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, 2021 ("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, 2020 , which are included in Items 8 and 7, respectively, of the 2020 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 stockholder value through a combination of profitable growth and generating cash flows. The Company is pursuing the key business objectives of preserving financial strength, maximizing profitability through operational and capital efficiencies, paying sustainable dividends, and generating cash flows through a disciplined capital allocation strategy by investing in a limited number of core assets with high margin liquids. To support the Company's business objectives,Ovintiv actively monitors and manages market volatility through the diversification of price risks, and market access risks to enhance returns and maintain a consistent cash flow stream. In conjunction withOvintiv's focus on preserving financial strength, the Company is targeting a long-term debt balance, less cash and cash equivalents held, of approximately$3.0 billion by the end of 2023.Ovintiv is also committed to 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 decreasing emissions intensity. The Company's annual Sustainability Report outlining its key metrics and progress achieved relating to environmental, social and governance ("ESG") practices can be found on the Company's website. 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 continually reviews and evaluates its strategy and changing market conditions in order to maximize cash flow generation from its top tier assets located in some of the best plays inNorth America , referred to as the "Core Assets". As atJune 30, 2021 , 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 2020 Annual Report on Form 10-K. 35
-------------------------------------------------------------------------------- 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 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.
Highlights
During the first six months of 2021, the Company focused on executing its 2021 capital plan aimed at maximizing profitability through operational and capital efficiencies, delivering cash from operating activities and using excess cash flows to reduce total long-term debt. Higher upstream product revenues in the first six months of 2021 compared to 2020 resulted from higher average realized prices, excluding the impact of risk management activities. Increases in average realized liquids and natural gas prices of 92 percent and 79 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 continued to deliver significant cash from operating activities while reducing its total long-term debt balance. Cash from operating activities of$1,577 million included a net realized loss of$379 million on settlement of risk management positions and a current income tax recovery of$156 million primarily due to the resolution of certain tax items relating to prior taxation years. The Company used excess cash flows to reduce its total long-term debt balance by$1,571 million in the first six months of 2021.
Significant Developments
• On
closing and other adjustments. The transaction had an effective date of
January 1, 2021 .
• On
closing and other adjustments. The transaction had an effective date of
January 1, 2021 .
• On
million, 3.90 percent senior notes due
notes were redeemed on
announced it expects to redeem the 2021 senior notes on
combined redemptions represent approximately $1.1 billion of debt
repayments, resulting in expected annualized interest savings of over $50
million .
• On
quarterly dividend payment representing an annualized dividend of
share of common stock as part of the Company's commitment to returning
capital to shareholders.
Financial Results
Three months ended
• Reported net loss of
in revenues of
• Generated cash from operating activities of
of
• Paid dividends of
• Reduced total long-term debt by$1,104 million . 36
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Six months ended
• Reported net earnings of
management in revenues of
tax recovery of
• Generated cash from operating activities of
Flow of
• Paid dividends of
• Had
available credit facilities of
lines of $281 million , and cash and cash equivalents of $122 million .
• Reduced total long-term debt by $1,571 million .
• Reported Net Debt to Adjusted EBITDA of 1.9 times.
• Continued to execute the Company's 2021 capital plan with expenditures
totaling
the Core Assets.
• 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 286.7 Mbbls/d, which accounted for
52 percent of total production volumes. Average oil and plant condensate
volumes of 200.8 Mbbls/d, represented 70 percent of total liquids production
volumes.
• Produced average natural gas volumes of 1,607 MMcf/d, which accounted for 48
percent of total production volumes.
Six months ended
• Produced average liquids volumes of 281.2 Mbbls/d, which accounted for
51 percent of total production volumes. Average oil and plant condensate
volumes of 199.4 Mbbls/d, represented 71 percent of total liquids production
volumes.
• Produced average natural gas volumes of 1,591 MMcf/d, which accounted for 49
percent of total production volumes.
Operating Expenses
• Incurred Total Costs in the first six months of 2021 of
compared to the first six months of 2020. Total Costs is defined in the
Non-GAAP Measures section of this MD&A. Significant items in the first six
months of 2021 compared to 2020 impacting Total Costs include:
o Higher upstream transportation and processing expenses of $64 million ,
primarily due to higher production volumes in Montney and a higher
U.S. /Canadian dollar exchange rate;
o Higher production, mineral and other taxes of $54 million , primarily
due to higher commodity prices;
o Higher administrative expenses, excluding long-term incentive,
restructuring and legal costs, and current expected credit losses of
$7 million , primarily due to higher consulting costs; and
o Lower upstream operating expenses, excluding long-term incentive costs
of $30 million , primarily due to durable cost savings including
workforce reductions in 2020.
37
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• Total Operating Expenses in the first six months of 2021 of
decreased by
impairment of
Additional information on Total Costs items and Total Operating Expenses above can be found in the Results of Operations section of this MD&A.
2021 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.
Oil prices during 2021 will continue to be impacted by the global containment of
the coronavirus ("COVID-19"), pace of economic recovery, OPEC+ production
levels, and the potential for higher U.S. production. The accelerating
distribution of COVID-19 vaccines continues to drive optimism and oil demand as
countries reopen their economies. Upward pressures on oil prices and the
tightening of global oil inventories during the first six months of 2021 were
mainly caused by ongoing OPEC+ production cuts and increased global demand for
oil.
As announced in the OPEC+ April 2021 meeting, May and June production levels
were adjusted, allowing for gradual increases in production output and in June,
OPEC+ reaffirmed commitments to adjust July production levels for similar
increases. In July, OPEC+ announced monthly production increases starting from
August until December 2021 . OPEC+ will assess market developments in December
and continue to meet regularly to review the state of global oil supply, demand
and inventory levels.
Despite signs of economic recovery centered on the COVID-19 vaccine rollouts and
OPEC+ production cuts, oil markets remain volatile. The emergence of COVID-19
variants may threaten the reopening of economies in certain countries while the
gradual easing of OPEC+ oil production cuts and the potential for higher U.S.
oil production could contribute to commodity market uncertainty.
Natural Gas Markets
Natural gas prices are primarily affected by structural changes in supply and demand as well as deviations from seasonally normal weather. In combination, these factors contributed to increased drawdowns of natural gas inventory and generally supported natural gas prices in the first six months of 2021. Natural gas prices for the remainder of 2021 are expected to be impacted by the interplay between gas production and associated gas from oil production, as well as changes in demand from the power generation sector and changes in export levels of liquified natural gas.
Company Outlook
The Company continues to exercise discretion and discipline to optimize capital allocation throughout 2021 as oil demand recovers and the commodity price environment evolves.Ovintiv pursues innovative ways to reduce upstream operating and administrative expenses and expects to benefit from durable cost savings and efficiencies to maximize cash flows. 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. To mitigate price volatility and help sustain revenues, particularly during periods of low commodity prices, the Company enters into derivative financial instruments. As atJuly 15, 2021 , the Company has hedged approximately 130.0 Mbbls/d of expected crude oil and condensate production and 1,170 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$1.5 billion 2021 capital investment program, the majority of which is allocated to the Core Assets with a focus on maximizing returns from high margin liquids to optimize cash flows. During the first six months of 2021, the Company spent$733 million , of which$344 million was directed to Permian,$193 million was directed toMontney ,$153 million was directed toAnadarko and the remainder was primarily directed to other upstream assets.Ovintiv will continue to evaluate its capital investment plans as the global economic environment evolves.Ovintiv continually strives to improve well performance and lower costs through innovative techniques. Initiatives such as applying Simul-Frac techniques, a process of fracking pairs of wells at the same time instead of a single well, increases operational efficiencies and contributes to well cost savings.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. ProductionOvintiv is strategically positioned in the current environment to maintain a flat liquids production profile while generating significant cash flows in excess of capital expenditures. During the first six months 2021, average liquids production volumes were 281.2 Mbbls/d, or 51 percent of total production volumes, and average oil and plant condensate production volumes were 199.4 Mbbls/d, or 71 percent of total liquids production volumes. Average natural gas production volumes were 1,591 MMcf/d, or 49 percent of total production volumes. During the second quarter of 2021, the Company updated its full year 2021 guidance for oil and plant condensate production volumes to approximately 190.0 Mbbls/d to 195.0 Mbbls/d, other NGLs production volumes to approximately 80.0 Mbbls/d to 85.0 Mbbls/d and natural gas production volumes to approximately 1,550 MMcf/d to 1,575 MMcf/d. The updated guidance reflects the recently completed divestitures.
Operating Expenses
The Company will continue to benefit from cost savings measures implemented in 2020 which included workforce reductions and operating efficiencies.Ovintiv continues to pursue innovative ways to reduce upstream operating and administrative expenses. With rising activity in the oil and gas industry and the recovery of commodity prices, service and supply costs are expected to increase. The Company strives to minimize any inflationary pressures with efficiency improvements and effective supply chain management. For 2021,Ovintiv has revised its expectation of Total Costs to approximately$12.95 per BOE to$13.20 per BOE to reflect higher than expected changes in foreign exchange rates and increased production taxes resulting from higher than expected commodity prices. Total Costs were$12.92 per BOE in the first six months of 2021. Total Costs is defined in the Non-GAAP Measures section of this MD&A. Long-Term Debt ReductionOvintiv remains focused on strengthening its balance sheet. Since the second quarter of 2020, the Company has allocated$2,052 million in excess cash flows to reduce its total long-term debt balance, which included proceeds from theDuvernay andEagle Ford asset divestitures. The Company is targeting a long-term debt balance, less cash and cash equivalents held, of approximately$3.0 billion by the end of 2023. The Company expects lower interest expense as it reaches its debt reduction target. InJune 2021 , the Company redeemed its$600 million , 5.75 percent senior notes dueJanuary 30, 2022 . The Company also expects to redeem its$518 million , 3.90 percent senior notes dueNovember 15, 2021 in mid-August. The combined redemptions represent approximately$1.1 billion of debt repayments, resulting in expected annualized interest savings of over$50 million .
As at
39
-------------------------------------------------------------------------------- Additional information onOvintiv's long-term debt and liquidity position can be found in Note 10 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Liquidity and Capital Resources section of this MD&A, respectively.
Additional information on
Environmental, Social and Governance
Ovintiv recognizes the importance of reducing its environmental footprint and voluntarily participates in emission reduction programs. The Company has targeted a 33 percent reduction in methane intensity which has been tied to its annual incentive compensation program for all employees beginning in 2021.Ovintiv is on track to meet the reduction target by the end of 2021.
Additional information on
40
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Results of Operations
Selected Financial Information
Three months ended June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
Product and Service Revenues
Upstream product revenues $ 1,723 $ 673 $ 3,317 $ 1,824
Market optimization 748 348 1,400 767
Service revenues (1) 2 2 3 2
Total Product and Service Revenues 2,473 1,023 4,720 2,593
Gains (Losses) on Risk Management, Net (799 ) (314 ) (1,226 ) 741
Sublease Revenues 18 17 36 35
Total Revenues 1,692 726 3,530 3,369
Total Operating Expenses (2) 1,813 4,785 3,456 6,669
Operating Income (Loss) (121 ) (4,059 ) 74 (3,300 )
Total Other (Income) Expenses 84 30 146 228
Net Earnings (Loss) Before Income Tax (205 ) (4,089 ) (72 ) (3,528 )
Income Tax Expense (Recovery) - 294 (176 ) 434
Net Earnings (Loss) $ (205 ) $ (4,383 ) $ 104 $ (3,962 ) (1) Service revenues include amounts related to the
(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) 2021 2020 2021 2020
Oil & NGLs
WTI ($/bbl) $ 66.07 $ 27.85 $ 61.96 $ 37.01
Houston ($/bbl) 67.02 29.43 63.19 39.46
Edmonton Condensate (C$/bbl) 81.52 30.71 77.50 46.22
Natural Gas
NYMEX ($/MMBtu) $ 2.83 $ 1.72 $ 2.76 $ 1.83
AECO (C$/Mcf) 2.85 1.91 2.89 2.03
Dawn (C$/MMBtu) 3.42 2.25 3.70 2.32
41
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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)
2021 2020 2021 2020 2021 2020 2021 2020
Oil (Mbbls/d, $/bbl)
USA Operations 148.2 146.0 $ 63.65 $ 22.95 146.9 153.9 $ 60.04 $ 33.74
Canadian Operations 0.3 0.5 60.68 11.90 0.6 0.6 54.58 28.38
Total 148.5 146.5 63.65 22.91 147.5 154.5 60.02 33.72
NGLs - Plant Condensate
(Mbbls/d, $/bbl)
USA Operations 10.5 11.0 55.54 12.47 10.1 10.9 53.44 23.51
Canadian Operations 41.8 40.8 64.85 20.48 41.8 41.3 61.07 32.36
Total 52.3 51.8 62.98 18.79 51.9 52.2 59.58 30.51
NGLs - Other (Mbbls/d,
$/bbl)
USA Operations 69.2 67.2 20.10 7.83 65.2 72.4 20.31 7.56
Canadian Operations 16.7 12.9 23.88 9.56 16.6 15.0 25.33 8.08
Total 85.9 80.1 20.83 8.11 81.8 87.4 21.34 7.65
Total Oil & NGLs
(Mbbls/d, $/bbl)
USA Operations 227.9 224.2 50.05 17.91 222.2 237.2 48.09 25.28
Canadian Operations 58.8 54.2 53.19 17.79 59.0 56.9 50.91 25.91
Total 286.7 278.4 50.70 17.88 281.2 294.1 48.68 25.40
Natural Gas (MMcf/d,
$/Mcf)
USA Operations 497 536 2.60 1.33 478 552 2.78 1.37
Canadian Operations 1,110 1,014 2.81 1.69 1,113 1,007 2.96 1.78 Total 1,607 1,550 2.75 1.57 1,591 1,559 2.91 1.63 Total Production (MBOE/d, $/BOE) USA Operations 310.8 313.4 40.87 15.09 301.8 329.2 39.80 20.52 Canadian Operations 243.8 223.2 25.67 11.99 244.7 224.8 25.79 14.50 Total 554.6 536.6 34.20 13.80 546.5 554.0 33.54 18.08 Production Mix (%) Oil & Plant Condensate 36 37 36 37 NGLs - Other 16 15 15 16 Total Oil & NGLs 52 52 51 53 Natural Gas 48 48 49 47 Production Change Year Over Year (%) (3) Total Oil & NGLs 3 (14 ) (4 ) 6 Natural Gas 4 (4 ) 2 3 Total Production 3 (9 ) (1 ) 4 Core Assets Production Oil (Mbbls/d) 115.9 107.9 108.8 109.6 NGLs - Plant Condensate (Mbbls/d) 50.1 45.9 48.9 46.0 NGLs - Other (Mbbls/d) 78.5 71.8 73.8 77.7 Total Oil & NGLs (Mbbls/d) 244.5 225.6 231.5 233.3 Natural Gas (MMcf/d) 1,500 1,392 1,467 1,399 Total Production (MBOE/d) 494.5 457.6 475.9 466.4 % of Total Production 89 85 87 84 (1) Average daily.
(2) Average per-unit prices, excluding the impact of risk management activities.
(3) Includes production impacts from acquisitions and divestitures.
42
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Upstream Product Revenues
Three months ended June 30,
NGLs - Plant Natural
($ millions) Oil Condensate NGLs - Other Gas Total
2020 Upstream Product Revenues (1) $ 306 $ 89 $ 58 $ 220 $ 673
Increase (decrease) due to:
Sales prices 549 210 99 172 1,030
Production volumes 4 1 5 9 19
2021 Upstream Product Revenues $ 859 $ 300 $ 162 $ 401 $ 1,722
Six months ended June 30,
NGLs - Plant Natural
($ millions) Oil Condensate NGLs - Other Gas Total
2020 Upstream Product Revenues (1) $ 949 $ 290 $ 121 $ 464 $ 1,824
Increase (decrease) due to:
Sales prices 701 271 202 363 1,537
Production volumes (48 ) (2 ) (8 ) 11 (47 )
2021 Upstream Product Revenues $ 1,602 $ 559 $
315
(1) Revenues for the second quarter and first six months of 2021 exclude certain
other revenue and royalty adjustments with no associated production volumes
of
Oil Revenues
Three months ended
Oil revenues increased
• Higher average realized oil prices of
increased revenues by
respectively, and the strengthening of regional pricing relative to the WTI
benchmark price in the
• Higher average oil production volumes of 2.0 Mbbls/d increased revenues by
million. Higher volumes were primarily due to successful drilling in Permian
(9.9 Mbbls/d), production shut-ins due to the economic downturn in 2020 (9.0
Mbbls/d) and third-party gathering capacity constraints in 2020 (3.3
Mbbls/d), partially offset by natural declines surpassing incremental
production in
the Eagle Ford assets in the second quarter of 2021 (6.6 Mbbls/d).
Six months ended
Oil revenues increased
• Higher average realized oil prices of
increased revenues by
respectively, and the strengthening of regional pricing relative to the WTI
benchmark price in the
• Lower average oil production volumes of 7.0 Mbbls/d decreased revenues by
million. Lower volumes were primarily due to natural declines surpassing
incremental production in
severe winter weather conditions in Permian and
the sale of the Eagle Ford assets in the second quarter of 2021 (3.3
Mbbls/d), partially offset by successful drilling in Permian (5.7 Mbbls/d),
production shut-ins due to the economic downturn in 2020 (4.4 Mbbls/d) and
third-party gathering capacity constraints (1.7 Mbbls/d).
43
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NGL Revenues
Three months ended
NGL revenues increased
• Higher average realized plant condensate prices of
percent, increased revenues by
Edmonton Condensate and WTI benchmark prices which were up 165 percent and
137 percent, respectively, as well as higher regional pricing relative to the
WTI benchmark price in the Canadian Operations;
• Higher average realized other NGL prices of
increased revenues by
prices and higher regional pricing;
• Higher average other NGL production volumes of 5.8 Mbbls/d increased revenues
by
economic downturn in 2020 (3.1 Mbbls/d), partially offset by natural declines
in
Ford assets in the second quarter of 2021 (1.7 Mbbls/d); and
• Higher average plant condensate production volumes of 0.5 Mbbls/d increased
revenues by
shut-ins due to the economic downturn in 2020 (2.8 Mbbls/d) and successful
drilling in
the second quarter of 2021 (1.8 Mbbls/d).
Six months ended
NGL revenues increased
• Higher average realized plant condensate prices of
percent, increased revenues by
Edmonton Condensate and WTI benchmark prices which were up 68 percent and 67
percent, respectively, as well as higher regional pricing relative to the WTI
benchmark price;
• Higher average realized other NGL prices of
increased revenues by
prices and higher regional pricing;
• Lower average other NGL production volumes of 5.6 Mbbls/d decreased revenues
by
conditions in
Ford assets in the second quarter of 2021 (0.9 Mbbls/d), partially offset by
successful drilling in
• Lower average plant condensate production volumes of 0.3 Mbbls/d decreased
revenues by
in
in the second quarter of 2021 (0.9 Mbbls/d), partially offset by successful
drilling in
Natural Gas Revenues
Three months ended
Natural gas revenues increased
• Higher average realized natural gas prices of
increased revenues by
and AECO benchmark prices which were up 65 percent, 52 percent and 49
percent, respectively, and higher regional pricing; and
• Higher average natural gas production volumes of 57 MMcf/d increased revenues
by
and production shut-ins due to the economic downturn in 2020 (27 MMcf/d),
partially offset by natural declines in
the sales of the
(34 MMcf/d), and third-party plant issues in Montney (14 MMcf/d).
44
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Six months ended
Natural gas revenues increased
• Higher average realized natural gas prices of
increased revenues by
and AECO benchmark prices which were up 59 percent, 51 percent and 42
percent, respectively, and higher regional pricing; and
• Higher average natural gas production volumes of 32 MMcf/d increased revenues
by
and production shut-ins due to the economic downturn in 2020 (14 MMcf/d),
partially offset by natural declines in
MMcf/d), the sales of the
quarter of 2021 (17 MMcf/d), severe winter weather conditions in
Permian (15 MMcf/d), and third-party plant issues in
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, 2021 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.
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) 2021 2020 2021 2020
Realized Gains (Losses) on Risk
Management
Commodity Price (1)
Oil $ (167 ) $ 223 $ (284 ) $ 305
NGLs - Plant Condensate (35 ) 59 (60 ) 82
NGLs - Other (20 ) 7 (39 ) 12
Natural Gas (2 ) 73 1 112
Other (2) 1 3 3 5
Total (223 ) 365 (379 ) 516
Unrealized Gains (Losses) on Risk
Management (576 ) (679 ) (847 ) 225
Total Gains (Losses) on Risk
Management, Net $ (799 ) $ (314 )
Three months ended June 30, Six months ended June 30,
(Per-unit) 2021 2020 2021 2020
Realized Gains (Losses) on Risk
Management
Commodity Price (1)
Oil ($/bbl) $ (12.38 ) $ 16.79 $ (10.64 ) $ 10.86
NGLs - Plant Condensate ($/bbl) $ (7.39 ) $ 12.58 $ (6.43 ) $ 8.65
NGLs - Other ($/bbl) $ (2.46 ) $ 0.90 $ (2.60 ) $ 0.75
Natural Gas ($/Mcf) $ (0.01 ) $ 0.52 $ - $ 0.39
Total ($/BOE) $ (4.44 ) $ 7.41 $ (3.86 ) $ 5.07 (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. 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 June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
Market Optimization $ 748 $ 348 $ 1,400 $ 767 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 (
Six 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. 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) 2021 2020 2021 2020
USA Operations $ 69 $ 24 $ 124 $ 72
Canadian Operations 4 3 9 7
Total $ 73 $ 27 $ 133 $ 79
Three months ended June 30, Six months ended June 30,
($/BOE) 2021 2020 2021 2020
USA Operations $ 2.43 $ 0.82 $ 2.27 $ 1.20
Canadian Operations $ 0.17 $ 0.17 $ 0.19 $ 0.18
Production, Mineral and Other Taxes $ 1.44 $ 0.55 $ 1.34 $ 0.79
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Three months ended
Production, mineral and other taxes increased
• Higher production tax in USA Operations due to higher commodity prices (
million).
Six months ended
Production, mineral and other taxes increased
• Higher production tax in USA Operations due to higher commodity prices (
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) 2021 2020 2021 2020 USA Operations $ 126$ 115 $ 239 $ 236 Canadian Operations 248 198 472 411 Upstream Transportation and Processing 374 313 711 647 Market Optimization 44 55 86 117 Total $ 418$ 368 $ 797 $ 764 Three months ended June 30, Six months ended June 30, ($/BOE) 2021 2020 2021 2020 USA Operations $ 4.44$ 4.07 $ 4.38 $ 3.95 Canadian Operations $ 11.24 $
9.75
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Three months ended
Transportation and processing expense increased
• Higher volumes in
exchange rate (
and Uinta ($10 million );
partially offset by:
• Expired contracts relating to previously divested assets and the
decommissioning of
Six months ended
Transportation and processing expense increased
• Higher volumes in
exchange rate (
million) and higher costs relating to the diversification of the Company's
downstream markets (
partially offset by:
• The expiration of certain transportation contracts in the
well as expired contracts relating to previously divested assets (
million), the decommissioning of
volumes in
certain transportation contracts (
Operating
Operating expense includes costs paid by the Company, net of amounts capitalized, on oil and natural gas properties in which the Company has a working interest. These costs primarily include labor, service contract fees, chemicals, fuel, water hauling, electricity and workovers.
Three months ended June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
USA Operations $ 117 $ 121 $ 246 $ 260
Canadian Operations 25 25 53 51
Upstream Operating Expense 142 146 299 311
Market Optimization 7 8 14 10
Corporate & Other - - - (2 )
Total $ 149 $ 154 $ 313 $ 319
Three months ended June 30, Six months ended June 30,
($/BOE) 2021 2020 2021 2020
USA Operations $ 4.16 $ 4.22 $ 4.51 $ 4.33
Canadian Operations $ 1.11 $ 1.20 $ 1.17 $ 1.23
Upstream Operating Expense (1) $ 2.82 $ 2.97 (1) Upstream Operating Expense per BOE for the second quarter and first six
months of 2021 include long-term incentive costs of
respectively (2020 - long-term incentive costs of
long-term incentive costs of
Three months ended
Operating expense decreased
• Lower salaries and benefits due to decreased headcount resulting from
workforce reductions in the second quarter of 2020 (
sales of the Eagle Ford and
million);
partially offset by:
• Increased activity resulting from improved commodity prices (
lower capitalization of overhead costs ($10 million ).
48
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Six months ended
Operating expense decreased
• Lower salaries and benefits due to decreased headcount resulting from
workforce reductions in the second quarter of 2020 (
initiatives implemented at the end of the first quarter of 2020 (
and the sales of the Eagle Ford and
2021 ($8 million );
partially offset by:
• Lower capitalization of overhead costs (
incentive costs resulting from an increase in the Company's share price in
the first six months of 2021 compared to a decrease in 2020 (
Additional information on the Company's long-term incentives can be found in Note 16 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Purchased Product
Purchased product expense includes purchases of oil, NGLs and natural gas from
third parties that are used to provide operational flexibility and cost
mitigation for transportation commitments, product type, delivery points and
customer diversification. The Company also purchases and sells third-party
volumes under marketing arrangements associated with the Company's previous
divestitures.
Three months ended June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
Market Optimization $ 733 $ 319 $ 1,337 $ 717 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 (
Six 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 2020 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 2020 Annual Report on Form 10-K.
Three months ended June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
USA Operations $ 220 $ 375 $ 428 $ 793
Canadian Operations 89 111 182 220
Upstream DD&A 309 486 610 1,013
Corporate & Other 2 7 9 14
Total $ 311 $ 493 $ 619 $ 1,027
Three months ended June 30, Six months ended June 30,
($/BOE) 2021 2020 2021 2020
USA Operations $ 7.79 $ 13.18 $ 7.84 $ 13.24
Canadian Operations $ 4.01 $ 5.41 $ 4.12 $ 5.35
Upstream DD&A $ 6.13 $ 9.94 $ 6.17 $ 10.03 Three months ended
DD&A decreased
• Lower depletion rates in the
exchange rate (
Operations (
The depletion rate in theUSA Operations decreased$5.39 per BOE compared to the second quarter of 2020 primarily due to the ceiling test impairments recognized in 2020. The depletion rate in the Canadian Operations decreased$1.40 per BOE compared to the second quarter of 2020 primarily due to a lower depletable base.
Six months ended
DD&A decreased
• Lower depletion rates and production volumes in the
million and
Canadian Operations (
dollar exchange rate (
Canadian Operations (
The depletion rate in theUSA Operations decreased$5.40 per BOE compared to the first six months of 2020 primarily due to the ceiling test impairments recognized in 2020. The depletion rate in the Canadian Operations decreased$1.23 per BOE compared to the first six months of 2020 primarily due to a lower depletable base. 50
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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 2021, the Company did not recognize ceiling test impairments (2020 -$3,250 million before tax, and$3,527 million before tax, respectively, in theUSA Operations). The non-cash ceiling test impairments in 2020 primarily resulted from the decline in the 12-month average trailing prices, which reduced proved reserves. The 12-month average trailing prices used in the ceiling test calculations were based on the benchmark prices below. The benchmark prices were adjusted for basis differentials to determine local reference prices, transportation costs and tariffs, heat content and quality. Oil & NGLs Natural Gas Edmonton WTI Condensate Henry Hub AECO ($/bbl) (C$/bbl) ($/MMBtu) (C$/MMBtu) 12-Month Average Trailing Reserves Pricing (1) June 30, 2021 49.78 62.73 2.43 2.60 December 31, 2020 39.62 49.77 1.98 2.13 June 30, 2020 47.47 58.46 2.07 1.70
(1) All prices were held constant in all future years when estimating net
revenues and reserves.
The Company believes that the discounted after-tax future net cash flows from proved reserves required to be used in the ceiling test calculation are not indicative of the fair market value ofOvintiv's oil and natural gas properties or the future net cash flows expected to be generated from such properties. The discounted after-tax future net cash flows do not consider the fair market value of unamortized unproved properties, or probable or possible liquids and natural gas reserves. In addition, there is no consideration given to the effect of future changes in commodity prices.Ovintiv manages its business using estimates of reserves and resources based on forecast prices and costs. Additional information on the ceiling test calculation can be found in Note 8 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 51
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Administrative
Administrative expense represents costs associated with corporate functions
provided by
Three months ended June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
Administrative, excluding
Long-Term Incentive,
Restructuring and Legal Costs, and
Current
Expected Credit Losses (1) $ 68 $ 68 $ 149 $ 142
Long-term incentive costs 31 19 66 (7 )
Restructuring and legal costs 25 81 31 81
Current expected credit losses (1 ) (3 ) (1 ) 2
Total Administrative (2) $ 123 $ 165 $ 245 $ 218
Three months ended June 30, Six months ended June 30,
($/BOE) 2021 2020 2021 2020
Administrative, excluding
Long-Term Incentive,
Restructuring and Legal Costs, and
Current
Expected Credit Losses (1) $ 1.36 $ 1.38 $ 1.51 $ 1.41
Long-term incentive costs 0.61 0.40 0.67 (0.07 )
Restructuring and legal costs 0.48 1.66 0.31 0.80
Current expected credit losses (0.01 ) (0.06 ) (0.01 ) 0.02
Total Administrative $ 2.44 $ 3.38 $ 2.48 $ 2.16 (1) The second quarter and first six months of 2021 include costs related to The
Bow office lease of
million and
sublease revenues.
(2) The second quarter and first six months of 2021 reflect a higher
respectively.
Three months ended
Administrative expense in the second quarter of 2021 decreased
Six months ended
Administrative expense in the first six months of 2021 increased$27 million compared to the first six months of 2020 primarily due to higher long-term incentive costs resulting from an increase in the Company's share price in the first six months of 2021 compared to a decrease in 2020 ($73 million ), higher legal and consulting costs ($31 million ), partially offset by a decrease in restructuring costs and lower salaries and benefits related to workforce reductions in 2020 ($70 million and$5 million , respectively). During 2020, the Company completed workforce reductions as part of a company-wide reorganization in response to the low commodity price environment resulting from the global pandemic and the Company's planned reductions in capital spending. Additional information on restructuring charges can be found in Note 15 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other (Income) Expenses
Three months ended June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
Interest $ 99 $ 86 $ 186 $ 182
Foreign exchange (gain) loss, net (8 ) (40 ) (15 ) 76
Other (gains) losses, net (7 ) (16 ) (25 ) (30 )
Total Other (Income) Expenses
$ 146 $ 228 52
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Interest
Interest expense primarily includes interest on
Three months ended
Interest expense increased$13 million compared to the second quarter of 2020 primarily due to a one-time make-whole interest payment of$19 million resulting from theJune 2021 early redemption of the Company's$600 million , 5.75 percent senior notes dueJanuary 30, 2022 , partially offset by open market repurchases of long-term debt completed in 2020 and decreased amounts drawn from the Company's credit facilities ($8 million ).
Six months ended
Interest expense increased$4 million compared to the first six months of 2020 primarily due to a one-time make-whole interest payment of$19 million resulting from theJune 2021 early redemption of the Company's$600 million , 5.75 percent senior notes dueJanuary 30, 2022 , partially offset by open market repurchases of long-term debt completed in 2020 and decreased amounts drawn from the Company's credit facilities ($13 million ).
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. Following the completion of the corporate reorganization andU.S. domestication in the first quarter of 2020, 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
• Unrealized foreign exchange losses on the translation of
management contracts and financing debt issued from
in 2020 (
partially offset by:
• Realized foreign exchange gains on the settlement of
management contracts issued from
million).
Six months ended
Net foreign exchange gain of
• Lower unrealized foreign exchange losses on the translation of
financing debt and risk management contracts issued from
2020 (
exchange gains on the settlement of
financing debt issued from
partially offset by:
• Lower unrealized foreign exchange gains on the translation of intercompany
notes ($27 million ).
53
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Other (Gains) Losses, Net Other (gains) losses, net, primarily includes other non-recurring revenues or expenses and may also include items such as interest income, interest received from tax authorities, transaction costs relating to acquisitions, reclamation charges relating to decommissioned assets, gains on debt repurchases, government stimulus programs and adjustments related to other assets.
Other gains in the first six months of 2021 includes interest income of
Other gains in the second quarter and first six months of 2020 primarily
included a gain of
Income Tax
Three months ended June 30, Six months ended June 30,
($ millions) 2021 2020 2021 2020
Current Income Tax Expense (Recovery) $ - $ (1 ) $ (156 ) $ (1 ) Deferred Income Tax Expense (Recovery)
- 295 (20 ) 435
Income Tax Expense (Recovery) $ - $ 294 $ (176 ) $ 434
Effective Tax Rate 0.0% (7.2%) 244.4% (12.3%)
Income Tax Expense (Recovery)
Three months ended
In the second quarter of 2021,Ovintiv recorded an income tax expense of nil compared to an income tax expense of$294 million in 2020, primarily due to the change in valuation allowances.
Six months ended
In the first six months of 2021,Ovintiv recorded an income tax recovery of$176 million compared to an income tax expense of$434 million in 2020, primarily due to the resolution of certain tax items relating to prior taxation years and the change in valuation allowances.
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, state taxes, income tax related to foreign operations, 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.
The Company's effective tax rate was zero percent for the second quarter of
2021, which is lower than the
The Company's effective tax rate was 244.4 percent for the first six months of 2021, which is higher than theU.S. federal statutory tax rate of 21 percent primarily due to the resolution of certain tax items relating to prior taxation years and the change in valuation allowances recorded relating to the current year net loss before tax. 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 were lower than theU.S. statutory tax rate of 21 percent primarily due to valuation allowances recorded due to net losses arising from ceiling test impairments and an increase in the valuation allowance of$568 million inCanada related to prior year's deferred tax assets, which was recorded as a discrete item. 54
-------------------------------------------------------------------------------- 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.
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, 2021 ,$117 million in cash and cash equivalents was held by Canadian subsidiaries. The cash held by Canadian subsidiaries is accessible and may be subject to additionalU.S. income taxes and Canadian withholding taxes if repatriated. The Company's capital structure consists of total shareholders' equity plus long-term debt, including any current portion. The Company's objectives when managing its capital structure are to maintain financial flexibility to preserveOvintiv's access to capital markets and its ability to meet financial obligations and execute its strategy.Ovintiv has a practice of maintaining capital discipline and strategically managing its capital structure by adjusting capital spending, adjusting dividends paid to stockholders, issuing new shares of common stock, purchasing shares of common stock for cancellation, issuing new debt and repaying or repurchasing existing debt. As at June 30, ($ millions, except as indicated) 2021 2020 Cash and Cash Equivalents$ 122 $ 39 Available Credit Facilities (1) 4,000 2,750
Available Uncommitted Demand Lines (2) 281 183 Total Liquidity
$ 4,403 $ 2,972
Long-Term Debt, including current portion
$ 3,934 $ 5,873 Debt to Capitalization (%) (3) 57 56
Debt to Adjusted Capitalization (%) (4) 31 35
(1) Includes available credit facilities of
in the
2021 (collectively, the "Credit Facilities").
(2) Includes three uncommitted demand lines totaling
million in related undrawn letters of credit (2020 -
million, respectively).
(3) Calculated as long-term debt, including the current portion, divided by
shareholders' equity plus long-term debt, including the current portion.
(4) 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, both maturing inJuly 2024 . The Credit Facilities provide financial flexibility and allow the Company to fund its operations or capital program. AtJune 30, 2021 , there were no outstanding amounts under the revolving credit facility forOvintiv Inc. and for the Canadian subsidiary.Ovintiv currently has both investment and non-investment grade credit ratings and has full access to its Credit Facilities andU.S. commercial paper ("U.S. CP") programs. 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 and limit access to the Company's commercial paper program. 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 atJune 30, 2021 , the Company had no commercial paper outstanding under itsU.S. CP programs. 55
-------------------------------------------------------------------------------- The Credit Facilities, uncommitted demand lines, and cash and cash equivalents provideOvintiv with total liquidity of approximately$4.4 billion . AtJune 30, 2021 ,Ovintiv also had approximately$62 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. Reductions in the Company's credit ratings could trigger additional collateral requirements to support existing agreements and such amounts could be material.Ovintiv has 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, 2021 ,$6.0 billion remained accessible under the Canadian shelf prospectus. The ability to issue securities under theU.S. shelf registration statement or Canadian shelf prospectus is dependent upon market conditions and securities law requirements.Ovintiv is currently in compliance with, and expects that it will continue to be in compliance with, all financial covenants under the Credit Facilities. Management monitors Debt to Adjusted Capitalization, which is a non-GAAP measure defined in the Non-GAAP Measures section of this MD&A, as a proxy forOvintiv's financial covenant under the Credit Facilities, which requires Debt to Adjusted Capitalization to be less than 60 percent. As atJune 30, 2021 , the Company's Debt to Adjusted Capitalization was 31 percent. The definitions used in the covenant under the Credit Facilities adjust capitalization for cumulative historical ceiling test impairments recorded in conjunction with the Company'sJanuary 1, 2012 adoption ofU.S. GAAP.Ovintiv does not expect the current COVID-19 pandemic to impact the Company's ability to remain in compliance with its financial covenants under the Credit Facilities. Additional information on financial covenants can be found in Note 15 to the Consolidated Financial Statements included in Item 8 of the 2020 Annual Report on Form 10K.
Sources and Uses of Cash
In the second quarter and first six months of 2021,
Three months ended June 30, Six months ended June 30,
($ millions) Activity Type 2021 2020 2021 2020
Sources of Cash, Cash
Equivalents and Restricted
Cash
Cash from operating
activities Operating $ 750
Investing 1,023 8 1,025 30
Net issuance of revolving
long-term debt Financing - 408 - 552
1,773 533 2,602 1,265
Uses of Cash and Cash
Equivalents
Capital expenditures Investing 383 252 733 1,042
Acquisitions Investing 2 1 3 18
Net repayment of revolving
long-term debt Financing 490 - 950 -
Repayment of long-term debt
(1) Financing 619 26 619 115
Dividends on shares of
common stock Financing 25 25 49 49
Other Financing/Investing 143 294 138 186
1,662 598 2,492 1,410
Foreign Exchange Gain (Loss) on Cash, Cash
Equivalents
and Restricted Cash Held in Foreign Currency 2 1 2 (6 )
Increase (Decrease) in Cash, Cash Equivalents
and Restricted Cash $ 113 (1) Includes open market repurchases in 2020.
Operating Activities
Net cash from operating activities in the second quarter and first six months of 2021 was$750 million and$1,577 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. 56
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Additional detail on changes in non-cash working capital can be found in Note 20
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 2021 was$733 million and$1,623 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 (
working capital (
related to
excluding non-cash long-term incentive costs and current expected credit
losses (
operating expense, excluding non-cash long-term incentive costs (
partially offset by:
• Realized losses on risk management in revenues compared to gains in 2020
(
and higher production, mineral and other taxes (
Six months ended
Net cash from operating activities increased
• Higher realized commodity prices (
recovery mainly due to the resolution of certain tax items relating to prior
taxation years (
related to
excluding non-cash long-term incentive costs and current expected credit
losses (
incentive costs (
partially offset by:
• Realized losses on risk management in revenues compared to gains in 2020
(
lower production volumes (
processing expense (
Investing Activities
Cash from investing activities in the first six months of 2021 was$247 million primarily due to proceeds from divestitures, partially offset by capital expenditures. Capital expenditures decreased$309 million compared to the first six months of 2020 due to the Company's reduced capital program in response to the volatile market conditions in 2020.
Acquisitions in the first six months of 2021 were
Divestitures in the first six months of 2021 were$1,025 million (2020 -$30 million ), which primarily included the sale of the Eagle Ford assets in southTexas andDuvernay assets in west centralAlberta , as well as certain properties that did not complementOvintiv's existing portfolio of assets. 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. 57
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Financing Activities
Net cash used in financing activities has been impacted by the Company's strategy to enhance liquidity, strengthen its balance sheet by repaying or repurchasing existing debt, and returning value to stockholders by paying dividends.
Net cash used in financing activities in the first six months of 2021 was$1,714 million compared to net cash from financing activities of$344 million in 2020. The change was primarily due to a net repayment of revolving long-term debt in 2021 of$950 million compared to a net issuance in 2020 of$552 million and higher repayment of long-term debt ($504 million ) associated with the early redemption of the Company's 2022 senior notes 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, the Company's liquidity requirements, contractual restrictions and other factors. The Company's long-term debt, including the current portion of$518 million , totaled$5,314 million atJune 30, 2021 . The Company's long-term debt atDecember 31, 2020 totaled$6,885 million , which included the current portion of$518 million . As atJune 30, 2021 , over 90 percent of the Company's fixed rate long-term debt is not due until 2024 and beyond. Since the second quarter of 2020, the Company has allocated$2,052 million in excess cash flows to reduce its total long-term debt balances, which included proceeds from theDuvernay andEagle Ford asset divestitures. The Company is targeting a long-term debt balance, less cash and cash equivalents held, of approximately$3.0 billion by the end of 2023. InJune 2021 , the Company redeemed its$600 million , 5.75 percent senior notes dueJanuary 30, 2022 . The Company also expects to redeem its$518 million , 3.90 percent senior notes dueNovember 15, 2021 in mid-August. The combined redemptions represent approximately$1.1 billion of debt repayments, resulting in expected annualized interest savings of over$50 million .
For additional information on long-term debt, refer to Note 10 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Dividends
Three months ended June 30, Six months ended June 30,
($ millions, except as indicated) 2021 2020 2021 2020
Dividend Payments $ 25 $ 25 $ 49 $ 49
Dividend Payments ($/share) $ 0.09375 $ 0.09375 OnJuly 27, 2021 , the Board of Directors declared a dividend of$0.14 per share of common stock payable onSeptember 30, 2021 to common stockholders of record as ofSeptember 15, 2021 . This represents an increase of about 50 percent to the annualized dividend payment.
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 2020 Annual Report on Form 10-K.
Commitments and Contingencies
For information on commitments and contingencies, refer to Note 21 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 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.
Three months ended June 30, Six months ended June 30,
($ millions, except as indicated) 2021 2020 2021 2020
Cash From (Used in) Operating
Activities $ 750 $ 117 $ 1,577 $ 683
(Add back) deduct:
Net change in other assets and
liabilities (5 ) (68 ) (11 ) (120 )
Net change in non-cash working
capital 22 (119 ) (35 ) (36 )
Current tax on sale of assets - - - -
Non-GAAP Cash Flow (1) $ 733 $ 304 $ 1,623 $ 839
Divided by:
Production Volumes (MMBOE) 50.5 48.8 98.9 100.8
Non-GAAP Cash Flow Margin ($/BOE) $ 14.51
(1) The second quarter and first six months of 2021 include restructuring costs
of $5 million and $11 million , respectively (2020 - $81 million and $81
million , respectively).
59
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Total Costs
Total Costs is a non-GAAP measure which includes the summation of production,
mineral and other taxes, upstream transportation and processing expense,
upstream operating expense and administrative expense, excluding the impact of
long-term incentive, restructuring and legal costs, and current expected credit
losses. It is calculated as total operating expenses excluding non-upstream
operating costs and non-cash items which include operating expenses from the
Market Optimization and Corporate and Other segments, depreciation, depletion
and amortization, impairments, accretion of asset retirement obligation,
long-term incentive, restructuring and legal costs, and current expected credit
losses. When presented on a per BOE basis, Total Costs is divided by production
volumes. Management believes this measure is useful to the Company and its
investors as a measure of operational efficiency across periods.
Three months ended June 30, Six months ended June 30,
($ millions, except as indicated) 2021 2020 2021 2020
Total Operating Expenses $ 1,813 $ 4,785 $ 3,456 $ 6,669
Deduct (add back):
Market optimization operating
expenses 784 382 1,437 844
Corporate & other operating
expenses - - - (2 )
Depreciation, depletion and
amortization 311 493 619 1,027
Impairments - 3,250 - 3,527
Accretion of asset retirement
obligation 6 9 12 18
Long-term incentive costs 39 25 81 (10 )
Restructuring and legal costs 25 81 31 81
Current expected credit losses (1 ) (3 ) (1 ) 2
Total Costs $ 649 $ 548 $ 1,277 $ 1,182
Divided by:
Production Volumes (MMBOE) 50.5 48.8 98.9 100.8
Total Costs ($/BOE) (1) $ 12.90 $ 11.23 $ 12.92 $ 11.72 (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)June 30, 2021
Long-Term Debt, including current portion $ 5,314 $ 6,885 Total Shareholders' Equity 3,934 3,837 Equity Adjustment for Impairments at December 31, 2011 7,746 7,746 Adjusted Capitalization$ 16,994 $ 18,468 Debt to Adjusted Capitalization 31% 37% 60
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Net Debt to Adjusted EBITDA Net Debt to Adjusted EBITDA is a non-GAAP measure 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 this measure is 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. This measure is used, along with other measures, in the calculation of certain financial performance targets for the Company's management and employees. ($ millions, except as indicated)June 30, 2021
Long-Term Debt, including current portion $ 5,314 $ 6,885 Less: Cash and cash equivalents 122 10 Net Debt 5,192 6,875 Net Earnings (Loss) (2,031 ) (6,097 ) Add back (deduct): Depreciation, depletion and amortization 1,426 1,834 Impairments 2,053 5,580 Accretion of asset retirement obligation 23 29 Interest 375 371 Unrealized (gains) losses on risk management 1,276 204 Foreign exchange (gain) loss, net (74 ) 17 (Gain) loss on divestitures, net - - Other (gains) losses, net (50 ) (55 ) Income tax expense (recovery) (243 ) 367 Adjusted EBITDA (trailing 12-month) $ 2,755 $ 2,250 Net Debt to Adjusted EBITDA (times) 1.9 3.1 61
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