Ovintiv Inc. (NYSE:OVV) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Ovintiv’s 2023 First Quarter Results Conference Call. As a reminder, today’s call is being recorded. [Operator Instructions]. I would now like to turn the conference call over to Jason Verhaest from Investor Relations. Please go ahead, Mr. Verhaest.

Jason Verhaest: Thank you, operator, and welcome, everyone, to our first quarter ’23 conference call. This call is being webcast and the slides are available on our website at ovintiv.com. Please take note of the advisory regarding forward-looking statements at the beginning of our slides and in our disclosure documents filed on SEDAR and EDGAR. [Operator Instructions]. Following prepared remarks, we’ll be available to take your questions. Please limit your time to 1 question and 1 follow-up. I will now turn the call over to our President and CEO, Brendan McCracken.

Brendan McCracken: Good morning. Thank you for joining us. We’ve kicked the year off with great momentum. We delivered net earnings of $487 million; cash from operating activities of $1.1 billion; free cash flow of $241 million; and cash flow per share of $3.44, beating consensus estimates. We also returned approximately $300 million to our shareholders through share buybacks and base dividends. This represents a cash return yield of nearly 15%, which is very competitive in today’s market across both industry peers and the broader economy. Production during the quarter came in at 511,000 BOEs per day. We exceeded guidance on oil, gas and NGL while coming in at the low end of guidance for capital. This result was driven by strong well performance across our portfolio and combined with some impressive capital savings from our innovation and efficiency focus that saw us once again push the leading edge for industry on drilling and completion speed.

We also announced 2 compelling transactions that enhance our capital efficiency, grow our margins, simplify our portfolio and extend our premium inventory depth. First, we entered into an agreement to acquire core Midland acreage and added over 1,000 locations to our inventory. And second, we entered into a separate agreement to sell all our assets in the Bakken for $825 million. The combined transactions are immediately and sustainably accretive on all key metrics including cash flow per share, free cash flow per share, shareholder returns, NAV and inventory life. In conjunction with the transactions, we also announced a 20% per share increase to our base dividend. I’ll speak more to the transactions later in the call, but we are reiterating the projections we made at the announcement and remain on track to close both deals before the end of June.

I want to thank our team for delivering an impressive quarter in all aspects across every asset. These results demonstrate that our strategy is working and our execution is translating into value for our shareholders. Our team is focused on execution and delivery. Our 2023 program is designed to maximize free cash flow while load leveling our activity through the year. The beat in our first quarter production volumes reflect the intense focus of our teams on executing that plan and delivering strong well performance. We saw great results across the portfolio with especially strong productivity in the Permian. Greg will speak to more — to this more in a minute, but the work our teams are doing to enhance completions design is clearly showing up in our well results.

Our culture of innovation amplifies these operational successes as learnings are quickly transferred across the portfolio. In addition to strong volumes, we also saw significant margin enhancement from our market access strategy. We continue to successfully manage our gas flow assurance and price risk across the portfolio. With over 90% of our Montney gas priced outside the basin and 65% of our production physically accessing downstream markets, we were once again positioned to benefit from premium pricing at Malin, Sumas, Dawn and Chicago. This diversification allowed us to capture some of the high West Coast gas prices we saw in the quarter, resulted in a pre-hedged natural gas price realizations of more than 140% of NYMEX for our Canadian gas.

Across the whole portfolio, we realized 111% of NYMEX after hedges. I’ll now turn the call over to Greg to discuss the operational highlights from the quarter.

Gregory Givens: Thanks, Brendan. As Brendan noted, capital efficiency remains a key focus for our operating teams as we work to efficiently convert our inventory into cash flow and generate durable returns for our shareholders. Our efforts on completion design and particularly on stage architecture delivered stellar well performance across our Permian acreage this quarter. This continues the well performance momentum we generated in the second half of last year. The chart on the right shows our results across 2022, the first quarter of this year and our first year — excuse me, our full year 2023 performance expectations. We are actively working to increase resource recovery through our culture of innovation and our cross-basin learning approach.

The Permian wells we turned online in the quarter had an impressive IP30 rate of 1,165 barrels of oil a day on a 10,000-foot normalized basis. This level of oil production per foot of lateral is in line with our strong fourth quarter results and is among the highest we’ve ever delivered in the Permian. It’s important to stress that we continue to utilize our cube development approach to achieve these results. It’s also important to note that these results are spread out across our acreage footprint, and we have pumped these completions without added well costs above our budget. We are very encouraged by the year-to-date results we’re seeing in the play. However, we recognize this early, and we have not yet underwritten this performance in our guidance numbers for the rest of the year.

We continue to set the efficient frontier and operational performance in the Permian. Our track record of continuous improvement has resulted in both cost efficiencies and productivity improvements. After navigating a challenging operating environment in 2022, our team has put us back on track in 2023 with some significant completions milestones. For example, our year-to-date average completion speed at well over 3,000 feet per day is about 25% faster than our average speed over the last 3 years and tops the performance quoted by peers. Using the same time frame comparison, we now pump 65% more proppant and 35% more fluid. Our enhanced performance efficiency means that these higher intensity completions are not resulting in higher well costs.

We are also demonstrating industry-leading drilling efficiency, ranking second in an independent Midland Basin peer review of drilling feet per day over the last 12 months. In our business, time is money, and these achievements mean we spend fewer days on location with less downtime, improving our capital efficiency and reducing our costs. Our strong performance in the quarter was not limited to the Permian. We are continuing to deliver impressive results across our portfolio. Nowhere is this more evident than in the Montney. Over the last 12 months, Ovintiv has dominated the list of most productive wells in the play on a total BOE basis. One of our recent lower Montney wells posted a 30-day IP rate of more than 5,300 BOE per day, comprised of 1,150 barrels per day of condensate and 25 million a day of natural gas.

There are very few players in North America that are capable of delivering multiproduct yields like this from a single well. The economics in the Montney remain extremely robust. Even with the current strip pricing, we expect to generate well-above returns of more than 100% across the 2023 program. These great returns are driven by our superior well productivity, low D&C costs and strong price realizations. During the quarter, our Montney condensate realized price was greater than 100% of WTI. And as Brendan mentioned earlier, our Montney gas realized prices were more than 140% of NYMEX on a pre-hedge basis. The Anadarko is also outperforming our expectations. Our reduced activity levels in the play this year enabled the team to innovate and refine our completion design, improve well targeting and optimize base production.

Our activity has been focused on the oiliest highest margin parts of the acreage. They’ve also done a great job in shallowing out the base decline rate in the play to about 20%, further improving the cash flow generation of the asset. The Anadarko continues to provide great product optionality and stable base production with ample market access and strong price realizations. In the Uinta, we are gearing up for an active program in the second half of the year. We are currently running 2 rigs in the play and drilling a 9-well pad, which we expect to bring on production in the third quarter. Our Uinta land base of approximately 130,000 net acres is about 80% undeveloped and is primed for cube development. It has multiple stacked horizons with about 1,000 feet of collective pay.

This translates into a significant inventory runway. We continue to generate industry-leading well results comparable to those in the Delaware Basin and outpacing our peers by about 50%. So overall, we are very pleased with the operational performance across the asset base, and we remain intensely focused on delivering our targets for the remainder of the year. I’ll now turn the call back to Brendan.

Brendan McCracken: Thanks, Greg. The Permian acquisition we announced last month checks all the boxes for our durable return strategy. It extends our future inventory runway in a core area and is immediately accretive across all key financial metrics. It will also enhance our capital efficiency, lower our cash cost per BOE. Importantly, we maintain our strong investment-grade rated balance sheet. Although commodities have been volatile since we announced the transaction, it’s important to note that the original accretion metrics were calculated before the OPEC supply cut announcement using March 30 strip pricing, which was actually a few dollars below today’s WTI strip. The metrics we highlighted remain as robust or even slightly better today.

Located in some of the best rock in the Permian, these assets have demonstrated leading well performance and are a natural fit with our existing Martin County acreage. The blocked up acreage sits in the core of the northern Midland Basin and is about 85% undeveloped. It is also well delineated with more than 180 horizontal wells producing today. That is an ideal setup for our team. The transaction will add 1,050 net well locations to our Permian inventory. Now land position offsets our current acreage in Martin County. We have a deep understanding in the resource here, and we’ll be able to leverage our existing operations. And at close, we will nearly double our Permian oil and condensate production. The acquired assets immediately compete for capital across our program, and we expect to run 2 to 3 rigs on the acquired acreage for a total of 5 rigs in the Permian.

While the performance of the acquired assets stands on its own, we do see several potential upsides. We will apply full-scale cube development across the acreage. We’ll be deploying our proven optimization techniques around completion design, Simul-Frac, stage architecture, artificial lift and accelerated cycle times. We’ll also be optimizing development and logistics across our combined Permian position versus the 3 separate operating companies that are planning and executing work on each of their individual footprints previously. We anticipate reduced offset frac hits as we significantly reduced activity across the position. As I noted earlier, the transaction is progressing as planned. We are targeting a mid-June closing date if we get regulatory approval in a timely manner.

With an effective date of January 1 for both the Permian acquisition and the Bakken sale, there will be typical purchase price adjustments which are typical for these types of transactions. The acquired assets are expected to be free cash flow negative in the first half of the year, while the Bakken assets will be free cash flow positive. As a result, we’ll pay an adjustment for both deals. These anticipated price adjustments were baked into our valuation of the assets and our purchase price and were also incorporated into our accretion metrics. Teams have been focused on seamless integration, and we look forward to closing. Yesterday, we provided our second quarter guidance and updated our 2023 full year guide. In the second quarter, we expect to see production grow to roughly 515,000 to 535,000 BOEs per day with associated capital spending of $590 million to $630 million.

We have provided our Q2 guidance under the assumption of a June 30 closing date. However, we have the potential to close a couple of weeks earlier in mid-June, and we’ve provided a guidance sensitivity for that scenario. Assuming we close both transactions in mid-June, we would expect to add, on a net basis, roughly 5,000 to 6,000 barrels of oil and condensate to our second quarter production guidance and we would expect to add capital of about $70 million to $90 million to our second quarter capital guidance. Our full year guidance remains unchanged from the update we provided in April when we announced the transaction. In the Permian, we expect to shift from a 10-rig program at the time the acquisition closes to a 5-rig program by the fourth quarter, with most of the transition happening in Q3.

As a result, Q3 will be our highest quarter of capital spend. In addition to increased capital efficiency, the transaction will also drive increased cash cost savings. We are divesting a relatively higher operating and T&P cost asset in the Bakken and adding a relatively lower cost asset in the Permian. We anticipate company level savings of 3% to 5% for both OpEx and T&P in the second half of the year. While our hedging philosophy has not changed, we have layered in additional WTI and NYMEX protection to reflect the additional scale and the debt of the company post transaction. We now have about 50% of our pro forma WTI exposure hedged using a combination of swaps in the mid- to high 70s, collars with floors in the mid-60s with upsides into the 80s and 3 ways with soft floors in the mid-60s and upside to 90 plus.

On the gas side, we have layered in production through a mix of structures, again, many with attractive upside. Next year, we expect to run a low-level development program, producing more than 200,000 barrels of oil and condensate per day with a capital range of $2.1 billion to $2.5 billion. To put that into context, next year, we will spend roughly the same amount of capital at the midpoint as our original 2023 guide, but that CapEx will produce an additional 30,000 barrels per day of oil and condensate. We believe that long-term value creation in the E&P space will come from companies that can demonstrate durability in both their return on invested capital and the return of cash to shareholders. Generating durable returns requires a deep inventory of premium return drilling locations, the culture and expertise to convert that resource to free cash flow at a superior rate of return and disciplined capital allocation to make sure that value flows through to the bottom line.

And we check all 3 boxes. Our leading capital efficiency is underpinned by our multi-basin, multiproduct portfolio, which provides operational and commodity diversification, cross-basin learnings and premium inventory depth. Following the close of the transactions, we will have anchor positions in 4 basins, the Permian, the Montney, and a quick cycle time and multiproduct asset in the Anadarko and a high-margin, high-return emerging oil play in the Uinta. We’re delivering outstanding results. We’re well positioned for today’s volatility. We take great pride at producing safe, affordable, reliable and secure energy while delivering superior returns to our shareholders. That concludes our prepared remarks. Operator, we’re now pleased to take questions.

Q&A Session

Operator: [Operator Instructions]. Your first question will come from Doug Leggate at Bank of America.

Operator: Your next question comes from Josh Silverstein at UBS.

Operator: Your next question comes from Neal Dingmann at Truist Securities.

Operator: Your next question comes from Gabe Daoud at TD Cowen.

Operator: Your next question comes from Nicholas Pope at Seaport Research Partners.

Operator: Your next question comes from Noel Parks at Tuohy Brothers Investment Research.

Operator: Your next question comes from Arun Jayaram at JPMorgan.

Operator: At this time, ladies and gentlemen, we have completed the question-and-answer session. And I will turn the call back to Mr. Verhaest.

Jason Verhaest: Thank you, operator, and thanks, everyone, for joining us today. Our call is now complete.

Operator: Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.