Ovintiv wraps up 2019 strong, expects positive trend for 2020
Ovintiv Inc. has announced its fourth quarter and full-year 2019 financial and operating results, which exceeded consensus estimates.
The company also announced its 2020 Outlook with capital investments expected to decrease about $175 million from the prior year on a proforma basis. The outlook is expected to generate the Company's third consecutive year of significant non-GAAP free cash flow and grow crude oil and condensate production by 4%. The 2020 investment program is aligned with Ovintiv's strategy to grow long-term stockholder value through disciplined capital investments, a return of cash to stockholders and profitable liquids growth.
"We finished 2019 very strong, marking the second consecutive year of generating free cash flow while growing our crude and condensate production," said CEO Doug Suttles. "Our disciplined capital investments, combined with a relentless focus on efficiency and innovation, has transformed Ovintiv into one of the largest independent producers of crude oil and condensate and amongst the top independents in EBITDA generation."
Crude oil and condensate volumes are expected to grow 4% proforma year-over-year to 229 - 239 Mbbls/d. Full-year NGL (C2 - C4) production is expected to be 89 - 93 Mbbls/d, up 2% proforma from the prior year. Liquids (total crude oil and NGLs) are expected to comprise 56% of total production, up 2% over 2019 proforma volumes.
Total Costs in 2020 are expected to drop again year-over-year to $12.20 - $12.50 per barrel of oil equivalent (BOE).
The 2020 Outlook is supported by Ovintiv's derivatives' positions with over 70% of 2020 crude oil, condensate and natural gas production hedged. The 2020 program is expected to be free cash flow positive at prices lower than the current strip prices of approximately $52/bbl WTI oil and approximately $2.15/MMBtu NYMEX natural gas. As of December 31, 2019, Ovintiv had 2020 benchmark hedges of approximately 165 Mbbls/d of crude oil and condensate and 1,188 MMcf/d of natural gas. An updated hedge table can be found below.
"Our 2020 Outlook balances industry competitive crude oil and condensate growth, disciplined capital allocation and highly efficient execution to generate free cash flow for the third consecutive year", said Suttles. "In 2020, our business is well positioned for the current market volatility. Our risk management programs combined with almost complete capital flexibility give us confidence that we can generate free cash flow across a wide range of commodity outcomes and continue to return cash to our stockholders."
Full-year and fourth quarter 2019 summary
For 2019, net earnings were $234 million, or $0.90 per share. Non-GAAP operating earnings were $860 million, or $3.29 per share. Cash from operating activities for the full year was $2.9 billion, equivalent to non-GAAP cash flow.
For the fourth quarter, Ovintiv reported a net loss of $6 million, or $(0.02) per share, driven primarily by a $264 million (after-tax) non-cash unrealized risk management loss on hedge positions recognized in the quarter. Non-GAAP operating earnings for the quarter were $210 million, or $0.81 per share. Cash from operating activities for the fourth quarter was $730 million and non-GAAP cash flow was $815 million.
At year-end, Ovintiv had $3.5 billion of liquidity. The Company's credit facilities have no reserve-based covenants. In early 2020, the facilities were replaced and extended to July 2024. Ovintiv has an investment grade credit rating and maintains significant financial flexibility. The Company has no debt maturities until late 2021 and approximately 80% of long-term debt does not come due until 2024 or later.
Production summary and asset highlights
Ovintiv's higher than expected production was driven by strong and consistent well results across the portfolio. Through its proven cube development practices, the Company continues to deliver leading performance across all assets to generate quality returns and maximize acreage value.
For the full year, on a proforma basis and excluding production from assets divested during 2019, Ovintiv's total production averaged 578,600 BOE/d, 9% higher than the prior year. Full year proforma crude oil and condensate production, excluding the impact of divestitures, also grew 9% over 2018. See the "Capital Investment and Production" table below.
Total Company production in the fourth quarter of 2019 was 592,600 BOE/d. Fourth quarter liquids production averaged 322,000 bbls/d. See the "Capital Investment and Production" table below.
Production in the Permian increased 14% over 2018 and averaged 104,800 BOE/d. Fourth quarter production averaged 112,200 BOE/d (81% liquids) with 18 net wells turned-in-line (TILs) during the quarter.
For 2020, well costs are forecast to be 8% lower than the prior year as a result of play-leading drilling and completion performance and supply chain management. Improved spud-to-rig release times led to five recent pacesetter wells which averaged under 11 days from spud to rig release.
Proforma production from the Anadarko increased 17% year-over-year to 158,300 BOE/d, of which 62% was liquids. For the fourth quarter, production averaged 163,500 BOE/d (62% liquids) and 25 net TILs.
During the year, Ovintiv doubled its initial target for well cost reductions in the play, lowering completed well costs by nearly $2 million per well. Recently, Ovintiv turned to sales four pacesetter wells at a drilling and completions cost of less than $5.2 million per well.
Liquids production grew 25% year-over-year to 52,100 bbls/d. Fourth quarter production averaged 209,100 BOE/d (25% liquids) with eight net TILs during the quarter. Ovintiv had industry leading cycle times (78 days with an average of seven wells per pad) in the Montney in 2019.
Year-end 2019 reserves
Under Canadian reserves protocol, proved and probable reserves were 5.1 billion BOE before royalties and 4.2 billion BOE after royalties. SEC proved reserves at year-end 2019 were 2.2 billion BOE, of which 60% were liquids and 48% were proved developed and, excluding the impact of acquisitions and dispositions, reserve replacement was more than two times 2019 production.
On February 19, 2020, Ovintiv's Board declared a dividend of $0.09375 per share of common stock payable on March 31, 2020 to common stockholders of record as of March 13, 2020.
Differences between estimates under Canadian and U.S. protocols primarily represent the use of forecast prices in the estimation of reserves under Canadian standards, while U.S. standards require the use of 12-month average historical prices which are held constant. For information on reserves reporting, see Note 2.
Ovintiv reports in U.S. dollars unless otherwise noted. Production, sales and reserves estimates are reported on an after-royalties basis, unless otherwise noted. The term liquids is used to represent oil and NGLs. The term liquids-rich is used to represent natural gas streams with associated liquids volumes. Unless otherwise specified or the context otherwise requires, references to Ovintiv or to the Company includes reference to subsidiaries of and partnership interests held by Ovintiv Inc and its subsidiaries.
NOTE 1: Non-GAAP measures
Certain measures in this news release do not have any standardized meaning as prescribed by U.S. GAAP and, therefore, are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other companies and should not be viewed as a substitute for measures reported under U.S. GAAP. These measures are commonly used in the oil and gas industry and/or by Ovintiv to provide stockholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations. For additional information regarding non-GAAP measures, see the Company's website. This news release contains references to non-GAAP measures as follows:
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. Non-GAAP Free Cash Flow is a non-GAAP measure defined as Non-GAAP Cash Flow in excess of capital investment, excluding net acquisitions and divestitures.
Non-GAAP Operating Earnings (Loss) is a non-GAAP measure defined as net earnings (loss) excluding non-recurring or non-cash items that management believes reduces the comparability of the company's financial performance between periods. These items may include, but are not limited to, unrealized gains/losses on risk management, impairments, restructuring charges, non-operating foreign exchange gains/losses, gains/losses on divestitures and gains on debt retirement. Income taxes may include valuation allowances and the provision related to the pre-tax items listed, as well as income taxes related to divestitures and U.S. tax reform, and adjustments to normalize the effect of income taxes calculated using the estimated annual effective income tax rate.
Total Costs per BOE is defined as 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 and restructuring costs, per BOE of production. Management believes this measure is useful to the company and its investors as a measure of operational efficiency across periods.
NOTE 2: Information on reserves reporting - Detailed Canadian protocol disclosure will be contained in the Company's Form 51-101F1 for the year ended December 31, 2019 ("Form 51-101F1") and detailed U.S. protocol disclosure will be contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 ("Annual Report on Form 10-K"), each of which the Company anticipates filing with applicable securities regulatory authorities on or about February 21, 2020. A description of the primary differences between the disclosure requirements under Canadian standards and under U.S. standards will be set forth under the heading "Note Regarding Additional Reserves Information" in the Form 51-101F1.