.6 233.3 209.4
Natural Gas (MMcf/d) 1,392 1,348 1,399 1,280
Total Production
(MBOE/d) 457.6 470.3 466.4 422.6
% of Total Production 85 79 84 80
(1) Average daily.
(2) Average per-unit prices, excluding the impact of risk management activities.
(3) The Company terminated its production sharing contract with China National
from
(4) Includes production impacts from acquisitions and divestitures.
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Upstream Product Revenues
Three months ended June 30,
NGLs - Plant NGLs - Natural
($ millions) Oil Condensate Other Gas Total
2019 Upstream Product Revenues (1) $ 968 $ 266 $ 98 $ 258 $ 1,590
Increase (decrease) due to:
Sales prices (483 ) (160 ) (30 ) (29 ) (702 )
Production volumes (179 ) (17 ) (10 ) (9 ) (215 )
2020 Upstream Product Revenues $ 306 $ 89 $ 58 $ 220 $ 673
Six months ended June 30,
NGLs - Plant NGLs - Natural
($ millions) Oil Condensate Other Gas Total
2019 Upstream Product Revenues (1) $ 1,586 $ 464 $ 198 $ 581 $ 2,829
Increase (decrease) due to:
Sales prices (652 ) (195 ) (112 ) (137 ) (1,096 )
Production volumes 15 21 35 20 91
2020 Upstream Product Revenues
(1) Revenues for the second quarter and the first six months of 2019 exclude
certain other revenue and royalty adjustments with no associated production
volumes of
Oil Revenues
Three months ended
Oil revenues decreased
• Lower average realized oil prices of
revenues by
benchmark prices which were down 56 percent and 53 percent, respectively, and
weakening regional pricing relative to the WTI benchmark price in the USA
Operations; and
• Lower average oil production volumes of 32.8 Mbbls/d decreased revenues by
Operations, with reduced drilling programs in Core Assets, and suspended
capital spending in Eagle Ford and Uinta (18.3 Mbbls/d), production shut-ins
due to the economic downturn (9.2 Mbbls/d), the termination of the Company's
production sharing contract in its China Operations in the third quarter of
2019 (3.4 Mbbls/d) and third-party gathering capacity constraints (3.3
Mbbls/d).
Six months ended
Oil revenues decreased
• Lower average realized oil prices of
revenues by
benchmark prices which were down 38 percent and 35 percent, respectively, and
weakening regional pricing relative to the WTI benchmark price in the USA
Operations; and
• Higher average oil production volumes of 1.8 Mbbls/d increased revenues by
and Permian (6.4 Mbbls/d), partially offset by natural declines surpassing
new production in Eagle Ford, Uinta and
shut-ins due to the economic downturn (4.6 Mbbls/d), the termination of the
Company's production sharing contract in its China Operations in the third
quarter of 2019 (2.8 Mbbls/d) and third-party gathering capacity constraints
(1.7 Mbbls/d).
47
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NGL Revenues
Three months ended
NGL revenues decreased
• Lower average realized plant condensate prices of
percent, decreased revenues by
Edmonton Condensate and WTI benchmark prices which were down 59 percent
and 53 percent, respectively, as well as declines in regional pricing
relative to the Edmonton Condensate and WTI benchmark prices;
• Lower average realized other NGL prices of
decreased revenues by
in the
• Lower average plant condensate production volumes of 3.5 Mbbls/d decreased
revenues by
in the Canadian Operations (3.9 Mbbls/d); and
• Lower average other NGL production volumes of 9.3 Mbbls/d decreased revenues
by
the economic downturn (3.1 Mbbls/d), partially offset by successful drilling
programs in Permian (2.5 Mbbls/d).
Six months ended
NGL revenues decreased
• Lower average realized plant condensate prices of
percent, decreased revenues by
and Edmonton Condensate benchmark prices which were both down 35 percent, as
well as declines in regional pricing relative to the Edmonton Condensate and
WTI benchmark prices;
• Lower average realized other NGL prices of
decreased revenues by
prices in the
• Higher average other NGL production volumes of 12.3 Mbbls/d increased
revenues by
acquisition on
programs in Permian and
declines in
• Higher average plant condensate production volumes of 2.1 Mbbls/d increased
revenues by
drilling programs in
Newfield acquisition on
natural declines in
Natural Gas Revenues
Three months ended
Natural gas revenues decreased
• Lower average realized natural gas prices of
decreased revenues by
Dawn benchmark prices which were down 35 percent and 28 percent,
respectively, partially offset by a higher AECO benchmark price which was up
63 percent; and
• Lower average natural gas production volumes of 57 MMcf/d decreased revenues
by
the third quarter of 2019 (78 MMcf/d), production shut-ins due to the
economic downturn (27 MMcf/d) and natural declines surpassing new production
in
drilling programs in Permian,
pipeline restrictions in
downtime (11 MMcf/d).
48
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Six months ended
Natural gas revenues decreased
• Lower average realized natural gas prices of
decreased revenues by
Dawn benchmark prices which were down 37 percent and 34 percent,
respectively, partially offset by a higher proportion of total production
volumes in the
Newfield acquisition on
which was up 30 percent; and
• Higher average natural gas production volumes of 45 MMcf/d increased revenues
by
(91 MMcf/d), successful drilling programs in Permian and
(49 MMcf/d), decreased pipeline restrictions in
decreased third-party plant downtime (7 MMcf/d), partially offset by the sale
of the Arkoma natural gas assets in the third quarter of 2019 (59 MMcf/d),
natural declines surpassing new production in
Ford (43 MMcf/d) and production shut-ins due to the economic downturn (14
MMcf/d).
Gains (Losses) on Risk Management, Net
As a means of managing commodity price volatility,Ovintiv enters into commodity derivative financial instruments on a portion of its expected oil, NGL and natural gas production volumes. The Company's commodity price mitigation program reduces volatility and helps sustain revenues during periods of lower prices. Additional information on the Company's commodity price positions as atJune 30, 2020 can be found in Note 22 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The following tables provide the effects of the Company's risk management activities on revenues.
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
Realized Gains (Losses) on
Risk Management
Commodity Price (1)
Oil $ 223 $ 15 $ 305 $ 46
NGLs - Plant Condensate 59 3 82 15
NGLs - Other 7 22 12 33
Natural Gas 73 67 112 83
Other (2) 3 - 5 2
Total 365 107 516 179
Unrealized Gains (Losses) on
Risk Management (679 ) 83 225 (344 )
Total Gains (Losses) on Risk
Management, Net $ (314 ) $ 190 $ 741
Three months ended June 30, Six months ended June 30,
(Per-unit) 2020 2019 2020 2019
Realized Gains (Losses) on
Risk Management
Commodity Price (1)
Oil ($/bbl) $ 16.79 $ 0.87 $ 10.86 $ 1.65
NGLs - Plant Condensate
($/bbl) $ 12.58 $ 0.53 $ 8.65 $ 1.60
NGLs - Other ($/bbl) $ 0.90 $ 2.66 $ 0.75 $ 2.44
Natural Gas ($/Mcf) $ 0.52 $ 0.46 $ 0.39 $ 0.30
Total ($/BOE) $ 7.41 $ 1.96 $ 5.07 $ 1.84 (1) Includes realized gains and losses related to the
Operations.
(2) Other primarily includes realized gains or losses from Market Optimization
and other derivative contracts with no associated production volumes.
Ovintiv recognizes fair value changes from its risk management activities each reporting period. The changes in fair value result from new positions and settlements that occur during each period, as well as the relationship between contract prices and the associated forward curves. Realized gains or losses on risk management activities related to commodity price mitigation are included in theUSA Operations, Canadian Operations and Market Optimization revenues as the contracts are cash settled. Unrealized gains or losses on fair value changes of unsettled contracts are included in the Corporate and Other segment. 49
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Market Optimization Revenues
Market Optimization product revenues relate to activities that provide
operational flexibility and cost mitigation for transportation commitments,
product type, delivery points and customer diversification. The Company also
purchases and sells third-party volumes under long-term marketing arrangements
associated with the Company's previous divestitures.
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
Market Optimization $ 348 $ 250 $ 767 $ 576
Three months ended
Market Optimization product revenues increased
• Higher sales of third-party purchased liquid volumes primarily relating to
price optimization activities in the
sales of third-party purchased natural gas volumes primarily relating to
long-term marketing arrangements for assets divested in prior years (
million);
partially offset by:
• Lower oil and natural gas benchmark prices (
Six months ended
Market Optimization product revenues increased
• Higher sales of third-party purchased liquid volumes primarily relating to
price optimization activities in the
sales of third-party purchased natural gas volumes primarily relating to
long-term marketing arrangements for assets divested in prior years (
million);
partially offset by:
• Lower oil and natural gas benchmark prices (
Sublease Revenues
Sublease revenues primarily include amounts related to the sublease of office space in The Bow office building recorded in the Corporate and Other segment. Additional information on office sublease income can be found in Note 11 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Operating Expenses
Production, Mineral and Other Taxes
Production, mineral and other taxes include production and property taxes. Production taxes are generally assessed as a percentage of oil, NGLs and natural gas production revenues. Property taxes are generally assessed based on the value of the underlying assets.
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
USA Operations $ 24 $ 69 $ 72 $ 113
Canadian Operations 3 4 7 8
Total $ 27 $ 73 $ 79 $ 121
Three months ended June 30, Six months ended June 30,
($/BOE) 2020 2019 2020 2019
USA Operations $ 0.82 $ 2.07 $ 1.20 $ 2.08
Canadian Operations $ 0.17 $ 0.22 $ 0.18 $ 0.20
Production, Mineral and
Other Taxes $ 0.55 $ 1.36 $ 0.79 $ 1.26
50
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Three months ended
Production, mineral and other taxes decreased
• Lower production tax in USA Operations due to lower commodity prices and
production volumes (
gas assets and the termination of the Company's production sharing contract
in its China Operations in the third quarter of 2019 (
Six months ended
Production, mineral and other taxes decreased
• Lower production tax in USA Operations due to lower commodity prices (
million), as well as the sale of the Arkoma natural gas assets and the
termination of the Company's production sharing contract in its China
Operations in the third quarter of 2019 ($1 million ).
Transportation and Processing
Transportation and processing expense includes transportation costs incurred to move product from production points to sales points including gathering, compression, pipeline tariffs, trucking and storage costs.Ovintiv also incurs costs related to processing provided by third parties or through ownership interests in processing facilities. Three months ended June 30, Six months ended June 30, ($ millions) 2020 2019 2020 2019 USA Operations $ 115 $ 136$ 236 $ 215 Canadian Operations 198 217 411 429 Upstream Transportation and Processing 313 353 647 644 Market Optimization 55 59 117 106 Total $ 368 $ 412$ 764 $ 750 Three months ended June 30, Six months ended June 30, ($/BOE) 2020 2019 2020 2019 USA Operations$ 4.07 $ 4.09$ 3.95 $ 3.95 Canadian Operations$ 9.75 $ 10.60$ 10.02 $ 10.40 Upstream Transportation and Processing$ 6.44 $ 6.54
Three months ended
Transportation and processing expense decreased
• Lower
due to a third-party plant turnaround in
Arkoma natural gas assets in the third quarter of 2019 and the expiration of
certain transportation contracts relating to decommissioned and previously
divested assets;
partially offset by:
• Production volume increases under existing transportation contracts.
Six months ended
Transportation and processing expense increased
51
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• Higher production volumes as a result of the Newfield acquisition on February
13, 2019, rate escalation in certain transportation contracts relating to
previously divested assets, higher production volumes and rates in Permian,
production volume increases under existing transportation contracts and
higher downstream transportation costs in Montney due to third-party
adjustments;
partially offset by:
• The sale of the Arkoma natural gas assets in the third quarter of 2019, the
expiration of certain transportation contracts relating to decommissioned and
previously divested assets, lower
lower flow-through operating costs due to a third-party plant turnaround in
Upstream transportation and processing decreased$0.28 per BOE compared to the first six months of 2019 primarily due to a higher proportion of total production volumes in theUSA Operations resulting from the Newfield acquisition, which benefit from lower than average per BOE transportation and processing costs. Operating Operating expense includes costs paid by the Company, net of amounts capitalized, to operate oil and natural gas properties in which the Company has a working interest. These costs primarily include labor, service contract fees, chemicals, fuel, water hauling, electricity and workovers. Three months ended June 30, Six months ended June 30, ($ millions) 2020 2019 2020 2019 USA Operations $ 121 $ 148$ 260 $ 263 Canadian Operations 25 27 51 64 China Operations (1) - 8 - 12 Upstream Operating Expense 146 183 311 339 Market Optimization 8 5 10 15 Corporate & Other - (1 ) (2 ) (2 ) Total $ 154 $ 187$ 319 $ 352 Three months ended June 30, Six months ended June 30, ($/BOE) 2020 2019 2020 2019 USA Operations$ 4.22 $ 4.46$ 4.33 $ 4.84 Canadian Operations$ 1.20 $ 1.27$ 1.23 $ 1.54 China Operations (1) $ - $ 27.68 $ -$ 23.80 Upstream Operating Expense (2)$ 2.97 $ 3.39
(1) The Company terminated its production sharing contract with CNOOC and exited
its China Operations effective
China Operations is presented for the period from
(2) Upstream Operating Expense per BOE for the second quarter and first six
months of 2020 includes long-term incentive costs of
of long-term incentive costs of
long-term incentive costs of
Three months ended
Operating expense decreased
• Decreased activity mainly as a result of the economic downturn and cost
saving initiatives (
gas assets and the termination of the Company's production sharing contract
in its China Operations in the third quarter of 2019 (
partially offset by:
• Lower capitalization of overhead costs, primarily in Permian,
Ford and
resulting from an increase in the Company's share price in the second quarter
of 2020 compared to long-term incentive recovery resulting from a decrease in
the share price in 2019 ($10 million ).
52
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Six months ended
Operating expense decreased
• Decreased activity mainly as a result of the economic downturn and cost
saving initiatives (
and the termination of the Company's production sharing contract in its
Operations in the third quarter of 2019 (
of long-term incentive costs resulting from a decrease in the Company's share
price in the first six months of 2020 compared to long-term incentive costs
resulting from an increase in the share price in the first six months of 2019
($16 million );
partially offset by:
• Lower capitalization of overhead costs, primarily in Permian,
Ford and
2019 (
Additional information on the Company's long-term incentives can be found in Note 19 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Purchased Product
Purchased product expense includes purchases of oil, NGLs and natural gas from
third parties that are used to provide operational flexibility and cost
mitigation for transportation commitments, product type, delivery points and
customer diversification. The Company also purchases and sells third-party
volumes under long-term marketing arrangements associated with the Company's
previous divestitures.
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
Market Optimization $ 319 $ 222 $ 717 $ 520
Three months ended
Purchased product expense increased
• Higher third-party purchased liquid volumes primarily relating to price
optimization activities in the
third-party purchased natural gas volumes primarily relating to long-term
marketing arrangements for assets divested in prior years (
partially offset by: • Lower oil and natural gas benchmark prices ($322 million ). 53
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Six months ended
Purchased product expense increased
• Higher third-party purchased liquid volumes primarily relating to price
optimization activities in the
third-party purchased natural gas volumes primarily relating to long-term
marketing arrangements for assets divested in prior years (
partially offset by:
• Lower oil and natural gas benchmark prices (
Depreciation, Depletion & Amortization
Proved properties within each country cost centre are depleted using the
unit-of-production method based on proved reserves as discussed in Note 1 to the
Consolidated Financial Statements included in Item 8 of the 2019 Annual Report
on Form 10-K. Depletion rates are impacted by impairments, acquisitions,
divestitures and foreign exchange rates, as well as fluctuations in 12-month
average trailing prices which affect proved reserves volumes. Corporate assets
are carried at cost and depreciated on a straight-line basis over the estimated
service lives of the assets.
Additional information can be found under Upstream Assets and Reserve Estimates
in the Critical Accounting Estimates section of the MD&A included in Item 7 of
the 2019 Annual Report on Form 10-K.
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
USA Operations $ 375 $ 429 $ 793 $ 703
Canadian Operations 111 95 220 187
Upstream DD&A 486 524 1,013 890
Corporate & Other 7 8 14 19
Total $ 493 $ 532 $ 1,027 $ 909
Three months ended June 30, Six months ended June 30,
($/BOE) 2020 2019 2020 2019
USA Operations $ 13.18 $ 12.96 $ 13.24 $ 12.96
Canadian Operations $ 5.41 $ 4.64 $ 5.35 $ 4.53
Upstream DD&A $ 9.94 $ 9.78 $ 10.03 $ 9.32 Three months ended
DD&A decreased
• Lower production volumes in the
by higher depletion rates in the Canadian and
The depletion rate in the Canadian and
Six months ended
DD&A increased
• Higher production volumes in the
depletion rates in the Canadian and
million, respectively).
The depletion rate in the Canadian and
54
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Impairments
Under full cost accounting, the carrying amount ofOvintiv's oil and natural gas properties within each country cost centre is subject to a ceiling test performed quarterly. Ceiling test impairments are recognized when the capitalized costs, net of accumulated depletion and the related deferred income taxes, exceed the sum of the estimated after-tax future net cash flows from proved reserves as calculated underSEC requirements using the 12month average trailing prices and discounted at 10 percent. The 12-month average trailing price is calculated as the average of the price on the first day of each month within the trailing 12-month period. In the second quarter and first six months of 2020, the Company recognized a before-tax non-cash ceiling test impairment of$3,250 million and$3,527 million , respectively, in theUSA Operations. The non-cash ceiling test impairments primarily resulted from the decline in the 12-month average trailing prices, which reduced proved reserves. The 12-month average trailing prices used in the ceiling test calculations were based on the benchmark prices below. The benchmark prices were adjusted for basis differentials to determine local reference prices, transportation costs and tariffs, heat content and quality. Oil & NGLs Natural Gas Edmonton WTI Condensate Henry Hub AECO ($/bbl) (C$/bbl) ($/MMBtu) (C$/MMBtu) 12-Month Average Trailing Reserves Pricing (1) June 30, 2020 47.47 58.46 2.07 1.70 December 31, 2019 55.93 68.80 2.58 1.76 June 30, 2019 61.38 72.91 3.02 1.61
(1) All prices were held constant in all future years when estimating net
revenues and reserves.
Due to the recent low commodity price environment, further declines in the 12-month average trailing prices are expected and could reduce proved reserves volumes and values and result in the recognition of future ceiling test impairments. However, future ceiling test impairments are difficult to reasonably predict and depend on commodity prices, as well as changes to reserves estimates, future development costs, capitalized costs, unproved property costs transferred to the depletable base of the full cost pool, as well as proceeds received from upstream divestitures which are generally deducted from the Company's capitalized costs and can reduce the likelihood of ceiling test impairments. The Company has calculated the estimated effects that certain price changes would have had on its ceiling test impairment for the six months endedJune 30, 2020 . Using commodity futures prices as atJune 30, 2020 for the three months endingSeptember 30, 2020 , the estimated 12-month average trailing prices for the period endedJune 30, 2020 would have been$43.35 per bbl for WTI,C$53.25 per bbl for Edmonton Condensate,$1.93 per MMBtu forHenry Hub andC$1.94 per MMBtu for AECO. Based on these estimated prices, while holding all other inputs and assumptions constant, an additional before-tax ceiling test impairment of approximately$1.3 billion for theUSA Operations would have been recognized for the six months endedJune 30, 2020 . If a low commodity price environment is sustained during the remainder of 2020, further ceiling test impairments and related allowances on deferred tax assets may be recognized. The additional estimated before-tax ceiling test impairment is partly a result of a 13 percent decrease in proved undeveloped reserves for theUSA Operations as certain locations would not be economic at these revised estimated prices. This estimate strictly isolates the potential impact of commodity prices on the Company's proved reserves volumes and values. If the low commodity price environment continues, further negative price related reserve revisions during the remainder of 2020 may occur, the magnitude of which could be significant.
Due to uncertainties in estimating proved reserves, the additional before-tax
ceiling test impairment described and resulting implications may not be
indicative of
55
-------------------------------------------------------------------------------- The Company believes that the discounted after-tax future net cash flows from proved reserves required to be used in the ceiling test calculation are not indicative of the fair market value ofOvintiv's oil and natural gas properties or the future net cash flows expected to be generated from such properties. The discounted after-tax future net cash flows do not consider the fair market value of unamortized unproved properties, or probable or possible liquids and natural gas reserves. In addition, there is no consideration given to the effect of future changes in commodity prices.Ovintiv manages its business using estimates of reserves and resources based on forecast prices and costs. Additional information on the ceiling test calculation can be found in Note 10 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Administrative
Administrative expense represents costs associated with corporate functions
provided by
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
Administrative, excluding
Long-Term Incentive Costs,
Restructuring Costs and Current
Expected Credit Losses $ 68 $ 79 $ 142 $ 161
Long-term incentive costs 19 (15 ) (7 ) 17
Restructuring costs 81 17 81 130
Current expected credit losses
(1) (3 ) - 2 -
Total Administrative $ 165 $ 81 $ 218 $ 308
Three months ended June 30, Six months ended June 30,
($/BOE) 2020 2019 2020 2019
Administrative, excluding
Long-Term Incentive Costs,
Restructuring Costs and Current
Expected Credit Losses $ 1.38 $ 1.48 $ 1.41 $ 1.67
Long-term incentive costs 0.40 (0.28 ) (0.07 ) 0.18
Restructuring costs 1.66 0.31 0.80 1.36
Current expected credit losses
(1) (0.06 ) - 0.02 -
Total Administrative $ 3.38 $ 1.51 $ 2.16 $ 3.21 (1) On
Credit Losses: Measurement of Credit Losses on Financial Instruments" under
Topic 326. Further details on the adoption of ASU 2016-13 can be found in
Note 2 to the Consolidated Financial Statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
Three months ended
Administrative expense in the second quarter of 2020 increased$84 million compared to the second quarter of 2019 primarily due to higher restructuring costs incurred in 2020 ($64 million ) and long-term incentive costs resulting from an increase in the Company's share price in the second quarter of 2020 compared to a recovery of long-term incentive costs in the second quarter of 2019 resulting from a decrease in the share price in 2019 ($34 million ), partially offset by lower non-recurring integration expenses of$4 million relating to the Newfield acquisition in 2019.
Six months ended
Administrative expense in the first six months of 2020 decreased$90 million compared to the first six months of 2019 primarily due to lower restructuring costs incurred in 2020 ($49 million ) and a recovery of long-term incentive costs resulting from a decrease in the Company's share price in the first six months of 2020 compared to long-term incentive costs resulting from an increase in the share price in the first six months of 2019 ($24 million ) and lower non-recurring integration expenses of$8 million relating to the Newfield acquisition in 2019. During 2019, the Company completed workforce reductions in conjunction with the Newfield acquisition to better align staffing levels and the organizational structure. InJune 2020 , the Company completed further workforce reductions as part of a company-wide reorganization to better align with the Company's planned activity levels. Additional information on restructuring charges can be found in Note 18 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 56
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Other (Income) Expenses
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
Interest $ 86 $ 99 $ 182 $ 186
Foreign exchange (gain) loss, net (40 ) (55 ) 76 (92 )
(Gain) loss on divestitures, net - - - 1
Other (gains) losses, net (16 ) (3 ) (30 ) 25
Total Other (Income) Expenses $ 30 $ 41 $ 228 $ 120
Interest
Interest expense primarily includes interest on Ovintiv's long-term debt arising
from U.S. dollar denominated unsecured notes. Additional information on changes
in interest can be found in Note 5 to the Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Three months ended
Interest expense decreased
• Lower interest expense resulting from the repayment of the Company's
million senior note in the second quarter of 2019 (
savings related to open market repurchases in 2020 (
Six months ended
Interest expense decreased
• Lower interest expense resulting from the repayment of the Company's
million senior note in the second quarter of 2019 (
savings related to open market repurchases in 2020 (
partially offset by:
• Higher interest expense on long-term debt primarily relating to the
assumption of Newfield's outstanding senior notes, interest expense relating
to amounts drawn on the Company's credit facilities and issuances under the
Company's
Foreign Exchange (Gain) Loss, Net
Foreign exchange gains and losses primarily result from the impact of fluctuations in the Canadian toU.S. dollar exchange rate. Additional information on changes in foreign exchange gains or losses can be found in Note 6 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Following the completion of the Reorganization, including theU.S. Domestication, onJanuary 24, 2020 , as described in the Highlights section of this MD&A, theU.S. dollar denominated unsecured notes issued byEncana Corporation fromCanada were assumed byOvintiv Inc. , a company incorporated inDelaware with aU.S. dollar functional currency. Accordingly, theseU.S. dollar denominated unsecured notes, along with certain intercompany notes, no longer attract foreign exchange translation gains or losses.
Three months ended
Net foreign exchange gain decreased by
• Lower unrealized foreign exchange gains on the translation of
financing debt issued from
realized foreign exchange gains on the settlement of
debt issued from Canada and intercompany notes ($22 million );
57
--------------------------------------------------------------------------------
partially offset by:
• Lower unrealized foreign exchange losses on the translation of intercompany
notes (
translation of
million).
Six months ended
Net foreign exchange loss of
• Unrealized foreign exchange losses on the translation of
financing debt and risk management contracts issued from
gains in 2019 (
foreign exchange losses on the translation of
issued from
(
partially offset by:
• Unrealized foreign exchange gains on the translation of intercompany notes
compared to losses in 2019 (
Other (Gains) Losses, Net
Other (gains) losses, net, primarily includes other non-recurring revenues or expenses and may also include items such as interest income, interest received from tax authorities, transaction costs relating to acquisitions, reclamation charges relating to decommissioned assets, gains on debt repurchases and adjustments related to other assets. Other gains in the second quarter and first six months of 2020 primarily includes gains of$11 million and$22 million , respectively, relating to the repurchase of the Company's fixed long-term debt on the open market as discussed in the Liquidity and Capital Resources section of this MD&A. Other losses in the first six months of 2019 primarily included legal fees and transaction costs related to the Newfield acquisition of$33 million , partially offset by interest income on short-term investments of$8 million .
Income Tax
Three months ended June 30, Six months ended June 30,
($ millions) 2020 2019 2020 2019
Current Income Tax Expense
(Recovery) $ (1 ) $ 3 $ (1 ) $ 4
Deferred Income Tax Expense
(Recovery) 295 158 435 96Income Tax Expense (Recovery) $ 294 $ 161
$ 434 $ 100 Effective Tax Rate (7.2%) 32.4% (12.3%) 52.4%
Income Tax Expense (Recovery)
In the second quarter and first six months of 2020, income tax expense increased$133 million and$334 million , respectively, compared to 2019, primarily due to current year losses arising from non-cash ceiling test impairments and an increase in the valuation allowance of$568 million inCanada related to prior years' deferred tax assets, which was recorded as a discrete item. Deferred income tax assets are routinely assessed for realizability. During the six months endedJune 30, 2020 , the Company determined, after weighing both positive and negative evidence, that a valuation allowance should be recorded to reduce the associated deferred tax assets inthe United States and inCanada . The Company is in a cumulative three-year loss position as ofJune 30, 2020 and is expected be in a cumulative three-year loss position by the end of the current fiscal year in boththe United States andCanada . The cumulative losses, as well as increased uncertainty in the timing as to when the realization of deferred tax assets will occur, is significant negative evidence to overcome, and consequently, it is more likely than not that the deferred tax assets will not be realizable. If it is determined that the deferred tax assets are realized in the future, a reduction in the valuation allowance will be recorded. Additional information on the determination of the valuation 58
--------------------------------------------------------------------------------
allowance can be found in Note 7 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
As part of theU.S. Domestication,Ovintiv recognized a capital loss and recorded a deferred income tax benefit in the amount of$1.2 billion for Canadian income tax purposes due to the decline in the Company's share value compared to the historical tax basis of its properties that were transferred as part of the Reorganization.Ovintiv assessed the realizability of these capital losses against capital gains and concluded that it is more likely than not that the deferred tax asset will not be realizable. Therefore,Ovintiv has recorded a corresponding valuation allowance against the deferred tax asset. If it is determined the capital loss can be utilized at a future date, a reduction in the valuation allowance will be recorded.
Effective Tax Rate
Ovintiv's interim income tax expense is determined using the estimated annual effective income tax rate applied to yeartodate net earnings before income tax plus the effect of legislative changes and amounts in respect of prior periods. The estimated annual effective income tax rate is impacted by expected annual earnings, valuation allowances related to current year losses, income tax related to foreign operations, state tax, the effect of legislative changes, non-taxable capital gains and losses, and tax differences on divestitures and transactions, which can produce interim effective tax rate fluctuations. Following theU.S. Domestication as described in the Highlights section of this MD&A, the applicable statutory rate became theU.S. federal income tax rate. The Company's effective tax rate was (7.2) percent for the second quarter and (12.3) percent for the first six months of 2020, which are lower than theU.S. federal statutory tax rate of 21 percent primarily due to valuation allowances recorded due to current year losses arising from ceiling test impairments, and an increase in the valuation allowance of$568 million inCanada related to prior years' deferred tax assets, which was recorded as a discrete item. The effective tax rate of 52.4 percent for the six months endedJune 30, 2019 , was higher than the Canadian statutory tax rate of 26.6 percent primarily due to the re-measurement of the Company's deferred tax position resulting from the Alberta tax rate reduction. OnJune 28, 2019 ,Alberta Bill 3, the Job Creation Tax Cut (Alberta Corporate Tax Amendment) Act, was signed into law resulting in a reduction of the Alberta corporate tax rate from 12 percent to 11 percent effectiveJuly 1, 2019 , with further one percent rate reductions to take effect every year onJanuary 1 until the general corporate tax rate is eight percent onJanuary 1, 2022 . During the three months endedJune 30, 2019 , the deferred tax expense of$158 million included an adjustment of$55 million resulting from the re-measurement of the Company's deferred tax position due to the Alberta tax rate reduction. OnJune 29, 2020 Alberta announced the previously scheduled rate reduction will be accelerated with the Alberta rate reducing to eight percent effectiveJuly 1, 2020 . This new legislation is not yet enacted and the impact resulting from this announcement is not expected to be material for the Company's tax position. The tax impacts of the various stimulus and fiscal measures announced in theU.S. andCanada in response to the COVID-19 pandemic, including theU.S. Coronavirus Aid, Relief and Economic Security ("CARES") Act and theCanada Emergency Wage Subsidy ("CEWS") legislation are currently not expected to be material on the Company's tax or financial position. The determination of income and other tax liabilities of the Company and its subsidiaries requires interpretation of complex domestic and foreign tax laws and regulations, that are subject to change. The Company's interpretation of taxation laws may differ from the interpretation of the tax authorities. As a result, there are tax matters under review for which the timing of resolution is uncertain. The Company believes that the provision for income taxes is adequate. 59
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Liquidity and Capital Resources
Sources of Liquidity
The Company has the flexibility to access cash equivalents and a range of funding alternatives at competitive rates through committed revolving credit facilities as well as debt and equity capital markets.Ovintiv closely monitors the accessibility of cost-effective credit and ensures that sufficient liquidity is in place to fund capital expenditures and dividend payments. In addition, the Company may use cash and cash equivalents, cash from operating activities, or proceeds from asset divestitures to fund its operations or to manage its capital structure as discussed below. AtJune 30, 2020 ,$22 million in cash and cash equivalents was held by Canadian subsidiaries. The cash held by Canadian subsidiaries is accessible and may be subject to additionalU.S. income taxes and Canadian withholding taxes if repatriated. The Company's capital structure consists of total shareholders' equity plus long-term debt, including any current portion. The Company's objectives when managing its capital structure are to maintain financial flexibility to preserveOvintiv's access to capital markets and its ability to meet financial obligations and finance internally generated growth, as well as potential acquisitions.Ovintiv has a practice of maintaining capital discipline and strategically managing its capital structure by adjusting capital spending, adjusting dividends paid to shareholders, issuing new shares, purchasing shares for cancellation, issuing new debt, repaying or repurchasing existing debt. As at June 30, ($ millions, except as indicated) 2020 2019 Cash and Cash Equivalents$ 39 $ 167 Available Credit Facilities (1) 2,750 4,000 Available Uncommitted Demand Lines (2) 183 192 Issuance of U.S. Commercial Paper - (761 ) Total Liquidity$ 2,972 $ 3,598
Long-Term Debt, including current portion (3)
$ 5,873 $ 10,015 Debt to Capitalization (%) (5) 56 41 Debt to Adjusted Capitalization (%) (6) 35 28
(1) Includes available credit facilities of
in the
2020 (collectively, the "Credit Facilities").
(2) Includes three uncommitted demand lines totaling
million in undrawn letters of credit (2019 -
respectively).
(3) Long-Term Debt as at
Credit Facilities.
(4) Shareholders' Equity reflects the common shares purchased, for cancellation,
under the Company's 2019 NCIB and substantial issuer bid programs.
(5) Calculated as long-term debt, including the current portion, divided by
shareholders' equity plus long-term debt, including the current portion.
(6) A non-GAAP measure which is defined in the Non-GAAP Measures section of this
MD&A.
The Company has access to two committed revolvingU.S. dollar denominated credit facilities totaling$4.0 billion , which include a$2.5 billion revolving credit facility forOvintiv Inc. and a$1.5 billion revolving credit facility for a Canadian subsidiary. These facilities mature inJuly 2024 and are fully revolving up to maturity. The Credit Facilities provide financial flexibility and allow the Company to fund its operations, development activities or capital programs. AtJune 30, 2020 ,$995 million and$255 million were outstanding under the revolving credit facility forOvintiv Inc. and for the Canadian subsidiary, respectively. During the first six months of 2020, as a result of the recent economic downturn from the COVID-19 pandemic and falling oil prices,Ovintiv received updates to its credit ratings.Ovintiv remains investment grade which reflects the Company's strong liquidity position within a volatile and low commodity price environment.Ovintiv has full access to its Credit Facilities and the credit rating updates have not impacted the Company's ability to fund its operations, development activities or its reduced capital program. WhileOvintiv currently maintains an investment grade credit rating, further reductions in the Company's credit ratings could increase the cost of short-term borrowings on the existing Credit Facilities or other sources of liquidity. A prolonged period of low commodity prices and the global impact of the COVID-19 pandemic could impact the Company's credit ratings in the future. 60
-------------------------------------------------------------------------------- As atJune 30, 2020 , the Company had no amounts outstanding under itsU.S. CP programs. Outstanding commercial paper balances due in the second quarter of 2020, were repaid using advances from the Company's Credit Facilities.Ovintiv's access to itsU.S. CP programs is market-driven, and as a result of the current low commodity price environment and the Company's current debt rating, the Company's access to commercial paper is limited and on less favorable terms. Depending on the Company's credit rating and market demand, the Company may issue from its twoU.S. CP programs, which include a$1.5 billion program forOvintiv Inc. and a$1.0 billion program for a Canadian subsidiary. The Credit Facilities, uncommitted demand lines, and cash and cash equivalents provideOvintiv with total liquidity of approximately$3.0 billion . AtJune 30, 2020 ,Ovintiv also had approximately$137 million in undrawn letters of credit issued in the normal course of business primarily as collateral security, related to transportation arrangements and to support future abandonment liabilities. Further downgrades in the Company's credit ratings could trigger additional collateral requirements to support existing agreements and such amounts could be material. In the first six months of 2020,Ovintiv filed aU.S. shelf registration statement and a Canadian shelf prospectus, under which the Company may issue from time to time, debt securities, common stock, preferred stock, warrants, units, share purchase contracts and share purchase units in theU.S. and/orCanada . AtJune 30, 2020 ,$6.0 billion remained accessible under the Canadian shelf prospectus. The ability to issue securities under theU.S. shelf registration statement or Canadian shelf prospectus is dependent upon market conditions and securities law requirements.Ovintiv is currently in compliance with, and expects that it will continue to be in compliance with, all financial covenants under the Credit Facilities. Management monitors Debt to Adjusted Capitalization, which is a non-GAAP measure defined in the Non-GAAP Measures section of this MD&A, as a proxy forOvintiv's financial covenant under the Credit Facilities, which requires Debt to Adjusted Capitalization to be less than 60 percent. As atJune 30, 2020 , the Company's Debt to Adjusted Capitalization was 35 percent. The definitions used in the covenant under the Credit Facilities adjust capitalization for cumulative historical ceiling test impairments recorded in conjunction with the Company'sJanuary 1, 2012 adoption ofU.S. GAAP.Ovintiv does not expect the current COVID-19 pandemic to impact the Company's ability to remain in compliance with its financial covenants under the Credit Facilities. Additional information on financial covenants can be found in Note 15 to the Consolidated Financial Statements included in Item 8 of the 2019 Annual Report on Form 10K. 61
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Sources and Uses of Cash
In the second quarter and first six months of 2020,Ovintiv primarily generated cash through operating activities. The following table summarizes the sources and uses of the Company's cash and cash equivalents. Three months ended June 30, Six months ended June 30, ($ millions) Activity Type 2020 2019 2020 2019 Sources of Cash, Cash Equivalents and Restricted Cash Cash from operating activities Operating$ 117
Investing 8 4 30 6
Corporate acquisition, net of cash
and restricted cash acquired Investing - - - 94
Net issuance of revolving long-term
debt Financing 408 761 552 761
Other Investing - - - 24
533 1,671 1,265 2,320
Uses of Cash and Cash Equivalents
Capital expenditures Investing 252 750 1,042 1,486
Acquisitions Investing 1 19 18 41
Repayment of long-term debt (1) Financing 26 500 115 500
Purchase of shares of common stock Financing - 637 - 1,037
Dividends on shares of common stock Financing 25 25 49 53
Other Investing/Financing 294 51 186 41
598 1,982 1,410 3,158Foreign Exchange Gain (Loss) on Cash, Cash Equivalents
and Restricted Cash Held in Foreign Currency 1 1 (6 ) 4 Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash$ (64 )
(1) Includes open market repurchases.
Operating Activities
Cash from operating activities in the second quarter and first six months of 2020 was$117 million and$683 million , respectively, and was primarily a reflection of the impacts from lower average realized commodity prices, partially offset by the Newfield acquisition, the effects of the commodity price mitigation program and changes in noncash working capital.
Additional detail on changes in non-cash working capital can be found in Note 23
to the Consolidated Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Non-GAAP Cash Flow in the second quarter and first six months of 2020 was$304 million and$839 million , respectively, and was primarily impacted by the items affecting cash from operating activities which are discussed below and in the Results of Operations section of this MD&A.
Three months ended
Net cash from operating activities decreased
• Lower realized commodity prices (
(
restructuring costs (
related to
partially offset by:
• Higher realized gains on risk management in revenues (
production, mineral and other taxes (
processing expense (
long-term incentive costs ($43 million ).
62
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Six months ended
Net cash from operating activities decreased
• Lower realized commodity prices (
capital ($198 million ), higher decommissioning costs primarily related to
Deep Panuke ($82 million ) and acquisition costs incurred in 2019
($33 million );
partially offset by:
• Higher realized gains on risk management in revenues (
administrative expense, excluding non-cash long-term incentive costs and
current expected credit losses (
costs of $49 million , higher production volumes ($91 million ), lower
operating expenses, excluding non-cash long-term incentive costs ($48
million ), and lower production, mineral and other taxes ($42 million ).
Investing Activities
Cash used in investing activities in the first six months of 2020 was$1,172 million primarily due to capital expenditures. Capital expenditures decreased$444 million compared to the first six months of 2019 due to the Company's reduced capital program in response to the volatile market conditions in 2020, as discussed in the 2020 Outlook section of this MD&A.
Corporate acquisition in the first six months of 2019 was
Acquisitions in the first six months of 2020 were$18 million , which primarily included property purchases with liquids-rich potential. Acquisitions in the first six months of 2019 were$41 million which primarily included seismic purchases and water rights. Divestitures in the first six months of 2020 and 2019 were$30 million and$6 million , respectively, which primarily included the sale of certain properties that did not complementOvintiv's existing portfolio of assets. Capital expenditures and acquisition and divestiture activity are summarized in Notes 3, 8 and 9 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Financing Activities
Net cash used in financing activities has been impacted by the Company's strategy to enhance liquidity, strengthen its balance sheet and return value to stockholders through the purchase of shares of common stock.
Net cash from financing activities in the first six months of 2020 was$344 million compared to net cash used of$870 million in 2019. The change was primarily due to the purchase of common shares under a NCIB ($1,037 million ) in 2019 as discussed in more detail below and repayment of long-term debt in 2019 ($500 million ) partially offset by a decrease in net issuance of revolving long-term debt in 2020 ($209 million ) and the open market repurchase of long-term debt in 2020 ($115 million ) as discussed below. From time to time,Ovintiv may seek to retire or purchase the Company's outstanding debt through cash purchases and/or exchanges for other debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In the first six months of 2020, the Company repurchased$137 million in principal amount of its senior notes in the open market, which included approximately$90 million in principal amount of its 5.75 percent senior notes due inJanuary 2022 , approximately$17 million in principal amount of its 6.5 percent senior notes due inFebruary 2038 , approximately$12 million in principal amount of its 5.375 percent senior notes due inJanuary 2026 , approximately$10 million in principal amount of its 3.9 percent senior notes due inNovember 2021 , and approximately$8 million in principal amount of its 5.15 percent senior notes due inNovember 2041 for an aggregate cash payment of approximately$115 million , plus accrued interest, and recognized a net gain of approximately$22 million .Ovintiv utilized funds available from the Company's credit facilities, cash on hand and cash from implementing cost savings initiatives to complete these open market repurchases. 63
-------------------------------------------------------------------------------- The Company's long-term debt totaled$7,366 million atJune 30, 2020 and$6,974 million atDecember 31, 2019 . There was no current portion outstanding atJune 30, 2020 orDecember 31, 2019 .Ovintiv has no long-term debt maturities untilNovember 2021 and, as atJune 30, 2020 , over 79 percent of the Company's fixed rate long-term debt is not due until 2024 and beyond. For additional information on long-term debt, refer to Note 12 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Dividends
Three months ended June 30, Six months ended June 30,
($ millions, except as indicated) 2020 2019 2020 2019
Dividend Payments $ 25 $ 25 $ 49 $ 53
Dividend Payments ($/share) (1) $ 0.09375 $ 0.09375 (1) Dividend payments per share reflect the Share Consolidation. Accordingly, the
comparative period has been restated.
OnJuly 28, 2020 , the Board of Directors declared a dividend of$0.09375 per share ofOvintiv common stock payable onSeptember 30, 2020 to stockholders of record as ofSeptember 15, 2020 .
Normal Course Issuer Bid
In the second quarter and first six months of 2019, the Company used cash on hand of approximately$637 million and$1,037 million , respectively, to purchase, for cancellation, approximately 93.5 million and 149.4 million common shares, respectively, on a pre-Share Consolidation basis or approximately 18.7 million and 29.9 million common shares, respectively, on a post-Share Consolidation basis. For additional information on the NCIB, refer to Note 15 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
For information on off-balance sheet arrangements and transactions, refer to the Off-Balance Sheet Arrangements section of the MD&A included in Item 7 of the 2019 Annual Report on Form 10-K.
Commitments and Contingencies
For information on commitments and contingencies, refer to Notes 8 and 24 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 64
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Non-GAAP Measures
Certain measures in this document do not have any standardized meaning as prescribed byU.S. GAAP and, therefore, are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other issuers and should not be viewed as a substitute for measures reported underU.S. GAAP. These measures are commonly used in the oil and gas industry and byOvintiv to provide shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. Non-GAAP measures include: Non-GAAP Cash Flow, Non-GAAP Cash Flow Margin, Total Costs, Debt to Adjusted Capitalization and Net Debt to Adjusted EBITDA. Management's use of these measures is discussed further below.
Non-GAAP Cash Flow and Non-GAAP Cash Flow Margin
Non-GAAP Cash Flow is a non-GAAP measure defined as cash from (used in) operating activities excluding net change in other assets and liabilities, net change in non-cash working capital and current tax on sale of assets.
Non-GAAP Cash Flow Margin is a non-GAAP measure defined as Non-GAAP Cash Flow per BOE of production.
Management believes these measures are useful to the Company and its investors as a measure of operating and financial performance across periods and against other companies in the industry, and are an indication of the Company's ability to generate cash to finance capital programs, to service debt and to meet other financial obligations. These measures are used, along with other measures, in the calculation of certain performance targets for the Company's management and employees.
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