Ovintiv Inc. (OVV) FY 2023 MD&A

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:

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Executive Overview

•
Results of Operations

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Liquidity and Capital Resources

•
Accounting Policies and Estimates

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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

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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.

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On June 12, 2023, the Company announced its inclusion on the S&P 400 index effective June 20, 2023.

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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.

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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

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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.

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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.

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Paid dividends of $1.15 per share of common stock totaling $307 million.

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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.

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Reported Debt to EBITDA of 1.2 times and Non-GAAP Debt to Adjusted EBITDA of 1.3 times.

Capital Investment

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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.

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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

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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.

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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

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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.

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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

Oil Markets

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

(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

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Production Volumes and Realized Prices

(1)
Average daily.

(2)
Average per-unit prices, excluding the impact of risk management activities.

(3)
Includes production impacts of acquisitions and divestitures. See Notes 8 and 9 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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Upstream Product Revenues

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

Oil Revenues

2023 versus 2022

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

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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

2023 versus 2022

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

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

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

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

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Natural Gas Revenues

2023 versus 2022

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

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

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

Gains (Losses) on Risk Management, Net

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

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

(1)
Primarily includes realized gains and losses related to the USA and Canadian Operations.

(2)
Other primarily includes realized gains or losses from other derivative contracts with no associated production volumes.

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

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Market Optimization Revenues

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

2023 versus 2022

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

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

Sublease Revenues

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

Operating Expenses

Production, Mineral and Other Taxes

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

2023 versus 2022

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

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

partially offset by:

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

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Transportation and Processing

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

2023 versus 2022

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

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

partially offset by:

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

Operating

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

2023 versus 2022

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

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

partially offset by:

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

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

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Purchased Product

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

2023 versus 2022

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

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

Depreciation, Depletion & Amortization

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

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

2023 versus 2022

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

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

partially offset by:

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

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

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Administrative

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

(1)
Includes costs related to The Bow office lease of $114 million (2022 - $116 million), half of which is recovered from sublease revenues.

2023 versus 2022

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

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

partially offset by:

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

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

Other (Income) Expenses

Interest

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

2023 versus 2022

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

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

partially offset by:

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

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Foreign Exchange (Gain) Loss, Net

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

2023 versus 2022

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

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

partially offset by:

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

Other (Gains) Losses, Net

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

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

Income Tax

Income Tax Expense (Recovery)

2023 versus 2022

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

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

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Effective Tax Rate

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

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

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

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

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

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

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

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Liquidity and Capital Resources

Sources of Liquidity

The Company has the flexibility to access cash equivalents and a range of funding alternatives at competitive rates through committed revolving credit facilities as well as debt and equity capital markets. Ovintiv closely monitors the accessibility of cost-effective credit and ensures that sufficient liquidity is in place to fund capital expenditures and dividend payments. In addition, the Company may use cash and cash equivalents, cash from operating activities, or proceeds from asset divestitures to fund its operations and capital allocation framework or to manage its capital structure as discussed below.

The Company’s capital structure consists of total shareholders’ equity plus long-term debt, including any current portion. The Company’s objectives when managing its capital structure are to maintain financial flexibility to preserve Ovintiv’s access to capital markets and its ability to meet financial obligations and finance internally generated growth, as well as potential acquisitions. Ovintiv has a practice of maintaining capital discipline and strategically managing its capital structure by adjusting capital spending, adjusting dividends paid to shareholders, issuing new shares of common stock, purchasing shares of common stock for cancellation or return to treasury, issuing new debt and repaying or repurchasing existing debt.

(1)
Includes three uncommitted demand lines totaling $289 million, net of $55 million in related undrawn letters of credit (2022 - $321 million and $126 million, respectively).

(2)
Includes the impact of long-term debt and shares of common stock issued in conjunction with the Permian Acquisition.

(3)
These measures are defined in the Non-GAAP Measures section of this MD&A.

The Company has full access to two committed revolving U.S. dollar denominated credit facilities totaling $3.5 billion, which include a $2.2 billion revolving credit facility for Ovintiv Inc. and a $1.3 billion revolving credit facility for a Canadian subsidiary (collectively, the “Credit Facilities”). The Credit Facilities, which mature in July 2026, provide financial flexibility and allow the Company to fund its operations or capital investment program. At December 31, 2023, $14 million was outstanding under the revolving Credit Facilities.

Depending on the Company’s credit rating and market demand, the Company may issue from its two U.S. CP programs, which include a $1.5 billion program for Ovintiv Inc. and a $1.0 billion program for a Canadian subsidiary. As at December 31, 2023, the Company had $270 million of commercial paper outstanding under its U.S. CP program maturing at various dates with a weighted average interest rate of approximately 6.17 percent, which is supported by the Company’s Credit Facilities. All of Ovintiv’s credit ratings are investment grade as at December 31, 2023.

The available Credit Facilities, uncommitted demand lines, and cash and cash equivalents, net of outstanding commercial paper provide Ovintiv with total liquidity of approximately $3.5 billion. At December 31, 2023, Ovintiv also had approximately $55 million in undrawn letters of credit issued in the normal course of business primarily as collateral security, related to sales arrangements.

On June 12, 2023, the Company closed the Permian Acquisition and issued approximately 31.8 million shares of Ovintiv common stock and paid approximately $3.2 billion in cash, for total consideration of approximately $4.4 billion, which included preliminary customary closing adjustments. The cash portion of the acquisition was funded through a combination of net proceeds 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.

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Ovintiv has a U.S. shelf registration statement under which the Company may issue from time to time, debt securities, common stock, preferred stock, warrants, units, share purchase contracts and share purchase units in the U.S. The U.S. shelf registration statement was renewed in March 2023 and expires in March 2026.

The obligations under the Company’s existing debt securities are fully and unconditionally guaranteed on a senior unsecured basis by Ovintiv Canada ULC, an indirect wholly-owned subsidiary of the Company. Additional information on the Company’s Canadian Operations segment and the Bow office lease can be found in the Results of Operations section in this MD&A and the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Ovintiv is currently in compliance with all financial covenants under the Credit Facilities. Management monitors Debt to Adjusted Capitalization, which is a non-GAAP measure defined in the Non-GAAP Measures section of this MD&A, as a proxy for Ovintiv’s financial covenant under the Credit Facilities, which requires Debt to Adjusted Capitalization to be less than 60 percent. As at December 31, 2023, the Company’s Debt to Adjusted Capitalization was 24 percent. The definitions used in the covenant under the Credit Facilities adjust capitalization for cumulative historical ceiling test impairments recorded in conjunction with the Company’s January 1, 2012 adoption of U.S. GAAP. Additional information on financial covenants can be found in Note 15 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The Company’s debt-based metrics have increased over the prior year primarily due to the increase in long-term debt resulting from the Permian Acquisition in the second quarter of 2023.

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Sources and Uses of Cash

During 2023, Ovintiv primarily generated cash through operating activities and received net proceeds from the Company’s debt issuance to fund a portion of the Permian Acquisition. The following table summarizes the sources and uses of the Company’s cash and cash equivalents.

(1)
Includes open market repurchases and redemption of the Company’s $1.0 billion senior notes in 2022.

Operating Activities

Net cash from operating activities in 2023 was $4,167 million and was primarily a reflection of the impacts from average realized commodity prices, production volumes and changes in non-cash working capital.

Additional detail on changes in non-cash working capital can be found in Note 25 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Ovintiv expects it will continue to meet the payment terms of its suppliers.

Non-GAAP Cash Flow in 2023 was $3,899 million and was primarily impacted by the items affecting cash from operating activities which are discussed below and in the Results of Operations section of this MD&A.

2023 versus 2022

Net cash from operating activities increased $301 million compared to 2022 primarily due to:

•
Lower realized losses on risk management in revenues compared to 2022 ($2,565 million), higher production volumes ($1,273 million), changes in non-cash working capital ($517 million), lower production, mineral and other taxes ($73 million), and lower transportation and processing expense ($20 million);

partially offset by:

•
Lower realized commodity prices ($3,638 million), increase in current income taxes ($271 million), higher interest expense ($71 million), higher operating expense, excluding non-cash long-term incentive costs ($68 million), higher administrative expenses, excluding non-cash long-term incentive costs ($67 million) and lower interest income ($14 million).

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Investing Activities

The Company’s primary investing activities are capital expenditures, acquisitions and divestitures, and are summarized in Notes 2 and 8 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

2023 and 2022

Net cash used in investing activities in 2023 was $5,519 million primarily due to capital expenditures and the Permian Acquisition. Capital expenditures increased $913 million compared to 2022 primarily due to a higher capital expenditure plan, additional capital spending associated with the Permian assets acquired in the second quarter of 2023 and sustained inflationary cost pressures.

Acquisitions in 2023, other than the Permian Acquisition, were $277 million, which primarily included property purchases with oil and liquids-rich potential in the USA Operations (2022 - $286 million).

Corporate acquisition in 2023 was $3,225 million, which relates to the Permian Acquisition in the second quarter of 2023. Additional information regarding the Permian Acquisition can be found in Note 9 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Divestitures in 2023 were $772 million, which primarily included the sale of the Bakken assets in North Dakota and certain properties that did not complement Ovintiv’s existing portfolio of assets. Divestitures in 2022 were $228 million, which primarily included the sale of portions of the Uinta assets located in northeastern Utah and Bakken assets located in northeastern Montana, as well as certain properties that did not complement Ovintiv’s existing portfolio of assets.

Financing Activities

Net cash from and/or used in financing activities has been impacted by the Company’s bond offering in the second quarter of 2023 to finance a portion of the Permian Acquisition and Ovintiv’s strategic objective to return value to shareholders by repaying or repurchasing existing debt, purchasing shares of common stock and paying dividends.

2023 versus 2022

Net cash from financing activities in 2023 was $1,359 million compared to net cash used in financing activities of $2,268 million in 2022. The change was primarily due to the net issuance of long-term debt in 2023 of $2,278 million as discussed below compared to a repayment in 2022 of $1,634 million and decreased purchases of shares of common stock in 2023 compared to 2022 ($293 million), partially offset by a repayment of revolving debt compared to a net issuance in 2022 ($502 million) and an increase in dividend payments in 2023 ($68 million).

From time to time, Ovintiv may seek to retire or purchase the Company’s outstanding debt through cash purchases and/or exchanges for other debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

The Company’s long-term debt, including the current portion of $284 million, totaled $5,737 million at December 31, 2023. The Company’s long-term debt at December 31, 2022 totaled $3,570 million, including the current portion of $393 million. As at December 31, 2023, the Company has no fixed rate long-term debt due until 2025 and beyond.

On May 31, 2023, Ovintiv completed a public offering of senior unsecured notes of $600 million with a coupon rate of 5.65 percent due May 15, 2025, $700 million with a coupon rate of 5.65 percent due May 15, 2028, $600 million with a coupon rate of 6.25 percent due July 15, 2033 and $400 million with a coupon rate of 7.10 percent due July 15, 2053. The net proceeds of the offering, totaling $2,278 million, were used to fund a portion of the Company’s Permian Acquisition.

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 expects to continue to deliver additional shareholder returns through share buybacks.

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For additional information on long-term debt, refer to Note 15 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Dividends

The Company pays quarterly dividends to common shareholders at the discretion of the Board of Directors.

On February 27, 2024, the Board of Directors declared a dividend of $0.30 per share of common stock payable on March 28, 2024 to common shareholders of record as of March 15, 2024.

Dividends increased $68 million compared to 2022 as a result of Ovintiv increasing its annualized dividend to $1.00 per share of common stock in the second quarter of 2022 and a further increase to an annualized dividend of $1.20 per share of common stock in the second quarter of 2023. The dividend increase reflects the Company’s commitment to returning capital to shareholders.

Normal Course Issuer Bid and Other Share Buybacks

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.

During 2023, the Company purchased for cancellation, approximately 10 million shares of common stock for total consideration of approximately $426 million. This includes the Company’s share purchases from the secondary public offerings by NMB Stock Trust as discussed below.

On September 13, 2023, the Company purchased one million shares of Ovintiv common stock from the 15 million shares offered for sale in an underwritten secondary public offering by NMB Stock Trust. The total consideration paid was approximately $45 million, averaging $45.45 per share, and the shares were canceled during the third quarter of 2023.

On November 22, 2023, the Company purchased approximately 1.2 million shares of Ovintiv common stock from the 9.4 million shares offered for sale in an underwritten secondary public offering by NMB Stock Trust. The total consideration paid was approximately $53 million, averaging $44.00 per share, and the shares were canceled during the fourth quarter of 2023.

The two share purchases discussed above were completed in contemplation of the shareholder return framework and were executed under the Company’s U.S. shelf registration statement.

For additional information on the NCIB, refer to Note 18 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Material Cash Requirements

Ovintiv’s material cash requirements include various contractual obligations arising from long-term debt, operating leases, risk management liabilities and asset retirement obligations which are recognized on the Company’s Consolidated Balance Sheet. The Company expects to fund long-term material cash requirements primarily with cash from operating activities.

Interest payments include scheduled cash payments on finance leases, long-term debt, and other obligations. Additional information can be found in Notes 14 and 15 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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Operating leases include drilling rigs, compressors, office and buildings, certain land easements and various equipment utilized in the development and production of oil, NGLs and natural gas, as well as The Bow building. The Company subleased approximately 50 percent of The Bow office space under the lease agreement. Additional information on leases can be found in Note 14 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Risk management liabilities represent Ovintiv’s net liability positions with counterparties. Additional information can be found in Note 24 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Contractual commitments relating to transportation and processing commitments, and drilling and field services can be found in Notes 14 and 26 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Further to the commitments discussed above, Ovintiv also has various obligations that become payable if certain future events occur relating to take or pay arrangements and guarantees on transportation commitments resulting from completed property divestitures as described in Notes 20, 24 and 26, respectively, to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

In addition, the Company has obligations to fund the disposal of long-lived assets upon their abandonment as well as its obligations to fund its defined benefit pension and other post-employment benefit plans as described in Notes 17 and 22, respectively, to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Other than the items discussed above, there are no other transactions, arrangements, or relationships with unconsolidated entities or persons that are reasonably likely to materially affect the Company’s liquidity or the availability of, or requirements for, capital resources.

Contingencies

For information on contingencies, refer to Note 26 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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Accounting Policies and Estimates

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. For a discussion of the Company’s significant accounting policies refer to Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. Management considers the following to be its most critical accounting estimates that involve judgment. The following discussion outlines the accounting policies and practices involving the use of estimates that are critical to determining Ovintiv’s financial results. Changes in the estimates and assumptions discussed below could materially affect the amount or timing of the financial results of the Company.

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Non-GAAP Measures

Certain measures in this document do not have any standardized meaning as prescribed by U.S. GAAP and, therefore, are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other issuers and should not be viewed as a substitute for measures reported under U.S. GAAP. These measures are commonly used in the oil and gas industry and by Ovintiv to provide shareholders and potential investors with additional information regarding the Company’s liquidity and its ability to generate funds to finance its operations. Non-GAAP measures include: Non-GAAP Cash Flow, Debt to Adjusted Capitalization, Debt to EBITDA and Debt to Adjusted EBITDA. Management’s use of these measures is discussed further below.

Cash from Operating Activities and Non-GAAP Cash Flow

Non-GAAP Cash Flow is a non-GAAP measure defined as cash from (used in) operating activities excluding net change in other assets and liabilities, and net change in non-cash working capital.

Management believes this measure is useful to the Company and its investors as a measure of operating and financial performance across periods and against other companies in the industry, and is an indication of the Company’s ability to generate cash to finance capital investment programs, to service debt and to meet other financial obligations. This measure is used, along with other measures, in the calculation of certain performance targets for the Company’s management and employees.

Debt to Capitalization and Debt to Adjusted Capitalization

Debt to Adjusted Capitalization is a non-GAAP measure which adjusts capitalization for historical ceiling test impairments that were recorded as at December 31, 2011. Management monitors Debt to Adjusted Capitalization as a proxy for the Company’s financial covenant under the Credit Facilities which require Debt to Adjusted Capitalization to be less than 60 percent. Adjusted Capitalization includes debt, total shareholders’ equity and an equity adjustment for cumulative historical ceiling test impairments recorded as at December 31, 2011 in conjunction with the Company’s January 1, 2012 adoption of U.S. GAAP.

The increases in Debt to Capitalization and Debt to Adjusted Capitalization are primarily due to the increase in long-term debt resulting from the Permian Acquisition in the second quarter of 2023.

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Debt to EBITDA and Debt to Adjusted EBITDA

Debt to EBITDA and Debt to Adjusted EBITDA are non-GAAP measures. EBITDA is defined as trailing 12- month net earnings (loss) before income taxes, depreciation, depletion and amortization, and interest. Adjusted EBITDA is EBITDA adjusted for impairments, accretion of asset retirement obligation, unrealized gains/losses on risk management, foreign exchange gains/losses, gains/losses on divestitures and other gains/losses.

Management believes these measures are useful to the Company and its investors as a measure of financial leverage and the Company’s ability to service its debt and other financial obligations. These measures are used, along with other measures, in the calculation of certain financial performance targets for the Company’s management and employees.

The increases in Debt to EBITDA and Debt to Adjusted EBITDA are primarily due to the increase in long-term debt resulting from the Permian Acquisition. EBITDA and Adjusted EBITDA only include the results of operations from the acquired Permian assets for the post-acquisition period from June 12, 2023 to December 31, 2023.

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