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.

Upstream Product Revenues, Excluding Realized Gains (Losses) on Risk Management

(1)

Revenues for the third quarter and first nine months of 2023 exclude certain other revenue and royalty adjustments with no associated production volumes of $1 million and $1 million, respectively.

Oil Revenues

Oil revenues were lower by $133 million compared to the third quarter of 2023 primarily due to:

•

A decrease of $7.47 per bbl, or nine percent, in the average realized oil prices which decreased revenues by $120 million. The decrease reflected lower Houston and WTI benchmark prices which were both down nine percent, and lower regional pricing relative to the benchmark prices.

Oil revenues were higher by $446 million compared to the first nine months of 2023 primarily due to:

•

Higher average oil production volumes of 21.6 Mbbls/d increased revenues by $466 million. Higher volumes were primarily due to the Permian assets acquired in the second quarter of 2023 (28.2 Mbbls/d) and successful drilling in Uinta and Permian (15.9 Mbbls/d), partially offset by the sale of the Bakken assets in the second quarter of 2023 (12.5 Mbbls/d) and natural declines in Anadarko (9.7 Mbbls/d).

NGL Revenues

NGL revenues were lower by $5 million compared to the third quarter of 2023 primarily due to:

•

A decrease of $4.31 per bbl, or six percent, in the average realized plant condensate prices which decreased revenues by $19 million. The decrease reflected the lower Edmonton Condensate benchmark price which was down seven percent; and

•

Higher average other NGL volumes of 5.9 Mbbls/d increased revenues by $9 million. Higher volumes were primarily due to successful drilling in Permian, Uinta and Montney (8.8 Mbbls/d) and third-party plant outages and pipeline restrictions in Montney in 2023 (1.3 Mbbls/d), partially offset by natural declines in Anadarko and Montney (4.5 Mbbls/d).

NGL revenues were higher by $47 million compared to the first nine months of 2023 primarily due to:

•

An increase of $1.31 per bbl, or seven percent, in the average realized other NGL prices which increased revenues by $34 million. The increase reflected higher regional pricing and Other NGL benchmark prices;

•

Higher average plant condensate production volumes of 1.1 Mbbls/d increased revenues by $26 million. Higher volumes were primarily due to successful drilling in Montney and Permian (2.5 Mbbls/d), partially offset by natural declines in Montney and Anadarko (1.6 Mbbls/d); and

•

A decrease of $1.44 per bbl, or two percent, in the average realized plant condensate prices decreased revenues by $19 million. The decrease reflected the lower Edmonton Condensate benchmark price which was down three percent.

Natural Gas Revenues

Natural gas revenues were lower by $143 million compared to the third quarter of 2023 primarily due to:

•

A decrease of $1.04 per Mcf, or 45 percent, in the average realized natural gas prices which decreased revenues by $164 million. The decrease reflected lower AECO, Dawn and NYMEX benchmark prices which were down 66 percent, 24 percent and 15 percent, respectively, and lower regional pricing relative to benchmark prices; and

•

Higher average natural gas production volumes of 100 MMcf/d increased revenues by $21 million. Higher volumes were primarily due to successful drilling in Permian, Montney and Uinta (78 MMcf/d), third-party plant outages and pipeline restrictions in Montney in 2023 (57 MMcf/d), and lower effective royalty rates in Montney resulting from lower commodity prices (18 MMcf/d). The higher production volumes were partially offset by natural declines in Anadarko and Montney (29 MMcf/d), and the shut-in of production in Other Canadian Operations in the third quarter of 2024 due to low commodity prices (22 MMcf/d).

Natural gas revenues were lower by $524 million compared to the first nine months of 2023 primarily due to:

•

A decrease of $1.23 per Mcf, or 44 percent, in the average realized natural gas prices which decreased revenues by $577 million. The decrease reflected lower AECO, NYMEX and Dawn benchmark prices which were down 53 percent, 22 percent and 16 percent, respectively, and lower regional pricing relative to benchmark prices in the USA Operations; and

•

Higher average natural gas production volumes of 63 MMcf/d increased revenues by $53 million. Higher volumes were primarily due to successful drilling in Permian and Montney (63 MMcf/d), lower effective royalty rates resulting from lower commodity prices in Montney (61 MMcf/d), and the Permian assets acquired in the second quarter of 2023 (16 MMcf/d). The higher production volumes were partially offset by the sale of the Bakken assets in the second quarter of 2023 (33 MMcf/d), natural declines in Anadarko (17 MMcf/d), and the shut-in of production in Other Canadian Operations beginning in the second quarter of 2024 due to low commodity prices (18 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 September 30, 2024, can be found in Note 19 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The following tables provide 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 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 18 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 $455 million compared to the third quarter of 2023 primarily due to:

•

Lower sales of third-party purchased volumes primarily relating to price optimization activities in the USA Operations ($421 million) and lower natural gas benchmark prices ($36 million).

Market Optimization product revenues decreased $1,068 million compared to the first nine months of 2023 primarily due to:

•

Lower sales of third-party purchased volumes primarily relating to price optimization activities in the USA Operations ($1,016 million) and lower natural gas benchmark prices ($89 million);

•

Higher oil benchmark prices ($37 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 11 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 $3 million compared to the third quarter of 2023 primarily due to:

•

Lower oil and natural gas commodity prices ($7 million) and lower oil production volumes in Anadarko and Permian ($5 million);

•

Higher property taxes in Permian primarily due to increased property values ($5 million) and increased oil production volumes in Uinta ($4 million).

Production, mineral and other taxes increased $9 million compared to the first nine months of 2023 primarily due to:

•

Higher production volumes in Permian and Uinta ($51 million) and higher property taxes in Permian primarily due to the assets acquired in the second quarter of 2023 ($14 million);

•

The sale of the Bakken assets in the second quarter of 2023 ($26 million), lower production volumes in Anadarko ($14 million), lower production tax rates ($11 million), and lower natural gas commodity prices ($5 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 $25 million compared to the third quarter of 2023 primarily due to:

•

An expired pipeline transportation contract ($35 million), the impact of new downstream contracts in Uinta ($19 million) and a higher U.S./Canadian dollar exchange rate ($5 million);

•

Higher production volumes in Permian and Uinta ($18 million), and higher transportation costs in Montney ($12 million).

Transportation and processing expense decreased $100 million compared to the first nine months of 2023 primarily due to:

•

The impact of new downstream contracts in Uinta ($55 million), an expired pipeline transportation contract ($51 million), the sale of the Bakken assets in the second quarter of 2023 ($45 million), lower variable contract rates in Permian ($14 million), lower production volumes in Anadarko ($14 million), and a higher U.S./Canadian dollar exchange rate ($9 million);

•

Higher production volumes in Permian and Uinta ($86 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 decreased $8 million compared to the third quarter of 2023 primarily due to:

•

Lower electricity costs in Permian ($9 million) and decreased activity in Anadarko ($7 million);

•

Lower capitalization of directly attributable internal costs in Montney ($8 million).

Operating expense increased $91 million compared to the first nine months of 2023 primarily due to:

•

Higher activity in Permian primarily related to the assets acquired in the second quarter of 2023 ($105 million), updates to operating contracts terms, including a recovery of prior years’ costs in 2023 ($29 million), lower capitalization of directly attributable internal costs in Montney ($8 million) and increased activity in Uinta primarily due to workovers ($7 million);

•

The sale of the Bakken assets in the second quarter of 2023 ($41 million) and decreased activity in Anadarko ($22 million).

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 $454 million compared to the third quarter of 2023 primarily due to:

•

Lower third-party purchased volumes primarily relating to price optimization activities in the USA Operations ($420 million) and lower natural gas benchmark prices ($36 million).

Purchased product expense decreased $1,074 million compared to the first nine months of 2023 primarily due to:

•

Lower third-party purchased volumes primarily relating to price optimization activities in the USA Operations ($1,016 million) and lower natural gas benchmark prices ($95 million);

•

Higher oil benchmark prices ($37 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 the 2023 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 the MD&A included in Item 7 of the 2023 Annual Report on Form 10-K.

DD&A increased $113 million compared to the third quarter of 2023 primarily due to:

•

Higher depletion rates and production volumes in the USA Operations ($92 million and $15 million, respectively).

The depletion rate in the USA Operations increased $2.97 per BOE compared to the third quarter of 2023 primarily due to a higher depletable base.

DD&A increased $476 million compared to the first nine months of 2023 primarily due to:

•

Higher depletion rates and production volumes in the USA Operations ($374 million and $90 million, respectively).

The depletion rate in the USA Operations increased $3.96 per BOE compared to the first nine months of 2023 primarily due to a higher depletable base.

Full Cost Accounting and Ceiling Test Impairments

Under full cost accounting, the carrying amount of Ovintiv’s oil and natural gas properties within each country cost center is subject to a ceiling test performed quarterly. Ceiling test impairments are recognized when the capitalized costs, net of accumulated depletion and the related deferred income taxes, exceed the sum of the estimated after-tax future net cash flows from proved reserves as calculated under SEC requirements using the 12-month average trailing prices and discounted at 10 percent. The 12‑month average trailing price is calculated as the average of the price on the first day of each month within the trailing 12‑month period.

The Company did not recognize ceiling test impairments during the first nine months of 2024, however during this period, the 12-month average trailing prices have generally declined. Further declines in the 12‑month average trailing commodity prices could reduce proved reserves values and result in the recognition of future ceiling test impairments. Future ceiling test impairments can also result from changes to reserves estimates, future development costs, capitalized costs and unproved property costs. Proceeds received from oil and natural gas divestitures are typically deducted from the Company’s capitalized costs and can reduce the risk of ceiling test impairments.

Administrative

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

(1)

The third quarter and first nine months of 2024 includes costs related to The Bow office lease of $29 million and $87 million, respectively (2023 - $29 million and $86 million, respectively), half of which is recovered from sublease revenues.

Administrative expense decreased $8 million compared to the third quarter of 2023 primarily due to:

•

Lower long-term incentive costs resulting from changes in the Company’s share price in the third quarter of 2024 ($7 million).

Administrative expense decreased $56 million compared to the first nine months of 2023 primarily due to:

•

Transaction costs incurred mainly related to the Permian assets acquired in the second quarter of 2023 ($84 million);

•

Higher long-term incentive costs resulting from changes in the Company’s share price in 2023 ($19 million).

Additional information on the Company’s long-term incentive costs can be found in Note 17 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 5 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Interest expense increased $57 million compared to the first nine months of 2023 primarily due to:

•

Interest expense related to the senior unsecured notes issued in May 2023 ($56 million).

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 6 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Additional information on foreign exchange rates and the effects of foreign exchange rate changes can be found in Part I, Item 3 of this Quarterly Report on Form 10-Q.

Net foreign exchange loss of $17 million compared to a gain of $22 million during the third quarter of 2023 primarily due to:

•

Unrealized foreign exchange losses on the translation intercompany notes compared to gains in 2023 ($41 million).

Net foreign exchange gain of $21 million compared to nil during the first nine months of 2023 primarily due to:

•

Realized foreign exchange gains on the settlement of intercompany notes compared to losses in 2023 ($15 million), higher unrealized foreign exchange gains on the translation of intercompany notes ($14 million), and lower realized foreign exchange losses on the settlement of U.S. dollar risk management contracts issued from Canada ($6 million);

•

Unrealized foreign exchange losses on the translation of U.S. dollar risk management contracts issued from Canada compared to gains in 2023 ($16 million).

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, reclamation charges relating to decommissioned assets, and adjustments related to other assets.

In the second quarter of 2024, the Company resolved a dispute related to the previous disposition of certain legacy assets for approximately $150 million. On September 30, 2024, the Company received $50 million of the settlement proceeds in escrow as restricted cash and Ovintiv expects to receive the remaining $100 million of the proceeds by the end of the year. Accordingly, during the third quarter of 2024, the Company recognized a gain of $150 million in Other (gains) losses, net related to this dispute resolution.

Income Tax

During the three and nine months ended September 30, 2024, current income tax expense in the U.S. of $16 million and $40 million, respectively, is higher than the comparative periods in 2023 primarily due to the impact of the corporate alternative minimum tax. In Canada, the current income tax expense for the three and nine months ended September 30, 2024, of $14 million and $45 million, respectively, is lower than the comparative periods in 2023 due to lower expected full year taxable earnings.

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.

On June 20, 2024, Canada enacted its Global Minimum Tax Act (“GMTA”), which implements the Organization for Economic Cooperation and Development Pillar II framework, providing a global minimum tax rate of 15 percent. The Company continues to evaluate the GMTA but does not anticipate any material impact in 2024.

Additional information on income taxes can be found in Note 7 to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.