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Ovintiv Inc. - Quarter Report: 2020 March (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-39191

 

Ovintiv Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

84-4427672

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

Suite 1700, 370 17th Street, Denver, Colorado, 80202, U.S.A.

(Address of principal executive offices)

Registrant’s telephone number, including area code (303) 623-2300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

    Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

    Smaller reporting company

 

 

 

 

 

 

 

 

    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes     No  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares

OVV

New York Stock Exchange

 

 

 

 

 

 

Number of registrant’s shares of common stock outstanding as of May 1, 2020

  

 

259,821,141

  

 

1


 

OVINTIV INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

PART I

 

 

 

 

 

 

Item 1.

Financial Statements

 

6

 

Condensed Consolidated Statement of Earnings

 

6

 

Condensed Consolidated Statement of Comprehensive Income

 

6

 

Condensed Consolidated Balance Sheet

 

7

 

Condensed Consolidated Statement of Changes in Shareholders’ Equity

 

8

 

Condensed Consolidated Statement of Cash Flows

 

9

 

Notes to Condensed Consolidated Financial Statements

 

10

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

59

Item 4.

Controls and Procedures

 

61

 

 

 

 

 

PART II

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

62

Item 1A.

Risk Factors

 

62

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

Item 3.

Defaults Upon Senior Securities

 

63

Item 4.

Mine Safety Disclosures

 

63

Item 5.

Other Information

 

63

Item 6.

Exhibits

 

63

Signatures

 

 

64

 

2


 

DEFINITIONS

Unless the context otherwise indicates, references to “Ovintiv,” the “Company” “us,” “we,” “our,” “ours,” (i) for periods until the Reorganization (as hereinafter defined), refer to Encana Corporation and its consolidated subsidiaries and (ii) for periods after the Reorganization, refer to Ovintiv Inc. and its consolidated subsidiaries. In addition, the following are other abbreviations and definitions of certain terms used within this Quarterly Report on Form 10-Q:

“AECO” means Alberta Energy Company and is the Canadian benchmark price for natural gas.

“ASU” means Accounting Standards Update.

“bbl” or “bbls” means barrel or barrels.

“BOE” means barrels of oil equivalent.

“Btu” means British thermal units, a measure of heating value.

“DD&A” means depreciation, depletion and amortization expenses.

“FASB” means Financial Accounting Standards Board.

“Mbbls/d” means thousand barrels per day.

“MBOE/d” means thousand barrels of oil equivalent per day.

“Mcf” means thousand cubic feet.

“MD&A” means Management’s Discussion and Analysis of Financial Condition and Results of Operations.

“MMBOE” means million barrels of oil equivalent.

“MMBtu” means million Btu.

“MMcf/d” means million cubic feet per day.

“NCIB” means normal course issuer bid.

“NGL” or “NGLs” means natural gas liquids.

“NYMEX” means New York Mercantile Exchange.

“NYSE” means New York Stock Exchange.

“OPEC” means Organization of the Petroleum Exporting Countries.

“SEC” means United States Securities and Exchange Commission.

“SIB” means substantial issuer bid.

“TSX” means Toronto Stock Exchange.

“U.S.”, “United States” or “USA” means United States of America.

“U.S. GAAP” means U.S. Generally Accepted Accounting Principles.

“WTI” means West Texas Intermediate.

CONVERSIONS

In this Quarterly Report on Form 10-Q, a conversion of natural gas volumes to BOE is on the basis of six Mcf to one bbl.  BOE is based on a generic energy equivalency conversion method primarily applicable at the burner tip and does not represent economic value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value, particularly if used in isolation.

CONVENTIONS

Unless otherwise specified, all dollar amounts are expressed in U.S. dollars, all references to “dollars”, “$” or “US$” are to U.S. dollars and all references to “C$” are to Canadian dollars. All amounts are provided on a before tax basis, unless otherwise stated. In addition, all information provided herein is presented on an after royalties basis.

3


 

The term “liquids” is used to represent oil, NGLs and condensate. The term “liquids rich” is used to represent natural gas streams with associated liquids volumes. The term “play” is used to describe an area in which hydrocarbon accumulations or prospects of a given type occur. Ovintiv’s focus of development is on hydrocarbon accumulations known to exist over a large areal expanse and/or thick vertical section and are developed using hydraulic fracturing. This type of development typically has a lower geological and/or commercial development risk and lower average decline rate, when compared to conventional development.

The term “core asset” refers to plays that are the focus of the Company’s current capital investment and development plan. The Company continually reviews funding for development of its plays based on strategic fit, profitability and portfolio diversity and, as such, the composition of plays identified as a core asset may change over time.

References to information contained on the Company’s website at www.ovintiv.com are not incorporated by reference into, and does not constitute a part of, this Quarterly Report on Form 10-Q.

 

FORWARD-LOOKING STATEMENTS AND RISK

This Quarterly Report on Form 10-Q contains certain forward-looking statements or information (collectively, “forward-looking statements”) within the meaning of applicable securities legislation, including the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements include: composition of the Company’s core assets, including allocation of capital and focus of development plans; growth in long-term shareholder value; vision of being a leading North American energy producer; statements with respect to the Company’s strategic objectives, including capital allocation strategy, shut-in strategy, focus of investment, return of capital to stockholders, growth of high margin liquids volumes, operating and capital efficiencies and ability to preserve balance sheet strength; statements regarding the benefits of the Company’s multi-basin portfolio; ability to deliver free cash flow through a disciplined capital allocation strategy; anticipated cost savings, capital efficiency and sustainability thereof; ability to repeat and deploy successful practices across the Company’s multi-basin portfolio; anticipated commodity prices; success of and benefits from technology and innovation, including cube development approach and advanced completion designs; ability to optimize well and completion designs; future well inventory; anticipated drilling, number of drilling rigs and the success thereof; anticipated drilling costs and cycle times; anticipated proceeds and future benefits from various joint venture, partnership and other agreements; potential impacts of an extended period of low commodity prices and responses of the Company thereto; estimates of reserves and resources and potential for negative price related reserve revisions; expected production and product types; statements regarding anticipated cash flow, non-GAAP cash flow margin and leverage ratios; anticipated access to cash, cash equivalents and other methods of funding; anticipated hedging and outcomes of risk management program, including exposure to certain commodity prices and foreign exchange fluctuations, amount of hedged production, market access and physical sales locations; impact of changes in laws and regulations; compliance with environmental legislation and claims related to the purported causes and impact of climate change, and the costs therefrom; adequacy of provisions for abandonment and site reclamation costs; statements regarding the Company’s operational and financial flexibility, discipline and ability  to respond to evolving market conditions; ability to meet financial obligations, manage debt and financial ratios, finance growth and comply with financial covenants; impact to the Company as a result of changes to its credit rating; access to the Company’s credit facilities; planned dividend and the declaration and payment of future dividends, if any; adequacy of the Company’s provision for taxes and legal claims; projections and statements in respect of funding; ability to manage cost inflation and expected cost structures, including expected operating, transportation and processing and administrative expenses; competitiveness and pace of growth of the Company’s assets within North America and against its peers; outlook of oil and gas industry generally and impact of geopolitical environment; expected future interest expense; the Company’s commitments and obligations and anticipated payments thereunder; and the possible impact of accounting pronouncements, rule changes and standards.

Readers are cautioned against unduly relying on forward-looking statements which, by their nature, involve numerous assumptions, risks and uncertainties that may cause such statements not to occur, or results to differ materially from those expressed or implied. These assumptions include: future commodity prices and differentials; foreign exchange rates; ability to access credit facilities and shelf prospectuses; data contained in key modeling statistics; availability of attractive hedges and enforceability of risk management program; effectiveness of the Company’s drive to productivity and efficiencies; results from innovations; expectation that counterparties will fulfill their obligations under the gathering, midstream and marketing agreements; access to transportation and processing facilities where Ovintiv operates; assumed tax, royalty and regulatory regimes; assumptions contained herein and expectations and projections made in light of, and generally consistent with,

4


 

Ovintiv’s historical experience and its perception of historical trends, including with respect to the pace of technological development, benefits achieved and general industry expectations.

Risks and uncertainties that may affect these business outcomes include: suspension of or changes to guidance, and associated impact to production; ability to generate sufficient cash flow to meet obligations; market and commodity price volatility and associated impact to the Company’s stock price, credit rating, financial condition, reserves and access to liquidity; the impact of COVID-19 to the Company’s operations, including maintaining ordinary staffing levels, securing operational inputs, executing on portions of its business and managing cyber-security risks associated with remote work; ability to secure adequate transportation; potential curtailments of refinery operations, including resulting storage constraints or widening price differentials; variability and discretion of Ovintiv’s board of directors (the “Board of Directors”) to declare and pay dividends, if any; timing and costs of well, facilities and pipeline construction; business interruption, property and casualty losses or unexpected technical difficulties, including impact of weather; risks associated with decommissioning activities, including timing and costs thereof; the Company’s ability to achieve the anticipated benefits of the Reorganization (as defined below); counterparty and credit risk; impact of changes  in credit rating and access to  liquidity, including costs thereof; fluctuations in currency and interest rates; failure to achieve cost and efficiency initiatives; risks inherent in marketing operations; risks associated with technology, including electronic, cyber and physical security breaches; changes in or interpretation of royalty, tax, environmental, greenhouse gas, carbon, accounting and other laws or regulations; risks associated with existing and potential lawsuits and regulatory actions made against the Company; impact of disputes arising with its partners, including suspension of certain obligations and inability to dispose of assets or interests in certain arrangements; the Company’s ability to acquire or find additional reserves; imprecision of reserves estimates and estimates of recoverable quantities, including future net revenue estimates; risks associated with past and future acquisitions or divestitures of certain assets or other transactions or receipt of amounts contemplated under the transaction agreements (such transactions may include third-party capital investments, farm-outs or partnerships, which Ovintiv may refer to from time to time as “partnerships” or “joint ventures” and the funds received in respect thereof which Ovintiv may refer to from time to time as “proceeds”, “deferred purchase price” and/or “carry capital”, regardless of the legal form) as a result of various conditions not being met; and other risks described in Item 1A. Risk Factors of the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Annual Report on Form 10-K”) and in this Quarterly Report on Form 10-Q, and risks and uncertainties impacting Ovintiv’s business as described from time to time in the Company’s other periodic filings with the SEC.

Although the Company believes the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the assumptions, risks and uncertainties referenced above are not exhaustive. Forward-looking statements are made as of the date of this document and, except as required by law, the Company undertakes no obligation to update publicly or revise any forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are expressly qualified by these cautionary statements.

The reader should read carefully the risk factors described in Item 1A. Risk Factors of the 2019 Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements.

 

 

 

 

5


 

PART I

Item 1. Financial Statements

 

Condensed Consolidated Statement of Earnings (unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

(US$ millions, except per share amounts)

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

(Note 3)

 

 

 

 

 

 

 

 

Product and service revenues

 

(Note 4)

 

$

1,570

 

 

$

1,572

 

Gains (losses) on risk management, net

 

(Note 22)

 

 

1,055

 

 

 

(355

)

Sublease revenues

 

(Note 11)

 

 

18

 

 

 

18

 

Total Revenues

 

 

 

 

2,643

 

 

 

1,235

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

(Note 3)

 

 

 

 

 

 

 

 

Production, mineral and other taxes

 

 

 

 

52

 

 

 

48

 

Transportation and processing

 

 

 

 

396

 

 

 

338

 

Operating

(Notes 19, 20)

 

 

165

 

 

 

165

 

Purchased product

 

 

 

 

398

 

 

 

298

 

Depreciation, depletion and amortization

 

 

 

 

534

 

 

 

377

 

Impairments

 

(Note 10)

 

 

277

 

 

 

-

 

Accretion of asset retirement obligation

 

(Note 14)

 

 

9

 

 

 

9

 

Administrative

(Notes 18, 19, 20)

 

 

53

 

 

 

227

 

Total Operating Expenses

 

 

 

 

1,884

 

 

 

1,462

 

Operating Income (Loss)

 

 

 

 

759

 

 

 

(227

)

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expenses

 

 

 

 

 

 

 

 

 

 

Interest

 

(Note 5)

 

 

96

 

 

 

87

 

Foreign exchange (gain) loss, net

 

(Notes 6, 22)

 

 

116

 

 

 

(37

)

(Gain) loss on divestitures, net

 

 

 

 

-

 

 

 

1

 

Other (gains) losses, net

 

(Notes 8, 12, 20)

 

 

(14

)

 

 

28

 

Total Other (Income) Expenses

 

 

 

 

198

 

 

 

79

 

Net Earnings (Loss) Before Income Tax

 

 

 

 

561

 

 

 

(306

)

Income tax expense (recovery)

 

(Note 7)

 

 

140

 

 

 

(61

)

Net Earnings (Loss)

 

 

 

$

421

 

 

$

(245

)

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss) per Share of Common Stock (1)

 

 

 

 

 

 

 

 

 

 

Basic & Diluted

 

(Note 15)

 

$

1.62

 

 

$

(1.00

)

Weighted Average Shares of Common Stock Outstanding (millions) (1)

 

 

 

 

 

 

 

 

 

Basic & Diluted

 

(Note 15)

 

 

259.8

 

 

 

244.3

 

(1)

Net earnings (loss) per share of common stock and weighted average shares of common stock outstanding reflect the Share Consolidation as described in Note 1. Accordingly, the comparative period has been restated.

 

Condensed Consolidated Statement of Comprehensive Income (unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

(US$ millions)

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings (Loss)

 

 

 

$

421

 

 

$

(245

)

Other Comprehensive Income (Loss), Net of Tax

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(Note 16)

 

 

(134

)

 

 

34

 

Pension and other post-employment benefit plans

 

(Notes 16, 20)

 

 

(2

)

 

 

(1

)

Other Comprehensive Income (Loss)

 

 

 

 

(136

)

 

 

33

 

Comprehensive Income (Loss)

 

 

 

$

285

 

 

$

(212

)

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

6

 

 


 

Condensed Consolidated Balance Sheet (unaudited)

 

 

 

 

 

As at

 

 

As at

 

 

 

 

 

March 31,

 

 

December 31,

 

(US$ millions)

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

82

 

 

$

190

 

Accounts receivable and accrued revenues (net of allowances

     of $11 million (2019: $3 million)

 

 

 

 

918

 

 

 

1,235

 

Risk management

 

(Notes 21, 22)

 

 

958

 

 

 

148

 

Income tax receivable

 

 

 

 

283

 

 

 

296

 

 

 

 

 

 

2,241

 

 

 

1,869

 

Property, Plant and Equipment, at cost:

 

(Note 10)

 

 

 

 

 

 

 

 

Oil and natural gas properties, based on full cost accounting

 

 

 

 

 

 

 

 

 

 

Proved properties

 

 

 

 

50,952

 

 

 

51,210

 

Unproved properties

 

 

 

 

3,460

 

 

 

3,714

 

Other

 

 

 

 

852

 

 

 

904

 

Property, plant and equipment

 

 

 

 

55,264

 

 

 

55,828

 

Less: Accumulated depreciation, depletion and amortization

 

 

 

 

(40,184

)

 

 

(40,637

)

Property, plant and equipment, net

 

(Note 3)

 

 

15,080

 

 

 

15,191

 

Other Assets

(Note 3)

 

 

1,088

 

 

 

1,213

 

Risk Management

 

(Notes 21, 22)

 

 

1

 

 

 

2

 

Deferred Income Taxes

 

 

 

 

540

 

 

 

601

 

Goodwill

 

(Notes 3, 8)

 

 

2,555

 

 

 

2,611

 

 

 

(Note 3)

 

$

21,505

 

 

$

21,487

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

$

2,049

 

 

$

2,239

 

Current portion of operating lease liabilities

 

 

 

 

70

 

 

 

78

 

Income tax payable

 

 

 

 

1

 

 

 

1

 

Risk management

 

(Notes 21, 22)

 

 

40

 

 

 

114

 

 

 

 

 

 

2,160

 

 

 

2,432

 

Long-Term Debt

 

(Note 12)

 

 

7,006

 

 

 

6,974

 

Operating Lease Liabilities

 

 

 

 

883

 

 

 

977

 

Other Liabilities and Provisions

(Note 13)

 

 

402

 

 

 

464

 

Risk Management

 

(Notes 21, 22)

 

 

81

 

 

 

68

 

Asset Retirement Obligation

 

(Note 14)

 

 

438

 

 

 

425

 

Deferred Income Taxes

 

 

 

 

344

 

 

 

217

 

 

 

 

 

 

11,314

 

 

 

11,557

 

Commitments and Contingencies

 

(Note 24)

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

Share capital - authorized 775 million shares of common stock

 

 

 

 

 

 

 

 

 

 

2020 issued and outstanding: 259.8 million shares (2019: 259.8 million shares)

 

(Note 15)

 

 

3

 

 

 

7,061

 

Paid in surplus

 

(Note 15)

 

 

8,460

 

 

 

1,402

 

Retained earnings

 

 

 

 

818

 

 

 

421

 

Accumulated other comprehensive income

 

(Note 16)

 

 

910

 

 

 

1,046

 

Total Shareholders’ Equity

 

 

 

 

10,191

 

 

 

9,930

 

 

 

 

 

$

21,505

 

 

$

21,487

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

7

 

 


 

Condensed Consolidated Statement of Changes in Shareholders’ Equity (unaudited)

 

Three Months Ended March 31, 2020 (US$ millions)

 

 

 

Share

Capital

 

 

Paid in

Surplus

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Shareholders’

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

 

$

7,061

 

 

$

1,402

 

 

$

421

 

 

$

1,046

 

 

$

9,930

 

Net Earnings (Loss)

 

 

 

 

-

 

 

 

-

 

 

 

421

 

 

 

-

 

 

 

421

 

Dividends on Shares of Common Stock ($0.09375 per share)

 

(Note 15)

 

 

-

 

 

 

-

 

 

 

(24

)

 

 

-

 

 

 

(24

)

Other Comprehensive Income (Loss)

 

(Note 16)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(136

)

 

 

(136

)

Reclassification of Share Capital due to the Reorganization

 

(Note 15)

 

 

(7,058

)

 

 

7,058

 

 

 

-

 

 

 

-

 

 

 

-

 

Balance, March 31, 2020

 

 

 

$

3

 

 

$

8,460

 

 

$

818

 

 

$

910

 

 

$

10,191

 

 

Three Months Ended March 31, 2019 (US$ millions)

 

 

 

Share

Capital

 

 

Paid in

Surplus

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Shareholders’

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

 

 

$

4,656

 

 

$

1,358

 

 

$

435

 

 

$

998

 

 

$

7,447

 

Net Earnings (Loss)

 

 

 

 

-

 

 

 

-

 

 

 

(245

)

 

 

-

 

 

 

(245

)

Dividends on Common Shares ($0.09375 per share (1))

 

(Note 15)

 

 

-

 

 

 

-

 

 

 

(28

)

 

 

-

 

 

 

(28

)

Common Shares Purchased under Normal

    Course Issuer Bid

 

(Note 15)

 

 

(307

)

 

 

-

 

 

 

(93

)

 

 

-

 

 

 

(400

)

Common Shares Issued

 

(Notes 8, 15)

 

 

3,478

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,478

 

Other Comprehensive Income (Loss)

 

(Note 16)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

33

 

 

 

33

 

Impact of Adoption of Topic 842, Leases

 

 

 

 

-

 

 

 

-

 

 

 

75

 

 

 

-

 

 

 

75

 

Balance, March 31, 2019

 

 

 

$

7,827

 

 

$

1,358

 

 

$

144

 

 

$

1,031

 

 

$

10,360

 

 

(1)

Dividends per share reflect the Share Consolidation as described in Note 1. Accordingly, the comparative period has been restated.

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

8

 

 


 

Condensed Consolidated Statement of Cash Flows (unaudited)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

(US$ millions)

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

 

 

$

421

 

 

$

(245

)

Depreciation, depletion and amortization

 

 

 

 

534

 

 

 

377

 

Impairments

 

(Note 10)

 

 

277

 

 

 

-

 

Accretion of asset retirement obligation

 

(Note 14)

 

 

9

 

 

 

9

 

Deferred income taxes

 

(Note 7)

 

 

140

 

 

 

(62

)

Unrealized (gain) loss on risk management

 

(Note 22)

 

 

(904

)

 

 

427

 

Unrealized foreign exchange (gain) loss

 

(Note 6)

 

 

101

 

 

 

(25

)

Foreign exchange on settlements

 

(Note 6)

 

 

20

 

 

 

(13

)

(Gain) loss on divestitures, net

 

 

 

 

-

 

 

 

1

 

Other

 

 

 

 

(63

)

 

 

(47

)

Net change in other assets and liabilities

 

 

 

 

(52

)

 

 

(11

)

Net change in non-cash working capital

 

(Note 23)

 

 

83

 

 

 

118

 

Cash From (Used in) Operating Activities

 

 

 

 

566

 

 

 

529

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(Note 3)

 

 

(790

)

 

 

(736

)

Acquisitions

 

(Note 9)

 

 

(17

)

 

 

(22

)

Corporate acquisition, net of cash and restricted cash acquired

 

(Note 8)

 

 

-

 

 

 

94

 

Proceeds from divestitures

 

(Note 9)

 

 

22

 

 

 

2

 

Net change in investments and other

 

 

 

 

130

 

 

 

54

 

Cash From (Used in) Investing Activities

 

 

 

 

(655

)

 

 

(608

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

Net issuance (repayment) of revolving long-term debt

 

(Note 12)

 

 

144

 

 

 

-

 

Repayment of long-term debt

 

(Note 12)

 

 

(89

)

 

 

-

 

Purchase of shares of common stock

 

(Note 15)

 

 

-

 

 

 

(400

)

Dividends on shares of common stock

 

(Note 15)

 

 

(24

)

 

 

(28

)

Finance lease payments and other financing arrangements

 

 

 

 

(22

)

 

 

(20

)

Cash From (Used in) Financing Activities

 

 

 

 

9

 

 

 

(448

)

Foreign Exchange Gain (Loss) on Cash, Cash Equivalents

 

 

 

 

 

 

 

 

 

 

and Restricted Cash Held in Foreign Currency

 

 

 

 

(7

)

 

 

3

 

Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash

 

 

 

(87

)

 

 

(524

)

Cash, Cash Equivalents and Restricted Cash, Beginning of Year

 

 

 

 

190

 

 

 

1,058

 

Cash, Cash Equivalents and Restricted Cash, End of Period

 

 

 

$

103

 

 

$

534

 

Cash, End of Period

 

 

 

$

35

 

 

$

66

 

Cash Equivalents, End of Period

 

 

 

 

47

 

 

 

413

 

Restricted Cash, End of Period (1)

 

 

 

 

21

 

 

 

55

 

Cash, Cash Equivalents and Restricted Cash, End of Period

 

 

 

$

103

 

 

$

534

 

(1)

Restricted cash of $21 million is included in accounts receivable and accrued revenues on the Condensed Consolidated Balance Sheet as at March 31, 2020. The amount, currently held in escrow, relates to accrued and unpaid interest on certain senior notes and will be paid to bondholders on scheduled interest payment dates during the three months ended June 30, 2020.

See accompanying Notes to Condensed Consolidated Financial Statements

 

 

 

 

9

 

 


 

1.

Basis of Presentation and Principles of Consolidation

On January 24, 2020, Encana Corporation (“Encana”) completed a corporate reorganization, which included a plan of arrangement (the “Arrangement”) that involved, among other things, a share consolidation by Encana on the basis of one post-consolidation share for each five pre-consolidation shares (the “Share Consolidation”), and Ovintiv Inc. ultimately acquired all of the issued and outstanding common shares of Encana in exchange for shares of common stock of Ovintiv Inc. on a one-for-one basis. Following completion of the Arrangement, Ovintiv Inc. migrated from Canada and became a Delaware corporation, domiciled in the U.S. (the “U.S. Domestication”). The Arrangement and the U.S. Domestication together are referred to as the “Reorganization”. Ovintiv Inc. and its subsidiaries (collectively, “Ovintiv”) continue to carry on the business of the exploration for, the development of, and the production and marketing of oil, NGLs and natural gas, which was previously conducted by Encana and its subsidiaries prior to the completion of the Reorganization. References to the “Company” are to Encana Corporation and its subsidiaries prior to the completion of the Reorganization and to Ovintiv Inc. and its subsidiaries following the completion of the Reorganization.

The Arrangement, as described above, was accounted for as a reorganization of entities under common control. Accordingly, the resulting transactions were recognized using historical carrying amounts. On January 24, 2020, Ovintiv became the reporting entity upon completion of the Reorganization.

In accordance with the Share Consolidation, all common shares and per-share amounts disclosed herein reflect the post-Share Consolidation shares unless otherwise specified; comparative periods have been restated accordingly. References to shares of common stock refer to the shares of common stock of Ovintiv Inc. for any periods after the completion of the Arrangement, and to the common shares of Encana Corporation for any periods before January 24, 2020.

Following the U.S. Domestication, on January 24, 2020, the functional currency of Ovintiv Inc. became U.S. dollars, and accordingly, the financial results herein are consolidated and reported in U.S. dollars.

The interim Condensed Consolidated Financial Statements include the accounts of Ovintiv and entities in which it holds a controlling interest. All intercompany balances and transactions are eliminated on consolidation. Undivided interests in oil and natural gas exploration and production joint ventures and partnerships are consolidated on a proportionate basis. Investments in non-controlled entities over which the Company has the ability to exercise significant influence are accounted for using the equity method.  

The interim Condensed Consolidated Financial Statements are prepared in conformity with U.S. GAAP and the rules and regulations of the SEC. Pursuant to these rules and regulations, certain information and disclosures normally required under U.S. GAAP have been condensed or have been disclosed on an annual basis only. Accordingly, the interim Condensed Consolidated Financial Statements should be read in conjunction with the annual audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2019, which are included in Item 8 of Ovintiv’s 2019 Annual Report on Form 10-K.

The interim Condensed Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the annual audited Consolidated Financial Statements for the year ended December 31, 2019, except as noted below in Note 2. The disclosures provided below are incremental to those included with the annual audited Consolidated Financial Statements.

These unaudited interim Condensed Consolidated Financial Statements reflect, in the opinion of Management, all normal and recurring adjustments necessary to present fairly the financial position and results of the Company as at and for the periods presented. Interim condensed consolidated financial results are not necessarily indicative of consolidated financial results expected for the fiscal year.

 

 

 

10

 

 


 

2.

Recent Accounting Pronouncements

 

Changes in Accounting Policies and Practices

 

On January 1, 2020, Ovintiv adopted the following ASUs issued by the FASB, which have not had a material impact on the interim Condensed Consolidated Financial Statements:

 

 

ASU 2017-04, “Simplifying the Test for Goodwill Impairment”. The amendment eliminates the second step of the goodwill impairment test which requires the Company to measure the impairment based on the excess amount of the carrying value of the reporting unit’s goodwill over the implied fair value of its goodwill. Under this amendment, the goodwill impairment will be measured based on the excess amount of the reporting unit’s carrying value over its respective fair value. The amendment has been applied prospectively.

 

 

ASU 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” under Topic 326. The standard amends the impairment model which requires utilizing a forward-looking expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables. The standard requires entities to consider a broader range of information to estimate expected credit losses, resulting in earlier recognition of credit losses. The standard has been applied using the modified retrospective approach.

 

3.

Segmented Information

Ovintiv’s reportable segments are determined based on the following operations and geographic locations:

USA Operations includes the exploration for, development of, and production of oil, NGLs and natural gas and other related activities within the U.S. cost center.  

Canadian Operations includes the exploration for, development of, and production of oil, NGLs and natural gas and other related activities within the Canadian cost center.    

China Operations included the exploration for, development of, and production of oil and other related activities within the China cost center. Effective July 31, 2019, the production sharing contract with China National Offshore Oil Corporation (“CNOOC”) was terminated and the Company exited its China Operations.

Market Optimization is primarily responsible for the sale of the Company’s proprietary production. These results are reported in the USA and Canadian Operations. Market optimization activities include third-party purchases and sales of product to provide operational flexibility and cost mitigation for transportation commitments, product type, delivery points and customer diversification. These activities are reflected in the Market Optimization segment. Market Optimization sells substantially all of the Company’s upstream production to third-party customers. Transactions between segments are based on market values and are eliminated on consolidation.  

Corporate and Other mainly includes unrealized gains or losses recorded on derivative financial instruments. Once the instruments are settled, the realized gains and losses are recorded in the reporting segment to which the derivative instruments relate. Corporate and Other also includes amounts related to sublease rentals.

 

 

11

 

 


 

Results of Operations (For the three months ended March 31)

Segment and Geographic Information

 

 

 

USA Operations

 

 

Canadian Operations

 

 

China Operations (1)

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product and service revenues

 

$

800

 

 

$

777

 

 

$

351

 

 

$

456

 

 

$

-

 

 

$

13

 

Gains (losses) on risk management, net

 

 

114

 

 

 

52

 

 

 

36

 

 

 

20

 

 

 

-

 

 

 

-

 

Sublease revenues

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Revenues

 

 

914

 

 

 

829

 

 

 

387

 

 

 

476

 

 

 

-

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production, mineral and other taxes

 

 

48

 

 

 

44

 

 

 

4

 

 

 

4

 

 

 

-

 

 

 

-

 

Transportation and processing

 

 

121

 

 

 

79

 

 

 

213

 

 

 

212

 

 

 

-

 

 

 

-

 

Operating

 

 

139

 

 

 

115

 

 

 

26

 

 

 

37

 

 

 

-

 

 

 

4

 

Depreciation, depletion and amortization

 

 

418

 

 

 

274

 

 

 

109

 

 

 

92

 

 

 

-

 

 

 

-

 

Impairments

 

 

277

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Operating Expenses

 

 

1,003

 

 

 

512

 

 

 

352

 

 

 

345

 

 

 

-

 

 

 

4

 

Operating Income (Loss)

 

$

(89

)

 

$

317

 

 

$

35

 

 

$

131

 

 

$

-

 

 

$

9

 

 

 

 

Market Optimization

 

 

Corporate & Other

 

 

Consolidated

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product and service revenues

 

$

419

 

 

$

326

 

 

$

-

 

 

$

-

 

 

$

1,570

 

 

$

1,572

 

Gains (losses) on risk management, net

 

 

1

 

 

 

-

 

 

 

904

 

 

 

(427

)

 

 

1,055

 

 

 

(355

)

Sublease revenues

 

 

-

 

 

 

-

 

 

 

18

 

 

 

18

 

 

 

18

 

 

 

18

 

Total Revenues

 

 

420

 

 

 

326

 

 

 

922

 

 

 

(409

)

 

 

2,643

 

 

 

1,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production, mineral and other taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

52

 

 

 

48

 

Transportation and processing

 

 

62

 

 

 

47

 

 

 

-

 

 

 

-

 

 

 

396

 

 

 

338

 

Operating

 

 

2

 

 

 

10

 

 

 

(2

)

 

 

(1

)

 

 

165

 

 

 

165

 

Purchased product

 

 

398

 

 

 

298

 

 

 

-

 

 

 

-

 

 

 

398

 

 

 

298

 

Depreciation, depletion and amortization

 

 

-

 

 

 

-

 

 

 

7

 

 

 

11

 

 

 

534

 

 

 

377

 

Impairments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

277

 

 

 

-

 

Accretion of asset retirement obligation

 

 

-

 

 

 

-

 

 

 

9

 

 

 

9

 

 

 

9

 

 

 

9

 

Administrative

 

 

-

 

 

 

-

 

 

 

53

 

 

 

227

 

 

 

53

 

 

 

227

 

Total Operating Expenses

 

 

462

 

 

 

355

 

 

 

67

 

 

 

246

 

 

 

1,884

 

 

 

1,462

 

Operating Income (Loss)

 

$

(42

)

 

$

(29

)

 

$

855

 

 

$

(655

)

 

 

759

 

 

 

(227

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96

 

 

 

87

 

Foreign exchange (gain) loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

116

 

 

 

(37

)

(Gain) loss on divestitures, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

1

 

Other (gains) losses, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

28

 

Total Other (Income) Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

198

 

 

 

79

 

Net Earnings (Loss) Before Income Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

561

 

 

 

(306

)

Income tax expense (recovery)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

140

 

 

 

(61

)

Net Earnings (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

421

 

 

$

(245

)

(1)

The Company terminated its production sharing contract with CNOOC and exited its China Operations effective July 31, 2019.

 

 

12

 

 


 

Intersegment Information

 

 

 

 

 

 

 

 

 

 

 

Market Optimization

 

 

 

 

 

 

 

 

 

 

 

Marketing Sales

 

 

Upstream Eliminations

 

 

Total

 

For the three months ended March 31,

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,095

 

 

$

1,236

 

 

$

(1,675

)

 

$

(910

)

 

$

420

 

 

$

326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation and processing

 

 

168

 

 

 

139

 

 

 

(106

)

 

 

(92

)

 

 

62

 

 

 

47

 

Operating

 

 

2

 

 

 

10

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

10

 

Purchased product

 

 

1,967

 

 

 

1,116

 

 

 

(1,569

)

 

 

(818

)

 

 

398

 

 

 

298

 

Operating Income (Loss)

 

$

(42

)

 

$

(29

)

 

$

-

 

 

$

-

 

 

$

(42

)

 

$

(29

)

 

Capital Expenditures

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USA Operations

 

 

 

 

 

$

628

 

 

$

577

 

Canadian Operations

 

 

 

 

 

 

161

 

 

 

157

 

Corporate & Other

 

 

 

 

 

 

1

 

 

 

2

 

 

 

 

 

 

 

$

790

 

 

$

736

 

 

Costs Incurred

 

For the year ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

United States

 

 

Canada

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition Costs (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unproved

 

 

 

 

 

 

 

 

 

 

 

 

 

$

843

 

 

$

-

 

 

$

843

 

Proved

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,963

 

 

 

-

 

 

 

5,963

 

Total Acquisition Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,806

 

 

 

-

 

 

 

6,806

 

Exploration Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

-

 

 

 

5

 

Development Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,129

 

 

 

480

 

 

 

2,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,940

 

 

$

480

 

 

$

9,420

 

 

(1)

Acquisition costs were restated and include the non-cash acquisition of the proved and unproved properties of Newfield Exploration Company in conjunction with the business combination described in Note 8.

 

Goodwill, Property, Plant and Equipment and Total Assets by Segment

 

 

 

Goodwill

 

 

Property, Plant and Equipment

 

 

Total Assets

 

 

 

As at

 

 

As at

 

 

As at

 

 

 

March 31,

 

December 31,

 

 

March 31,

 

December 31,

 

 

March 31,

 

December 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USA Operations

 

$

1,938

 

 

$

1,938

 

 

$

13,696

 

 

$

13,757

 

 

$

16,229

 

 

$

16,613

 

Canadian Operations

 

 

617

 

 

 

673

 

 

 

1,173

 

 

 

1,205

 

 

 

1,949

 

 

 

2,122

 

Market Optimization

 

 

-

 

 

 

-

 

 

 

2

 

 

 

2

 

 

 

272

 

 

 

253

 

Corporate & Other

 

 

-

 

 

 

-

 

 

 

209

 

 

 

227

 

 

 

3,055

 

 

 

2,499

 

 

 

$

2,555

 

 

$

2,611