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 endedSeptember 30, 2022 ("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, 2021 , which are included in Items 8 and 7, respectively, of the 2021 Annual Report on Form 10K.
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 shareholder value by delivering on its strategic priorities through execution excellence, disciplined capital allocation, commercial acumen and risk management, while driving environmental, social and governance progress. The Company's strategy is founded on its multi-basin portfolio of top tier assets, financial strength, as well as its core and foundational values. In support of the Company's commitment to unlocking shareholder value,Ovintiv utilizes its capital allocation framework to increase returns to shareholders while focusing on continued debt reduction.Ovintiv is delivering results in a socially and environmentally responsible manner. Thoughtfully developed best practices are deployed across its assets, allowing the Company to capitalize on operational efficiencies and decrease emissions intensity. The Company's sustainability reporting, which outlines its key metrics, new targets and progress achieved relating to ESG practices can be found in the Company Outlook section of this MD&A and on the Company's sustainability website.Ovintiv continually reviews and evaluates its strategy and changing market conditions in order to maximize cash flow generation from its Core Assets located in some of the best plays inNorth America . As atSeptember 30, 2022 , 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. UnderpinningOvintiv's strategy are core values of one, agile, innovative and driven, which guide the organization to be collaborative, responsive, flexible and determined. The Company is committed to excellence with a passion to drive corporate financial performance and shareholder value. 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 2021 Annual Report on Form 10-K. In evaluating its operations and assessing its leverage,Ovintiv reviews performance-based measures such as NonGAAP Cash Flow, Non-GAAP Cash Flow Margin, Total Costs and debt-based metrics such as Debt to Adjusted Capitalization, Net Debt and 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. 35
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Highlights
During the first nine months of 2022, the Company focused on executing its 2022 capital investment plan aimed at maximizing profitability through operational and capital efficiencies, minimizing the impact of inflation and delivering cash from operating activities. Higher upstream product revenues in the first nine months of 2022 compared to 2021 resulted from higher average realized prices, excluding the impact of risk management activities. Increases in average natural gas and realized liquids prices of 89 percent and 50 percent, respectively, were primarily due to higher benchmark prices.Ovintiv continues to focus on optimizing realized prices from the diversification of the Company's downstream markets.
The Company delivered significant cash from operating activities of
Significant Developments
• On
dividend payment representing an annualized dividend of
common stock as part of the Company's commitment to returning capital to
shareholders.
• On
Company's
senior notes were redeemed on
existing sources of liquidity. The debt redemption will result in annualized
interest savings of approximately
• On
to shareholders as a result of the Company's continued strong financial
performance and the previously announced asset sales. During the third
quarter of 2022, the Company increased its cash return to shareholders from
25 percent to 50 percent of Non-GAAP Cash Flow in excess of capital
expenditures and base dividends. Ovintiv delivered the additional
shareholder returns through share buybacks under its NCIB program.
• During the third quarter of 2022, the Company closed its previouslyannounced divestitures for portions of its Uinta and Bakken assets, and
received combined proceeds of approximately
other adjustments. Both transactions were effective
• On
approval for the renewal of its NCIB program, that enables the Company to
purchase, for cancellation or return to treasury, up to approximately 24.8
million shares of common stock over a 12-month period from October 3, 2022
to
approximately 10 percent of
common stock as at
NCIB program in conjunction with its capital allocation framework.
Financial Results
Three months ended
• Reported net earnings of
management in revenues of
• Generated cash from operating activities of
of
• Purchased for cancellation, approximately 6.7 million shares of common stock
for total consideration of approximately
• Paid dividends of
• Repurchased in the open market approximately
amount of the Company's senior notes.
• Reduced total long-term debt by
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Nine months ended
• Reported net earnings of
management in revenues of
• Generated cash from operating activities of
Flow of $3,215 million and NonGAAP Cash Flow Margin of $23.30 per BOE.
• Purchased for cancellation, approximately 11.2 million shares of common
stock for total consideration of approximately
• Paid dividends of
• Repurchased in the open market approximately
amount of the Company's senior notes.
• Had
available credit facilities of
lines of
outstanding commercial paper of
• Reduced total long-term debt by
• Reported Net Debt to Adjusted EBITDA of 0.9 times.
• Executed the Company's 2022 capital plan with expenditures totaling
million for the nine months ended September 30, 2022 , of which $1,157
million , or 79 percent, was directed to the Core Assets.
• Focused on highly efficient capital activity to minimize the impact of
inflation and to benefit from short-cycle high margin and/or low-cost
projects which provide flexibility to respond to fluctuations in commodity
prices.
Production
Three months ended
• Produced average liquids volumes of 266.3 Mbbls/d, which accounted for
52 percent of total production volumes. Average oil and plant condensate
volumes of 179.4 Mbbls/d, represented 67 percent of total liquids production
volumes.
• Produced average natural gas volumes of 1,500 MMcf/d, which accounted for 48
percent of total production volumes.
Nine months ended
• Produced average liquids volumes of 260.3 Mbbls/d, which accounted for
51 percent of total production volumes. Average oil and plant condensate
volumes of 175.9 Mbbls/d, represented 68 percent of total liquids production
volumes.
• Produced average natural gas volumes of 1,471 MMcf/d, which accounted for 49
percent of total production volumes.
Operating Expenses
• Incurred Total Costs in the first nine months of 2022 of
2021. Total Costs is defined in the Non-GAAP Measures section of this MD&A.
Significant items impacting Total Costs in the first nine months of 2022
compared to 2021 include:
o Higher upstream transportation and processing expenses of $141
million , primarily due to higher variable contract rates in Permian,
Uinta and Anadarko resulting from higher commodity prices;
o Higher upstream operating expenses, excluding long-term incentive
costs, of $127 million , primarily due to inflationary pressures as a
result of the higher commodity price environment and increased
activity relating to discretionary workovers;
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o Higher production, mineral and other taxes of $111 million , primarily
due to higher commodity prices; and
o Lower administrative expenses, excluding long-term incentive,
restructuring and legal costs, and current expected credit losses, of
$25 million , primarily due to a decrease in consulting and operating
lease costs.
• Total Operating Expenses in the first nine months of 2022 of
increased by
Additional information on Total Costs items and Total Operating Expenses above can be found in the Results of Operations section of this MD&A.
2022 Outlook Industry Outlook Oil Markets
The oil and gas industry is cyclical and commodity prices are inherently volatile. Oil prices reflect global supply and demand dynamics as well as the geopolitical and macroeconomic environment.
During the first nine months of 2022, oil prices have seen significant volatility. Oil prices for the remainder of 2022 will continue to be impacted by the interplay between recessionary concerns, continued OPEC+ production restraint, increasing global demand for oil, supply uncertainties resulting from the Russian invasion ofUkraine and the pace of recoveringU.S. production. The global recessionary concerns and tightening of monetary policies by central banks weighs on market sentiment and could further impact demand, subsequently driving prices down. OPEC+ recently announced that it would decrease oil production starting inNovember 2022 and will continue to meet to review the state of global oil supply, demand and inventory levels. Although the COVID-19 pandemic continues to impact economies with the emergence of variants, vaccine rollout/uptake and the relaxing of restrictions have lessened the impact on global markets.
Natural Gas Markets
Natural gas prices are primarily impacted by structural changes in supply and demand as well as deviations from seasonally normal weather.
Similar to oil prices, natural gas prices have been volatile during the first nine months of 2022. Natural gas prices for the remainder of 2022 will continue to be impacted by the interplay between natural gas production and associated natural gas from oil production, changes in demand from the power generation sector, changes in export levels ofU.S. liquefied natural gas, impacts from seasonal weather, as well as supply chain constraints or other disruptions resulting from the Russian invasion ofUkraine .
Company Outlook
The Company continues to exercise discretion and discipline to optimize capital allocation throughout 2022 as oil demand recovers and the commodity price environment evolves.Ovintiv pursues innovative ways to maximize cash flows and minimize the impact of inflation to reduce upstream operating and administrative expenses. Markets for oil and natural gas are exposed to different price risks and are inherently volatile. While the market price for 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. To mitigate price volatility and provide more certainty around cash flows, the Company enters into derivative financial instruments. As atSeptember 30, 2022 , the Company has hedged approximately 80.0 Mbbls/d of expected oil and condensate production and 1,305 MMcf/d of expected natural gas production for the remainder of the year. In addition,Ovintiv proactively utilizes transportation contracts to diversify the Company's sales markets, thereby reducing significant exposure to any given market and regional pricing.
Additional information on
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The Company continues to execute its 2022 capital investment program, the majority of which is allocated to the Core Assets, with a focus on maximizing returns from high margin liquids and minimizing the impact of inflation to optimize cash flows. InNovember 2022 , the Company updated its full year 2022 capital investment guidance to approximately$1.8 billion . The recent divestitures did not have a significant impact on the Company's capital program and the Company plans to fund the remainder of its 2022 capital investment program using cash from operations.
During the first nine months of 2022, the Company invested
Ovintiv continually strives to improve well performance and lower costs through innovative techniques.Ovintiv's redesigned wet sand sourcing model, which incorporates on-site sand storage and delivery systems, helps to prevent mine and trucking delays, thereby increasing truck productivity to enable smooth integration with local mine access. This model increases operational efficiencies and contributes to well cost savings as well as providing increased resiliency against winter weather.Ovintiv's large-scale cube development model utilizes multi-well pads and advanced completion designs to maximize returns and resource recovery from its reservoirs.Ovintiv's disciplined capital program and continuous innovation create flexibility to allocate capital in changing commodity markets to minimize the impact of inflation and maximize cash flows while preserving the long-term value of the Company's multi-basin portfolio.
Production
During the third quarter of 2022, total average production volumes were 516.3 MBOE/d. Average oil and plant condensate production volumes were 179.4 Mbbls/d and natural gas production volumes were 1,500 MMcf/d, which were within third quarter guidance of 178.0 Mbbls/d to 183.0 Mbbls/d and 1,440 MMcf/d to 1,500 MMcf/d, respectively. Average other NGL production volumes were 86.9 Mbbls/d, which exceeded third quarter guidance of 80.0 Mbbls/d to 84.0 Mbbls/d. During the first nine months of 2022, total average production volumes were 505.5 MBOE/d. Average oil and plant condensate production volumes were 175.9 Mbbls/d, other NGLs were 84.4 Mbbls/d and natural gas were 1,471 MMcf/d. The Company is on track to meet its updated full year 2022 total production guidance range of 505.0 MBOE/d to 515.0 MBOE/d, including oil and plant condensate production volumes of approximately 174.0 Mbbls/d to 176.0 Mbbls/d and other NGLs production volumes of approximately 84.0 Mbbls/d to 86.0 Mbbls/d. The Company is also on track to meet its updated full year 2022 guidance range for natural gas production volumes of approximately 1,480 MMcf/d to 1,510 MMcf/d. Full year guidance ranges were updated inNovember 2022 to reflect the strong performance inMontney , the expected impact of returning oil volumes following the resolution of line pressure issues in theAnadarko and the decision to delay the completion of certain wells across theUSA Operations to preserve capital discipline. Operating Expenses With increased activity in the oil and gas industry and strong commodity prices, service and supply costs are expected to continue to increase.Ovintiv continues to pursue innovative ways to minimize inflationary pressures with efficiency improvements and effective supply chain management to reduce upstream operating and administrative expenses. InNovember 2022 ,Ovintiv confirmed its full year 2022 Total Costs guidance range remains unchanged at$16.35 per BOE to$16.60 per BOE based on updated commodity price assumptions of$94.00 per barrel for WTI oil and$7.00 per MMBtu for NYMEX natural gas. Total Costs for the first nine months of 2022 was$16.45 per BOE and is expected to remain within the full year guidance range. Total Costs is defined in the Non-GAAP Measures section of this MD&A. Total Costs of$17.16 per BOE in the third quarter of 2022 was higher than third quarter guidance of$16.50 per BOE to$17.00 per BOE, based on the commodity prices of$100.00 per barrel for WTI oil and$8.00 per MMBtu for NYMEX natural gas. This increase is primarily due to higher electricity costs associated with higher than expected NYMEX natural gas prices and increased activity related to discretionary workovers. 39
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Long-Term Debt Reduction
Ovintiv remains focused on strengthening its balance sheet. Since the second quarter of 2020, the Company has allocated$3,748 million in excess cash flows to reduce its total long-term debt balance. In conjunction with the Company's focus on debt reduction,Ovintiv redeemed its$1.0 billion , 5.625 percent senior notes dueJuly 1, 2024 inJune 2022 , with cash on hand and other existing sources of liquidity. The debt redemption will result in annualized interest savings of approximately$55 million . In the first nine months of 2022, the Company also repurchased in the open market, approximately$565 million in principal, plus accrued interest and premiums, which included a portion of its 5.375 percent senior notes dueJanuary 2026 , its 6.5 percent senior notes dueAugust 2034 , its 6.625 percent senior notes dueAugust 2037 , its 6.5 percent senior notes dueFebruary 2038 and its 5.15 percent senior notes dueNovember 2041 . The Company paid premiums of$22 million to complete the open market repurchases. The open market repurchases will result in annualized interest savings of approximately$33 million .
As at
Additional information onOvintiv's long-term debt and liquidity position 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 and the Liquidity and Capital Resources section of this MD&A, respectively.
Additional information on
Environmental, Social and Governance
Ovintiv recognizes the importance of reducing its environmental footprint and voluntarily participates in certain emission reduction programs. The Company has adopted a range of strategies to help reduce emissions from its operations. These strategies include incorporating new and proven technologies and optimizing processes in its operations and working closely with third-party providers to develop best practices. The Company continues to look for innovative techniques and efficiencies to help maintain its commitment to emission reductions.
The Company is in full alignment with the World Bank Zero Routine Flaring
initiative, well ahead of the
During the first quarter of 2022, the Company announced a Scope 1&2 GHG emissions intensity reduction target of 50 percent compared to 2019 levels, to be achieved by 2030. The GHG emissions reduction target is tied to the 2022 annual compensation program for all employees.
In
Ovintiv is committed to diversity, equity and inclusion. The Company's social commitment framework, which is rooted in the Company's foundational values of integrity, safety, sustainability, trust and respect, fosters a culture of inclusion that respects stakeholders and strengthens communities.Ovintiv remains committed to protecting the health and safety of its workforce. Safety is a foundational value atOvintiv and plays a critical role in the Company's belief that a safe workplace is a strong indicator of a well-managed business. This safety-oriented mindset enables the Company to quickly respond to emergencies and minimize any impacts to employees and business continuity.
Additional information on
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Results of Operations
Selected Financial Information
Three months ended September 30, Nine months ended September 30,
($ millions) 2022 2021 2022 2021
Product and Service Revenues
Upstream product revenues $ 2,653 $ 1,948 $ 7,864 $ 5,265
Market optimization 988 771 3,197 2,171
Service revenues (1) 2 1 3 4
Total Product and Service Revenues 3,643 2,720 11,064 7,440
Gains (Losses) on Risk Management, Net (111 ) (950 ) (1,864 ) (2,176 )
Sublease Revenues 17 19 52 55
Total Revenues 3,549 1,789 9,252 5,319
Total Operating Expenses (2) 2,176 1,789 6,563 5,245
Operating Income (Loss) 1,373 - 2,689 74
Total Other (Income) Expenses 99 71 239 217
Net Earnings (Loss) Before Income Tax 1,274 (71 ) 2,450 (143 )
Income Tax Expense (Recovery) 88 1 148 (175 )
Net Earnings (Loss) $ 1,186 $ (72 ) $ 2,302 $ 32
(1) Service revenues include amounts related to the
(2) Total Operating Expenses include non-cash items such as DD&A, accretion of
asset retirement obligations and long-term incentive costs.
Revenues
Ovintiv'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. The Company's realized prices generally reflect WTI, NYMEX, Edmonton Condensate and AECO benchmark prices, as well as other downstream benchmarks, includingHouston andDawn . The Company proactively mitigates price risk and optimizes margins by entering into firm transportation contracts to diversify market access to different sales points. Realized prices, excluding the impact of risk management activities, may differ from the benchmarks for many reasons, including quality, location, or production being sold at different market hubs.
Benchmark prices relevant to the Company are shown in the table below.
Benchmark Prices
Three months ended September 30, Nine months ended September 30,
(average for the period) 2022 2021 2022 2021
Oil & NGLs
WTI ($/bbl) $ 91.55 $ 70.56 $ 98.09 $ 64.82
Houston ($/bbl) 93.24 71.01 99.59 65.80
Edmonton Condensate (C$/bbl) 114.19 87.26 124.90 80.75
Natural Gas
NYMEX ($/MMBtu) $ 8.20 $ 4.01 $ 6.77 $ 3.18
AECO (C$/Mcf) 5.81 3.54 5.56 3.11
Dawn (C$/MMBtu) 9.75 5.13 8.19 4.18
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Production Volumes and Realized Prices
Three months ended September 30, Nine months ended September 30,
Production Volumes (1) Realized Prices (2) Production Volumes (1) Realized Prices (2)
2022 2021 2022 2021 2022 2021 2022 2021
Oil (Mbbls/d, $/bbl)
USA Operations 133.3 136.7 $ 93.22 $ 68.69 131.4 143.5 $ 98.37 $ 62.82
Canadian Operations 0.1 0.1 82.86 64.95 0.1 0.4 88.58 55.51
Total 133.4 136.8 93.21 68.69 131.5 143.9 98.36 62.80
NGLs - Plant Condensate
(Mbbls/d, $/bbl)
USA Operations 11.1 11.3 66.62 62.84 10.1 10.5 78.77 56.84
Canadian Operations 34.9 40.6 86.65 68.78 34.3 41.4 96.59 63.62
Total 46.0 51.9 81.82 67.49 44.4 51.9 92.53 62.25
NGLs - Other (Mbbls/d,
$/bbl)
USA Operations 74.1 69.4 29.82 28.77 70.5 66.6 32.69 23.29
Canadian Operations 12.8 15.5 41.12 31.73 13.9 16.3 43.49 27.38
Total 86.9 84.9 31.49 29.31 84.4 82.9 34.46 24.09
Total Oil & NGLs
(Mbbls/d, $/bbl)
USA Operations 218.5 217.4 70.37 55.63 212.0 220.6 75.59 50.59
Canadian Operations 47.8 56.2 74.43 58.57 48.3 58.1 81.32 53.41
Total 266.3 273.6 71.10 56.23 260.3 278.7 76.65 51.18
Natural Gas (MMcf/d,
$/Mcf)
USA Operations 502 495 7.55 3.80 487 484 6.45 3.13
Canadian Operations 998 1,071 6.11 3.63 984 1,099 5.78 3.18
Total 1,500 1,566 6.60 3.69 1,471 1,583 6.00 3.17
Total Production
(MBOE/d, $/BOE)
USA Operations 302.1 300.0 63.44 46.59 293.3 301.2 65.37 42.08
Canadian Operations 214.2 234.7 45.11 30.61 212.2 241.3 45.30 27.38
Total 516.3 534.7 55.83 39.57 505.5 542.5 56.94 35.54
Production Mix (%)
Oil & Plant Condensate 35 35 35 36
NGLs - Other 17 16 16 15
Total Oil & NGLs 52 51 51 51
Natural Gas 48 49 49 49
Production Change
Year Over Year (%) (3)
Total Oil & NGLs (3 ) 1 (7 ) (3 )
Natural Gas (4 ) 9 (7 ) 4
Total Production (3 ) 5 (7 ) 1
Core Assets Production
Oil (Mbbls/d) 96.8 112.2 97.8 109.9
NGLs - Plant Condensate
(Mbbls/d) 44.6 50.8 43.1 49.5
NGLs - Other (Mbbls/d) 78.2 78.8 76.5 75.6
Total Oil & NGLs
(Mbbls/d) 219.6 241.8 217.4 235.0
Natural Gas (MMcf/d) 1,409 1,487 1,384 1,473
Total Production
(MBOE/d) 454.5 489.6 448.1 480.5
% of Total Production 88 92 89 89
(1) Average daily.
(2) Average per-unit prices, excluding the impact of risk management activities.
(3) Includes production impacts of acquisitions and divestitures.
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Upstream Product Revenues
Three months ended September 30,
NGLs - Plant Natural
($ millions) Oil Condensate NGLs - Other Gas Total
2021 Upstream Product Revenues (1)
230 $ 530 $ 1,947
Increase (decrease) due to:
Sales prices 301 60 17 402 780
Production volumes (22 ) (37 ) 4 (21 ) (76 )
2022 Upstream Product Revenues
251 $ 911 $ 2,651
Nine months ended September 30,
NGLs - Plant Natural
($ millions) Oil Condensate NGLs - Other Gas Total
2021 Upstream Product Revenues (1)
545 $ 1,368 $ 5,261
Increase (decrease) due to:
Sales prices 1,276 370 241 1,139 3,026
Production volumes (212 ) (129 ) 7 (96 ) (430 )
2022 Upstream Product Revenues
793
(1) Revenues for the third quarter and first nine months of 2022 exclude certain
other revenue and royalty adjustments with no associated production volumes
of
respectively).
Oil Revenues
Three months ended
Oil revenues were higher by
• An increase of
prices which increased revenues by
higher
percent, respectively, and the strengthening of regional pricing relative to
the WTI benchmark price in the
• Lower average oil production volumes of 3.4 Mbbls/d decreased revenues by
million. Lower volumes were primarily due to natural declines and changes in
commodity composition of Permian wells (10.1 Mbbls/d), natural declines in
quarter of 2022 (1.5 Mbbls/d), partially offset by successful drilling in
Uinta and Bakken (13.3 Mbbls/d).
Nine months ended
Oil revenues were higher by
• An increase of
prices which increased revenues by
higher WTI and
the strengthening of regional pricing relative to the WTI benchmark price in
the
• Lower average oil production volumes of 12.4 Mbbls/d decreased revenues by
changes in commodity composition of Permian wells (8.5 Mbbls/d), the sale of
the Eagle Ford assets in the second quarter of 2021 (7.7 Mbbls/d) and natural
declines in
in Uinta and Bakken (8.6 Mbbls/d).
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NGL Revenues
Three months ended
NGL revenues were higher by
• An increase of
condensate prices which increased revenues by
reflected higher Edmonton Condensate and WTI benchmark prices which were up
31 percent and 30 percent, respectively, partially offset by lower regional
pricing relative to the WTI benchmark price in Canadian Operations;
• An increase of
NGL prices which increased revenues by
higher other NGL benchmark prices and higher regional pricing; and
• Lower average plant condensate production volumes of 5.9 Mbbls/d decreased
revenues by
resulting from higher commodity prices in
declines in
Nine months ended
NGL revenues were higher by
• An increase of
condensate prices which increased revenues by
reflected higher Edmonton Condensate and WTI benchmark prices which were up
55 percent and 51 percent, respectively, partially offset by lower regional
pricing relative to the WTI benchmark price in Canadian Operations;
• An increase of
NGL prices which increased revenues by
higher other NGL benchmark prices and higher regional pricing; and
• Lower average plant condensate production volumes of 7.5 Mbbls/d decreased
revenues by
royalties resulting from higher commodity prices in
natural declines in
Natural Gas Revenues
Three months ended
Natural gas revenues were higher by
• An increase of
gas prices which increased revenues by
higher NYMEX,
percent and 64 percent, respectively; and
• Lower average natural gas production volumes of 66 MMcf/d decreased revenues
by
commodity prices in
MMcf/d), partially offset by successful drilling in
natural changes in commodity composition of Permian (13 MMcf/d).
Nine months ended
Natural gas revenues were higher by
• An increase of
gas prices which increased revenues by
higher NYMEX,
percent and 79 percent, respectively; and
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• Lower average natural gas production volumes of 112 MMcf/d decreased revenues
by
commodity prices in
by successful drilling in
commodity composition of Permian wells (19 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, NGLs and natural gas production volumes. Additional information on the Company's commodity price positions as atSeptember 30, 2022 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.
The following tables provide the effects of the Company's risk management activities on revenues.
Three months ended September 30, Nine months ended September 30,
($ millions) 2022 2021 2022 2021
Realized Gains (Losses) on Risk
Management
Commodity Price (1)
Oil $ (141 ) $ (194 ) $ (519 ) $ (478 )
NGLs - Plant Condensate (26 ) (39 ) (109 ) (99 )
NGLs - Other - (42 ) - (81 )
Natural Gas (654 ) (97 ) (1,449 ) (96 )
Other (2) - 1 2 4
Total (821 ) (371 ) (2,075 ) (750 )
Unrealized Gains (Losses) on Risk
Management 710 (579 ) 211 (1,426 )
Total Gains (Losses) on Risk
Management, Net $ (111 ) $ (950
)
Three months ended September 30, Nine months ended September 30,
(Per-unit) 2022 2021 2022 2021
Realized Gains (Losses) on Risk
Management
Commodity Price (1)
Oil ($/bbl) $ (11.47 ) $ (15.38 ) $ (14.44 ) $ (12.16 )
NGLs - Plant Condensate ($/bbl) $ (6.09 ) $ (8.15 ) $ (8.96 ) $ (7.01 )
NGLs - Other ($/bbl) $ - $ (5.45 ) $ - $ (3.59 )
Natural Gas ($/Mcf) $ (4.75 ) $ (0.67 ) $ (3.61 ) $ (0.22 )
Total ($/BOE) $ (17.28 ) $ (7.57 ) $ (15.05 ) $ (5.09 )
(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. Additional information on fair value changes can be found in Note 17 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 45
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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.
Three months ended September 30, Nine months ended September 30,
($ millions) 2022 2021 2022 2021
Market Optimization $ 988 $ 771 $ 3,197 $ 2,171
Three months ended
Market Optimization product revenues increased
• Higher oil and natural gas benchmark prices (
of third-party purchased liquids volumes primarily relating to price
optimization activities in the
partially offset by:
• Lower sales of third-party purchased natural gas volumes primarily relating
to marketing arrangements for assets divested in prior years (
Nine months ended
Market Optimization product revenues increased
• Higher oil and natural gas benchmark prices (
of third-party purchased liquids volumes primarily relating to price
optimization activities in the
partially offset by:
• Lower sales of third-party purchased natural gas volumes primarily relating
to marketing arrangements for assets divested in prior years (
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 9 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 46
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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 September 30, Nine months ended September 30,
($ millions) 2022 2021 2022 2021
USA Operations $ 106 $ 75 $ 311 $ 199
Canadian Operations 3 2 10 11
Total $ 109 $ 77 $ 321 $ 210
Three months ended September 30, Nine months ended September 30,
($/BOE) 2022 2021 2022 2021
USA Operations $ 3.83 $ 2.71 $ 3.89 $ 2.42
Canadian Operations $ 0.12 $ 0.13 $ 0.15 $ 0.17 Production, Mineral and Other Taxes $ 2.29 $ 1.57 $ 2.32 $ 1.42
Three months ended
Production, mineral and other taxes increased
• Higher production tax in USA Operations due to higher commodity prices (
million).
Nine months ended
Production, mineral and other taxes increased
• Higher production tax in USA Operations due to higher commodity prices (
million);
partially offset by:
• The sale of the Eagle Ford assets in the second quarter of 2021 (
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 September 30, Nine months ended September 30, ($ millions) 2022 2021 2022 2021 USA Operations $ 170 $ 122 $ 464 $ 361 Canadian Operations 257 231 741 703 Upstream Transportation and Processing 427 353 1,205 1,064 Market Optimization 41 44 122 130 Total $ 468 $ 397 $ 1,327 $ 1,194 Three months ended September 30, Nine months ended September 30, ($/BOE) 2022 2021 2022 2021 USA Operations $ 6.14 $ 4.43 $ 5.80 $ 4.40 Canadian Operations $ 13.01 $
10.68 $ 12.78 $ 10.68 Upstream Transportation and Processing $
8.99 $ 7.17 $ 8.73 $ 7.19
47
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Three months ended
Transportation and processing expense increased
• Higher variable contract rates in Permian, Uinta and
commodity prices (
million), higher flow-through rates resulting from increased third-party
plant operating costs and turnarounds, and higher capital fees in
(
higher costs relating to the diversification of the Company's downstream
markets (
partially offset by:
• A lower
Nine months ended
Transportation and processing expense increased
• Higher variable contract rates in Permian, Uinta and
commodity prices (
(
higher flow-through rates resulting from increased third-party plant
operating costs and turnarounds, and higher capital fees in
million), and higher costs relating to the diversification of the Company's
downstream markets (
partially offset by:
• The sales of the Eagle Ford and
($18 million ), lower U.S. /Canadian dollar exchange rate ($18 million ) and
expired contracts relating to previously divested assets ($8 million ).
Operating
Operating expense includes costs paid by the Company, net of amounts capitalized, on oil and natural gas properties in whichOvintiv has a working interest. These costs primarily include labor, service contract fees, chemicals, fuel, water hauling, electricity and workovers. Three months ended September 30, Nine months ended September 30, ($ millions) 2022 2021 2022 2021 USA Operations $ 187 $ 122 $ 478 $ 368 Canadian Operations 34 25 96 78 Upstream Operating Expense 221 147 574 446 Market Optimization 7 5 22 19 Corporate & Other - 1 - 1 Total $ 228 $ 153 $ 596 $ 466 Three months ended September 30, Nine months ended September 30, ($/BOE) 2022 2021 2022 2021 USA Operations $ 6.73 $ 4.38 $ 5.96 $ 4.47 Canadian Operations $ 1.69 $
1.20 $ 1.65 $ 1.17 Upstream Operating Expense (1) $ 4.64 $ 2.98 $ 4.16 $ 3.00
(1) Upstream Operating Expense per BOE for the third quarter and first nine
months of 2022 includes long-term incentive costs of
respectively (2021 -
Three months ended
Operating expense increased
• Inflationary pressures as a result of the higher commodity price environment
and increased activity relating to discretionary workovers (
48
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Nine months ended
Operating expense increased
• Inflationary pressures as a result of the higher commodity price environment
and increased activity relating to discretionary workovers (
partially offset by:
• The sales of the Eagle Ford and
(
Additional information on the Company's long-term incentive costs can be found in Note 15 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.Ovintiv also purchases and sells third-party volumes under marketing arrangements associated with the Company's previous divestitures. Three months ended September 30, Nine months ended September 30, ($ millions) 2022 2021 2022 2021 Market Optimization $ 973 $ 759 $ 3,154 $ 2,096
Three months ended
Purchased product expense increased
• Higher oil and natural gas benchmark prices (
third-party purchased liquids volumes primarily relating to price
optimization activities in the
partially offset by:
• Lower third-party purchased natural gas volumes primarily relating to
marketing arrangements for assets divested in prior years (
Nine months ended
Purchased product expense increased
• Higher oil and natural gas benchmark prices (
third-party purchased liquids volumes primarily relating to price
optimization activities in the
partially offset by:
• Lower third-party purchased natural gas volumes primarily relating to
marketing arrangements for assets divested in prior years (
49
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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 2021 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 2021 Annual Report on Form 10-K.
Three months ended September 30, Nine months ended September 30,
($ millions) 2022 2021 2022 2021
USA Operations $ 225 $ 207 $ 642 $ 635
Canadian Operations 61 83 176 265
Upstream DD&A 286 290 818 900
Corporate & Other 5 7 15 16
Total $ 291 $ 297 $ 833 $ 916
Three months ended September 30, Nine months ended September 30,
($/BOE) 2022 2021 2022 2021
USA Operations $ 8.11 $ 7.52 $ 8.03 $ 7.73
Canadian Operations $ 3.09 $ 3.82 $ 3.04 $ 4.02
Upstream DD&A $ 6.03 $ 5.90 $ 5.93 $ 6.08
Three months ended
DD&A decreased
• Lower depletion rates and production volumes in the Canadian Operations (
million and
exchange rate (
partially offset by:
• Higher depletion rates in the
The depletion rate in theUSA Operations increased$0.59 per BOE compared to the third quarter of 2021 primarily due to a higher depletable base. The depletion rate in the Canadian Operations decreased$0.73 per BOE compared to the third quarter of 2021 primarily due to higher reserve volumes.
Nine months ended
DD&A decreased
• Lower depletion rates in the Canadian Operations (
production volumes in the Canadian and USA Operations ($31 million and $17
million , respectively) and a lower U.S. /Canadian dollar exchange rate ($6
million );
partially offset by:
• Higher depletion rates in the
The depletion rate in theUSA Operations increased$0.30 per BOE compared to the first nine months of 2021 primarily due to a higher depletable base. The depletion rate in the Canadian Operations decreased$0.98 per BOE compared to the first nine months 2021 primarily due to higher reserve volumes. 50
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Administrative
Administrative expense represents costs associated with corporate functions
provided by
Three months ended September 30, Nine months ended September 30,
($ millions) 2022 2021 2022 2021
Administrative, excluding
Long-Term Incentive,
Restructuring and Legal Costs, and
Current
Expected Credit Losses (1) $ 66 $ 70 $ 194 $ 219
Long-term incentive costs 37 25 123 91
Restructuring and legal costs - 6 (1 ) 37
Current expected credit losses - - 2 (1 )
Total Administrative $ 103 $ 101 $ 318 $ 346
Three months ended September 30, Nine months ended September 30,
($/BOE) 2022 2021 2022 2021
Administrative, excluding
Long-Term Incentive,
Restructuring and Legal Costs, and
Current
Expected Credit Losses (1) $ 1.39 $ 1.44 $ 1.40 $ 1.50
Long-term incentive costs 0.77 0.51 0.89 0.61
Restructuring and legal costs - 0.11 (0.01 ) 0.24
Current expected credit losses - - 0.02 (0.01 )
Total Administrative $ 2.16 $ 2.06 $ 2.30 $ 2.34
(1) The third quarter and first nine months of 2022 include costs related to The
Bow office lease of
million and
sublease revenues.
Three months ended
Administrative expense increased
• Higher long-term incentive costs resulting from an increase in the Company's
share price in the third quarter of 2022 compared to 2021 (
partially offset by:
• Lower legal and operating lease costs (
respectively) and a decrease in restructuring costs (
Nine months ended
Administrative expense decreased
• Lower legal, consulting and operating lease costs (
and
million);
partially offset by:
• Higher long-term incentive costs mainly due to higher settlement prices
related to cash-settled compensation plans during the first quarter of 2022
compared to 2021 (
Additional information on the Company's long-term incentive costs can be found in Note 15 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 51
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Other (Income) Expenses
Three months ended September 30, Nine months ended September 30,
($ millions) 2022 2021 2022 2021
Interest $ 83 $ 77 $ 248 $ 263
Foreign exchange (gain) loss, net 19 - 21 (15 )
Other (gains) losses, net (3 ) (6 ) (30 ) (31 )
Total Other (Income) Expenses $ 99 $ 71 $ 239 $ 217
Interest
Interest expense primarily includes interest on
Three months ended
Interest expense increased
• Premiums of
2022 and issuances under the Company's U.S. CP program ($5 million );
partially offset by:• Interest savings related to the redemption of certain senior notes in 2021
and 2022 (
Nine months ended
Interest expense decreased
• Interest savings related to the redemption of certain senior notes in 2021
and 2022 (
related to the early redemption of the Company's 2024 senior notes in June
2022 of $30 million ;
partially offset by:
• A one-time make-whole interest payment of
early redemption of the Company's 2024 senior notes in
a one-time make-whole interest payment of
early redemption of the Company's 2022 senior notes in
premiums of
2022.
Additional information on the early debt redemption and open market repurchases 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 and the Liquidity and Capital Resources section of this MD&A.
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 5 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Additional information on foreign exchange rates and the effects of foreign exchange rate changes can be found in Part I, Item 3 of this Quarterly Report on Form 10-Q.
Three months ended
Net foreign exchange loss was
• Higher realized foreign exchange losses on the settlement of
financing debt issued from
losses on the settlement of
exchange losses on the translation of
issued from Canada ($6 million );
52
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partially offset by:
• Higher gains on monetary revaluations (
Nine months ended
Net foreign exchange loss of
• Lower realized foreign exchange gains on the settlement of
management contracts issued from
exchange losses on the settlement of
exchange losses on the translation of
issued from
partially offset by:
• Gains on monetary revaluations compared to losses in 2021 (
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, reclamation charges relating to decommissioned assets, government stimulus programs and adjustments related to other assets. Other gains in the first nine months of 2022 includes interest income of$24 million (2021 -$13 million ) primarily associated with the resolution of prior years' tax items. Income Tax Three months ended September 30, Nine months ended September 30, ($ millions) 2022 2021 2022 2021 Current Income Tax Expense (Recovery) $ - $ - $ 10 $ (156 ) Deferred Income Tax Expense (Recovery) 88 1 138 (19 ) Income Tax Expense (Recovery) $ 88 $ 1 $ 148 $ (175 ) Effective Tax Rate 6.9% (1.4% ) 6.0% 122.4%
Income Tax Expense (Recovery)
Three months ended
In the third quarter of 2022,
Nine months ended
In the first nine months of 2022,Ovintiv recorded an income tax expense of$148 million compared to an income tax recovery of$175 million in 2021, primarily due to the resolution of prior years' tax items recognized in 2021 and the changes in valuation allowances. 53
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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, changes in valuation allowances, income tax related to foreign operations, state taxes, the effect of legislative changes, non-taxable items and tax differences on transactions, which can produce interim effective tax rate fluctuations. For the third quarter and the first nine months of 2022, the Company's effective tax rates were 6.9 percent and 6.0 percent, respectively, which are lower than theU.S. federal statutory tax rate of 21 percent primarily due to the lower annual effective income tax rate resulting from a reduction in valuation allowances. The Company's effective tax rate was (1.4) percent for the third quarter of 2021, which was lower than theU.S federal statutory tax rate of 21 percent primarily due to the change in valuation allowances. The Company's effective tax rate was 122.4 percent for the first nine months of 2021, which was higher than theU.S federal statutory tax rate of 21 percent primarily due to the resolution of prior years' tax items and the change in valuation allowances. 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 tax 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.
Additional information on income taxes 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.
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 and capital allocation framework or to manage its capital structure as discussed below. AtSeptember 30, 2022 ,$15 million in cash and cash equivalents was held by Canadian subsidiaries. The cash held by Canadian subsidiaries is accessible and may be subject to additionalU.S. income taxes and Canadian withholding taxes if repatriated. The Company's capital structure consists of total shareholders' equity plus long-term debt, including any current portion. The Company's objectives when managing its capital structure are to maintain financial flexibility to preserveOvintiv's access to capital markets and its ability to meet financial obligations and finance internally generated growth, as well as potential acquisitions.Ovintiv has a practice of maintaining capital discipline and strategically managing its capital structure by adjusting capital spending, adjusting dividends paid to shareholders, issuing new shares of common stock, purchasing shares of common stock for cancellation or return to treasury, issuing new debt and repaying or repurchasing existing debt. As at September 30, ($ millions, except as indicated) 2022 2021 Cash and Cash Equivalents$ 18 $ 8 Available Credit Facilities (1) 3,500 4,000 Available Uncommitted Demand Lines (2) 296 278 Issuance of U.S. Commercial Paper (440 ) - Total Liquidity$ 3,374 $ 4,286
Long-Term Debt, including current portion
$ 6,550 $ 3,797 Debt to Capitalization (%) (4) 36 56 Debt to Adjusted Capitalization (%) (5) 20 29 54
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(1) 2022 includes available credit facilities of
(2) Includes three uncommitted demand lines totaling
million in related undrawn letters of credit (2021 -
million, respectively).
(3) Shareholders' Equity reflects the shares of common stock purchased, for
cancellation, under the Company's NCIB program initiated in 2021.
(4) Calculated as long-term debt, including the current portion, divided by
shareholders' equity plus long-term debt, including the current portion.
(5) A non-GAAP measure which is defined in the Non-GAAP Measures section of this
MD&A.
In March, the Company commenced negotiations to amend and restate its committed revolving credit facilities. EffectiveApril 1, 2022 , the Company has access to two committed revolvingU.S. dollar denominated credit facilities totaling$3.5 billion , which include a$2.2 billion revolving credit facility forOvintiv Inc. and a$1.3 billion revolving credit facility for a Canadian subsidiary (collectively, the "Credit Facilities"). Maturity dates for both credit facilities were extended toJuly 2026 and the Company has full access to these Credit Facilities. The Credit Facilities provide financial flexibility and allow the Company to fund its operations or capital investment program. AtSeptember 30, 2022 , there were no outstanding amounts under the revolving Credit Facilities.
During the first quarter of 2022,
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. As atSeptember 30, 2022 , the Company had approximately$440 million of commercial paper outstanding under itsU.S. CP programs which is supported by the Company's Credit Facilities. The Credit Facilities, uncommitted demand lines, and cash and cash equivalents provideOvintiv with total liquidity of approximately$3.4 billion as atSeptember 30, 2022 . AtSeptember 30, 2022 ,Ovintiv also had approximately$23 million in undrawn letters of credit issued in the normal course of business primarily as collateral security, related to transportation arrangements and to support future abandonment liabilities.Ovintiv has aU.S. shelf registration statement under which the Company may issue from time to time, debt securities, common stock, preferred stock, warrants, units, share purchase contracts and share purchase units in theU.S. TheU.S. shelf registration statement expires inMarch 2023 . The ability to issue securities under theU.S. shelf registration statement is dependent upon market conditions and securities law requirements.Ovintiv is currently in compliance with, and expects that it will continue to be in compliance with, all financial covenants under the Credit Facilities. Management monitors Debt to Adjusted Capitalization, which is a non-GAAP measure defined in the Non-GAAP Measures section of this MD&A, as a proxy forOvintiv's financial covenant under the Credit Facilities, which requires Debt to Adjusted Capitalization to be less than 60 percent. As atSeptember 30, 2022 , the Company's Debt to Adjusted Capitalization was 20 percent. The definitions used in the covenant under the Credit Facilities adjust capitalization for cumulative historical ceiling test impairments recorded in conjunction with the Company'sJanuary 1, 2012 adoption ofU.S. GAAP. Additional information on financial covenants can be found in Note 15 to the Consolidated Financial Statements included in Item 8 of the 2021 Annual Report on Form 10K. 55
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Sources and Uses of Cash
In the third quarter and first nine months of 2022,Ovintiv primarily generated cash through operating activities. The following table summarizes the sources and uses of the Company's cash and cash equivalents. Nine months ended Three months ended September 30, September 30, ($ millions) Activity Type 2022 2021 2022 2021 Sources of Cash, Cash Equivalents and Restricted Cash Cash from operating activities Operating$ 962 $ 812$ 2,991 $ 2,389 Proceeds from divestitures Investing 225 (8 ) 230 1,017 Net issuance of revolving long-term debt Financing 225 - 440 - Other Investing 34 6 82 - 1,446 810 3,743 3,406 Uses of Cash and Cash Equivalents Capital expenditures Investing 511 365 1,473 1,098 Acquisitions Investing 12 - 34 3 Net repayment of revolving long-term debt Financing - - - 950 Repayment of long-term debt (1) Financing 525 518 1,634 1,137 Purchase of shares of common stock Financing 325 - 531 - Dividends on shares of common stock Financing 62 37 178 86 Other Investing/Financing 2 2 68 134 1,437 922 3,918 3,408 Foreign Exchange Gain (Loss) on Cash, Cash Equivalents and Restricted Cash Held in Foreign Currency 1 (2 ) (2 ) - Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash$ 10
$ (114 )
(1) Includes open market repurchases in 2022.
Operating Activities
Net cash from operating activities in the third quarter and first nine months of 2022 was$962 million and$2,991 million , respectively, and was primarily a reflection of the impacts from higher average realized commodity prices, partially offset by 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 19
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 third quarter and first nine months of 2022 was$948 million and$3,215 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 increased
• Higher realized commodity prices (
capital (
long-term incentive costs and current expected credit losses (
partially offset by:
• Higher realized losses on risk management in revenues compared to 2021 (
million), lower production volumes (
excluding non-cash long-term incentive costs (
transportation and processing expense (
mineral and other taxes ($32 million ).
56
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Nine months ended
Net cash from operating activities increased
• Higher realized commodity prices (
partially offset by:
• Higher realized losses on risk management in revenues compared to 2021
(
recovery mainly due to the resolution of prior years' tax items in 2021 of
(
incentive costs (
million) and higher production, mineral and other taxes (
Investing Activities Cash used in investing activities in the first nine months of 2022 was$1,195 million primarily due to capital expenditures. Capital expenditures increased$375 million compared to the first nine months of 2021, primarily due to timing of projects and inflationary cost pressures.
Acquisitions in the first nine months of 2022 were
Divestitures in the first nine months of 2022 were$230 million , which primarily included the sale of portions of the Uinta assets located in northeasternUtah and Bakken assets location in northeasternMontana , as well as certain properties that did not complementOvintiv's existing portfolio of assets.
Divestitures in the first nine months of 2021 were
Capital expenditures and acquisition and divestiture activity are summarized in Notes 2 and 7 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 strategic objective to return value to shareholders by repaying or repurchasing existing debt, purchasing shares of common stock and paying dividends.
Net cash used in financing activities in the first nine months of 2022 decreased by$300 million compared to 2021. The decrease was primarily due to a net issuance of revolving long-term debt compared to a net repayment in 2021 ($1,390 million ), partially offset by increased purchases of shares of common stock under the Company's NCIB program in 2022 compared to 2021 ($531 million ), higher repayment of long-term debt associated with open market repurchases in 2022 and the early redemption of the Company's 2024 senior notes inJune 2022 compared to the early redemption of the Company's 2022 senior notes inJune 2021 ($497 million ) and an increase in dividend payments in 2022 ($92 million ). 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, the Company's liquidity requirements, contractual restrictions and other factors. In the first nine months of 2022, the Company repurchased in the open market, approximately$565 million in principal, plus accrued interest and premiums, which included a portion of its 5.375 percent senior notes dueJanuary 2026 , its 6.5 percent senior notes dueAugust 2034 , its 6.625 percent senior notes dueAugust 2037 , its 6.5 percent senior notes dueFebruary 2038 and its 5.15 percent senior notes dueNovember 2041 . The Company paid premiums of$22 million to complete the open market repurchases. InJune 2022 ,Ovintiv redeemed its$1.0 billion , 5.625 percent senior notes dueJuly 1, 2024 , with cash on hand and other existing sources of liquidity. The redemption resulted in a one-time make-whole payment of$47 million . 57
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The Company's long-term debt, including the current portion of$440 million , totaled$3,618 million atSeptember 30, 2022 . The Company's long-term debt atDecember 31, 2021 totaled$4,786 million . There was no current portion outstanding atDecember 31, 2021 . As atSeptember 30, 2022 , the Company has no fixed rate long-term debt due until 2026 and beyond. In support of the Company's commitment to unlocking shareholder value,Ovintiv utilizes its capital allocation framework to increase returns to shareholders and maintain the Company's progress on debt reduction. Since the second quarter of 2020, the Company has allocated$3,748 million in excess cash flows to reduce its total long-term debt balance. OnJuly 6, 2022 ,Ovintiv elected to accelerate the increase in cash returns to shareholders as a result of the Company's continued strong financial performance and the asset sales that closed during the third quarter of 2022. During the third quarter of 2022, the Company increased its cash return to shareholders from 25 percent to 50 percent of Non-GAAP Cash Flow in excess of capital expenditures and base dividends.Ovintiv delivered the additional shareholder returns through share buybacks under its NCIB program.
For additional information on long-term debt, refer to Note 10 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Dividends
The Company pays quarterly dividends to common shareholders at the discretion of the Board of Directors.
Three months ended September 30, Nine months ended September 30,
($ millions, except as indicated) 2022 2021 2022 2021
Dividend Payments $ 62 $ 37 $ 178 $ 86
Dividend Payments ($/share) $ 0.25 $ 0.14 $ 0.70 $ 0.3275
On November 8, 2022 , the Board of Directors declared a dividend of $0.25 per
share of common stock payable on December 30, 2022 to common shareholders of
record as of December 15, 2022 .
Dividends increased $92 million compared to the first nine months of 2021, as a
result of Ovintiv increasing its quarterly dividend payments to an annualized
dividend of $0.80 per share of common stock during the first quarter of 2022 and
a further increase to an annualized dividend of $1.00 per share of common stock
in the second quarter of 2022. The dividend increases reflect the Company's
commitment to returning capital to shareholders.
Normal Course Issuer Bid
OnSeptember 28, 2022 , the Company announced it had received regulatory approval for the renewal of its NCIB program, that enables the Company to purchase, for cancellation or return to treasury, up to approximately 24.8 million shares of common stock over a 12-month period fromOctober 3, 2022 toOctober 2, 2023 . The number of shares authorized for purchase represents approximately 10 percent ofOvintiv's issued and outstanding shares of common stock as atSeptember 19, 2022 . The Company will continue to execute the renewed NCIB program in conjunction with its capital allocation framework. In the third quarter and first nine months of 2022, under the previous NCIB program, which extended fromOctober 1, 2021 toSeptember 30, 2022 , the Company purchased, for cancellation, approximately 6.7 million and 11.2 million shares of common stock for total consideration of approximately$325 million and$531 million , respectively. Material Cash Requirements
For information on material cash requirements, refer to the Material Cash Requirements section of the MD&A included in Item 7 of the 2021 Annual Report on Form 10-K.
Commitments and Contingencies
For information on commitments and contingencies, refer to Note 20 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
58
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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, Net Debt 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 investment 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.
Three months ended September 30, Nine months ended September 30,
($ millions, except as indicated) 2022 2021 2022 2021
Cash From (Used in) Operating
Activities $ 962 $ 812 $ 2,991 $ 2,389
(Add back) deduct:
Net change in other assets and
liabilities (17 ) (10 ) (42 ) (21 )
Net change in non-cash working
capital 31 (23 ) (182 ) (58 )
Current tax on sale of assets - - - -
Non-GAAP Cash Flow $ 948 $ 845 $ 3,215 $ 2,468 Divided by: Production Volumes (MMBOE)
47.5 49.2 138.0 148.1
Non-GAAP Cash Flow Margin ($/BOE) $ 19.96 $ 17.17 $ 23.30 $ 16.66
59
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Total Costs
Total Costs is a non-GAAP measure which includes the summation of production,
mineral and other taxes, upstream transportation and processing expense,
upstream operating expense and administrative expense, excluding the impact of
long-term incentive, restructuring and legal costs, and current expected credit
losses. It is calculated as total operating expenses excluding non-upstream
operating costs and non-cash items, which include operating expenses from the
Market Optimization and Corporate and Other segments, depreciation, depletion
and amortization, impairments, accretion of asset retirement obligation,
long-term incentive, restructuring and legal costs, and current expected credit
losses. When presented on a per BOE basis, Total Costs is divided by production
volumes. Management believes this measure is useful to the Company and its
investors as a measure of operational efficiency across periods.
Three months ended September 30, Nine months ended September 30,
($ millions, except as indicated) 2022 2021 2022 2021
Total Operating Expenses $ 2,176 $ 1,789 $ 6,563 $ 5,245
Deduct (add back):
Market optimization operating
expenses 1,021 808 3,298 2,245
Corporate & other operating
expenses - 1 - 1
Depreciation, depletion and
amortization 291 297 833 916
Accretion of asset retirement
obligation 4 5 14 17
Long-term incentive costs 44 31 145 112
Restructuring and legal costs - 6 (1 ) 37
Current expected credit losses - - 2 (1 )
Total Costs $ 816 $ 641 $ 2,272 $ 1,918 Divided by: Production Volumes (MMBOE)
47.5 49.2 138.0 148.1
Total Costs ($/BOE) (1) $ 17.16 $ 13.03 $ 16.45 $ 12.97
(1) Calculated using whole dollars and volumes.
Debt to Adjusted Capitalization
Debt to Adjusted Capitalization is a non-GAAP measure which adjusts capitalization for historical ceiling test impairments that were recorded as atDecember 31, 2011 . Management monitors Debt to Adjusted Capitalization as a proxy for the Company's financial covenant under the Credit Facilities which require debt to adjusted capitalization to be less than 60 percent. Adjusted Capitalization includes debt, total shareholders' equity and an equity adjustment for cumulative historical ceiling test impairments recorded as atDecember 31, 2011 in conjunction with the Company'sJanuary 1, 2012 adoption ofU.S. GAAP. ($ millions, except as indicated)September 30 ,
2022
Long-Term Debt, including current portion $ 3,618 $ 4,786 Total Shareholders' Equity 6,550 5,074 Equity Adjustment for Impairments at December 31, 2011 7,746 7,746 Adjusted Capitalization $ 17,914 $ 17,606 Debt to Adjusted Capitalization 20% 27% 60
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Net Debt and Net Debt to Adjusted EBITDA
Net Debt and Net Debt to Adjusted EBITDA are non-GAAP measures whereby Net Debt is defined as long-term debt, including the current portion, less cash and cash equivalents and Adjusted EBITDA is defined as trailing 12-month net earnings (loss) before income taxes, depreciation, depletion and amortization, impairments, accretion of asset retirement obligation, interest, unrealized gains/losses on risk management, foreign exchange gains/losses, gains/losses on divestitures and other gains/losses. Management believes these measures are useful to the Company and its investors as a measure of financial leverage and the Company's ability to service its debt and other financial obligations. These measures are used, along with other measures, in the calculation of certain financial performance targets for the Company's management and employees. ($ millions, except as indicated)September 30, 2022
Long-Term Debt, including current portion $ 3,618 $ 4,786 Less: Cash and cash equivalents 18 195 Net Debt 3,600 4,591 Net Earnings (Loss) 3,686 1,416 Add back (deduct): Depreciation, depletion and amortization 1,107 1,190 Accretion of asset retirement obligation 19 22 Interest 325 340 Unrealized (gains) losses on risk management (1,149 ) 488 Foreign exchange (gain) loss, net 13 (23 ) Other (gains) losses, net (36 ) (37 ) Income tax expense (recovery) 146 (177 ) Adjusted EBITDA (trailing 12-month) $ 4,111 $ 3,219 Net Debt to Adjusted EBITDA (times) 0.9 1.4 61
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