Ovintiv faces test of staying power
The Canadian firm has rebranded and joined the US shale revolution. But the oil price crisis is raising doubts about whether recent acquisitions will be economically viable
Reinventing Canadian energy company Encana as Ovintiv has been a long battle for survival, CEO Doug Suttles tells Petroleum Economist. Encana became primarily a natural gas producer in November 2009, when it spun off its upstream oil and refining assets into a new company called Cenovus Energy, just as the US shale gas revolution was gaining momentum.
Since taking over the formerly Calgary-based company in June 2013, Suttles has rebalanced its production portfolio primarily through a series of acquisitions and asset sales, streamlined company operations and re-domiciled its headquarters to Denver, Colorado under its new name to gain access to greater pools of capital in the US.
“Ovintiv was a technology company long before technology was even cool” Suttles
Despite these moves, Ovintiv’s survival remains in doubt. The company’s stock price was hit harder than that of most North American oil and gas producers during the recent market rout. Analysts question whether Ovintiv will be able to successfully monetise newly acquired acreage in the Anadarko basin, where many other producers have failed, while a complex oil and gas price hedging strategy for the year appears to have gone awry.
Encana was the largest company by market capitalisation in Canada as recently as 2008, before the Cenovus spinoff. The firm remained the largest gas producer in the country and the second or third-largest in the US until 2013, when Suttles took the reins.
“At one time, Encana’s conventional gas assets, situated primarily in the Rockies, were considered the best in North America,” Suttles says. “But the shale revolution in the US changed that. We could not compete. Our gas was relatively high cost and too far from market. It was critical we did something.”
In November 2013, Suttles announced his company’s new strategy. The core elements included laying off 20pc of its over 4,000 employees; selling gas-rich properties and buying oil-rich ones; setting up a separate company to monetise mineral rights and royalty interests in southern Alberta; and focusing capital spending on liquids-rich resources in five basins—the Montney and Duvernay in Canada, and three lesser known ones in the US.
578,600bl/d oe – 2019 production
Since then, Ovintiv has acquired significant oil-rich acreage in a number of major basins in the US. The company has tended to redirect its capital spending towards those basins—capital employed on Canada’s liquids-rich Montney being the major exception.
In June 2014, Ovintiv acquired acreage and 53,000bl/d oe of production in the Eagle Ford basin from US mining firm Freeport-McMoran in a $3.1bn deal. In November of the same year, the Canadian company acquired US independent Athlon Energy for $7.1bn. The Athlon acquisition provided the company with 30,000bl/d oe in the prolific Permian basin.
In February 2019, Ovintiv bought US producer Newfield Exploration in an all-stock deal for C$5.5bn (US$3.89bn) and took on C$2.2bn in debt, providing it with a significant foothold in the Anadarko basin and 140,000bl/d oe of added production.
“US shale gas was the threat,” Suttles says. “And US shale oil is where opportunities have mostly been.”
Ovintiv’s sales of gas-rich assets have been more numerous and have tended to be of significantly smaller value than its acquisitions of oil-rich resources. The two major exceptions were the sale of PrairieSky Royalty, the spinoff of its mineral holding in southern Alberta, in two tranches for a total of C$4.3bn in 2014; and the sale of its Bighorn assets, also in Alberta, to Calgary-based Jupiter Resources for US$1.8bn in June 2014.
“The trend is towards greater passive investment and by having a US address we have access to larger pools of capital” Suttles
Suttles has transformed Ovintiv over the past seven years. Production may be up by only about 20pc, to an average of 578,600bl/d oe in 2019, but it is being accomplished with roughly half the workforce. More importantly, liquids accounted for 54pc of the company’s output last year, and gas only 46pc—compared with 95pc at the time of the Cenovus spinoff. Roughly three-fifths of the company’s production is now from US basins.
Ovintiv announced its original capital-spending plan for 2020 on 20 February, the same day most North American stock indices peaked and just before the economic impact of the Covid-19 pandemic became apparent. At that time, the company was planning to spend $2.7bn over the year, with 80pc allocated to oil-rich US basins and more than three-quarters earmarked for what the company now considers its three core basins—the Permian and Anadarko in the US and the Montney in Canada.
Domicile shift and name change
The shift in Ovintiv’s production profile from Canada to the US may have been due to opportunity, but its move to Denver and change of name—both of which took effect on 24 January—was a calculated financial decision.
“The trend is towards greater passive investment, and by having a US address we have access to larger pools of capital,” says Suttles. “About 7pc of our ownership was comprised of passive accounts [index funds and passively managed accounts] at the time of our announcement [in October], far less than the 30pc average for our US peers.”
Contrary to comments by many pundits, Suttles says the political climate in Canada, in which it is difficult to construct oil and gas pipelines and LNG liquefaction plants in a timely manner, had nothing to do with his company’s decision to re-domicile to Denver. But he did imply it has affected capital investment decisions to the degree the company attempts to develop liquids and gas resources that achieve maximum possible returns.
In terms of the company’s new name, Suttles said Ovintiv is a play on the words invention and innovation, two traits he says the company and its predecessors have prided themselves on. “Ovintiv was a technology company long before technology was even cool,” Suttles says.
Ovintiv’s share price has been hammered since the beginning of the year, declining by 88pc to US$2.86 per share compared with an all-time high of over US$240 in mid-2008. The market capitalisation of the company is now below $1bn, making it a potential takeover target as and when M&A activity becomes easier.
“We are in an unprecedented period,” Suttles says, referring to the more than halving of crude prices since the beginning of the year due to the combined effect of Covid-19 and the breakdown of Opec+ cooperation.
In response, Ovintiv chopped capital spending and drilling activity quicker and deeper than most of its peers. On 12 March, the company announced plans to cut second-quarter capital spending by $300mn and full-year cash costs by $100mn while indicating it was prepared to make further reductions in the second half of the year. By May, the company will have cut its number of operated drilling rigs by more than two-thirds, from 23 to seven.
70pc – 2020 hedged production
Ovintiv had hedged over 70pc of the company’s anticipated 2020 oil and gas production at relatively high prices. But over a third of its price hedges are so-called three-way-collars, which will cost the company when the WTI crude is below $43.44/bl and Henry Hub gas is below $2.25/’000 ft3.
In Suttles’ view, the collapse in oil and gas prices should be relatively short-lived. The demand decline caused by the coronavirus will likely last no more than a couple of quarters, while Suttles is optimistic the oil price war between Saudi Arabia and Russia will be resolved relatively quickly.
“Demand destruction caused by coronavirus simply overwhelmed Russia and Saudi Arabia,” Suttles says. “Opec+ issues are always delicate to manage, and Trump administration pressure could help the Russians and Saudis to agree.”
In addition, Ovintiv has “massively reduced development costs” in the Anadarko basin. The company has been drilling there by applying the extensive knowledge and experience it has acquired in other basins. It has reduced drilling and completion costs in the Stack play from $8mn to $6mn per well in less than a year—double the original $1mn reduction target for this timeframe. The company now estimates its breakeven oil price in the Anadarko basin—including the Scoop play—to be about $30/bl.