Ovintiv Inc. (NYSE:OVV) Q1 2024 Earnings Call Transcript

Ovintiv Inc. (NYSE:OVV) Q1 2024 Earnings Call Transcript May 8, 2024

Ovintiv Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to Ovintiv’s 2024 First Quarter Results Conference Call. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. Members of the media attending in a listen-only mode today, you may quote statements made by any of Ovintiv representatives or members of the media who wish to quote others who are speaking on this call today, we advise you to contact those individuals directly to obtain their consent. Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Ovintiv. I would now like to turn the conference call over to Jason Verhaest from Investor Relations. Please go ahead, Mr. Verhaest.

Jason Verhaest: Thanks, Joanna, and welcome, everyone, to our first quarter 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. Following prepared remarks, we will be available to take your questions. I’ll now turn the call over to our President and CEO, Brendan McCracken.

Brendan McCracken: Good morning. Thank you for joining us. Our team has carried our momentum from last year into 2024 with every item at or ahead of our first quarter guidance midpoints. We delivered net earnings of $338 million, free cash flow of $444 million and cash flow per share of $3.80, beating consensus estimates. We’ve raised our full year production guidance, which will see us deliver oil and condensate volumes of about 206,000 barrels per day, while leaving our capital guide unchanged at $2.3 billion at the midpoint. Our 2024 oil and condensate capital efficiency now reflects a 19% gain compared to our original pre-acquisition 2023 guide. The combination of strong productivity across the portfolio, our leading capital efficiency and stronger oil price environment have raised our expectations for 2024 free cash flow from $1.6 billion to $1.9 billion, roughly $750 million more than last year with similar volumes and less capital spend.

This will allow us to deliver enhanced returns to our shareholders and accelerate debt repayment. As we highlighted in February, we also added 65 premium 10,000-foot equivalent locations in the Permian through three bolt-on transactions at an average cost of less than $3 million per location. These inventory additions are immediately competitive for capital, and are contiguous with our existing acreage in the core of the Midland Basin. Our multiyear disciplined strategy of both organic and inorganic inventory extension has added about 1,650 premium net 10,000-foot locations to our portfolio, delivering a huge boost to our full cycle returns and the durability of our business. We believe our 2024 program is highly repeatable in 2025 and beyond, reflecting our leading capital efficiency and the depth of our premium inventory.

As I mentioned, our strong execution enabled us to meet or beat all our first quarter guidance items. Production during the quarter came in above the midpoint of guidance on all products. Oil and condensate volumes averaged 211,000 barrels per day, with total volumes of 574,000 BOEs per day. We also came in below the midpoint on capital. We resolved the production disruptions we experienced during the quarter, largely due to refinery turnarounds in Salt Lake City as well as some downtime related maintenance that was largely in the Montney. We expect our oil and condensate volumes to stabilize through the second quarter with a more consistent profile in the second half of the year. I’ll now turn the call over to Corey.

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Q&A Session

Corey Code: Thanks, Brendan, and good morning. Our track record of shareholder returns continued through the quarter. We returned $328 million through share buybacks of $248 million and base dividends of $80 million. This represents a competitive cash return yield of approximately 8%. Since the inception of our buyback program in the third quarter of 2021, we have repurchased a total of 33 million shares and distributed approximately $700 million in base dividend payments for total shareholder returns of about $2.2 billion. In the second quarter, as per our shareholder returns framework, we will buy back 182 million in shares, and we expect to allocate $182 million to the balance sheet. We remain committed to lowering the overall debt level in our capital structure and the interest costs that go with it.

Our strong capital efficiency, combined with higher oil prices, will allow us to reach our $4 billion net debt target sooner. This bolsters the resiliency of our business and positions us to withstand market volatility over the long-term. Our focus in 2024 is to generate superior returns on our invested capital and maximize our free cash flow. Assuming full year average crude prices of $80 WTI oil and a NYMEX natural gas price of $2.25, we expect to generate about $1.9 billion of free cash flow. This is about $750 million or more than 60% higher than last year with similar production volumes. Second quarter production is set to average 560,000 to 575,000 BOEs per day, with oil and condensate volumes of about 207,000 barrels per day at the midpoint.

As Brendan mentioned, we expect to deliver a more consistent oil and condensate production profile for the remainder of the year. From a capital investment perspective, the second quarter will be our high point for the year. We added a sixth rig in the Permian at the start of April and we recently commenced our Anadarko drilling program. We expect capital spending to trend down through the second half of the year, and we remain very comfortable with the midpoint of our full year capital guide at $2.3 billion. Our full year TILs are expected to be roughly evenly split between the first and second half of the year. Capital efficiency remains a primary focus for our teams, as we work to efficiently convert our inventory into cash flow and generate consistent durable returns for our shareholders.

As a reminder, an additional feature supporting our strong free cash flow this year is the expiry of our REX pipeline commitment here in May, which represents about $100 million in savings versus 2023. Additionally, the recent resolution of a legacy legal matter will result in a onetime recovery of approximately $150 million that will go straight to the balance sheet to reduce debt. Between this and the REX roll off, we’ll realize an additional $250 million in the cleanup costs from the legacy business. I’ll now turn the call over to Greg, who will speak to our operational highlights.

Greg Givens: Thanks, Corey. Across our acreage footprint, our Permian well performance continues to deliver. As planned, Q1 was a relatively lighter quarter for new wells on stream in the Permian with only 17% of our full year turned in lines. On Slide 8, the chart on the right shows our result across the last two quarters. The dash line shows all 80 of the wells we brought online over that period. These wells demonstrate the performance of our new completions design across our asset footprint. The green line is our 2024 Permian type curve, unchanged from its introduction in February. As you can see, our performance continues to match the type curve, which incorporates all of the improved well productivity we achieved last year and demonstrates how our team is continuing to innovate to drive returns.

We only turned in line 21 wells in the first quarter, but have already turned in line 14 wells in Q2. The performance from these 35 wells as well as our continued solid base performance gave us the confidence to increase our oil and condensate guide for the year to 206,000 barrels per day at the midpoint. Our execution across drilling and completions in the Permian continued to deliver improvements in cycle time, which will ultimately reduce the number of days on looking and lower costs. On the drilling side, our average drilling speed in the first quarter was roughly 5% faster than our 2023 program. As Corey mentioned, we recently added a sixth rig in the Permian. With respect to completions, our year-to-date Trimulfrac wells were completed 30% faster than our average speed in 2023 at an industry-leading 4,200 feet per day.

We expect to utilize Trimulfrac on more than half of our program this year. This approach yields a 15% savings in completions cost per foot and essentially doubles the completed feet per day versus a traditional zipper frac. We have deep experience with Trimulfrac, having completed nearly 70 wells in more than 3,400 stages since we began deploying the technique over two years ago. We are also seeing industry-leading drilling and completion metrics in the Montney, where in the first quarter, we delivered an average of 1,750 feet drilled per day and over 4,100 feet completed per day. These results are in line with our Permian pacesetters and demonstrate the value of our culture of innovation and multi-basin portfolio to deliver learnings and transfer learnings in real-time.

Despite the current weakness in gas prices, the economics on our Montney wells remain outstanding. Assuming $75 WTI and $2.50 NYMEX gas, we expect our Montney to generate a program level IRR of more than 60%. These returns are driven by our superior well productivity, low well costs and strong price realizations for both condensate, which generate — which generally trades in line with WTI as well as natural gas. In fact, our Montney gas realized 103% of NYMEX in Q1 on an unhedged basis. This is the result of our physical transportation arrangements to markets in Eastern Canada Chicago, California and the Pacific Northwest. Our Montney program remains robust in both BC and Alberta as we have in hand, all of the permits needed to execute our 2024 plan and 100% of our water needs secured.

Our performance in the play continues to demonstrate the expertise of our team and maximizing value from this incredible resource. In the Uinta, our continued focus on well cost reductions makes the play highly competitive in our portfolio as it generates a margin similar to our Permian operations. Our large contiguous land base of approximately 137,000 net acres has multiple benches across 1,000 feet of collective pay. It is greater than 80% undeveloped, which translates into a significant inventory runway. As Brendan mentioned earlier, the refinery turnarounds in Salt Lake City were completed at the end of the first quarter, allowing us to bring constrained production back online and return the local refining complex at our typical rates.