ITEM 1A. Risk Factors
Our business and operations, and our industry in general, are subject to a variety of risks. If any event arising from the risk factors set forth below occurs, our business, financial condition, results of operations, liquidity, the trading prices of our securities and in some cases our reputation could be materially and adversely affected. When assessing the materiality of the foregoing risk factors, we consider several qualitative and quantitative factors, including, but not limited to, financial, operational, environmental, regulatory, reputational and safety aspects of the identified risk factor. The risks described below may not be the only risks we face, as our business, operations and industry may also be subject to risks that we do not yet know of, or that we currently believe are immaterial.
The Company’s risk factors are summarized as market; operational; environmental; financial; regulatory; tax and general risks associated with business and industry.
Market Risks
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A substantial or extended decline in oil, NGLs or natural gas prices, or a substantial increase in oil, NGLs and natural gas price differentials, could have a material adverse effect on our business, financial condition, results of operations, and the trading prices of our securities.
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A pandemic, epidemic or other widespread outbreak of an infectious disease could materially and adversely affect the operation of our business.
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The trading price of our securities, including our common stock, is subject to volatility.
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Fluctuations in exchange rates could affect expenses or result in realized and unrealized losses.
Operational Risks
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Our ability to operate and complete projects is dependent on numerous factors outside of our control.
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Our operations involve many risks, some of which could result in unforeseen interruptions and expose us to substantial losses and liabilities, for which our insurance may not fully protect us.
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Oil and natural gas exploration, development and production activities involve substantial costs and risks and may not result in commercially productive reserves.
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The proved reserves data provided in this Annual Report on Form 10-K is an estimate only and any inaccuracies in the methodology or assumptions underlying our proved reserves estimates could cause the quantity and net present value of our oil, NGLs, and natural gas reserves to be materially overstated or understated.
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If we fail to find, develop or acquire additional oil, NGLs and natural gas reserves, our reserves and production will decline materially from their current levels.
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Horizontal multi-well pad drilling involves certain risks which may cause volatility in our operating results.
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We are subject to risks and liabilities from acquisitions and any anticipated or desired benefits from such acquisitions may not be realized.
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We are dependent on partners to fund certain projects conducted through joint ventures and partnerships.
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We do not operate all of our assets, and, in such instances, we may have a limited ability to exercise influence over the operation and development of such assets.
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Our customers, counterparties and lenders may be unable to satisfy their contractual or legal obligations.
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We retain certain indemnification obligations related to our corporate reorganization in November of 2009.
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We may be unable to dispose of certain assets and may be required to retain liabilities for certain matters.
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Our operations may be affected by indigenous treaty, title and other rights.
Environmental Risks and Risks Associated with Climate Change
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We are subject to risks and uncertainties associated with increased environmental regulations in all jurisdictions in which we operate.
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We are subject to risks and uncertainties arising out of government, investor and consumer action in response to concerns over climate change and the transition to a lower-carbon economy that could reduce demand for the oil, NGLs and natural gas we produce; increase our operating costs; and limit the areas in which we may explore for, develop, and produce oil, NGLs and natural gas.
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Estimates used in various scenario planning analyses could differ materially from actual results as the policy and regulatory environment evolves.
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Enhanced scrutiny on sustainability matters could have an adverse effect on our operations.
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Financial and Liquidity Risk
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Downgrades in our credit ratings could increase our cost of capital and limit our access to capital, suppliers or counterparties.
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Our level of indebtedness may limit our financial flexibility.
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Our risk management activities may prevent us from fully benefiting from an increase in oil, NGLs and natural gas prices and expose us to certain other risks.
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The decision to return capital to shareholders, whether through cash dividends, share buybacks or otherwise, and the amount and timing of such capital returns is subject to the discretion of the Board of Directors and will vary from time to time.
Regulation and Litigation Risk
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We are subject to extensive federal, state, provincial and local government laws, rules and regulations that can adversely affect the cost, manner and feasibility of our business, and increased regulation in the future could increase costs, impose additional operating restrictions and cause delays.
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We currently are, and from time to time in the future may be, subject to claims, litigation, administrative proceedings and regulatory actions that may not be resolved in our favor.
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The ability of Canadian and other non-resident shareholders to effect service of process or enforce remedies against Ovintiv, its directors, officers, experts, and assets may be limited.
Tax Risks
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U.S. and Canadian tax laws and regulations may change over time, and such changes may result in increased taxes on our business.
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Our corporate reorganization in January of 2020 may result in material Canadian and/or U.S. federal income taxes.
General Risks
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The oil and natural gas industry is highly competitive and many of our competitors have available resources in excess of our own.
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We could be adversely affected by security threats, including cyber-security threats and related disruptions.
The following risk factors should be read in conjunction with the other information contained herein, including the consolidated financial statements and the related notes. Unless the context requires otherwise, "we," "us," "our" and "Ovintiv" refer to Ovintiv Inc. and its subsidiaries.
Market Risks
A substantial or extended decline in oil, NGLs or natural gas prices, or a substantial increase in oil, NGLs and natural gas price differentials, could have a material adverse effect on our business, financial condition, results of operations, and the trading prices of our securities.
Our financial performance and condition are substantially dependent on the prevailing prices we receive for the oil, NGLs and natural gas which we produce. Prices for oil, NGLs and natural gasare inherently volatile and fluctuate in response to changes in a variety of factors beyond our control, including:
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the international and domestic supply and demand for oil, NGLs and natural gas;
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volatility and trading patterns in the commodity futures market;
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global economic conditions;
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production levels of members of OPEC, Russia, the United States or other hydrocarbon producing nations;
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geopolitical risks, including political and civil unrest in oil and natural gas producing regions;
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adverse weather conditions, natural disasters and other catastrophic events, such as tornadoes, flooding, severe heat or cold, earthquakes and hurricanes;
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the price and level of North American oil, NGLs and natural gas imports and exports;
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the level of global oil, NGLs and natural gas inventories;
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the economic and financial impact of epidemics or other public health issues;
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differing quality of production, including the gravity and sulphur content of our oil, the Btu and sulphur content of our natural gas, and the quantity of NGLs associated with our natural gas;
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the price and availability of, and demand for, alternative sources of energy (including coal, nuclear, hydroelectric, solar and wind);
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the effect of energy conservation efforts and technological advances in energy consumption and production, including with respect to transportation and power generation;
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the availability and proximity of gathering, transportation, processing, refining, storage and other infrastructure facilities;
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changes in trade relations and policies, including the imposition of tariffs by the United States or Canada;
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conservation and environmental protection efforts, including activities by non-governmental organizations to restrict the exploration, development and production of oil, NGLs and natural gas; and
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the nature and extent of governmental regulations, including any changes or other actions with respect to emissions, climate change, tariffs or tax laws.
Prices for oil, NGLs and natural gasare particularly sensitive to actual and perceived threats to geopolitical stability and to changes in production from OPEC+ member states. For example, the ongoing conflict, and the continuation of, or any increase in the severity of, the conflict between Russia and Ukraine, has led and may continue to lead to an increase in the volatility of global oil and gas prices.
We also may receive discounted prices for our oil, NGLs and natural gas production relative to certain benchmark prices (such as Brent and WTI for oil and Henry Hub and AECO for natural gas) due to constraints on our ability to transport and sell such production to certain markets. A failure to resolve such regional pricing differentials may result in our continued realization of discounted or reduced oil, NGLs and natural gas prices relative to such benchmarks.
A substantial or extended decline in oil, NGLs and natural gas prices, or a substantial increase in oil, NGLs and natural gas price differentials with respect to certain benchmarks, could result in, among other things, (a) a delay or cancellation of existing or future drilling, development or construction programs; (b) the curtailment or shut-in of production at some or all of our properties; (c) unutilized long-term transportation and drilling commitments; or (d) a decrease in the value of our oil, NGLs and natural gas reserves, each of which could have a material adverse effect on our business, financial condition, results of operations and the trading prices of our securities. Additionally, on at least an annual basis, we assess the carrying value of our oil and natural gas properties in accordance with applicable accounting standards. If oil, NGLs and natural gasprices decline significantly for a sufficient period, the carrying value of our properties could be subject to financial impairment, and our net earnings could be materially and adversely affected.
A pandemic, epidemic or other widespread outbreak of an infectious disease, could materially and adversely affect the operation of our business.
Global or national health concerns, including a pandemic, epidemic or other widespread outbreak of an infectious disease, can, among other impacts, negatively impact the global economy and business prospects, reduce demand for crude oil, NGLs and natural gas, increase volatility in commodity prices, lead to operational disruptions and limit our ability to execute on our business plan, any of which could reduce our spending and operating plans, reduce the value and amount of our oil, NGLs or natural gas reserves and production, cause substantial fluctuations in our stock price and credit ratings, or otherwise materially and adversely affect our business, financial condition, results of operations, and access to liquidity. Furthermore, uncertainty regarding the impact of any outbreak of contagious disease could also lead to substantial fluctuations in currency exchange rates, inflation rates and interest rates, increased counterparty credit and performance risk, and reduced levels of general investing and consumption.
A pandemic, epidemic or other widespread outbreak of an infectious disease, and resulting restrictive measures implemented by governments in the jurisdictions in which we operate, could in the future prevent our employees, contractors or suppliers from accessing our properties or performing critical services. Such measures may include limitations or prohibitions on cross-border travel, restrictions on large gatherings, stay-at-home orders, vaccine mandates and mandatory closures of “non-essential” businesses which could remain in place for an extended period of time. While the full impact of a pandemic, epidemic or other widespread outbreak of an infectious disease is inherently uncertain, the ultimate impact depends on several factors, including the location, severity, and contagiousness, the effectiveness and adoption rate of vaccines, the emergence of variant mutations and the effectiveness of mitigation actions taken by governmental authorities.
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For example, the novel coronavirus global pandemic, known as COVID-19, had a material adverse impact on our business, financial condition and results of operations in 2020. Any resurgence of the COVID-19 pandemic, and threat of new and different strains of the virus and their severity, could again cause disruption of global supply chains, increase volatility in the financial markets and commodity markets, and have the effect of heightening the other risks described herein.
The trading price of our securities, including our common stock, is subject to volatility.
The trading price of our securities, including our common stock, may be volatile. The value of an investment in our securities may decrease or increase abruptly, and such volatility may bear little or no relation to our financial or operational performance. The price of our securities may fall in response to market appraisal of our strategy or if our results of operations and/or prospects are below the expectations of market analysts or stakeholders. In addition, equity and debt markets have, from time to time, experienced significant price and volume fluctuations that have affected the market price of securities, and may, in the future, experience similar fluctuations which may be unrelated to our operating performance and prospects but nevertheless affect the price of our securities. Broad equity and debt market fluctuations resulting from general economic conditions, as well as our ability to meet or exceed market expectations, may materially and adversely affect the trading prices of our securities, including our common stock.
Fluctuations in exchange rates could affect expenses or result in realized and unrealized losses.
We currently have operations in Canada and, as a result, a portion of our revenues and expenses are denominated in Canadian dollars. In addition, our subsidiaries that are domiciled in Canada may hold U.S. dollar denominated assets and liabilities. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar have resulted in and could in the future result in realized and unrealized losses, which has impacted and could in the future impact our revenue and expenses and have a material adverse effect on our business, financial condition and results of operations.
Operational Risks
Our ability to operate and complete projects is dependent on numerous factors outside of our control.
We undertake a variety of projects including exploration and development projects and the construction or expansion of facilities and pipelines. Our ability to operate, generate sufficient cash flows, and timely complete projects depends upon numerous factors largely beyond our control. These factors include:
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oil, NGLs and natural gas prices;
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global supply and demand for oil, NGLs and natural gas;
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the overall state of the financial markets, including investor appetite for debt and equity securities issued by oil and natural gas companies and the effects of economic recessions or depressions;
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the ability to secure and maintain financing on acceptable terms;
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legislative, environmental and regulatory matters;
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oil and natural gas reservoir quality;
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the availability of drilling rigs, completions equipment and other facilities and equipment;
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the ability to access lands;
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the ability to access water for hydraulic fracturing operations;
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reliance on vendors, suppliers, contractors and service providers;
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shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages;
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changes to free trade agreements;
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inflation and other unexpected cost increases, including with respect to materials and labor;
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prevailing interest and foreign exchange rates;
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royalty and tax rates;
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physical impacts from adverse weather conditions and natural disasters;
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transportation and processing interruptions or constraints, including the availability and proximity of pipeline and processing capacity;
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technology failures or cyber attacks; and
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accidents.
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In addition, part of our corporate strategy is focused on a limited number of high-quality assets which results in a concentration of development capital and production. Some of the foregoing risks may be magnified due to the concentrated nature of our development activities and may result in a relatively greater impact on our financial condition and results of operations compared to other companies that may have more geographically diversified operations. Any material delays in a project or project cost overruns could result in delayed revenues and some projects becoming uneconomic, each of which could have a material and adverse effect on our business, financial condition and results of operations.
Our operations involve many risks, some of which could result in unforeseen interruptions and expose us to substantial losses and liabilities, for which our insurance may not fully protect us.
Our business is subject to the operating risks normally associated with (a) the exploration, development and production of oil, NGLs and natural gas and (b) the operation of midstream facilities, including the gathering, transportation, processing, storing and marketing of oil, NGLs and natural gas. These risks include:
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blowouts, cratering, explosions and fires;
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loss of well control;
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environmental hazards, such as the uncontrollable release or spill of oil, natural gas, toxic gases (such as hydrogen sulfide), produced water (brine), drilling or completion fluids, or other pollutants into the environment, including the surface, subsurface, air and groundwater;
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pipeline ruptures, vessel ruptures and other equipment malfunctions, failures or accidents;
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mechanical difficulties, such as stuck oilfield drilling and service tools, pipe or cement failures and casing collapses;
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adverse weather conditions, such as severe heat or cold, wildfire, flooding, tornados and other natural disasters;
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encountering unexpected or abnormally pressured formations;
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premature declines of reservoir pressure or productivity;
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acts of vandalism and terrorism, including attacks targeting oil, NGLs and natural gas facilities and infrastructure; and
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cyber attacks targeting oil and gas infrastructure.
If any of the foregoing risks were to materialize, we could sustain material losses as a result of:
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injury or loss of life;
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damage to, or destruction of, property, natural resources or equipment, including the costs of repair or replacement;
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pollution or other environmental harm, including the costs associated with remediation, reclamation and plugging and abandonment;
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interruptions to our ongoing operations, including the reduction or shutting-in of existing production;
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regulatory investigations and administrative, civil and criminal penalties; and
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injunctions resulting in limitation or suspension of current or future operations.
To the extent such weather events or natural disasters become more frequent or more severe, disruptions to our business and costs to repair damaged facilities could increase.
While we maintain insurance against some, but not all, of these risks and losses described above, our insurance may not be adequate to cover all casualty losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a governmental authority. We cannot predict the continued availability of insurance at premium levels that justify its purchase. The occurrence of a significant event for which we are not fully insured may have a material adverse effect on our business, financial position and results of operations.
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Oil and natural gas exploration, development and production activities involve substantial costs and risks and may not result in commercially productive reserves.
Oil and natural gasexploration, development and production activities involve numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be encountered. The cost of drilling and completing wells is often uncertain and operations may be curtailed, delayed or canceled, or become costlier, as a result of a variety of factors, including:
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unexpected drilling conditions, including abnormal pressures or irregularities in formations;
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equipment failures or accidents;
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construction delays;
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fracture stimulation accidents or failures;
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adverse weather conditions or natural disasters;
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title defects or restricted access to land;
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lack of available gathering, transportation, processing, fractionation, storage, refining or export facilities;
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lack of available capacity on interconnecting transmission pipelines;
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access to, and the cost and availability of, the equipment, services, resources and personnel required to complete our drilling, completion and production activities, including as a result of increased inflation, labor shortages or supply chain issues; and
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delays imposed by or resulting from compliance with or changes in environmental and other governmental, regulatory or contractual requirements.
Additionally, our operations involve utilizing some of the latest horizontal drilling and completion techniques as developed internally and by our service providers. Risks that we face while drilling and completing horizontal oil and natural gas wells include the following:
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landing the wellbore in the desired zone within the target formation;
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staying in the desired zone within the target formation while drilling horizontally for extended lengths;
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controlling formation pressures during drilling;
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running casing the entire length of the wellbore;
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being able to run tools and other equipment consistently through the horizontal wellbore;
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the ability to effectively fracture stimulate the reservoir with the desired number of stages; and
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the ability to successfully clean out the wellbore after completion of the final fracture stimulation stage.
Our future exploration and development activities may not be successful as a result of, among other things, the risks set forth above and, if unsuccessful, our proved oil, NGLs and natural gas reserves and production would decline, which could have a material and adverse effect on our business, financial condition and results of operation. While all development activities involve these risks, exploratory and extension development activities involve a greater risk of dry holes or failure to find commercial quantities of hydrocarbons.
The proved reserves data provided in this Annual Report on Form 10-K is an estimate only and any inaccuracies in the methodology or assumptions underlying our proved reserves estimates could cause the quantity and net present value of our oil, NGLs, and natural gas reserves to be materially overstated or understated.
There are numerous uncertainties inherent in estimating economically recoverable quantities of oil, NGLs and natural gas reserves, including many factors beyond our control. All oil, NGLs and natural gas reserve estimates are uncertain to some degree, and classifications of oil, NGLs and natural gas reserves are only attempts to define the degree of uncertainty involved. For those reasons, estimates of the quantity of oil, NGLs and natural gas economically recoverable from a group of properties and the classification of such oil, NGLs and natural gas reserves, when prepared by different engineers or by the same engineers at different times, may vary substantially. Additionally, estimates with respect to oil, NGLs and natural gas reserves can be based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Oil, NGLs and natural gas reserve estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history will result in variations in the estimated reserves and these variations may be material.
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Proved reserves data in this Annual Report on Form 10-K and other publications we make publicly available represent estimates only. In general, estimates of our oil, NGLs and natural gas reserves, and the future net cash flows therefrom, are based upon a number of factors and assumptions, including commodity prices, operating and capital costs, availability of future capital, historical production from the same or similar properties and the assumed effects of regulation by governmental agencies, including with respect to royalty payments, all of which may vary considerably from actual results. Our actual production, revenues, taxes and development and operating expenditures with respect to our proved reserves may vary materially from such estimates.
The estimates of proved reserves included in this Annual Report on Form 10-K are prepared in accordance with SEC regulations. Subject to limited exceptions, oil, NGLs and natural gas reserves may only be classified as proved undeveloped reserves if the wells developing such reserves are scheduled to be drilled within five years after the date of classification. The development timing of our oil, NGLs and natural gas reserves is based upon numerous expectations and assumptions, including the allocation of development capital; anticipated costs to drill, complete and operate our wells; and anticipated commodity prices. Our development expectations and assumptions are subject to change and proved undeveloped reserves may be reclassified to unproved reserves at any time. Additionally, commodity prices used to estimate proved reserves included in this Annual Report on Form 10-K are calculated as the unweighted arithmetic average of the price on the first day of each month within the preceding 12-month period. Significant future price changes can have a material effect on the quantity and value of our proved reserves. The standardized measure of discounted future net cash flows included in this Annual Report on Form 10-K will not represent the current market value of our estimated proved reserves. In addition, these proved reserve estimates do not include any value for probable or possible reserves that may exist, nor do they include any value for unproved undeveloped acreage.
If we fail to find, develop or acquire additional oil, NGLs and natural gas reserves, our reserves and production will decline materially from their current levels.
Our future oil, NGLs and natural gas reserves and production, and therefore our future cash flows, are highly dependent upon our success in developing our current reserves base and exploring for, developing or acquiring additional oil, NGLs and natural gas reserves. Typically, to maintain an oil and natural gas lease in the United States, we are required to drill at least one well that is commercially productive within the primary term of the lease and, once drilled, maintain oil or natural gas production in paying quantities from the lease. If we are unsuccessful in drilling a commercially productive well during the primary term of the lease or, once drilled, in maintaining oil or natural gas production in paying quantities from the lease, we could lose our rights to explore for and develop oil and natural gas under such lease and our right to any oil, NGLs and natural gas reserves associated with the lease. In some cases, the initial commercially productive well will only maintain the lease as to a portion of the lands covered thereby and further oil and natural gas development activities are required to maintain the entirety of the lease.
The business of exploring for, developing and acquiring oil and natural gas reserves is capital intensive. Acquisition opportunities in the oil and natural gas industry are inherently competitive, which can increase the cost of, or cause us to refrain from, completing acquisitions. To the extent that cash flows from our operations are insufficient and external sources of capital become limited or undesirable, our ability to make the necessary capital investments to maintain and expand our oil, NGLs and natural gas reserves and production will be impaired. In addition, there can be no certainty that we will be able to find, develop or acquire additional oil, NGLs and natural gas reserves to replace current reserves and production at acceptable costs. Without additions through exploration, development or acquisition activities, our oil, NGLs and natural gas reserves and production will decline over time as the reserves are depleted, which may materially and adversely affect our business, financial condition and results of operations.
Horizontal multi-well pad drilling involves certain risks which may cause volatility in our operating results.
Our operations utilize horizontal multi-well pad drilling. In this type of development, multiple wells are drilled based upon spacing and completions techniques that evolve over time as learnings are captured and applied. Wells drilled on a multi-well pad are generally not placed on production until all wells on the pad are drilled and completed. While the use of this development technique can accelerate the production of our oil, NGLs and natural gas reserves and increase our observed recovery factor from the reservoir, it can also result in production delays as problems with a single well can adversely affect the production of all wells on the pad. Additionally, horizontal multi-well pad drilling increases the risk of unintentional communication or pressure interference between wells which may adversely affect our production. As a result, multi-well pad drilling can both cause delays in our production schedule and result in oil,
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NGLs and natural gas production below expectations. These delays or production interruptions may reduce our anticipated production volumes from both new and existing wells and this volatility could have a material and adverse effect on our business, financial condition and results of operations.
We are subject to risks and liabilities from acquisitions and any anticipated or desired benefits from such acquisitions may not be realized.
Historically, acquisitions of oil and natural gas properties, including through acreage trades, farm-ins and asset- or corporate-level acquisitions, have contributed to our growth. Acquisition opportunities in the oil and natural gas industry are inherently competitive, which can increase the cost of, or cause us to refrain from, completing acquisitions. The success of any acquisition will depend on several factors and involves potential risks and uncertainties, including, among other things:
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the inability to accurately forecast and estimate oil, NGLs and natural gas reserves, production volumes, development costs and the net cash flows attributable to such properties;
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the inability to accurately forecast commodity prices;
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the assumption of unknown liabilities, including environmental liabilities, for which we may not be indemnified or for which the indemnity may not be adequate;
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the anticipated growth opportunities, cost savings and synergies from combining the acquired businesses and operations;
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the ability to integrate operations and internal controls, including those related to financial reporting, disclosure and cybersecurity and data protection;
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the effect on our liquidity or financial leverage when using available cash or debt to finance the acquisition or from the amount of debt assumed as part of the acquisition;
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the diversion of management’s attention from other business concerns; and
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the inability to hire, train or retain qualified personnel to manage and operate the acquired assets or business.
All of these factors, among others, affect whether an acquisition will ultimately generate cash flows sufficient to provide a suitable return on investment. Even though we assess and review the properties we seek to acquire in a manner consistent with what we believe to be industry practice, such reviews are limited in scope, inexact and not capable of identifying all existing or potentially adverse conditions. This risk is magnified when the acquired properties are in a geographic area where we have not historically operated. As a result, the anticipated and desired benefits of an acquisition may not materialize, and this may have a material and adverse effect on our business, financial performance and results of operations.
We are dependent on partners to fund certain projects conducted through joint ventures and partnerships.
Some of our projects are conducted through joint ventures, partnerships or other arrangements, where we are dependent on our partners to fund their contractual share of the project’s capital and operating expenditures. If our partners do not approve their contractual share of capital or operating expenditures, are unable to fulfill their contractual obligations, or suspend or terminate their contractual arrangements with us, the projects may become delayed or we may be forced to absorb additional capital or operating expenditures, each of which may materially and adversely affect the viability of such projects and our business, financial condition and results of operations.
These partners may also have strategic plans, objectives and interests that do not coincide, and may conflict, with our plans, objectives and interests. While certain operational decisions may be made solely at our discretion in our capacity as the operator of certain projects, major capital and strategic decisions affecting such projects may require agreement among the partners. No assurance can be provided that future demands or expectations of any party, including our demands and expectations, relating to such project will be met satisfactorily or in a timely manner. Failure to satisfactorily meet such demands or expectations may affect our or our partners’ participation in the operation of such project or the timing for undertaking various activities, which could materially and adversely affect the viability of such project and our business, financial condition and results of operations. Further, we are involved from time to time in disputes with our partners and, as such, we may be unable to dispose of certain assets or interests in certain arrangements if such disputes cannot be resolved in a satisfactory or timely manner.
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We do not operate all of our assets, and, in such instances, we may have a limited ability to exercise influence over the operation and development of such assets.
Third parties operate a portion of the assets in which we have an ownership interest, and, in such instances, we may have a limited ability to exercise influence over the operation and development of such assets. The success and timing of our activities on these assets is therefore dependent upon factors that are largely outside of our control. These factors include (a) the timing and amount of capital, operating and maintenance expenditures related to the project; (b) the third-party operator’s expertise and financial resources; (c) the third-party operator’s ability to obtain required approvals from other non-operating partners; and (d) the third-party operator’s selection and implementation of adequate technology and risk management practices. The failure of one or more third-party operators to effectively and efficiently operate assets in which we have an ownership interest could result in the inefficient deployment of capital and the loss of production volumes, each of which could have a material and adverse effect on our business, financial condition and results of operations.
Our customers, counterparties and lenders may be unable to satisfy their contractual or legal obligations.
We are exposed to certain risks associated with our customers, contractual counterparties and lenders. These risks include (a) credit risks associated with (i) customers who purchase our oil, NGLs and natural gas production, (ii) the collection of receivables from our joint interest partners for their proportionate share of expenditures made on projects we operate, and (iii) counterparties to our derivative financial contracts; (b) performance risks associated with the non-delivery, or delayed delivery, of contracted products or services, including the transportation and processing of our oil, NGLs and natural gas production; and (c) liquidity risk in the event one or more lenders under our existing credit facilities are unable to perform their funding obligations. We utilize a variety of mechanisms to limit our exposure to these and similar risks, including requiring guarantees, letters of credit, credit insurance or prepayments under certain conditions. Despite these mechanisms, in the event a customer, contractual counterparty or lender fails to satisfy their obligations, our business, financial condition and results of operations could be materially and adversely affected.
We retain certain indemnification obligations related to our corporate reorganization in November of 2009.
As part of our November 2009 corporate reorganization that split our predecessor, Encana Corporation (“Encana”), into two independent publicly traded energy companies, Encana and Cenovus Energy Inc. (“Cenovus”), Encana and Cenovus each agreed to indemnify the other for certain liabilities and obligations associated with, among other things, in the case of Encana’s indemnity, the business and assets retained by Encana, and in the case of Cenovus’s indemnity, the business and assets transferred to Cenovus. We are unable to predict whether we will be required to indemnify, or seek indemnity from, Cenovus for any obligations and the magnitude of such obligations. Any indemnification claims against us pursuant to the various agreements entered with Cenovus, or our failure to obtain indemnity from Cenovus for any claims we may hold, could have a material and adverse effect on our business, financial condition and results of operations.
We may be unable to dispose of certain assets and may be required to retain liabilities for certain matters.
We may identify certain assets for disposition, the proceeds of which could reduce the amount of our existing indebtedness and/or increase the amount of capital available for other business purposes, including shareholder returns and acquisitions. Various factors could materially affect our ability to dispose of the identified assets or complete any announced transactions, including commodity price volatility; the availability of counterparties willing to acquire oil and natural gas assets at prices and on terms acceptable to us; approval by our Board of Directors; associated asset retirement obligations; due diligence; general market conditions; the assignability of any associated contract, joint venture, partnership or other arrangements; and required stock exchange, governmental or third-party approvals. These factors may also reduce the value of our assets or the proceeds of any asset disposition.
We (including our predecessor entities) have retained, or in the future may retain, liabilities or indemnification obligations in connection with certain asset dispositions. While we are unable to predict the magnitude of any retained liabilities or indemnification obligations, any liabilities or indemnification obligations retained could ultimately be material. For example, under state and federal law, once an oil or natural gas well has permanently ceased production of oil or natural gas, the operator of such well is obligated to plug and abandon (“P&A”) the well, decommission production facilities and restore the well site to pre-operating conditions. U.S. state and federal regulations allow the government to call upon predecessors in interest of oil and natural gas leases associated with such well to pay for
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P&A, decommissioning and restoration obligations (together, “P&A Obligations”) if the current operator fails to fulfill those obligations. If purchasers of any assets previously owned by us or our predecessors (including any offshore wells or facilities), or any successor owners of those assets, are unable to meet their P&A Obligations due to bankruptcy, dissolution or other liquidity issues, we may be unable to rely on our arrangements with them, if any, to fulfill (or provide reimbursement for) those obligations. In those circumstances, the government may seek to impose the bankrupt entity’s P&A Obligations on us and any other predecessors in interest, and such payments could have a material adverse effect on our business, financial condition and results of operations.
Further, certain third parties may be unwilling to release us from guarantees or other credit support provided prior to the disposition of an asset. In those cases, after the asset disposition, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the acquirer of the assets fails to perform their obligations.
Our operations may be affected by indigenous treaty, title and other rights.
Indigenous peoples have claimed indigenous treaty, title and other rights in respect of areas within the United States and Canada. The legal basis of an indigenous land claim is a matter of considerable legal complexity and we cannot predict the impact of such a claim, or the possible effects of a settlement of such claim, with any degree of certainty. In addition, no assurance can be given that any recognition of indigenous rights or claims whether by way of a negotiated settlement or by judicial pronouncement (or through the grant of an injunction prohibiting exploration, development or production activities pending resolution of any such claim) would not delay or even prevent our exploration, development and production activities. If a material claim were to arise and be successful, such claim could have a material and adverse effect on our business, financial condition and results of operations. In addition, the process of addressing such claim, regardless of the outcome, could be expensive and time consuming and could result in delays which could have a material and adverse effect on our business, financial condition and results of operations. For more information on the BRFN case refer to “Regulatory Matters” under Items 1 and 2 of this Annual Report on Form 10-K.
In addition to the foregoing, we may become subject to various laws and regulations that apply to operators and other parties operating within the boundaries of Indian reservations in the United States. These laws and regulations may result in the imposition of certain fees, taxes, environmental standards, lease conditions or requirements to employ specified contractors or service providers. Any one of these requirements, or any delay in obtaining the approvals or permits necessary to operate within the boundaries of Indian reservations or tribal lands, could adversely impact our operations and ability to explore, develop and produce new properties.
Further, in Canada, the province of British Columbia enacted legislation to implement the United Nations Declaration on the Rights of Indigenous Peoples (“UNDRIP”) in the fall of 2019 and the Canadian federal government has followed suit by adopting the UNDRIP Act on June 21, 2021. The UNDRIP legislation adopted by both British Columbia and the Canadian federal government provide frameworks for recognizing the constitutional and human rights of indigenous peoples and aligning their respective provincial and federal laws with the internationally recognized standards of UNDRIP. Both pieces of UNDRIP legislation are at an early stage of implementation and we are unable to predict the total impact of the potential regulations upon our business. Although we do not anticipate any near-term impacts to our business as a result of such legislation, the implementation of the standards of UNDRIP has the potential to increase permitting times and change the processes and costs associated with project development and operations.
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Environmental Risks and Risks Associated with Climate Change
We are subject to risks and uncertainties associated with increased environmental regulations in all jurisdictions in which we operate.
Our operations and properties are subject to numerous existing laws, rules and regulations governing our interactions with the environment that are enacted by U.S. and Canadian federal, state, provincial, territorial, tribal, and municipal governments (collectively, “Environmental Regulations”). Environmental Regulations impose, among other things, restrictions, liabilities and obligations in connection with (a) discharges and emissions of various substances into the environment; (b) the hydraulic fracturing of wells; (c) the handling, use, storage, transportation, treatment and disposal of chemicals, hazardous substances and waste associated with finding, producing, transmitting and storing oil, NGLs and natural gas; (d) the availability and management of fresh, potable or brackish water sources that are being used, or whose use is contemplated, in oil and natural gas operations; and (e) requirements that well sites and other properties associated with our operations be constructed, operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. In addition, certain types of operations, including new exploration and development projects and certain changes to existing exploration and development projects, may require the submission and approval of environmental impact assessments or permit applications. Expenditures required to institute and maintain compliance with new or existing Environmental Regulations can be significant. Failure to comply with Environmental Regulations may result in substantial clean-up and remediation costs arising from damaged or contaminated properties, the imposition of significant fines and penalties by regulators and costly litigation or administrative proceedings. Examples of recently proposed and final Environmental Regulations or other regulatory initiatives include the following:
Emissions - Greenhouse gases (which include, among other things, methane, carbon dioxide, nitrous oxide and various fluorinated gases; “GHGs”) are typically emitted throughout all phases of the oil and natural gas supply chain, including production, transportation, processing, refining and storage operations. Additionally, although beyond our control, end user consumption of oil and natural gas in activities such as power generation and motorized transportation also results in GHG emissions. In the United States, the EPA has determined that GHG emissions present a danger to public health and the environment and has adopted Environmental Regulations that, among other things, restrict GHG emissions and require the monitoring and annual reporting of GHG emissions from specified sources. For example, in December 2023, the EPA announced its intent to finalize New Source Performance Standard Subpart OOOOb, which will impose more stringent methane and volatile organic compound emission standards for new, modified or reconstructed sources in the oil and natural gas industry. The EPA also finalized New Source Performance Standard Subpart OOOOc, which create, for the first-time, emission guidelines for existing oil and natural gas sources that would be included in individual states’ implementation plans. These Subpart OOOOb and OOOOc standards expand upon previously issued New Source Performance Standards, Subpart OOOO and Subpart OOOOa published by the EPA in 2012 and 2016, respectively. Furthermore, in November 2022, the BLM proposed regulations limiting the waste of natural gas from venting, flaring and leaks during operations on existing and new federal and tribal leases. In addition, in August 2022, President Biden signed the IRA creating a first-ever, phased-in methane fee that applies to certain oil and gas facilities. The methane fee commences in reporting year 2024. The proposed implementing regulations were published for public comment in January 2024. Policy makers at both the federal and state levels continue to propose more stringent Environmental Regulations designed to further limit GHG and other air emissions. Many state officials have stated their intent to intensify efforts to regulate GHG and other air emissions, including methane, from the oil and natural gas industry and it is anticipated that the Biden Administration will propose additional Environmental Regulations that may impose new costs on the oil and natural gas industry in an effort to accelerate reductions of GHG and other air emissions from both the production and consumption of energy.
In December 2023, the Government of Canada published draft amendments to the federal regulations respecting reduction in the release of methane and certain volatile organic compounds concerning the upstream oil and gas sector. If implemented, the amendments would require the oil and gas sector to achieve a 75 percent reduction in methane emissions from 2012 levels by 2030. The draft amendments would, among other things, prohibit flaring and venting with limited exceptions, require high levels of equipment efficiency and require annual inspections for non-producing wells. Alberta and British Columbia have equivalency agreements in place with the Government of Canada, such that the current federal methane regulations generally do not apply in these provinces. However, in the event that the draft amendments are passed, regulatory changes in Alberta and British Columbia may be required to maintain equivalency. The comment period for the draft amendments is open until mid-February 2024. Publication of the finalized amendments is expected in late 2024 and new requirements would come into force between 2027 and 2030. In
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December 2023, the Government of Canada announced plans to implement a national emissions cap-and-trade system for GHG emissions from the oil and gas sector through regulations to be made under the Canadian Environmental Protection Act, 1999 ("CEPA"). The cap-and-trade system is expected to be phased in between 2026 and 2030 and apply to, among other things, all direct GHG emissions from upstream oil and gas facilities, while also accounting for indirect emissions and emissions that are captured and permanently stored. It is currently proposed that the 2030 emissions cap (which will inform the number of emission allowances issued to regulated facilities) will be set at 35 percent to 38 percent below 2019 emission levels. The regulatory framework published in December 2023 is open for comment until February 2024. The Government of Canada has stated it intends to publish draft regulations for the cap-and-trade system for further comment in mid-2024.
On January 1, 2023, material amendments to Alberta's Technology, Innovation and Emissions Reduction Regulation (“TIER”) came into force. The amendments align TIER with Canada's federal Greenhouse Gas Pollution Pricing Act, provide price certainty and seek to address a potential surplus of provincial carbon credits in the coming years. As a result of the amendments, flaring emissions are now included in the total regulated emissions for the Company's aggregate oil and gas facilities that are subject to TIER.
In British Columbia, the government released a series of GHG reduction intention papers that target methane emissions, carbon pricing mechanisms, permitting of new infrastructure and mechanisms to cap future emissions. These proposed mechanisms include: an oil and gas sector emissions cap to achieve a 33-38 percent reduction in emissions below 2007 levels by 2030; the requirement for all new, large industrial facilities to achieve net-zero emissions by 2050 (2030 for LNG projects) showing how they align with interim 2030 and 2040; and, a new Output Based Pricing System for large industrial emitters to ensure equivalency with the federal carbon pricing regime. Implementation will likely take effect on April 1, 2024. While Ovintiv’s proactive approach to electrification in our Montney operations will shelter its exposure to the Output-Based Pricing System, there is the potential for additional burden associated with the other proposed policy items.
The U.S. and Canadian federal governments, along with several provincial and state governments, have also announced intentions to adhere to certain international protocols regarding GHG emissions and regulate GHGs and certain air pollutants. In addition to federal action, many state and provincial officials have stated their intent to intensify efforts to regulate GHG emissions, including methane, from the oil and natural gas industry. These governments are currently developing and/or implementing regulatory and policy frameworks to deliver on their announcements. For example, effective February 19, 2021, the United States officially rejoined the Paris Agreement, an international accord to address climate change through voluntary and non-binding commitments to reduce GHG emissions by signatory nations. Pursuant to its pledge under the Paris Agreement, the United States has committed to reducing its net GHG emissions by 50-52 percent below 2005 levels by 2030. In Canada, the Government of Canada (a) has committed to cutting Canada’s net GHG emissions by 40-45 percent below 2005 levels by 2030 in accordance with its pledge under the Paris Agreement; (b) is gradually raising the federal carbon tax to C$170/tonne CO2e by 2030; and (c) has announced its intention to impose a hard cap on GHG emissions from the oil and natural gas industry, seek to reduce methane emissions from the oil and natural gas industry by 75 percent below 2012 levels by 2030 and ensure GHG emission reductions are on a pace and scale sufficient to reach net-zero by 2050. In November 2021, the Unites States, Canada, and other countries entered into the Glasgow Climate Pact, which includes a range of measures designed to address climate change, including but not limited to the phase-out of fossil fuel subsidies, reducing methane emissions 30 percent by 2030, and cooperating toward the advancement of the development of clean energy. Similar regulatory and policy framework efforts were committed to at the 2023 UN Climate Change Conference (COP28) in late 2023. We actively participate in certain provincial industrial emission programs offered by both Alberta and British Columbia that allow for the generation of offsets and other rebates to incentivize emission reduction projects and mitigate carbon tax costs. We expect to continue to be able to utilize these provincial programs in the future to migrate our carbon tax costs.
Hydraulic Fracturing Operations- The U.S. and Canadian federal governments, along with certain U.S. state and Canadian provincial governments, continue to review aspects of the scientific, regulatory and policy framework under which hydraulic fracturing operations are conducted. Most of these governments are primarily engaged in the collection, review and assessment of technical information regarding the hydraulic fracturing process and have not provided specific details with respect to any significant actual, proposed or contemplated changes to the hydraulic fracturing regulatory construct. However, certain environmental and other groups have made claims that hydraulic fracturing techniques are harmful to surface water and drinking water sources and continue to suggest that additional Environmental Regulations may be needed to more closely regulate the hydraulic fracturing process. Further, certain
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governments in jurisdictions where we do not currently operate have considered or implemented moratoriums on hydraulic fracturing until further studies can be completed and some governments have adopted, and others have considered adopting, Environmental Regulations that could impose more stringent permitting, disclosure and well construction requirements on hydraulic fracturing operations or result in an outright ban of hydraulic fracturing in oil and natural gas operations.
Seismic Activity - Some areas of North America are experiencing an increased frequency of localized seismic activity which has been associated with oil and natural gas operations.Although the occurrence and risk of seismicity in relation to oil and natural gas operations is generally very low, it has been linked to the underground disposal of produced water and, in some instances, has been correlated with hydraulic fracturing activities. This has prompted legislative and regulatory initiatives intended to address these concerns. These initiatives have the potential to (a) require additional seismic monitoring; (b) restrict the volume of produced water injected in certain disposal wells; (c) restrict the injection of produced water in certain underground formations; and (d) modify or curtail hydraulic fracturing operations in certain areas.
The cost and effects of complying with existing and emerging Environmental Regulations (including those with respect to emissions, hydraulic fracturing operations and seismic activity) and proposed carbon taxes are not currently anticipated to be material to our operations, however federal, state, provincial and local regulations and programs are either under development or in the early stages of implementation and we are unable to accurately predict the total future impact of such regulations and programs. Increased Environmental Regulations and/or carbon taxes could (a) materially increase our cost of compliance and other operating costs; and/or (b) impede or prevent development of our oil, NGLs and natural gas assets, reducing (i) the amount of oil, NGLs and natural gas we are ultimately able to produce from our reserves and (ii) our overall quantity of oil, NGLs and natural gas reserves. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
We are subject to risks and uncertainties arising out of government, investor and consumer action in response to concerns over climate change and the transition to a lower-carbon economy that could reduce demand for the oil, NGLs and natural gas we produce; increase our operating costs; and limit the areas in which we may explore for, develop, and produce oil, NGLs and natural gas.
Policy and Legal Risks - Policy risks include actions seeking to address concerns over climate change, such as the enactment of climate change-related regulations, policies and initiatives addressing alternative energy requirements, new fuel consumption standards, energy conservation and emissions reductions measures or responsible energy development, among other measures that seek to promote adaptation to climate change or lessen activities that contribute to adverse effects of climate change. Internationally this has resulted in existing and pending international agreements to reduce GHG emissions globally, while in Canada and the United States, this has resulted in both national, regional and local legislation and regulatory programs. For example, on January 27, 2021, President Biden issued Executive Order 14008 entitled “Tackling the Climate Crisis at Home and Abroad,” directing the heads of various federal agencies, to the extent consistent with applicable law and in consultation with other agencies and stakeholders, to, among other things, (a) assess climate related risks to federal agencies; (b) pause the issuance of new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and natural gas permitting and leasing practices; (c) achieve a carbon-pollution free electricity sector by 2035; (d) procure clean and zero-emission vehicles for federal, state, local and tribal government fleets; and (e) identify and eliminate federal fossil fuel subsidies. On August 16, 2022, President Biden signed into law the IRA which contains tax inducements and other provisions that incentivize investment, development, and deployment of alternative energy sources and technologies, which could increase operating costs within the oil and gas industry and accelerate alternative energy technologies. Additionally, an increasing number of states, local municipalities and other groups have made claims in federal and state courts against oil and natural gas companies, including Ovintiv, alleging that GHG emissions from oil and natural gas produced by such companies has contributed, and continues to contribute, to climate change. These allegations have included claims of public and private nuisance, trespass, negligence, strict liability and civil conspiracy.
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Market Risks - Shifts in supply and demand for certain commodities, including oil and gas (as well as products dependent on oil and gas) due to concerns over climate change could affect markets. Lower demand for oil and gas production or products that use oil and gas as fuel or increased demand for lower-emission products and services could result in lower prices and lower revenues. Market risk may also take the form of limited access to capital as some in the investment community (including, among others, shareholders, bondholders, institutional lenders, investment advisors, pension and sovereign wealth funds and endowments) have also become increasing concerned with the causes of climate change and the role oil and natural gas companies play in any of its purported effects. This has led some in the investment community to shift all or part of their investment or funding allocations away from the oil and natural gas industry and others to modify the terms upon which funding is made available to the oil and natural gas industry. In other instances, it has led shareholders to initiate lawsuits against the directors and management of oil and natural gas companies and/or bring shareholder proposals demanding that oil and natural gas companies increase climate disclosure; change business practices or operations; or appoint new board representation.
Reputation Risk - Public attention to issues concerning the existence and extent of climate change, and the role of human activity in it, continues to increase, with the oil and natural gas industry receiving heightened scrutiny regarding GHG emissions. These changing perceptions could lower demand for our oil and gas production, resulting in lower prices and lower revenues as consumers avoid carbon-intensive industries and could also pressure banks and investment managers to shift investments and reduce lending as described above.
Technology Risk - The development and deployment of alternative energy sources and emerging technologies in renewable energy, battery storage and energy efficiency could lower demand for oil and gas, potentially resulting in decreased revenues within the oil and gas industry and accelerate alternative energy technology.
Physical Risk - Adverse weather conditions such as severe heat or cold, flooding, tornados and other natural disasters could affect our operations. If any such effects were to occur, they could adversely affect or delay demand for the oil or natural gas produced or cause us to incur significant costs in preparing for or responding to the effects of climatic events themselves. Potential adverse effects could include disruption of our and our customers’ operations, including, for example, damages to our facilities from winds or floods, increases in our costs of operation, or reductions in the efficiency of our operations, impacts on our personnel, supply chain, or distribution chain, as well as potentially increased costs for insurance coverages in the aftermath of such effects. Any of these events could have an adverse effect on our assets and operations.
If initiatives and actions brought by private parties or additional governmental regulations with respect to climate change intensify, we could experience (a) a reduction in demand for the oil and natural gas we produce and sell; (b) a material increase in our cost of compliance and other operating costs; (c) constraints around developing our oil and natural gas assets, reducing (i) the amount of oil, NGLs and natural gas we are ultimately able to produce from our reserves and (ii) our overall quantity of oil, NGLs and natural gas reserves; (d) limitations on our ability to access capital markets and raise capital on satisfactory terms, or at all; and (e) potential for costly and time consuming litigation. While we are unable to accurately assess the probability and impact of potential climate change regulations, initiatives and actions, the occurrence of any one or more of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Estimates used in various scenario planning analyses could differ materially from actual results as the policy and regulatory environment evolves.
Since 2021, we have disclosed scenario planning analysis in alignment with recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (“TCFD”). This expanded climate-focused scenario planning framework included forecasts of future demand and pricing in energy markets, as well as changes in government regulations and policy. Given the dynamic nature of the Company’s business, the Company performs scenario analyses with five-year time horizons. When analyzing longer-term TCFD scenarios, we rely on external analysis for demand scenarios, carbon pricing, and comparison-pricing scenarios, which are then compared to our internally prepared base-case pricing analysis. Given the numerous estimates that are required to run these scenarios, our estimates could differ materially from actual results. Additionally, the scenario analyses we currently perform may not be comparable to scenario analyses performed by our peers or frameworks established as a result of any future regulatory requirements. By electing to set and share publicly these metrics in our sustainability report and our commitment to expand upon its disclosures, our business may also face increased scrutiny related to sustainability initiatives.
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Enhanced scrutiny on sustainability matters could have an adverse effect on our operations.
Our efforts to research, establish, accomplish and accurately report on our emissions goals, targets and strategies expose us to numerous operational, reputational, financial, legal and other risks. Our ability to reach our target emissions is subject to a multitude of factors and conditions, many of which are out of our control. Examples of such factors include evolving government regulation, the pace of changes in technology, the successful development and deployment of existing or new technologies and business solutions on a commercial scale, the availability, timing and cost of equipment, manufactured goods and services, and the availability of requisite financing and federal and state incentive programs.
Enhanced scrutiny on sustainability matters related to, among other things, concerns raised by advocacy groups about climate change, hydraulic fracturing, waste disposal, oil spills, and explosions of natural gas transmission pipelines may lead to increased regulatory scrutiny, which may, in turn, lead to new state, provincial and federal safety and environmental laws, regulations, guidelines, and enforcement interpretations. These actions may cause operational delays or restrictions, increased operating costs, additional regulatory burdens, increased risk of litigation, and adverse impacts on our access to capital. Moreover, governmental authorities exercise considerable discretion in the timing and scope of permit issuance, and the public may engage in the permitting process, including through intervention in the courts. Negative public perception could cause the permits we require to conduct our operations to be withheld, delayed, or burdened by requirements that restrict our ability to profitably conduct our business.
We may face increased scrutiny from the investment community, other stakeholders and the media related to our emissions goals and strategies. As a result, we could damage our reputation if we fail to act responsibly in the areas in which we report. Any harm to our reputation resulting from setting these metrics, expanding our disclosures, or our failure or perceived failure to meet such metrics or disclosures could adversely affect our business, financial performance, and growth. If our emissions goals and strategies to achieve them do not meet evolving investor or other stakeholder expectations or standards, our reputation, ability to attract and retain employees and attractiveness as an investment, business partner or acquirer could be negatively impacted. Additionally, concerns over climate change have resulted in, and are expected to continue to result in, the adoption of regulatory requirements for climate-related disclosures such as the SEC’s proposed climate-related disclosure rule, which could increase our compliance burden and costs. Our failure or perceived failure to fulfill emissions goals and targets, to comply with ethical or other standards, regulations, or expectations, or to satisfy various reporting standards with respect to these matters effectively could have the same negative impacts and further expose us to government enforcement actions and private litigation. Even if we achieve our goals, targets and objectives, we may not realize all of the benefits that were expected at the time the goals were established.
Financial and Liquidity Risk
Downgrades in our credit ratings could increase our cost of capital and limit our access to capital, suppliers or counterparties.
Rating agencies regularly evaluate our credit, basing their credit ratings for our long-term and short-term debt securities on a variety of factors, including factors over which we have some control (e.g., our financial strength), as well as factors not entirely within our control (e.g., general macroeconomic trends and conditions affecting the oil and natural gas industry generally). There is no assurance that one or more of the Company’s credit ratings will not be downgraded in the future, including below investment grade.
Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. A credit rating downgrade may increase the cost of borrowing under our existing credit facilities, limit access to our current commercial paper programs, limit our access to private and public markets to raise short-term and long-term debt capital, and negatively impact our overall cost of capital. Credit ratings may also be important to suppliers or counterparties when they seek to engage in certain transactions. If we experience downgrades in one or more of our credit ratings, we may be required to post collateral, letters of credit, cash or other forms of security as financial assurance for our performance under certain contractual arrangements with various counterparties including marketing, midstream (including gathering, processing and transportation providers), over-the-counter derivative, and construction counterparties. Additionally, certain of these arrangements contain financial assurance language that may, under certain circumstances, permit our counterparties to request additional collateral based on our credit rating. The occurrence of any of the foregoing could
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adversely affect our ability to execute portions of our business strategy, including hedging, and could have a material adverse effect on our liquidity and capital position.
Our level of indebtedness may limit our financial flexibility.
As of December 31, 2023, we had outstanding long-term unsecured senior notes of $5,476 million, $270 million in outstanding commercial paper and $14 million drawn on its revolving credit facilities. The terms of our various financing arrangements, including but not limited to the indentures relating to our outstanding senior notes and the credit agreements relating to our revolving credit facilities, impose restrictions on our ability to take a number of actions that we may otherwise desire to take, including incurring additional debt (including guarantees of indebtedness) and selling or creating liens on certain assets.
Our level of indebtedness could affect our operations by:
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requiring us to dedicate a portion of our cash flows from operations to service indebtedness, thereby reducing the availability of cash flow for other purposes;
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reducing our competitiveness compared to similar oil and natural gas companies that have less debt;
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limiting our ability to obtain additional financing for working capital, capital investments and acquisitions;
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limiting our flexibility in planning for, or reacting to, changes in our business and industry; and
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increasing our vulnerability to general adverse economic and industry conditions.
Our ability to meet and service our debt obligations depends on our future operational performance. General economic conditions; oil, NGLs or natural gasprices; and financial, business and other factors may affect our operational performance. Many of these factors are beyond our control. If we are unable to satisfy our debt obligations with cash on hand, we may attempt to refinance or repay portions of our indebtedness, including with proceeds from a public securities offering or the sale of certain assets. No assurance can be given that we will be able to generate sufficient cash flows to pay the interest on our debt, or that funds from future borrowings, equity financings or asset sales will be available to pay or refinance our debt on terms that we consider favorable. Further, if we incur additional debt to finance asset or business acquisitions, we may decrease our liquidity by using a significant portion of our available cash or borrowing capacity to finance such acquisitions, and such acquisitions could result in a significant increase in our interest expense or financial leverage. The occurrence of any of the foregoing could adversely affect our ability to execute portions of our business strategy and could have a material adverse effect on our liquidity and capital position.
Our risk management activities may prevent us from fully benefiting from an increase in oil, NGLs and natural gas prices and expose us to certain other risks.
We are exposed to, among other things, fluctuations in oil, NGLs and natural gas prices and foreign currency exchange rates. We actively monitor such exposures and, where we deem appropriate, utilize derivative financial instruments and physical delivery contracts to mitigate the potential impact of declines in oil, NGLs and natural gas prices and fluctuations in foreign currency exchange rates. Under U.S. GAAP, derivative financial instruments that do not qualify or are not designated as hedges for accounting purposes are fair valued with the resulting changes recognized in current period net earnings. The utilization of derivative financial instruments may therefore introduce significant volatility into our reported net earnings.
The terms of our various risk management agreements and the amount of estimated production hedged may limit the benefits we receive from an increase in oil, NGLs and natural gas prices. We may also suffer financial loss if (a) we fail to produce anticipated volumes of oil, NGLs and natural gas, particularly during periods of increasing commodity prices; or (b) counterparties to our risk management agreements fail to fulfill their obligations under the agreements, particularly during periods of declining commodity prices. The occurrence of any of the foregoing could adversely affect our ability to execute portions of our business strategy and could have a material adverse effect on our liquidity and capital position.
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The decision to return capital to shareholders, whether through cash dividends, share buybacks or otherwise, and the amount and timing of such capital returns is subject to the discretion of the Board of Directors and will vary from time to time.
Although we currently intend to return capital to shareholders in the form of (a) a base quarterly cash dividend; (b) variable cash dividends; and/or (c) repurchases of our outstanding common stock (commonly known as share buybacks), the amount and timing of these returns of capital to shareholders may vary from time to time. The decision whether to return capital to shareholders, as well as the timing and amount of any return of capital to shareholders, is subject to the discretion of the Board of Directors, which regularly evaluates our proposed capital returns to shareholders and the requirements, if any, under Delaware General Corporation Law (“DGCL”). Additionally, in the case of share buybacks, we may be limited in our ability to repurchase shares of our common stock by various governmental laws, rules and regulations which prevent us from purchasing our common stock during periods when we are in possession of material non-public information. Our repurchases may also be impacted by a one percent excise tax on corporate stock repurchases under the IRA. The level of dividends per share of common stock will also be affected by the number of outstanding shares of common stock and other securities that may be entitled to receive cash dividends or other payments.
The amount of cash available to return to shareholders, if any, can vary significantly from period to period for a number of reasons, including, among other things: our operational and financial performance; fluctuations in the costs to produce oil, NGLs and natural gas; the amount of cash required or retained for debt service or repayment; amounts required to fund capital expenditures and working capital requirements; our ability to access capital markets; foreign currency exchange rates and interest rates; any agreements relating to our indebtedness that restrict our ability to return capital to shareholders and the other risks set forth in this Item 1A. Risk Factors of this Annual Report on Form 10‐K. The trading price of our securities, including our common stock, may deteriorate if we are unable to meet investor expectations with respect to the timing and amount of capital returns to shareholders, and such deterioration may be material.
Regulation and Litigation Risk
We are subject to extensive federal, state, provincial and local government laws, rules and regulations that can adversely affect the cost, manner and feasibility of our business, and increased regulation in the future could increase costs, impose additional operating restrictions and cause delays.
All of our operations are subject to extensive federal, state, provincial, local and other laws, rules and regulations, including with respect to drilling operations; completion operations, including the use of hydraulic fracturing; the production of oil, NGLs and natural gas; the disposal of produced water and other hazardous waste; the gathering and transportation of oil, NGLs and natural gas; the imposition of taxes; royalty payments; environmental matters, including air and water emissions or discharges; free trade agreements; worker health and safety; and conservation policies, including policies related to environmentally sensitive areas and protected species. These laws, rules and regulations may impose substantial liabilities for our failure to comply, including the assessment of administrative, civil and criminal penalties and the issuance of injunctions restricting or prohibiting some or all of our activities in a particular area.
In the normal course of our business, we may be required to make large expenditures to comply with applicable governmental laws, rules, regulations, permits or orders. While we cannot predict the actions that future laws, rules and regulations may require or prohibit, our business could be subject to increased operating and other compliance costs and our operations may be delayed if existing laws, rules and regulations are revised or reinterpreted, or if new laws, rules and regulations become applicable to our operations. Any such increases or delays could have a material and adverse effect on our business, financial condition and results of operations.
We currently are, and from time to time in the future may be, subject to claims, litigation, administrative proceedings and regulatory actions that may not be resolved in our favor.
We currently are, and from time to time in the future may be, subject to claims, litigation, administrative proceedings and regulatory actions. The outcome of these matters may be difficult to assess or quantify, and there cannot be any assurance that such matters will be resolved in our favor. If we are unable to resolve such matters favorably, we or our directors, officers or employees may become involved in legal proceedings that could result in an onerous or
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unfavorable decision, including fines, sanctions, monetary damages or the inability to engage in certain operations or transactions. The defence of such matters may also be costly, time consuming and could divert the attention of management and key personnel away from our operations. We may also be subject to adverse publicity associated with such matters, regardless of whether such allegations are valid or whether we are ultimately found liable. As a result, such matters could have a material adverse effect on our business, reputation, financial condition, results of operations or liquidity. See Item 3 of this Annual Report on Form 10-K.
The ability of Canadian and other non-resident shareholders to effect service of process or enforce remedies against Ovintiv, its directors, officers, experts, and assets may be limited.
We are incorporated in the State of Delaware and our principal place of business is in the United States. Most of our directors and officers are residents of the United States and many of the experts who provide us with services are residents of the United States. Additionally, most of our oil and natural gas assets and production are located in the United States. It may be difficult for our shareholders in Canada or other non-U.S. jurisdictions (each a "Foreign Jurisdiction") to (a) effect service of process within such Foreign Jurisdiction upon Ovintiv or certain of our directors, officers and representatives of experts who are not residents of the Foreign Jurisdiction (together, “Non-Residents”) and (b) enforce the judgments of courts in an applicable Foreign Jurisdiction against Ovintiv and other Non-Residents based upon liability under the laws of such Foreign Jurisdiction, including the securities laws of any province within Canada.
Tax Risks
U.S. and Canadian tax laws and regulations may change over time, and such changes may result in increased taxes on our business.
From time to time, legislation has been proposed that, if enacted into law, would make significant changes to U.S. and Canadian tax laws and regulations, including those specifically applicable to the oil and natural gas industry (such as the intangible drilling and development costs deduction under U.S. federal income tax law). On August 16, 2022, the 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 billion for any 3-year period preceding the tax year. Based on available guidance, the Company does not exceed the $1 billion threshold to be subject to the CAMT in 2023 but anticipates it will be subject to the CAMT in 2024. While we are unable to predict the timing, scope and effect of any proposed or enacted tax law changes, elimination of certain tax deductions, as well as any other changes to, or the imposition of new, federal, state or local U.S. or Canadian taxes (including the imposition of, or increases in, production, severance or similar taxes), could materially and adversely affect our business, financial condition and results of operations. We will continue to monitor and assess any proposed or enacted tax law changes to determine the impact on our business, financial condition and results of operations and take appropriate actions, where necessary.
Additionally, U.S. and Canadian tax authorities could detrimentally change their administrative practices or may disagree with the way we calculate our tax liabilities or structure our arrangements and there are certain tax matters under governmental review for which the timing of resolution is uncertain. While we believe that our current provision for income taxes is adequate, certain tax authorities may reassess our taxes and such reassessments may be material.
Our corporate reorganization in January of 2020 may result in material Canadian and/or U.S. federal income taxes.
On January 24, 2020, Encana completed a corporate reorganization (the “Reorganization”), which included among other things, our acquisition of all of the issued and outstanding shares of Encana common stock in exchange for shares of Ovintiv common stock on a one-for-one basis and becoming the parent company of Encana and its subsidiaries and our subsequent migration from Canada to the United States, becoming a Delaware corporation (the “U.S. Domestication”). The Reorganization and U.S. Domestication involved multiple complex U.S. and Canadian tax issues, including numerous assumptions and estimates of fair market value. While we believe that our analysis and application of both U.S. and Canadian tax laws to the Reorganization was correct, certain tax authorities may challenge our positions which could materially and adversely affect our business, financial condition and results of operations.
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General Risks
The oil and natural gas industry is highly competitive and many of our competitors have available resources in excess of our own.
The oil and natural gas industry is highly competitive. Many of our competitors, including major integrated and independent oil and natural gas companies, as well as national oil companies, are larger and have substantially greater resources at their disposal than we do and may have a competitive advantage when responding to factors that affect demand and prices for oil, NGLs and natural gas. We compete with these companies in the development and also acquisition of oil and natural gas leases and other properties. Such competition can significantly increase costs and affect the availability of resources, which could provide our larger competitors a competitive advantage when acquiring equipment, leases and other properties.
We also compete with these companies for the personnel, including petroleum engineers, geologists, geophysicists and other key personnel, required to both (a) find, acquire, develop and operate our properties and (b) market our oil, NGLs and natural gas production. The experience, knowledge and contributions of our existing management team and directors to our immediate and near-term operations is of central importance for the foreseeable future. As such, the unexpected loss of services from, or retirement of any, of our key operations or management personnel could have a material adverse effect on our business and results of operation. To help attract, retain, and motivate qualified employees, we deliver competitive base salaries and benefits and reward short and long-term performance through the grant of an annual cash bonus and LTI awards. Sustained declines in our stock price, or lower stock price performance relative to competitors, can reduce the retention value of our LTI awards, which can impact the competitiveness of our compensation. The competition for qualified personnel in the oil and natural gas industry means there can be no assurance that we will be able to attract and retain key personnel with the required specialized skills necessary for our business.
We could be adversely affected by security threats, including cyber-security threats and related disruptions.
We have become increasingly dependent upon information technology systems to conduct our daily operations. We depend on a variety of information technology systems to estimate oil, NGLs and natural gas reserve quantities; process and record financial and operating data; analyze seismic and drilling information; and communicate with employees and third-party partners. This growing dependence on technology is accompanied by a greater sensitivity to cyber-attacks and information systems breaches. Unauthorized access to information systems by employees or third parties could corrupt or expose confidential, fiduciary, or proprietary information; interrupt our communications or operations; disrupt our business activities; or interfere with our competitive position. Cybersecurity threat actors are becoming more sophisticated and coordinated in their attempts to access a company’s information technology systems and data, including the information technology systems of cloud providers. Furthermore, geopolitical tensions or conflicts, such as Russia’s invasion of Ukraine, may further heighten the risk of cybersecurity attacks. In addition, our vendors, suppliers and other business partners may separately suffer disruptions as a result of such security breaches which may directly or indirectly affect our business activities or our competitive position.
To protect our information assets and systems, we apply technical and process controls. However, such controls may not adequately prevent cyber-security breaches and we may not adopt all controls utilized by our peers. As cyber-attacks continue to evolve, we may be required to expend additional resources to investigate, mitigate and remediate any potential vulnerabilities. We may also be subject to regulatory investigations or litigation relating to cyber-security issues.
Although we have not suffered any material losses related to a cyber-security breach to date, there is no assurance that we will not suffer material losses associated with cyber-security breaches in the future. If a cyber-attack were to successfully breach our information or operating systems, we could incur substantial remediation costs and suffer other negative consequences, including exposure to significant litigation risks. The potential for such occurrences subjects our operations to increased risks that could have a material adverse effect on our business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
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Item 1C. Cybersecurity
Governance
Board of Directors
Ovintiv’s Board of Directors is responsible for the oversight of the Company’s enterprise risk management processes, and the Board’s committees help discharge this responsibility by managing issues under their purview. The Board has delegated the primary responsibility to oversee and monitor cybersecurity risks to the Audit Committee and the Audit Committee has direct oversight, and regularly reviews, the Company’s cybersecurity risks and related mitigations. The Audit Committee receives periodic updates from the Company’s Vice-President and Chief Information Officer (the “CIO”) concerning a wide range of topics, including risks from cybersecurity threats, evolving standards, vulnerability assessments, third-party and independent reviews, the threat environment, technological trends and information security considerations arising with respect to the Company’s peers and third parties. As part of the enterprise risk management process, the Audit Committee provides regular updates to the full Board on the risk categories for which it is responsible, which includes cybersecurity. The Company has processes by which certain cybersecurity incidents are escalated and where appropriate, reported in a timely manner to the Audit Committee and the Board.
Management
The Company’s Cybersecurity Group coordinates with business and legal functions to assess and manage the Company’s risks from cybersecurity threats, including those relating to information systems owned or operated by third parties that are used by the Company. The Cybersecurity Group is led by the Director, Cybersecurity & Compliance (the “Cybersecurity Director”). The Cybersecurity Director has extensive cybersecurity knowledge and skills gained from over 30 years of relevant work experience. The Cybersecurity Director is a Certified Information Systems Auditor, Chartered Professional Accountant and a Certified Fraud Examiner.
The Cybersecurity Group designs and implements the Company’s administrative and technical controls against risks from cybersecurity threats. The Cybersecurity Group also maintains the Company’s policies that prescribe procedures and standards for assessing, identifying and managing cybersecurity threats, which includes the Company’s Cybersecurity Incident Response Program. The Company’s Internal Audit Group conducts periodic independent audits of the Company’s cybersecurity procedures, systems, and controls, and also provides independent oversight into the engagement of cybersecurity resources.
The Cybersecurity Group reports to the CIO, who reports to the Executive Vice-President, Corporate Services. The CIO is responsible for overseeing the Company’s information technology, enterprise data, and cybersecurity, and, in conjunction with executive leadership, regularly reviews risk management measures implemented by the Company to identify and mitigate cybersecurity risk. The CIO receives reports from the Cybersecurity Group regarding cybersecurity matters on an ongoing basis and administers the Company’s Cybersecurity Incident Response Program. The CIO is primarily responsible for reporting cybersecurity matters, including cybersecurity incidents, to executive leadership and the Audit Committee. The CIO has 29 years of relevant information technology work experience with nine years of cybersecurity oversight at the Company and elsewhere.
Risk Management and Strategy
Ovintiv’s risk management strategy includes identifying risks, and developing and implementing risk management practices that include mitigation activities, systems, controls and business continuity plans for specific risks, which are aligned with, and complementary to, Ovintiv’s corporate risk management policy. The identification, analysis and mitigation strategy of cybersecurity risk is incorporated into the Company’s risk practices and is a component of an internal Risk Network that is comprised of senior leadership responsible for understanding and reporting each of Ovintiv’s entity-level risks.
Our cybersecurity program is aligned with the NIST Cybersecurity Framework and is designed to assess, identify, and manage material risks from cybersecurity threats, and protect and preserve the confidentiality, integrity, and continued availability of all information owned by, or in the care of, the Company. The Company maintains an Information
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Management Policy, which applies to both employees and third-party service providers, for the protection of the Company’s information. Our information systems are monitored by automated tools and the Cybersecurity Group. The Cybersecurity Group conducts an initial assessment of cybersecurity incidents and determines whether escalation is warranted. The Company’s Cybersecurity Incident Response Program (“CIRP”) provides guidelines to assist the Company in identifying and mitigating cyber risk effectively and efficiently, and sets out a coordinated approach to investigating, containing, documenting and mitigating incidents, including reporting findings and keeping executive leadership and other key stakeholders informed and involved as appropriate. The Company has implemented an incident response team and incident assessment team that includes internal leadership representatives from the executive, information technology, operational, legal, and corporate teams, as well as third-party experts as appropriate. Our processes and procedures also encompass oversight and identification of risks from cybersecurity threats associated with our use of third-party service providers, which includes engagement of a managed security service provider that performs a security review and ongoing monitoring of our third-party service providers.
The cybersecurity program, including the CIRP, undergoes periodic internal and external review. The Company engages qualified external auditors and cybersecurity risk assessors to provide independent assessments of our cybersecurity program and response preparedness along with reviews and audits by the Company’s Internal Audit Group. The Company conducts annual internal training for employees, and internal and external teams, including the Cybersecurity Group, as well as periodic penetration testing, red teaming, tabletop exercises and phishing drills. The results of these tests are measured and assessed for potential improvements.
The Company is not aware of having experienced any risks from cybersecurity threats or incidents through the date of this Annual Report on Form 10-K that have materially affected or are reasonably likely to materially affect the Company, its business strategy, results of operation or financial condition. This does not guarantee that future incidents or threats will not have a material impact or that we are not currently the subject of an undetected incident or threat that may have such an impact.
Additional information on cybersecurity risks we face is discussed in Item 1A. Risk Factors of this Annual Report on Form 10-K, which should be read in conjunction with the foregoing information.
Item 3. Legal Proceedings
Ovintiv is involved in various legal claims and actions arising in the normal course of the Company’s operations. Although the outcome of these claims cannot be predicted with certainty, the Company does not expect these matters to have a material adverse effect on Ovintiv’s financial position, cash flows or results of operations. If an unfavorable outcome were to occur, there exists the possibility of a material impact on the Company’s consolidated net earnings or loss for the period in which the effect becomes reasonably estimable. See Item 1A. Risk Factors of this Annual Report on Form 10-K, “We currently are, and from time to time in the future may be, subject to claims, litigation, administrative proceedings and regulatory actions that may not be resolved in the Company’s favor”.
In July 2020, the Company received a Notice of Violation (“NOV”) from the EPA and the Utah Department of Environmental Quality, Division of Air Quality (“UDAQ”). The NOV alleges violations under the federal Clean Air Act, the State of Utah’s State Implementation Plan, and the State of Utah’s air quality regulations for the oil and natural gas industry, at certain of the Company facilities located in the Uinta Basin. The Company has exchanged information with the EPA and UDAQ and is engaged in discussions aimed at resolving the allegations. Resolution of the matter may result in monetary sanctions of more than $300,000.
For additional information, see Note 26 to Ovintiv’s audited Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Ovintiv’s shares of common stock are listed and posted for trading on the NYSE and TSX under the symbol “OVV”.
Shareholders
The Company is authorized to issue up to 775,000,000 shares of stock consisting of: (a) 750,000,000 shares of common stock, par value $0.01 per share, and (b) 25,000,000 shares of preferred stock, par value $0.01 per share. As of February 16, 2024, there were 269,515,124 shares of common stock outstanding held by 4,953 shareholders of record, and no shares of preferred stock outstanding.
Capital Return Information
In 2023, the Company paid a quarterly dividend of $0.25 per share of common stock for the first quarter and $0.30 per share of common stock for each of the second, third and fourth quarters (2022: $0.20 per share of common stock for the first quarter and $0.25 per share of common stock for each of the second, third and fourth quarters) and $1.15 per share of common stock annually (2022: $0.95 per share of common stock annually). On February 27, 2024 the Board of Directors declared a dividend of $0.30 per share of Ovintiv common stock payable on March 28, 2024 to common shareholders of record as of March 15, 2024. The Company typically pays dividends quarterly to shareholders of record as of the 15th day (or the previous business day) of the last month of each calendar quarter, with the last business day of the same month being the corresponding payment date; however, the timing and amount of dividends, if any, is subject to the discretion of the Board of Directors.
Although we currently intend to return capital to shareholders in the form of (a) a base quarterly cash dividend; (b) variable cash dividends; and/or (c) repurchases of our outstanding common stock (commonly known as share buybacks), the amount and timing of these returns of capital to shareholders may vary from time to time. The decision whether to return capital to shareholders, as well as the timing and amount of any return of capital to shareholders, is subject to the discretion of the Board of Directors, which regularly evaluates our proposed capital returns to shareholders and the requirements, if any, under DGCL. See Item 1A. Risk Factors of this Annual Report on Form 10‐K, “The decision to return capital to shareholders, whether through cash dividends, share buybacks or otherwise, and the amount and timing of such capital returns is subject to the discretion of the Board of Directors and will vary from time to time”.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS
On September 26, 2023, Ovintiv announced it had received regulatory approval to purchase, for cancellation or return to treasury, up to approximately 26.7 million shares of common stock pursuant to a NCIB over a 12-month period from October 3, 2023 to October 2, 2024. The number of shares of common stock authorized for purchase represents approximately 10 percent of Ovintiv's issued and outstanding shares of common stock as of such time.
During the three months ended December 31, 2023, the Company purchased approximately 1.2 million shares of common stock for total consideration of approximately $53 million at an average price of $44.00 per share. The following table presents the shares of common stock purchased during the three months ended December 31, 2023.
(1)
For the three months ended December 31, 2023, no shares of common stock were repurchased through our broker in accordance with a Rule 10b5‐1 compliant plan initially adopted by the Company on September 30, 2021.
(2)
Includes commissions but excludes excise taxes.
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In the first quarter of 2022, Ovintiv obtained an exemption order (the “NCIB Exemption”) from the Alberta Securities Commission and the Ontario Securities Commission, which permits Ovintiv to make repurchases (the “Proposed Bids”), under its current and any future normal course issuer bids, through the facilities of the NYSE and other U.S.-based trading systems (collectively, “U.S. Markets”), in excess of the maximum allowable purchases under applicable Canadian securities laws. The NCIB Exemption applies to any Proposed Bid commenced within 36 months of the date of the exemption order and is subject to several other conditions, including that Ovintiv remain a U.S. and SEC foreign issuer under applicable Canadian securities laws. The purchases of common stock under a Proposed Bid must also be made in compliance with other applicable Canadian securities laws and applicable U.S. rules. Additionally, the NCIB Exemption imposes restrictions on the number of shares of common stock that may be acquired under the exemption, including that: (a) Ovintiv may not acquire common stock in reliance upon the exemption under subsection 4.8(3) of Canadian National Instrument 62-104 – Take-Over Bids and Issuer Bids (“NI 62-104”) from the requirements applicable to issuer bids (the “Other Published Markets Exemption”) if the aggregate number of shares of common stock purchased by Ovintiv, and any person or company acting jointly or in concert with Ovintiv, in reliance on the NCIB Exemption and the Other Published Markets Exemption within any period of 12 months exceeds 5 percent of the outstanding common stock on the first day of such 12-month period; and (b) the aggregate number of shares of common stock purchased pursuant to a Proposed Bid in reliance on the NCIB Exemption, exempt issuer bid purchases made in the normal course through the facilities of the TSX, and the Other Published Markets Exemption does not exceed, over the 12-month period of its current NCIB, 10 percent of Ovintiv’s public float. As a result, the NCIB Exemption effectively allows Ovintiv to purchase up to 10 percent of its public float on U.S. Markets under its NCIB. Without the NCIB Exemption this amount would be limited to 5 percent of Ovintiv’s outstanding common stock within a 12-month period under applicable Canadian securities law.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
None.
PERFORMANCE GRAPH
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing.
The following graph compares the cumulative five-year total return to shareholders of the Company’s common stock relative to the cumulative total returns of the S&P 400 and the SPDR Oil & Gas Exploration & Production ETF (“XOP U.S. Equity”). The graph was prepared assuming $100 was invested on December 31, 2018 in the Company’s common stock, the S&P 400 and the XOP U.S. Equity, and dividends have been reinvested subsequent to the initial investment. The graph is included for historical comparative purposes only and should not be considered indicative of future performance.
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Comparison of 5-Year Cumulative Total Return Among
Ovintiv, the S&P 400 and XOP U.S. Equity
(US$100 Invested in Base Period)
Item 6. [Reserved]
Not Applicable.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The MD&A is intended to provide a narrative description of the Company’s business from management’s perspective, which includes an overview of Ovintiv’s consolidated 2023 results and year-over-year comparisons between 2023 and 2022 results. This MD&A should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes for the year ended December 31, 2023 (“Consolidated Financial Statements”), which are included in Item 8 of this Annual Report on Form 10-K. Discussion and analysis of 2021 results and year-over-year comparisons between 2022 and 2021 results that are not included in this Form 10-K, can be found in Item 7 of the 2022 Annual Report on Form 10-K.
Common industry terms and abbreviations are used throughout this MD&A and are defined in the Definitions, Conversions and Conventions sections of this Annual Report on Form 10-K. This MD&A includes the following sections:
•
Executive Overview
•
Results of Operations
•
Liquidity and Capital Resources
•
Accounting Policies and Estimates
•
Non-GAAP Measures
Executive Overview
Strategy
Ovintiv aims to be a leading North American energy producer and is focused on developing its high-quality multi-basin portfolio of oil and natural gas producing plays as part of its strategy outlined in Items 1 and 2 of this Annual Report on Form 10-K.
Ovintiv is committed to delivering quality returns from its capital investment, generating significant cash flows and providing durable cash returns to its shareholders through the commodity price cycle. The Company aims to achieve its strategic priorities through execution excellence, disciplined capital allocation, and commercial acumen and risk management. In addition, the Company is dedicated to driving progress in areas of environmental, social, and governance, aligning with its commitment to corporate responsibility.
In support of the Company’s commitment to enhancing shareholder value, Ovintiv utilizes its capital allocation framework to provide competitive returns to shareholders while strengthening its balance sheet.
Ovintiv continually monitors and evaluates changing market conditions to maximize cash flows, mitigate risks and renew its premium well inventory. The Company’s assets, located in some of the best plays in North America, form a multi-basin, multi-product portfolio which enables flexible and efficient investment of capital that supports the Company’s strategy.
Ovintiv seeks to deliver results in a socially and environmentally responsible manner. Best practices are deployed across its assets, allowing the Company to capitalize on operational efficiencies and decrease emissions intensity. The Company’s sustainability reporting, which outlines its key metrics, targets and relative progress achieved can be found in the Company Outlook section of this MD&A and on the Company’s sustainability website.
Underpinning Ovintiv’s strategy are core values of one, agile, innovative and driven, which guide the organization to be collaborative, responsive, flexible and determined. The Company is committed to excellence with a passion to drive corporate financial performance and shareholder value.
For additional information on Ovintiv’s strategy, its reporting segments and the plays in which the Company operates, refer to Items 1 and 2 of this Annual Report on Form 10-K. For additional information on the segmented results, refer to Note 2 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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In evaluating its operations and assessing its leverage, Ovintiv reviews performance-based measures such as Non-GAAP Cash Flow and debt-based metrics such as Debt to Adjusted Capitalization, Debt to EBITDA and Debt to Adjusted EBITDA, which are non-GAAP measures and do not have any standardized meaning under U.S. GAAP. These measures may not be similar to measures presented by other issuers and should not be viewed as a substitute for measures reported under U.S. GAAP. Additional information regarding these measures, including reconciliations to the closest GAAP measure, can be found in the Non-GAAP Measures section of this MD&A.
Highlights
During 2023, the Company focused on executing its capital investment plan aimed at maximizing profitability through operational and capital efficiencies, minimizing the impact of inflation and delivering cash from operating activities. Upstream product revenues in 2023 were impacted by lower average realized prices, excluding the impact of risk management activities compared to 2022, partially offset by higher production volumes. Decreases in average realized natural gas and liquids prices of 53 percent and 21 percent, respectively, were primarily due to lower benchmark prices. In 2023, total production volumes increased by 11 percent compared to 2022 primarily due to the efficient integration of the assets from the Permian Acquisition, as defined below, during the latter half of the year.
Significant Developments
•
On November 22, 2023 and September 13, 2023, the Company purchased approximately 1.2 million shares and one million shares, respectively, of Ovintiv common stock from the secondary public offerings by NMB Stock Trust, a Delaware statutory trust (“NMB Stock Trust”). The total consideration paid was approximately $53 million, averaging $44.00 per share, and $45 million, averaging $45.45 per share, respectively. The shares were canceled during the third and fourth quarters of 2023.
•
On September 26, 2023, the Company announced it had received regulatory approval for the renewal of its NCIB program, which enables the Company to purchase, for cancellation or return to treasury, up to approximately 26.7 million shares of common stock over a 12-month period from October 3, 2023 to October 2, 2024. The number of shares authorized for purchase represents 10 percent of Ovintiv’s public float as at September 21, 2023. The Company expects to continue to execute the renewed NCIB program in conjunction with its capital allocation framework.
•
On June 12, 2023, the Company closed the purchase agreement to acquire substantially all leasehold interest and related assets from Black Swan Oil & Gas, LLC, PetroLegacy II Holdings, LLC, Piedra Energy III Holdings, LLC and Piedra Energy IV Holdings, LLC, which were portfolio companies of funds managed by EnCap Investments L.P. (“Permian Acquisition”). The Company issued approximately 31.8 million shares of Ovintiv common stock and paid approximately $3.2 billion in cash upon closing, for total consideration of approximately $4.4 billion, which included preliminary customary closing adjustments of approximately $85 million. The acquisition added approximately 65,000 net acres in the Midland Basin and approximately 1,050 net well locations to Ovintiv’s Permian inventory. The transaction had an effective date of January 1, 2023.
•
On June 12, 2023, the Company closed the agreement to sell the entirety of its Bakken assets, comprising approximately 46,000 net acres in the Williston Basin of North Dakota, to Grayson Mill Bakken, LLC, a portfolio company managed by EnCap Investments L.P., for proceeds of approximately $734 million after customary closing adjustments of approximately $91 million. The transaction had an effective date of January 1, 2023.
•
On June 12, 2023, the Company announced its inclusion on the S&P 400 index effective June 20, 2023.
•
On May 31, 2023, the Company issued $2.3 billion in senior unsecured notes with varying maturity dates and interest rates. The net proceeds from the bond offering were used to finance a portion of the Permian Acquisition.
•
On April 3, 2023, the Company announced an increase of 20 percent to its quarterly per share dividend payment representing an annualized dividend of $1.20 per share of common stock as part of Ovintiv’s commitment to returning capital to shareholders.
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Financial Results
•
Reported net earnings of $2,085 million, including income tax expense of $425 million and net gains on risk management in revenues of $151 million, before tax.
•
Generated cash from operating activities of $4,167 million and Non-GAAP Cash Flow of $3,899 million. Cash from operating activities exceeded capital expenditures by $1,423 million.
•
Purchased for cancellation, approximately 10 million shares of common stock for total consideration of approximately $426 million.
•
Paid dividends of $1.15 per share of common stock totaling $307 million.
•
Had approximately $3.5 billion in total liquidity as at December 31, 2023, which included available credit facilities of $3,486 million, available uncommitted demand lines of $234 million, and cash and cash equivalents of $3 million, net of outstanding commercial paper of $270 million.
•
Reported Debt to EBITDA of 1.2 times and Non-GAAP Debt to Adjusted EBITDA of 1.3 times.
Capital Investment
•
Reported total capital spending of $2,744 million, which was below the full year 2023 investment plan range of approximately $2,745 million to $2,785 million.
•
Focused on highly efficient capital activity to minimize the impact of inflation and to benefit from short-cycle high margin and/or low-cost projects which provide flexibility to respond to fluctuations in commodity prices, as discussed in the Company Outlook section of this MD&A.
Production
•
Produced average liquids volumes of 292.0 Mbbls/d, which accounted for 52 percent of total production volumes. Average oil and plant condensate volumes of 201.8 Mbbls/d, or 69 percent of total liquids production volumes, exceeded full year 2023 guidance of 196.0 Mbbls/d to 198.0 Mbbls/d.
•
Produced average natural gas volumes of 1,642 MMcf/d, which accounted for 48 percent of total production volumes. Average natural gas volumes exceeded full year 2023 guidance of 1,615 MMcf/d to 1,630 MMcf/d.
•
Produced average total volumes of 565.6 MBOE/d, which exceeded full year 2023 guidance of 550.0 MBOE/d to 560.0 MBOE/d.
Operating Expenses
•
Incurred total upstream transportation and processing expenses of $1,603 million or $7.76 per BOE, a decrease of $25 million compared to 2022, primarily due to lower variable contract rates in Permian, partially offset by higher volumes in Permian.
•
Incurred total upstream operating expenses of $831 million or $4.03 per BOE, an increase of $58 million compared to 2022, primarily due to the Permian Acquisition in the second quarter of 2023, increased activity resulting from more wells on production and sustained inflationary pressures, partially offset by the sale of the Bakken assets in the second quarter of 2023, the sale of portions of Uinta assets in the third quarter of 2022 and higher recoveries from updated operating contract terms.
•
Incurred total production, mineral and other taxes of $342 million, which represents approximately 4.4 percent of upstream revenues. Total production, mineral and other taxes decreased by $73 million compared to 2022, primarily due to lower production taxes in the USA Operations as a result of lower commodity prices.
The Company’s upstream operations refers to the summation of the USA and Canadian operating segments. Additional information on the items above and other expenses can be found in the Results of Operations section of this MD&A.
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2024 Outlook
Industry Outlook
OilMarkets
The oil and gas industry is cyclical and commodity prices are inherently volatile. Oil prices reflect global supply and demand dynamics as well as the geopolitical and macroeconomic environment.
Oil prices for 2024 are expected to be impacted by the interplay between the pace of global economic growth and demand for oil, continued OPEC+ production restraint and continued supply uncertainties resulting from geopolitical events. Recessionary concerns continue to have an impact on global demand as central banks evaluate and recalibrate their strategies in response to the prevailing economic environment. Supply and the accumulation of global oil inventories are expected to be impacted by changes in OPEC+ production levels, consumer demand behavior and geopolitical volatility.
Natural Gas Markets
Natural gas prices are primarily impacted by structural changes in supply and demand as well as deviations from seasonally normal weather.
Natural gas prices for 2024 are expected to be impacted by the interplay between natural gas production and associated natural gas from oil production, changes in demand from the power generation sector, changes in export levels of U.S. liquefied natural gas, impacts from seasonal weather, as well as supply chain constraints or other disruptions resulting from geopolitical events.
Company Outlook
The Company will continue to exercise discretion and discipline, and intends to optimize capital allocation throughout 2024 as the commodity price environment evolves. Ovintiv pursues innovative ways to maximize cash flows, and to reduce upstream operating and administrative expenses.
Markets for oil and natural gas are exposed to different price risks and are inherently volatile. To mitigate price volatility and provide more certainty around cash flows, the Company enters into derivative financial instruments. With the closing of the Permian Acquisition in the second quarter of 2023 and the associated increase in production volumes, the Company executed additional oil hedge positions. As at December 31, 2023, the Company has hedged approximately 70.3 Mbbls/d of expected oil and condensate production and 775 MMcf/d of expected natural gas production for 2024. In addition, Ovintiv proactively utilizes transportation contracts to diversify the Company’s sales markets, thereby reducing significant exposure to any given market and regional pricing.
Additional information on Ovintiv’s hedging program can be found in Note 24 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Capital Investment
The Company plans to spend approximately $2.2 billion to $2.4 billion on its full year 2024 capital investment program, focusing on maximizing returns from high-margin oil and condensate. In 2024, the Company expects to generate cash flows in excess of capital expenditures.
Ovintiv continually strives to improve well performance and lower costs through innovative techniques. Ovintiv's large-scale cube development model utilizes multi-well pads and advanced completion designs to maximize returns and resource recovery from its reservoirs. During 2023, the Company further enhanced its multi-frac technology by fracing three wells (“Trimulfrac”) at the same time compared to its current standard of fracing two wells (“Simulfrac”) at the same time. Ovintiv’s disciplined capital program and continuous innovation create flexibility to allocate capital in changing commodity markets to maximize cash flows while preserving the long-term value of the Company’s multi-basin portfolio.
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Production
In 2024, the Company expects full year average total production volumes of approximately 545 MBOE/d to 575 MBOE/d, including oil and plant condensate production volumes of approximately 202 Mbbls/d to 208 Mbbls/d, other NGLs production volumes of approximately 85 Mbbls/d to 90 Mbbls/d and natural gas production volumes of approximately 1,550 MMcf/d to 1,650 MMcf/d.
Operating Expenses
Ovintiv promotes a collaborative culture that values knowledge exchange, open communication, continuous improvement and learning. This culture stimulates innovation and fosters the creation of best practices resulting in efficiency improvements and enhanced operational performance for the Company.
In 2024, the Company expects to incur full year upstream transportation and processing costs of approximately $7.50 per BOE to $8.00 per BOE, upstream operating expenses of approximately $4.25 per BOE to $4.75 per BOE, and total production, mineral and other taxes of approximately four to five percent of upstream revenues. The Company’s upstream operations refers to the summation of the USA and Canadian operating segments.
Long-Term Debt
During the second quarter of 2023, the Company closed the Permian Acquisition and funded the cash portion of the transaction with net proceeds of $2,278 million from the issuance of senior unsecured notes, cash proceeds received from the sale of the Company’s Bakken assets, cash on hand and proceeds from short-term borrowings.
As at December 31, 2023, the Company had $270 million of commercial paper outstanding under its U.S. commercial paper (“U.S. CP”) programs and $14 million outstanding under its revolving credit facilities.
Additional information on Ovintiv’s long-term debt and liquidity position can be found in Note 15 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, and the Liquidity and Capital Resources section of this MD&A, respectively.
Additional information on Ovintiv’s 2024 Corporate Guidance can be accessed on the Company’s website at www.ovintiv.com.
Environmental, Social and Governance
Ovintiv recognizes climate change as a global concern and the importance of reducing its environmental footprint as part of the solution. The Company voluntarily participates in emission reduction programs and has adopted a range of strategies to help reduce emissions from its operations. These strategies include incorporating new and proven technologies, optimizing processes in its operations and working closely with third-party providers to develop best practices. The Company continues to look for innovative techniques and efficiencies in support of its commitment to emission reductions.
In May 2023, Ovintiv published its sustainability report, which highlights the Company’s progress in emissions intensity reductions including an emissions reduction roadmap aimed to meet the Company’s Scope 1&2 GHG emissions target by 2030. As at the end of 2023, the Company has achieved a greater than 40 percent reduction in the Scope 1&2 GHG emissions intensity and is on track to meet its emissions intensity reduction target of 50 percent by 2030. The GHG emissions reduction target is tied to the annual compensation program for all employees.
In June 2023, the Company closed the Permian Acquisition, increasing both oil production volumes and net premium inventory in the Permian. Ovintiv is undergoing an integration period to align the emissions profile of the acquired inventory with the World Bank Zero Routine Flaring initiative. Ovintiv remains committed to its emissions reduction targets.
The Company continues to find innovative approaches to reduce its emissions profile and add value to its business. During 2023, the Company entered into an agreement with a midstream company which will connect Ovintiv’s natural gas-powered facilities in Montney to British Columbia’s hydro and wind generated electrical grid. This arrangement will reduce the Company’s GHG emissions while adding processing capacity.
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Ovintiv is committed to diversity, equity and inclusion (“DEI”). The Company’s social commitment framework, which is rooted in the Company’s foundational values of integrity, safety, sustainability, trust and respect, fosters a culture of inclusion that respects stakeholders and strengthens communities.
Ovintiv remains committed to protecting the health and safety of its workforce. Safety is a foundational value at Ovintiv and plays a critical role in the Company’s belief that a safe workplace is a strong indicator of a well-managed business. This safety-oriented mindset enables the Company to quickly respond to emergencies and minimize any impacts to employees and business continuity. Safety performance goals are incorporated into the Company’s annual compensation program. Additional information on DEI and employee safety can be found in the Human Capital section of Items 1 and 2 of this Annual Report on Form 10-K.
Further information on Ovintiv’s sustainable business practices are outlined in Items 1 and 2 of this Annual Report on Form 10-K, and on the Company’s sustainability website at https://sustainability.ovintiv.com.
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Results of Operations
Selected Financial Information
Product and Service Revenues
Service revenues (1) 7 5
Gains (Losses) on Risk Management, Net 151 (1,867 )
Sublease Revenues 71 68
Total Other (Income) Expenses 354 293
Net Earnings (Loss) Before Income Tax 2,510 3,560
Income Tax Expense (Recovery) 425 (77 )
(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
Oil & NGLs
Natural Gas
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Production Volumes and Realized Prices
Production Volumes (1) Realized Prices (2)
Oil (Mbbls/d, $/bbl)
NGLs – Plant Condensate (Mbbls/d, $/bbl)
NGLs – Other (Mbbls/d, $/bbl)
Total Oil & NGLs (Mbbls/d, $/bbl)
Natural Gas (MMcf/d, $/Mcf)
Total Production (MBOE/d, $/BOE)
Production Mix (%)
Oil & Plant Condensate 36 34
Total Oil & NGLs 52 51
Production Change – Year Over Year (%) (3)
Total Oil & NGLs 12 (5 )
Natural Gas 10 (4 )
Total Production 11 (4 )
(1)
Average daily.
(2)
Average per-unit prices, excluding the impact of risk management activities.
(3)
Includes production impacts of acquisitions and divestitures. See Notes 8 and 9 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
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Upstream Product Revenues
($ millions) Oil NGLs - Plant Condensate NGLs - Other NaturalGas Total
Increase (decrease) due to:
(1)
Revenues for 2023 exclude certain other revenue and royalty adjustments with no associated production volumes of $1 million (2022 - $9 million).
Oil Revenues
2023 versus 2022
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