Ovintiv Inc. (NYSE:OVV) Q4 2023 Earnings Call Transcript
Ovintiv Inc. (NYSE:OVV) Q4 2023 Earnings Call Transcript February 28, 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 2023 Fourth Quarter and Year End Results Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the expressed 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: Thank you, Joana, and welcome, everyone, to our fourth quarter and year end '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 EDGAR and SEDAR+. Following our prepared remarks, we will be available to take your questions. Please limit your time to one question and one 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. 2023 marked another year of execution against our durable return strategy. We beat and reset our targets twice over the course of the year, and this trend continued into the fourth quarter in every aspect of our business. We converted our operational success into bottom line financial results with full year net earnings of $2.1 billion and cash flow of $3.9 billion. With capital investment totaling $2.7 billion, we generated free cash flow of approximately $1.2 billion, of which $733 million or 63% was returned directly to our shareholders. We continued to lead the industry by delivering efficiency gains in each of our assets. Completion design innovations, record setting, execution performance, leading well productivity per lateral foot and base decline management are a few of the areas contributing to our excellent return on invested capital.
In June, we more than doubled our premium drilling inventory in the Permian with a set of three highly accretive acquisitions. Our team has seamlessly integrated the new assets and we are very pleased to report out on the excellent results from our first end-to-end wells in the former end cap acreage. These Permian acquisitions combined with our strategic bolt-on additions and our organic assessment and appraisal programs have added 1,650 premium drilling locations to our portfolio in the last three years. We identified the importance of this inventory renewal years before others, and we prosecuted a multi-year disciplined strategy of both organic and inorganic investment. The result is a huge boost to our full cycle returns and the durability of our business.
We made great progress against our 50% greenhouse gas emissions intensity reduction target. For 2023, we achieved a 42% reduction from our 2019 baseline. Over the course of the year, we repurchased approximately 10 million shares and increased our base dividend by 20%. This reflects our commitment to maintaining financial strength, generating superior returns on capital investment, and returning significant cash to our shareholders. Our strong execution in 2023 has set us up for continued success in 2024. We'll cover more of the details later in the call, but year over year we are set to deliver 40% more free cash flow at lower commodity prices. Our strong execution momentum continued through the fourth quarter, at 240,000 barrels per day, our oil and condensate volumes significantly exceeded expectations coming in 7% above the midpoint of guidance.
This outperformance was driven by faster drilling and completions and strong well results from both our legacy and newly acquired Permian assets, and excellent base production performance across our portfolio. Our seamless asset integration in the Permian allowed us to accelerate our expected turn in line schedule, meaning that the vast majority of our fourth quarter turn in lines came on in October and November. This drove our -- this along with strong well performance drove our fourth quarter oil volumes, which peaked in November. The higher volumes were achieved with lower capital, which came in at the low end of our guide driven by operational efficiencies. Our per unit cost performance for both TMP and operating expense came in well below the mid points of our guide by margins of 15 and 4% respectively.
And finally, we reduced our total debt by $426 million further strengthening our balance sheet. Our message in 2024 is simple. We will continue to focus on maximizing returns on our invested capital and maximizing our free cash flow to enhance shareholder returns and further reduce our leverage. In 2024, we expect to generate about $1.6 billion of free cash flow. This is $450 million more than in 2023 with flat production and assuming lower commodity prices. Our 2024 oil and condensate capital efficiency reflects an 18% gain compared to our original pre-acquisition 2023 guide. This is driven by disciplined capital allocation and operational efficiencies. I'll now turn the call over to Corey, who will cover the 2024 plan in more detail.
Corey Code: Thanks, and good morning. As Brendan mentioned, we entered the year with strong momentum from 2023, which sets us up to deliver a highly-efficient development program and a substantial increase in free cash flow. We are currently producing about 20% more oil condensate than we were just one year ago and our 2024 plan is focused on exploiting the most oil rich areas in each of our plays. Additional catalysts supporting strong free cash flow include the expiry of our REX pipeline commitment, which represents about $100 million in savings year-over-year. We also expect about $100 million less in current tax expense year-over-year. As a reminder, we'll pay our 2023 current tax in the first quarter. This will not affect free cash flow, but it will result in a cash outflow of about $250 million.
We are currently well underway on our first quarter buyback program of $248 million. Collectively, we will return $330 million to shareholders in Q1 between our base dividend and share repurchases. We are well-protected against potentially weak natural gas prices, as we have hedged about 50% of our 2024 gas volumes. More than three quarters of our gas hedges have hard protection at prices exceeding $3, paired with upside participation to the mid-$4 range. For a $0.25 drop from our base assumption NYMEX price of $2.50, the impact to our full year cash flow would be limited to about $50 million. 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.
Our 2024 capital plan reflects a resilient level-loaded program. We are leveraging our multi basin, multi product flexibility and focusing 100% of our investment on oil and condensate across the portfolio. As always, we have the optionality to shift capital, if economic factors dictate over the course of the year. Our 2024 program will deliver annual total production volumes of about 560,000 BOEs per day, essentially flat with 2023 volumes for about $450 million less capital. The savings will translate directly into increased free cash flow. As expected, our first quarter production is set to be the high point for the year at a midpoint of about 568,000 BOEs per day, including about 210,000 barrels per day of oil and condensate. This includes the impact of refinery turnarounds at Salt Lake City, weather and planned maintenance that total about 8,000 barrels per day in the first quarter.
From an activity and capital investment perspective, 2024 will be relatively low leveled and ratable. Our development program will see less variation in turn in line cadence, setting us up for a more consistent production profile starting in the second quarter and going forward. Annual oil and condensate volumes are expected to average about 205,000 barrels per day, with production exceeding 200,000 barrels per day in every quarter. This is about 5,000 barrels per day higher than our previous 2024 guidance for the same amount of capital and is a credit to the strong capital efficiency delivered by our teams. Importantly, our development program is highly repeatable beyond 2024. I'll turn the call over to Greg. He'll speak to our operational highlights.
Greg Givens: Thanks Corey. 2023 was an exceptional year for our Permian team. Efficiency records, seamless asset integration and strong well performance were consistent themes throughout the year. Our execution across drilling and completions continued to redefine the efficient frontier and operational performance in the basin. Our enhanced completions have resulted in well performance, exceeding type curve expectations, and that performance has been included in our 2024 guide. While our cube development approach has stayed consistent, we are constantly looking for ways to improve cycle time and reduce the number of days on location. For example, our average completion speed at well over 4,000 feet per day for our Trimulfrac wells was about 9% faster than our average speed in 2022, and tops the performance quoted by our peers.
We pumped 29% more slurry and increased our equipment utilization by 14% for an average of 18 pumping hours per day. We continue to demonstrate industry leading drilling efficiency with an average of 12 days -- release, which is 5% faster year over year. We expect to utilize Trimulfrac on more than half of our program this year. This approach yields a 15% savings and completions cost per foot and essentially doubles the completed fee per day versus a traditional zipper frac. Importantly, the results from our trim Trimulfrac wells are right in line with the rest of our program, meaning it will see no degradation in well performance. So what does all this mean? It means we're able to more efficiently convert resource to cash flow and enhance shareholder returns.
As a result in 2023, the Permian generated an incremental $150 million in free cash flow due to our unique innovative approach. Across our acreage, our Permian well performance continues to be very strong. The chart on the right shows our results across 2023. The orange line includes all wells on our legacy acreage and all the EnCap wells since the start of the year. The dash line shows the 19 Ovintiv design end-to-end wells we brought online on the EnCap acreage during the fourth quarter. And finally, the green line is our 2024 Permian type curve. The initial results from the 19 fully Ovintiv design wells on the EnCap acreage are impressive, showing a 10% productivity uplift compared to prior operators. These cubes were designed and used the same well stacking and spacing that we use across our Permian position.
Our efforts on completion design and particularly on stage architecture delivered stellar well performance in 2023, and we expect this to continue in 2024. Our well results have been consistent across our legacy acreage and the acquired acreage position, and our new type curve was used to generate our 2024 plan. This improved well performance and faster cycle time is the major driver behind our increased oil guide to a midpoint of 205,000 barrels per day for the year versus the previous guidance of 200,000 barrels per day. Our 2023 actual oil production per foot of lateral is in line with the best we've ever delivered in the Permian and is among the best in the basin. In fact, when you compare our 2023 legacy wells combined with the EnCap wells, we controlled from end to end, our well productivity per foot ranks second versus our piers in the Midland basin.
We expect these results to be highly repeatable in 2024 and this expansion and type curve has been baked into our full year guide. In 2024, we plan to run an average of five to six rigs throughout the year with 1 to 1.5 frac spreads to bring on 120 to 130 net wells. The Montney is one of the largest remaining oil plays in North America. Our performance in the play continues to demonstrate the expertise of our team in maximizing value from this incredible resource. In both BC and Alberta, we have unleashed cross basin learnings and innovation to drill some highly prolific oil and condensate wells. Since the third quarter 2023, our 10 best Montney wells average more than 1,000 barrels per day on IP30 basis. Supported by our oil and condensate productivity, the economics on our Montney wells remain outstanding.
Even with the low natural gas prices reflected in the current strip, we expect to generate a program level IRR of more than 60%. These great returns are driven by our superior well productivity, low D&C costs and strong price realizations. As a reminder, our condensate trades in line with WTI. In 2023, we realized 96% of WTI, making the Montney competitive with the top oil basins in North America. With our portfolio of fixed transportation outside of AECO, we realized 106 percent of NYMEX for our 2023 natural gas volumes on an unhedged basis. Despite weaker natural gas prices, we are continuing to deliver exceptionally robust returns in this play. This year, we plan to run three to four rigs to turn in line 60 to 70 net wells. In the Uinta, we continue to deliver leading well results.
A recent third-party report noted that our six well -- pad is yielding a higher per acre oil EUR than over 75% of the developed DSUs in the Delaware Basin. With a similar cost structure, our wells are outpacing one of the top basins in North America. This strong well performance combined with our continued progress on cost reductions continues to make the Uinta competitive in our portfolio, generating a margin similar to our Permian operations. Our large contiguous land base of approximately 137,000 net acres has multiple benches across about a 1000 feet of collective pay. It is greater than 80% undeveloped, which translates into a significant inventory runway. Our scalable rail capacity to the Gulf Coast diversifies market exposure and supports our future development plans.
In 2024, we plan to average one rig in the Uinta to turn in line 25 to 30 net wells. Our 2024 program in the Anadarko is designed to target the oiliest parts of our acreage to leverage the strong performance we've seen from our most recent wells. The early production from these wells has displayed first year oil cuts of more than 55% with about 85% of first year revenue coming from oil. This combined with year-over-year D&C cost reductions of $1 million per well, significantly enhances the economics of the program, which we expect to deliver highly competitive returns in 2024. The team has also managed our base production very effectively and has cut base declines in half to less than 20% since 2021. Our planned one rig program will bring on 7 to 10 net wells.
I'll now turn the call back to Brendan.
Brendan McCracken: Thanks, Greg. Access to premium resource is an essential component to generating durable returns. In total, since 2021, we've cost-effectively added about 1650 locations, about two-thirds of which were in the Permian. Since the beginning of this year, we've added 65 premium 10,000 foot equivalent locations in the Permian through three bolt-on transactions averaging 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. We've continued to invest in assessment and appraisal to convert our inventory into the premium bucket. This generally represents about 10% of our total capital spend.
And appraisal wells are often included in our cube developments to prove up prospective zones. And this is something we are currently advancing in our new Permian acreage where we're testing up to six zones in some parts of that position. We're seeing promising results, which could add significant potential upside to our inventory. At the time we acquired the assets, our acquisition case was underwritten with only three development zones. We are committed to staying disciplined in opportunistic in our bolt-on efforts, and only transacting when we can generate strong full cycle return at mid cycle pricing. In closing, as a leading operator with more than a decade of high quality drilling locations and a deep commitment to capital efficiency, we are positioned to deliver consistent, durable returns to our shareholders through our focus on operational excellence, discipline capital allocation, and responsible operations.
In 2024, we're focused on maximizing capital efficiency and margins, generating significant free cash flow, reducing debt, maintaining our strong balance sheet, all while continuing to bolster our premium return drilling inventory. I'd like to thank our team for their safe work, their dedication, and for delivering these outstanding results. This concludes our prepared remarks, Joana, we're now ready to open the line for questions.
Operator: [Operator Instructions] First question comes from Neal Dingmann from Truist.
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