- Posted $47 million of non-GAAP free cash flow and reduced net debt by $217 million during the third quarter, reaffirmed pledge that all excess cash flows will go toward debt reduction
- Reported third quarter cash from operating activities of $493 million and non-GAAP cash flow of $398 million
- Exceeded guidance with third quarter crude and condensate(1) production of 186 thousand barrels per day (Mbbls/d). Fourth quarter and full-year 2021 crude and condensate average production forecast of 200 Mbbls/d reaffirmed
- Achieved 20% capital efficiency gains ahead of schedule; Company achieved record low well costs in each active drilling area which provides high confidence in 2021 scenario
- Reaffirmed 2020-21 scenarios and provided additional clarity around its framework for future capital allocation and debt reduction
- The 2021 scenario capital investment midpoint of $1.5 billion represents less than 70% cash flow reinvestment at at $45 WTI and $3 NYMEX natural gas
Ovintiv Inc. announced its third quarter 2020 financial and operating results. In addition, the Company reaffirmed the 2020-21 scenarios and provided additional visibility on its framework related to future capital allocation plans and ongoing focus on debt reduction.
"Our business is performing exceptionally well and we are exiting 2020 with lower costs, greater efficiencies and a laser-focus on debt reduction," said President & CEO Doug Suttles, "Our strong results in the third quarter continued to support our world class operations. Despite the global headwinds, during the quarter we delivered $47 million of free cash flow and reduced our net debt by $217 million. Consistent with our previous framework, today we provided additional insights into our future capital allocation framework and reiterated our focus on debt reduction."
Third Quarter 2020 Financial and Operating Results
The Company recorded a net loss in the third quarter of $1.5 billion, or ($5.85) per share of common stock. Results were impacted by the following items:
- A non-cash ceiling test impairment of $1,336 million, before-tax, primarily related to the decline in 12-month average trailing commodity prices which reduced SEC proved reserves.
- A non-cash unrealized loss on risk management of $243 million, before-tax, related to the mark-to-market value of derivative positions.
- Excluding these and other items, the Company reported a non-GAAP operating loss of $8 million. Cash from operating activities was $493 million and non-GAAP cash flow was $398 million.
Ovintiv delivered higher than expected crude and condensate production during the quarter and continued to achieve significant reductions in capital and costs.
Total average production for the third quarter was 510 thousand barrels of oil equivalent per day (MBOE/d). Crude and condensate production averaged 186 Mbbls/d. This compares to previous guidance of 180 Mbbls/d.
Total Costs year-to-date were $11.77 per barrel of oil equivalent (BOE); down 7% when compared to the same period in 2019.
Third quarter capital investments were $351 million. The Company reiterated its previous guidance for full year 2020 capital investments of $1.8 billion, down approximately $0.9 billion from its beginning of the year estimate.
Ovintiv safely resumed well completions in the third quarter on more than 100 drilled but uncompleted wells (DUCs). Completions activities were halted across the portfolio in the second quarter in response to low oil prices. The majority of the DUCs are expected to commence production by year-end 2020 and the Company anticipates a modest inventory of approximately 30 DUCs will be carried into 2021.
- Following a volatile second quarter, third quarter realized prices returned to more typical realizations versus benchmark prices, and the Company's hedge book continued to protect its cash flows.
- Third quarter average realized prices including hedge of $41.39 per barrel for oil, $20.81 per barrel for NGLs and $2.15 per thousand cubic feet (Mcf) for natural gas, resulted in a total equivalent price of $22.66 per BOE. Ovintiv realized third quarter total hedging gains of $89 million, before-tax.
- Third quarter 2020 average realized prices excluding hedge of $39.40 per barrel for oil, $19.45 per barrel for NGLs and $1.81 per Mcf for natural gas resulted in a total equivalent price of $20.81 per BOE.
1. Throughout this document, crude and condensate refers to tight oil including medium and light crude oil volumes and plant condensate.
Ovintiv is the "New E&P"
For the last three-plus years, Ovintiv has been managing its business within a framework that comprises the key ingredients of the "New E&P". The Company provided additional information on its capital allocation framework.
Suttles said, "The year 2020 will be the third consecutive year that we have generated free cash flow and we have returned $1.7 billion of cash to shareholders since 2018. Our priorities are very clear – reduce debt, maintain scale, drive efficiencies and return cash to shareholders. A long-term reinvestment rate of not greater than 75% provides significant cash for return to shareholders with a near term focus on debt reduction. Importantly, we can do this while maintaining our 'scale' at about 200 Mbbls/d of crude and condensate, and with significant natural gas and NGL production."
Reinvestment rate – The Company provided additional information on its capital allocation framework with an expected long-term cash flow reinvestment rate of less than 75%. This is in line with the Company's previously disclosed 2021 scenario which has an estimated reinvestment rate of less than 70%. The 2021 scenario has the Company generating approximately $800 million of non-GAAP free cash flow at $45 WTI and $3 NYMEX natural gas.
A focus on debt reduction – Ovintiv has been focused on debt reduction and has a plan to reduce total debt by at least $1 billion from the second half of 2020 through year-end 2021. Longer term at mid-cycle pricing, the Company is targeting a leverage ratio of 1.5x net debt to adjusted EBITDA, or less.
Ongoing focus on ESG – In November, Ovintiv will issue its 15th annual Sustainability Report. The Company is on track to include new emissions-related performance goals in its 2021 compensation program for the entirety of the organization. Ovintiv has been a leader in sustainability disclosure, and multiple Ovintiv executives are engaged in emissions-related leadership roles in the industry's largest trade associations.
Strong operating results in the third quarter support the assumptions behind the 2021 scenario the Company outlined in May 2020.
Full-year 2020 cost reductions in excess of $200 million are expected to be durable into 2021 and an additional $100 million of legacy cost reductions will further enhance cash flows. Capital expenditures of approximately $1.5 billion will maintain crude and condensate production of 200 Mbbls/d throughout 2021.
Strong Hedge Position Protects Cash Flow
Ovintiv is substantially hedged through year-end 2020 on benchmark WTI and Henry Hub price risk. As of October 16, 2020, fourth quarter 2020 hedges include 180 Mbbls/d of oil at an average price of $51.76 per barrel and about 1.2 billion cubic feet per day (Bcf/d) of natural gas at an average price of $2.66 per Mcf.
Based on the forward strip as of October 16, fourth quarter realized risk management gains on benchmark oil and natural gas prices are expected to total approximately $170 million. Settlements for various other oil differential and natural gas basis positions in 2020 serve to further reduce risk. See the Hedge Volume and Hedging Price Sensitivity tables below.
Balance Sheet and Liquidity
Current liquidity is approximately $3.1 billion, which represents the Company's $4 billion committed, unsecured credit facilities, available capacity on uncommitted demand lines and cash-on-hand, net of the amount drawn on the credit facilities and commercial paper outstanding.
Ovintiv has taken steps to capitalize on market dislocation, purchasing its notes at a discount in the open market, resulting in $28 million of gains as well as go-forward interest savings. During the first nine months of the year, Ovintiv repurchased approximately $252 million in principal of its senior notes for a cash payment of approximately $224 million, plus accrued interest. The Company has significant flexibility to manage its late 2021 and 2022 maturities, including the use of its credit facilities or available cash on hand.
Approximately 80% of the Company's total fixed-rate long-term debt is due in 2024 or later and has an aggregate weighted average bond maturity of approximately nine years.
Refer to Note 1 Non-GAAP measures and the tables in this release for reconciliation to comparable GAAP financial measures.
The Company continued to demonstrate industry-leading capital efficiencies, setting new, record-low well costs in each of its Core 3 asset areas during the third quarter. The Company attained its stated goal of reducing well costs by 20% when compared to 2019 averages and solidified the key assumptions in its 2021 scenario.
"We've benefitted greatly in 2020 from the flexibility we built into our business," said Suttles. "As oil prices dramatically reset in March and demand for our products was reduced, we immediately adjusted activity levels, without incurring penalties. Our team relentlessly sought out innovative ways to reduce costs. Their efforts far-exceed service provider cost reductions and have led to sustainable savings that will be durable even as prices improve. Even more important, they did this safely and we are on-track to again have our 'safest year ever' for the seventh consecutive year."
Permian production averaged 106 MBOE/d (81% liquids) in the quarter. The Company averaged three rigs, drilled 25 net wells, and had 16 net wells turned in line (TIL).
Permian operations continue to outperform with Simul-Frac activities pushing operational efficiencies and driving down well costs as seen by a 55% increase in completed lateral length per day since 2018. Third quarter drilling and completion (D&C) cost per lateral foot were $500, down over 20% year-to-date.
Anadarko production averaged 138 MBOE/d (62% liquids) in the quarter. The Company averaged two rigs, drilled 10 net wells, and had five net wells TIL.
Efficiency gains continued to be realized in the Anadarko, leading to new 2021 D&C well cost projections in the STACK of approximately $4.6 million per well. This represents a reduction of more than 40% when compared to the D&C costs at the time the asset was acquired less than two years ago. Multiple operational initiatives including Simul-Frac, the self-sourcing of chemicals and the utilization of "wet" sand in completion activities have been significant contributors to the well cost savings.
Montney production averaged 187 MBOE/d (24% liquids) in the quarter. The Company averaged two rigs, drilled 11 net wells and had 14 net wells TIL.
The Montney continued to execute with record-setting drilling costs of less than $1 million per well achieved in the quarter. On average in the quarter, Montney wells were completed in approximately two days, or half the time taken in 2018.
In October, Ovintiv successfully commenced operations at the Pipestone Processing Facility (PPF), which came on more than five months ahead of its original schedule and at budgeted costs. The start-up of the PPF provides Ovintiv with additional net processing capacity of approximately 170 million cubic feet per day (MMcf/d) of natural gas and 19 Mbbls/d of liquids, primarily condensate. The start-up of the PPF required no new drilling to satisfy the new capacity arrangements.
Base assets in the portfolio include the Eagle Ford, Bakken, Uinta and Duvernay. There were six net wells TIL in the third quarter, all in the Eagle Ford.
On October 28, 2020, Ovintiv's Board declared a dividend of $0.09375 per share of common stock payable on December 31, 2020 to common stockholders of record as of December 15, 2020.