Ovintiv Inc

Results of Operations

Selected Financial Information

(1)

Service revenues include amounts related to the USA and Canadian Operations.

(2)

Total Operating Expenses include non-cash items such as DD&A, accretion of asset retirement obligations and long-term incentive costs.

Revenues

Ovintiv’s revenues are substantially derived from sales of oil, NGLs and natural gas production. Increases or decreases in Ovintiv’s revenue, profitability and future production are highly dependent on the commodity prices the Company receives. Prices are market driven and fluctuate due to factors beyond the Company’s control, such as supply and demand, seasonality and geopolitical and economic factors. The Company’s realized prices generally reflect WTI, NYMEX, Edmonton Condensate and AECO benchmark prices, as well as other downstream benchmarks, including Houston and Dawn. The Company proactively mitigates price risk and optimizes margins by entering into firm transportation contracts to diversify market access to different sales points. Realized prices, excluding the impact of risk management activities, may differ from the benchmarks for many reasons, including quality, location, or production being sold at different market hubs.

Benchmark prices relevant to the Company are shown in the table below.

Benchmark Prices

Production Volumes and Realized Prices

(1)

Average daily.

(2)

Average per-unit prices, excluding the impact of risk management activities.

(3)

Includes production impacts of acquisitions and divestitures. See Notes 8 and 9 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Upstream Product Revenues

(1)

Revenues for 2023 exclude certain other revenue and royalty adjustments with no associated production volumes of $1 million (2022 - $9 million).

Oil Revenues

Oil revenues were lower by $92 million compared to 2022 primarily due to:

•

A decrease of $17.79 per bbl, or 19 percent, in the average realized oil prices which decreased revenues by $1,031 million. The decrease reflected lower WTI and Houston benchmark prices which were both down 18 percent and the weakening of regional pricing relative to the WTI benchmark price in the USA Operations; and

•

Higher average oil production volumes of 27.3 Mbbls/d increased revenues by $939 million. Higher volumes were primarily due to the Permian Acquisition in the second quarter of 2023 (26.5 Mbbls/d) and successful drilling in Permian and Uinta (12.0 Mbbls/d), partially offset by the sale of the Bakken assets in the second quarter of 2023 (6.5 Mbbls/d) and natural declines in Anadarko (5.5 Mbbls/d).

NGL Revenues

NGL revenues were lower by $704 million compared to 2022 primarily due to:

•

A decrease of $13.36 per bbl, or 42 percent, in the average realized other NGL prices which decreased revenues by $445 million. The decrease reflected lower other NGL benchmark prices and lower regional pricing;

•

A decrease of $18.06 per bbl, or 20 percent, in the average realized plant condensate prices which decreased revenues by $278 million. The decrease reflected lower WTI and Edmonton Condensate benchmark prices which were down 18 percent and 15 percent, respectively, and lower regional pricing relative to the WTI benchmark price; and

•

Higher average other NGL production volumes of 4.7 Mbbls/d increased revenues by $59 million. Higher volumes were primarily due to successful drilling in Permian and Montney (5.1 Mbbls/d), the Permian Acquisition in the second quarter of 2023 (2.7 Mbbls/d), and lower effective royalty rates resulting from lower commodity prices in Montney (1.5 Mbbls/d), partially offset by the sale of the Bakken assets in the second quarter of 2023 (3.4 Mbbls/d) and natural declines in Anadarko (1.4 Mbbls/d).

Natural Gas Revenues

Natural gas revenues were lower by $1,569 million compared to 2022 primarily due to:

•

A decrease of $3.15 per Mcf, or 53 percent, in the average realized natural gas prices which decreased revenues by $1,884 million. The decrease reflected lower Dawn, NYMEX and AECO benchmark prices which were down 60 percent, 59 percent and 47 percent, respectively; and

•

Higher average natural gas production volumes of 148 MMcf/d increased revenues by $315 million. Higher volumes were primarily due to lower effective royalty rates resulting from lower commodity prices in Montney (106 MMcf/d) and successful drilling in Montney and Permian (60 MMcf/d).

Gains (Losses) on Risk Management, Net

As a means of managing commodity price volatility, Ovintiv enters into commodity derivative financial instruments on a portion of its expected oil, NGLs and natural gas production volumes. Additional information on the Company’s commodity price positions as at December 31, 2023 can be found in Note 24 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The following table provides the effects of the Company’s risk management activities on revenues.

(1)

Primarily includes realized gains and losses related to the USA and Canadian Operations.

(2)

Other primarily includes realized gains or losses from other derivative contracts with no associated production volumes.

Ovintiv recognizes fair value changes from its risk management activities each reporting period. The changes in fair value result from new positions and settlements that occur during each period, as well as the relationship between contract prices and the associated forward curves. Realized gains or losses on risk management activities related to commodity price mitigation are included in the USA Operations, Canadian Operations and Market Optimization revenues as the contracts are cash settled. Unrealized gains or losses on fair value changes of unsettled contracts are included in the Corporate and Other segment. Additional information on fair value changes can be found in Note 23 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Market Optimization Revenues

Market Optimization product revenues relate to activities that provide operational flexibility and cost mitigation for transportation commitments, product type, delivery points and customer diversification. Ovintiv also purchases and sells third-party volumes under marketing arrangements associated with the Company’s previous divestitures.

Market Optimization product revenues decreased $1,231 million compared to 2022 primarily due to:

•

Lower oil and natural gas benchmark prices ($885 million), lower sales of third-party purchased liquids volumes primarily relating to price optimization activities in the USA Operations ($202 million) and lower sales of third-party purchased natural gas volumes primarily relating to marketing arrangements for assets divested in prior years ($144 million).

Sublease Revenues

Sublease revenues primarily include amounts related to the sublease of office space in The Bow office building recorded in the Corporate and Other segment. Additional information on office sublease income can be found in Note 14 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Production, Mineral and Other Taxes

Production, mineral and other taxes include production and property taxes. Production taxes are generally assessed as a percentage of oil, NGLs and natural gas production revenues. Property taxes are generally assessed based on the value of the underlying assets.

Production, mineral and other taxes decreased $73 million compared to 2022 primarily due to:

•

Lower production tax in USA Operations due to lower commodity prices ($93 million) and the sale of the Bakken assets in the second quarter of 2023 ($31 million);

•

Higher volumes in Permian primarily due to the Permian Acquisition in the second quarter of 2023 ($48 million).

Transportation and Processing

Transportation and processing expense includes transportation costs incurred to move product from production points to sales points including gathering, compression, pipeline tariffs, trucking and storage costs. Ovintiv also incurs costs related to processing provided by third parties or through ownership interests in processing facilities.

Transportation and processing expense decreased $20 million compared to 2022 primarily due to:

•

Lower variable contract rates in Permian ($139 million), a higher U.S./Canadian dollar exchange rate ($34 million) and the sale of the Bakken assets in the second quarter of 2023 ($24 million);

•

Higher volumes in Permian ($91 million), higher costs relating to the diversification of the Company’s downstream markets ($56 million) and higher third-party plant operating costs in Montney ($28 million).

Operating

Operating expense includes costs paid by the Company, net of amounts capitalized, on oil and natural gas properties in which Ovintiv has a working interest. These costs primarily include labor, service contract fees, chemicals, fuel, water hauling, electricity and workovers.

Operating expense increased $57 million compared to 2022 primarily due to:

•

The Permian Acquisition in the second quarter of 2023 ($128 million), and increased activity due to more wells on production and sustained inflationary pressures ($56 million);

•

The sale of the Bakken assets in the second quarter of 2023 ($50 million), the sale of portions of Uinta assets in the third quarter of 2022 ($36 million), updates to operating contract terms, including a recovery of prior years’ costs ($31 million), and lower long-term incentive costs resulting from a decrease in the Company’s share price compared to an increase in 2022 ($13 million).

Additional information on the Company’s long-term incentive costs can be found in Note 21 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Purchased Product

Purchased product expense includes purchases of oil, NGLs and natural gas from third parties that are used to provide operational flexibility and cost mitigation for transportation commitments, product type, delivery points and customer diversification. Ovintiv also purchases and sells third-party volumes under marketing arrangements associated with the Company’s previous divestitures.

Purchased product expense decreased $1,240 million compared to 2022 primarily due to:

•

Lower oil and natural gas benchmark prices ($898 million), lower third-party purchased liquids volumes primarily relating to price optimization activities in the USA Operations ($202 million) and lower third-party purchased natural gas volumes primarily relating to marketing arrangements for assets divested in prior years ($140 million).

Depreciation, Depletion & Amortization

Proved properties within each country cost center are depleted using the unit-of-production method based on proved reserves as discussed in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Depletion rates are impacted by impairments, acquisitions, divestitures and foreign exchange rates, as well as fluctuations in 12-month average trailing prices which affect proved reserves volumes. Corporate assets are carried at cost and depreciated on a straight-line basis over the estimated service lives of the assets.

Additional information can be found under Upstream Assets and Reserve Estimates in the Critical Accounting Estimates section of this MD&A.

DD&A increased $712 million compared to 2022 primarily due to:

•

Higher depletion rates in the USA and Canadian Operations ($556 million and $37 million, respectively) and higher production volumes in the USA and Canadian Operations ($102 million and $22 million, respectively);

•

Higher U.S./Canadian dollar exchange rate ($8 million).

The depletion rate in the USA Operations increased $4.62 per BOE compared to 2022 primarily due to a higher depletable base associated with the Permian Acquisition in the second quarter of 2023.

Administrative

Administrative expense represents costs associated with corporate functions provided by Ovintiv staff. These expenses primarily include salaries and benefits, operating leases, office, information technology, transaction and long-term incentive costs.

(1)

Includes costs related to The Bow office lease of $114 million (2022 - $116 million), half of which is recovered from sublease revenues.

Administrative expense decreased $29 million compared to 2022 primarily due to:

•

Lower long-term incentive costs resulting from a decrease in the Company’s share price in 2023 compared to an increase in 2022 ($142 million);

•

Transaction costs mainly related to the Permian Acquisition in the second quarter of 2023 ($83 million) and increases in legal, information technology and community investment costs ($16 million).

Additional information on the Company’s long-term incentive costs can be found in Note 21 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Other (Income) Expenses

Interest

Interest expense primarily includes interest on Ovintiv’s short-term and long-term debt. Additional information on changes in interest can be found in Note 4 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Interest expense increased $44 million compared to 2022 primarily due to:

•

Interest expense related to senior unsecured notes issued in May 2023 ($83 million), the acceleration of the fair value amortization related to the early redemption of the Company’s 2024 senior notes in June 2022 of $30 million and interest expense related to outstanding balances under the Company’s U.S. CP program and revolving credit facilities ($35 million);

•

A make-whole interest payment of $47 million resulting from the early redemption of the Company’s 2024 senior notes in June 2022, interest savings related to the redemption of certain other senior notes in 2022 ($33 million) and premiums of $22 million related to the Company’s open market repurchases of senior notes in 2022.

Foreign Exchange (Gain) Loss, Net

Foreign exchange gains and losses primarily result from the impact of fluctuations in the Canadian to U.S. dollar exchange rate. Additional information on changes in foreign exchange gains or losses can be found in Note 5 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Additional information on foreign exchange rates and the effects of foreign exchange rate changes can be found in Item 7A of this Annual Report on Form 10-K.

Net foreign exchange losses increased $4 million compared to 2022 primarily due to:

•

Losses on other monetary revaluations compared to gains in 2022 ($23 million), unrealized foreign exchange losses on the translation of intercompany notes ($14 million) and foreign exchange losses on the settlement of intercompany notes compared to 2022 ($8 million);

•

Unrealized foreign exchange gains on the translation of U.S. dollar risk management contracts and foreign exchange gains on the settlement of U.S. dollar financing debt issued from Canada compared to losses in 2022 ($34 million and $10 million, respectively).

Other (Gains) Losses, Net

Other (gains) losses, net, primarily includes other non-recurring revenues or expenses and may also include items such as interest income, interest received from tax authorities, government stimulus programs and adjustments related to other assets.

Other gains in 2023 includes interest income of $11 million primarily generated from short-term investments. Other gains in 2022 includes interest income of $25 million primarily associated with the resolution of prior years’ tax items.

Income Tax

Income Tax Expense (Recovery)

In 2023, Ovintiv recorded an income tax expense of $425 million compared to an income tax recovery of $77 million in 2022 primarily due to changes in valuation allowances and the expected full utilization of Ovintiv’s operating losses in Canada, resulting in current tax in 2023, partially offset by the recognition of U.S. federal and state research and development credits in 2023 of $128 million and $8 million, respectively, associated with eligible drilling and completion costs incurred in prior years.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not the tax position will be sustained upon audit by the taxing authorities. During 2023, the Company recorded unrecognized U.S. federal and state tax benefits of $148 million and $36 million, respectively, resulting from research and development expenditures related to drilling and completions costs incurred in prior years. If all, or a portion of, the unrecognized tax benefit is sustained upon examination by the taxing authorities, the tax benefit will be recognized as a reduction to the Company’s deferred tax liability and will affect the Company’s effective tax rate in the period recognized.

Effective Tax Rate

The Company’s annual effective income tax rate is primarily impacted by earnings, changes in valuation allowances, income tax related to foreign operations, state taxes, the effect of legislative changes, non-taxable items, and tax differences on transactions.

The Company’s effective tax rate was 16.9 percent for 2023, which is lower than the U.S. federal statutory tax rate of 21 percent primarily due to the recognition of research and development credits noted above.

The Company’s effective tax rate was (2.2) percent for 2022, which was lower than the U.S. federal statutory tax rate of 21 percent primarily due to a lower annual effective income tax rate resulting from a reduction in valuation allowances.

The determination of income and other tax liabilities of the Company and its subsidiaries requires interpretation of complex domestic and foreign tax laws and regulations, that are subject to change. The Company’s interpretation of tax laws may differ from the interpretation of the tax authorities. As a result, there are tax matters under review for which the timing of resolution is uncertain. The Company believes that the provision for income taxes is adequate.

In 2023, Canada released its draft Global Minimum Tax Act (“GMTA”), which implements the Organization for Economic Cooperation and Development Pillar II framework, providing a global minimum tax of 15 percent. The legislation, once enacted, will be effective as of January 1, 2024. The Company continues to evaluate the GMTA but does not anticipate any material impact in 2024.

On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. The IRA introduced a new 15 percent corporate alternative minimum tax (“CAMT”), effective for tax years beginning after December 31, 2022 on corporations with average adjusted financial statement income over $1.0 billion for any 3-year period preceding the tax year. Based on available guidance, the Company does not exceed the $1.0 billion threshold to be subject to the CAMT in 2023 but anticipates it will be subject to the CAMT in 2024.

Additional information on income taxes can be found in Note 6 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.