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Ovintiv Inc. First Quarter 2020 Results

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   |    Friday,May 08,2020

Ovintiv Inc. reported its Q1 2020 results.

Actions Taken in Response to Current Low Oil Price Environment:

• Second quarter planned capital investments reduced 60%.
• Company doubles its initial estimate of 2020 cash cost savings to $200 million, majority durable into future years.
• Completed well costs expected to be 20% better than 2019, driven by sustainable efficiency gains.
• 2021 legacy midstream and facility costs to decline by ~$100 million.
• Company fully hedged on second quarter benchmark oil price risk with more than 200,000 bbls/d hedged at an average price of $42.09 per barrel.
• Dynamic "shut-in strategy" preserving value.

First Quarter 2020 Highlights:

• Financial performance driven by strong production and lower costs.
• Net earnings of $421 million, with non-GAAP operating earnings of $27 million.
• Cash from operating activities of $566 million and non-GAAP cash flow of $535 million.
• Crude and condensate⁽¹⁾ production exceeded budget and averaged 215,200 bbls/d.
• Total production exceeded budget at 571,300 BOE/d (54% liquids).
• Total Costs were lower than expectations at $12.17 per BOE.
• Completed well costs 9% lower than 2019 average, reflecting efficiency gains made before downturn.
• Substantial liquidity at quarter-end of approximately $3.4 billion.
• Repurchased $100 million of long-term debt in the open markets at an 11% discount.
• Investment grade credit rating reaffirmed by two agencies.

CEO Doug Suttles said: "In the first quarter, we built on our track record of industry-leading efficiency and once again significantly drove down costs and delivered strong corporate-level results. These are challenging times, but we are using the flexibility we purposely built into our business to maintain financial strength and set our Company up to thrive in whatever new environment emerges in the coming months and years. Our focus on cost reductions is making a huge difference today and for the future. We are confident we can deliver both $200 million in cash cost reductions and a 20% improvement in capital efficiencies. Most of these savings will carry into 2021."

Due to the significant drop in oil prices and unprecedented near-term demand loss, Ovintiv has suspended all previously issued 2020 guidance. However, including recent cash cost reductions and its outlook for better capital efficiencies, the Company projects that a total capital investment scenario in 2020 of $1.8 to $1.9 billion would result in a 2020 exit rate for crude and condensate of approximately 200,000 bbls/d.

"In 2021, with a total capital investment scenario of approximately $1.5 billion, we are confident that we could deliver free cash flow at $35 per barrel WTI and $2.75 per MMBtu NYMEX natural gas while holding crude and condensate flat at 200,000 bbls/d," said Suttles.

Ovintiv delivered strong first quarter results driven by higher than budgeted production and a continued focus on cost reductions. Total average production was 571,300 BOE/d, or three percent higher than expectations. Crude and condensate production averaged 215,200 BOE/d. Total Costs of $12.17 per BOE were below expectations. First quarter capital investments were $790 million, below budget and consistent with previous expectations for a front-end weighted investment profile.

Net earnings in the first quarter were $421 million and were impacted by non-cash unrealized hedging gains of $904 million, before-tax, as well as a non-cash ceiling test impairment of $277 million, before-tax. The non-cash impairment primarily related to the decline in the 12-month average trailing prices for NGLs and natural gas which reduced the Company's SEC proved reserves values.

Cash from operating activities was $566 million and non-GAAP cash flow was $535 million.

Second Quarter 2020

Second quarter activity levels have been significantly reduced to ensure continued financial strength. Second quarter capital investments are expected to be $250 to $300 million, a $500 million reduction (60%) compared to original plans. By mid-May, the Company will have dropped two-thirds of its operated rig fleet and expects to run seven rigs (three Permian, two Anadarko, two Montney) and no frac spreads. The Company has deferred completions activity in the second quarter. Ovintiv has no long-term service commitments and is prepared to further adjust its investment and activity levels based on market conditions.

Ovintiv today doubled its full-year cash cost savings estimate to $200 million, with most of these savings projected into 2021 and beyond. Well costs in its core assets are expected to be 20% less in the remainder of 2020 and 2021 when compared to 2019 average results.

In response to low oil prices, a dynamic shut-in strategy has been developed and is based on variable costs/margins and price factors. Shutting in wells with higher variable costs allows volumes to be deferred into higher-priced periods in the future. Current net shut-in volumes are approximately 65 MBOE/d, including 35 Mbbls/d of crude and condensate.

Near-term scenarios for 2020 and 2021 have been provided within this release and the accompanying slide deck.

Strong Hedge Position Protects Cash Flow

Ovintiv is fully-hedged on near-term, benchmark oil price risk. For the second quarter, 203,000 bbls/d are hedged at an average of $42.09 per barrel. Of these positions, 188,000 bbls/d are in a fixed price swap at $41.47 per barrel and 15,000 bbls/d are covered by costless collars between $50.00 and $68.71 per barrel. "Benchmark" refers to NYMEX WTI. Natural gas hedges are also in place on approximately 1.2 Bcf/d.

Based on the forward strip as of April 30, second quarter realized risk management gains on benchmark oil and natural gas are expected to total approximately $500 million, and total $1.1 billion for the balance-of-year-2020. Settlements for various other oil differential and natural gas basis positions in 2020 serve to further reduce risk. 

Balance Sheet and Liquidity

Ovintiv's $4 billion committed, unsecured credit facilities were recently renewed and extended through July 2024. The facilities have no reserve-based, cash flow, or EBITDA lending covenants or minimum credit rating requirements. The facilities' primary financial covenant is debt to adjusted capitalization, which is not to exceed 60%. This ratio is based on book value only, not market capitalization. At March 31, 2020, the debt to adjusted capitalization ratio was 28%. The capitalization calculation adjustment includes a fixed $7.7 billion add back to capitalization.

Current liquidity is approximately $3.4 billion, which represents the $4 billion credit facilities, available capacity on uncommitted demand lines and cash-on-hand, less the current commercial paper outstanding and the amount drawn on the facilities.

During the first quarter, Ovintiv repurchased $100 million of its senior notes in the open market for $89 million. These transactions included approximately $90 million in principal amount of its 5.75% senior notes due January 2022 and approximately $10 million in principal amount of its 3.9% senior notes due November 2021. The Company has significant flexibility to manage the late 2021 and 2022 maturities, including the use of its credit facilities.

Approximately 80% of the Company's total long-term debt is due in 2024 or later with a weighted average bond maturity of approximately 10 years.

Asset Highlights

The Company has significantly reduced its estimates for future well costs based on recent efficiency gains and a lower service cost environment. A table comparing previous well costs by area to current estimate is included in today's accompanying presentation.

Permian
Permian production increased 20% year-over-year and averaged 109,600 BOE/d (81% liquids). The region saw strong operational performance, achieving an average drill, complete and tie-in cost of $0.7 million per 1,000 feet, or 7% below the 2019 average. Efficiencies were driven by drilling innovations and the deployment of "Simul-Frac" completions on two-thirds of its wells. During the quarter, 37 net wells were turned in line (TIL).

Anadarko
Anadarko production was 161,000 BOE/d (62% liquids), up 11% when compared to proforma results in the first quarter of 2019. There were 27 net TILs during the quarter.

Well costs were significantly lowered again, with 13 recent wells drilled and completed for under $5 million per well. This is $3 million (~40%) below pre-2019 costs. The Company is now estimating go-forward drill and complete costs at $5 million per well.

Montney
First quarter liquids production grew 8% year-over-year to 52,500 bbls/d. Total production averaged 204,700 BOE/d (26% liquids). There were 28 net TILs in the first quarter. The Montney produces nearly 60% of the Company's natural gas volumes and has a significant inventory of dry gas opportunities. The asset has the pipeline capacity, processing infrastructure and transportation contracts required to react quickly if gas prices continue to strengthen relative to oil and condensate.

Base Assets
The remaining assets in the portfolio include the Eagle Ford, Bakken, Uinta and Duvernay. All drilling and completion activities in these areas have been suspended.

2024 Development Plan

Category	2023	2024 Est. Initial	Updated 2024 Guidance	%Difference (2023 vs 2024)
Total Capital Expenditure($mm)

Production Oil(bbls/d)

 Click here for More Planned 2024 Activity