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Ovintiv Inc. Third Quarter 2021 Results; 2022 Outlook Keeps Capex Flat YOY

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Ovintiv Inc. reported its Q3 2021 results.

Ovintiv President and CEO, Brendan McCracken said: "Our third quarter results demonstrate our commitment to unlocking shareholder value by delivering on our strategic priorities. Year-to-date, we have generated nearly $1.4 billion of free cash flow, dropped our net debt by more than $2.1 billion, and increased our base dividend by about 50%. During the fourth quarter we expect to return approximately $150 million to our shareholders via our base dividend and share buybacks. Looking ahead, we are committed to debt reduction, generating superior returns on the capital we invest, returning cash to our shareholders, and driving ESG progress."

Q3 Financial and Operating Results:

• The Company recorded a net loss in the third quarter of $72 million, or $0.28 per diluted share of common stock. The results included the impact of net losses on risk management of $954 million, before-tax.
• Third quarter cash from operating activities was $812 million, non-GAAP cash flow was $845 million and capital investment totaled $365 million, resulting in $480 million of non-GAAP free cash flow.
• Average total production was 535 thousand barrels of oil equivalent per day (MBOE/d), including crude and condensate production of 189 thousand barrels per day (Mbbls/d), natural gas production of 1,566 million cubic feet per day (MMcf/d), and NGL production of 85 Mbbls/d.
• Total Costs for the third quarter were $13.03 per barrel of oil equivalent (BOE).
• Third quarter 2021 average realized prices, excluding losses on risk management, were $68.36 per barrel for oil and condensate (97% of WTI), $29.31 per barrel for other NGLs (C2-C4) and $3.69 per thousand cubic feet (Mcf) for natural gas (92% of NYMEX), resulting in a total average realized price of $39.57 per BOE.
• Third quarter 2021 average realized prices, including losses on risk management, were $54.97 per barrel for oil and condensate, $23.86 per barrel for other NGLs (C2-C4) and $3.02 per Mcf for natural gas, resulting in a total average realized price of $32.00 per BOE. Ovintiv reported third quarter realized commodity-based risk management losses of $372 million, before tax. The Company did not add any material new risk management positions during the quarter.

Share Buyback Program Underway

As of October 31, 2021, Ovintiv had repurchased for cancellation, approximately 791 thousand of its common shares outstanding at an average price of $37.91 per share, for a total investment of approximately $30 million. During the fourth quarter, the Company plans to buyback shares equivalent to 25% of its third quarter free cash flow less base dividend payments, or approximately $111 million.

Continued Net Debt Reduction

During the third quarter, Ovintiv reduced net debt by $409 million to $4.8 billion. The Company remains on track to reach its year-end net debt target of $4.5 billion, which will represent approximately $3 billion of net debt reduction since the second quarter of 2020.

During the quarter, the Company set a new net debt target of $3 billion, which, assuming current strip commodity prices, could be achieved as soon as year-end 2022. Assuming commodity prices of $50 per bbl WTI oil and $2.75 per MMBtu NYMEX natural gas, Ovintiv expects the net debt target to be reached by or before year-end 2023.

In August 2021, Ovintiv redeemed its $518 million, 3.90% senior notes due November 15, 2021. The Company redeemed the notes at par and paid approximately $523 million in cash including accrued and unpaid interest of $5 million. In June 2021, Ovintiv redeemed its $600 million 5.75% senior notes due January 30, 2022. The combined redemptions represent approximately $1.1 billion of debt repayments, resulting in expected annualized interest savings of over $50 million.

At the end of the third quarter, the Company had no outstanding balances under its revolving credit facilities and commercial paper programs. Ovintiv's available liquidity totaled $4.3 billion.

Dividend Declared

On November 2, 2021, Ovintiv's Board declared a dividend of $0.14 per share of common stock payable on December 31, 2021, to common stockholders of record as of December 15, 2021.The dividend was increased by approximately 50% in the third quarter.

ESG Performance

The Company recently announced the achievement of several key sustainability milestones related to emissions reductions, social responsibility and corporate governance. As highlighted below, Ovintiv is delivering measurable progress against its ESG initiatives. In addition, the Company launched a new sustainability website, highlighting Ovintiv's data-driven approach to environmental, social and governance (ESG) performance matters.

• Delivering on 33% methane intensity reduction target in 2021, four years ahead of schedule
• Expect to reduce 2021 Scope 1&2 GHG emissions intensity by more than 20% compared to 2019
• Committed to establishing a Scope 1&2 GHG emissions intensity target tied to 2022 employee compensation
• As of September 1, 2021, the Company is fully aligned with the World Bank Zero Routine Flaring by 2030 initiative, nine years ahead of the World Bank's target
• Established emissions monitoring dashboard across all operations
• Achieved 7th consecutive safest year ever in 2020 with a Total Recordable Injury Frequency of 0.19
• Established a social commitment leadership team and published inaugural social commitment framework
• Broadened the diversity of the Company's Board of Directors

2021 Guidance Update

The Company reiterated its original full year 2021 capital guidance of $1.5 billion as it expects to fully offset inflationary pressures on capital costs. Ovintiv has narrowed the production ranges in its full year 2021 guidance as follows:

2022 Outlook

Ovintiv views its 2021 development program as being highly repeatable in 2022 for the same amount of capital investment. With capital investment of approximately $1.5 billion in 2022, the Company expects to maintain crude and condensate production volumes consistent with the second half of 2021, at approximately 180 to 190 Mbbls/d. This range reflects a largely flat year-over-year production profile when including the impact of asset divestitures which closed during the first half of 2021. Ovintiv did not enter 2021 with a material drilled-but-uncompleted (DUC) well inventory nor does it expect to exit the year with a material number of DUC wells.

"We are confident in our ability to maintain our capital efficiency in 2022," said McCracken. "Our teams have been relentless in finding ways to offset cost inflation and make better wells. Our Permian, Anadarko, and Montney assets are all generating superior returns on invested capital as evidenced by the fact that each asset is on track to generate between $1.0 to $1.1 billion of upstream operating free cash flow in 2021. Our multi-basin portfolio, repeatable load-leveled program, pacesetter cost performance, and rigorous supply chain management provide a strong position to continue delivering industry leading capital efficiency as we head into 2022."

Asset Highlights

Ovintiv continued to demonstrate industry-leading capital efficiencies across its Core 3 assets during the third quarter. Despite inflationary pressures, program-leading, or "pacesetter" well cost performance was repeated in each of the three assets during the quarter.

Permian production averaged 126 MBOE/d (81% liquids) in the quarter. The Company averaged three gross rigs, drilled 17 net wells, and had 20 net wells turned in line (TIL).

Permian drilling and completion (D&C) costs have averaged $480 per foot year-to-date and are 11% lower than the 2020 program average. During the quarter, the 13 well Falcon East development in Midland County had an average lateral length of 13,500 feet, was drilled at an average rate of over 2,000 feet per day and was completed using simul-frac at a rate of over 3,300 feet per day. Completion efficiency for all 20 net TILs in the quarter averaged over 3,000 feet per day, with 95% of these wells completed using simul-frac. In addition, three of the five pads brought online during the quarter used 100% local, wet sand, generating savings of approximately $100,000 per well.

Anadarko production averaged 134 MBOE/d (62% liquids) in the quarter. The Company averaged two gross rigs, drilled 12 net wells, and had 10 net wells TIL.

In the STACK area, D&C costs have averaged $430 per foot year-to-date and are 10% lower than the 2020 program average. In addition to achieving best in class D&C costs, year-to-date 2021 STACK well results have demonstrated a significant uplift in performance, driven by enhanced artificial lift and optimized completion design.

The Anadarko team lowered facility costs in the quarter to approximately $300,000 per well, 27% below the 2020 program average. This cost reduction was driven by development optimization, including an increase in the number of wells drilled per pad and efficiently reoccupying older locations.

Montney production averaged 229 MBOE/d (25% liquids) in the quarter. The Company averaged four gross rigs, drilled 23 net wells and had 16 net wells TIL.

Montney year-to-date D&C costs have averaged $410 per foot and are 9% lower than the 2020 program average. During the quarter, Ovintiv drilled three of its longest laterals ever in the Montney. The longest of these was drilled at over 15,300 feet, 13% more than the previous company record. Industry wide, these wells mark three of the top five longest laterals drilled in the basin to date. About 90% of the completed wells in the quarter utilized an optimized casing design that saved approximately $120,000 per well. The 2021 Montney program is achieving better than expected well performance across all fluid windows. In the liquids-rich fairway of Pipestone, the 8 well 16-27 development has produced an average of 993 BOE/d (63% condensate) per well over the first 180 days of production.

Bakken production averaged 25 MBOE/d (80% liquids) in the quarter. The Company averaged one net rig, drilled four net wells and had two net wells TIL. The Bakken program is continuing to demonstrate exceptional performance through optimized completion and wellbore designs. The Kestrel 3 well development has achieved an IP120 production rate of 1,330 barrels of oil per day per well.